Inflation and Debtors' Relief Were Mercantilist Schemes to Aid the Rich

One of the most vigorously held tenets of the dominant neo-Marxist historians of America has been the view that inflation and debtors’ relief were always measures of the “lower classes,” the poor farmer-debtors and sometimes urban workers, engaging in a Marxian class struggle against conservative merchant creditors. But a glance at the origins of debtors’ relief and paper money in America easily shows the fallacy of this approach; inflation and debtors’ relief were mercantilist measures, pursued for familiar mercantilist ends.

Debtors’ relief began in the colonies, in Massachusetts in 1640. Massachusetts had experienced a sharp economic crisis in 1640, and the debtors turned immediately to special privilege from the government. Obediently, the legislature of Massachusetts passed the first of a series of debtors’ relief laws in October . . .

Further privileges to debtors were passed in 1642 and 1644, the latter permitting a debtor to escape foreclosure simply by leaving the colony. The most drastic proposal went to the amazing length of providing that the Massachusetts government assume all private debts that could not be paid! This plan was passed by the upper house, but defeated in the house of deputies.

The fact that this astounding bill was passed by the upper house—the council of magistrates—is evidence enough that this was not a proto-Marxian eruption of poor debtors. For this council was the ruling group of the colony, consisting of the wealthiest merchants and landowners. If not for historical myths, it should occasion no surprise that the biggest debtors were the wealthiest men of the colony, and that in the mercantilist era a drive for special privilege should have had typically mercantilist aims.

--Murray N. Rothbard, "Mercantilism: A Lesson for Our Times?" in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 652.

Mercantilism Was a pre-Keynesian Policy of Inflation, of Lowering Interest Rates Artificially, and of Increasing Effective Demand by Heavy Government Spending

Mercantilism was not only a policy of intricate government regulations; it was also a pre-Keynesian policy of inflation, of lowering interest rates artificially, and of increasing “effective demand” by heavy government spending and sponsorship of measures to increase the quantity of money. Like the Keynesians, the mercantilists thundered against “hoarding,” and urged the rapid circulation of money throughout the economy; furthermore, they habitually pointed to an alleged “scarcity of money” as the cause of depressed trade or unemployment.

--Murray N. Rothbard, "Mercantilism: A Lesson for Our Times?" in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 644.

The Success of Keynesianism Is Due to It Providing an Apparent Justification for Deficit Spending Policies

The "Keynesian revolution" took place long before Keynes approved of it and fabricated a pseudo-scientific justification for it. What he really did was to write an apology for the prevailing policies of governments.

This explains the quick success of his book. It was greeted enthusiastically by the governments and the ruling political parties. Especially enraptured were a new type of intellectuals, the "government economists." . . .

The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the "deficit spending" policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations.

--Ludwig von Mises, "Lord Keynes and Say's Law," in The Critics of Keynesian Economics, ed. Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 319-320.

The Mercantilistic-Keynesian Employment Theory Embraced All Essential Features of Modern Effective Demand Analysis

However, we do not want to examine further the factual conditions under which the Mercantilistic-Keynesian employment theory is valid. What we want to show is that this theory embraced in fact all essential features of modern "Effective Demand Analysis." As far as I can see, the man who developed this analysis most conclusively is John Law who, although generally not counted among the Mercantilists proper, is undoubtedly to be considered the strongest and most interesting exponent of their ideas.
--L. Albert Hahn, "Mercantilism and Keynesianism," in The Economics of Illusion: A Critical Analysis of Contemporary Economic Theory and Policy (New York: Squier Publishing, 1949), 108.

Keynes' "Monistic" Theory of Cash Demand for Hoarding Purposes: Interest Is the Reward for Not Hoarding

According to Keynes' liquidity preference theory, interest is paid for the "desire to hold wealth in the form of cash" and received as "the reward for parting with cash" against some instrument of saving. It is "the reward for not hoarding," not "the reward for not spending." In other words, the owner of a savings account receives interest because he does not hoard, not because he does not spend money; and he loses interest because he hoards money, not because he spends it. The demand for cash comes from the desire to transform savings accounts into cash. It is denied that money is demanded in order to be spent, not to be hoarded. In short, the switching from savings accounts into cash for hoarding, not the withdrawal of savings accounts for spending, is considered the only possibility. At least on the surface, this is a "monistic" theory of cash demand for hoarding purposes.

--L. Albert Hahn, "Anachronism of the Liquidity Preference Concept," in The Economics of Illusion: A Critical Analysis of Contemporary Economic Theory and Policy (New York: Squier Publishing, 1949), 147.

Wicksell's Theory of Unnatural Interest Rates with Cyclical Inflations and Deflations Should Be Regarded As the Most Decisive Progress in the Field of Economics

The over-investment theories being entirely unsatisfactory, the Swedish economist, K. Wicksell, developed a theory according to which cyclical inflations and deflations are due to, or at least made possible by, fluctuations in credit supply. For Wicksell and his followers the credit policy of the banks and Central Banks is primarily responsible for the business cycle. Their theory runs roughly as follows. If demand for credits picks up for one reason or another, the interest rates on the free markets--which appear as the natural rates to Wicksell--have a tendency to move up. If the Central Banks, and with their support also the commercial banks, fail to adjust their interest rates and keep them unnaturally low, the increased demand for credit will partly be satisfied by the banks' inflationary credit expansion. Later on, but too late, the Central Banks and consequently also the commercial banks raise their interest rates--either because they are losing gold or foreign exchange, or for other reasons. Now demand for new credits is discouraged, and at the same time the credits granted earlier appear less profitable and are repaid. Deflation ensues. In other words: delay in adjustment of the bank rate to the increased credit demand opens the death trap for money with the result that the volume of money grows; the subsequent belated adjustment forces the money back into the death trap so that the volume of money shrinks.

The Wicksellian argument is basically correct. His theory should be regarded as the most decisive progress in the field of economics. Much of what has been taught later appears retrogressive in comparison.

--L. Albert Hahn, Common Sense Economics (New York: Abelard-Schumann, 1956), 162-163.

The School Most Enthusiastic for Monetary Manipulations Is the Mercantilist School and It Is Related to Keynesianism

It might therefore be appropriate to recall briefly the teachings of the school that has shown more enthusiasm for monetary manipulations than any other during history. We mean the teachings of the Mercantilists. 

The relationship of Keynesianism to Mercantilism of the sixteenth to the eighteenth centuries is well known. Keynes himself has pointed to it. He has said much in praise and in defense of mercantilistic theory and policy and against arguments presented by its classical critics.

--L. Albert Hahn, "Mercantilism and Keynesianism," in The Economics of Illusion: A Critical Analysis of Contemporary Economic Theory and Policy (New York: Squier Publishing, 1949), 106-107.

The "Neglected Prophet," Silvio Gesell, on Postponing Depressions Indefinitely by Keeping Money Rolling through Fear of Its Depreciation

Another precursor of Keynes was the "unduly neglected prophet, Silvio Gesell," the proponent of Schwundgeld (vanishing money). Gesell's book, Die Verstaatlichung des Geldes (1891), was well known in continental Europe, especially in Switzerland. But despite wide propaganda by clubs formed to spread his theories, it was not taken seriously either. The proposition that depressions could be postponed indefinitely by keeping money rolling through fear of its depreciation rather than by correcting maladjustments seemed too absurd.

--L. Albert Hahn, "Continental European Pre-Keynesianism," in The Critics of Keynesian Economics, ed. Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 288.

In 1953, Mrs. Robinson Launched A Frontal Attack on the Neo-Classical Production Function

The controversy began in 1953 with a frontal attack by Mrs Robinson on the 'neo-classical production function' as a macro-variable designed to show output as a function of labour and capital input. She showed that there is no such thing as a quantity of capital, hence no measurable input of it.

--Ludwig M. Lachmann, Macro-economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-Foundations and Its Consequences, Hobart Paper 56 (London: Institute of Economic Affairs, 1973), 23.

The Cambridge School Wants to Undo the Marginal Revolution By Getting Rid of Human Action

The main aim of the present-day Cambridge School appears to be an attempt to undo the results of the marginal revolution and to bring about a Ricardian counter-revolution. For a hundred years economists have taken it for granted that what happens in a market economy ultimately depends on the subjective preferences and expectations of millions of individuals finding expression in the supply and demand for goods, services and financial assets. . . .

For them economic action always means the response of a 'typical agent' to a 'given' situation. Men act exclusively in their capacity as 'workers', 'capitalists', or 'landlords'. Spontaneous action does not exist. Men do not really act in the Ricardian world, they merely re-act to the circumstances in which they happen to find themselves.

--Ludwig M. Lachmann, Macro-economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-Foundations and Its Consequences, Hobart Paper 56 (London: Institute of Economic Affairs, 1973), 18-19.

Monetary Expansion and Recession Are Inseparable

Under the impact of a monetary disturbance, prices will transmit misinformation. The revelation of this misinformation and its correction constitute a recession. The abnormal rise in losses and unemployment is the counterpart to the misallocations created by the misinformation. In short, monetary expansion and recession are inseparable!

If the expansion is halted, the recession is precipitated rapidly. It may be extensive and deep. But once the readjustment is completed and a sustainable pattern of output and employment established, there need be no further allocative difficulties and certainly no currency depreciation. . . .

If the expansion is repeatedly accelerated to overcome the recession, the outcome is obvious. Such a a situation may well come to face the developed economies of the Western world, unintentionally, no doubt as the consequence of the cumulative outcome of successive decisions to expand the money supply in the face of the threatening depression. The economists quoted here assure us that our financial system will never permit another Great Depression. Can they also assure us that it will never permit a hyperinflation?

--Gerald P. O'Driscoll Jr. and Sudha R. Shenoy, "Inflation, Recession, and Stagflation," in The Foundations of Modern Austrian Economics, ed. Edwin G. Dolan (Kansas City: Sheed and Ward, 1976), 205-206.

The Austrian School's Contribution to Monetary Theory

The Austrian contribution to monetary theory is two-fold: First, it emphasizes the role of money in the pricing process and incorporates money--or, more precisely, changes in the stream of money payments--into the determination of relative prices. Second, it analyzes the effects of such money-induced relative price changes on the time structure of production, that is, the capital structure. . . .

Monetary changes are not neutral--they do not affect all prices uniformly so as to change their nominal height but leave relative price relationships unaltered. In reality money does not enter the economy by way of a simple uniform change in all money balances, as many textbook writers like to assume. Rather, newly created money always enters the economy at a specific point and is spent on certain specific goods before gradually working through the system.

Thus some prices and expenditures are altered first, and other prices and expenditures, later. As long as the original monetary change is maintained, this monetary "pull" on price interrelationships will persist. . . .

Resource allocation will not be left unchanged as a result of these relative price changes. At the point at which the new money enters the economy, prices will rise relative to prices elsewhere. The pattern of outputs will be altered correspondingly. Monetary expansion also prevents some prices from falling that otherwise might. Thus some businesses make profits that otherwise would have losses, and workers are employed in jobs they otherwise would leave. Another result of the monetary expansion is that more new and different kinds of businesses are started. Firms are also led to embark on new and/or different lines of production. In short, the pattern of expenditures, resource allocation, and above all relative prices is changed by monetary expansion.

--Gerald P. O'Driscoll Jr. and Sudha R. Shenoy, "Inflation, Recession, and Stagflation," in The Foundations of Modern Austrian Economics, ed. Edwin G. Dolan (Kansas City: Sheed and Ward, 1976), 194-195.

Neither Aggregates Nor Averages Act Upon One Another and It Is Impossible to Establish Connections of Cause and Effect Between Them

In an interesting, though apparently neglected, aside, Professor Hayek has remarked that ". . . neither aggregates nor averages do act upon one another, and it will never be possible to establish necessary connections of cause and effect between them as we can between individual phenomena, individual prices, etc. I would even go so far as to assert that, from the very nature of economic theory, averages can never form a link in its reasoning . . . ."

Now, any serious doubt concerning the validity of aggregates and averages is a dagger aimed straight at the heart of much current empirical research and statistical analysis in economics.

--Louis M. Spadaro, "Averages and Aggregates in Economics," in On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises, ed. Mary Sennholz (1956; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 140.

Action Specifically Implies the Contrary of Indifference

Indifference can never be demonstrated by action. Quite the contrary. Every action necessarily signifies a choice, and every choice signifies a definite preference. Action specifically implies the contrary of indifference. The indifference-concept is a particularly unfortunate example of the psychologizing error. Indifference-classes are assumed to exist somewhere underlying and apart from action. This assumption is particularly exhibited in those discussions that try to "map" indifference curves empirically by the use of elaborate questionnaires.

The concept of "indifference" may be important for psychology, but not for economics. In psychology, we are interested in finding out intensities of value, possible indifference, etc. In economics, however, we are only interested in values revealed through choices. It is immaterial to economics whether a man chooses alternative A to alternative B because he strongly prefers A, or because he tossed a coin. The fact of ranking is what matters for economics, not the reasons for the individual's arriving at that rank.

--Murray N. Rothbard, "Toward a Reconstruction of Utility and Welfare Economics," in On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises, ed. Mary Sennholz (1956; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 237.

Wicksteed and the Subjectivism of Cost

It was in regard to the role of costs in the theory of economic value that Wicksteed saw himself as most clearly departing from the Marshallian orthodoxy of his British contemporaries. He saw that orthodoxy paying lip-service to the marginal utility theory introduced by Jevons, but refusing to recognize the full implications of this theory for the final rejection of the classical cost theory of value.

Wicksteed rebelled against a view of production activity which sees it as a matter of strictly technical relationships, entirely distinct from the marginal-utility considerations governing consumption activity.

It was the confusion arising from this Marshallian view which was responsible for the residual classical idea that market price is in some sense the outcome of a balancing of an (objective) cost of production with (subjective) marginal utility.

--Israel M. Kirzner, "Philip Wicksteed: The British Austrian," in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 106.

Hutt Considered the Austrians to be the True Heirs of the Classical Tradition and Upholders of Pre-Keynesian Monetary Theory

Although Hutt and other critics of the Keynesian Revolution--including Arthur Marget and Henry Hazlitt--considered their work to be in the classical tradition, as the revolution's stunning popularity through the 1940s and 1950s pushed economists' memory of earlier monetary theory further into the background, Hutt and Hazlitt (Marget had left academic economics after the World War II and died in 1962) found themselves increasingly sharing perspectives with the School that had most firmly and consistently upheld pre-Keynesian monetary theory: the Austrians. Neither seems to have been attracted much to the aggregative, positivist method of the Chicago School's monetarism, a reaction to Keynesianism that to some extent shared its method. Hutt considered the Austrians to be the true heirs of the classical tradition with which, understandably, he preferred to be identified.

--John B. Egger, "William H. Hutt: The 'Classical' Austrian," in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 197.

Frank A Fetter on the Subjective Nature of Value in Economic Theory

Prior to the advent of a mature Ludwig von Mises, Fetter was the world's leading subjective-value theorist. While Mises would bring the theory of money within a subjective-value, general theory of economics in 1912, Fetter had by 1904 already extended the principle of subjective value to bring factor prices and the rate of interest into a unified theory.

Fetter himself was so adamant about the subjective nature of value in economic theory that he disdained referring to the watershed of economic thought in the 1870s as the Marginalist Revolution, preferring the adjectives "subjective" or "psychological" to describe the new theory.

--Jeffrey M. Herbener, "Frank A. Fetter: A Forgotten Giant," in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 125-126.

Entrepreneurship as Arbitrage

Following Kirzner's idea of entrepreneurship as the observation of an unexploited profit opportunity, entrepreneurship can be thought of as arbitrage: buying at one price and selling at a higher one. For example, someone might notice that apples sell for $0.75 in one city and $1 in a nearby one. A profit opportunity exists because apples can be purchased for $0.75 and sold for $1. To actually engage in the entrepreneurial act, however, will take production and time. The entrepreneur will have to buy or rent a truck to transport the apples, which will result in some expense, and there may be spoilage as the apples are shipped, further reducing the entrepreneur's profit. Taking production into account, there is no profit opportunity if it costs $0.25 or more to ship the apples from one city to the other.

Time is also a factor. By the time the entrepreneur actually gets the apples to the second city, it may be that the price of apples has fallen there, so the apples can only be sold for $0.85. If the shipping cost is $0.10 or more per apple, what at first appeared to be a profit opportunity will have turned out to result in a loss. Because an economy is always evolving, economic conditions will necessarily be different by the time the innovation is acted upon.

--Randall G. Holcombe, Advanced Introduction to the Austrian School of Economics, Elgar Advanced Introductions (Cheltenham, UK: Edward Elgar Publishing, 2014), 26.

As Is Usual for Hayek, the Argument for the Free Economy Rests on an Argument from Ignorance

It is no accident, in short, that Hayek and the Hayekians dropped Mises's term "impossible" as embarrassingly extreme and imprecise. For Hayek, the major problem for the socialist planning board is its lack of knowledge. Without a market, the socialist planning board has no means of knowing the value-scales of the consumers, or the supply of resources or available technologies. The capitalist economy is, for Hayek, a valuable means of disseminating knowledge from one individual to another through the pricing "signals" of the free market. A static, general equilibrium economy would be able to overcome the Hayekian problem of dispersed knowledge, since eventually all data would come to be known by all, but the everchanging, uncertain data of the real world prevents the socialist planning board from acquiring such knowledge. Hence, as is usual for Hayek, the argument for the free economy and against statism rests on an argument from ignorance.

--Murray N. Rothbard, "The End of Socialism and the Calculation Debate Revisited," Review of Austrian Economics 5, no. 2 (1991): 66.

The Mythology of the Socialist Calculation Debate

In the course of his two-part article and subsequent book, Lange concocted what could only be called the Mythology of the Socialist Calculation Debate, a mythology which, aided and abetted by Joseph Schumpeter, was accepted by virtually all economists of whatever ideological stripe. It was this mythology which I found handed down as the Orthodox Line when I entered Columbia University's graduate school at the end of World War II--a line promulgated in lectures by no less an expert on the Soviet economy than Professor Abram Bergson, then at Columbia.

The Lange-Bergson Orthodox Line went about as follows: Mises, in 1920, had done an inestimable service to socialism by raising the problem of economic calculation, a problem of which socialists had not generally been aware. Then Pareto and his Italian disciple Enrico Barone had shown that Mises's charge, that socialist calculation was impossible, was incorrect, since the requisite number of supply, demand, and price equations existed under socialism as under a capitalist system. At that point, F. A. Hayek and Lionel Robbins, abandoning Mises's extreme position, fell back on a second line of defense: that, while the calculation problem could be solved theoretically, in practice it would be too difficult. Thereby Hayek and Robbins fell back on a practical problem, or one of degree of efficiency rather than of a drastic difference in kind. But now, happily, the day has been saved for socialism, since Taylor-Lange-Lerner have shown that, by jettisoning utopian ideas of a money-less or price-less socialism, or of pricing according to a labor theory of value, the socialist Planning Board can solve these pesky equations simply by the good old capitalist method of trial and error.

--Murray N. Rothbard, "The End of Socialism and the Calculation Debate Revisited," Review of Austrian Economics 5, no. 2 (1991): 53-54.