Marx Supported the Mill-Tooke-Banking School Theory of the Business Cycle

Despite his overt scorn for John Stuart Mill, Marx was thereby driven into implicit support for the Mill-Tooke-banking school theory of the business cycle [Marx's entire theory of money was profoundly influenced by Thomas Tooke and the banking school. Marx believed, with Tooke, that changes in price levels determined changes in the quantity of money and not vice versa, and that balance of payments deficits were determined by real rather than monetary factors.] As we have seen, the currency school writers themselves were forced into this view after the seeming failure of Peel's Act of 1844 to eradicate business cycles. While all banking school-type theorists on non-monetary disproportionality and over-investment were obliged to admit that expansion of money and bank credit were necessary conditions to a cycle boom, they all proclaimed that credit cycles were only passive resultants of non-monetary cycles of 'over-' and 'under-' trading or of 'speculation'. Thus Millian non-monetary cycle theory permeated the ranks of economists, and encouraged economists, including Marx, to blame the capitalist market economy for the recurrence of business cycles.

--Murray N. Rothbard, Classical Economics, vol. 2 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), 432-433, 438n.

Karl Marx Found a Marvellous Weapon in Ricardian Economics, Which Ignores Market Exchanges by Focusing Instead on Production Followed by Distribution of Income

As Karl Marx plunged into the economics of capitalism that would occupy the rest of his life, he found ready at hand a marvellous weapon: Ricardian economics. In contrast to J.B. Say and the French tradition, Ricardo concentrated not on market exchange and its inevitable focus on individual actors and exchangers benefiting from exchange, but on 'production' followed by 'distribution' of income as a distinct and separate process. Ricardo's main focus was on how this social income from production is 'distributed'. Whereas Say or Turgot looked at individual factors of production and how their income emerges from production and exchange, Ricardo focused only on entire, allegedly homogeneous, 'classes' of producers: workers earning wages, capitalists earning 'profits' and landlords acquiring rent.

--Murray N. Rothbard, Classical Economics, vol. 2 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), 392.

The Doctrines of the English Socialists and the Theoretical Exposition of Karl Marx Spring from the Whiggish Pages of the Wealth of Nations

Smith's labour theory of value did inspire a number of English socialists before Marx, generally named 'Ricardian' but actually 'Smithian' socialists, who decided that if labour produced the whole product, and rent and profit are deductions from labour's produce, then the entire value of the product should rightfully go to its creators, the labourers. Douglas justly concluded that

It is then from the Whiggish pages of the Wealth of Nations that the doctrines of the English Socialists as well as the theoretical exposition of Karl Marx, spring. The history of social thought furnishes many instances where theories elaborated by one writer have been taken over by others to justify social doctrines antagonistic to those to which the promulgator of the theory gave adherence. But had the gift of prevision been granted to those men, few would have been more startled than Adam Smith in seeing himself as the theoretical founder of the doctrines of nineteenth-century socialism.

--Murray N. Rothbard, Economic Thought Before Adam Smith, vol. 1 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), 456.

The (Classical) Liberal Thinks That the Socialist Society Will Always Decide for the Shorter Production Period and Will Consume the Means of Production

In the individualistic society the individual, not society, accumulates. Capital accumulation takes place by saving; the saver has the incentive of receiving income from the saved capital as the reward of saving. In the communist society, society as such will receive the income that today flows to the capitalists alone; it will then distribute this income equally to all members or otherwise use it for the good of the whole. Will that alone be a sufficient incentive for saving? To be able to answer this question, one must imagine that the society of the socialist state will be faced every day with the choice whether it should devote itself more to the production of consumer goods or more to that of capital goods, whether it should choose productive processes that do indeed take a shorter time but correspondingly yield less output or choose ones that take more time but then also bring greater output. The liberal thinks that the socialist society will always decide for the shorter production period, that it will prefer to produce consumer goods instead of capital goods, that it will consume the means of production it will have taken over as heir of the liberal society or at best maintain them but in no case increase them.

--Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time, trans. Leland B. Yeager, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2006), 157.

The Marxian Exploitation Theory Is Largely the Product of Major Errors in Classical Economics Such As Errors Pertaining to the Conceptual Framework of the Exploitation Theory

Nevertheless, it is certainly true that the Marxian exploitation theory is largely the product of major errors in classical economics, particularly, as I will show, in the writings of Adam Smith. The relationship between classical economics and the exploitation theory represents a tangle of irony and tragedy.

One irony is that while various errors and confusions in classical economics really did contribute to the exploitation theory, the most fundamental and important of these errors and confusions have gone unnoticed and unidentified. These are the errors and confusions pertaining to the conceptual framework of the exploitation theory, which assumes that all income due to the performance of labor is wages and that profits are a deduction from what is naturally wages. They have gone unnoticed and unidentified because the validity of this framework is taken for granted—as being literally unexceptionable and therefore unobjectionable. It is assumed to be correct by the opponents of Marx as much as by Marx; this includes Böhm-Bawerk, the leading critic of the exploitation theory, as will be obvious once I have explained the essentials of his critique of the exploitation theory.

--George Reisman, Capitalism: A Treatise on Economics (Laguna Hills, CA: TJS Books, 1998), 474.

The Mistaken Belief that Classical Economics Inevitably Leads to the Marxian Exploitation Theory

I will focus on the views of Smith and Ricardo, the two foremost representatives of the classical school, to whom Marx is assumed to be particularly indebted. On the basis of my discussions in these sections, it will be obvious later on, in Chapter 14, that what Marx meant by the labor theory of value and the iron law of wages are two very different sets of ideas than what the classical economists meant, and are in fact gross distortions of what the classical economists meant.

Nevertheless, mainly because of the prominent role played by “the labor theory of value” and “the iron law of wages,” however different their actual content in the two systems of thought, classical economics is almost universally assumed to lead inexorably to the Marxian exploitation theory.

My reason for writing this part, and presenting it here, is that subsequent chapters in this book depend vitally on leading doctrines I have taken over from the classical economists and reintroduced in a modernized form, doctrines which have been abandoned or forgotten precisely because of the mistaken belief that classical economics inevitably leads to the Marxian exploitation theory. As a result, in order to demonstrate the consistency of my profound intellectual indebtedness to classical economics with my unswerving support of capitalism, it is necessary for me to explain the actual nature of the relationship between classical economics and the Marxian exploitation theory, which, I will show, is ultimately one of the most intense opposition.

--George Reisman, Capitalism: A Treatise on Economics (Laguna Hills, CA: TJS Books, 1998), 473.

Turgot's Theory of Capital: The Capitalist-Entrepreneur Must First Accumulate Saved Capital in order to Advance His Payment to Labourers While the Product Is Being Worked On

Turgot's theory of capital proper was echoed in the British classical economists as well as the Austrians. Thus in his great 'Reflections', Turgot pointed out that wealth is accumulated by means of unconsumed and saved annual produce. Savings are accumulated in the form of money, and then invested in various kinds of capital goods. Furthermore, as Turgot pointed out, the 'capitalist-entrepreneur' must first accumulate saved capital in order to 'advance' his payment to labourers while the product is being worked on. In agriculture, the capitalist-entrepreneur must save funds to pay workers, buy cattle, pay for buildings and equipment, etc., until the harvest is reaped and sold and he can recoup his advances. And so it is in every field of production.

--Murray N. Rothbard, Economic Thought Before Adam Smith, vol. 1 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), 395.

Anne Robert Jacques Turgot Worked Out Most of the Austrian Theory of Capital and Interest A Century Before Eugen von Böhm-Bawerk Did

In the roster of A.R.J. Turgot's outstanding contributions to economic theory,
the most remarkable was his theory of capital and interest which, in contrast
with such fields as utility, sprang up virtually full-blown without reference to
preceding contributions. Not only that: Turgot worked out almost completely
the Austrian theory of capital and interest a century before it was set forth in
definitive form by Eugen von Böhm-Bawerk.

--Murray N. Rothbard, Economic Thought Before Adam Smith, vol. 1 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), 395.

The National Subsistence Fund or Turgot's Saved Stocks of Goods Embraces the Entire Group of Goods by Means of Which the Capitalist Process Is Begun and Carried Through

The conception which seems to me to come nearest to ours is that suggestive one which may be most concisely called the "National Subsistence Fund," and which very much coincides with Turgot's "Saved Stocks of Goods." . . . The conception of the national subsistence fund is, like our own, a conception of great scientific suggestiveness, and is so as regards those very problems which connect themselves with the word capital. In particular, as being so much in touch with the phenomenon of capitalist production (production carried on in lengthy processes and roundabout methods), it is even more happy than our conception of the Intermediate Products. The latter, indeed, embraces all those goods which come into existence during the production process, the goods which carry it on and help to complete it; but it does not embrace the initial fund of consumption goods needed to commence the process. It therefore leaves out the first link in the chain, which is a very important one, while the conception of the Subsistence Fund, as I understand it, embraces the entire group of goods by means of which the capitalist process is begun and carried through.

--Eugen von Böhm-Bawerk, The Positive Theory of Capital, trans. William Smart (1891; repr., New York: G.E. Stechert and Co., 1930), 42.

The Basis of the Reasoning of the Classic Economists Was That Present Labor Gets Its Substantial Reward from a Product Made by Past Labor

The fact that present labor gets its substantial reward from a product made chiefly by past labor was the basis of the reasoning of the classic economists. The products of the past which served to support and remunerate laborers they called capital. They inferred--indeed, assumed as a thing so obvious as hardly to need inference--that wages were paid from capital. In the second part of the present volume we shall have occasion to note how briefly and inadequately they presented this cardinal proposition. Here we shall proceed at once to consider how far it is sound; how far the products of the past are to be called capital, and how far the proposition that labor gets its reward from past product is equivalent to the proposition that wages are paid from capital.

--F.W. Taussig, Wages and Capital: An Examination of the Wages Fund Doctrine (London: Macmillan and Co., 1896), 26.

The Political Consequence of the Wages Fund Theory Is, At Least Concerning the Lot of Workers, To Leave Things To Themselves -- Laissez Faire

That is to say, from the wages fund theory follows the idea of harmony between the two “classes” capital and labour. It follows, in the words of McCulloch, “that at bottom they [the work-people] have no exclusive interests, and that their prosperity is intimately connected with, and is indeed inseparable from, the prosperity of the other classes.” If the capitalists thrive, so will workers. This leads Adam Smith to an optimistic interpretation of the development of society. He thinks it best to leave everybody free to achieve his selfish goals. The increase of capital that would result would be of advantage also to the working class. Thus, the political consequence of the wages fund theory is, at least concerning the lot of workers, to leave things to themselves -- laissez faire.

--Eduard Braun, "Financial Markets and Economic Growth" (PhD diss., Université d'Angers, 2011), 114-115.

The Abandonment of the Wages-Fund Doctrine Made Possible the Acceptance of Keynesianism

According to this famous critic, the wages fund theory is a cornerstone of the classical system, not merely a part of it that could be erased or replaced at will. Also modern economists will see from this quote that, if George is correct, the wages fund theory is central to economic questions that are still of importance today. In the words of Reisman, “the abandonment of the wages-fund doctrine […] made possible the acceptance of Keynesianism and the policy of inflation, deficits, and ever expanding government spending.” Whether one shares Reisman’s opinion concerning Keynesianism or not, the wages or subsistence fund theory seems to be pivotal to economics.

--Eduard Braun, "Financial Markets and Economic Growth" (PhD diss., Université d'Angers, 2011), 113.

The Interest Rate Bears a Close Relationship to the Subsistence Fund

So in the Theory of Money and Credit, it is the subsistence fund, the fund of saved-up consumers’ goods that determines the length of the period of production.

Entrepreneurs, when they evaluate the profitability of the different investments and decide about the production processes they want to implement, do not, of course, orientate themselves by the size of the national subsistence fund. They have probably never heard of such a thing, and even if they had, they surely could not determine its size. Instead, they are guided by the interest rate. Yet, in the Theory of Money and Credit, the interest rate bears a close relationship to the subsistence fund. It provides the entrepreneurs with the information as to how lengthy the production processes can reasonably become, that is, it informs them about the size of the subsistence fund. Th is can be seen especially in Mises’s exposition of the ABCT [Austrian Business Cycle Theory].

--Eduard Braun, "The Subsistence Fund in Ludwig von Mises's Explanation of the Business Cycle," in Theory of Money and Fiduciary Media: Essays in Celebration of the Centennial, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2012), 197.

Savings, in Influencing the Size of the Subsistence Fund, Determine the Way Production Is Organised in the Economy

In Theorie des Geldes und der Umlaufsmittel, Mises explains the influence of circulation credit on the economy in terms of the so-called subsistence fund. This fund—which consists of saved-up consumers’ goods—looms large in his then exposition of the production process. To explain the subsistence fund theory in a few words: Consumers’ goods are a necessary pre-condition of every production process. Without something to eat, something to drink, clothes, and so forth, nobody will participate in production. The owners of the originary factors of production, most notably workers, need to be furnished with consumers’ goods during the production process. The subsistence fund is especially important when it comes to determining the possible length of the production processes. It is this point which Mises stresses in his 1912 book . . .

He further states that the “national subsistence fund is necessarily altered
by the increase of savings.” Thus savings, in influencing the size of the subsistence fund, determine the way production is organised in the economy:

A lengthening of the period of production is only practicable . . . when either the means of subsistence have increased sufficiently to support the laborers and entrepreneurs during the longer period or when the wants of producers have decreased sufficiently to enable them to make the same means of subsistence do for the longer period.

--Eduard Braun, "The Subsistence Fund in Ludwig von Mises's Explanation of the Business Cycle," in Theory of Money and Fiduciary Media: Essays in Celebration of the Centennial, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2012), 196.

Would the Austrian Business Cycle Disappear with Rational Expectations?

A related question is if better information of entrepreneurs about credit expansion and its effects could cushion its effects. Mises argues that entrepreneurs may in the future anticipate the effects of credit expansion and avoid using the easy credit. But would the Austrian business cycle disappear with rational expectations? For that to be the case, as Huerta de Soto argues all economic agents would have to agree that ABCT [the Austrian Business Cycle Theory] is the correct theory, and exactly know how much money is injected and where in the economy it is injected. They would have to have all the relevant information. And even if they had this information, the future would remain uncertain. Thus, economic agents would be tempted to participate in the boom trying to withdraw from the corresponding investment projects before the recession sets in. But they could not know how long the boom would last.

--Philipp Bagus, "Modern Business Cycle Theories in Light of the ABCT," in Theory of Money and Fiduciary Media: Essays in Celebration of the Centennial, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2012), 235.