Eugen von Böhm-Bawerk's Theory of the Determination of Price by "Marginal Pairs"

There are, however, two points in Böhm-Bawerk's doctrine to which reference is frequently made, and which may therefore be briefly noted here. One is his theory that price is determined by what he calls the "marginal pairs"; the other is represented by his views on interest, a subject which he describes as the" heavy part" of his leading work.

The theory of the determination of price by the so-called "marginal pairs" is to be found in the concluding portions of Böhm-Bawerk's discussion of "price," in which up to a point he shrouds obvious truth behind considerable complexity of statement. In the case of isolated exchange the price will be "determined somewhere between the subjective valuation of the commodity by the buyer as upper limit, and the subjective valuation by the seller as lower limit." Putting it in everyday language, in the isolated exchange the buyer will not pay more than he thinks the thing is worth, nor will the seller sell for less than he, on his side, thinks it is worth, and the actual price will fall between these two limits.

--Alexander Gray, The Development of Economic Doctrine: An Introductory Survey (1931; repr., London: Longmans, Green and Co., 1956), 357.

Eugen von Böhm-Bawerk's "Capital and Interest" Is an Elaborate Criticism of All Earlier Theories of Interest

The third of the great Austrians who form the core of the Austrian school is Eugen von Böhm-Bawerk (1851-1914), perhaps the best known in this country, by reason of his theories regarding interest, and his very brilliant assault on the Marxian system. For our immediate purposes, Böhm-Bawerk is the author of two considerable works, both of which have fortunately been translated, one under the title of Capital and Interest, and the other as The Positive Theory of Capital. The former is an elaborate criticism of all earlier theories of interest, so that the work is in substance a very learned and detailed history of economic doctrine on this one point. This work is wholly destructive and critical and though it prepares the way for a statement of the author's own views, it does not in fact contain such a statement. It is to its companion work, The Positive Theory of Capital, that we must tum to get Böhm-Bawerk's contribution to Austrian doctrine.

--Alexander Gray, The Development of Economic Doctrine: An Introductory Survey (1931; repr., London: Longmans, Green and Co., 1956), 356.

Capital Is Differentiated by Marx into Constant and Variable Capital (Machinery and Wages); Machinery Yields No Surplus Value; Labour Has the Whole Burden of Providing Surplus Value

It will be observed that the whole of the surplus value is derived from labour. Indeed, on the theory, as initially stated, it would appear to be derived from the individual worker; each individual worker would appear to be robbed by his own particular employer. This view is, however, modified by later elaborations of the analysis. That the surplus value comes from labour, and from labour alone, is reinforced by a distinction which is fundamental to the Marxian analysis. Capital is differentiated by Marx into constant and variable capital, corresponding broadly to the distinction between machinery and wages. But machinery yields no surplus value. It is of the essence of a machine that, in being used up, it transfers its value, neither more nor less, to the product. Whatever be thought of the validity of the argument, it has at least the advantage that it thrusts on labour the whole burden of providing surplus value. It should be noted for its significance later that industries will vary from each other according to their 'organic composition'; the ratio of constant to variable capital, low in some industries, will be high elsewhere.

--Alexander Gray, The Socialist Tradition: Moses to Lenin (London: Longmans, Green, 1946), 311.

There Is Great Confusion Over the Meaning of Capital

The use of the capital concept, or, more accurately, of the capital concepts, has been the source of infinite confusion, a "second confusion of tongues, a second Babel." "Our science cannot possibly concede the right to its students for all times to call ten or twelve  fundamentally different things by the same name."  Thus wrote Böhm-Bawerk in 1888. . . . The words of Carl Menger written half a
century ago are just as true to-day. "There are," he said, "as many different and equally confused ideas as to what is the nature of capital as there are authors." It is almost unbelievable that, many decades after the publication of Böhm-Bawerk's Positive Theory, we should have to recall these words not as a historical reminiscence but as relevant to the present day.

--Fritz Machlup, The Stock Market, Credit, and Capital Formation, trans. Vera C. Smith (London: William Hodge and Company, 1940), 8-9.

The Agio Theory of Interest: Explaining Interest as the Difference in Value Between Present and Future Goods

I have already remarked that in the most recent times some new opinions have been added to the old rivals. The most influential additions of this sort are represented by those theories which explain interest by a difference in value between present and future goods.

Remote allusions to this thought had already been made by Galiani and Turgot. A half-century later John Rae had given to it a very remarkable formulation, in spite of which, however, it was not his fate to exert any influence upon its further literary development. Again, forty years later, Jevons worked out in a masterly way most of the premises upon which that theory rests, but he neglected to develop the lines of thought which connect these premises with the phenomena of interest. . . .

In immediate connection with Jevons should be mentioned Launhardt and Emil Sax. Both of these authors excel Jevons in so far as they clearly express the concept, — involved, but not clearly expressed, in Jevons's work, and meantime announced in 1884 as the foundation of my interest theory, — that interest springs from the difference in value, resting upon psychological grounds, between present and future goods.

--Eugen von Böhm-Bawerk, Recent Literature on Interest: A Supplement to "Capital and Interest", trans. William A. Scott and Siegmund Feilbogen (New York: Macmillan Company, 1903), 6-7.

On the Rodbertus-Marx Exploitation Theory of Interest

I have chosen the statements of the Exploitation theory given by Rodbertus and Marx. They are the only ones that offer anything like a firm and coherent foundation. While that of Rodbertus is to my mind the best, that of Marx is the one which has won most general acceptance, and the one which may to a certain extent be regarded as the official system of the Socialism of to-day. In subjecting these two to a close examination I think I am taking the Exploitation theory on its strongest side, remembering that fine saying of Knies, " He that would be victorious on the field of scientific research must let his adversary advance fully armed and in all his strength."

To avoid misunderstandings, one more remark before beginning. The purpose of the following pages is to criticise the Exploitation theory exclusively as a theory; that is to say, to investigate whether the causes of the economic phenomenon of interest really consist in those circumstances which the Exploitation theory asserts to be its originating causes.

--Eugen von Böhm-Bawerk, Capital and Interest: A Critical History of Economical Theory, trans. William Smart (London: Macmillan and Co., 1890), 326.

The Keynesian Prescription for Eliminating Unemployment Rests on the Money Illusion

Keynes believed that while other elements of the economic system, including prices, were set basically in real terms, workers bargained even ultimately only in terms of money wages--that unions insisted on minimum money wage rates downward, but would passively accept falling real wages in the form of rising prices, money wage rates remaining the same. The Keynesian prescription for eliminating unemployment therefore rests specifically on the "money illusion"--that unions will impose minimum money wage rates, but are too stupid to impose minimum real wage rates per se. 

--Murray N. Rothbard, Man, Economy, and State with Power and Market, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2009), 783-784.

How Was the Keynesian Revolution Accomplished? How Was this Mare's Nest of Discredited Mercantilist Fallacies Put Over?

How was the Keynesian Revolution accomplished? How was this mare's nest of discredited Mercantilist fallacies put over? In the first place, by intellectual intimidation. The old fallacies were dressed up by Keynes in such a wilderness of unclear writing and pretentious jargon, in such a bewildering morass of strange concepts, that the Keynesian disciples claimed to be the only ones able to understand the Master. And they trumpeted Youth on their side. The older economists were cowed by newer lights who arrogantly proclaimed that no one over thirty-five was competent to understand the New Economics. Paul A. Samuelson has written of his joy at being under thirty-five when this New Revelation was announced to the world. And as their Master they had an eminent, aristocratic Englishman, witty, charming, and thoroughly irresponsible.

In their conquest, the Keynesians were aided by two other factors. For one thing, the world, inclined ever more toward statism, was looking for an economic theory which would at last make government spending and inflation respectable, while making private thrift and laissez-faire capitalism anathema in their ancient home--among economists. Second, the "neoclassical" economic theory taught at Cambridge (Keynes's home) and also in America, did have important gaps: in failing to integrate monetary theory and general economics, in lacking an adequate theory of the business cycle. For these reasons, the conquest was absurdly easy.

--Murray N. Rothbard, foreword to The Failure of the "New Economics": An Analysis of the Keynesian Fallacies, by Henry Hazlitt (1959; repr., Auburn, AL: Ludwig von Mises Institute, 2007), xiv-xv.

Roundabout Methods of Production Need Three Forms of Capital: Free Capital (the Subsistence Fund), Intermediate Products, and Fixed Capital

Production employing capital means production using roundabout methods. . . . We will now distinguish between three forms of capital:

1. Free capital: This is the subsistence fund (supply of consumer goods) which is made available for the support of roundabout methods of production;
2. Intermediate products: These are raw materials in the various stages of processing prior to the finishing of the consumer good (raw materials take on the shape of "maturing" consumer goods in the course of processing);
3. Fixed (stable) capital: ("relatively durable factors of production": machines, etc.); These are produced factors of production that can be used for a number of individual production processes.

Intermediate products and fixed capital are goods which are characteristic of roundabout methods of production. We will label them with the term "capital goods." In contrast, consumer goods as such are never capital; they only assume the function of capital if they are used in the specific way we previously described with the term "reproductive consumption," i.e., if they serve to support roundabout methods of production. Intermediate products and free capital serve to support the individual production processes and can thus be labeled "liquid" capital in contrast to "fixed" capital. Yet, one must pay attention to the fact that liquid capital is also employed in the process of producing fixed capital.

--Richard von Strigl, Capital and Production, trans. Margaret Rudelich Hoppe and Hans-Hermann Hoppe, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2000), 26-27.

The Mainstream View on Money Is Logically Incoherent

This book aims to show that the consensus is wrong. Today’s mainstream view on money is logically incoherent because it is in fundamental conflict with essential aspects of money and money’s role in a market economy. Even a carefully controlled elastic money system, that is, one that operates according to the best intentions and the best designs of today’s mainstream economists and that avoids any obvious policy errors, will not enhance economic stability. Instead, the ongoing injections of new money must systematically distort market signals and cause misuse of resources, mispricing of assets, and misallocation of capital. In fact, such a system is unsustainable in the long run. It is bound to generate larger and larger crises and is likely to end in total collapse.

--Detlev S. Schlichter, prologue to Paper Money Collapse: The Folly of Elastic Money, 2nd ed. (Hoboken, NJ: John Wiley and Sons, 2014), 8-9.

Werner Sombart Wishes to Trace Back the Opposition Between the Marxian System and the Austrian School System to a Dispute About Method

This leads me to a last point on which I must touch in regard to Sombart. Sombart wishes to trace back the opposition which exists between the Marxian system on the one side, and the adverse theoretic systems—especially of the so-called Austrian economists—on the other, to a dispute about method. Marx, he says, represents an extreme objectivity. We others represent a subjectivity which runs into psychology. Marx does not trace out the motives which determine individual subjects as economic agents in their mode of action, but he seeks the objective factors, the "economic conditions," which are independent of the will, and, I may add, often also of the knowledge, of the individual. He seeks to discover "what goes on beyond the control of the individual by the power of relations which are independent of him." We, on the contrary, " try to explain the processes of economic life in the last resort by a reference to the mind of the economic subject," and "plant the laws of economic life on a psychological basis."

--Eugen von Böhm-Bawerk, Karl Marx and the Close of His System: A Criticism, trans. Alice M. Macdonald (London: T. Fisher Unwin, 1898), 211-212.

Marx Has Not Proved His Fundamental Proposition That Labour Alone Governs Exchange Relations Either Objectively Or Subjectively

Thirdly—and this concerns the criticism of Marx in particular—I must ask with all plainness that if any use is made of the objective method it should be the right use. If external objective connections are shown to exist, which, like fate, control action with or without the knowledge, with or without the will of the doer, let them be shown to exist in their correctness. And Marx has not done this. He has not proved his fundamental proposition that labour alone governs exchange relations either objectively, from the external, tangible, objective world of facts, with which on the contrary they are in opposition, or subjectively, from the motives of the exchanging parties ; but he gives it to the world in the form of an abortive dialectic, more arbitrary and untrue to facts than has probably ever before been known in the history of our science.

--Eugen von Böhm-Bawerk, Karl Marx and the Close of His System: A Criticism, trans. Alice M. Macdonald (London: T. Fisher Unwin, 1898), 216.

The 'Great Depression' of 1873-1896: The Popular Linking of Deflation with Depression Was Contradicted by All Sorts of Evidence

The period from 1873 to 1896 bothered economic historians for decades. Both people living at the time, and many later academics, branded it a time of unprecedented economic stagnation throughout the gold-standard nations. In Britain (supposedly the hardest hit), 'there was an overwhelming mass of opinion -- in reports of parliamentary committees and royal commissions, in parliamentary debates, newspapers, books, pamphlets, and speeches -- that conditions were bad'.

The popular impression was supported by a single, indisputable fact: Britain and most of the West had witnessed a 'uniquely persistent deflation' with the British wholesale price index losing close to one-third of its value in less than a quarter-century. For many this 'most drastic deflation in the memory of man' was both evidence and cause of what Josiah Stamp called 'a chronic depression in trade'.

The decades-long decline in prices has been termed 'the essential problem of the Great Depression'. In what sense was it a problem? Basically, because the popular linking of deflation with depression was contradicted by all sorts of other evidence. As early as 1877 Robert Giffen found himself countering the 'common impression' that a depression of unprecedented severity was in progress. 'The common impression', Giffen insisted, 'is wrong, and the facts are entirely the other way.'

--George A. Selgin, Less Than Zero: The Case for a Falling Price Level in a Growing Economy, Hobart Paper 132 (London: The Institute of Economic Affairs, 1997), 49-50.