Classical Theories of Public Debt: Government Should Live within Its Means and That Its Means Should Be Limited

Without exception, but with some variation, the leading classical economists – David Hume, Adam Smith, David Ricardo, Jean-Baptiste Say, and John Stuart Mill – believed government should live within its means and that its means should be limited. Taxes should be light and the sovereign’s tasks restricted to military defense, law and order, and security of life, liberty, property, and contract. Beyond this government might provide public schooling and infrastructure (roads, bridges, canals), but little more.

For the classical economists governments must be as prudent as households; they must balance budgets and refrain from burdensome debt accumulations. Borrowing should be reserved for war, or for productive infrastructure, not ordinary outlays – and then repaid as soon as possible.

--Richard M. Salsman, The Political Economy of Public Debt: Three Centuries of Theory and Evidence, New Thinking in Political Economy (Cheltenham, UK: Edward Elgar Publishing, 2017), 30.

A Nation in the Economic-Commercial Sense Can Be Defined as the Space within Which Factors of Production Are Perfectly Mobile, although They Are Totally Immobile between Nations

In fact, for a theory of international trade to be developed, there must be differences between international trade and intra-national trade. Of course, in both cases, the same general theory is used, that is the general theory of exchange. But the theory of international trade has to add a specification, so that it can be a particular application of the general theory of exchange.

Most generally, economic theory assumes that goods and factors of production are perfectly mobile, which means that they can move without costs. One may study the consequences of a restriction on mobility (for example, arising from transport costs or information costs). Traditionally the trade theory assumes – as hypothesized by David Ricardo – that commodities are internationally mobile, whereas factors of production are mobile within a nation, but immobile internationally. In other words, a nation in the economic-commercial sense can be defined as the space within which factors of production are perfectly mobile, although they are totally immobile between nations. There is no need at this stage to investigate the specific causes of this immobility (natural or linguistic barriers, state controls and bans on trade, and so on).

--Pascal Salin, The International Monetary System and the Theory of Monetary Systems, New Thinking in Political Economy (Cheltenham, UK: Edward Elgar Publishing, 2016), 3.

Menger Hinted That Theoretical Economics Must Trace Economic Phenomena Back to Their Psychological Causes; Austrian Theory, Unlike Walrasian Economics, Was Founded on Introspection

Wieser and Böhm-Bawerk retained the styles of reasoning favoured by Menger. Menger merely hinted that theoretical economics must trace economic phenomena back to their ‘psychological causes’. Much later, Wieser expanded on what he believed to be the ‘psychological’ orientation of economic theory—theory which, it should be stated, paralleled Menger’s ‘exact’ theory in most important respects. The ‘“psychological” theory of economics’ was developed by introspection, that is, by ‘observations concerning the inner life of man’. . . . Schumpeter’s book had attempted to reconcile the irreconcilable—namely the central propositions and concepts of Austrian and Walrasian economics. His attempt failed because he neglected to appreciate that Austrian theory, unlike Walrasian economics, was founded on introspection.

--A.M. Endres, Neoclassical Microeconomic Theory: The Founding Austrian Version, Foundations of the Market Economy (London: Routledge, 2002), 15-16.

The Misesian Paradox of Interventionism

The first of these pertains to what might be called the Misesian “paradox of interventionism.” We have seen that Mises used words such as illogical, unworkable, unsuitable, self-defeating, and contradictory to describe interventionism. In addition, while he did not use the term, interventionism as a system was in Mises’s estimation highly unstable, a mere “interlude.” Among the alternative systems, therefore, one could easily come to imagine a priori that it would be the least enduring. Yet casual observation reveals that, among existing politico-economic systems, the interventionist mixed economy, all of its contradictions notwithstanding, is by far the most popular, widespread, and persistent of them all.

--Sanford Ikeda, Dynamics of the Mixed Economy: Toward a Theory of Interventionism, Foundations of the Market Economy (London: Routledge, 2003), 46.

The Traditional Pareto Criteria of Allocative Efficiency Are Tainted with a Definite Static Character and Should Be Replaced with the Alternative Standard of Dynamic Efficiency

The traditional Pareto criteria of allocative efficiency, which have predominated in economics up to this point, are tainted with a definite static character and therefore are inadequate to be applied as normative guidelines to the rich dynamics of real-life social institutions. Consequently, it is necessary to replace the traditional standards of efficiency with an alternative criterion, one which will fill the serious gaps in the traditional Pareto approach and be easily applicable to the realm of social institutions. We will call this alternative standard the ‘criterion of dynamic efficiency’.

--Jesús Huerta de Soto, The Theory of Dynamic Efficiency, Routledge Foundations of the Market Economy 28 (London: Routledge, 2009), 1.

Under an Institutional Regime which Attempts to Abolish Private Ownership in the Means of Production, Advanced Industrial Production Is Reduced to So Many Steps in the Dark

Acting people must mentally process the alternatives placed before them, and to do so they must have some “aid to the human mind” for comparing inputs and output. Mises’ great contribution to economic science was to establish that this decision-making ability is dependent on the institutional context of private property. Mises’ point, while not denying the importance of incentives in executing business plans, was that the necessary informational inputs into that decision process are made available to decision-makers only through the market process. The argument went as follows:

1. Without private property in the means of production, there will be no market for the means of production.
2. Without a market for a means of production, there will be no monetary prices established for the means of production.
3. Without monetary prices, reflecting the relative scarcity of capital goods, economic decision-makers will be unable to rationally calculate the alternative use of capital goods.

In short, without private property in the means of production, rational economic calculation is not possible. Under an institutional regime which attempts to abolish private ownership in the means of production, advanced industrial production is reduced to so many steps in the dark as decision-makers are denied the necessary compass. As Mises put in Socialism, economic calculation “provides a guide amid the bewildering throng of economic possibilities. It enables us to extend judgements of value which apply directly only to consumption goods – or at best to production goods of the lowest order – to all goods of higher orders. Without it, all production by lengthy and roundabout  processes would be so many steps in the dark … And then we have a socialist community which must cross the whole ocean of possible and imaginable economic permutations without the compass of economic calculation.”

--Peter J. Boettke, Calculation and Coordination: Essays on Socialism and Transitional Political Economy, Foundations of the Market Economy (London: Routledge, 2001), 31-32.

The Theoretical Positions of the Austrian School and Chicago School Do Not Converge

But there is one fundamental question that must be explained. If we acknowledge that it was Eugen Böhm-Bawerk, L. von Mises and F. Hayek who offered the best arguments in favour of the market in the debate on economic calculation in a communist society, why have their ideas been marginalized when it comes to offering a view of society? Why is pre-eminence given to the liberalism of the Chicago School and their homo economicus? It is generally argued that the contributions of the Austrian School have been absorbed into the present liberal neoclassical paradigm. I consider this argument to be false and the object of this book is to refute it. The theoretical positions of the Austrian School and Chicago School do not converge. The former is characterized by its construction of a theory of action, whose core is the creative capacity of people in their social and cultural environment. The latter reduces all human behaviour to a mere optimization of functions with restrictions. And here arises the radical question in the present debate on the social sciences: does the overcoming of socialism imply reducing man to the neoclassical homo economicus? In the following pages, you will find the arguments in favour of a humanistic economics based on the contributions of the Austrian School in order to transcend the so-called scientistic reductionism of the Chicago School.

--Javier Aranzadi, preface to Liberalism against Liberalism: Theoretical Analysis of the Works of Ludwig von Mises and Gary Becker, Foundations of the Market Economy (London: Routledge, 2006), xv.

According to Hayek, the Perfect-Knowledge Assumption Has Allowed Neoclassical Economics to Assume Away THE Problem That Needs to Be Explained

According to Hayek, ‘Competition is essentially a process of the formation of opinion: by spreading information…[i]t creates the views people have about what is best and cheapest…’. Moreover, said Hayek, the perfect-knowledge assumption has allowed neoclassical economics to assume away the problem that needs to be explained, namely,

how the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs [of zero-profit general equilibrium]…which could be brought about by deliberate direction only by somebody who possessed the combined knowledge of all those individuals. 

To show that…the spontaneous actions of individuals will, under the conditions we can define, bring about a distribution of resources which can be understood as if it were made according to a single plan, although nobody planned it, seems to me indeed an answer to the problem which has sometimes been metaphorically described as that of the ‘social mind’.

Hayek’s greatest single contribution has been his emphasis on the market’s role in ameliorating ‘the real problem faced by society’: the imperfection of knowledge and the resultant need for a system which provides incentives for agents to seek and to transmit new insights via the pursuit of profit-making activities.

--Frank M. Machovec, Perfect Competition and the Transformation of Economics, Foundations of the Market Economy (London: Routledge, 2003), 23-24.

Neoclassical Economics Is Not Concerned with Markets and Competition Is Absent

When many post-Keynesians target neoclassical economics they presume to target the market system. This is curious: neoclassical economics is not concerned with markets. The neoclassical method of marginal analysis identifies the characteristics of an economically efficient outcome; it says nothing about how that outcome might be achieved. Although different sets of assumptions are categorised as competitive, monopolistic, and oligopolistic, close inspection reveals that no one is competing. The entrepreneurial function is either about to commence (disequilibrium) or completed (equilibrium). Entrepreneurial battle-plans for logistics, reconnaissance, communication and deployment are strangely absent.

--G.R. Steele, Keynes and Hayek: The Money Economy, Foundations of the Market Economy (London: Routledge, 2002), 166.

The Dynamic Notion of Competition Pervaded the Bulk of Economics up to the 1920s

In his doctoral dissertation, Frank Machovec documented the thesis that the dynamic notion of competition pervaded the bulk of economics in the neoclassical period up until the 1920s. It was only during the twenties and thirties that equilibrium thinking, and thus the static model of perfect competition, assumed its current dominance in mainstream economic thought. It was presumably this prevalence of the dynamic notion of competition which led Mises into believing, as late as 1932, that the various schools of twentieth-century economic thought shared a common basic understanding of the workings of the market economy.

--Israel M. Kirzner, The Driving Force of the Market: Essays in Austrian Economics, Foundations of the Market Economy (London: Routledge, 2003), 235.

Hayek Criticized the Federal Reserve’s Policy of Stabilizing the Price Level During 1922–9 because It Required the Fed to Inject Money in order to Offset the Price-Reducing Effects of Productivity Improvements

Hayek criticized the Federal Reserve’s policy of stabilizing the price level during 1922–9 because it required the Fed to inject money M in order to offset the price-reducing effects of productivity improvements that were increasing real output Q. The Fed’s injections distorted the interest rate away from its equilibrium value, leading to savings-investment discoordination.

--Lawrence H. White, The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years (New York: Cambridge University Press, 2012), 84.

The Natural Rate of Interest Is a Theoretical Construct and It Can Be Thought of As the Direct “Price of Time”; Banks Exist to Trade Time

Since Wicksell, the natural rate of interest has been understood to be the rate that directly reflects actors’ underlying time preferences, i.e., the degree to which they discount the future. The natural rate is a theoretical construct and unobservable in the market. It can be thought of as the direct “price of time.” Because we cannot exchange time directly, financial intermediaries such as banks have evolved to trade time in the form of money. The supply and demand for loanable funds correspond, respectively, to a desire to part with time by pushing consumption to the future and a desire to acquire time by pushing consumption into the present.

--Steven Horwitz, "Monetary Disequilibrium Theory and Austrian Macroeconomics: Further Thoughts on a Synthesis," in Money and Markets: Essays in Honor of Leland B. Yeager, ed. Roger Koppl, Foundations of the Market Economy (London: Routledge, 2006), 174-175.

Roger W. Garrison Gives Three Answers to the Cantabrigian Question: “So Why Is the Aggregate Production Function Still Widely Used in Neoclassical Macro Economics?"

It is not difficult to imagine substantive answers to the confrontational question posed by Felipe and McCombie (“Why is the aggregate production function still widely used . . . ?”). Three such answers suggest themselves: (1) The alleged paradoxes are not so paradoxical once the particulars of the trumped-up instances of them are fully understood. (2) The particular temporal profiles of reswitching-prone techniques are sufficiently quirky as to warrant neglect in setting out fundamental supply-side principles – a mode of argument that has its parallel in the neglect of the Giffen good in setting out fundamental demand-side principles. (3) No actual instances of the paradoxical supply-side phenomena have ever been identified by the Cantabrigians – there not being even so much as a suspected instance to parallel the suspected upward-sloping demand for Giffenesque potatoes in Ireland during the mid-nineteenth-century famine.

--Roger W. Garrison, "Reflections on Reswitching and Roundaboutness," in Money and Markets: Essays in Honor of Leland B. Yeager, ed. Roger Koppl, Foundations of the Market Economy (London: Routledge, 2006), 188.

Up to the 1930s the Austrian Capital Theory Was an Important School, But It Fell into Oblivion after the Great Capital Controversies of the 1930s

During the fifties and the sixties the neoclassical concept of the production function was criticized in numerous papers. In particular, the aggregation of different capital goods into a single number was reprehended. A second essential disadvantage, namely the neglect of the time structure of the production process, found, however, relatively little attention.

While up to the thirties the Austrian capital theory which stressed the time aspect of production was an important school, it fell into oblivion after the great capital controversies of the thirties. It took over thirty years, i.e. till the beginning of the seventies before it came to a renaissance of the Austrian capital theory by various writers. We may roughly classify the different attempts to "its rebirth in modern economics" into three groups.

--Malte Faber, preface to Introduction to Modern Austrian Capital Theory, Lecture Notes in Economics and Mathematical Systems 167 (Berlin: Springer-Verlag, 1979), v.

Hicks Voiced the Opinion that Austrian Vertical Analysis of Growth Problems Was Superior to Walrasian Horizontal Approaches

With regards to the historical development of ideas it would be interesting to research the question of why after the confrontation between the critics of Austrian capital theory lead by Knight and its defenders under the banner of Machlup and von Hayek it fell into "Rip van Winklian sleep." It was not until the end of the sixties that it was revitalized by Hicks, Bernholz, Reetz, von Weizsäcker, Fehl and Jaksch. At the beginning of this period Hicks voiced the opinion that Austrian vertical analysis of growth problems was superior to Walrasian horizontal approaches. At this point we would like to mention that Hicks had already expressed unease, concerning the results of the thirties' capital controversy in his book Value and Capital: "The core of truth of the Austrian theory needs to be rediscovered before we can really claim to have a satisfactory theory of capital." Following this Hicks developed his theoretical approach to capital theory. . .

--Malte Faber, Introduction to Modern Austrian Capital Theory, Lecture Notes in Economics and Mathematical Systems 167 (Berlin: Springer-Verlag, 1979), 33.

From the Perspective of a Technologically Dynamic Market Economy, Both the English Neo-Ricardian and the American Neoclassical Approaches Appear to be Largely Irrelevant

The debate between the Cambridges in the 1950s, 1960s, and 1970s featured the English neo-Ricardians against the American neoclassicals. Taking the production function approach to be definitive of production economics, the neo-Ricardians relentlessly picked at its logical limits in an effort to discredit it and seem to have been largely successful in this. But what they gained in logical consistency, they arguably lost in relevance. Both the Cambridges implicitly assumed a Ricardian equilibrium world in which the “rate of profit” was uniformly equal to the rate of interest. From the perspective of a technologically dynamic market economy, both approaches would appear to be largely irrelevant.

--Peter Lewin, introduction and outline to Capital in Disequilibrium: The Role of Capital in a Changing World, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011), 10.

Exchange Control Leads to State Socialism Because the Authorities Must Agree to Every Single Foreign Transaction

In the present context I want to emphasize not so much the administrative complexity of the system, its obvious interference with economic internationalism, and the more or less considerable degree of expropriation to which it gives rise, as the degree of government control that it involves. In the end, every single foreign transaction made by the nationals of the country, and every single transaction, whether foreign or domestic, made by a foreigner must be agreed to by the authorities. And, since the system can only be worked if no "leakages" are allowed to happen, the policing must be excellently organized and penalties must be severe enough to act as an efficient deterrent. One may find that capital punishment is a rather exaggerated penalty for an offence in the field of foreign exchange dealings; fierce though it is, it is quite in keeping with the internal logic of the system. It is difficult to escape the impression that exchange control, if allowed to develop indefinitely in the direction in which its "logic" carries it, must involve a transition from a liberal to an authoritarian form of political organization within the country which practises that system. Ultimately, exchange control leads to State Socialism.

--Michael A. Heilperin, International Monetary Economics (London: Longmans, Green and Co., 1939), 242.

Generating the Great Depression: The First World War and the Federal Reserve System Propagated an Unprecedented Orgy of Inflation

Two events occurred in 1914 that were to have profound influence upon subsequent economic developments in the United States. The first of these was external, the outbreak in Europe of the World War; the second was internal, the formal inauguration of the Federal Reserve System. Both were events propagative of an unprecedented orgy of inflation. The two, inextricably intertwined, brought about a great inflation of bank credit in connection with war finance, and both were productive of striking changes in the economic structure of the world during and after the War.

--C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle: A Study of the Great Depression in the United States (New York: The Macmillan Company, 1937), 11.

Murray Rothbard Thinks Abstinence Theories Are Close to Pure Time-Preference Theories of Interest and He Develops His Bargaining Theory of Interest Formation

Rothbard in his framework adhered to what he called pure time-preference theory. Despite this classification of his own, we may see some important differences between him and his Austrian forerunners. First, in his history-of-thought textbook, he does not agree with Böhm-Bawerk’s arguments against all abstinence theories. He actually says abstinence theories are quite close to pure time-preference theories since their main focus is the passage of time. Time preference accounts for the disutility of waiting. One can therefore state that Rothbard saw himself as a presenter of the broader tradition of analyzing interest. . . .

Rothbard starts to develop his bargaining theory of interest formation in the market, and in this lies his great contribution to interest theory: treating interest like any other price formed purely by actors in the market.

--Mateusz Machaj, Money, Interest, and the Structure of Production: Resolving Some Puzzles in the Theory of Capital, Capitalist Thought: Studies in Philosophy, Politics, and Economics (Lanham, MD: Lexington Books, 2017), 28.