Socialism Began to Make Use of the Promise of a "New Freedom"

To allay these suspicions and to harness to its cart the strongest of all political motives, the craving for freedom, socialism began increasingly to make use of the promise of a "new freedom". The coming of socialism was to be the leap from the realm of necessity to the realm of freedom. It was to bring "economic freedom", without which the political freedom already gained was "not worth having". Only socialism was capable of effecting the consummation of the agelong struggle for freedom in which the attainment of political freedom was but a first step.

The subtle change in meaning to which the word freedom was subjected in order that this argument should sound plausible is important. To the great apostles of political freedom the word had meant freedom from coercion, freedom from the arbitrary power of other men, release from the ties which left the individual no choice but obedience to the orders of a superior to whom he was attached. The new freedom promised, however, was to be freedom from necessity, release from the compulsion of the circumstances which inevitably limit the range of choice of all of us, although for some very much more than for others. Before man could be truly free, the "despotism of physical want" had to be broken, the "restraints of the economic system" relaxed.

--F. A. Hayek, The Road to Serfdom, Routledge Classics (1944; repr., London: Routledge, 2006), 25-26.

Dealing with the Cambridge Capital Controversy: The Reswitching Interest Rates Represent Multiple Equilibria ONLY in a Partial Equilibrium Framework

Real interest rates measure only one aspect of project profitability, the cost of funds. Project profitability depends upon an entire set of funds, flows and prices, of which real interest rates are only one component. Once we allow other values to vary with the real interest rate, the Cambridge demonstration of project equiprofitability at two distant real interest rates disappears.

Technique 1 may be most profitable at two disparate real interest rates if we vary the real interest rate alone. Technique 1 is not necessarily the most profitable alternative at both interest rates if we also specify the changed expenditure patterns and changed relative prices which, in a general equilibrium, must accompany differing real interest rates. In other words, the reswitching interest rates represent multiple equilibria only in a partial equilibrium framework; the Cambridge critique treats the rate of discount as the only relevant determinant of project profitability. It has not been shown that reswitching will occur in a more realistic context.

--Tyler Cowen, Risk and Business Cycles: New and Old Austrian Perspectives, Foundations of the Market Economy (London: Routledge, 2003), 113.

Murray Rothbard's Greatest Contribution to Capital Theory Was to Unify Jevon's Approach and Hayek's Approach

The shortcoming of Jevons’s presentation is that he did not include in his trapezoids detailed factor payments. He only analyzed interest payments in the investment process. The shortcoming of Hayek’s presentation is that his trapezoids are focused on the distinction between capital goods and original means of production, while interest payments are omitted. Rothbard’s greatest contribution to capital theory was to unify both approaches and place them in the context of the marginal-pricing process. A table developed by him decomposes all spending into the earnings of all the factors of production, intermediate and original ones, by including interest alongside labor and land. We have no reason to exclude any of them, especially if we want to construct a complete micro- and macroeconomic framework of the economy.

Rothbard’s Trapezoid

--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), 52.

Loanable Funds Theory Was Standard in Pre-Keynesian Macroeconomics

In Hayek’s theory, the interest rate clears the market for loanable funds, equating the quantity supplied (savings including the earnings retained by business firms) with the quantity demanded (principally for investment). Loanable funds theory was standard in pre-Keynesian macroeconomics, especially as developed by Keynes’s contemporary and critic Dennis H. Robertson (1890– 1963). A loanable funds diagram does appear in The General Theory – it is in fact the only diagram in the book – but only to indicate explicitly what Keynes was discarding from the standard toolbox. Keynes instead offered the “liquidity preference” theory in which the interest rate does not serve to coordinate saving and investment.

--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), 138.

Theoretical Schizophrenia and the Neoclassical Synthesis: The Marriage of the Walrasian Theory of General Competitive Equilibrium to Keynesian Macroeconomics

We can only speculate on what Keynes would have made of the Keynesian policies carried out in his name. What we can see more clearly, with the benefit of hindsight and experience, is that at the theoretical level Keynesian economics created schizophrenia in the way that economics was taught, with courses in microeconomics typically concentrating on issues relating to allocation, production and distribution (questions of efficiency and equity) and courses in macroeconomics focusing on problems associated with the level and the long-term trend of aggregate output and employment, and the rate of inflation (questions of growth and stability). The Keynesian propositions of market failure and involuntary unemployment expounded within macroeconomics did not rest easily alongside the Walrasian theory of general competitive equilibrium, where the actions of rational optimizing individuals ensure that all markets, including the labour market, are cleared by flexible prices. In the Walrasian model, which dominated microeconomics, lapses from full employment cannot occur. Although Paul Samuelson and others attempted to reconcile these two strands of economics, producing a ‘neoclassical synthesis’, Keynesian macroeconomics and orthodox neoclassical microeconomics integrated about as well as oil and water. During the ‘Golden Age’ this problem could be ignored. By 1973, with accelerating inflation, it could not. As Greenwald and Stiglitz have argued, from this point there were two ways in which the two sub-disciplines could be reconciled. Either macro theory could be adapted to orthodox neoclassical micro theory (the new classical approach) or micro theory could be adapted to macro theory (the new Keynesian approach). As we shall see, these attempts at reconciliation have been a dominating influence on macroeconomic theorizing during the past three decades.

--Brian Snowdon and Howard R. Vane, Modern Macroeconomics: Its Origins, Development and Current State (Cheltenham, UK: Edward Elgar Publishing, 2005), 21.

For Friedrich A. Hayek, the Central Problem of Economics Is the Coordination Problem Arising from the Division of Knowledge and Labor

Yet, Hayek raised another fundamental challenge to equilibrium analysis that remains unresolved by mainstream formalism, and arguably less explored than problems relating to dynamic processes by alternative schools—that is, the epistemic nature of equilibrium, and the implications for understanding the coordination problem. As Hayek explained, equilibrium is a coherent concept, and capable of having meaningful content, only insofar as it is defined in terms of the subjective knowledge of individual actors. Further, the central problem of economics, and indeed of the social sciences, is the coordination problem arising from the nature of the division of knowledge and labor in society. Therefore, a fundamental analytical problem for economic theory is to explain the mechanisms and processes whereby the subjective data to the individual actors converges, such that they hold mutually compatible beliefs and expectations about the plans and actions of others and the objective facts of the world, and are able to successfully dovetail their plans and actions.

--Peter J. Boettke, F. A. Hayek: Economics, Political Economy and Social Philosophy, Great Thinkers in Economics (London, UK: Palgrave Macmillan, 2018), 109.

The Neglect of Subjectivism Is Central to the Feminist and Interventionist Fallacy of Comparable Worth

Neglect of subjectivism is central to the fallacy of “comparable worth.” According to that doctrine, fashionable among feminists and interventionists, the worth of work performed in different jobs can be objectively ascertained and compared. People performing different jobs that are nevertheless judged alike, on balance, in their arduousness or pleasantness, their requirements in ability and training, the degrees of responsibility involved, and other supposedly ascertainable characteristics should receive the same pay; and government, presumably, should enforce equal pay. Formulas should replace wage-setting by voluntary agreements reached under the influences of supply and demand. . . .

The comparable-worth doctrine neglects the ineffable individual circumstances and subjective feelings that enter into workers’ decisions to seek or avoid particular jobs, employers’ efforts to fill them, and consumers’ demands for the goods and services produced in them. Yet wages and prices set through market processes do take account of individual circumstances and personal feelings.

--Leland B. Yeager, "Why Subjectivism?" in Is the Market a Test of Truth and Beauty? Essays in Political Economy (Auburn, AL: Ludwig von Mises Institute, 2011), 25.

On the Neomercantilist Component of Hooverism: Harvard's Frank W. Taussig Rejects the Pauper-Labor Argument

The Hooverites were emphatic in their view that America's trade relationships with the rest of the world should be organized to support rising standards of living in the United States and, more particularly, that tariff policies should be designed to defend American wage standards. The "cheap foreign labor" argument for protection was regularly invoked as providing a self-evident demonstration of the merits of this view. This doctrine won applause from interest groups that stood to benefit from high duties. But it gave more than a little pause to most economists, including some who were associated with Hoover during his Commerce Department years and sympathetic to other parts of his program.

Frank W. Taussig of Harvard University, then widely recognized as one of the nation's most thoughtful students of international trade, characterized the view of the professionals when he wrote: "I know of no economist, certainly none in England or this country, who would sanction the pauper-labor argument." He did not question the sincerity of those who believed "in their hearts that our standard of living and the very basis of our prosperity rest on the maintenance of a system of high duties." But economic theory could show that this belief was just plain wrong.

--William J. Barber, From New Era to New Deal: Herbert Hoover, the Economists, and American Economic Policy, 1921-1933, Historical Perspectives on Modern Economics (Cambridge, UK: Cambridge University Press, 1988), 62.

Say's Law of Markets Was Formulated Specifically to Deny the Relevance of Demand Deficiency as a Cause of Recession

Aggregate demand has since 1936 played the central role in the theory of recession. Recessions are attributed to an absence of demand, and even where they are not, overcoming recessions is seen as dependent on the restoration of demand, which is the active responsibility of governments.

Until 1936, no mainstream theory of recession had so much as glanced at the notion of demand deficiency as a cause of recession. It was specifically to deny the relevance of demand deficiency as a cause of recession that Say’s Law had been formulated in the first place. Accepting the possibility of demand deficiency as a cause of recession was then seen as the realm of cranks. How the world does change.

--Steven Kates, "The Crisis in Economic Theory: The Dead End of Keynesian Economics," in Macroeconomic Theory and its Failings: Alternative Perspectives on the Global Financial Crisis, ed. Steven Kates (Cheltenham, UK: Edward Elgar Publishing, 2010), 113.

Sraffa's Vision of the "Production of Commodities by Means of Commodities" Admits of No Distinct Capital Goods

Classical models, at least on this count, exhibit more similarities than differences when compared with their neoclassical counterparts. Although an explicit period of production is built into the models patterned after classical theory, the collection of capital goods spanning this period is never brought into view. Classical models are completely specified in terms of the initial inputs and the ultimate outputs—which, in turn, become the inputs of the subsequent period. The basic structure of these models requires that the list of inputs and the list of outputs be qualitatively identical. Corn and iron, for instance, are used to produce greater quantities of corn and iron. (The quantitative difference between inputs and outputs, the surplus, becomes the primary focus of classical analysis.)

This vision of the “production of commodities by means of commodities” (Sraffa, 1960) has served as a basis for capital theory in spite of the fact that the vision admits of no distinct capital goods. Capital theory of this type is based on the premise that the time separating the input commodities and the output commodities is a satisfactory surrogate for capital. Insights about the nature of capital goods that come into (and go out of) existence during this time and about the relationships between different kinds of capital goods are simply out of reach.

--Roger W. Garrison, "A Subjectivist Theory of a Capital-Using Economy," in The Economics of Time and Ignorance with a New Introduction, by Gerald P. O'Driscoll Jr. and Mario J. Rizzo, Foundations of the Market Economy (London: Routledge, 2002), 161-162.

Hayek and Sraffa Duel over the Meaning of Equilibrium: Neoclassical Market-Clearing Versus Long-Run Cost-of-Production

Here it becomes quite clear that to Sraffa equilibrium means ‘classical’ long-run cost-of-production equilibrium (that is, price equals cost of production), a norm from which market prices always diverge, while to Hayek equilibrium is ‘neoclassical’ market-clearing equilibrium in all markets (what neo-Ricardians nowadays call ‘supply-and-demand equilibrium’) with no particular regard being paid to the difference between the long and short run. And here, then, we have got to the bottom of our dispute and are provided with a clue to most of the other points at issue between the two contestants.

--Ludwig Lachmann, "Austrian Economics under Fire: The Hayek-Sraffa Duel in Retrospect," in Expectations and the Meaning of Institutions: Essays in Economics, ed. Don Lavoie, Foundations of the Market Economy (London: Routledge, 2005), 145.

Both Mises and Rothbard Reject Standard Free Rider Justifications for Government Subsidization or Direct Provision of Any Goods or Services

Mises, on the other hand, rejects all natural law arguments for property rights, adopting a strictly utilitarian approach. This allows him to be more flexible in considering alternative property rights arrangements. The underlying conclusion though, on the part of both authors, is that once property rights are clearly established a policy of strict laissez faire is seen as best promoting social welfare, even in the face of any external benefits or "free rider problems" that might still exist. Both Mises and Rothbard reject standard free rider justifications for either government subsidization or direct provision of any goods or services. Even though Mises is in favor of a minimal state apparatus to provide for the enforcement of property rights, there is no indication in his writings that the justification is based on free rider arguments.

--Roy Cordato, Efficiency and Externalities in an Open-Ended Universe: A Modern Austrian Perspective (Auburn, AL: Ludwig von Mises Institute, 2007), 22.

Gardiner C. Means' Thesis on Administered Prices Is Louis D. Brandeis' "Curse of Bigness" All Over Again

Gardiner C. Means' Pricing Power and the Public Interest is Louis D. Brandeis' "curse of bigness" of a half-century ago all over again. In a nutshell, the major Means premise is the break-down of effective competition in big business. And so his thesis is: Bigness equals administered prices, administered prices equals administrative inflation, and administrative inflation requires a restructuring of United States manufacturing, beginning with the steel industry.

The literature is already replete with contributions quite damaging to the Means doctrine of administered prices. Dr. Rufus S. Tucker, for example, dealt the doctrine a serious blow in his articles in the American Economic Review and the Journal of Marketing. In his Journal of Marketing article, Dr. Tucker concluded, on the basis of statistics compiled by the National Resources Committee during the 1930's, that there was no association whatever between concentration in the manufacturing industries and the rigidity of prices of manufactured products.

--William H. Peterson, "Steel Price Administration: Myth and Reality," in Central Planning and Neomercantilism, ed. Helmut Schoeck and James W. Wiggins, The William Volker Fund Series in the Humane Studies (Princeton, NJ: D. Van Nostrand Company, 1964), 163.

Gardiner Means Resurrected the 1930's Theory of Administered or Oligopolistic Pricing to Explain Inflation

On the other side of the fence are, among many others, John Kenneth Galbraith and Gardiner Means.

Means has resurrected and refurbished for the purposes of explaining the inflation from 1955 to 1958 the theory of "administered prices" or "oligopolistic pricing" in "concentrated industries" which he had helped, most prominently, to develop and to make popular in the 1930's. Then the theory was used to explain the rigidity of the prices of the concentrated, oligopolistic industries (mainly steel, machinery and vehicles, other metals and metal products, chemicals, fuel, and power). The failure of these prices to fall, or to fall as much as other prices, was put forward as one of the strategic factors responsible for the severity of the depression. In the 1950's, the alleged upward flexibility of these same prices was made responsible for the 1953-57 or 1958 phase of the inflation.

--Gottfried Haberler, Inflation: Its Causes and Cures (Washington, DC: American Enterprise Association, 1960), 40-41.

Conventional Macroeconomics Is Choice-Theoretic But Austrian Cycle Theory Has a Coordinationist Style of Macroeconomics

What is of continuing value in Austrian cycle theory is its foundational orientation toward a coordinationist style of macroeconomics. In sharp contrast, conventional macroeconomics is choice-theoretic and not coordinationist. Macro variables are treated as direct objects of choice, whereas within a coordinationist perspective macro variables are simply phenomena that emerge through interaction among people, but which are not chosen directly by anyone. Central to the entire corpus of Austrian economics is the claim that macro variables are not direct objects of choice but are built up through the interactions among participants within the economic process.

--Richard E. Wagner, "Austrian Cycle Theory and the Prospect of a Coordinationist Macroeconomics," in Modern Applications of Austrian Thought, ed. Jürgen G. Backhaus, Routledge Frontiers of Political Economy (London: Routledge, 2005), 82.

The Underconsumptionist Solution for Economic Depressions Calls for a Reduction in the Amount of Saving and a Stimulation of Consumption by Issuing New Money

Foster and Catchings, inflationists popular in the 1920s, denounced the capitalist system as inherently deficient because consumers do not have the means to buy the goods they produce, "for every dollar which is saved and invested, instead of spent, causes one dollar of deficiency in consumer buying unless that deficiency is made up in some way." As recommended by Foster and Catchings, that "way" was to issue new money-credits to consumers. E. F. M. Durbin summarizes the underconsumptionist attack on savings as follows:

Saving is a peculiarly dangerous and self-defeating process, for it withdraws money from the purchase of finished commodities and makes their production less profitable, while at the same time it seeks to set up still further capital resources with which the production of finished commodities is to be increased. It is this paradoxical process which makes a deficiency of purchasing power inevitable. It increases the supply of and diminishes the demand for the products of the industrial system to the point at which production cannot be continued any longer with profit and at that point crisis and depression begins. Hence depression can always be prevented and relieved either by reducing the amount of saving or by stimulating consumption by the issue of new money.

--Mark Skousen, "Keynes and the Anti-Saving Mentality," in Dissent on Keynes: A Critical Appraisal of Keynesian Economics, ed. Mark Skousen (New York: Praeger Publishers, 1992), 90.

The Received View Attributes a Form of Synthetic Apriorism to Ludwig von Mises, but We Contend His Epistemological Position Is a Form of Conventionalism

Whereas the predominating received view promoted by many Neo-Austrian economists attributes a form of synthetic apriorism to Mises, we contend that his epistemological position is ideally classified as a form of conventionalism. Reinterpreting praxeology as a conventionalist research program yields several beneficial upshots: It allows to resolve some open interpretational problems in Mises’ writings; objections to applying formal methods to problems in Austrian economics are alleviated; and above all, a conventionalist reading likely increases fruitful interaction between the Austrian School and mainstream philosophers of science, social scientists, and economists.

--Alexander Linsbichler, introduction to Was Ludwig von Mises a Conventionalist? A New Analysis of the Epistemology of the Austrian School of Economics (Cham, CH: Palgrave Macmillan, 2017), 3-4.