Regarding the Core Message of the Classical Economists, the One Pertaining to the Wealth of Nations, the Austrian School Has Been Their Intellectual Heirs

The classical economists had rejected the notion that overall monetary spending — in current jargon: aggregate demand — is a driving force of economic growth. The true causes of the wealth of nations are nonmonetary factors such as the division of labor and the accumulation of capital through savings. Money comes into play as an intermediary of exchange and as a store of value. Money prices are also fundamental for business accounting and economic calculation. But money delivers all these benefits irrespective of its quantity. A small money stock provides them just as well as a bigger one. It is therefore not possible to pull a society out of poverty, or to make it more affluent, by increasing the money stock. By contrast, such objectives can be achieved through technological progress, through increased frugality, and through a greater division of labor. They can be achieved through the liberalization of trade and the encouragement of savings.

For more than a century, the Austrian school of economics has almost singlehandedly upheld, defended, and refined these basic contentions. Initially Carl Menger and his disciples had perceived themselves, and were perceived by others, as critics of classical economics. That “revolutionary” perception was correct to the extent that the Austrians, initially, were chiefly engaged in correcting and extending the intellectual edifice of the classics. But in retrospect we see more continuity than rupture. The Austrian school did not aim at supplanting classical economics with a completely new science. Regarding the core message of the classics — the one pertaining to the wealth of nations — they have been their intellectual heirs. They did not seek to demolish the theory of Adam Smith root and branch, but to correct its shortcomings and to develop it.

The core message of the classics is very much out of fashion today — probably just as much as it was at the end of the eighteenth century. As the prevailing way of economic thinking has it, monetary spending is the lubricant and engine of economic activity. Savings are held to be a blight on the social economy, the selfish luxury of the ignorant or the evil, at the expense of the rest of humanity. To promote growth and to combat economic crises, it is crucial to maintain the present level of aggregate spending, and to increase it if possible.

This prevailing theory is precisely the one refuted by Smith and his disciples. Classical economics triumphed over that theory, which Smith called “mercantilism,” but its triumph was short-lived. Starting in the 1870s, at the very moment of the appearance of the Austrian school, mercantilism started its comeback, at first slowly, but then in ever-increasing speed. In the 1930s it was led to triumph under the leadership of Lord Keynes.

--Jörg Guido Hülsmann, foreword to Finance Behind the Veil of Money: The Economics of Capital, Interest, and the Financial Market, by Eduard Braun (West Palm Beach: Liberty.me, 2014), e-book.