In Addition to His Famous “Law of Markets,” Jean-Baptiste Say Was a Pioneer in Praxeological Methodology

The praxeological tradition has a long history in economic thought. We will indicate briefly the outstanding figures in the development of that tradition, especially since these economic methodologists and their views have been recently neglected by economists steeped in the positivist world view.

One of the first self-conscious methodologists in the history of economics was the early-nineteenth-century French economist Jean-Baptiste Say. In the lengthy introduction to his magnum opus, A Treatise on Political Economy, Say laments that people

are too apt to suppose that absolute truth is confined to the mathematics and to the results of careful observation and experiment in the physical sciences; imagining that the moral and political sciences contain no invariable facts of indisputable truth, and therefore cannot be considered as genuine sciences, but merely hypothetical systems.

Say could easily have been referring to the positivists of our day, whose methodology prevents them from recognizing that absolute truths can be arrived at in the social sciences, when grounded, as they are in praxeology, on broadly evident axioms. Say insists that the “general facts” underlying what he calls the “moral sciences” are undisputed and grounded on universal observation.

—Murray N. Rothbard, “Praxeology as the Method of the Social Sciences,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 42.

Positivists Rest Their Case on Misleading Analogies from the Epistemology of Physics But Human Action Is Not Like Physics

First, it should be made clear that neither Professor Machlup nor Professor Hutchison is what Mises calls a praxeologist, that is, neither believes (a) that the fundamental axioms and premises of economics are absolutely true; (b) that the theorems and conclusions deduced by the laws of logic from these postulates are therefore absolutely true; (c) that there is consequently no need for empirical “testing,” either of the premises or the conclusions; and (d) that the deduced theorems could not be tested even if it were desirable. Both disputants are eager to test economic laws empirically. The crucial difference is that Professor Machlup adheres to the orthodox positivist position that the assumptions need not be verified so long as their deduced consequents may be proven true—essentially the position of Professor Milton Friedman—while Professor Hutchison, wary of shaky assumptions takes the more empirical—or institutionalist—approach that the assumptions had better be verified as well.

Strange as it may seem for an ultra-apriorist, Hutchison’s position strikes me as the better of the two. If one must choose between two brands of empiricism, it seems like folly to put one’s trust in procedures for testing only conclusions by fact. Far better to make sure that the assumptions also are correct. Here I must salute Professor Hutchison’s charge that the positivists rest their case on misleading analogies from the epistemology of physics. This is precisely the nub of the issue. All the positivist procedures are based on the physical sciences. It is physics that knows or can know its “facts” and can test its conclusions against these facts, while being completely ignorant of its ultimate assumptions. In the sciences of human action, on the other hand, it is impossible to test conclusions. There is no laboratory where facts can be isolated and controlled; the “facts” of human history are complex ones, resultants of many causes. These causes can only be isolated by theory, theory that is necessarily a priori to these historical (including statistical) facts. Of course, Professor Hutchison would not go this far in rejecting empirical testing of theorems; but, being commendably skeptical of the possibilities of testing (though not of its desirability), he insists that the assumptions be verified as well.

—Murray N. Rothbard, “In Defense of ‘Extreme Apriorism,’” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 103-105.

Murray N. Rothbard Criticizes the Chicago School's Definition of the Supply of Money as a Flagrant Example of Question-Begging

The concept of the supply of money plays a vitally important role, in differing ways, in both the Austrian and the Chicago Schools of economics. Yet, neither school has defined the concept in a full or satisfactory manner; as a result, we are never sure to which of the numerous alternative definitions of the money supply either school is referring.

The Chicago School definition is hopeless from the start. For, in a question-begging attempt to reach the conclusion that the money supply is the major determinant of national income, and to reach it by statistical rather than theoretical means, the Chicago School defines the money supply as that entity which correlates most closely with national income. This is one of the most flagrant examples of the Chicagoite desire to avoid essentialist concepts, and to “test” theory by statistical correlation; with the result that the supply of money is not really defined at all. Furthermore, the approach overlooks the fact that statistical correlation cannot establish causal connections; this can only be done by a genuine theory that works with definable and defined concepts.

In Austrian economics, Ludwig von Mises set forth the essentials of the concept of the money supply in his Theory of Money and Credit, but no Austrian has developed the concept since then, and unsettled questions remain (e.g., are savings deposits properly to be included in the money supply?). And since the concept of the supply of money is vital both for the theory and for applied historical analysis of such consequences as inflation and business cycles, it becomes vitally important to try to settle these questions, and to demarcate the supply of money in the modern world. In The Theory of Money and Credit, Mises set down the correct guidelines: money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods on the market.

—Murray N. Rothbard, “Austrian Definitions of the Supply of Money,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 727-728.

The Purchasing Power or the “Objective Exchange-Value” of Money Is Determined by the Intersection of the Money Stock and the Demand for Cash Balance Schedule

The purchasing power of the money unit, which Mises also termed the “objective exchange-value” of money, was then determined, as in the usual supply-and-demand analysis, by the intersection of the money stock and the demand for cash balance schedule. We can see this visually by putting the purchasing power of the money unit on the y-axis and the quantity of money on the x-axis of the conventional two-dimensional diagram corresponding to the price of any good and its quantity. Mises wrapped up the analysis by pointing out that the total supply of money at any given time is no more or less than the sum of the individual cash balances at that time. No money in a society remains unowned by someone and is therefore outside some individual’s cash balances.

While, for purposes of convenience, Mises’s analysis may be expressed in the usual supply-and demand diagram with the purchasing power of the money unit serving as the price of money, relying solely on such a simplified diagram falsifies the theory. For, as Mises pointed out in a brilliant analysis whose lessons have still not been absorbed in the mainstream of economic theory, the purchasing power of the money unit is not simply the inverse of the so-called price level of goods and services.

—Murray N. Rothbard, “The Austrian Theory of Money,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 686.

Adam Smith Concluded that "in the Mercantile System, the Interest of the Consumer Is Almost Constantly Sacrificed to that of the Producer"

Mercantilism, then, was not simply an embodiment of theoretical fallacies; for the laws were only fallacies if we look at them from the point of view of the consumer, or of each individual in society. They are not fallacious if we realize that their aim was to confer special privilege and subsidy on favored groups; since subsidy and privilege can only be conferred by government at the expense of the remainder of its citizens, the fact that the bulk of the consumers lost in the process should occasion little surprise.

Contrary to general opinion, the classical economists were not content merely to refute the fallacious economics of such mercantilist theories as bullionism or protectionism; they also were perfectly aware of the drive for special privilege that propelled the “mercantile system.” Thus, Adam Smith pointed to the fact that linen yarn could be imported into England duty free, whereas heavy import duties were levied on finished woven linen. The reason, as seen by Smith, was that the numerous English yarn-spinners did not constitute a strong pressure-group, whereas the master-weavers were able to pressure the government to impose high duties on their product, while making sure that their raw material could be bought at as low a price as possible. He concluded that the

motive of all these regulations, is to extend our own manufactures, not by their own improvement, but by the depression of those of all our neighbors, and by putting an end, as much as possible, to the troublesome competition of such odious and disagreeable rivals.

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. . . . But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

--Murray N. Rothbard, "Mercantilism: A Lesson for Our Times?" in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 642-644.

Inflation and Debtors' Relief Were Mercantilist Schemes to Aid the Rich

One of the most vigorously held tenets of the dominant neo-Marxist historians of America has been the view that inflation and debtors’ relief were always measures of the “lower classes,” the poor farmer-debtors and sometimes urban workers, engaging in a Marxian class struggle against conservative merchant creditors. But a glance at the origins of debtors’ relief and paper money in America easily shows the fallacy of this approach; inflation and debtors’ relief were mercantilist measures, pursued for familiar mercantilist ends.

Debtors’ relief began in the colonies, in Massachusetts in 1640. Massachusetts had experienced a sharp economic crisis in 1640, and the debtors turned immediately to special privilege from the government. Obediently, the legislature of Massachusetts passed the first of a series of debtors’ relief laws in October . . .

Further privileges to debtors were passed in 1642 and 1644, the latter permitting a debtor to escape foreclosure simply by leaving the colony. The most drastic proposal went to the amazing length of providing that the Massachusetts government assume all private debts that could not be paid! This plan was passed by the upper house, but defeated in the house of deputies.

The fact that this astounding bill was passed by the upper house—the council of magistrates—is evidence enough that this was not a proto-Marxian eruption of poor debtors. For this council was the ruling group of the colony, consisting of the wealthiest merchants and landowners. If not for historical myths, it should occasion no surprise that the biggest debtors were the wealthiest men of the colony, and that in the mercantilist era a drive for special privilege should have had typically mercantilist aims.

--Murray N. Rothbard, "Mercantilism: A Lesson for Our Times?" in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 652.

Mercantilism Was a pre-Keynesian Policy of Inflation, of Lowering Interest Rates Artificially, and of Increasing Effective Demand by Heavy Government Spending

Mercantilism was not only a policy of intricate government regulations; it was also a pre-Keynesian policy of inflation, of lowering interest rates artificially, and of increasing “effective demand” by heavy government spending and sponsorship of measures to increase the quantity of money. Like the Keynesians, the mercantilists thundered against “hoarding,” and urged the rapid circulation of money throughout the economy; furthermore, they habitually pointed to an alleged “scarcity of money” as the cause of depressed trade or unemployment.

--Murray N. Rothbard, "Mercantilism: A Lesson for Our Times?" in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 644.

Government As Robber: Rothbard Versus Public Choice Theorists

We are now in a position to analyze government and its relationship to the market. Economists have generally depicted the government as a voluntary social institution providing important services to the public. The modern “public choice” theorists have perhaps gone furthest with this approach. Government is considered akin to a business firm, supplying its services to the consumer-voters, while the voters in turn pay voluntarily for these services. All in all, government is treated by conventional economists as a part of the market, and therefore, as in the case of a business firm or a membership organization, either totally or in part neutral to the market.

It is true that if taxation were voluntary and the government akin to a business firm, the government would be neutral to the market. We contend here, however, that the model of government is akin, not to the business firm, but to the criminal organization, and indeed that the State is the organization of robbery systematized and writ large. The State is the only legal institution in society that acquires its revenue by the use of coercion, by using enough violence and threat of violence on its victims to ensure their paying the desired tribute. The State benefits itself at the expense of its robbed victims. The State is, therefore, a centralized, regularized organization of theft. Its payments extracted by coercion are called “taxation” instead of tribute, but their nature is the same.

--Murray N. Rothbard, "The Myth of Neutral Taxation," in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 459-460.

During the 1930s, Fisher and the Chicago School Were Pre-Keynes Keynesians

During the 1930s, therefore, the Fisher-Chicago position was that, in order to cure the depression, the price level needed to be “reflated” back to the levels of the 1920s, and that reflation should be accomplished by:

1. the Fed expanding the money supply, and
2. the Federal government engaging in deficit spending and large-scale public works programs.

In short, during the 1930s, Fisher and the Chicago School were “pre-Keynes Keynesians,” and were, for that reason, considered quite radical and socialistic—and with good reason.

--Murray N. Rothbard, "Milton Friedman Unraveled," in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 906-907.

The Key Problem with Friedman’s Fisherine Approach Is the Same Orthodox Separation of the Micro and Macro Spheres

The third major feature of the New Deal program was proto-Keynesian: the planning of the “macro” sphere by the government in order to iron out the business cycle. In his approach to the entire area of money and the business cycle—an area on which unfortunately Friedman has concentrated most of his efforts—Friedman harks back not only to the Chicagoans, but, like them, to Yale economist Irving Fisher, who was the Establishment economist from the 1900s through the 1920s. Friedman, indeed, has openly hailed Fisher as the “greatest economist of the twentieth century,” and when one reads Friedman’s writings, one often gets the impression of reading Fisher all over again, dressed up, of course, in a good deal more mathematical and statistical mumbo-jumbo.

But the key problem with Friedman’s Fisherine approach is the same orthodox separation of the micro and macro spheres that played havoc with his views on taxation. For Fisher believed, again, that on the one hand there is a world of individual prices determined by supply and demand, but on the other hand there is an aggregate “price level” determined by the supply of money and its velocity of turnover, and never the twain do meet. The aggregate, macro, sphere is supposed to be the fit subject of government planning and manipulation, again supposedly without affecting or interfering with the micro area of individual prices.

--Murray N. Rothbard, "Milton Friedman Unraveled," in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 903-904.

Milton Friedman Is the Establishment’s Court Libertarian, According to Murray Rothbard

Mention “free-market economics” to a member of the lay public and chances are that if he has heard the term at all, he identifies it completely with the name Milton Friedman. For several years, Professor Friedman has won continuing honors from the press and the profession alike, and a school of Friedmanites and “monetarists” has arisen in seeming challenge to the Keynesian orthodoxy.

However, instead of the common response of reverence and awe for “one of our own who has made it,” libertarians should greet the whole affair with deep suspicion: “If he’s so devoted a libertarian, how come he’s a favorite of the Establishment?” An advisor of Richard Nixon and a friend and associate of most administration economists, Friedman has, in fact, made his mark in current policy, and indeed reciprocates as a sort of leading unofficial apologist for Nixonite policy.

In fact, in this as in other such cases, suspicion is precisely the right response for the libertarian, for Professor Friedman’s particular brand of “free-market economics” is hardly calculated to ruffle the feathers of the powers-that-be. Milton Friedman is the Establishment’s Court Libertarian, and it is high time that libertarians awaken to this fact of life.

--Murray N. Rothbard, "Milton Friedman Unraveled," in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 895.

The Knightians Deny Time Preference and Base Interest Return Solely on Productivity of Capital

Of current schools of economic thought, the most fashionable have been the econometric, the Keynesian, the institutionalist, and the neo-classic. “Neo-classic” refers to the pattern set by the major economists of the late nineteenth century. The dominant neoclassical strain at present is to be found in the system of Professor Frank Knight, of which the most characteristic feature is an attack on the whole concept of time preference. Denying time preference, and basing interest return solely on an alleged “productivity” of capital, the Knightians attack the doctrine of the discounted MVP and instead advocate a pure MVP theory. The clearest exposition of this approach is to be found in an article by a follower of Knight’s, Professor Earl Rolph.

--Murray N. Rothbard, "Professor Rolph on the Discounted Marginal Productivity Theory," in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 277.