The Original Gold Standard Did Not Submit Wage-Policies to Dictation But Made Them the Resultant of Impersonal Forces

Lord Keynes, however, is, I think, not right in saying that ‘the error of the gold standard lay in submitting national wage-policies to outside dictation’. The original gold standard did not submit wage-policies to dictation, by governing authority anywhere, but made them the resultant of impersonal forces issuing out of the disposition, and potentiality, of individuals to follow what they conceived to be their own interest. This system, as Professor Hayek points out, had many virtues, and we should be badly advised if we should throw away its virtues along with its imperfections. The automaticity of the gold standard was, per se, all to the good, and what we need is a similarly automatic system which will be free of the vices of the traditional gold standard. We should not forget that the once well-nigh universal adhesion to the gold standard was spontaneous rather than imposed, and that it was only after the gold standard had been subjected to varying national management, in an attempt to overcome the original objections against it, that it was abandoned by those countries that could not make their ideas on its management effective, that is, after (unstable) price levels had been imposed from without.

--Friedrich A. von Hayek, A Tiger by the Tail: The Keynesian Legacy of Inflation, ed. Sudha R. Shenoy, 3rd ed. (London: The Institute of Economic Affairs and the Ludwig von Mises Institute, 2009), 50.

Keynes Has Given Us a System of Economics Which Is Based on the Assumption That No Real Scarcity Exists

Now such a situation, in which abundant unused reserves of all kinds of resources, including all intermediate products, exist, may occasionally prevail in the depths of a depression. But it is certainly  not a normal position on which a theory claiming general applicability could be based. Yet it is some such world as this which is treated in Mr. Keynes' General Theory of Employment, Interest and Money, which in recent years has created so much stir and confusion among economists and even the wider public. Although the technocrats, and other believers in the unbounded productive capacity of our economic system, do not yet appear to have realised it, what he has given us is really that economics of abundance for which they have been clamouring so long. Or rather, he has given us a system of economics which is based on the assumption that no real scarcity exists, and that the only scarcity with which we need concern ourselves is the artificial scarcity created by the determination of people not to sell their services and products below certain arbitrarily fixed prices. These prices are in no way explained, but are simply assumed to remain at their historically given level, except at rare intervals when "full employment" is approached and the different goods begin successively to become scarce and to rise in price.

--Friedrich A. Hayek, The Pure Theory of Capital (1941; repr., Auburn, AL: Ludwig von Mises Institute, 2009), 373-374.

Economic Education Must Unmask and Must Refute the Ten Main Theses of "Progressive Economics"

The doctrines which are taught today under the appellation “Progressive economics” can be condensed in the following ten points.

1. The fundamental economic thesis common to all socialist groups is that there is a potential plenty, thanks to the technological achievements of the last two hundred years. The insufficient supply of useful things is due merely, as Marx and Engels repeated again and again, to the inherent contradictions and shortcomings of the capitalist mode of production. Once socialism is adopted, once socialism has reached its "higher stage," and after the last vestiges of capitalism have been eradicated, there will be abundance. To work then will no longer cause pain, but pleasure. Society will be in a position to give "to each according to his needs." Marx and Engels never noticed that there is an inexorable scarcity of the material factors of production. 
• The academic Progressives are more cautious in the choice of terms, but virtually all of them adopt the socialist thesis.
2. The inflationist wing of Progressivism agrees with the most bigoted Marxians in ignoring the fact of the scarcity of the material factors of production. It draws from this error the conclusion that the rate of interest and entrepreneurial profit can be eliminated by credit expansion. As they see it, only the selfish class interests of bankers and usurers are opposed to credit expansion.
• The overwhelming success of the inflationist party manifests itself in the monetary and credit policies of all countries. The doctrinal and semantic changes that preceded this victory, which made this victory possible and which now prevent the adoption of sound monetary policies, are the following:
• Until a few years ago, the term inflation meant a substantial increase in the quantity of money and money-substitutes. Such an increase necessarily tends to bring about a general rise in commodity prices. But today the term inflation is used to signify the inevitable consequences of what was previously called inflation. It is implied that an increase in the quantity of money and money-substitutes does not affect prices, and that the general rise in prices which we have witnessed in these last years was not caused by the government's monetary policy, but by the insatiable greed of business. 
• It is assumed that the rise of foreign exchange rates in those countries, where the magnitude of the inflationary increment to the quantity of money and money-substitutes in circulation exceeded that of other countries, is not a consequence of this monetary excess but a product of other agents, such as: the unfavorable balance of payments, the sinister machinations of speculators, the "scarcity" of foreign exchange, and the trade barriers erected by foreign governments, not by one's own.
• It is assumed that a government, which is not on the gold standard and which has control of a central bank system, has the power to manipulate the rate of interest downward ad libitum [at will] without bringing about any undesired effects. It is vehemently denied that such an "easy money" policy inevitably leads to an economic crisis. The theory, which explains the recurrence of periods of economic depression as the necessary outcome of the repeated attempts to reduce interest rates artificially and expand credit, is either intentionally passed over in silence or distorted in order to ridicule it and to abuse its authors.
3. Thus the way is free to describe the recurrence of periods of economic depression as an evil inherent in capitalism. The capitalist society, it is asserted, lacks the power to control its own destiny. 
4. The most disastrous consequence of the economic crisis is mass unemployment prolonged year after year. People are starving, it is claimed, because free enterprise is unable to provide enough jobs. Under capitalism technological improvement which could be a blessing for all is a scourge for the most numerous class.
5. The improvement in the material conditions of labor, the rise in real wage rates, the shortening of the hours of work, the abolition of child labor, and all other "social gains" are achievements of government pro-labor legislation and labor unions. But for the interference of the government and the unions, the conditions of the laboring class would be as bad as they were in the early period of the "industrial revolution."
6. In spite of all the endeavors of popular governments and labor unions, it is argued, the lot of the wage earners is desperate. Marx was quite right in predicting the inevitable progressive pauperization of the proletariat. The fact that accidental factors have temporarily secured a slight improvement in the standard of living of the American wage earner is of no avail; this improvement concerns merely a country whose population is not more than 7 percent of the world's population and moreover, so the argument runs, it is only a passing phenomenon. The rich are still getting richer; the poor are still getting poorer; the middle classes are still disappearing. The greater part of wealth is concentrated in the hands of a few families. Lackeys of these families hold the most important public offices and manage them for the sole benefit of "Wall Street." What the bourgeois call democracy means in reality "pluto-democracy," a cunning disguise for the class rule of the exploiters.
7. In the absence of government price control, commodity prices are manipulated ad libitum [at will] by the businessmen. In the absence of minimum wage rates and collective bargaining, the employers would manipulate wages in the same way too. The result is that profits are absorbing more and more of the national income. There would prevail a tendency for real wage rates to drop if efficient unions were not intent upon checking the machinations of the employers.
8. The description of capitalism as a system of competitive business may have been correct for its early stages. Today it is manifestly inadequate. Mammoth-size cartels and monopolistic combines dominate the national markets. Their endeavors to attain exclusive monopoly of the world market result in imperialistic wars in which the poor bleed in order to make the rich richer.
9. As production under capitalism is for profit and not for use, those things manufactured are not those which could most effectively supply the real wants of the consumers, but those the sale of which is most profitable. The "merchants of death" produce destructive weapons. Other business groups poison the body and soul of the masses by habit-creating drugs, intoxicating beverages, tobacco, lascivious books and magazines, silly moving pictures, and idiotic comic strips. 
10. The share of the national income that goes to the propertied classes is so enormous that, for all practical purposes, it can be considered inexhaustible. For a popular government, not afraid to tax the rich according to their ability to pay, there is no reason to abstain from any expenditure beneficial to the voters. On the other hand, profits can be freely tapped to raise wage rates and lower prices of consumers' goods.

--Ludwig von Mises, "The Objectives of Economic Education," in Economic Freedom and Interventionism: An Anthology of Articles and Essays, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 1990), 208-210.

The Assumptions behind John Stuart Mill's Doctrine That Supply Creates Its Own Demand

Keynes, furthermore, ignores entirely the rich, fine work done by such writers as J. B. Clark and the Austrian School, who elaborated the laws of proportionality and equilibrium.

The doctrine that supply creates its own demand, as presented by John Stuart Mill, assumes a proper equilibrium among the different kinds of production, assumes proper terms of exchange (i.e., price relationships) among different kinds of products, assumes proper relations between prices and costs. And the doctrine expects competition and free markets to be the instrumentality by means of which these proportions and price relations will be brought about. The modern version of the doctrine would make explicit certain additional factors. There must be a proper balance in the international balance sheet. If foreign debts are excessive in relation to the volume of foreign trade, grave disorders can come. Moreover, the money and capital markets must be in a state of balance. When there is an excess of bank credit used as a substitute for savings, when bank credit goes in undue amounts into capital uses and speculative uses, impairing the liquidity of bank assets, or when the total volume of money and credit is expanded far beyond the growth of production and trade, disequilibria arise, and, above all, the quality of credit is impaired. Confidence may be suddenly shaken and a countermovement may set in.

With respect to all these points, automatic market forces tend to restore equilibrium in the absence of overwhelming governmental interference.

Keynes has nothing to say in his attack upon the doctrine that supply creates its own demand, in the volume referred to, with respect to these matters.

Indeed, far from considering the intricacies of the interrelations of markets, prices and different kinds of production, Keynes prefers to look at things in block.

--Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946 (1949; repr., Princeton, NJ: D. Van Nostrand Company, 1965), 392-393.

The "New Economics" (Keynesian Revolution) Has Several Points in Common with Marxian and Russian Socialism

From the foregoing, one may see that Keynesism [sic] has several points in common with Marxian Socialism. Among these are:

1. the theory that the rate of return on investments tends to decline and unemployment tends to increase in a free-enterprise, capitalistic economy;
2. emphasis on the depressing influence of savings in a "mature" capitalistic economy;
3. theories of an irresistible tendency to monopoly, increasing concentration of wealth, and the doom of free markets in free enterprise, or laissez faire;
4. disparagement of individual enterprise and responsibility in favor of government control over savings and provision for old age, unemployment, and other emergencies in an elaborate "social security" program;
5. proposals for "progressive" income and inheritance taxes;
6. proposals for government management of the currency and banking, for government ownership of certain industries; and for liquidation ("euthanasia") of the rentier (bond-holding and fixed-income) classes; 
7. a collectivistic view of property rights as privileges from the State, to be given or taken away at the will of the State;
8. a tendency to identify government with "all of us," or with "society," in the democratic socialist state and in the democratic Keynesian "mixed" economy;
9. a tendency to deal with persons and economic activity in terms of "classes," "averages," "aggregates," and technological or economic "forces";
10. a mechanistic view of human behavior as predictable and controllable by government, through study and manipulation of interest rates, money, government lending and spending, taxation, and technological developments. 

Yet, despite the similarities between Marxian socialism and Keynesism [sic] and despite growing hostility to Russian Marxists, the Keynesian national-income approach makes rapid headway in American colleges and universities. Why?

--Vervon Orval Watts, Away from Freedom: The Revolt of the College Economists (1952; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 28-30.

Professor Hayek on the Mythology of Capital: The Misleading Concept of Capital as a Definite “Fund” and the Meaningless Abstraction of a Single or Average Period of Production

Professor Knight’s crusade against the concept of the period of investment revives a controversy which attracted much attention thirty and forty years ago but was not satisfactorily settled at that time. In his attack he uses very similar arguments to those which Professor J. B. Clark employed then against Böhm-Bawerk. However, I am not concerned here with a defense of the details of the views of the latter. In my opinion the oversimplified form in which he (and Jevons before him) tried to incorporate the time element into the theory of capital prevented him from cutting himself finally loose from the misleading concept of capital as a definite “fund,” and is largely responsible for much of the confusion which exists on the subject; and I have full sympathy with those who see in the concept of a single or average period of production a meaningless abstraction which has little if any relationship to anything in the real world. But Professor Knight, instead of directing his attack against what is undoubtedly wrong or misleading in the traditional statement of this theory, and trying to put a more appropriate treatment of the time element in its place, seems to me to fall back on the much more serious and dangerous error of its opponents of forty years ago. In the place of at least an attempt of analysis of the real phenomena, he evades the problems by the introduction of a pseudo concept devoid of content and meaning, which threatens to shroud the whole problem in a mist of words.

--F.A. Hayek, Capital and Interest, ed. Lawrence H. White, vol. 11 of The Collected Works of F.A. Hayek (Chicago: The University of Chicago Press, 2015), 119-120.

"Forced Saving" Occurs When Real Resources Are Transferred (As a Direct Result of Monetary Expansion) from Producing Consumer Goods to Producing Capital Goods

Hayek contested the alleged 'neutrality' of money. Variations in money could instigate change in real economic variables; and Hayek's work emphasises the all-pervasive, short-run effects of changes in the money supply. Wicksell's analysis had ignored those effects, but his introduction of the concept of 'neutral money' itself suggested 'recognition of the fact that money need not be neutral' (Schumpeter). The subsequent search for the conditions in which money is neutral had only one logical outcome: for as soon as a set of conditions is established for ensuring monetary stability, it follows that money itself 'exerts an influence and hence that it is not neutral' (Schumpeter). Hayek emphasised that monetary disturbances affected real sectors of the economy through induced changes in relative prices and interest rates; and he focused upon the mechanism by which these occurred. Central to his analysis is the concept of 'forced saving' which occurs when real resources are transferred (as a direct result of monetary expansion) from the production of consumer goods to the production of capital goods.

--G.R. Steele, Monetarism and the Demise of Keynesian Economics (New York: Palgrave Macmillan, 1989), 32.

Keynesian (So-Called) Full-Employment Policies Are Implausible Because of the Ricardo Effect

In the practical world of business, the function of investment expenditure is to provide the capital necessary to increase the supply of consumption goods in the future. However, Keynes’s General Theory provides a macroeconomic analysis where investment is treated as a component of aggregate demand that may be used to boost employment both directly and indirectly via the multiplier process. In setting aside the functional purpose of investment, to produce a short-run model of employment and national income, Keynesian macroeconomics neglects a hugely important area of economics; that is, the determinants of the changing levels and composition of production through time.

Hayek argues that the strategy of an expansionary monetary policy as the means to reach full employment is explained by Keynes’s ignorance of Austrian capital theory. The successful implementation of roundabout production methods requires a prior provision of resources that is delivered by voluntary saving. Forced saving (which accrues whenever inflated consumption goods’ prices reduce real wages) is not a viable alternative, because the Ricardo effect tells cumulatively against roundabout production methods. The relevance of monetary expansion is clear. A macroeconomic investment boom launched upon the back of monetary expansion is an inevitable failure. Keynesian (so-called) full-employment policies are implausible because of the Ricardo effect.

--G.R. Steele, The Economics of Friedrich Hayek, 2nd ed. (Houndmills, UK: Palgrave Macmillan, 2007), 148-149.

Hayek on Keynes' Fourth Fundamental Error: The Keynesian Philosophy of “In the Long Run, We Are All Dead” Is the Height of Scientific Irresponsibility

The General Theory is a model focused primarily on the short term. Hayek criticized Keynes because, in his opinion, only entrepreneurs have much to say in the short term, and economists do not have much to contribute in this field. In his view, an economist has the privilege and duty to analyze the medium term and long term effects of the economic policies undertaken. For Hayek, the Keynesian philosophy of “in the long run, we are all dead” is the height of scientific irresponsibility, and leads to policies which may give good results in the short term but can be extremely harmful in the long run.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 296.

Hayek on Keynes' Third Fundamental Error: Keynes' Macroeconomic Approach Hides from Economists the Fundamental Mechanisms of Change in the Market

Keynes’ model is clearly macroeconomic. According to Hayek, though, this approach is wrong, as it hides the fundamental mechanisms of change in the market from the economist. In his view, in order to understand the market process, economists need to study the economy from the point of view of the actors involved. Therefore, the relevant things are relative prices and the investment structure, and not concepts such as aggregate investment or the level of wages. Thus, Keynes’ theory would not be enough to explain the market process.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 296.

Hayek on Keynes' Second Fundamental Error: Keynes Considers the Market Exclusively As a Set of Monetary Flows

In Hayek’s opinion, Keynes focuses his analysis mainly on the monetary surface of the market process while he neglects analyzing the underlying real process. Hayek believes that Keynes considers the market exclusively as a set of monetary flows and, therefore, in The General Theory everything is explained through the variation of monetary expenditure. For Hayek, this approach to the economic problem makes it impossible to construct theories to understand the market process.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 295.

Hayek on Keynes' First Fundamental Error: Keynes' General Theory Lacks a Theory of Capital and It Suppresses the Production Structure in the Concept of Aggregate Investment

From Hayek’s point of view, the major deficiency in The General Theory is that it is not based on a theory of capital. According to Hayek, the market is a network of millions of companies that complement and coordinate with each other intertemporally and synchronically, forming an extremely complex production structure. In order to understand how and why this structure is coordinated or discoordinated, we need to apply a theory allowing us to study the way it works. However, Keynes does not study this production structure, but suppresses it in the concept of aggregate investment. This is why Hayek thought that Keynes was not able to understand the causes of and the solutions to economic fluctuations.

--David Sanz Bas, "Hayek's Critique of The General Theory: A New View of the Debate between Hayek and Keynes," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 294.

The Concept of Social Justice Has No Meaning

More recently, I have encountered similar difficulties with the blessed word 'social.' Like 'planning' it is one of the fashionable good words of our time, and in its original meaning of belonging to society it could be a very useful word. But in its modern usage in such connections as 'social justice' (one would have thought that all justice is a social phenomenon!), or when our social duties are contrasted with mere moral duties, it has become one of the most confusing and harmful words of our time, not only itself empty of content and capable of being given any arbitrary content one likes, but depriving all terms with which it is combined . . . of any definite content. In consequence I felt obliged to take a position against the word 'social', and to demonstrate that in particular the concept of social justice had no meaning whatever, calling up a misleading mirage which clear-thinking people ought to avoid. But this attack on one of the sacred idols of our time again made many people regard me as an irresponsible extremist, entirely out of sympathy with the spirit of our time.

--F.A. Hayek, The Market and Other Orders, ed. Bruce Caldwell, vol. 15 of The Collected Works of F.A. Hayek (Chicago: The University of Chicago Press, 2014), 40.

Theories of Underconsumption Permeate the Main Doctrines of Socialist Economics

The assertion that saving renders the purchasing power of the consumer insufficient to take up the volume of current production, although made more often by members of the lay public than by professional economists, is almost as old as the science of political economy itself. The question of the utility of 'unproductive' expenditure was first raised by the Mercantilists, who were thinking chiefly of luxury expenditure. The idea recurs in those writings of Lauderdale and Malthus which gave rise to the celebrated Théorie des Débouchés [Theory of Markets] of James Mill and J.B. Say, and, in spite of many attempts to refute it, permeates the main doctrines of socialist economics right up to Tugan-Baranovsky, Thorstein Veblen, and J.A. Hobson. . . .

This state of affairs, however, may yet be endangered by a new theory of underconsumption now current in the United States and in England. Its authors are people who spare neither money nor time in the propagation of their ideas. Their doctrine is no less fallacious than all the previous theories of underconsumption . . .

The teachings of Messrs Foster and Catchings, with which I am primarily concerned in this study, attained their widest circulation in the United States where they have achieved considerable repute not only among members of the public, but also among professional economists.

--F.A. Hayek, Contra Keynes and Cambridge: Essays, Correspondence, ed. Bruce Caldwell, vol. 9 of The Collected Works of F.A. Hayek (London, UK: Routledge, 1995), 74-76.

Friedrich A. Hayek Attributes the Severity and Duration of the Depression to the World Taking Monetary Policy Advice from the "Stabilizers" (Forerunners of the Monetarists)

Hayek wrote Monetary Theory and the Trade Cycle as an explication of the monetary causes of the business cycle. However, in order to do so, he believed that he had to “save the sound elements in the monetary theories of the trade cycle” by refuting those naïve quantity theorists who posited a simplistic and mechanical connection between the aggregate money supply and the average price level. Thus he took after the price “stabilizers” like Irving Fisher and Gustav Cassel who were the forerunners of the modern monetarists. He identified “the critique of the program of the ‘stabilizers’” as “the central theme of this book.” Nor did Hayek tread lightly in verbalizing his criticisms. He placed the blame for “the exceptional severity and duration of the depression” squarely on central banks’, particularly the Fed’s, “experiment” in “forced credit expansion,” first to stabilize prices in the 1920s, and then to combat the depression in the early 1930s. Hayek defiantly declared:

We must not forget that, for the last six or eight years [up to 1932] monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.

--Joseph T. Salerno, introduction to Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, by F.A. Hayek (Auburn, AL: Ludwig von Mises Institute, 2008), xix-xx.

Friedrich A. Hayek Defends a Solid and Natural Theory of Capital Against Frank Knight's Mythology of Capital

In the “The Mythology of Capital,” Hayek took on the long and bitter crusade against the Austrian theory of capital waged by Frank Knight, fifteen years Hayek’s senior, an eminent American economist and the founder and leader of the early Chicago School. Hayek fittingly adopted as the introductory quotation of his article a statement by Eugen von Böhm-Bawerk, not coincidentally the greatest economic disputant of the nineteenth century and Hayek’s chief influence in capital theory. Hayek’s quotation of Böhm-Bawerk read, “With every respect for the intellectual qualities of my opponent, I must oppose his doctrine with all possible emphasis, in order to defend a solid and natural theory of capital against a mythology of capital.” This is actually a concise statement of the early Hayek’s general method of attaining theoretical breakthroughs: he would carefully develop the correct theoretical position and then use it as a weapon with which to strike down the fallacies of his opponents. In this article he proceeded to demolish Knight’s claim that capital, once accumulated, was a permanent fund that perpetually and automatically reproduced itself without regard to human purposes and the prevailing conditions of scarcity. Hayek trenchantly characterized Knight’s notion of capital as “a pseudo-concept devoid of content and meaning, which threatens to shroud the whole problem in a mist of words.”

--Joseph T. Salerno, introduction to Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, by F.A. Hayek (Auburn, AL: Ludwig von Mises Institute, 2008), xviii-xix.

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.