When we expand the survey area a bit to include the D.C.  suburbs in Maryland, Virginia, and West Virginia, where most of the high-level Federal bureaucrats, government contractors, and lobbyists working in D.C. reside, median household income leaps to $88,233.  This puts the D.C. metro area at the very top of the list of the 25 most populous metro areas in the U.S. in terms of median household income, revealing  an even more glaring and growing income disparity between the political predators and their cronies on the one hand  and the private producers of  wealth on the other.

The establishment media and many economists and other social scientists continually bemoan the varying  income differences generated by voluntary and ever changing consumer choices on the market.  In fact, these differences are  not a problem at all,  but rather the necessary and benign  outcome of a dynamically efficient market economy, which rewards all market participants according to their productivity in serving consumer wants.  Furthermore,   the obsession with “income inequality” obscures the enormity and the very existence of the real problem, which is  ”income plundering”  of the productive class by the political class.  The latter class is composed of politicians, bureaucrats and their allied special interests in the private sector.  In the U.S., the political  class  regularly and forcibly extracts a massive amount of income from productive workers, investors, and entrepreneurs via taxation and money creation (“quantitative easing” and “zero interest-rate policies”) and funnels these stolen funds  into its own pockets and those of privileged financial institutions, giant agribusiness corporations,  government military contractors, construction unions, etc.  Recently, in the  U.S. this plundering of productive incomes has grown to an enormous scale, enabled by  the huge Federal budget deficits financed by the Fed’s money printing.  Plutocratic exploitation, therefore, and not any kind of market failure, is the explanation of the impoverishment of the productive middle class which has been manifested so dramatically  in the past decade.

It all started one Saturday morning when Jarl Syvertsen, a 59-year-old disabled Norwegian man, purchased a PC, TVs, and washing machines for 80,000 kroner (roughly US$13,000) which he paid in cash. The store immediately alerted the police about the large cash payment. On Sunday a male and a female police officer appeared on Mr Syvertsen’s doorstep. Upon seeing them, Mr. Syvertsen at first feared that something may have happened to his mother, who is 86 years old and resides in a nursing home. But the police were there with a warrant to search his home, charging that the cash he had spent was money that “came from a criminal offense.” In fact, the money was actually part of an approximately one-million dollar advance on an inheritance he had received. Mr. Syvertsen attempted several times to explain to the officers where the money had come from and to show them a letter confirming that fact, but they would have none of it and proceeded to invade his home and his privacy. Eventually the police realized their error and left his home.

Although the police now admit that they investigated Mr. Syvertsen prior to the warrant being issued and found that he had never been implicated in any criminal activity, they insist that “there were reasonable grounds to suspect” criminal activity given the “sum of the information available,” that is,  the large cash payment. As Mr. Syvertsen points out, however, had the police waited until Monday, the matter could have been resolved “in a single phone call to the bank.” But the police are unrepentant and have the unmitigated gall to lecture law abiding citizens against carrying large sums of cash on their persons for their own safety–against private thugs, not police thugs of course. According to acting station commander Jarle Kolstad:

It is far safer to pay such large amounts [with] cards than to go with 80,000 [kroner] in cash on the body. Not because you risk getting the police at the door [really?], but because it is safer to use the cards. . . .

Mr Syvertsen’s reply to such self-serving nonsense?

It’s not stamped on my forehead that I have 80,000 [kroner] on the inside pocket, so I judge [it] as quite safe. Besides, I have previously experienced not [being able to] pay because payment terminals are down. Therefore, I chose to pay with cash, and there is no prohibition [against it] in Norwegian law. . . .

In the aftermath of this egregious home invasion, Mr. Syvertsen is suing the police for compensation. In the meantime, his experience with such lawless and arbitrary police conduct makes him feel unsafe in his own home and leaves him wondering “How low the threshold is supposed to be for police to intrude into private homes”? Well Mr. Syvertsen,as in the case of any government war against its own people (e.g., the War on Drugs, the War on Terror etc.) the threshold is very low indeed.

HT to Vegard Notnaes.

Joseph Salerno [send him mail] is academic vice president of the Mises Institute, chairman of the graduate program in economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

Robert Lenzner of Forbes advises that you and I will be blindsided by the next financial crisis. Lenzner bases his reasoning on Yale economist Gary Gorton’s recent book Misunderstanding Financial Crises, Why We Don’t See Them Coming. According to Gorton the old-fashioned bank run is back, only in a different form. The recent financial crisis was different from earlier ones in that it was not initiated by bank depositors scrambling to withdraw their funds. Rather it was precipitated by a “run” among short-term lenders who had purchased banks’ commercial paper or lent money to banks through “repos” (repurchase agreements). When these lenders suddenly tried to liquidate these assets by selling them or not renewing the loans, their actions deprived banks of the short-term funds that the banks had been using to finance their long-term lending and investments.

As Lenzner describes the evolution of the crisis:

What transpired in 2007-08 “resembled the bank runs of the pre-Federal Reserve era. These were primitive expressions of panic by people trying desperately to sell assets, driving the price of those assets down, and causing other people to panic as well and try to get out at the same time. The panic spread from short-term instruments like repos and commercial paper to bonds and stocks and commodities and real estate. The wave of fear sweeps from short-term investments to longer term obligations. [There is an open quotation mark in this passage before "resembling" but no closed quotation mark to indicate where the quotation from Gorton ends.]

Lenzner goes on to warn:

The playbook in the next crisis will be the same as it was in past crises from 2008 to 1987, 1929, 1907, 1893, 1857 and so on. The run on the banks becomes systemic as no one institution is spared. Credit markets freeze, the economy goes south, millions lose their jobs, and other millions have their savings decimated. It happened time and time again in the 19th century before there was a central bank, and panics didn’t stop after the Fed appeared in 1913. . . .

Expect it to happen again. Gorton warns clearly that “there is no mechanism for determining when there actually is a crisis.” In fact, there was no panic by depositors in Citibank, BankAmerica, Wells Fargo that would have alerted the nation. It required the Fed to realize how over-leveraged, under-capitalized and insolvent major banks had become before it acted to rescue them with huge monetary bailouts.

So, in other words, federal deposit insurance no longer works to discourage or mitigate bank runs, because it does not cover short-term lenders. It will take massive money creation and bailouts by the Fed to defend against and cope with future bank runs by skittish investors.

All this is a great source of worry to Lenzner who pessimistically concludes:

We cannot afford for the market to lose confidence and for lenders (not depositors) to pull all their funds from one or more banks. Without the steady substantial continuation of short term funds the major banks cannot meet their longer term liabilities, and you could very well have another crisis begin. The unavoidable conclusion is that we have to focus on the continued stability of funding for the banks as much as strengthening their capital resources.

This is welcome news, indeed, to those advocates of free banking like myself who see the ever-present threat of bank runs as the one and only effective means of discouraging fractional-reserve banks from issuing un-backed deposits, or “fiduciary media,” and systematically mismatching the maturity profiles of their liabilities and assets (“borrowing short and lending long”). It is the creation and lending of fiduciary media that falsifies the interest rate and thereby causes the recurrence of booms and busts. If the Fed and the financial elites are unable to figure out a way of ensuring “stability of funding for the banks,” the scam will be up and the turbulent and destructive era of fractional-reserve banking will come to a rapid and well-deserved close.

The Best of Joseph Salerno

The gold “price rule” denotes the monetary reform proposal put forth in various forms by a number of supply-siders, including Arthur Laffer,[1] Robert Mundell,[2] and Jude Wanniski.[3]Laffer’s detailed formulation of the proposal also served as the basis of the Gold Reserve bill, introduced in the Senate by Jesse Helms in January 1981.[4]

The scheme has reared its head once again in H.R. 1576, the “Dollar Bill Act of 2013,” introduced by Congressman Ted Poe, and strongly supported by Steve Forbes.

According to Laffer’s blueprint from the 1980s, at the end of a previously announced transition period of three months, the Federal Reserve would establish an official dollar price of gold “at that day’s average transaction price in the London gold market.”[5] From that date onward, the Fed would stand ready to freely convert dollars into gold and gold into dollars at the official price. In addition, “when valued at the official price, the Federal Reserve will attempt over time to establish an average dollar value of gold reserves equal to 40 percent of the dollar value of its liabilities.”[6]This level of gold reserves Laffer designates the “Target Reserve Quantity.”

Once Laffer’s plan was fully operational, the Fed would have full discretion in conducting monetary policy through discounting, open market operations, etc., provided that: the dollar remains fully convertible into gold at the official price; and the quantity of actual gold reserves does not deviate from the Target Reserve Quantity by more than 25 percent in either direction, i.e., actual gold reserves do not fall below 30 percent or rise above 50 percent of the Fed’s liabilities, which are also known as the “monetary base.” However, should gold reserves decline to a level between 20 percent and 30 percent of its liabilities, the Fed would lose all discretion in determining the monetary base which, as a result, would be completely frozen at the existing level. If, in spite of this, gold reserves continued to decline to between 10 percent and 20 percent of the Fed’s liabilities, the Fed would be legally constrained to reduce the monetary base at the rate of one percent per month.

Should these measures prove incapable of arresting the decline in the dollar value of gold reserves before it reaches less than 10 percent of Fed liabilities, then:

The dollar’s convertibility will be temporarily suspended and the dollar price of gold will be set free for a three month adjustment period.

During this temporary period of inconvertibility, the monetary authorities will be required to suspend all actions that would affect the monetary base. Again, the price of gold would be reset as before and convertibility would be reinstated.[7]

Laffer’s plan also includes “a symmetric set of policy dicta” which are to be implemented in the case in which actual gold reserves exceed the Target Reserve Quantity.

It must first be pointed out that Laffer’s monetary reform proposal, whatever its merits or drawbacks, is not a blueprint for the gold standard. Rather, it is an outline of an elaborate scheme for legally constraining the monetary authority to adhere to a “price rule” in determining the supply of fiat money in the economy. In fact, as Laffer himself has made clear recently, gold has no necessary role in the implementation of such a price rule. According to Laffer and Miles:

… the Fed would institute its dollar “price rule” by stabilizing the value of the dollar in terms of an external standard. This standard would be a single commodity or a basket of commodities (a price index).…

Regardless of precisely which external standard is chosen, there are two basic rules of Fed behavior under the price rule. First, if the dollar price of the standard starts to rise (the dollar starts to fall in value), the Fed must reduce the quantity of dollars through open market sales of bonds, foreign exchange, gold, or other commodities. Second, if the dollar price starts to fall (the dollar rises in value), the Fed must increase the quantity of dollars through open market purchases of bonds, foreign exchange, gold or other commodities. The Fed is charged with keeping the value or price of the dollar stable in terms of the external standard.[8]

Compare this to Forbes’s explanation of Poe’s 2013 plan:

Unlike in days of old we don’t need piles of the yellow metal for a new standard to operate. Under Poe’s plan – an approach I have long favored – the dollar would be fixed to gold at a specific price. For argument’s sake let’s say the peg is $1,300. If the price of gold were to go above that, the Federal Reserve would sell bonds from its portfolio, thereby removing dollars from the economy to maintain the $1,300 level. Conversely, if the gold price were to drop below $1,300, the Fed would “print” new money by buying bonds, thereby injecting cash into the banking system.

Even if gold is chosen as the “external standard” in the price-rule regime, it is not itself money, as in the case of a genuine gold standard, but merely “the intervention asset” or “the item for which dollars are exchanged.”[9]

When we strip away its gold plating, Laffer’s and Poe’s price rule appears as a technique designed to control inflation under the current fiat money standard. It is thus differs only in technical detail from the quantity rule advocated by the monetarists. Laffer and Miles admit as much when they state, “in an unchanging world where all information is freely available, there of course would be a ‘quantity rule’ which would correspond to a given ‘price rule.”[10] In fact, Miles and Laffer prefer a price rule to a quantity rule because they believe that, under the current monetary system, the former is technically superior to the latter in “restraining the supply of dollars.”[11]

Under close examination, the Laffer/Poe/Forbes approach thus turns out to be, in essence, a kind of “price-rule monetarism,” the references to gold notwithstanding. The most serious defect in both variants of monetarism is that they fail to address the underlying cause of inflation, namely, the government monopoly of the supply of money. This is true of Laffer’s plan despite the elaborate set of legal sanctions which would be invoked against the monetary authorities for their violations of the price rule. For, in the end, such sanctions, even if rigorously applied, do not prevent inflation but merely respond to a fait accompli. This point is implicitly recognized by Laffer, who includes in his plan a provision for “temporary periods” of dollar inconvertibility. These would readjust the official gold price following sustained bouts of monetary inflation which cause gold reserves to fall below the legally permissible lower limit.

Furthermore, as in the case of the gold certificate reserve, we may appeal to history for evidence regarding the success of the gold price rule in stanching the flow of government fiat currency. We need look no further than the late, unlamented Bretton Woods System (1946–1971). Under this “fixed-exchange-rate” system, the U.S. monetary authority followed a gold price rule, buying and selling gold at an officially fixed price of $35 per ounce. Foreign monetary authorities, on the other hand, pursued a dollar price rule, maintaining their respective national currencies convertible into dollars at a fixed price. According to Laffer and Miles, “as long as the rules of the system were being followed, the supplies of all currencies were constricted to a strict price relationship among one another and to gold.”[12]

Unfortunately, “the rules of the system” were subjected to numerous and repeated government violations and evasions, including frequent outright “readjustment” of the price rules, i.e., exchangerate devaluations, when they became inconvenient restraints on the inflationary policies pursued by particular governments.[13] Needless to say, the Bretton Woods System did not prevent the development of a worldwide inflation which brought the system to its knees in 1968 and led to its final collapse in 1971.

After duly noting the political manipulations involved in the destruction of the Bretton Woods System,[14] Laffer and Miles clearly delineate the reasons why governments prefer and benefit from the removal of any and all checks on their power to inflate the money supply:

Why should governments be biased toward increasing the money supply at a faster rate? There are essentially two incentives – a political incentive and a financial one. The political incentive is political survival. Many politicians, especially those up for reelection, are familiar with the theory that increases in the money supply promote expenditure, increase GNP, and reduce unemployment. These changes in turn are assumed to make the citizens of the country look more kindly upon the incumbent government. While there may be some validity in this theory, unfortunately it is often implemented under the notion that if a little money creation is good, a lot must be even better.

The financial motive for printing money is the fact that while money is practically costless to produce, it can be used for purchasing goods and services. The resulting seignorage represents revenue to the government. Revenue gathered in this way means less revenue must be gathered in another way, say, through direct taxation.

Given these incentives to print money, it can be seen why removal of the monetary constraints on governments tends to create inflation rather than deflation.[15]

Given his recognition of the powerful inflationary bias built into the political process and of the historical failure of monetary price rules to hold such a bias in check, Laffer’s advocacy of a renewed gold price rule was always something of a mystery.

In light of the inherent flaws of all varieties of the gold price rule, Forbes and Poe should seriously rethink their advocacy of its resurrection.

This article was adapted from an excerpt of Money Sound and Unsound by Joseph T. Salerno

Notes

[1] Arthur Laffer, Reinstatement of the Dollar: The Blueprint (Rolling Hill Estates, Calif.: A.B. Laffer Associates, 1980). Also see Arthur B. Laffer and Charles W. Kadlec, “The Point of Linking the Dollar to Gold,” Wall Street Journal (October 13, 1982): p. 32.

[2] Robert A. Mundell, “Gold Would Serve into the 21st Century,” Wall Street Journal (September 30, 1981): p. 33.

[3] Jude Wanniski, The Way the World Works (New York: Simon and Schuster, 1978), especially pp. 161–67. See Wanniski, “A Job Only Gold Can Do,” New York Times (August 27, 1981): p. A31.

[4] The text of Helms’ bill is reproduced in Ernest P. Welker, “Plans to Revive the Gold Standard,” Economic Education Bulletin 20, no. 10 (Great Barrington, Mass.: American Institute for Economic Research, 1980), pp. 7–9.

[5] Laffer, Reinstatement of the Dollar, p. 4.

[6] Ibid.

[7] Ibid., p. 5.

[8] Arthur B. Laffer and Marc A. Miles, International Economics in an Integrated World (Glenview, Ill.: Scott, Foresman and Co., 1982), pp. 399–400.

[9] Ibid., p. 400.

[10] Ibid., p. 401.

[11] Ibid.

[12] Ibid., p. 260.

[13] For accounts of the breakdown of the Bretton Woods System see Jacques Rueff, The Monetary Sin of the West, trans. Roger Glémet (New York: Macmillan Co., 1972); and Guillaume Guindey, The International Monetary Tangle: Myths and Realities, trans. Michael L. Hoffman (White Plains, N.Y.: M.E. Sharpe, Inc., 1977).

[14] Laffer and Miles, International Economics, pp. 259–62.

[15] Ibid., pp. 397–98.

The Best of Joseph Salerno

One potential spillover from yesterday’s agreement is the knock-on effects for bank funding, analysts said. Banks typically fund themselves with some combination of deposits, equity, senior and subordinate notes and covered bonds, which are backed by a pool of high-quality assets that stay on the lender’s balance sheet.

The consequences of the Cyprus bailout could be that banks will be more likely to use contingent convertible bonds – known as CoCos – to raise money as their ability to encumber assets by issuing covered bonds reaches regulatory limits, said Chris Bowie at Ignis Asset Management Ltd. in London.

“We’d expect to see some deposit flight and a shift in funding towards a combination of covered bonds, real equity and quasi-equity,” said Bowie, who is head of credit portfolio management at Ignis, which oversees about $110 billion.

Recently by Joseph T. Salerno: Using Legal Tender Laws Against the State?

The “Cyprus deal” as it has been widely referred to in the media may mark the next to last act in the the slow motion collapse of fractional-reserve banking that began with the implosion of the savings-and-loan industry in the U.S. in the late 1980s. This trend continued with the currency crises in Russia, Mexico, East Asia and Argentina in the 1990s in which fractional-reserve banking played a decisive role. The unraveling of fractional-reserve banking became visible even to the average depositor during the financial meltdown of 2008 that ignited bank runs on some of the largest and most venerable financial institutions in the world. The final collapse was only averted by the multi-trillion dollar bailout of U.S. and foreign banks by the Federal Reserve.

Even more than the unprecedented financial crisis of 2008, however, recent events in Cyprus may have struck the mortal blow to fractional-reserve banking. For fractional reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their “deposits,” they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system. Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always “in the bank” thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace). Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity – especially the largest and least stable. Thus arose the “too-big-to-fail doctrine.” Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.

Getting back to the Cyprus deal, admittedly it is hardly ideal from a free-market point of view. The solution in accord with free markets would not involve restricting deposit withdrawals, imposing fascistic capital controls on domestic residents and foreign investors, and dragooning taxpayers in the rest of the Eurozone into contributing to the bailout to the tune of 10 billion euros. Nonetheless, the deal does convey a salutary message to bank depositors and creditors the world over. It does so by forcing previously untouchable senior bondholders and uninsured depositors in the Cypriot banks to bear part of the cost of the bailout. The bondholders of the two largest banks will be wiped out and it is reported that large depositors (i.e. those holding uninsured accounts exceeding 100,000 euros) at the Laiki Bank may also be completely wiped out, losing up to 4.2 billion euros, while large depositors at the Bank of Cyprus will lose between 30 and 60 percent of their deposits. Small depositors in both banks, who hold insured accounts of up to 100,000 euros, would retain the full value of their deposits.

The happy result will be that depositors, both insured and uninsured, in Europe and throughout the world will become much more cautious or even suspicious in dealing with fractional-reserve banks. They will be poised to grab their money and run at the slightest sign or rumor of instability. This will induce banks to radically alter the sources of the funds they raise to finance loans and investments, moving away from deposit and toward equity and bond financing. As was reported this week, this is already expected by many analysts:

One potential spillover from yesterday’s agreement is the knock-on effects for bank funding, analysts said. Banks typically fund themselves with some combination of deposits, equity, senior and subordinate notes and covered bonds, which are backed by a pool of high-quality assets that stay on the lender’s balance sheet.

The consequences of the Cyprus bailout could be that banks will be more likely to use contingent convertible bonds – known as CoCos – to raise money as their ability to encumber assets by issuing covered bonds reaches regulatory limits, said Chris Bowie at Ignis Asset Management Ltd. in London.

“We’d expect to see some deposit flight and a shift in funding towards a combination of covered bonds, real equity and quasi-equity,” said Bowie, who is head of credit portfolio management at Ignis, which oversees about $110 billion.

If this indeed occurs it will be a significant move toward a free-market financial system in which the radical mismatching of the maturities of assets and liabilities in the case of demand deposits is eliminated once and for all. A few more banking crises in the Eurozone – especially one in which insured depositors are made to participate in the so-called “bail-in” – will likely cause the faith in government deposit insurance to completely evaporate and with it confidence in fractional-reserve banking system. There may then naturally arise on the market a system in which equity, bonds, and genuine time deposits that cannot be redeemed before maturity become the exclusive sources of finance for bank loans and investments. Demand deposits, whether checkable or not, would be segregated in actual deposit banks which maintain 100 percent reserves and provide a range of payments systems from ATMs to debit cards. While this conjecture may we overly optimistic, we are certainly a good deal closer to such an outcome today than we were before the “Cyprus deal” was struck. Of course we would be closer still if there were no bailout and the full brunt of the bank failures were borne solely by the creditors and depositors of the failed banks rather than partly by taxpayers. The latter solution would have completely and definitively exposed the true nature of fractional-reserve banking for all to see.

Joseph Salerno [send him mail] is academic vice president of the Mises Institute, chairman of the graduate program in economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

The Best of Joseph Salerno

About a month ago I had a doctor’s appointment at the city’s health services emergency ward (government institution).

When leaving, I asked to pay cash. I was told that the cashier’s desk was closed, that I would be invoiced, and that they generally did not accept cash. I reminded the nurse(?) on duty about legal tender.

When I got the invoice, I called accounting at the ward. I told the accountant that I wished to pay cash. I was told that was not possible. I asked if she knew about legal tender, referring to the specific legislation. She went completely defensive, as I clearly perceived it. She even claimed that legal issues with the no-cash arrangement had been dealt with. I said I would file a written complaint.

So I did. I called in a few days later to check if the complaint had been received, which she could confirm. Now the accountant was apparently more interested in discussing the issue.

Yesterday, I got the written response. I was given the opportunity to pay cash in this one case if I brought the exact amount. Moreover, no changes in the general arrangements would be made. Today, I made the payment in cash.

Why did they do this? I would suspect that they figured they had a weak legal case, that they were dealing with someone who apparently wasn’t going to give up, and that allowing it in this case would avoid having to deal with someone with a formal legal interest in challenging their anti-cash system, the alternatives being changing their system voluntarily and fighting an administrative complaint case – or even worse, a court case.

Of course, things would be much better if we weren’t forced to use this fiat money. However, it is reasonable to expect government institutions to comply with the government’s own legal tender regulations.

“As long as we know that our customers are asking for cash, it is important that we as a bank [are] providing it. . . . We see places where other banks are taking other decisions, we get customers from them and positive response.”

With this law, the French government will be able to tighten the vise on its people one more turn, restricting their freedom of choice (how to pay), wiping out any privacy in those transactions, and imposing another layer of government control. Once people have gotten used to the €1,000 limit – based on the great principle of incrementalism with which restrictions of freedom come to pass in democracies – the vise will be tightened further, until the government can document every purchase made by “fiscal residents.”

Recently by Joseph T. Salerno: Addicted to Asset Bubbles

The relentless war against cash payments waged by governments worldwide has perhaps gone furthest in Scandinavia. The ostensible reason given by our rulers for suppressing cash is to keep society safe from terrorists, tax evaders, money launderers, drug cartels and sundry other villains, real or imagined. But the actual aim of the recent flood of laws rendering cash transactions less convenient or limiting or even prohibiting them is to force the public at large to make payments through the financial system in order to prop up the unstable fractional-reserve banks and, more importantly, to expand the ability of governments to spy on and keep track of their citizens’ most private financial dealings. One ingenious friend from Norway has fought to protect his right to use cash by invoking his government’s own legal tender laws against it. Here is his story in his own words:

About a month ago I had a doctor’s appointment at the city’s health services emergency ward (government institution).

When leaving, I asked to pay cash. I was told that the cashier’s desk was closed, that I would be invoiced, and that they generally did not accept cash. I reminded the nurse(?) on duty about legal tender.

When I got the invoice, I called accounting at the ward. I told the accountant that I wished to pay cash. I was told that was not possible. I asked if she knew about legal tender, referring to the specific legislation. She went completely defensive, as I clearly perceived it. She even claimed that legal issues with the no-cash arrangement had been dealt with. I said I would file a written complaint.

So I did. I called in a few days later to check if the complaint had been received, which she could confirm. Now the accountant was apparently more interested in discussing the issue.

Yesterday, I got the written response. I was given the opportunity to pay cash in this one case if I brought the exact amount. Moreover, no changes in the general arrangements would be made. Today, I made the payment in cash.

Why did they do this? I would suspect that they figured they had a weak legal case, that they were dealing with someone who apparently wasn’t going to give up, and that allowing it in this case would avoid having to deal with someone with a formal legal interest in challenging their anti-cash system, the alternatives being changing their system voluntarily and fighting an administrative complaint case – or even worse, a court case.

Of course, things would be much better if we weren’t forced to use this fiat money. However, it is reasonable to expect government institutions to comply with the government’s own legal tender regulations.

Sweden’s War on Cash Runs Into a Wall – and a Heroic Bank

The war on cash in Sweden may be stalling. The anti-cash movement has been vigorously promoted by major Swedish commercial banks as well as the Riksbank, the Swedish central bank. In fact, for three of the four major Swedish banks combined, 530 of their 780 office no longer accept or pay out cash. In the case of the Nordea Bank, 200 of its 300 branches are now cashless, and three-quarters of Swedbank’s branches no longer handle cash. As Peter Borsos, a spokesman for Swedbank, freely admits, his bank is working “actively to reduce the [amount] of cash in society.” The reasons for this push toward a cashless society, of course, have nothing to do with pumping up earnings from bank card fees or, more important, freeing fractional-reserve banks from the constraints of bank runs. No, according to Borsos, the reasons are the environment, cost, and security: ”We ourselves emit 700 tons of carbon dioxide by cash transport. It costs society 11 billion per year. And cash helps robberies everywhere.” Hans Jacobson, head of Nordea Bank, argues similarly: “Our mission is to make people understand the point of cards, cards are more secure than cash.”

Fortunately, it seems that the Swedish people are not falling for the anti-cash propaganda spewed by private bankers and Riksbank officials and are resisting the trend toward a cashless economy. It is reported that last year the value of cash transactions in Sweden were 99 billion krona which represented only a marginal decrease from ten years ago. And small shops continue to do one-third to one-half of their business in cash. Furthermore a study of bank customers satisfaction released by the Swedish Quality Index in October 2012, indicated that the satisfaction index was pulled down among customers of Swedbank, Nordea and SEB by their policy of eliminating cash transactions at their bank branches. Even more heartening is the fact that Handelsbanken, the largest bank in Sweden, is committed to serving consumers who demand cash. As Kai Jokitulppo, head of private services at Handelsbanken, puts it:

“As long as we know that our customers are asking for cash, it is important that we as a bank [are] providing it. . . . We see places where other banks are taking other decisions, we get customers from them and positive response.”

Fewer then 10 of Handelsbanken’s 461 branches currently do not handle cash and the bank’s goal is to have cash in every branch by the first quarter of 2013.

France Ratchets Up the War on Cash

France’s state auditing bureau, Cour des Comptes, informed the French government that it was “dreaming” in forecasting that the French economy would grow this year by 0.8 percent, which would enable it to meet its budget deficit target of 3 percent of GDP. The bureau told French Prime Minister Jean-Marc Ayrault that a growth rate of 0.3 percent was more like it, which would not be sufficient to meet the deficit reduction target. This was the case despite–or more likely because of–the fact that a broad based tax increase had just been imposed that would extract another €32 billion euros from overburdened French businesses and households this year. So would a desperate Ayrault finally open his eyes to economic reality and slash the budget of the bureaucratic and bloated French State, a budget that is liberally larded with fascistic corporate welfare subsidies and bailouts? No way, no how. Instead Ayrault convened a meeting of the National Anti-Fraud Committee to crack down on tax cheats and presided over it himself–”A first for a head of government,” he crowed.

Tax fraud in France has been estimated to be in the range of €60 to €80 billion annually. Buried in Ayrault’s proposal to crack down on tax cheats and further squeeze more revenue from its “fiscal residents”–those citizens and foreigners who have not been driven into part-time exile to escape French taxes–is a draconian provision that would lower the maximum cash payment per transaction from €3,000 to €1,000. Under the new limit a French citizen would not even be able to buy a used car for cash. The provision would not apply, however, to citizens and foreigners wealthy and savvy enough to have placed their income beyond the clutches of the rapacious French State by becoming fiscal residents of other countries. They would be subject to a limit of €10,000 per purchase in cash, down from the current limit of €15,000 per purchase. This may come to be called the Depardieu exception because French actor Gerard Depardieu recently caused a public stir by obtaining a Russian passport in order to take advantage of Russia’s flat-rate income tax of 13 percent.

One commentator perceptively summed up the inextricable link between the war on cash and the war on personal liberties:

With this law, the French government will be able to tighten the vise on its people one more turn, restricting their freedom of choice (how to pay), wiping out any privacy in those transactions, and imposing another layer of government control. Once people have gotten used to the €1,000 limit – based on the great principle of incrementalism with which restrictions of freedom come to pass in democracies – the vise will be tightened further, until the government can document every purchase made by “fiscal residents.”

Joseph Salerno [send him mail] is academic vice president of the Mises Institute, chairman of the graduate program in economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

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Recently by Joseph T. Salerno: The Flipside of the Trillion Dollar Coin

Helicopter Ben Runs Out of Ideas for Creating Money

Ben Bernanke confided on January 14 that he is unaware of any new method of stimulating economic growth. Bernanke said: u201CAs far as I'm aware, there's no completely new method that we haven't [already tapped].u201D So Helicopter Ben has run out of innovative and unconventional ways to create new money. Lest you be tempted to breathe a bit easier, however, rest assured that the now conventional method of quantitative easing, involving the Fed's monthly purchase of $85 billion worth of mortgage-backed and U.S. government securities, seems to be working just fine according to Bernanke and he foresees its continuation. Noting the stubbornly high unemployment rate combined with the low inflation rate in the U.S. economy, Bernanke stated, u201CThat is the case for being aggressive, which we are trying to do.u201D Although he is u201Ccautiously optimistic,u201D he does promise to closely monitor the risks, efficacy, costs, and benefits of this inflationary policy.

I guess the rapid asset price run-up in stock and commodities markets, which are nearly back to financial bubble levels, and booming farmland prices do not count in Bernanke's benefit-cost calculus. More likely, Bernanke accounts them as a benefit, which, via the u201Cwealth effect,u201D will induce another debt-driven consumption spree on the part of the American public that will stimulate economic growth, i.e., create another bubble economy.

Recreating the Asset Bubble: The Fed's Plan for Economic Recovery

While Keynesians continue to sing that lame old song about insufficient aggregate demand stimulus and the horrors of austerity and u201Cmarketu201D monetarists prattle on about deficient growth in nominal GDP, the signs of an incipient asset bubble become more evident every day. In fact, it would not be overstating the case to say that the Fed is deliberately aiming at recreating an asset bubble as a means of rekindling the historically unprecedented consumption booms of the latter half of the 1990s and the first part of the last decade. These consumption manias were driven by the u201Cwealthu201D or u201Cnet worthu201D effect, pithily described in the metaphor u201Cusing one's home as an ATM machine.u201D As the following graphs show, Fed monetary policy is succeeding in pumping up total net worth, which consists mainly of financial assets plus real estate owned by households (and nonprofit organizations) minus household debt.

What the above graph shows is that total net worth peaked at $67.3 trillion in Q3 2007 and fell precipitously to $51.1 trillion in Q1 2009. This $16.1 trillion decline in U.S. household wealth exceeded the combined annual GDP of Great Britain, Germany, and Japan. The Fed has since succeeded in pumping up net worth, to $64.8 trillion by Q3 2012, which is only $2.5 trillion below its level at the peak of the bubble. Although the value of household real estate remained $5.5 trillion below its bubble peak for Q3 2012 and has been slowly increasing, the Fed has been wildly successful in pushing up the value of U.S. financial assets. This is revealed in the the Wilshire 5000 Total Market Index. This index tracks the total dollar value of all U.S.-headquartered equity securities with readily available price data and includes more than 6,000 firms.

Note in the graph above that the index reached its peak of 15,244 in December 2007, then went crashing to its trough of 6,800 by March 2009. By January 2013 the Fed's inflationary policies drove it past its previous peak, reflating the index by 2,000 points in 2012 alone. But perhaps the most telling graph is the ratio of household net worth to GDP.

This graph shows that for over 40 years, from 1952 until the dot-com boom began in the mid-1990s, the household net worth to GDP ratio fluctuated in a band between 300 percent and 350 percent. After falling back toward this range after the recession of 2001, the Fed's monetary expansion interrupted the correction and sharply drove the ratio up by 100 percentage points in a matter of three years. The financial crisis set another needed asset price readjustment in train, but it was once again reversed by the Fed, which was desperate to re-inflate asset prices in order to first prevent a financial collapse and then to start another consumption boom. The ratio now sits at 400 percent – a level it first reached midway through the dot-com bubble – and is headed inexorably upward. Once housing markets in general begin to follow the lead of New York City's and Washington, D.C.'s overheated residential real estate markets, we will be well on our way to another unsustainable asset bubble.

The Fed is Blowing More Bubbles

As if any more evidence were needed that the Fed has succeeded, either through ignorance or design, in igniting new asset bubbles throughout the economy, the Federal Reserve Bank of Kansas City just released a survey of bankers that confirms a continuing rise in U.S. farmland prices. The following chart shows the stratospheric year-over-year rise in non-irrigated cropland prices for 3Q 2012.

As reported by TheBlaze, one analyst noted, u201CIf this trend continues . . . these agricultural areas may very well become u2018New Manhattans' (as far as wealth is concerned).u201D The chart below from the report by the Kansas City Fed puts this stunning trend in temporal perspective and reveals that it extends across all farmland, including irrigated cropland and ranchland.

Bernanke the Comedian

Dr. Brendan Brown is an eminent financial economist in the City of London and the author of The Global Curse of the Federal Reserve, initially published in 2011 and just released in its second revised edition. In his book, Brown is critical of Milton Friedman and the monetarists for ignoring the effects of monetary expansion on interest rates and asset prices and for assuming that a stable price level indicates an absence of inflation. Brown adopts Rothbard's view that the 1920s were an inflationary decade, because, despite the rough price-level stability that obtained, asset and commodities markets were u201Coverheated.u201D Brown also rejects the monetarist argument that price-level stabilization is the sine qua non of economic stability. He argues that price stabilization policy is one of the u201Cdangerous features of Friedmanite monetarismu201D which u201CAustrian critics have long highlightedu201D and u201Cwhich in hindsight may have played a role in the growth in Bernanke-ism.u201D Finally, and most insightfully, Brown also maintains that deflation is effective – and indeed, necessary – to extricate an economy from the depths of a recession or depression.

Needless to say, Dr. Brown is no fan of Chairman Bernanke. In fact, in a memo today, Brown perceptively identifies the comedic aspect of Bernanke's testimony on the first day of his semiannual monetary policy report to Congress. Writes Brown:

Comedy according to the theorists of drama is based on inflexibility of character. The lead role cannot in any way bend his stereotyped behaviour even when this would avoid an accident or disaster which is looming. And so u201CDon Juanu201D of Molire is a comedy. Even when the ghostly statue of his slain victim threatens to take Don Juan on a fiery descent into hell, the lead character cannot show remorse and desist from his life of debauchery. Chekhov listed his u201CCherry Orchardu201D as a comedy because the lead characters could not shake themselves out of their nonchalance and avoid bankruptcy by selling the cherry orchard of their villa to a property developer on which he would build bungalows.

And so we come to the monetary comedy which played out in Washington yesterday. Professor Bernanke, adamant as always that the road to economic prosperity and stability takes the form of a rigorous targeting of inflation and supremely confident in a good outcome to his massive monetary experimentation tells his Congressional questioners that he sees no signs of asset price inflation which would justify changing his present policies. This is the same professor who largely repudiates any concept of asset price inflation and believes totally that any such dangers can be avoided well ahead of time by skilful action on the part of an army of regulators following the recently expanded book of rules. And this is the same professor who denies that monetary disequilibrium played any role in the giant asset and credit market inflations of the last two decades.

There is another element in the monetary comedy under the title of u201CFed chair's semi-annual testimony to Congress.u201D This is the failure of congressional questioners to hold the professor to account. When he declared that there is no asset price inflation, there was no follow on question such as u201Cbut professor you still say there was no asset price inflation in the last great bubble and bust and deny that the Fed of which you were a leading policy maker was in any way responsible: why should we believe you now?u201D That there should be no such question is part of the comedy, in its literal sense.

Dr. Brown will deliver the Murray N. Rothbard Memorial Lecture at the Austrian Economics Research Conference in March 2013.

Joseph Salerno [send him mail] is academic vice president of the Mises Institute, chairman of the graduate program in economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

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Recently by Joseph T. Salerno: Sweden's War on Cash Runs Into a Wall — and a HeroicBank

As outlandish as the idea of the $1 trillion platinum coin at first appears, it gives us a glimpse of a monetary arrangement that, although far from ideal, is superior to the current system. Now that the Obama Treasury has definitely ruled out the scheme to mint the coin to circumvent the gimmicky debt ceiling, it is instructive to take a closer look at the reason why it did so and to articulate the lessons that can be learned from the episode.

To begin with, the scheme has ramifications far beyond a one-off political trick to avoid the debt ceiling. Indeed, it presented an implicit challenge to the much vaunted and sacrosanct “independence” of the Fed. That is why, from the very beginning, Fed worshippers in the establishment media — left, right and center — mercilessly mocked the idea and denigrated its supporters as grossly ignorant or irresponsible, although they dared not spell out its full policy implications.

No doubt the Fed was acutely aware of the threat posed to its independence by the coin gimmick. As a senior administration official revealed, had the Treasury minted and tried to deposit the coin, the Fed would have refused to credit the Treasury’s account for the $1 trillion. This indicates the overweening arrogance of the Fed — as well as its great power — because the Fed was in effect threatening a president and a member of his cabinet with an illegal action. For even though they are not intended for circulation, US commemorative coins, which the platinum coin would have been, are legal tender at their face value.

One of the few commentators to fully articulate the anti-Fed implication of the trillion-dollar coin was Michael Sandler, a left-wing populist blogger and self-described “Political Economist, Climate Change Professional, and Sustainability Advocate.” Although his article is mostly nonsense on stilts, Sandler does recognize that the coin scheme provided an entre to wresting control of the money supply away from the unelected bureaucrats at the Fed and returning it to Congress and the Treasury. Sandler promotes a monetary reform program based on the template developed by the anti-Fed American Monetary Institute. He welcomes the minting of the trillion-dollar coin as a step toward implementing a central element of this program:

Repeal the congressional mandate for the Treasury to issue debt when it deficit spends. Instead, the Treasury could be allowed to spend money into circulation directly, or use debt-free instruments (of which the coin is one example) in its money creation process (with or without the Federal Reserve).

A common objection to such a proposal is that if money were under the control of the Treasury, monetary policy would become a political football, inflation would be rampant, the United States would founder in a sea of red ink, the dollar would tank on foreign exchange markets, blah, blah, blah. But how much more inflationary would monetary policy become than it is right now? The unelected and unaccountable bureaucrats at the Fed have fastened on the US economy a regime of zero interest rates, indefinite quantitative easing, and the insane targeting of a real variable (the unemployment rate) using nominal variables (i.e., the money supply, nominal interest rates). This is a reversion to stone age Keynesianism. Indeed, current Fed policy has enabled a fiscal policy of high deficits and rapidly mounting national debt, anyway.

But let us grant for the sake of argument that congressional control of monetary policy alters the mix of financing government spending toward less taxation and more deficits paid for by money creation. From the point of view of Austrian public finance theory, the method of governmental “revenue extraction” does not matter nearly as much as the total amount extracted. For all government spending, including transfer payments, drains resources from productive uses in the private economy and squanders them on the wasteful spending of politicians and bureaucrats. Government spending is either consumption spending that directly satisfies the preferences of members of the political establishment and their special interest constituencies, or it is investment in waste assets because it is not based on the profit and capital-value calculations that guide the decisions of private entrepreneurs and capitalists. It is in effect a redistribution of income and resources from the productive to the unproductive, from the “taxpayers” to the “tax-consumers.”

The total amount of government spending is therefore what Murray Rothbard called (p. 339) “government depredation on the private product.” For Austrians, then, the method of financing government depredation — whether it be taxation, borrowing from the public, or money creation — is of secondary importance. Thus, at a given level of government spending, siphoning off resources from the private economy via deficits financed by money creation is no worse than extracting them through taxation. Indeed inflationary finance may even be preferable to taxation because the threat of physical coercion implicit in taxation has a detrimental effect on the direct utility of private individuals that goes beyond the expropriation of their income. As Rothbard (pp. 10-11) put it,

[W]hy should anyone believe that a tax is better than a higher price? It is true that inflation is a form of taxation, in which the government and other early receivers of the new money are able to expropriate the members of the public whose income rises later in the process of inflation. But at least with inflation people are still reaping some of the benefits of exchange. If bread rises to $10 a loaf, this is unfortunate but at least you can still eat the bread. But if taxes go up, your money is expropriated for the benefit of politicians and bureaucrats, and you are left with no service or benefit.

Needless to say, from the point of view of consumer welfare and economic efficiency, Austrian economists unquestionably prefer a smaller government budget financed by deficits and money creation to a larger budget that is in balance. For example, if confronted with a choice between an annual U.S. government budget of $2 trillion financed wholly by money creation and a balanced budget of $4 trillion, Austrians would without hesitation choose the former as less disruptive of the market process and less injurious to the welfare of individuals who earn their income through peaceful production and voluntary exchange. It is thus the total level of depredation on private producers and consumers, as reflected in government spending, that matters most for the Austrian economist; deficits and debt are at best of secondary importance and at worst a diversion from the true fiscal burden of government.

Obviously, congressional control of the fiat money supply is far from the ideal monetary system, which involves the complete separation of government and money through the establishment of a commodity money, such as gold, the supply of which is determined exclusively by market forces. Nonetheless, there is much merit in replacing the opaque and pseudo-scientific control of “the money supply process” by the entrenched bureaucrats of the Fed with overtly political control of money by elected officials and partisan Administration appointees.[1] There are a number of benefits of stripping the Fed of its quasi-independent status and transforming it into a handmaiden of the Treasury, in the mode of the trillion-dollar coin idea.

First, money would be created in a transparent manner that is understandable to the public at large. The Treasury would simply send an administrative order to the Fed to credit its checking account with the sum of money needed to pay the government’s bills that are not covered by tax revenues. Now, formally, this order would be called a “Treasury bond,” but it would not be a bond in the economic sense because it would not be exchanged in financial markets. Nor would the “interest” that the Treasury may pay on these pseudo-bonds really be interest because it would not be determined by supply and demand on financial markets. Rather it would be a payment to reimburse the administrative costs of the Fed and its amount would be completely controlled by the Treasury. It thus becomes pellucidly clear to the public that every single increase in the money supply engineered by the Treasury is not to “stabilize the economy” or “prevent a financial meltdown,” but to benefit the specific individuals and firms receiving the government checks. The new money is being created from nothing to purchase military aircraft from Boeing, to subsidize agribusiness giant Archer Daniels Midland, to bail out General Motors, etc.

This contrasts with the arcane process by which money is now created, which involves the Treasury issuing debt that is purchased by private entities, mainly banks and other financial institutions, and then eventually repurchased by the Fed via open market operations. In this way the Fed circuitously “monetizes the debt” and expands the money supply while pretending to control interest rates. Invisible to the lay person is the fact that twenty or so privileged Wall Street banks and financial institutions — so-called “primary dealers” — that sell bonds to the Fed profit immensely from the money creation process. Also benefitting are the fractional-reserve banks that get hold of the newly created reserves and their business clients who borrow the money at reduced interest rates and spend it to appropriate extra resources before prices have begun to rise.

Giving the Treasury control over the money supply by drawing checks on deposit balances that it “borrows” from the Fed yields another benefit. It not only shuts the Fed out of financial markets and renders the money creation process transparent, it also completely cuts out the fractional-reserve bank cartel from a central role in the money-creation process. This would mitigate that process’s tendency to create business cycles. When new money is injected into the economy via open market operations, as it is today, it expands bank reserves. The lending out of these created reserves by fractional-reserve banks artificially reduces the interest rate below the natural level determined by the voluntary saving of private income-earners. The distorted interest rate falsifies the profit and wealth calculations of entrepreneurs and households causing malinvestment and over-consumption and precipitating the boom-bust cycle that usually culminates in run-away asset bubbles and a financial crisis. In contrast, when the Treasury creates money it does so by writing checks for bureaucrats’ salaries, for entitlement payments, and to pay vendors for government purchases. This mode of money creation causes what Ludwig von Mises called “simple inflation,” which does not generally perturb financial markets and systematically distort interest rates. As Mises (p. 570) explained, financing Treasury borrowing directly from the central bank is no different from a government simply issuing fiat money to finance its spending:

Political and institutional convenience sometimes makes it expedient for a government to take advantage of the facilities of banking as a substitute for issuing government fiat money. The treasury borrows from the bank, and the bank provides the funds needed by issuing additional banknotes or crediting the government on a deposit account. Legally the bank becomes the treasury’s creditor. In fact the whole transaction amounts to fiat money inflation. The additional fiduciary media [i.e. unbacked notes and deposits] enter the market by way of the treasury as payment for various items of government expenditure. It is this additional government demand that incites business to expand its activities.

Furthermore, Mises argued (p. 570), this kind of simple inflation is not likely to produce financial conditions that lead to a business cycle:

The issuance of these newly created fiat money sums does not directly interfere with the gross [i.e., nominal] market rate of interest, whatever the rate of interest may be which the government pays to the bank. They affect the loan market and the gross market rate of interest, apart from the emergence of a positive price [i.e., inflation] premium, only if a part of them reaches the loan market at a time at which their effects upon commodity prices and wage rates have not yet been consummated.

In other words, the (non-bank) recipients of government checks would tend to allocate the new money between consumption and saving roughly in the same ratio as the rest of their income. Thus the prices of consumer goods and investment goods would rise in roughly equal proportion and the market interest rate would not be systematically displaced from its natural or equilibrium level. The result would be inflation, but no business cycle.

Last but not least, as an adjunct of the Treasury, the Fed would no longer function as bailer-outer of last resort, a role that is held in unquestioned importance by almost all contemporary economists, but which infects the entire financial system with pandemic moral hazard. No longer would the Fed be able to surreptitiously, arbitrarily, and without democratic oversight or accountability bail out all manner of financial institutions not only in the United States but in foreign countries. A partisan Treasury under the watchful eye of the congressional opposition and in full view of the public will have to make these decisions. I daresay that with the Fed neutered and unable to leap to their rescue at the first sign of distress and with their requests for bailouts subject to full scrutiny by a skeptical Congress and public, fractional-reserve banks would run their affairs much more prudently.

Let me be clear: my intention is not to deny that the trillion-dollar coin is a ludicrous and dangerous idea; it is rather to point out that the Fed is a more ludicrous and dangerous idea.

Notes

[1]Murray Rothbard, in The Case Against the Fed (pp. 5-12), gave the definitive critique of the alleged ideal of the Fed’s “independence from politics” from the standpoint of Austro-libertarian political economy.

Joseph Salerno [send him mail] is academic vice president of the Mises Institute, chairman of the graduate program in economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

The Best of Joseph Salerno

Recently by Joseph T. Salerno: Imperialism and the Logic of War-Making

The war on cash in Sweden may be stalling. The anti-cash movement has been vigorously promoted by major Swedish commercial banks as well as the Riksbank, the Swedish central bank. In fact, for three of the four major Swedish banks combined, 530 of their 780 office no longer accept or pay out cash. In the case of the Nordea Bank, 200 of its 300 branches are now cashless, and three-quarters of Swedbank’s branches no longer handle cash. As Peter Borsos, a spokesman for Swedbank, freely admits, his bank is working “actively to reduce the [amount] of cash in society.” The reasons for this push toward a cashless society, of course, have nothing to do with pumping up earnings from bank card fees or, more important, freeing fractional-reserve banks from the constraints of bank runs. No, according to Borsos, the reasons are the environment, cost, and security: ”We ourselves emit 700 tons of carbon dioxide by cash transport. It costs society 11 billion per year. And cash helps robberies everywhere.” Hans Jacobson, head of Nordea Bank, argues similarly: ”Our mission is to make people understand the point of cards, cards are more secure than cash.”

Fortunately, it seems that the Swedish people are not falling for the anti-cash propaganda spewed by private bankers and Riksbank officials and are resisting the trend toward a cashless economy. It is reported that last year the value of cash transactions in Sweden were 99 billion krona which represented only a marginal decrease from ten years ago. And small shops continue to do one-third to one-half of their business in cash. Furthermore a study of bank customers satisfaction released by the Swedish Quality Index in October 2012, indicated that the satisfaction index was pulled down among customers of Swedbank, Nordea and SEB by their policy of eliminating cash transactions at their bank branches. Even more heartening is the fact that Handelsbanken, the largest bank in Sweden, is committed to serving consumers who demand cash. As Kai Jokitulppo, head of private services at Handelsbanken, puts it:

“As long as we know that our customers are asking for cash, it is important that we as a bank [are] providing it. . . . We see places where other banks are taking other decisions, we get customers from them and positive response.”

Fewer then 10 of Handelsbanken’s 461 branches currently do not handle cash and the bank’s goal is to have cash in every branch by the first quarter of 2013.

HT to Per Bylund

Joseph Salerno [send him mail] is academic vice president of the Mises Institute, chairman of the graduate program in economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

The Best of Joseph Salerno

This is a revised version of a talk given at the October 28th, 2006 Mises Institute Supporter’s Summit, “Imperialism: Enemy of Freedom.” The original talk, “Taxation, Inflation, and War” is available in MP3 audio from Mises Media.

Praxeology and War

Commentaries on war stretching back more than two millennia to the Peloponnesian Wars have enshrouded the fundamental causes of war in an almost impenetrable fog of myths, fallacies, and outright lies. In most studies, war is generally portrayed as the inevitable outcome of either complex historical forces or accidental circumstances generally beyond the understanding or control of the human combatants.

Fortunately, there exists a science of human action that is applicable to all purposeful activities. This science is referred to as “praxeology.” Although economics is its most developed branch, the basic principles of this science can also be applied to analyzing violent action including warfare. Thus Murray Rothbard wrote:

The rest of praxeology [besides economics] is an unexplored area. Attempts have been made to formulate a logical theory of war and violent action, and violence in the form of government has been treated by political philosophy and by praxeology in tracing the effects of violent intervention in the free market.[1]

As Rothbard suggested, what we might call the “Logic of War Making” is a relatively undeveloped area of the science of human action. Its elaboration is therefore especially necessary if we are to dispel the mythology of war and elucidate its true origin and character. The basic axiom of this praxeological discipline is that war is the objective outcome of the human endeavor of war-making.

As a human endeavor like any other, war-making is the product of reason, purpose and choice. Therefore a proper analysis of war must take into account the goals of the war makers, the means at their disposal, the benefits they anticipate from the war and the costs they expect to incur in executing it. It also must distinguish in a general way between the individual beneficiaries and victims of war. These victims include not only the vanquished group of war makers and those who reside in the territory they control but especially the productive inhabitants of the region controlled by the victorious organization of war makers.

The Meaning of Imperialist War

At this point it is necessary to define war and distinguish it from other forms of inter-human violence in order to circumscribe the bounds of the logic of war-making within the general praxeological system. For not all violent conflict constitutes war-making. War is here defined as violent interaction between two groups of humans, one or both of which is a state. We adopt the definition of the state given by the anthropologist and historian of primitive warfare, Lawrence H. Keeley:

States are political organizations [that] have a central government empowered to collect taxes, draft labor for public works or war, decree laws, and physically enforce those laws. Essentially states are class-stratified political units that maintain a “monopoly of deadly force” – a monopoly institutionalized as permanent police and military forces.[2]

Pre-civilized social groups such as bands, tribes and even chiefdoms are not states because, according to Keeley, “a chief, unlike a king, does not have the power to coerce people into obedience physically,” instead employing economic means or exploiting a belief in magic to enforce his decrees.[3] Although Keeley refers to “pre-state warfare” or “primitive war,” for the purposes of praxeological analysis, we restrict the term the “war” to violent conflicts involving at least one state.

Combat between looser social groupings was most commonly motivated by vengeance for previous homicides or economic issues, especially access to natural resources and crude capital goods. For example in Minnesota the Chippewa and Dakota Sioux tribes battled one another for over 150 years over access to hunting territories and wild rice fields, while tribes in the Pacific Northwest frequently fought for frontage on the ocean and rivers giving access to the salmon run.[4] Anthropological studies show that, while most of these conflicts involved savage violence and extreme cruelty, often resulting in the expropriation, enslavement, expulsion or annihilation of the vanquished tribe, their purpose was never to establish a hegemonic relationship and exact regular tribute from the foe. As Kelley explains, “Polities that lack the physical power to subjugate their own populations or to extract involuntary tribute or taxes from them are extremely unlikely to make war against others for these purposes, since they lack the institutional and administrative means to convert victory into hegemony or taxation.”[5]

Thus, while both non-state social groups and states have historically engaged in the violent annexation of territories to acquire natural resources, only states possess the institutional means necessary to pursue a policy of imperialism i.e., the ongoing subjugation and economic exploitation of other peoples. Imperialist wars waged by states in every epoch of history are not accidental; they are the outcome of the powerful tendency to war-making inherent in the very nature of the state.

War Making and Class Conflict

All governments past and present, regardless of their formal organization, involve the rule of the many by the few. In other words, all governments are fundamentally oligarchic. The reasons are twofold. First, governments are nonproductive organizations and can only subsist by extracting goods and services from the productive class in their territorial domain. Thus the ruling class must remain a minority of the population if they are to continually extract resources from their subjects or citizens. Genuine “majority rule” on a permanent basis is impossible because it would result in an economic collapse as the tribute or taxes expropriated by the more numerous rulers deprived the minority engaged in peaceful productive activities of the resources needed to sustain and reproduce itself. Majority rule would therefore eventually bring about a violent conflict between factions of the previous ruling class, which would terminate with one group establishing oligarchic rule and economically exploiting its former confederates.

The second factor that renders oligarchic rule practically inevitable is related to the law of comparative advantage. The tendency toward division of labor and specialization based on the unequal endowment of skills pervades all sectors of human endeavor. Just as a small segment of the population is adept at playing professional football or dispensing financial advice, so a tiny fraction of the population tends to excel at wielding coercive power. As one writer summed up this Iron Law of Oligarchy: “[In] all human groups at all times there are the few who rule and the many who are ruled.”[6]

The inherently nonproductive and oligarchic nature of government thus ensures that all nations under political rule are divided into two classes: a productive class and a parasitic class or, in the apt terminology of the American political theorist John C. Calhoun, “taxpayers” and “tax-consumers.”[7]

The king and his court, elected politicians and their bureaucratic and special-interest allies, the dictator and his party apparatchiks – these are historically the tax-consumers and, not coincidentally, the war makers. War has a number of advantages for the ruling class. First and foremost, war against a foreign enemy obscures the class conflict that is going on domestically in which the minority ruling class coercively siphons off the resources and lowers the living standards of the majority of the population, who produce and pay taxes. Convinced that their lives and property are being secured against a foreign threat, the exploited taxpayers develop a “false consciousness” of political and economic solidarity with their domestic rulers. An imperialist war against a weak foreign state, e.g., Grenada, Panama, Haiti, Iraq, Afghanistan, Iran, etc. is especially enticing to the ruling class of a powerful nation such as the United States because it minimizes the cost of losing the war and being displaced by domestic revolution or by the rulers of the victorious foreign state.

A second advantage of war is that it provides the ruling class with an extraordinary opportunity to intensify its economic exploitation of the domestic producers through emergency war taxes, monetary inflation, conscripted labor, and the like. The productive class generally succumbs to these increased depredations on its income and wealth with some grumbling but little real resistance because it is persuaded that its interests are one with the war makers. Also, in the short run at least, modern war appears to bring prosperity to much of the civilian population because it is financed in large part by money creation.

We thus arrive at a universal, praxeological truth about war. War is the outcome of class conflict inherent in the political relationship – the relationship between ruler and ruled, parasite and producer, tax-consumer and taxpayer. The parasitic class makes war with purpose and deliberation in order to conceal and ratchet up their exploitation of the much larger productive class. It may also resort to war-making to suppress growing dissension among members of the productive class (libertarians, anarchists, etc.) who have become aware of the fundamentally exploitative nature of the political relationship and become a greater threat to propagate this insight to the masses as the means of communication become cheaper and more accessible, e.g., desktop publishing, AM radio, cable television, the Internet, etc. Furthermore, the conflict between ruler and ruled is a permanent condition. This truth is reflected – perhaps half consciously – in the old saying that equates death and taxes as the two unavoidable features of the human condition.

Thus, a permanent state of war or preparedness for war is optimal from the point of view of the ruling elite, especially one that controls a large and powerful state. Take the current US government as an example. It rules over a relatively populous, wealthy, and progressive economy from which it can extract ever larger boodles of loot without destroying the productive class. Nevertheless, it is subject to the real and abiding fear that sooner or later productive Americans will come to recognize the continually increasing burden of taxation, inflation, and regulation for what it really is – naked exploitation. So the US government, the most powerful mega-state in history, is driven by the very logic of the political relationship to pursue a policy of permanent war.

From “The War to Make the World Safe for Democracy” to “The War to End All Wars” to “The Cold War” and on to the current “War on Terror,” the wars fought by US rulers in the twentieth century have progressed from episodic wars restricted to well-defined theaters and enemies to a war without spatial or temporal bounds against an incorporeal enemy named “Terror.” A more appropriate name for this neoconservative-contrived war would involve a simple change in the preposition to a “War of Terror” – because the American state is terrified of productive, work-a-day Americans, who may someday awaken and put an end to its massive predations on their lives and property and maybe to the American ruling class itself.

In the meantime, the War on Terror is an open-ended imperialist war the likes of which were undreamt of by infamous war makers of yore from the Roman patricians to German National Socialists. The economist Joseph Schumpeter was one of the few non-Marxists to grasp that the primary stimulus for imperialist war is the inescapable clash of interests between rulers and ruled. Taking an early mega-state, Imperial Rome, as his example, Schumpeter wrote:

Here is the classic example … of that policy which pretends to aspire to peace but unerringly generates war, the policy of continual preparation for war, the policy of meddlesome interventionism. There was no corner of the known world where some interest was not alleged to be in danger or under actual attack. If the interests were not Roman, they were those of Rome’s allies; and if Rome had no allies, then allies would be invented. When it was utterly impossible to contrive such an interest – why, then it was national honor that had been insulted. The fight was always invested with an aura of legality. Rome was always being attacked by evil minded neighbors, always fighting for a breathing space. The whole world was pervaded by a host of enemies, and it was manifestly Rome’s duty to guard against their indubitably aggressive designs. They were enemies who only waited to fall upon the Roman people. [No] attempt [can] be made to comprehend these wars of conquest from the point of view of concrete objectives…. Thus there is but one way to an understanding: scrutiny of domestic class interests, the question of who stood to gain…. Owing to its peculiar position as the democratic puppet of ambitious politicians and as the mouthpiece of a popular will inspired by the rulers [the Roman proletariat] did indeed get the benefit of the [war] booty. So long as there was good reason to maintain the fiction that the population of Rome constituted the Roman people and could decide the destinies of the empire, much did depend on its good temper…. But again, the very existence, in such large numbers, of this proletariat, as well as its political importance, was the consequence of a social process that also explains the policy of conquest. For this was the causal connection: The occupation of public land and the robbery of peasant land formed the basis of a system of large estates, operating extensively and with slave labor. At the same time the displaced peasants streamed into the city and the soldiers remained landless – hence the war policy.

The latifundian landowners were, of course, deeply interested in waging war…. . The alternative to war was agrarian reform. The landed aristocracy could counter the perpetual threat of revolution only with the glory of victorious leadership. [I]t was an aristocracy of landlords, large-scale agricultural entrepreneurs, born of struggle against their own people. It rested solely on control of the state machine. Its only safeguard lay in national glory…. An unstable social structure of this kind merely creates a general disposition to watch for pretexts for war – often held to be adequate with entire good faith – and to turn to questions of foreign policy whenever the discussion of social problems grew too troublesome for comfort. The ruling class was always inclined to declare that the country was in danger, when it really was only class interests that were threatened.

This lengthy quotation from Schumpeter vividly describes how the expropriation of peasants by the ruling aristocracy created a permanent and irreparable class division in Roman society that led to a policy of unrestrained imperialism and perpetual war. This policy was designed to submerge beneath a tide of national glory and war booty the deep-seated conflict of interests between expropriated proletarians and landed aristocracy.

Democracy and Imperialist War Making

Schumpeter’s analysis explains the particularly strong propensity of democratic states to engage in imperialist war-making and why the Age of Democracy has coincided with the Age of Imperialism. The term “democratic” is here being used in the broad sense that includes “totalitarian democracies” controlled by “parties” such as the Nationalist Socialist Workers Party in Germany and the Communist Party in the Soviet Union. These political parties, as opposed to purely ideological movements, came into being during the age of nationalist mass democracy that dawned in the late nineteenth century.[8]

Because the masses in a democratic polity are deeply imbued with the ideology of egalitarianism and the myth of majority rule, the ruling elites who control and benefit from the state recognize the utmost importance of concealing its oligarchic and exploitative nature from the masses. Continual war-making against foreign enemies is a perfect way to disguise the naked clash of interests between the taxpaying and tax-consuming classes.

In this vein, it is noteworthy that the first instance of sustained global imperialism in the Western world was the democratic city-state of Athens. Victor Davis Hanson has emphasized this in his path-breaking work on the Peloponnesian War. Hanson writes:

“Athenianism” was the Western world’s first example of globalization. There was a special word of sorts for Athenian expansionism in the Greek language, attikizô, “to Atticize,” to become like or join the Athenians.[9]

By the standards of the time, the expanse of the Athenian empire was breath-taking. By the outbreak of the Peloponnesian War, the Athenian empire had swelled to “nearly two hundred states run by seven hundred imperial overseers.” According to Hanson, “To maintain such an empire, in the fifth century [B.C.] Athens had fought three out of every four years, a remarkable record of constant mobilization, unrivaled even in modern times.”[10] Moreover, unlike its openly oligarchic rival Sparta who led a loose voluntary coalition of states that genuinely feared a “proselytizing and expansionary” Athenian democracy, Athens unilaterally formulated and imposed a single strategy on its imperial subject-states and allies.[11]

Hanson does not shrink from noting the parallels between the imperialism of ancient Athens and the modern US mega-state, writing:

Although Americans offer the world a radically egalitarian popular culture and, more recently, in a very Athenian mood, have sought to remove oligarchs and impose democracy – in Grenada, Panama, Serbia, Afghanistan and Iraq – enemies, allies, and neutrals alike are not so impressed. They understandably fear American power and intentions while our successive governments, in the manner of confident and proud Athenians, assure them of our morality and selflessness. Military power and idealism about bringing perceived civilization to others are a prescription for conflict in any age – and no ancient state made war more often than did fifth-century imperial Athens.[12]

Severing The Sinews of Imperialist War

Ernest Hemingway once wrote, “The sinews of war are five – men, money, materials, maintenance (food) and morale.”[13] In a modern market economy, Hemingway’s five M’s, in practice, boil down to one: money. A political oligarchy that rules and exploits a large and productive economy need only get its hands on sufficient monetary funds in order to obtain the men, material, and maintenance necessary to carry out its war plans. Furthermore, an ever expanding supply of money and credit also boosts the morale of the civilian population by distorting economic calculation and creating the temporary illusion that war brings prosperity. Thus Cicero spoke more truly when he said, “The sinews of war, a limitless supply of money.”[14]

Explaining the connection between monetary inflation and civilian morale during wartime, Mises wrote in 1919:

In every great war monetary calculation was disrupted by inflation…. The economic behavior of the belligerents was thereby led astray; the true consequences of the war were removed from their view. One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.[15]

However, the initial stages of war inflation must eventually give way to crisis and depression. The reason is that war entails a massive consumption of capital because of the diversion of real resources from production for present and especially future civilian needs – that is, the maintenance and replacement of capital goods – to production for immediate military purposes. The productive class only becomes aware of the enormous destruction of its real income and wealth when inflation ceases and the ensuing crisis and recession reveal the true costs of the war, aside from its physical destruction of lives and property.[16] At this point the bitterly disillusioned and demoralized producers begin to realize that their own interests are not identical with those of their imperialist rulers.

In the two World Wars of the twentieth century the war makers on both sides were able to forestall this day of reckoning by abrogating the freedom to produce and exchange and instituting a more or less thoroughgoing command economy featuring pervasive price controls and central direction of production and distribution by legal fiat.[17] Things are different in contemporary imperialist wars, such as those fought by the United States since the end of the Cold War. The reason is that the vast disparity in military and economic power between the imperial state and the state it wishes to subjugate obviates recourse to massive monetary expansion.

For example, the current US war on Iraq is estimated to have cost roughly $346 billion from its inception in 2003 until the present.[18] During this time, the change in the Adjusted Monetary Base (MB), which is completely controlled by the Fed and represents the “seigniorage” or inflation tax that the government realizes from money creation, has been about $137 billion. But the rate of growth of MB has steadily declined from mid-2002 from 10 percent to below 5 percent currently. This is reflected in a decline in the rates of growth of broader monetary aggregates such as MZM, M2, and M3. Yet at the same time, US Federal Government debt has ballooned by nearly $2 trillion since March 2003, expanding the total debt accumulated since the inception of the American Republic by over 30 percent! How has this flood of new debt been financed if not by money creation?

The answer is by borrowing from foreigners. In March 2003, foreign investors held about $1,286.3 billion of Federal government debt. By June 2006, foreign investors were holding $2091.7 billion of the debt, an increase of $805.4 billion or over 40 percent of the increase of the total debt since March 2003.[19] In other words, foreigners have by and large financed the US imperialist adventure in Iraq, greatly mitigating the economic burden of the war borne by US taxpayers and consumers – at least until foreigners refuse to absorb any more US debt. At this point increased taxation and more rapid money creation must be resorted to in continuing to finance the war as well as the interest payments on the outstanding debt.

In the meantime, an interesting issue to contemplate is whether an aroused and disgruntled taxpaying class has any means at its disposal short of violent revolution for putting an end to the never-ending series of imperialist wars sucking the lifeblood (accumulated capital) out of the economy and consuming its real wealth and income. Vladimir Lenin’s answer was, “[C]onvert the imperialist war into a civil war; all consistently waged class struggles in wartime and all seriously conducted ‘mass-action’ tactics inevitably lead to this.”[20] The logic of war-making in conjunction with its cognate praxeological discipline, economics, reveals that Lenin’s dictum is indeed practicable and that there are a number of peaceful tactics available to the productive masses that strike directly at the sinews of the imperialist war machine.

The first is the general strike, an Atlas Shrugged scenario writ large, in which the producers go on strike for lengthy periods of time and live off their accumulated savings. This chokes off the current taxes that pay for the war as well as the military supplies needed to execute it. Mass boycotts of goods and services produced by enterprises directly profiting from the war as well as central government enterprises such as the post office strike directly at the revenues of the tax-consuming class. So do economic boycotts of the mass media, including establishment newspapers and periodicals and the major television broadcast networks. In the contemporary United States, the latter, in particular, are little more than legally licensed cartelists spewing forth government war propaganda.

Withdrawing all bank deposits and using only cash or barter arrangements in exchange would cause the fractional-reserve banking system to grind to a halt for a lengthy period of time as the monetary authorities would have to freeze all bank accounts until sufficient currency was printed and delivered to banks throughout the country. This would take months and would completely disrupt the monetary and financial system in the meanwhile, forcing the government to resort to the archaic and costly technique of literally printing up and shipping new currency to pay for its war expenditures.[21] Selling government bonds en masse causing their prices to plunge would wreak havoc with the balance sheets of banks and other financial institutions and make it extremely difficult for the government to issue war debt.

These mass-action tactics would have a number of additional and very important benefits. First, they would cause a deep rift in the ruling class, which, in a plutocratic democracy such as the United States, is by no means monolithic because it includes significant elements of the big business and finance establishment that are competing with one another for subsidies and special legal privileges from the state.

This uneasy coalition of political interests can be readily destabilized by the radical change in the pattern of benefits and costs brought about by mass-action tactics that unevenly affect the revenues and subsidies of politically connected business firms. Thus, those industrial firms and financial institutions suffering significant hardships from these tactics would turn against the war, thereby shrinking and weakening the ruling class. With the prospect of civil war with its former allies looming, those in control of the state apparatus would have a strong incentive to halt its war-making activities.

Second, other business firms completely outside the ambit of the tax-consuming, government-industrial complex – e.g., McDonald’s, Wal-Mart, Microsoft, etc. – would also suffer economic losses as a result of the general strike and financial collapse, giving them an incentive to ally themselves with the renegade firms that were formerly members of the political establishment. This newly emergent anti-state coalition of business organizations could also peacefully strike at the enfeebled and demoralized imperial state by refusing to do business with it and threatening to blacklist individual bureaucrats and politicians as candidates for the anticipated lucrative jobs in the private sector.

Finally, the anti-imperialist alliance of large and powerful business interests brought into existence by the general strike and other peaceful mass-action economic tactics would naturally, if unintentionally, interpose itself as a protective shield between the economically debilitated but still dangerous and vindictive state and the individual dissidents of the taxpaying class.

Conclusion

The praxeological method, which has been used successfully to elaborate the laws of economics, is also capable of yielding a systematic body of truths when applied to the analysis of war. Although the logic of war-making has yet to be fully elaborated, it is clear that this praxeological sub-discipline is useful in dispelling the long entrenched myths and fallacies about war. The logic of war-making also provides knowledge of the means to those whose goal, for ideological or economic reasons, is to bring about the cessation of a war.

Notes

[1] Murray N. Rothbard, Man, Economy and State: A Treatise on Economic Principles, 2nd ed., Scholar’s ed. with Power and Market: Government and the Economy, 3rd ed., Scholar’s ed. (Auburn, AL: Ludwig von Mises Institute, 2004), p. 74

[2] Lawrence H. Keeley, War before Civilization: The Myth of the Peaceful Savage (New York: Oxford University Press, 1996), p. 27.

[3] Ibid.

[4] Ibid., p. 115.

[5] Ibid., p. 116.

[6] Arthur Livingston, Introduction in Gaetano Mosca, The Ruling Class: Elementi di Scienza Politica, ed. Arthur Livingston, trans. Hannah D. Kahn (New York: McGraw-Hill Book Company, 1939), p. x. On the Iron Law of Oligarchy, also see Murray N. Rothbard, For a New Liberty: The Libertarian Manifesto, 2nd ed. (San Francisco: Wilkes & Fox, 1996), pp. 45–69.

[7] John C. Calhoun, “A Disquisition on Government,” in Union and Liberty: The Political Philosophy of John C. Calhoun, ed. Ross M. Lence (Indianapolis, IN: Liberty Fund, 1992), pp. 15–21.

[8] On the concept of “totalitarian democracy,” see J.L. Talmon, The Origins of Totalitarian Democracy (New York: W. W. Norton & Company, Inc., [1951] 1970). My conception of totalitarian democracy differs from Talmon’s because he applies the term only to “Totalitarianism of the Left” and but not to “Totalitarianism of the Right” (ibid., pp. 6–8).

[9] Victor Hanson Davis, A War Like No Other: How the Athenians and Spartans Dought the Peloponnesian War (New York: Random House, 2005), p. 14

[10] Ibid., p. 27

[11] Ibid., pp. 13, 29.

[12] Ibid., p. 8.

[13] Ernest Hemingway, Brainy Quote.

[14] Marcus Tullio Cicero, Brainy Quote.

[15] Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time, trans. Leland B. Yeager (New York,: New York University Press, 1983), pp. 163.

[16] For an explanation of how financing war through money creation distorts and conceals its actual costs, see Joseph T. Salerno, “War and the Money Machine: Concealing the Costs of War beneath the Veil of Inflation,” Journal des Economistes et des Etudes Humaines 6 (March 1995): 153–73.

[17] For a description of the process by which the US economy was transformed into a command economy during World War II, see Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of the American Government (New York: Oxford University Press, 1987), pp. 196–236.

[18] National Priorities Project, Cost of War.

[19] The data in this paragraph are drawn from Federal Reserve Bank of St. Louis Monetary Trends (December 2006) and National Economic Trends (November 2006).

[20] Vladimir Ilyich Lenin, “Socialism and War in The Lenin Anthology, ed. Robert C. Tucker (New York: W. W. Norton & Company, 1975), p. 195.

[21] As an indication of the enormous expense involved in printing Federal Reserve dollar notes, a 2002 study by the Government Accounting Office estimated that even replacing $1 notes only by $1 coins would save $500 million annually (Barbara Hagenbaugh, “Dollar Coin Series Will Feature Presidents,” USA Today.

Joseph Salerno [send him mail] is academic vice president of the Mises Institute, chairman of the graduate program in economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

The Best of Joseph Salerno

Under cover of its multiplicity of fabricated wars on drugs, terror, tax evasion, and organized crime, the US government has long been waging a hidden war on cash. One symptom of the war is that the largest denomination of US currency is the $100 note, whose ever-eroding purchasing power is far below the purchasing power of the €500 note. US currency used to be issued in denominations running up to $10,000 (including also $500; $1,000; $5,000 notes). There was even a $100,000 note issued for transactions among Federal Reserve banks. The United States stopped printing large denomination notes in 1945 and officially discontinued their issuance in 1969, when the Fed began removing them from circulation. Since then the largest currency note available to the general public has a face value of $100. But since 1969, the inflationary monetary policy of the Fed has caused the US dollar to depreciate by over 80 percent, so that a $100 note in 2010 possessed a purchasing power of only $16.83 in 1969 dollars. That is less purchasing power than a $20 bill in 1969!

Despite this enormous depreciation, the Federal Reserve has steadfastly refused to issue notes of larger denomination. This has made large cash transactions extremely inconvenient and has forced the American public to make much greater use than is optimal of electronic-payment methods. Of course, this is precisely the intent of the US government. The purpose of its ongoing breach of long-established laws regarding financial privacy is to make it easier to monitor the economic affairs and abrogate the financial privacy of its citizens, ostensibly to secure their safety from Colombian drug lords, Al Qaeda operatives, and tax cheats and other nefarious white-collar criminals

Now the war on cash has begun to spread to other countries. As reported a few months ago, Italy lowered the legal maximum on cash transactions from €2,500 to €1,000. The Italian government would have preferred to set a €500 or even €300 maximum limit but reasoned that it should permit Italians time to adjust to the new limit. The rationale for this limit on the size of cash transactions is the fact that the profligate Italian government is trying to reduce its €1.9 trillion debt and views its anticash measures as a means of cracking down on tax evasion, which "costs" the government an estimated €150 billion annually.

The profligacy of the Italian ruling class is in sharp contrast to ordinary Italians who are the least indebted consumers in the eurozone and among its biggest savers. They use their credit cards very infrequently compared to citizens of other eurozone nations. So deeply ingrained is cash in the Italian culture that over 7.5 million Italians do not even have checking accounts. Now most of these "bankless" Italians will be dragooned into the banking system so that the notoriously corrupt Italian government can more easily spy on them and invade their financial privacy. Of course Italian banks, which charge 2 percent on credit-card transactions and assess fees on current accounts, stand to earn an enormous windfall from this law. As controversial former prime minister Berlusconi noted, "There’s a real danger of crossing over into a fiscal police state." Indeed, one only need look at the United States today to see what lies in store for Italian citizens.

Meanwhile the war on cash in Sweden is accelerating, although the involvement of the state is less overt. In Swedish cities, cash is no longer acceptable on public buses; tickets must be purchased in advance or via a cell-phone text message. Many small businesses refuse cash, and some bank facilities have completely stopped handling cash. Indeed in some Swedish towns it is no longer possible to use cash in a bank at all. Even churches have begun to facilitate electronic donations from their congregations by installing electronic card readers. Cash transactions represent only 3 percent of the Swedish economy, while they account for 9 percent of the eurozone and 7 percent of the US economies.

A leading proponent of the anticash movement is none other than Bjorn Ulvaeus, former member of the pop group ABBA. The dotty pop star, whose son has been robbed three times, believes that a cashless world means greater security for the public! Others, more perceptive than Ulvaeus, point to another alleged advantage of electronic transactions: they leave a digital trail that can be readily followed by the state. Thus, unlike countries with a strong "cash culture" like Greece and Italy, Sweden has a much lower incidence of graft. As one "expert" on underground economies instructs us, "If people use more cards, they are less involved in shadowy economy activities," in other words, secreting their hard-earned income in places where it cannot be plundered by the state.

The deputy governor of the Swedish central bank, Lars Nyberg, gloated before his retirement last year that cash will survive "like the crocodile, even though it may be forced to see its habitat gradually cut back." But not everyone in Sweden is celebrating the dethronement of cash. The chairman of Sweden’s National Pensioners’ Organization argues that elderly people in rural areas either do not have credit or debit cards or do not know how to use them to withdraw cash. Oscar Swartz, the founder of Sweden’s first Internet provider, a supporter of the phasing out of cash, argues that without the adoption of anonymous payment methods, people who send money and make donations to various organizations can be "traced every time." But, of course, what the artless Mr. Swartz does not see is that this is the whole point of a cashless economy – to make even the most intimate economic affairs of private citizens transparent to the state and its fiscal and monetary apparatchiks, who themselves hate and fear transparency like vampires do sunlight. And then there are the benefits that accrue to the government-privileged banking system from the demise of cash. One Swedish small businessman shrewdly noted the connection. While he gets charged 5 kronor (80¢) for every credit-card transaction, he is prevented by law from passing this on to his customers. In his words, "For them (the banks), this is a very good way to earn a lot of money, that’s what it’s all about. They make huge profits."

Fortunately, the free market provides the prospect of an escape from the fiscal police state that seeks to stamp out the use of cash through either depreciation of central-bank-issued currency combined with unchanged currency denominations or direct legal limitation on the size of cash transactions. As Carl Menger, the founder of the Austrian School of economics, explained over 140 years ago, money emerges not by government decree but through a market process driven by the actions of individuals who are continually seeking a means to accomplish their goals through exchange most efficiently. Every so often history offers up another example that illustrates Menger’s point. The use of sheep, bottled water, and cigarettes as media of exchange in Iraqi rural villages after the US invasion and collapse of the dinar is one recent example. Another example was Argentina after the collapse of the peso, when grain contracts (for wheat, soybeans, corn, and sorghum) priced in dollars were regularly exchanged for big-ticket items like automobiles, trucks, and farm equipment. In fact Argentine farmers began hoarding grain in silos to substitute for holding cash balances in the form of depreciating pesos.

As has been widely reported recently, an unlikely crime wave has rapidly spread throughout the United States and has taken local law-enforcement officials by surprise. The theft of Tide liquid laundry detergent is pandemic throughout cities in the United States. One individual alone stole $25,000 worth of Tide detergent during a 15-month crime spree, and large retailers are taking special security measures to protect their inventories of Tide. For example, CVS is locking down Tide alongside commonly stolen items like flu medications. Liquid Tide retails for $10–$20 per bottle and sells on the black market for $5–$10. Individual bottles of Tide bear no serial numbers, making them impossible to track. So some enterprising thieves operate as arbitrageurs buying at the black-market price and reselling to the stores, presumably at the wholesale price. Even more puzzling is the fact that no other brand of detergent has been targeted.

What gives here? This is just another confirmation of Menger’s insight that the market responds to the absence of sound money by monetizing highly salable commodities. It is clear that Tide has emerged as a subsidiary local currency for black-market, especially drug, transactions – but for legal transactions in low-income areas as well. Indeed police report that Tide is being exchanged for heroin and methamphetamine and that drug dealers possess inventories of the commodity that they are also willing to sell. But why is laundry detergent being employed as money, and why Tide in particular?

Menger identified the qualities that a commodity must possess in order to evolve into a medium of exchange. Tide possesses most of these qualities in ample measure. For a commodity to emerge as money out of barter, it must be widely used, readily recognizable, and durable. It must also have a relatively high value-to-weight ratio so that it can be easily transported. Tide is the most popular brand of laundry detergent and is widely used by all socioeconomic groups. Tide also is easily recognized because of its Day-Glo orange logo. Laundry detergent can also be stored for long periods without loss of potency or quality. It is true that Tide is somewhat bulky and inconvenient to transport by hand in large quantities. But enough can be carried by hand or shopping cart for smaller transactions while large quantities can easily be transported and transferred using automobiles.

Just like the highly publicized war on drugs that the US government has been waging – and losing – for decades, it is doomed to lose its surreptitious war on cash, because the free market can and will respond to the demand of ordinary citizens for a reliable and convenient money.

Joseph Salerno [send him mail] is academic vice president of the Mises Institute, chairman of the graduate program in economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

The Best of Joseph Salerno

Introduction to History of Money and Banking in the United States: The Colonial Era to World War II

In this volume, Murray Rothbard has given us a comprehensive history of money and banking in the United States, from colonial times to World War II, the first to explicitly use the interpretive framework of Austrian monetary theory. But even aside from the explicitly Austrian theoretical framework undergirding the historical narrative, this book does not “look” or “feel” like standard economic histories as they have been written during the past quarter of a century, under the influence of the positivistic “new economic history” or “cliometrics.”

The focus of this latter approach to economic history, which today completely dominates this field of inquiry, is on the application of high-powered statistical methods to the analysis of quantitative economic data. What profoundly distinguishes Rothbard’s approach from the prevailing approach is his insistence upon treating economic quantities and processes as unique and complex historical events. Thus, he employs the laws of economic theory in conjunction with other relevant disciplines to trace each event back to the nonquantifiable values and goals of the particular actors involved.

In Rothbard’s view, economic laws can be relied upon in interpreting these nonrepeatable historical events because the validity of these laws – or, better yet, their truth – can be established with certainty by praxeology, a science based on the universal experience of human action that is logically anterior to the experience of particular historical episodes.[1] It is in this sense that it can be said that economic theory is an a priori science.

In sharp contrast, the new economic historians view history as a laboratory in which economic theory is continually being tested. The economic quantities observed at different dates in history are treated like the homogeneous empirical data generated by a controlled and repeatable experiment. They are used as evidence in statistical tests of hypotheses regarding the causes of a class of events, such as inflations or financial crises, that are observed to recur in history. The hypothesis that best fits the evidence is then tentatively accepted as providing a valid causal explanation of the class of events in question, pending future testing against new evidence that is constantly emerging out of the unfolding historical process.

One of the pioneers of the new economic history, Douglass C. North, a Nobel Prize winner in economics, describes its method in the following terms:

It is impossible to analyze and explain the issues dealt with in economic history without developing initial hypotheses and testing them in the light of available evidence. The initial hypotheses come from the body of economic theory that has evolved in the past 200 years and is being continually tested and refined by empirical inquiry. The statistics provide the precise measurement and empirical evidence by which to test the theory. The limits of inquiry are dictated by the existence of appropriate theory and evidence…. The evidence is, ideally, statistical data that precisely define and measure the issues to be tested.[2]

This endeavor of North and others to deliberately extend the positivist program to economic history immediately confronts two problems. First, as North emphasizes, this approach narrowly limits the kinds of questions that can be investigated in economic history. Those issues that do not readily lend themselves to formulation in quantitative terms or for which statistical data are not available tend to be downplayed or neglected altogether. Thus the new economic historians are more likely to seek answers to questions like, What was the net contribution of the railroad to the growth of real GNP in the United States? Or, what has been the effect of the creation of the Federal Reserve System on the stability of the price level and real output? They are much less likely to address in a meaningful way the questions of what motivated the huge government land grants for railroad rights of way or the passage of the Federal Reserve Act.

In general, the question of “Cui bono?” – or “Who benefits?” – from changes in policies and institutions receives very little attention in the cliometric literature, because the evidence that one needs to answer it, bearing as it does on human motives, is essentially subjective and devoid of a measurable or even quantifiable dimension. This is not to deny that new economic historians have sought to explain the ex post aggregate distribution of income that results from a given change in the institutional framework or in the policy regime. What their method precludes them from doing is identifying the ex ante purposes as well as ideas about the most efficacious means of accomplishing these purposes that motivated the specific individuals who lobbied for or initiated the change that effected a new income distribution. However, avoiding such questions leaves the quantitative data themselves ultimately unexplained. The reason is that the institutions that contribute to their formation, such as the railroads or the Fed, are always the complex resultants of the purposive actions of particular individuals or groups of individuals aimed at achieving definite goals by the use of specific means. So the new economic history is not history in the traditional sense of an attempt to “understand” the human motives underlying the emergence of economic institutions and processes.

The second and even more profound flaw in the new economic history is the relationship it posits between theory and history. For North, history is the source of the “empirical evidence” – that is, “ideally, statistical data” – against which the economic theory is tested. This means that the claim to validity of a particular theorem is always tentative and defeasible, resting as it does on its nonfalsification in previous empirical tests. However, this also means that economic history must be continually revised, because the very theory that is employed to identify the causal relations between historical events can always be falsified by new evidence coming to light in the ongoing historical process. In other words, what the new economic historians characterize as “the intimate relationship between measurement and theory” is in reality the vicious circle that ensnares all attempts to invoke positivist precepts in the interpretation of history.[3] For if the theory used to interpret past events can always be invalidated by future events, then it is unclear whether theory is the explanans or the explanand in historical research.

Rothbard’s approach to monetary history does not focus on measurement but on motives. Once the goals of the actors and their ideas about the appropriate means for achieving these goals have been established, economic theory, along with other sciences, is brought to bear to trace out the effects of these actions in producing the complex events and processes of history that are only partially and imperfectly captured in statistical data. This is not to say that Rothbard ignores the quantitative aspects of historical monetary processes. Indeed, his book abounds with money, price, and output data; but these data are always interpreted in terms of the motivations of those who have contributed to their formation. For Rothbard, a particular price datum is, no less than the Spanish-American War, a historical event, and its causes must be traced back to the subjective aims governing human plans and choices.

In flatly rejecting the positivist approach to economic history, Rothbard adopts the method of historical research first formulated by Ludwig von Mises. In developing this method, Mises correctly delineated, for the first time, the relationship between theory and history. It is Rothbard’s great contribution in this volume – and his earlier America’s Great Depression – to be the first to consistently apply it to economic history.[4] It is worth summarizing this method here for several reasons. First, Mises’s writings on the proper method of historical research have inexplicably been almost completely ignored up to the present, even by those who have adopted Mises’s praxeological approach in economics.[5] Second, familiarity with Mises’s method of historical research illuminates the source and character of the remarkable distinctiveness of Rothbard’s historical writings. In particular, it serves to correct the common but mistaken impression that Rothbard’s historical writings, especially on the origin and development of the US monetary system, are grounded in nothing more substantial than an idiosyncratic “conspiracy theory of history.” Third, it gives us an opportunity to elucidate the important elaboration of Mises’s method that Rothbard contributed and that he deploys to great effect in explicating the topic of this volume. And finally, we find in Mises’s method a definitive refutation of the positivist’s claim that it is impossible to acquire real knowledge of subjective phenomena like human motives and that, therefore, economic history must deal exclusively with observable and measurable phenomena.

To begin with, Mises grounds his discussion of historical method on the insight that ideas are the primordial stuff of history. In his words,

History is the record of human action. Human action is the conscious effort of man to substitute more satisfactory conditions for less satisfactory ones. Ideas determine what are to be considered more and less satisfactory conditions and what means are to be resorted to to alter them. Thus ideas are the main theme of the study of history.[6]

This is not to say that all history should be intellectual history, but that ideas are the ultimate cause of all social phenomena, including and especially economic phenomena. As Mises puts it,

The genuine history of mankind is the history of ideas. It is ideas that distinguish man from all other beings. Ideas engender social institutions, political changes, technological methods of production, and all that is called economic conditions.[7]

Thus, for Mises, history

establishes the fact that men, inspired by definite ideas, made definite judgments of value, chose definite ends, and resorted to definite means in order to attain the ends chosen, and it deals furthermore with the outcome of their actions, the state of affairs the action brought about.[8]

Ideas – specifically those embodying the purposes and values that direct action – are not only the point of contact between history and economics, but differing attitudes toward them are precisely what distinguish the methods of the two disciplines. Both economics and history deal with individual choices of ends and the judgments of value underlying them. On the one hand, economic theory as a branch of praxeology takes these value judgments and choices as given data and restricts itself to logically inferring from them the laws governing the valuing and pricing of the means or “goods.” Therefore, economics does not inquire into the individual’s motivations in valuing and choosing specific ends. Hence, contrary to the positivist method, the truth of economic theorems is substantiated apart from and without reference to specific and concrete historical experience. They are the conclusions of logically valid deduction from universal experience of the fact that humans adopt means that they believe to be appropriate in attaining ends that they judge to be valuable.[9]

The subject of history, on the other hand, “is action and the judgments of value directing action toward definite ends.”[10] This means that for history, in contrast to economics, actions and value judgments are not ultimate “givens” but, in Mises’s words, “are the starting point of a specific mode of reflection, of the specific understanding of the historical sciences of human action.” Equipped with the method of “specific understanding,” the historian, “when faced with a value judgment and the resulting action … may try to understand how they originated in the mind of the actor.”[11]

The difference between the methods of economics and history may be illustrated with the following example. The economist qua economist “explains” the Vietnam War–era inflation that began in the mid-1960s and culminated in the inflationary recession of 1973–1975 by identifying those actions of the Fed with respect to the money supply that initiated and sustained it.[12] The historian, including the economic historian, however, must identify and then assign weights to all those factors that motivated the various members of the Fed’s Board of Governors (or of the Federal Open Market Committee) to adopt this course of action. These factors include ideology; partisan politics; pressure exerted by the incumbent administration; the grasp of economic theory; the expressed and perceived desires of the Fed’s constituencies, including commercial bankers and bond dealers; the informal power and influence of the Fed chairman within the structure of governance; and so on.

In short, the economic historian must supply the motives underlying the actions that are relevant to explaining the historical event. And for this task, his only suitable tool is understanding. Thus, as Mises puts it,

The scope of understanding is the mental grasp of phenomena which cannot be totally elucidated by logic, mathematics, praxeology, and the natural sciences to the extent that they cannot be cleared up by all these sciences.[13]

To say that a full explanation of any historical event, including an economic one, requires that the method of specific understanding be applied is not to diminish the importance of pure economic theory in the study of history. Indeed, as Mises points out, economics

provides in its field a consummate interpretation of past events recorded and a consummate anticipation of the effects to be expected from future actions of a definite kind. Neither this interpretation nor this anticipation tells anything about the actual content and quality of the actual individuals’ judgments of value. Both presuppose that the individuals are valuing and acting, but their theorems are independent of and unaffected by the particular characteristics of this valuing and acting.[14]

For Mises, then, if the historian is to present a complete explanation of a particular event, he must bring to bear not only his “specific understanding” of the motives of action but the theorems of economic science as well as those of the other “aprioristic,” or nonexperimental, sciences, such as logic and mathematics. He must also utilize knowledge yielded by the natural sciences, including the applied sciences of technology and therapeutics.[15] Familiarity with the teachings of all these disciplines is required in order to correctly identify the causal relevance of a particular action to a historical event, to trace out its specific consequences, and to evaluate its success from the point of view of the actor’s goals.

For example, without knowledge of the economic theorem that, ceteris paribus, changes in the supply of money cause inverse changes in its purchasing power, a historian of the price inflation of the Vietnam War-era probably would ignore the Fed and its motives altogether. Perhaps, he is under the influence of the erroneous Galbraithian doctrine of administered prices with its implication of cost-push inflation.[16] In this case, he might concentrate exclusively and irrelevantly on the motives of union leaders in demanding large wage increases and on the objectives of the “technostructure” of large business firms in acceding to these demands and deciding what part of the cost increase to pass on to consumers. Thus, according to Mises,

If what these disciplines [i.e., the aprioristic and the natural sciences] teach is insufficient or if the historian chooses an erroneous theory out of several conflicting theories held by the specialists, his effort is misled and his performance is abortive.[17]

But what exactly is the historical method of specific understanding, and how can it provide true knowledge of a wholly subjective and unobservable phenomenon like human motivation? First of all, as Mises emphasizes, the specific understanding of past events is

not a mental process exclusively resorted to by historians. It is applied by everybody in daily intercourse with all his fellows. It is a technique employed in all interhuman relations. It is practiced by children in the nursery and kindergarten, by businessmen in trade, by politicians and statesmen in affairs of state. All are eager to get information about other people’s valuations and plans and to appraise them correctly.[18]

The reason this technique is so ubiquitously employed by people in their daily affairs is because all action aims at rearranging future conditions so that they are more satisfactory from the actor’s point of view. However, the future situation that actually emerges always depends partly on the purposes and choices of others besides the actor. In order to achieve his ends, then, the actor must anticipate not only changes affecting the future state of affairs caused by natural phenomena, but also the changes that result from the conduct of others who, like him, are contemporaneously planning and acting.[19] Understanding the values and goals of others is thus an inescapable prerequisite for successful action.

Now, the method that provides the individual planning action with information about the values and goals of other actors is essentially the same method employed by the historian who seeks knowledge of the values and goals of actors in bygone epochs. Mises emphasizes the universal application of this method by referring to the actor and the historian as “the historian of the future” and “the historian of the past,” respectively.[20] Regardless of the purpose for which it is used, therefore, understanding

aims at establishing the facts that men attach a definite meaning to the state of their environment, that they value this state and, motivated by these judgments of value, resort to definite means in order to preserve or to attain a definite state of affairs different from that which would prevail if they abstained from any purposeful reaction. Understanding deals with judgments of value, with the choice of ends and of the means resorted to for the attainment of these ends, and with the valuation of the outcome of actions performed.[21]

Furthermore, whether directed toward planning action or interpreting history, the exercise of specific understanding is not an arbitrary or haphazard enterprise peculiar to each individual historian or actor; it is the product of a discipline that Mises calls “thymology,” which encompasses “knowledge of human valuations and volitions.”[22] Mises characterizes this discipline as follows:

Thymology is on the one hand an offshoot of introspection and on the other a precipitate of historical experience. It is what everybody learns from intercourse with his fellows. It is what a man knows about the way in which people value different conditions, about their wishes and desires and their plans to realize these wishes and desires. It is the knowledge of the social environment in which a man lives and acts or, with historians, of a foreign milieu about which he has learned by studying special sources.[23]

Thus, Mises tells us, thymology can be classified as “a branch of history” since “[i]t derives its knowledge from historical experience.”[24] Consequently, the epistemic product of thymological experience is categorically different from the knowledge derived from experiments in the natural sciences. Experimental knowledge consists of “scientific facts” whose truth is independent of time. Thymological knowledge is confined to “historical facts,” which are unique and nonrepeatable events. Accordingly, Mises concludes,

All that thymology can tell us is that in the past definite men or groups of men were valuing and acting in a definite way. Whether they will in the future value and act in the same way remains uncertain. All that can be asserted about their future conduct is speculative anticipation of the future based on specific understanding of the historical branches of the sciences of human action…. What thymology achieves is the elaboration of a catalogue of human traits. It can moreover establish the fact that certain traits appeared in the past as a rule in connection with certain other traits.[25]

More concretely, all our anticipations about how family members, friends, acquaintances, and strangers will react in particular situations are based on our accumulated thymological experience. That a spouse will appreciate a specific type of jewelry for her birthday, that a friend will enthusiastically endorse our plan to see a Clint Eastwood movie, that a particular student will complain about his grade – all these expectations are based on our direct experience of their past modes of valuing and acting. Even our expectations of how strangers will react in definite situations or what course political, social, and economic events will take are based on thymology. For example, our reservoir of thymological experience provides us with the knowledge that men are jealous of their wives. Thus, it allows us to “understand” and forecast that if a man makes overt advances to a married woman in the presence of her husband, he will almost certainly be rebuffed and runs a considerable risk of being punched in the nose. Moreover, we may forecast with a high degree of certitude that both the Republican and the Democratic nominees will outpoll the Libertarian Party candidate in a forthcoming presidential election; that the price for commercial time during the televising of the Major League Soccer championship will not exceed the price for commercials during the broadcast of the Super Bowl next year; that the average price of a personal computer will be neither $1 million nor $10 in three months; and that the author of this paper will never be crowned king of England. All of these forecasts, and literally millions of others of a similar degree of certainty, are based on the specific understanding of the values and goals motivating millions of nameless actors.

As noted, the source of thymological experience is our interactions with and observations of other people. It is

acquired either directly from observing our fellow men and transacting business with them or indirectly from reading and from hearsay, as well as out of our special experience acquired in previous contacts with the individuals or groups concerned.[26]

Such mundane experience is accessible to all who have reached the age of reason and forms the bedrock foundation for forecasting the future conduct of others whose actions will affect their plans. Furthermore, as Mises points out, the use of thymological knowledge in everyday affairs is straightforward:

Thymology tells no more than that man is driven by various innate instincts, various passions, and various ideas. The anticipating individual tries to set aside those factors that manifestly do not play any concrete role in the concrete case under consideration. Then he chooses among the remaining ones.[27]

To aid in this task of narrowing down the goals and desires that are likely to motivate the behavior of particular individuals, we resort to the “thymological concept” of “human character.”[28] The concrete content of the “character” we attribute to a specific individual is based on our direct or indirect knowledge of his past behavior. In formulating our plans, “We assume that this character will not change if no special reasons interfere, and, going a step further, we even try to foretell how definite changes in conditions will affect his reactions.”[29] It is confidence in our spouse’s “character,” for example, that permits us to leave for work each morning secure in the knowledge that he or she will not suddenly disappear with the children and the family bank account. And our saving and investment plans involve an image of Alan Greenspan’s character that is based on our direct or indirect knowledge of his past actions and utterances. In formulating our intertemporal consumption plans, we are thus led to completely discount or assign a very low likelihood to the possibility that he will either deliberately orchestrate a 10 percent deflation of the money supply or attempt to peg the short-run interest rate at zero percent in the foreseeable future.

Despite reliance on the tool of thymological experience, however, all human understanding of future events remains uncertain, to some degree, for these events are generally a complex resultant of various causal factors operating concurrently. All forecasts of the future, therefore, must involve not only an enumeration of the factors that operate in bringing about the anticipated result but also the weighting of the relative influence of each factor on the outcome. Of the two, the more difficult problem is that of apportioning the proper weights among the various operative factors. Even if the actor accurately and completely identifies all the causal factors involved, the likelihood of the forecast event being realized depends on the actor having solved the weighting problem. The uncertainty inherent in forecasting, therefore, stems mainly from the intricacy of assigning the correct weights to different actions and the intensity of their effects.[30]

While thymology powerfully, but implicitly, shapes everyone’s understanding of and planning for the future in every facet of life, the thymological method is used deliberately and rigorously by the historian who seeks a specific understanding of the motives underlying the value judgments and choices of the actors whom he judges to have been central to the specific event or epoch he is interested in explaining. Like future events and situations envisioned in the plans of actors, all historical events and the epochs they define are unique and complex outcomes codetermined by numerous human actions and reactions. This is the meaning of Mises’s statement,

History is a sequence of changes. Every historical situation has its individuality, its own characteristics that distinguish it from any other situation. The stream of history never returns to a previously occupied point. History is not repetitious.[31]

It is precisely because history does not repeat itself that thymological experience does not yield certain knowledge of the cause of historical events in the same way as experimentation in the natural sciences. Thus the historian, like the actor, must resort to specific understanding when enumerating the various motives and actions that bear a causal relation to the event in question and when assigning each action’s contribution to the outcome a relative weight. In this task, “Understanding is in the realm of history the equivalent, as it were, of quantitative analysis and measurement.”[32] The historian uses specific understanding to try to gauge the causal “relevance” of each factor to the outcome. But such assessments of relevance do not take the form of objective measurements calculable by statistical techniques; they are expressed in the form of subjective “judgments of relevance” based on thymology.[33] Successful entrepreneurs tend to be those who consistently formulate a superior understanding of the likelihood of future events based on thymology.

The weighting problem that confronts actors and historians may be illustrated with the following example. The Fed increases the money supply by 5 percent in response to a 20 percent plunge in the Dow Jones Industrial Average – or, perhaps now, the Nasdaq – that ignites fears of a recession and a concomitant increase in the demand for liquidity on the part of households and firms. At the same time, OPEC announces a 10 percent increase in its members’ quotas and the US Congress increases the minimum wage by 10 percent. In order to answer the question of what the overall impact of these events will be on the purchasing power of money six months hence, specific understanding of individuals’ preferences and expectations is required in order to weight and time the influence of each of these events on the relationship between the supply of and the demand for money. The ceteris-paribus laws of economic theory are strictly qualitative and only indicate the direction of the effect each of these events has on the purchasing power of money and that the change occurs during a sequential adjustment process so that some time must elapse before the full effect emerges. Thus the entrepreneur or economist must always supplement economic theory with an act of historical judgment or understanding when attempting to forecast any economic quantity. The economic historian, too, exercises understanding when making judgments of relevance about the factors responsible for the observed movements of the value of money during historical episodes of inflation or deflation.

Rothbard’s contribution to Mises’s method of historical research involves the creation of a guide that mitigates some of the uncertainty associated with formulating judgments of relevance about human motives. According to Rothbard, “It is part of the inescapable condition of the historian that he must make estimates and judgments about human motivation even though he cannot ground his judgments in absolute and apodictic certainty.”[34] But the task of assigning motives and weighting their relevance is rendered more difficult by the fact that, in many cases, historical actors, especially those seeking economic gain through the political process, are inclined to deliberately obscure the reasons for their conduct. Generally in these situations, Rothbard points out, “the actor himself tries his best to hide his economic motive and to trumpet his more abstract and ideological concerns.”[35]

Rothbard contends, however, that such attempts to obfuscate or conceal the pecuniary motive for an action by appeals to higher goals are easily discerned and exposed by the historian in those cases “where the causal chain of economic interest to action is simple and direct.”[36] Thus, for example, when the steel industry lobbies for higher tariffs or reduced quotas, no sane adult, and certainly no competent historian, believes that it is doing so out of its stated concern for the “public interest” or “national security.” Despite its avowed motives, everyone clearly perceives that the primary motivation of the industry is economic, that is, to restrict foreign competition in order to increase profits. But a problem arises in those cases “when actions involve longer and more complex causal chains.”[37] Rothbard points to the Marshall Plan as an example of the latter. In this instance, the widely proclaimed motives of the architects of the plan were to prevent starvation in Western European nations and to strengthen their resistance to the allures of Communism. Not a word was spoken about the goal that was also at the root of the Marshall Plan: promoting and subsidizing US export industries. It was only through painstaking research that historians were later able to uncover and assess the relevance of the economic motive at work.[38]

Given the propensity of those seeking and dispensing privileges and subsidies in the political arena to lie about their true motives, Rothbard formulates what he describes as “a theoretical guide which will indicate in advance whether or not a historical action will be predominantly for economic, or for ideological, motives.”[39] Now, it is true that Rothbard derives this guide from his overall worldview. The historian’s worldview, however, should not be interpreted as a purely ideological construction or an unconscious reflection of his normative biases. In fact, every historian must be equipped with a worldview – an interrelated set of ideas about the causal relationships governing how the world works – in order to ascertain which facts are relevant in the explanation of a particular historical event. According to Rothbard, “Facts, of course, must be selected and ordered in accordance with judgments of importance, and such judgments are necessarily tied into the historian’s basic world outlook.”[40]

Specifically, in Mises’s approach to history, the worldview comprises the necessary preconceptions regarding causation with which the historian approaches the data and which are derived from his knowledge of both the aprioristic and natural sciences. According to Mises,

History is not an intellectual reproduction, but a condensed representation of the past in conceptual terms. The historian does not simply let the events speak for themselves. He arranges them from the aspect of the ideas underlying the formation of the general notions he uses in their presentation. He does not report facts as they happened, but only relevant facts. He does not approach the documents without presuppositions, but equipped with the whole apparatus of his age’s scientific knowledge, that is, with all the teachings of contemporary logic, mathematics, praxeology, and natural science.[41]

So, for example, the fact that heavy speculation against the German mark accompanied its sharp plunge on foreign-exchange markets is not significant for an Austrian-oriented economic historian seeking to explain the stratospheric rise in commodity prices that characterized the German hyperinflation of the early 1920s. This is because he approaches this event armed with the supply-and-demand theory of money and the purchasing-power–parity theory of the exchange rate. These “presuppositions” derived from praxeology lead him to avoid any attribution of causal significance to the actions of foreign-exchange speculators in accounting for the precipitous decline of the domestic purchasing power of the mark. Instead they direct his attention to the motives of the German Reichsbank in expanding the money supply. In the same manner, a modern historian investigating the cause and dissemination of bubonic plague in 14th-century Europe would presuppose that the blossoming of religious heresy during that period would have no significance for his investigation. Instead he would allow himself to be guided by the conclusions of modern medical science regarding the epidemiology of the disease.

The importance of Rothbard’s theoretical guide is that it adds something completely new to the historian’s arsenal of scientific preconceptions that aids him in making judgments of relevance when investigating the motives of those who promote or oppose specific political actions. The novelty and brilliance of this guide lies in the fact that it is neither a purely aprioristic law like an economic theorem nor an experimentally established “fact” of the natural sciences. Rather it is a sociological generalization grounded on a creative blend of thymological experience and economic theory. At the core of this generalization is the insight that the state throughout history has been essentially an organization of a segment of the population that forsakes peaceful economic activity to constitute itself as a ruling class. This class makes its living parasitically by establishing a permanent hegemonic or “political” relationship between itself and the productive members of the population. This political relationship permits the rulers to subsist on the tribute or taxes routinely and “legally” expropriated from the income and wealth of the producing class. The latter class is composed of the “subjects” or, in the case of democratic states, the “taxpayers,” who earn their living through the peaceful “economic means” of production and voluntary exchange. In contrast, constituents of the ruling class may be thought of as “tax consumers” who earn their living through the coercive “political means” of taxation and the sale of monopoly privileges.[42]

Rothbard argues that economic logic dictates that the king and his courtiers, or the democratic government and its special-interest groups, can never constitute more than a small minority of the country’s population – that all states, regardless of their formal organization, must effectively involve oligarchic rule.[43] The reasons for this are twofold. First, the fundamentally parasitic nature of the relationship between the rulers and the ruled by itself necessitates that the majority of the population engages in productive activity in order to be able to pay the tribute or taxes extracted by the ruling class while still sustaining its own existence. If the ruling class comprised the majority of the population, economic collapse and systemic breakdown would swiftly ensue as the productive class died out. The majoritarian ruling class itself then would either be forced into productive activity or dissolve into internecine warfare aimed at establishing a new and more stable – that is, oligarchic – relationship between rulers and producers.

The second reason why the ruling class tends to be an oligarchy is related to the law of comparative advantage. In a world where human abilities and skills vary widely, the division of labor and specialization pervades all sectors of the economy as well as society as a whole. Thus, not only is it the case that a relatively small segment of the populace possesses a comparative advantage in developing new software, selling mutual funds, or playing professional football; it is also the case that only a fraction of the population tends to excel at wielding coercive power. Moreover, the law of comparative advantage governs the structure of relationships within as well as between organizations, accounting for the hierarchical structure that we almost invariably observe within individual organizations. Whether we are considering a business enterprise, a chess club, or a criminal gang, an energetic and visionary elite invariably comes to the fore, either formally or informally, to lead and direct the relatively inert majority. This “Iron Law of Oligarchy,” as this internal manifestation of the law of comparative advantage has been dubbed, operates to transform an initially majoritarian democratic government, or even a decentralized republican government, into a tightly centralized state controlled by a ruling elite.[44]

The foregoing analysis leads Rothbard to conclude that the exercise of political power is inherently an oligarchic enterprise. The small minority that excels in wielding political power will tend to coalesce and devote an extraordinary amount of mental energy and other resources to establishing and maintaining a permanent and lucrative hegemonic bond over the productive majority. Accordingly, since politics is the main source of their income, the policies and actions of the members of this oligarchic ruling class will be driven primarily by economic motives. The exploited producing class, in contrast, will not expend nearly as many resources on politics, and their actions in the political arena will not be motivated by economic gain to the same degree, precisely because they are absorbed in earning their livelihoods in their own chosen areas of specialization on the market. As Rothbard explains,

the ruling class, being small and largely specialized, is motivated to think about its economic interests twenty-four hours a day. The steel manufacturers seeking a tariff, the bankers seeking taxes to repay their government bonds, the rulers seeking a strong state from which to obtain subsidies, the bureaucrats wishing to expand their empire, are all professionals in statism. They are constantly at work trying to preserve and expand their privileges.[45]

The ruling class, however, confronts one serious and ongoing problem: how to persuade the productive majority – whose tribute or taxes it consumes – that its laws, regulations, and policies are beneficial; that is, that they coincide with “the public interest” or are designed to promote “the common good” or to optimize “social welfare.” Given its minority status, failure to solve this problem exposes the political class to serious consequences. Even passive resistance by a substantial part of the producers, in the form of mass tax resistance, renders the income of the political class and, therefore, its continued existence extremely precarious. More ominously, attempts to suppress such resistance may cause it to spread and intensify and eventually boil over into an active revolution whose likely result is the forcible ousting of the minority exploiting class from its position of political power. Here is where the intellectuals come in. It is their task to convince the public to actively submit to state rule because it is beneficial to do so, or at least to passively endure the state’s depredations because the alternative is anarchy and chaos. In return for fabricating an ideological cover for its exploitation of the masses of subjects or taxpayers, these “court intellectuals” are rewarded with the power, wealth, and prestige of a junior partnership in the ruling elite. Whereas in preindustrial times these apologists for state rule were associated with the clergy, in modern times – at least since the Progressive Era in the United States – they have been drawn increasingly from the academy.[46]

Politicians, bureaucrats, and those whom they subsidize and privilege within the economy thus routinely trumpet lofty ideological motives for their actions in order to conceal from the exploited and plundered citizenry their true motive of economic gain. In today’s world, these motives are expressed in the rhetoric of “social democracy” in Europe and that of modern – or welfare-state – liberalism in the United States.[47] In the past, ruling oligarchies have appealed to the ideologies of royal absolutism, Marxism, Progressivism, Fascism, National Socialism, New Deal liberalism, and so on to camouflage their economic goals in advocating a continual aggrandizement of state power. In devising his theoretical guide, then, Rothbard seeks to provide historians with a means of piercing the shroud of ideological rhetoric and illuminating the true motives underlying the policies and actions of ruling elites throughout history. As Rothbard describes this guide, whenever the would-be or actual proprietors and beneficiaries of the state act,

when they form a State, or a centralizing Constitution, when they go to war or create a Marshall Plan or use and increase State power in any way, their primary motivation is economic: to increase their plunder at the expense of the subject and taxpayer. The ideology that they profess and that is formulated and spread through society by the Court Intellectuals is merely an elaborate rationalization for their venal economic interests. The ideology is the smoke screen for their loot, the fictitious clothes spun by the intellectuals to hide the naked plunder of the Emperor. The task of the historian, then, is to penetrate to the essence of the transaction, to strip the ideological garb from the Emperor State and to reveal the economic motive at the heart of the issue.[48]

In characterizing the modern democratic State as essentially a means for coercively redistributing income from producers to politicians, bureaucrats, and special-interest groups, Rothbard opens himself up to the charge of espousing a conspiracy theory of economic history. But it is his emphasis on the almost-universal propensity of those who employ the political means for economic gain to conceal their true motives with ideological cant that makes him especially susceptible to this charge. Indeed, the Chicago School’s theory of economic regulation and the public-choice theory of the Virginia School also portray politicians, bureaucrats, and industries regulated by the state as interested almost exclusively in maximizing their utility in the narrow sense, which in many, if not most, cases involves a maximization of pecuniary gain.[49] However, economists of both schools are inured against the charge of conspiracy theory because in their applied work they generally eschew a systematic, thymological investigation of the actual motives of those individuals or groups whose actions they are analyzing. Instead, their positivist methodology inclines them to mechanically impute to real actors in concrete historical circumstances a narrowly conceived utility maximization.

James Buchanan, one of the founders of public-choice theory, writes, for instance, that economists pursuing this paradigm tend

to bring with them models of man that have been found useful within economic theory, models that have been used to develop empirically testable and empirically corroborated hypotheses. These models embody the presumption that persons seek to maximize their own utilities, and their own narrowly defined economic well-being is an important component of these utilities.[50]

George Stigler, who pioneered the theory of economic regulation, argues, “There is, in fact, only one theory of human behavior, and that is the utility-maximizing theory.” But for Stigler, unlike Rothbard or Mises, the exact arguments of the utility function of flesh-and-blood actors are not ascertained by the historical method of specific understanding but by the empirical method. Thus, Stigler argues,

The first purpose of the empirical studies [of regulatory policy] is to identify the purpose of the legislation! The announced goals of a policy are sometimes unrelated or perversely related to its actual effects and the truly intended effects should be deduced from the actual effects. This is not a tautology designed to gloss over a hard problem, but instead a hypothesis on the nature of political life…. If an economic policy has been adopted by many communities, or if it is persistently pursued by a society over a long span of time, it is fruitful to assume that the real effects were known and desired.[51]

By thus discounting the effect of erroneous ideas about the appropriate means for achieving preferred goals on the choices made by historical actors, Stigler the positivist seeks to free himself from the task of delving into the murky and unmeasurable phenomenon of motives. Without doubt, if the historical outcome of a policy or action is always what was aimed at by an individual or organization – because, according to Stigler, “errors are not what men live by or on” – then there is no need to ever address the question of motive. For Stigler, then, there is no reason for the historian to try to subjectively understand the motive for an action because the actor’s goal is objectively revealed by the observed result. Now, Stigler would probably agree that it is absurd to assume that Hitler was aiming at defeat in World War II by doggedly pursuing his disastrous policy on the Eastern front over an extended period of time. But this assumption only appears absurd to us in light of the thymological insight into Hitler’s mind achieved by examining the records of his actions, policies, utterances, and writings, and those of his associates. This insight leads us to an understanding that cannot be reasonably doubted by anyone of normal intelligence: that Hitler was fervently seeking victory in the war.

Rothbard insists that the same method of specific understanding that allows the historian to grasp Hitler’s objectives in directing the German military campaign against the Soviet Union also is appropriate when attempting to discern the motives of those who lobby for a tariff or for the creation of a central bank. Accordingly, the guide that Rothbard originates to direct the economic historian first to a search for evidence of an unspoken economic motive in such instances is only a guide. As such, it can never rule out in advance the possibility that an ideological or altruistic goal may serve as the dominant motivation in a specific case. If his research turns up no evidence of a hidden economic motive, then the historian must explore further for ideological or other noneconomic motives that may be operating. Thus, as Rothbard points out, his approach to economic history, whether it is labeled a “conspiracy theory of history” or not, “is really only praxeology applied to human history, in assuming that men have motives on which they act.”[52] This approach also respects what Mises has called “historical individuality” by assuming that “[t]he characteristics of individual men, their ideas and judgments of value as well as the actions guided by those ideas and judgments, cannot be traced back to something of which they would be the derivatives.”[53] In sharp contrast, the positivist methods of Stigler and Buchanan attempt to force participants in historical events into the Procrustean bed of homo economicus, who ever and unerringly seeks for his own economic gain.

We can more fully appreciate the significance of Rothbard’s methodological innovation by briefly contrasting his explanation of the origins of the Federal Reserve System with the explanation given by Milton Friedman and Anna J. Schwartz in their influential work, A Monetary History of the United States, 1867–1960.[54] Since its publication in 1963, this book has served as the standard reference work for all subsequent research in US monetary history. While Friedman and Schwartz cannot exactly be classified as new economic historians, their book is written from a strongly positivist viewpoint and its methods are congenial to those pursuing research in this paradigm.[55] For example, in the preface to the book, Friedman and Schwartz write that their aim is “to provide a prologue and a background for a statistical analysis of the secular and cyclical behavior of money in the United States, and to exclude any material not relevant to that purpose.” In particular it is not their ambition to write “a full-scale economic and political history that would be required to record at all comprehensively the role of money in the United States in the past century.”[56] Thus, in effect, the behavior of the unmotivated money supply takes center stage in this tome of 808 pages including appendices. Indeed, the opening sentence of the book reads, “This book is about the stock of money in the United States.”[57]

Now Friedman and Schwartz certainly do not, and would not, deny that movements in the money supply are caused by the purposeful actions of motivated human beings. Rather, the positivist methodology they espouse constrains them to narrowly focus their historical narrative on the observable outcomes of these actions and never to formally address their motivation. For, according to the positivist philosophy of science, it is only observable and quantifiable phenomena that can be assigned the status of “cause” in a scientific investigation, while human motives are intensive qualities lacking a quantifiable dimension. So, if one is to write a monetary history that is scientific in the strictly positivist sense, the title must be construed quite literally as the chronicling of quantitative variations in a selected monetary aggregate and the measurable effects of these variations on other quantifiable economic variables, such as the price level and real output.

However, even Friedman and Schwartz’s Monetary History must occasionally emerge from the bog of statistical analysis and address human motivation in order to explain the economic events, intellectual controversies, social conflicts, and political maneuverings that had an undeniable and fundamental impact on the institutional framework of the money supply. Due to the awkward fit of motives into the positivist framework, however, Friedman and Schwartz’s forays into human history tend to be cursory and unilluminating, when not downright misleading. For example, their two chapters dealing with the crucial period from 1879 to 1914 in US monetary history comprise 100 pages, only 11 of which are devoted to discussing the political and social factors that culminated in the establishment of the Federal Reserve System.[58] In these pages, Friedman and Schwartz suggest that the “money ‘issue’” that consumed American politics in the last three decades of the 19th century was precipitated by “the crime of 1873″ and was almost exclusively driven by the silver interests in league with the inflationist and agrarian Populist Party. This movement, moreover, was partly expressive of the 1890s, a decade that, according to C. Vann Woodward as quoted by the authors, “had rather more than its share of zaniness and crankiness, and that these qualities were manifested in the higher and middling as well as lower orders of American society.”[59] In thus trivializing the “money issue,” the authors completely ignore the calculated and covert drive by the Wall Street banks led by the Morgans and Rockefellers for a cartelization of the entire banking industry, with themselves and their political allies at the helm. This movement, which began in earnest in the 1890s, was also in part a reaction to the proposals of the silverite and agrarian inflationists and was aimed at reserving to the banks the gains forthcoming from monetary inflation.

Friedman and Schwartz thus portray the drive toward a central bank as completely unconnected with the money issue and as only getting under way in reaction to the panic of 1907 and the problem with the “inelasticity of the currency” that was then commonly construed as its cause. The result is that they characterize the Federal Reserve System as the product of a straightforward, disinterested, bipartisan effort to provide a practical solution to a purely technical problem afflicting the monetary system.[60] Nowhere in their discussion of the genesis of the Federal Reserve System do Friedman and Schwartz raise the all-important question of precisely which groups benefitted from this “solution.” Nor do they probe deeply into the motives of the proponents of the Federal Reserve Act. After a brief and superficial account of the events leading up to the enactment of the law, they hasten to return to the main task of their “monetary history” which, as Friedman expresses it in another work, is “to add to our tested knowledge.”[61]

For Friedman and Schwartz, then, the central aim of economic history is the testing of hypotheses suggested by empirical regularities observed in the historical data. Accordingly, Friedman and Schwartz describe their approach to economic history as “conjectural history – the tale of ‘what might have been.’”[62] In their view, the primary task of the economic historian is to identify the observable set of circumstances that accounts for the emergence of the historical events under investigation by formulating and testing theoretical conjectures about the course of events that would have developed in the absence of these circumstances. This “counterfactual method,” as the new economic historians refer to it, explains the historical events in question and, at the same time, adds to the “tested knowledge” of theoretical relationships to be utilized in future investigations in economic history.[63]

Friedman and Schwartz exemplify this method in their treatment of the panic of 1907.[64] During this episode, banks swiftly restricted cash payments to their depositors within weeks after the financial crisis struck, and there ensued no large-scale failure or even temporary closing of banks. Friedman and Schwartz formulate from this experience the theoretical conjecture that, when a financial crisis strikes, early restrictions on currency payments work to prevent a large-scale disruption of the banking system. They then test this conjecture by reference to the events of 1929–1933. In this case, although the financial crisis began with the crash of the stock market in October 1929, cash payments to bank depositors were not restricted until March 1933. From 1930 to 1933, there occurred a massive wave of bank failures. The theoretical conjecture, or “counterfactual statement,” that a timely restriction of cash payments would have checked the spread of a financial crisis, is therefore empirically validated by this episode because, in the absence of a timely bank restriction, a wave of bank failures did, in fact, occur after 1929.

Granted, Friedman and Schwartz do recognize that these theoretical conjectures cannot be truly tested because “[t]here is no way to repeat the experiment precisely and so to test these conjectures in detail.” Nonetheless, they maintain that “all analytical history, history that seeks to interpret and not simply record the past, is of this character, which is why history must be continuously rewritten in the light of new evidence as it unfolds.”[65] In other words, history must be revised repeatedly because the very theory that is employed to interpret it is itself subject to constant revision on the basis of “new evidence” that is continually coming to light in the ongoing historical process. As pointed out above, this is the vicious circle that characterizes all attempts to apply the positive method to the interpretation of history.

As if to preempt recognition of this vicious circle, Friedman and Schwartz take as the motto of their volume a famous quote from Alfred Marshall, which reads in part,

Experience … brings out the impossibility of learning anything from facts till they are examined and interpreted by reason; and teaches that the most reckless and treacherous of all theorists is he who professes to let facts and figures speak for themselves.[66]

But clearly, reason teaches us that the observable – and, in some cases, countable, but never measurable – events of economic history ultimately are caused by the purposive actions of human beings whose goals and motives can never be directly observed. In rejecting the historical method of specific understanding, Friedman and Schwartz are led not by reason, but by a narrow positivist prepossession with using history as a laboratory, albeit imperfect, for formulating and testing theories that will allow prediction and control of future phenomena. Of the underlying intent of such a positivist approach to history, Mises wrote, “This discipline will abstract from historical experience laws which could render to social ‘engineering’ the same services the laws of physics render to technological engineering.”[67]

Needless to say, for Rothbard, history can never serve even as an imperfect laboratory for testing theory, because of his agreement with Mises that “the subject matter of history … is value judgments and their projection into the reality of change.”[68] In seeking to explain the origins of the Federal Reserve System, therefore, Rothbard focuses on the question of who would reasonably have expected to benefit from and valued such a radical change in the monetary system. Here is where Rothbard’s scientific worldview comes into play. As an Austrian monetary theorist, he recognizes that the limits on bank-credit inflation confronted by a fractional-reserve banking system based on gold are likely to be much less confining under a central bank than under the quasi-decentralized National Banking System put in place immediately prior to the passage of the Federal Reserve Act in 1913. The praxeological reasoning of Austrian monetary theory also leads to the conclusion that those who stand to reap the lion’s share of the economic benefits from a bank-credit inflation tend to be the lenders and first recipients of the newly created notes and deposits, namely, commercial and investment bankers and their clients. Guided by the implications of this praxeological knowledge and of his thymological rule about the motives of those who lobby for state laws and regulations, Rothbard is led to scrutinize the goals and actions of the large Wall Street commercial and investment bankers, their industrial clientele, and their relatives and allies in the political arena.

Rothbard’s analysis of the concrete evidence demonstrates that, beginning in the late 1890s, a full decade before the panic of 1907, this Wall Street banking axis and allied special interests began to surreptitiously orchestrate and finance an intellectual and political movement agitating for the imposition of a central bank. This movement included academic economists who covered up its narrow and venal economic interests by appealing to the allegedly universal economic benefits that would be forthcoming from a central bank operating as a benevolent and disinterested provider of an “elastic” currency and “lender of last resort.” In fact, what the banking and business elites dearly desired was a central bank that would provide an elastic supply of paper reserves to supplement existing gold reserves. Banks’ access to additional reserves would facilitate a larger and more lucrative bank-credit inflation and, more important, would provide the means to ward off or mitigate the recurrent financial crises that had brought past inflationary booms to an abrupt and disastrous end in bank failures and industrial depression.

Rothbard employs the approach to economic history exemplified in this treatment of the origins of the Fed consistently and dazzlingly throughout this volume to unravel the causes and consequences of events and institutions ranging over the course of US monetary history, from colonial times through the New Deal era. One of the important benefits of Rothbard’s unique approach is that it naturally leads to an account of the development of the US monetary system in terms of a compelling narrative linking human motives and plans that oftentimes are hidden and devious to outcomes that sometimes are tragic. And one will learn much more about monetary history from reading this exciting story than from poring over reams of statistical analysis.

Notes

[1] For good discussions of praxeology, see Ludwig von Mises, Human Action: A Treatise on Economics, Scholar’s Edition (Auburn, Ala.: Mises Institute, 1998), pp. 1–71; Murray N. Rothbard, The Logic of Action I: Method, Money, and the Austrian School (Cheltenham, U.K.: Edward Elgar, 1997), pp. 28–77; and Hans-Hermann Hoppe, Economic Science and the Austrian Method (Auburn, Ala.: Mises Institute, 1995).

[2] Douglass C. North, Growth and Welfare in the American Past: A New Economic History (Englewood Cliffs, N.J.: Prentice-Hall, 1966), pp. 1–2 (emphasis in original).

[3] Robert William Fogel, "The New Economic History: Its Findings and Methods," in The Reinterpretation of American History, Robert William Fogel and Stanley L. Engerman, eds. (New York: Harper and Row, 1971), p. 7.

[4] Murray N. Rothbard, America’s Great Depression, 5th ed. (Auburn, Ala.: Mises Institute, 2000).

[5] As Rothbard has written of Theory and History, the book in which Mises gives this method its most detailed exposition, this work "has made remarkably little impact, and has rarely been cited even by the young economists of the recent Austrian revival. It remains by far the most neglected masterwork of Mises." Murray N. Rothbard, Preface to Ludwig von Mises’s Theory and History: An Interpretation of Social and Economic Evolution, 2nd ed. (Auburn, Ala.: Mises Institute, 1985), p. xi.

[6] Ibid., pp. 224–25.

[7] Ibid., p. 187.

[8] Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method, 2nd ed. (Kansas City, Mo.: Sheed Andrews and McMeel, 1978), p. 45.

[9] It is true that in deriving theorems that apply to the specific conditions characterizing human action in our world, a few additional facts of a lesser degree of generality are inserted into the deductive chain of reasoning. These include the facts that there exists a variety of natural resources, that human labor is differentiated, and that leisure is valued as a consumer’s good. See Mises, Human Action; Rothbard, The Logic of Action I; and Hoppe, Economic Science and the Austrian Method.

[10] Mises, Theory and History, p. 298.

[11] Ibid., p. 310.

[12] Some economists would date this inflation from 1965 to 1979, but the precise dates do not matter for our present purposes. See, for example, Thomas Mayer, Monetary Policy and the Great Inflation in the United States: The Federal Reserve and the Failure of Macroeconomic Policy (Northampton, Mass.: Edward Elgar, 1999).

[13] Mises, Human Action, p. 50.

[14] Mises, Theory and History, p. 309.

[15] Ibid., p. 301.

[16] John Kenneth Galbraith, The New Industrial State (New York: New American Library, 1967), pp. 189–207, 256–70.

[17] Mises, Theory and History, p. 301.

[18] Ibid., p. 265.

[19] As Mises puts it, "Understanding aims at anticipating future conditions as far as they depend on human ideas, valuations, and actions." Mises, Ultimate Foundation, p. 49.

[20] Mises, Theory and History, p. 320.

[21] Mises, Ultimate Foundation, p. 48.

[22] Mises, Theory and History, p. 265.

[23] Ibid., p. 266.

[24] Ibid., p. 272.

[25] Ibid., pp. 272, 274.

[26] Ibid., p. 313.

[27] Ibid.

[28] Mises, Ultimate Foundation, p. 50.

[29] Ibid.

[30] Mises, Theory and History, pp. 306–08, 313–14.

[31] Ibid., p. 219.

[32] Mises, Human Action, p. 56.

[33] Ibid.

[34] Murray N. Rothbard, "Economic Determinism, Ideology, and The American Revolution," The Libertarian Forum 6 (November 1974): 4.

[35] Mises makes a similar point:

The endeavors to mislead posterity about what really happened and to substitute a fabrication for a faithful recording are often inaugurated by the men who themselves played an active role in the events, and begin with the instant of their happening, or sometimes even precede their occurrence. To lie about historical facts and to destroy evidence has been in the opinion of hosts of statesmen, diplomats, politicians and writers a legitimate part of the conduct of public affairs and of writing history.

Mises concludes that one of the primary tasks of the historian, therefore, "is to unmask such falsehoods." Mises, Theory and History, pp. 291–92.

[36] Rothbard, "Economic Determinism," p. 4.

[37] Ibid.

[38] See, for example, David Eakins, "Business Planners and America’s Postwar Expansion," in Corporations and the Cold War, David Horowitz, ed. (New York: Modern Reader, 1969), pp. 143–71.

[39] Rothbard, "Economic Determinism," p. 4.

[40] Murray N. Rothbard, Conceived in Liberty, vol. 1, A New Land, A New People: The American Colonies in the Seventeenth Century, 2nd ed. (Auburn, Ala.: Mises Institute, 1999), p. 9.

[41] Mises, Human Action, pp. 47–48.

[42] For expositions of the view of the origin and nature of the state as a coercive organization of the political means for acquiring income, see Franz Oppenheimer, The State (New York: Free Life Editions, [1914] 1975); Albert J. Nock, Our Enemy, The State (New York: Free Life Editions, [1935] 1973); and Murray N. Rothbard, For a New Liberty: The Libertarian Manifesto, 2nd ed. (San Francisco: Fox and Wilkes, 1996), pp. 45–69.

[43] Rothbard, For a New Liberty, pp. 49–50; and idem, "Economic Determinism," pp. 4–5.

[44] One of the first expositions of the operation of this law, within the context of social democratic political parties can be found in Robert Michels, Political Parties: A Sociological Study of the Oligarchical Tendencies of Modern Democracy (New York: Dover Publications, [1915] 1959).

[45] Rothbard, "Economic Determinism," p. 5.

[46] On the alliance between intellectuals and the state, see Rothbard, For a New Liberty, pp. 54–69. A particularly graphic example of this alliance can be found in late-nineteenth-century Germany, where the economists of the German Historical School were referred to as "Socialists of the Chair," because they completely dominated the teaching of economics at German universities. They also explicitly viewed their role as providing an ideological shield for the royal line that ruled Germany and proudly proclaimed themselves to be "the Intellectual Bodyguard of the House of Hohenzollern." Ibid., p. 60.

[47] So-called "neoconservatism," which dominates the conservative movement and the Republican Party in the United States, is merely a variant of modern liberalism. Its leading theoreticians envision a slightly smaller and more efficient welfare state, combined with a larger and more actively interventionist global-warfare state.

[48] Rothbard, "Economic Determinism," p. 5.

[49] For examples, see, respectively, George J. Stigler, "The Theory of Economic Regulation," in The Citizen and the State: Essays on Regulation (Chicago: University of Chicago Press, 1975), pp. 114–41; and James M. Buchanan, "Politics without Romance: A Sketch of Positive Public Choice Theory and Its Normative Implications," in The Theory of Public Choice – II, James M. Buchanan and Robert D. Tollison, eds. (Ann Arbor: University of Michigan Press, 1984), pp. 11–22.

[50] Buchanan, "Politics without Romance," p. 13.

[51] Stigler, "Theory of Economic Regulation," p. 140.

[52] Murray N. Rothbard, "Only One Heartbeat Away," The Libertarian Forum 6 (September 1974): 5.

[53] Mises, Theory and History, p. 183.

[54] Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J.: Princeton University Press, 1963).

[55] See, for example, North, Growth and Welfare in the American Past, p. 11, n. 6.

[56] Friedman and Schwartz, A Monetary History, p. xxii.

[57] Ibid., p. 3. As doctrinaire positivists, Friedman and Schwartz consistently refer to the "stock" or "quantity" of money rather than to the "supply" of money, presumably because the former is the observable market outcome of the interaction of the unobservable money supply and money demand curves. However, it is likely that Friedman and Schwartz conceive the money stock as a good empirical proxy for the money supply, because they view the latter as perfectly inelastic with respect to the price level. On this point, compare Peter Temin’s interpretation. Peter Temin, Did Monetary Forces Cause the Great Depression? (New York: W.W. Norton, 1976), p. 18.

[58] Friedman and Schwartz, A Monetary History, pp. 89–188.

[59] Ibid., p. 115, n. 40.

[60] Ibid., p. 171.

[61] Milton Friedman, "The Quantity Theory of Money – A Restatement," in Studies in the Quantity Theory of Money (Chicago: University of Chicago Press, [1956] 1973), p. 18.

[62] Ibid., p. 168.

[63] For more on the nature and use of the counterfactual method, see Robert William Fogel, "The New Economic History: Its Findings and Methods," in The Reinterpretation of American History, Robert William Fogel and Stanley L. Engerman, eds. (New York: Harper and Row, 1971), pp. 8–10; and Donald N. McCloskey, "Counterfactuals," in The New Palgrave: The New World of Economics, John Eatwell, Murray Milgate, and Peter Newman, eds. (New York: W.W. Norton, 1991), pp. 149–54.

[64] Friedman and Schwartz, A Monetary History, pp. 156–68.

[65] Ibid., p. 168.

[66] Ibid., p. xix.

[67] Mises, Theory and History, p. 285.

[68] Mises, Human Action, p. 48.

Joseph Salerno [send him mail] is academic vice president of the Mises Institute, chairman of the graduate program in economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

The Best of Joseph Salerno

Testimony before the US House of Representatives, Committee on Financial Services, Subcommittee on Monetary Policy, March 17, 2011

The old argument has recently come back into vogue that moderate inflation is desirable to prevent the far greater evil of deflation. What used to be roundly condemned as "creeping inflation" in the 1950s by Fed officials and mainstream economists alike is today given the scientific-sounding name "inflation-targeting" and hailed as the proper goal of monetary policy.1 In the past decade, this view has been promoted by many mainstream economists, most notably former Fed Chairman Greenspan and current Fed chairman Bernanke. But this view is based on a fundamental confusion. It conflates deflation and depression, which are two very different phenomena. Falling prices are, under most circumstances, absolutely benign and the natural outcome of a prosperous and growing economy. The fear of falling prices is thus a phobia — I call it a "deflation-phobia" — which has no rational basis in economic theory or history.

Let me explain. As technology advances and saving increases in a progressing economy, entrepreneurs and business firms are given the means and the incentive to invest in new methods of production, which in turn enables them to lower their costs and expand their profit margins. For a given good, the natural result is an increase in the supply of the good and more intense competition among its suppliers. Assuming no change in the money supply and continuing technological innovation, this competitive process will drive the unit production costs and price of the good ever downward. Consumers will benefit from the falling price because their real wages will continually increase as each dollar of income commands an increasing quantity of the good in exchange.

This is not merely abstract theoretical speculation; it is precisely the process that occurred in the past four decades with respect to the products of the consumer electronics and high-tech industries. Thus, for example, a mainframe computer sold for $4.7 million in 1970, while today one can purchase a PC that is 20 times faster for less than $1,000. The first hand calculator was introduced in 1971 and was priced at $240 (which is roughly $1,400 in terms of today's inflated dollar). By 1980, similar hand calculators were selling for $10 despite the fact that the 1970s was the most inflationary peacetime decade in U.S. history. The first HDTV was introduced in 1990 and sold for $36,000. When HDTVs began to be sold widely in the United States in 2003 their prices ranged between $3,000 and $5,000. Today you can purchase one of much higher quality for as little as $500. In the medical field, the price of Lasik eye surgery dropped from $4,000 per eye in 1998, when it was first approved by the FDA, to as little as $300 per eye today.

Now, no one — not even a Keynesian economist — would claim that the spectacular price deflation in these industries has been a bad thing for the U.S. economy. Indeed the falling prices reflect a greater abundance of goods which enhances the welfare of American consumers. Nor has price deflation in these industries diminished profits, production, and employment. In fact, the growth of these industries has been just as spectacular as the decline in the prices of their products. But if deflation is a benign development for both consumers and businesses in individual markets and industries then why should we fear a fall in the general price level, which of course is nothing but an average of the prices of individual goods? The answer given by theory and history is that a falling price level is the natural outcome of a dynamic market economy operating with a sound money like gold.

Under a gold standard, prices naturally tend to decline as ongoing technological advance and investment in more and better capital goods rapidly improve labor productivity and increase the supplies of consumer goods, while the money supply grows very gradually. For instance, throughout the nineteenth century and up until World War I, the heyday of the classical gold standard, a mild deflationary trend prevailed in the U.S. As a result, an American consumer in the year 1913 needed only $0.79 to purchase the same basket of goods that required $1.00 to purchase in 1800. In other words, due to the gentle fall in prices during the nineteenth century, a dollar purchased 27 percent more in terms of goods in 1913 than it did in 1800. Contrast this with the current day consumer who must pay over $22 for what a consumer in 1913 (the year before the Fed began operating) paid $1.00 for.

Contrary to our contemporary deflation-phobes, the secular fall in prices under the classical gold standard did not impede economic growth in the U.S. In fact, deflation coincided with the spectacular transformation of the United States from an agrarian economy in 1800 to the greatest industrial power on earth by the eve of World War One. If we examine the data more closely, we find that the years from 1880 to 1896 included the decade of the most rapid growth in U.S. history. Yet, during this period, prices fell by almost 30 percent, or by 1.75 percent per year, while real income rose by about 85 percent, or roughly 5 percent per year. More generally, a 2004 study of 73 episodes of deflation from sixteen different countries dating back to 1820 indicates that only 8 of the 73 episodes of deflation involved recession or depression. It also indicates that 21 of the 29 depression episodes involved no deflation. The authors of this study, Andrew Atkeson and Patrick J. Kehoe conclude, “In a broader historical context, beyond the Great Depression, the notion that deflation and depression are linked virtually disappears.”  Even when the Great Depression is included in the data, they find that the link between falling prices and negative economic growth is economically insignificant.2

Ironically, while Chairman Bernanke just affirmed again a few days ago that the Fed will persist in its inflationary policy of quantitative easing to ward off the imaginary threat of falling prices, signs of inflation abound. The prices of consumer food staples have risen by 6 percent over the past year, with the prices of beef, bacon, butter and lamb rising by 10 percent or more. The U.N. index of grain export prices has risen by 70 percent in the past year and stands at its highest level in 21 years. Gasoline prices have surged 49 percent in the last six months. According to IMF statistics, commodity prices are up by 33 percent in the past year; metals prices by 40 percent; energy prices by 30 percent; crude oil prices by 31 percent; and commodity industrial inputs by 40 percent.3 As a result of skyrocketing prices of agricultural products such as corn, wheat, soybeans and other crops, the price of farmland in the U.S. has been soaring, particularly in the Midwest where land prices increased at double-digit rates last year and even regulators fear that a bubble is forming.

Just today, USA Today reported "that signs throughout Silicon Valley are starting to show eerie similarities to the dot-com bust."4 Facebook is estimated to be worth $75 billion based on private trading from the SharesPost market, which would mean that it is more valuable than Disney. It is rumored to be in a bidding war with Google for Twitter, with the firms considering bids as high as $10 billion. Over the last year, there have been 48 tech IPOs, which is 28 percent of the total number of deals. Also the stock prices of tech IPOs have leaped 19 percent on the first day of trading.

Not only does Chairman Bernanke seem unfazed by these inflationary developments, but, what is more astounding, he appears to welcome the rapid increase in stock prices as evidence that QE2 is working to right the economy. When it became apparent that the Fed's $600 billion buying program for treasury bonds had failed to reduce long-term interest rates as intended but caused them to rise instead, Mr. Bernanke desperately sought another sign that QE2 was working. While he denied that the Fed was responsible for rapidly rising commodity prices, he credited the Fed with re-igniting the stock market boom. Oddly, he seized on the Russell 2000 index of small cap stocks, which has increased 25 percent in the last six months, stating "A stronger economy helps smaller businesses." In other words, despite the stagnant job creation and sluggish growth of real output, Mr. Bernanke has declared Fed policy a success on the basis of yet another financial asset bubble that threatens again to devastate the global economy. This would be farcical were it not so tragic. But what else can be expected from the leader of an institution whose very rationale is to manipulate interest rates and print money.

1. Time Magazine Editorial, "Creeping Inflation: How to Keep It from Galloping, (Oct. 07, 1957).
2. Andrew Atkeson and Patrick J. Kehoe, “Deflation and Depression: Is There an Empirical Link,” American Economic Review Papers and Proceedings 94 (May 2004): 99–103.
3. Commodity data is from Index Mundi.
4. Jon Swartz and Matt Krantz, Is a New Tech Bubble Starting to Grow, USA Today (March 17, 2011).

Joseph Salerno [send him mail] is academic vice president of the Mises Institute, chairman of the graduate program in economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

Excerpted from I Chose Liberty (2010)

I vividly recall the event that set me on a long and winding road to libertarianism and Austrian economics. I was 12 years old and my parents, who were both first-generation Italian-Americans, were hosting some of my mother’s relatives, including a distant male cousin who had traveled from Italy to visit relatives residing in Rhode Island and New Jersey. His visit to our home was proceeding pleasantly if uneventfully that day when the subject of politics came up and the cousin revealed that he was a card-carrying member of the Italian Communist Party. My father was still a New Deal Democrat at the time, but also a devout, Jesuit-trained Catholic and staunch anticommunist who had voted for Kennedy in the presidential election the year before.

A ferocious argument immediately erupted between my father and the cousin that enthralled me – not because of the issues debated, which I did not understand, but because of the passion with which the two men expressed their views. The argument came to an abrupt halt when my father, who was a formidable presence with an appearance and booming voice that suggested the actor Anthony Quinn in his prime, roared a threat to throw the Commie out of our house. Naturally I was eager to see what would ensue and would have permitted events to take their course if I had had my druthers, but my mother’s untimely intervention succeeded in negotiating a shaky truce between the two combatants that held until the visit ended.

That night I decided that I would learn all I could about the subject that had roused such volcanic passion in my father. I soon began scouring the local library for literature on communism and over the next year devoured everything I could lay my hands on related to the subject. These were mainly Cold War polemical tracts with grizzly titles like Masters of Deceit and You Can Trust the Communists (… to do exactly as they say!).

I quickly became an ardent anticommunist but knew little else about politics or political philosophy until Barry Goldwater began to campaign for the Republican nomination for president when I was 13 years old. His firebrand anticommunism greatly appealed to me at the time and after reading an article about him in Life magazine, in late 1963, I became aware of the conservative-liberal political spectrum and immediately proclaimed myself a conservative, much to my father’s chagrin. My conservatism was reinforced by reading Goldwater’s book Conscience of a Conservative and his biography, Barry Goldwater: Freedom Is His Flight Plan by Stephen Shadegg. A voracious reader of science fiction and political fiction, I also discovered the novels of Ayn Rand and read Anthem and Atlas Shrugged at about the same time. By the time I entered high school, I was a full-blown Goldwaterite conservative and Cold Warrior, who, inconsistently, believed in the inviolability of the rights to liberty and property.

I attended St. Joseph’s High School, an all-boys Catholic institution, where, in the fall semester of my freshman year, my teacher for both English and speech was a young former marine, Bill Murray, who also passionately detested communism. After I delivered a speech to the class mocking the military capabilities of the People’s Republic of China, he was so enthusiastic he exclaimed, "Salerno, you beautiful anticommunist, you." During the same semester, in my American history class, the teacher organized a debate between the supporters of Goldwater and the supporters of Lyndon Johnson. I was one of the seven students who self-consciously fidgeted on the Goldwater side and faced down the horde of thirty or so Johnson partisans, but we gave as a good as we got, at least according to the teacher’s assessment.

My interest in political issues and my conservative convictions intensified during my high-school years. It was the mid-1960s, the era of free-speech and Vietnam War protests on college campuses, and just a few miles down the road, at Rutgers University, Eugene Genovese was dismissed from the faculty for having publicly dissented against the Vietnam War. The atmosphere at my high school was highly charged politically. A few of the younger members of the Brothers of the Sacred Heart, the order that administered and staffed the high school, were deeply committed to Vatican II liberal Catholicism and New Frontier–Great Society political liberalism, as were some of the younger lay faculty. They were also very eager to debate the issues in the classroom and encouraged the airing of opposing points of view.

But the faculty was by no means ideologically monolithic and, in my sophomore year, the school hired as head varsity-basketball coach and English teacher a hardcore member and chapter organizer of the John Birch Society. Bill Schreck was very charismatic and articulate and influenced Mr. Murray, the anticommunist English teacher, to become a Bircher too. Mr. Schreck also openly propagated his views to my class as our study-hall proctor. He eventually persuaded me and some other conservative students to attend a meeting of the local chapter of the Birch Society. However, I quickly lost interest in Birchism when I heard that Mr. Schreck had asserted in another class that the Beatles’ music was manufactured by a communist computer secreted in the English countryside with the aim of corrupting the minds and morals of American youth. My English teacher in my sophomore year, Mr. Walko, although he had no apparent association with Mr. Schreck or the Birchers and revealed no political biases in class, initiated an extracurricular reading club that I joined. The first book we discussed was None Dare Call It Treason by the Bircher John Stormer.

By my junior year, I had become recognized among the faculty as one of the most outspoken of the group of conservative students informally known as the "Lower Ten Percent." This label emerged from a debate in religion class over the Catholic view of the Vietnam War wherein I called Pope Paul VI’s position on the war "quixotic" and another conservative referred to it as "asinine." This infuriated our religion teacher who abruptly halted the debate. The next class the brother informed us that there would be no more discussion of current events in class, noting cryptically that in some bushels of apples the "lower ten percent" begins to rot prematurely and threatens to spoil the rest. Of course, we conservatives perversely seized on his words and proudly touted them as our new moniker.

Late in my junior year I tried to foment a petition drive among my fellow students in the A class to protest the rumored integration of the A, B, C, and D classes in our senior year. When my cohorts had entered as freshmen, we had been placed according to our scores on special placement exams. Each class moved from subject to subject (except for languages, I believe) en bloc. One significant result of this rigidly hierarchical system, which had existed since the founding of the institution, was that the classes competed ferociously with one another in intramural sports. Most importantly the A class, which took mostly accelerated courses, was supposed to have its grades more heavily weighted in calculating grade-point average for the purpose of class ranking in senior year.

Needless to say my antiegalitarian and protradition petition drive was ruthlessly quashed by the administration, and a few of the smarter B class kids were seeded amongst us in senior year. However, the administration did continue its policy of more heavily weighting grades for accelerated courses, while we "native" A class students employed informal methods of persuasion to ensure that the integrity of our intramural teams was not breached.

It was early in my senior year when I first became acquainted with the science of economics. My economics teacher was an enthusiastic young adherent of Great Society liberalism and the improbable brother-in-law of the Bircher, Mr. Schreck. Mr. Mautner assigned us to read John Kenneth Galbraith’s The Affluent Society and then parts of Adam Smith’s Wealth of Nations. Completely unacquainted with economics and distracted by Galbraith’s relentlessly sententious and laboriously styled prose, I could not follow and did not care much for The Affluent Society.

The Wealth of Nations was another matter. I was enthralled by Smith’s straightforward and nonmoralizing analysis of the free-market economy and its social benefits. It dawned on me that economics offered a scientific argument for the free society that complemented the moral argument in its favor. By the time I finished reading the assigned passages in Smith’s book, I knew that I wanted to be an economist and I never really deliberated upon the matter again.

There was a pregraduation tradition at St. Joseph’s in which the senior class presented a burlesque show amiably mocking the speech, dress, and mannerisms of its favorite – and not so favorite – teachers, and the faculty returned the favor by bestowing frivolous legacies on selected seniors. My legacy read, "To Joseph Salerno, leader of the Lower Ten Percent, we leave a pair of binoculars with which to look down upon your fellow man."

In 1968, I enrolled – or rather my father enrolled me – in Boston College, a Jesuit institution of higher education, which was actually a university not located in Boston but in the tony suburb of Chestnut Hill. In my freshman year I squirmed through the typically dreary two-semester principles of economics course taught by a graduate student from Samuelson’s Principles of Economics, 7th edition. However this experience did not deflect me from my career goal and I declared economics as my major sometime during my freshman (or sophomore) year.

That year I also began reading the New Guard, a periodical published by the conservative Young Americans for Freedom (YAF), where I encountered for the first time the schism in the conservative movement between "traditionalists" and "libertarians." I was impressed by the arguments presented by the libertarian contributors and in short order jettisoned the Goldwater-Buckley conservatism of my early adolescence and adopted the libertarian positions to abolish the draft, legalize drugs and other victimless "crimes," and immediately end the Vietnam War. In my sophomore year I began to read Rand’s nonfiction works including Capitalism: The Unknown Ideal. It was in the latter work that I first saw a reference to Ludwig von Mises, although I did not realize his significance at the time.

It was in mid-April of my sophomore year that a general student boycott of classes at Boston College began as a protest against a large tuition increase. Leaders of the campus SDS quickly gained control of the amorphous movement and by early May the boycott metamorphosed into a general student strike against the draft and the Vietnam War. A few hardy souls defied the strike and continued to attend classes – the squishy-soft liberal president of BC had declared attendance to be "optional," with midterm grades being the default final grade for those who chose to strike – while most earnestly participated in the innumerable informal "teach-ins" conducted by clueless liberal faculty on the war, women’s liberation, racism, ecology, etc.

I did neither. A select group of more entrepreneurial students carrying midterm grades of B or higher alertly seized the essentially "costless" opportunity to frolic and carouse with like-minded students of other striking colleges, along the Charles River, in the Boston Gardens, and amidst other landmarks of lovely springtime Boston.

The break from course work did not preclude me, however, from learning a very important lesson concerning radical political change, although its importance and relevance for libertarian strategy was clarified for me only many years later by Murray Rothbard. One day during the strike, a coalition of left-wing organizations called for a march to the Boston Commons where assorted Yippies, peaceniks, and left-wing academics were to address an antiwar rally. Abbie Hoffman was there as, I vaguely recollect, were Noam Chomsky and Jerry Rubin. Despite my deep personal disdain for these men and for the mainly leftist hippie students who would turn out for the demonstration, I participated because I was opposed to the war and because I anticipated that many coeds of like mind would participate.

The march commenced on the outskirts of Boston and was composed mainly of disheveled, although reasonably well-behaved, college students. But as the crowd swept down Commonwealth Avenue, a main artery into the downtown area, I noted young middle-class adults pouring out of residences and office buildings to join us. As the demonstration was swelled by what Murray Rothbard would later call "real people" – people with real jobs and family responsibilities – a palpable change occurred in the demeanor of the police monitoring the march.

Initially coldly detached – if not mildly hostile – they began to appear progressively anxious and forlorn, unsure of their positions as representatives of a State whose legitimacy was suddenly being seriously questioned by tens of thousands of ordinary Americans. Some of the younger officers even seemed as if they would have liked to shed their uniforms and join us. At the rally itself the greatest response from the crowd occurred when the clownish but charismatic Abbie Hoffman pointed to the John Hancock building looming over the Commons and roared, "John Hancock wasn’t an insurance salesman, he was a f—–g revolutionary."

The ability of charismatic leaders to imbue ordinary middle-class Americans with a radical antistate mentality by demonstrating how specific government policies exploited and victimized them and disrupted their families and communities had actually been brought home to me a year earlier when I attended a rally for George Wallace at the same Boston Commons in the waning days of the presidential campaign of 1968. Campaigning on an antiestablishment third-party ticket, Wallace roused the crowd by hammering on the absurdity of the despotic and unconstitutional judicial mandate that prevented white and black students in Boston from attending schools near their homes and coercively bused them to schools in strange and distant – and sometimes dangerous – neighborhoods.

At the end of his talk, the feisty Wallace waded into the dispersing crowd to shake hands and engage a gaggle of leftist student hecklers in good-natured repartee. I was standing a few feet away from Wallace when he jovially suggested to one of the students, "Why don’t you bring your sandal over here, hippie, and I’ll autograph it for ya." After the laughter abated, Wallace surprised and disarmed his erstwhile hecklers by standing among them and amiably responding to their questions and criticisms.

I was deeply impressed by these two episodes, although at the time I could not have articulated the reasons why, let alone recognized their general implications for a coherent libertarian strategy of political change. It was only many years later that I was enlightened on this matter by Murray Rothbard’s analysis of the Joe McCarthy phenomenon of the early 1950s. Rothbard delighted in standing the established view of McCarthy on its head.

The entire political and academic establishment, from New Deal/Truman Democrats to Eisenhower Republicans, from moderate liberals to moderate conservatives, concurred in the necessity of waging a Cold War to contain the alleged Soviet conspiracy to take over the so-called Free World and therefore were in explicit agreement with McCarthy’s ultimate goals. What they detested, they said, was McCarthy’s means.

Rothbard, in sharp contrast, never believed that the Soviet Union, albeit a bloody and repressive dictatorship, had the ability or intention of taking over the West. Rather, he argued that the Cold War was a ruse devised by the American ruling elite to justify the continuation and expansion of the massive, tax-consuming, welfare-warfare state built up during World War II at home and to rationalize postwar US imperialist ambitions for assorted military interventions abroad. While dismissing McCarthy’s ridiculous and contrived Cold War ideology – which, to repeat, he shared with most of his respectable establishment detractors – Rothbard had a profound appreciation for the means McCarthy employed. According to Rothbard,

The unique and glorious thing about McCarthy was not his goals or his ideology, but precisely his radical, populist means. For McCarthy was able, for a few years, to short-circuit the intense opposition of all the elites in American life: from the Eisenhower-Rockefeller administration to the Pentagon and the military-industrial complex to liberal and left media and academic elites – to overcome all that opposition and reach and inspire the masses directly. And he did it through television, and without any real movement behind him; he had only a guerrilla band of a few advisers, but no organization and no infrastructure.[1]

The strategy of directly appealing to the exploited middle- and working-class masses and short-circuiting the entrenched political and media elites is what later led Rothbard to support the presidential candidacies of Ross Perot and Pat Buchanan.

The academic year following that of the student strike was my junior year. The concurrence of a number of events marked it as a pivotal year in my intellectual development. To start with, soon after my return from summer break I discovered that a chapter of the Young Americans for Freedom had begun operating on campus. Its eclectic membership included Buckleyite traditionalist conservatives, fusionist libertarian-conservatives, laissez-faire capitalist Randians, and a few nearly pure libertarians. Although I do not believe I joined the organization immediately, I began spending my spare time in their office participating in informal discussions and debates. This marked the first time that I had interacted with a group of my peers whose political philosophy even loosely paralleled my own, and I found the experience exhilarating. Also, the friendly verbal sparring with thoughtful young "conservatives" of various stripes helped clarify my own thinking and propelled me toward a progressively more consistent and radical libertarian position.

My transformation into a full-fledged libertarian was completed when, at the start of my second semester, I read in a white heat the cover article of the New York Times Magazine entitled "The New Right Credo – Libertarianism" (1971). The authors, Stan Lehr and Louis Rossetto Jr., were seniors at Columbia University, and their article presented the first comprehensive account that I had read of the unadulterated libertarian political philosophy, carefully differentiated from both establishment liberalism and conservatism, as well as from the New Left, whose positions it shared on the abolition of the draft and all drug laws, and an immediate US withdrawal from Vietnam.

The article also portrays libertarianism as a vital and flourishing political movement that draws inspiration from Rand and science-fiction writer Robert Heinlein, whose novels I had been reading since I began college. Jerome Tuccille and former Goldwater speechwriter Karl Hess, unfamiliar names to me at the time, are identified as leading publicists and pamphleteers for the movement and their writings cited for their defense of radical libertarianism. More significantly, from the standpoint of my academic interests, the article refers to "economists of the Austrian School" – a school I had never been introduced to in my two-and-half years as an undergraduate economics major – as having demonstrated that recessions and depressions were not inherent defects of the free market but the result of government and central bank manipulation of the money supply.

The article later quotes a passage from Man, Economy, and State by Murray N. Rothbard, explaining why state management of an economy deprived of market prices is inevitably chaotic. As with the Austrian School in general, I had never heard Rothbard’s name mentioned by any of my economics professors and had no idea who he was. By the time I finished reading the article I had been converted to the pure libertarian position – a position the authors designated by the then-novel term anarchocapitalism – and my curiosity about Austrian economics had been piqued.

Back at the YAF office I mentioned my discovery of Austrian economics to my comrades. Shortly thereafter, one of them, Gerald Uba, produced and placed in my hands an odd-sized "minibook" (measuring 3.75" by 5") written by Rothbard and entitled Depressions: Their Cause and Cure. After reading Rothbard’s 30 pages of clear and scintillating prose, I knew I had learned more in one hour about business cycles or "macroeconomic fluctuations" than I had absorbed from two semesters of listening to lectures in Principles of Macroeconomics and Intermediate Macroeconomics and of poring over the jargon-filled, opaquely written, deadly dull textbooks assigned in these courses. Moreover, my deep interest in economics was now transformed into a burning passion for the subject.

Serendipitously, in the same semester that I was introduced to Rothbard and modern Austrian business-cycle theory, I was enrolled in a history-of-economic-thought course taught by Robert Cheney, SJ. Father Cheney was a superb, if somewhat low-key, teacher and near the end of the course he introduced the topic of the marginalist revolution. Referring to the early Austrians – Carl Menger, Eugen von Bhm-Bawerk, and the latter’s brother-in-law, Friedrich von Wieser – he characterized the formation of the Austrian School as a "unique event" in intellectual history. Never before, he declared, had such brilliant men worked so closely together to develop a common approach to economic phenomena. Father Cheney’s enthusiastic endorsement of the older Austrian School further bolstered my interest in learning more about the school.

As soon as I arrived back home that summer I began to devour all the libertarian and Austrian books I could lay my hands on. Through my local bookstore I ordered Jerome Tuccille’s Radical Libertarianism: A Right Wing Alternative. Although some of its illustrations are now a bit dated and it contains a few minor "lifestyle libertarian" confusions and deviations, it served, and still serves, as a compelling introduction to the radical-libertarian philosophy and movement.

I next began to scour public libraries in the suburbs of central New Jersey for books by Rothbard and the two Austrian business-cycle theorists he had referred to in his booklet, Mises and Hayek. Needless to say, I did not have much luck at first. Desperate, I then decided to venture into the Plainfield Public Library. Plainfield was a small city that, like Newark, had been torn by race riots in 1967. A city policeman chasing looters had been set upon by a black mob and beaten to death with a shopping cart. The National Guard, which had then been sent in to quell the riot, conducted an indiscriminate and warrantless house-to-house search for weapons that inflamed even the most peaceful black residents and left lingering bitterness and racial hatred.

Anyway, by the summer of 1971, "white flight" from the beautiful Victorian houses and Dutch colonials that encircled the once thriving shopping district of the city was almost complete, leaving the large, well-stocked library, housed in a new glass-walled building next to the increasingly rowdy high school, nearly always deserted. It was there one late spring evening that I finally located musty copies of America’s Great Depression, The Theory of Money and Credit, Human Action, Monetary Theory and the Trade Cycle, and Prices and Production. Despite the fact that I was an out-of-towner I somehow or other finagled a library card from the sympathetic and lonely librarian and was able to withdraw the books.

That summer I worked as a janitor at an engineering facility for AT&T. I always completed my assigned tasks quickly and distinctly recall spending a great deal of time ensconced in a stuffy broom closet with a naked overhead light bulb reading America’s Great Depression. Although the Mises and Hayek volumes presented more of a challenge because of some unfamiliar terminology and stylistic idiosyncrasies, by summer’s end I had grasped enough of the substantive theory to consider myself a reasonably well-informed student of Austrian business-cycle theory.

As my senior year began, I discovered the Books for Libertarians catalogue and ordered Rothbard’s Man, Economy, and State, Power and Market, and What Has Government Done to Our Money? as well as the first modern anarchocapitalist treatise, The Market for Liberty by Morris and Linda Tannehill.

The most memorable course my senior year was Political Economy taught by Professor Barry Bluestone, a young Marxist economist and member of URPE (Union of Radical Political Economists), newly hired by the department. Professor Bluestone knew and had worked with David Friedman on an antidraft coalition and was familiar with Rothbard’s writings. He was also somewhat conversant with the radical libertarian position. One day, while explaining this position to the class, he stated with a smirk that some libertarians actually believed that law could be enforced through private competing police agencies, although even they conceded that the functions of lawmaking and the judicial system would have to be monopolized by the State. I immediately raised my hand and pointed out that there were libertarians, myself included, who would relegate even these functions to private competition. I went on to explain why, under competition, honest courts would drive the corrupt and biased courts, such as he had told us existed in "Amerika," out of business. A good speaker and teacher, never at a loss for words, he was momentarily struck speechless.

After graduation from Boston College, I proceeded on to the graduate program in economics at Rutgers University, just ten minutes away from my parents’ home in New Jersey. Graduate school was hugely entertaining owing to the eclectic mixture of the Rutgers graduate economics faculty. The most noteworthy among the faculty included Paul Davidson, the prominent post-Keynesian who taught macro and monetary theory; Hugh Rockoff, a Chicago PhD and eminent economic historian who published a number of seminal articles on the free-banking era in the United States; Alexander Balinky, a Marx scholar, who claimed the distinction of having been Joseph Schumpeter’s last graduate assistant and whose office was occasionally picketed by the Maoist Progressive Labor party over some arcane point of Marxist dogma; Marc Miles, a student of Arthur Laffer’s, who later coauthored an international-economics textbook with Laffer and also published a book on supply-side monetary theory and policy; and the prolific international economist, H. Peter Gray, a former student of William Fellner’s at Berkeley and a strict, but tolerant and well-read, Keynesian who was to become my dissertation adviser. To Professor Gray, I owe a debt of gratitude for introducing me to the classical "monetary" approach to the balance of payments and exchange rates, an approach that was later revived and elaborated by Ludwig von Mises and that I investigated in my dissertation.

Overall, I was quite pleased with my experience at Rutgers. The diversity among the faculty led to my exposure to a broad range of literature and also to toleration of my vigorously expressed Austrolibertarian views by my professors and peers alike. My dissertation committee comprised a Keynesian, a monetarist, and a supply-sider. Perhaps as important, the transmogrifying of economics into a branch of applied mathematics, which had begun in the 1960s in American economics, had not yet progressed very far at Rutgers. Indeed, it was this trend that led to my enrolling at Rutgers. After I had received my GRE (graduate record exam) results in my senior year at BC, I went to see my faculty adviser to discuss my prospects for graduate education. Having scored in the 99th percentile in the verbal part of the exam and just below the 90th percentile in the economics part and on track to graduate with honors from BC, I thought I could write my own ticket to graduate school. I asked him what he thought of Princeton, where he had received his PhD. He took one look at my mediocre score in the math part (76th percentile), smiled indulgently, and said, "With that score you won’t get into Princeton and if you do, you won’t make it through. I suggest you apply to a school just up the road, Rutgers University." Although I was stunned and dismayed at the time, I remain grateful today for his straightforward advice.

It was while I was attending graduate school that I met Murray Rothbard. Shortly before my first semester began I was involved with the founding of the New Jersey Libertarian Party, of which I was subsequently elected treasurer. Our first convention was scheduled for February of 1973 and we required a keynote speaker. In November 1972, the president of the NJLP Bob Steiner and I attended a libertarian conference in New York City whose featured speakers included Rothbard, Bob LeFevre, and Karl Hess, among others. It was the first time I had seen any of these giants of the nascent libertarian movement in person and I was excited especially at the prospect of hearing Rothbard speak. Rothbard followed LeFevre on the program and, although I do not recall the precise topic of his talk that day, I was extremely impressed with the joyfulness, affability, and sense of humor he projected. The latter was especially on display during the question-and-answer period following his talk. When someone asked him his view of the extreme pacifism of LeFevre’s "autarchist" philosophy – which prohibited any form of violence even in self-defense – Rothbard replied, "Well, if someone was brandishing a mallet at me and I had a gun, I’d plug him."

We subsequently invited Rothbard to give the keynote address at the NJLP convention, and he graciously agreed to do it for the rubber-chicken dinner and paltry $75 we were able to offer him. Prior to his talk, I introduced myself to him and we spoke for a while about libertarian issues before I mentioned that I was a graduate student in economics and was going through Frank Fetter’s articles, the references to which I had gleaned from reading Man, Economy, and State. I never expected his reaction to my casual remark. His eyes immediately lit up and he seemed like he could barely contain his enthusiasm. He feverishly searched for a pen and asked me for my address and phone number and told me that he would pass on this information to people in New Jersey who had formed an Austrian reading group.

The following Monday I received a call from a student member of this group who invited me to attend the meetings of this reading circle, which was directed by Walter Grinder and included another one of my libertarian heroes, Walter Block. In the year-and-one-half that followed, I enjoyed increasing personal contact with Murray Rothbard, including visits to his home, meetings with him in his office at Brooklyn Polytechnic Institute, and arranging for him to address the graduate economics faculty and students at Rutgers. Rothbard also encouraged me to write a review essay on David Friedman’s book, The Machinery of Freedom, for the Libertarian Forum, and this became my first publication. Thus when I disembarked from Don Lavoie’s car in South Royalton, Vermont in June 1974 to attend the first Austrian economics conference to be convened in the United States, I, like Don and most of the other attendees, had arrived by way of Murray Rothbard.

Notes

[1] Murray N. Rothbard and Llewellyn H Rockwell, The Irrepressible Rothbard (Burlingame, California: Center for Libertarian Studies, 2000), p. 13.

This is reprinted from Mises.org.

Joseph Salerno [send him mail] is academic vice president of the Mises Institute, professor of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

Three weeks ago I read the news that a 24.78-carat "fancy
intense pink" diamond sold for $46,158,674 at an auction held
by Sotheby’s in Geneva, Switzerland. The winning bid for "The
Graff Pink," as it was named immediately after its purchase by
London jeweler Laurence Graff, was the highest price ever recorded
for a jewel at auction and more than double the $24.3 price paid for
the 35.56-carat Wittelsbach blue diamond purchased by Graff in 2008.
Nowhere in the article was there any mention of the monetary costs
of producing either gem, although I presume that in each case they
were a negligible fraction of the diamond’s price – if anyone
alive today even knows those costs

Last week I
accompanied my wife to Walgreen’s to buy lighted outdoor Christmas
figures for display in my front yard. A snowman on display in the
store caught our eye and we decided to purchase it only to be told
by the manager that it was already out of stock. My wife, ever the
negotiator, proposed that the manager sell us the figure at a $5
discount from the advertised price of the snowman. He agreed, even
though the snowman on display probably cost the store $5 or $10
more to produce than the unavailable packaged item because it involved
an additional hour of a stock clerk’s labor to remove it from the
packaging and assemble it.

Last night
I was shopping online for tickets to a New Jersey Nets basketball
game as a Christmas gift. The Nets are an NBA franchise in transit
from New Jersey to Brooklyn, New York, and their temporary home
for the next two years is the Prudential Center in Newark, New Jersey.
On December 12, the Nets play the Los Angeles Lakers. Prices for
individual tickets in the upper corner sections (the "nosebleed"
seats) start at $24, in the lower center at $160, and in the courtside
section frequented by celebrities at $400. Two days later, the Nets
take on the Philadelphia 76ers: starting prices for tickets in exactly
the same sections are $1.00, $29, and $150, respectively. So the
price differential between the same seats at the Lakers’ and 76ers’
games ranges from two-and-a-half times higher for the priciest seats
to 24 times higher for the cheapest seats. Presumably the average
money cost of producing a basketball game for an individual occupying
the same seat is identical for both games and does not differ much
for individuals occupying different seats at the same game.

Now despite
countless instances like these that we all regularly encounter in
our market activities, most people still take for granted the view
that costs of production basically determine prices. Furthermore,
they believe that if prices greatly exceed costs, it is the result
of price gouging, monopoly, or some other nefarious scheme on the
part of producers. But as Carl Menger, the founder of the Austrian
School of economics, brilliantly explained nearly 140 years ago,
past expenses incurred during the production of a good are completely
irrelevant to the determination of the current price of a good.
For Menger, the market price of a good is determined solely by the
relative valuations of goods and money by the buyers and sellers
of the good, in conjunction with the number of units of the good
currently in existence. The records and memories of how much money
was spent to enlist the labor and other resources needed to produce
the good have absolutely no effect on how much money people are
currently willing to exchange for a unit of the good.

But Menger
went even further and demonstrated that the (anticipated) selling
prices of goods actually determine the costs of production for a
good. Using the example of tobacco, Menger argued that if people
completely lost their desire for consuming tobacco, not only would
the prices of cigarettes, cigars, and pipes fall to zero, but raw
tobacco and the machines specifically designed to produce these
items would cease to command a price greater than zero, no matter
how much it cost to produce them.

For Menger
and modern Austrians, then, the ultimate source of value is the
ceaseless efforts of individual human beings to use their scarce
resources and money to improve their well-being by interacting with
one another on the market to achieve their most cherished goals
and desires while renouncing less-important desires and satisfactions.
The actual market prices and costs of production we observe are
simply the objective manifestation of this war of scarcity in the
human soul. It is the current or future goods we have to sacrifice
and the opportunities for satisfaction that we have to renounce
that are the only relevant "opportunity costs" of the
things that we purchase. These subjective and immediate experiences
of renunciation and sacrifice – and not some recorded sum of
money that one guy paid another guy to perform a production task
last month or last year – these are the costs that will influence
our decisions about what to buy and what not to buy and, thereby,
determine the prices we pay during this Christmas shopping season.

Modern mainstream
economists portray the Mengerian-Austrian theory of price as "extreme"
and "one-sided," supposedly over-emphasizing subjective
value while ignoring money costs of production. But it is precisely
the one-sidedness of Austrian theory that makes sense of our market
experiences. The higher cost "display" snowman sells for
a lower price than the packaged snowman because most consumers view
the former as a less-valuable "used" item. They do not
care about the stock clerk’s past exertions or wages. The Graff
Pink commanded such a high price at auction because it is so scarce
in relation to the number of people who want to possess it and the
intensity of their desires for it relative to money and other things.
Even if the production costs of the diamond were the same, the sudden
discovery of 10,000 diamonds identical to the Graff Pink would drive
its price down far below the recorded auction price. And I need
not belabor the point that the price differential of up to 2,300
percent for the same seat in the same arena two days apart exists
because, for most basketball fans, the experience of watching the
talent-laden Lakers with their coaching icon and glorious tradition
shred the dreadful and itinerant Nets is vastly preferable to witnessing
a dreary contest between the Nets and the equally woeful 76ers.

The laws of
value and price discovered by Carl Menger are universal and immutable.
They are true and apply everywhere and at all times, so long as
human beings consciously seek to improve their well-being by using
their scarce time, energy, money, and material resources to attain
their most important goals.

Now, let me
go back online and check if the price of those unsold Nets-76ers
tickets has plunged below a dollar yet.

This is
reprinted from Mises.org.

December
10, 2010

Joseph
Salerno [send him mail]
is academic vice president of the Mises
Institute, professor of economics at Pace University, and editor
of the Quarterly
Journal of Austrian Economics.

When I was an undergraduate at Boston College in the 1970s,
one of the weekly underground newspapers that catered to the 250,000
college students in the Boston metropolitan area featured a page-length
ad by the graduate economic students of the Boston chapter of URPE
(Union of Radical Political Economists). The ad appealed to the college
students of Boston to withdraw all the cash from their checking and
saving accounts the following Friday as a protest against the Vietnam
War. Being an economics major and neophyte Austrian, I realized that
such an action would cause severe difficulties for the banks, because
they only held (at the time) about 13 cents of every dollar of demand
deposits and 3 cents of every dollar of saving deposits in the form
of cash. The rest of the deposits were lent out for longer or shorter
periods of time despite the fact that the banks had contractually
obligated themselves to redeem the entire amount on demand. There
was much discussion of such an action on the BC and other Boston campuses
during the week leading up to the mass action. Of course, when Friday
rolled around the event fizzled, because students were too busy partying
(Thursday being the unofficial start of the weekend). But the idea
was a sound one.

Murray Rothbard never tired of pointing out that in a free society
plain citizens could bring inflationary fractional reserve banks to
heel through a deliberate and concerted campaign to get people to
withdraw their deposits in cash. “Antibank Leagues,” as
he called them, would be formed by those “who know the truth
about the real insolvency of the banking system” to “urge
bank runs.” The bank runs or their very threat would “be
able to stop and reverse monetary expansion.”

Now we have
the first stirrings of the formation of such a league in the Move
Your Money campaign. This modest but growing movement is urging
people to move their money from big banks to small community banks
and credit unions. Establishment media such as Time, Newsweek,
The Nation, Salon and CBS News have already taken
note of the campaign. The organizers are urging people to lobby
their friends, organizations, and municipal governments to move
their money and to use online social networks to propagate the idea.

The organizers
of the Move Your Money campaign of course are superficially focused
on the fact that big banks and financial institutions were at the
eye of the recent financial storm. They do not understand that it
is the entire system of fractional reserve banking, which has been
cartelized, regulated and bailed out by the Federal Reserve System
for nearly a century, that is mainly at fault for the financial
meltdown. Still, the idea underlying Move Your Money is a sound
one that needs to be expanded to include mass deposit withdrawal
from all banks.

Depositors
have more power over banks than customers have over normal businesses
in a market economy. The reason is that banks are permitted by law
today to hold only about ten percent of demand deposits and zero
percent of so-called “saving” deposits in ready cash reserve,
even though they are contractually obligated to redeem these deposits
in cash whenever the depositor requests. Thus the banking system
would not be able to withstand a concerted campaign to withdraw
cash and the Fed would have to shut down the banking system (including
ATMs) to sort things out. It would take months, if not a year, before
the Fed could print up and deliver sufficient quantities of cash
to the banks to meet all of their depositors’ demands in full.
In the meantime cash withdrawals might be limited to small quantities
biweekly or monthly as occurred in Argentina during the last meltdown
of the peso in 2000–2001.

So the weapon
to thwart inflation and deficit spending and by extension socialized
health care and imperialist wars is finally now in the grasp of
American citizens and partialy unsheathed. Let us wish the Move
Your Money campaign success and nudge its economic knowledge and
political ideology in the right direction.

This is
reprinted from Mises.org.

March
3, 2010

Joseph
Salerno [send him mail]
is academic vice president of the Mises
Institute, professor of economics at Pace University, and editor
of the Quarterly
Journal of Austrian Economics.

Rothbard’s
explanation of how the temporary and benign recession-adjustment
process was impeded and diverted into the Great Depression ran
counter to the view that Milton Friedman and Anna Schwartz put
forth in their classic work A
Monetary History of the United States, 1867–1960,
also published in 1963. According to Friedman-Schwartz, it was
the collapse of the money supply due to the negligence of the
Fed that turned what should have been a "garden-variety recession"
into the Great Depression. The Friedman-Schwartz view came to
dominate mainstream macroeconomics after the collapse of the Keynesian
consensus in the 1970s. Indeed, it is today the conventional explanation
of the Great Depression, which Bernanke holds to and which governs
the policy response of the Fed to the current financial crisis.

Thus, for
decades Rothbard and a handful of Misesian economists were virtually
alone in maintaining that Hoover’s interventionist policies, particularly
as they impacted the industrial labor market, were mainly responsible
for transforming what should have been a short and sharp recession
into the economic catastrophe of epic proportions that we now
know as the "Great Depression." Now comes a National
Bureau of Economic Research (NBER)
working paper written by a prominent macroeconomist with impeccable
academic credentials – and accepted for publication by the
influential Journal of Economic Theory – which challenges
the Friedman-Schwartz view and lends ample evidence to the Rothbardian
position on the genesis of the Great Depression. In writing his
article, "Who – or What – Started the Great Depression,"
UCLA economist Lee E. Ohanian spent four years poring over wage
data and culling information from sources related to Hoover and
his administration.

In order
to quantify the magnitude of the effects of Hoover’s industrial
labor market program, Ohanian used these data and sources to construct
and calculate a general-equilibrium model of the Hoover economy
and compared it to how the model economy would have behaved without
the Hoover program.

Ohanian contends
that Hoover’s policy of propping up wages and encouraging work
sharing "was the single most important event in precipitating
the Great Depression" and resulted in "a significant
labor market distortion."

Thus, "the
recession was three times worse – at a minimum – than
it otherwise would have been, because of Hoover."

The main
reason is that in September 1931 nominal wage rates were 92 percent
of their level two years earlier. Since a significant price deflation
had occurred during these two years, real wages rose by
10 percent during the same period, while gross domestic product
(GDP) fell by 27 percent. By contrast, during 1920–1921 –
a period that was accompanied by a severe deflation – "some
manufacturing wages fell by 30 percent. GDP, meanwhile, only dropped
by 4 percent."

As Ohanian
notes, "The Depression was the first time in the history
of the US that wages did not fall during a period of significant
deflation." Ohanian estimates that the severe labor-market
disequilibrium induced by Hoover’s policies accounted for 18 percent
of the 27 percent decline in the nation’s GDP by the fourth quarter
of 1931.

Read
the rest of the article

September
10, 2009

Joseph
Salerno [send him mail]
is a senior fellow at the Ludwig
von Mises Institute, professor of economics at Pace University,
and editor of the Quarterly
Journal of Austrian Economics.

Murray
Rothbard began work on this magnum opus on January 1, 1952.[1]
On May 5, 1959 Rothbard wrote to his mentor, Ludwig von Mises, informing
him, “È finito!”[2]
The more-than-seven years that it took Rothbard to complete Man,
Economy, and State elapsed during, what was up to that time,
one of the most sterile and retrogressive decades in the history
of scientific economics, dating back to the birth of the science
in the systematic treatise of Richard Cantillon published in 1755.[3]
In view of the progressive degeneration of economic thought throughout
the 1950s, the eventual publication of Rothbard’s treatise in 1962
was a milestone in the development of sound economic theory and
an event that rescued the science from self-destruction.

The era of
modern economics emerged with the publication of Carl Menger’s seminal
work, Principles
of Economics, in 1871. In this slim book, Menger set forth
the correct approach to theoretical research in economics and elaborated
some of its immediate implications. In particular, Menger sought
to identify the causal laws determining the prices that he observed
being paid daily in actual markets.[4]
His stated goal was to formulate a realistic price theory that would
provide an integrated explanation of the formation of market phenomena
valid for all times and places.[5]
Menger’s investigations led him to the discovery that all market
prices, wage rates, rents, and interest rates could ultimately be
traced back to the choices and actions of consumers striving to
satisfy their most important wants by “economizing” scarce means
or “economic goods.” Thus, for Menger, all prices, rents, wage,
and interest rates were the outcome of the value judgments of individual
consumers who chose between concrete units of different goods according
to their subjective values or “marginal utilities” to use the term
coined by his student Friedrich Wieser. With this insight was born
modern economics.

Menger’s causal-realist
approach to economic theorizing quickly began to attract outstanding
followers both in Austria and, later, throughout Continental Europe
and the Anglophone countries. What came to be called the “Austrian
School” grew rapidly in prestige and numbers and by World War I
theoretical research based on the causal-realist approach was considered
the cutting edge of economic science. For various reasons, the school
suffered an amazingly rapid decline, especially in Great Britain
and the United States but also in Austria, after the war. By the
1920s, the causal-realist approach had been overshadowed by the
partial equilibrium approach of Alfred Marshall in Great Britain,
the United States, and even parts of Continental Europe. Its star
fell further with the importation of the mathematical general-equilibrium
approach of Léon Walras into the English-speaking world in
the early 1930s. A little later Menger’s approach was nearly buried
by the Keynesian revolution. Hence, by the advent of World War Two
there ceased to be a self-conscious, institutionally embedded network
of economists actively engaged in teaching and research in the Mengerian
tradition.[6]

After World
War II, a new and stifling orthodoxy known as the “neoclassical
synthesis” had descended upon economics, especially in the United
States. This so-called “synthesis” was actually a hodgepodge of
the three disparate approaches that had overwhelmed the Mengerian
causal-realist approach in the interwar period. It jumbled together
the Marshallian and Walrasian approaches to price determination
with Keynesian macroeconomics. The first two approaches focused
narrowly on analyzing the determination of unreal, equilibrium prices
either in single markets (partial equilibrium) or in all markets
simultaneously (general equilibrium). Keynesian macroeconomics denied
the efficacy of the price system altogether in coordinating the
various sectors of an economy confronted with the “failure of aggregate
demand.” This latter condition was supposed to have caused the Great
Depression and was further alleged by Keynes and his followers to
be an endemic feature of the market economy. The neoclassical synthesis
thus proclaimed that the price system worked efficiently to allocate
scarce resources only if the government deftly employed fiscal and
monetary policies to maintain a level of aggregate demand or total
spending in the economy that was sufficient to absorb a full-employment
level of output.

This new orthodoxy
also promoted hyperspecialization and a corresponding disintegration
of economic science into a clutter of compartmentalized subdisciplines.
Even the theoretical core of economics was now split into “microeconomics”
and “macroeconomics,” which had seemingly very little connection
to each other. Specialized journals proliferated and resulted in
a radical change in the research culture, with a premium on the
writing and reading of the latest journal articles. The few books
that were published were technical monographs or dumbed-down textbooks;
the era of the great systematic treatise on economic theory was
at a close.[7]

Almost
the sole holdout against this intellectual revolution was Ludwig
von Mises. With the publication in 1940 of Nationalökonomie,
the German-language forerunner of Human
Action, Mises singlehandedly recovered and greatly advanced
the system of causal-realistic economic theory.[8]
In particular, he integrated Mengerian value and price theory with
his own earlier restatement of monetary theory. In addition, he
provided a rigorous foundation for the entire system of economic
theory in a broader science of human action that he himself had
expounded in earlier works and now further elaborated. This science
of human action he now dubbed, “praxeology.” Unfortunately, Mises’s
great treatise was almost completely ignored by the postwar economics
profession.[9]
However, while it failed to inspire an immediate renewal of the
Mengerian scientific movement, Human Action did lay the
foundations for its later revival. This revival was to be ignited
by the publication of Man, Economy, and State in 1962.[10]

When Rothbard
initiated work on what would turn out to be a full-blown treatise,
he conceived of the project as a book suitable both for lay readers
and for college instruction that would bring “to the surface and
[clarify] the step-by-step nature of the edifice which Mises had
constructed but more or less had taken for granted that his readers
would understand.”[11]
This was necessary because Human Action was addressed to
a scholarly audience, and Mises had accordingly assumed a great
deal of familiarity among his readers with many of the concepts
and theorems of what he called “modern subjectivist economics.”
Thus Rothbard intended “to do for Mises, what McCulloch did for
Ricardo,” that is, to make his work comprehensible to an intelligent
lay readership.[12]

But Rothbard
quickly realized that his original plan was flawed and had to be
abandoned for three reasons. First the traditional textbook format
was too disorganized in its arrangement and treatment of various
topics to accommodate the development of economic theory in the
logical step-by-step manner that Rothbard had envisioned. As such,
it was inadequate to convey a “sense of the grand sweep, of the
coherent system integrating and pervading all aspects of sound economic
doctrine.”[13]

Second, Rothbard
discovered that there existed “a lot of gaps” in Mises’s “economic
organon” that he had to “fill in” himself.[14]
In addition, Rothbard’s step-by-step deductions led him to the conclusion
that Mises’s theory of monopoly, which was held by most economists
in the Mengerian tradition, was irreparably flawed and had to be
completely revised. The book was thus turning out “to involve a
good deal of original contribution” on Rothbard’s part.

Third, as he
proceeded in writing the book, Rothbard was concurrently researching
the literature and reading widely, and he began to realize that
Human Action had emerged from a very broad tradition that
included many more economists than just Mises and his famous predecessors
and direct protégés (e.g., Friedrich A. Hayek) in the
native Austrian School. Moreover, as Rothbard read and wrote, it
became increasingly clear to him that the various strands of this
theoretical tradition, which included many important American and
British contributions in addition to the great Austrian works, had
not yet been completely integrated and their principles fully delineated
in a systematic treatise. Accordingly, Rothbard concluded, “many
essential points must be deduced originally or with the help of
other works” and therefore “the book cannot simply be a paraphrase
of Human Action.”[15]
Rothbard’s proposed book was thus transformed, in the very process
of its writing, from a straightforward exposition of the principles
of received doctrine of the Austrian School narrowly conceived to
a treatise elaborating a complete system of economic theory and
featuring many original, and even radically new, deductions and
theorems.

Mises himself
immediately recognized the profound originality and significance
of Rothbard’s contribution. In his review of Man, Economy, and
State, Mises wrote
that Rothbard

joins the
ranks of eminent economists by publishing a voluminous work,
a systematic treatise on economics … . In every chapter of his
treatise, Rothbard … adopt[s] the best teachings of his predecessors
… and add[s] to them highly important observations … .[16]

Mises went
on to characterize Rothbard’s work as

an epochal
contribution to the general science of human action, praxeology,
and its practically most important and up-to-now best-elaborated
part, economics. Henceforth, all essential studies in these
branches of knowledge will have to take full account of the
theories and criticisms expounded by Dr. Rothbard.[17]

Given Mises’s
exacting scholarly standards and his well-known parsimony in paying
compliments for scientific contributions, this is high praise indeed
for a book published by a thirty-six-year-old economist.[18]
More importantly, Mises evidently viewed Rothbard’s work as opening
a new epoch in modern economic science.

Rothbard himself
was not reluctant to indicate the respects in which he considered
his treatise to have been a departure from or an advance upon Mises’s
work. Foremost among Rothbard’s theoretical innovations was his
formulation of a complete and integrated theory of production. Previously,
production theory in causal-realist analysis was in disarray and
had consisted of a number of independent and conflicting strands
of thought that treated capital and interest, marginal-productivity
theory, rent theory, entrepreneurship, and so on in isolation. Somewhat
surprised by this yawning gap in production theory, Rothbard commented,

Mises has
very little detail on production theory, and as a consequence
it took me many false starts, and lots of what turned out to
be wasted effort, before I arrived at what satisfied me as a
good Production Theory. (It’s involved emancipation from 90
percent of current textbook material.)[19]

In Man,
Economy, and State, Rothbard elaborates a unified and systematic
treatment of the structure of production, the theory of capital
and interest, factor pricing, rent theory, and the role of entrepreneurship
in production. Furthermore, production theory is presented as part
of the core of economic analysis and covers five of the book’s twelve
chapters and approximately 30 percent of its text. One of Rothbard’s
greatest accomplishments in production theory was the development
of a capital-and-interest theory that integrated the temporal production-structure
analysis of Knut Wicksell and Hayek with the pure-time-preference
theory expounded by Frank A. Fetter and Ludwig von Mises. Although
the roots of both of these strands of thought can be traced back
to Böhm-Bawerk’s work, his exposition was confused and raised
seemingly insoluble contradictions between the two.[20]
They were subsequently developed separately until Rothbard revealed
their inherent logical connection.

Despite Mises’s
lavish praise for the book as an epochal leap forward in economic
science as well as general recognition among many adherents, observers,
and critics of the contemporary Austrian movement that Man,
Economy, and State is indeed a foundational work in the renaissance
of modern Austrian economics, there are two crucial questions regarding
the book that, surprisingly, have never even been addressed, let
alone resolved. The first question relates to the precise sense
in which Rothbard’s treatise can be described as a work in “Austrian
economics” and how Rothbard himself conceived the connection between
his treatise and this body of received doctrine. The second question
concerns Rothbard’s perception of the relationship of the theoretical
system expounded in his treatise and the neoclassical synthesis
of the 1950s. As we shall see, the answers to these questions are
not only surprising but are pregnant with implications for interpreting
recent developments in Austrian economics and evaluating its future
possibilities and prospects.

Before addressing
the question of the doctrinal filiation between Man, Economy,
and State and Austrian economics, it is instructive to examine
Mises’s attitude toward the Austrian School, because it is not as
straightforward as is generally supposed and it clearly influenced
Rothbard’s view. As early as 1932, Mises had argued that all the
essential ideas of the Austrian School of economics had been absorbed
into the mainstream of what he called “modern subjectivist economics.”[21]
According to Mises,

the Austrian
and the Anglo-American Schools and the School of Lausanne …
differ only in their mode of expressing the same fundamental
idea and … are divided more by their terminology and by peculiarities
of presentation than by the substance of their teachings.[22]

Now admittedly
this opinion was delivered at an economics conference in Germany
that was heavily attended by the still influential remnants of the
German Historical School who were antagonistic to economic theory
of all kinds. It certainly can be reasonably argued that, given
this venue, Mises’s remarks were intended as a generic defense of
theoretical research in economics. In fact, a year earlier Mises
had written,

Within
the field of modern economics the Austrian School has shown
its superiority to the School of Lausanne and the schools related
to the latter, which favor mathematical formulations, by clarifying
the causal relationship between value and cost, while at the
same time eschewing the concept of function, which in our science
is misleading.[23]

In spite of
the foregoing caveat, Mises continued to maintain that the label
“Austrian School” was an anachronism, arguing in the last publication
of his career in 1969, that the Austrian School constituted a closed
chapter in the history of economic thought from about the time of
Menger’s death in 1921. By that time, according to Mises,

all the
essential ideas of the Austrian School were by and large accepted
as an integral part of economic theory … [and] one no longer
distinguished between an Austrian School and other economics.
The appellation “Austrian School” became the name given to an
important chapter of the history of economic thought; it was
no longer the name of the specific sect with doctrines different
from those held by other economists.[24]

As noted, Mises
used the term “modern subjectivist economics” to describe the new
synthesis of theoretical approaches that he believed had begun to
emerge in the 1920s. There are two problems with this label, which
may explain Mises’s ambivalent attitude toward the inclusion of
the Marshallian and Lausanne Schools under its head. First, by World
War I most theoretical economists at least paid lip service to some
version of subjective-value theory, so that subjectivism was no
longer a distinguishing characteristic of a unique approach to theoretical
research. Second, as we have seen in our own time, the term subjectivism
is a notoriously elastic term that can be stretched to denote even
the nihilistic approach to economic theory famously propounded by
George Shackle, the later Ludwig Lachmann, and a number of post-modernist
and hermeneutical economists.[25]

Rothbard evidently
followed Mises in construing the term “Austrian School” as the designation
for an important movement in the history of economic thought. In
the text of Man, Economy, and State, Rothbard uses the
terms “Austrian” or “Austrian School” at least ten times enclosed
in quotation marks, as he naturally would if he were referring to
a movement that had only historical significance to the contemporary
reader. The few times he uses these terms without quotation marks,
they clearly refer to historical doctrines or controversies such
as “the Austrian-Wicksteedian theory of price” or the Austrian School
versus Alfred Marshall on the relationship between prices and costs.
The single time that Rothbard mentions “Austrian” in his preface
to the first edition, he does so in the phrase “the ‘Austrian’ economists,”
placing the word in quotation marks and using it in a sentence featuring
verbs in the past tense.[26]

This textual
exegesis is not meant to imply that Rothbard did not consider his
work as continuing the great tradition originated by the early Austrian
economists. Indeed Rothbard wrote of

the myth
among economists that the Austrian School is effectively dead
and has no more to contribute and that everything of lasting
worth that it had to offer was effectively stated and integrated
in Alfred Marshall’s Principles.[27]

Rather, the
point is that Rothbard’s goal was to recover and advance a much
broader doctrinal tradition, for which Menger’s and Böhm-Bawerk’s
works were indisputably the taproot. Thus in his preface, Rothbard
stated, “This book, then, is an attempt to fill part of the enormous
gap of 40 years’ time.”[28]
The “gap” Rothbard is here referring to separates the publication
of Man, Economy, and State and that of the last three systematic
economics treatises to appear in English, by Philip Wicksteed (1910),
Frank Fetter (1910), and Frank Taussig (1911).[29]
The treatises of Wicksteed and Fetter in particular were in what
Rothbard called “the praxeological tradition.” Their procedure,
like his own, was “slowly and logically to build on the basic axioms
an integrated and coherent edifice of economic truth.”[30]
The main reason that his treatise contains numerous references to
the historical Austrian School was because Rothbard judged the members
of this school to have “best perceived this method and used it most
fully and cogently. They were the classic employers, in short, of
the ‘praxeologic’ method.”[31]

In contrast
to Mises’s “modern subjectivist economics,” Rothbard’s reference
to the “praxeologic method” drew a bright line between those who
employed Menger’s procedure in logically deducing economic laws
from a few basic facts of reality and those who did not. “Praxeology”
was Mises’s explicit and self-conscious elaboration of this venerable
procedure for discovering the causal laws governing market phenomena.
The early Austrian School and their followers, and even some of
the better classical economists, had used this research method without
being fully aware of it. The praxeological method begins with the
self-evident reality of human action and its immediate implications.
It then introduces other empirical postulates that reflect the concrete
conditions of action from which emerge the historically specific
market phenomena that the economist seeks to analyze. It is, therefore,
necessarily about real things. It is for this reason that it has
no use for fictions and figments like the “representative firm,”
“the perfectly competitive market,” or “the social-welfare function”;
nor does it concern itself with the existence, uniqueness, and stability
of general equilibrium.

The highly
selective use that the praxeological method makes of imaginary constructs
has a single aim: the systematic elaboration of a unified body of
theory comprising meaningful propositions about the causes of economic
phenomena in the world as it is, has been, or is likely to be. As
Mises put it, the praxeological method

studies
acting under unrealized and unrealizable conditions only from
two points of view. It deals with states of affairs which, although
not real in the present and past world, could possibly become
real at some future date. And it examines unreal and unrealizable
conditions if such an inquiry is needed for a satisfactory grasp
of what is going on under the conditions present in reality.[32]

Mises concluded,
“The specific method of economics is the method of imaginary constructions
… . [I]t is the only method of praxeological and economic inquiry.”[33]

Rothbard took
Mises’s dictum seriously and for seven years immersed himself in
employing and perfecting this method in elaborating an integrated
system of economic theory. This explains why Rothbard identified
the use of the praxeological method, rather than a loose subjectivist
orientation, as the hallmark and acid test of scientific economics.
During the long period of sustained effort in writing the present
volume, Rothbard thus became a master practitioner of the praxeological
research method. He not only skillfully used the various imaginary
constructs whose nature and specific use Mises had explicitly formulated
in Human Action, but also devised new ones as needed to
assist in the deduction of new theorems to elucidate unexplained
features of economic reality.[34]

Let us take
a detailed example to illustrate Rothbard’s procedure. In confronting
the daunting task of untangling and systematizing causal-realist
production theory, Rothbard postulates an imaginary world of specific
factors, in which each and every individual laborer, parcel of land,
and capital good is irrevocably committed to the production of a
single product and cannot be converted to use in any other production
process.[35]

Rothbard also
imagines two variations of this world. In the first, the cooperating
factors in each stage of a given production process jointly own
the product (i.e., capital good) of that stage and, since the services
of all capital goods are embodied in the final product, therefore
all factors jointly own the final good that is sold to consumers
in exchange for money. The money receipts are then distributed according
to the terms of a voluntary contract among all joint factor owners.
In the second variation, a single capitalist or consortium of capitalists
pay the various factors participating in the amalgamated process
in advance of the sale of the final product on the market and in
exchange receive ownership of the capital goods from every stage
as well as the stock of final consumer goods and the money revenue
obtained from its sale to consumers.[36]
In both variations of the construct, an evenly rotating economy
is assumed in order to abstract from the problems of entrepreneurship.

With the assistance
of this construct, Rothbard deduces a number of important theorems
and principles of production. First, in the case of joint ownership
of the product by the collaborating land and labor factors, there
are no independent, primordial owners of capital goods, which are
intermediate goods in the production process and therefore resolvable
into the labor and land inputs that cooperated in producing them.

Second, and
consequently, all income in production consists of wages and land
rents – capital goods, which are merely way stations on the
path to the final product, do not earn any net rents for their owners.
Third, all cooperating laborers and land owners must wait for their
income from the inception of the productive process to its termination
and the subsequent sale of the final product to consumers. Therefore,
fourth, the size of the aggregate income of the cooperating factor
owners depends solely and completely on the demand of consumers
for their product. A relative shift in relative consumer demand
between final goods will fall solely and completely on the specific
factors that are involved in the production of the affected products.

Once the capitalist
is introduced into this fictitious world, a fifth principle becomes
immediately evident: the function of the capitalist is to relieve
the factor owners of the burden of waiting for income, as he advances
them present money payments from his accumulated savings for the
joint product of their labor and land services. In exchange for
these present wages and rents, the capitalist receives an interest
return on his invested funds, which is based on time preference
and reflects the value discount of the anticipated future
monetary revenues he will be receiving relative to the present
money payments he expends on the factor services. Conversely, the
factor owners agree to this deduction from the full-sale proceeds
of their product that is embodied in their discounted wage and rent
payments from the capitalist, because these present payments unshackle
them from the temporal dimension of the production process.

A sixth principle
is that, even in a world of capitalist ownership of the entire production
process, capital goods still do not generate a net monetary income
for their owners, because the net interest return obtained by the
capitalist-owners is fully derived from the discount incorporated
into the present wages and rents paid to owners of labor and land
factors, who are the only net recipients of incomes in a world without
capitalists. Thus wage, rent, and interest incomes logically exhaust
the entire proceeds from the sale of the final product, leaving
no remainder for net payments to capital goods.[37]

This analysis
of Rothbard’s hypothetical world of purely specific factors also
is pregnant with implications for the role of subjective costs in
production and pricing. Given that specific land factors and capital
goods have no alternative uses in this imagined world, an immediate
inference is that their use in production is “costless” and their
respective supply curves perfectly inelastic. Labor, specific to
a particular production process though it may be, in contrast, is
costly to use because it has an alternative use in the production
of “leisure,” which is an instantaneously producible consumers’
good. Thus, in a world without capitalists, labor involves the disutility
of foregoing both leisure and present goods. The arrival of capitalists
on the scene reduces, but does not eradicate, the disutility of
labor.

These inferences
starkly demonstrate the principle that all production costs are
ultimately and essentially subjective. Leisure preferences and time
preferences thus determine the ultimate costs of production and
these costs are purely subjective and consist of the valuation of
the forgone utilities of the producers against the anticipated monetary
revenues from consumers. Once these (subjective) producers’ costs
have all been incurred, the stocks of the various kinds of consumers’
goods emerge from the production process ready for sale to consumers.
Unless their producers have a direct use for the goods, their sale
to consumers is completely costless and their relative prices are
determined solely by the structure-of-value scale of consumers.
Hence, barring speculation on future price variations, the supply
curves for the various stocks of consumer goods are also perfectly
inelastic. In sum, “production costs” – that is, the disutilities
of labor and waiting that have already been incurred, or the utilities
of leisure and immediate enjoyment that have already been forgone,
by producers – have no role whatever in determining the prices
of the existing stocks of consumers goods.

Rothbard also
wields the fictive construction he formulated to demolish Marshallian
price theory, according to which prices were determined by two scissor
blades: the subjective values of consumers composing one blade while
the objective or real costs of production compose the other. While
Marshall and his contemporary followers concede that, in the transient
immediate run the subjective-value blade predominates in determining
prices, they maintain that in the long-run equilibrium, where the
permanent tendencies of the economy reveal themselves, the cost-of-production
blade governs because the price of every product conforms to its
average cost of production. Thus Marshallians superficially conclude
that costs must therefore determine prices.

However, Rothbard
easily demonstrates that this conformity between price and average
cost in long-run equilibrium or the ERE – which itself is not
real but a useful imaginary construction – is the result of
the same principles governing the determination of the actual prices
that momentarily prevail and at which exchanges take place in real-world
markets. In a world where all factors are purely specific to a single
production process, Rothbard shows that in the long run, where entrepreneurial
errors are absent and profits and losses have been totally eliminated,
the aggregate payments to all factors cooperating in a given production
process are rigidly governed by, and must perfectly correspond to,
the aggregate revenues spent on the final product by consumers minus
the interest return to capitalists. Accepting this deduction and
dividing both aggregate revenues and aggregate factor payments by
the quantity of product implies that the direction of causation
of the equality between price and average cost, especially
in the long run, runs from the former to the latter.

Rothbard’s
formulation and deployment of this imaginary world of purely specific
factors epitomizes the application of the praxeological method in
theoretical research. As Mises pointed out,

The main
formula for designing of imaginary constructions is to abstract
from the operation of some conditions present in actual action.
Then we are in a position to grasp the hypothetical consequences
of the absence of these conditions and to conceive the effects
of their existence.[38]

Thus Rothbard
first imagines that in this world all production processes are owned
by the cooperating factors themselves, who must endure without income
until the final product has emerged and is sold to consumers. By
first analyzing the state of affairs in abstraction from the existence
of the capitalist, we are able to grasp his function of advancing
his accumulated savings to the factors before the sale of the final
product and to comprehend the nature of his income as a return to
time preference, which has been previously established much earlier
in the chain of praxeological deductions as an immediate inference
from the Action Axiom. In assuming away the capitalist we have also
assumed away monetary costs of production, since the only money
payments are directly from consumers to the joint factor owners
of the final product. This enables us to see that total monetary
costs are essentially determined by and equal to these total money
expenditures by consumers as mediated through capitalists who have
previously advanced present wages and rents to the factor owners.

In later chapters,
Rothbard proceeds to drop the assumption of purely specific factors
and admits varying degrees of specificity among factors into his
analysis. The effects of relatively nonspecific factors in the production
process can now be identified by investigating how their presence
modifies the outcomes of a hypothetical world of purely specific
factors. Since nonspecific factors can be converted to use in a
wide range of production processes, a relative shift in consumer
demand, ceteris paribus, will alter their allocation while
only temporarily affecting their prices. But the principles already
deduced regarding specific factors still hold sway in this more
complex world and so we are able to conclude that prices of the
relatively specific factors in any process will bear the brunt of
the change in aggregate consumer expenditures on a given final product.

Thus, for instance,
in the case of a relative decline of the demand for diamonds, all
other things equal, the capital values of diamond mines and the
wages of highly skilled jewelers will also decline while the wages
of diamond miners and rents of electric generators will undergo
little change as these nonspecific factors shift to other employments.
Furthermore, introduction of nonspecific factors into the analysis
will make a large part of the monetary costs of production appear
to be given to the capitalist-employer of factors independently
of the demand for his particular good. As a result, the capitalist
will react to a change in his costs by adjusting his level of production,
just as he would in the case of a change in the demand for his product.
Hence, in the absence of a long chain of deductive reasoning utilizing
imaginary constructs, à la Rothbard and earlier Austrians,
a superficial view of the matter will render Marshall’s metaphor
of the two blades of the scissors as a plausible representation
of reality. Without sedulous employment of the praxeological method,
it would be impossible to conceive that it is the demands of consumers
for the outputs of a wide range of production processes, as mediated
through the bids of capitalist-entrepreneurs, as ultimately and
exclusively determinative of the prices of all factors, relatively
nonspecific as well as purely specific.

This praxeological
method so masterfully deployed by Rothbard had been used, even if
implicitly and crudely, as the primary tool of theoretical research
in economics up through the 1930s. However, as Rothbard points out,
it was precisely “Marshall’s distrust of ‘long chains of deduction,’”
in addition to “the whole Cambridge impetus toward” making short-cut
assumptions designed to make their theory more testable that led
to the gradual breakdown of the praxeological method and its replacement
by positivism.[39]

By the early
1950s, the praxeological method and verbal logic had been eclipsed
by positivism and mathematical models. For example, the leading
economist of the postwar era, Paul Samuelson, now maintained that
the task of economic theory was to “organize the facts into useful
and meaningful” patterns and in so doing to provide economical descriptions
of complex reality.[40]

Economic theorems,
then, had to be framed in a manner that was “operationally meaningful.”
According to Samuelson, a meaningful theorem was “simply a hypothesis
about empirical data that could conceivably be refuted, if only
under ideal conditions.” Whether such a theorem was “false,” or
“of trivial importance,” or even of “indeterminate” validity was
not as important to Samuelson as it being framed as a proposition
capable in principle of empirical refutation.[41]

For Samuelson,
theorems would thus be embodied and expressed in highly simplified
mathematical models that could be subjected to empirical
tests if the data were available. Since, admittedly, the
requisite data were rarely accessible, the most that could be expected
from such abstract models was that they “often point the way to
an element of truth present in a complex situation” and that they
“afford tolerably accurate extrapolations and interpolations.”[42]

However, in
a retrospective, Samuelson lamented the lack of success of the crude
positive method in economics, writing,

When I
was 20 … I expected that the new econometrics would enable us
to narrow down the uncertainties of our economic theories. We
would be able to test and reject false theories. We would be
able to infer new good theories … [I]t has turned out not to
be possible to arrive at a close approximation to indisputable
truth [and] it seems objectively to be the case that there does
not accumulate a convergent body of econometric findings, convergent
on a testable truth.[43]

Of course this
does not mean that Samuelson’s faith in the positivist method was
shaken. Rather, it confirmed his prior belief that truth was multifaceted
and therefore “Precision in deterministic facts or in probability
laws can at best be only partial and approximate.”[44]

If Samuelson
downplayed the attainment of truth as a goal of theoretical research
in favor of the formulation of operationally meaningful theorems,
the other avatar of positivism in postwar economics, Milton Friedman,
jettisoned all references to truth and realism in assessing the
validity of economic theorems. Rejecting Samuelson’s crude logical
positivism, Friedman reveled in the falsity or “unrealism” of a
theorem’s assumptions and offered the seemingly more sophisticated
alternative of “falsificationism,” which was allegedly based on
Karl Popper’s philosophy of science.[45]
Friedman’s position was concisely summed up in Mark Blaug’s statement,
“No assumptions about economic behavior are absolutely true and
no theoretical conclusions are valid for all times and places …
.”[46]

Despite the
formal adherence by most of the profession to positivist methods
during the 1950s, Rothbard’s quest to recover and reconstruct the
edifice of sound economic theory drove him to scour the contemporary
literature for new ideas and insights as carefully as he had scrutinized
the writings of his predecessors in the causal-realist tradition.
Rothbard’s treatise contains citations from over 150 books, journal
articles, conference proceedings, government documents, dissertations,
and policy- and research-institute monographs published between
the appearance of Human Action in 1949 and Man, Economy,
and State in 1962.[47]
Rothbard’s deep engagement with the contemporary literature paid
off as he discovered that many of these works contained research
that clarified, refined or advanced causal-realist theory and he
eagerly integrated these contributions into his own work.

For example,
in his notable development of an explanation of the firm’s costs
and return on investment that sharply deviates from the Marshallian
theory of the firm, Rothbard was heavily influenced by two neglected
articles coauthored by André Gabor and I.F. Pierce on “the
Austro-Wicksellian” theory of the firm.[48]

Rothbard cites
a discussion by the Cambridge economist Roy Harrod, in addition
to a discussion by Böhm-Bawerk, as a source for his own path-breaking
identification of a fourth component in the gross business income
of the capitalist-entrepreneur. This “ownership” or “decision-making”
rent is distinct from and in addition to implicit wages of management,
interest return on invested capital, and pure profit.[49]
In his thoroughgoing critique of the theories of perfect- and monopolistic-competition
doctrines and his original formulation of a positive theory of competition
as a dynamic process, Rothbard favorably cites the contributions
of a number of his mainstream contemporaries, including G. Warren
Nutter, Wayne Leeman, Marshall I. Goldman, and Reuben Kessel. Rothbard
singles out a book by Lawrence Abbott published in 1952 titled Quality
and Competition for special praise, characterizing it as “one
of the outstanding theoretical works of recent years.”[50],[51]
Indeed, the theory of rivalrous competition that Rothbard expounds
is clearly influenced by Abbott’s arguments on the central importance
of the qualitative dimensions of competition.

The fact that
theoretical research employing verbal logic and the praxeological
method still remained relatively pervasive among academic economists
even as late as the 1950s highlights the deep and hardy roots of
the causal-realist tradition. It also accounts for why Rothbard
did not yet perceive any advantage in appropriating the label “Austrian”
to differentiate his treatise from contemporary economics. In fact,
in private correspondence dated February 1954, Rothbard expressed
confidence that mainstream economic theorists could still be drawn
back toward the causal-realist research program and that his work
in progress

will, I
believe, command the attention of the profession as a treatise
because of its considerable elaborations in those areas not
developed by Mises, its differences from Mises in such areas
as monopoly, banking ethics, and government … and its refutations
of current economic theory.[52]

While in retrospect
we may be tempted to dismiss Rothbard’s bold prediction as a burst
of youthful optimism, it hardly reflects the attitude of someone
intent on completely breaking with the prevailing doctrine and founding
a heterodox school of thought.

By the advent
of the 1970s, however, mainstream economic theory had sunk to almost
unfathomable depths, degenerating into a series of loosely related
mathematical models which had little contact with reality. Following
the prevailing Friedmanite positivist methodology, the tentative
“validity” – never the truth – of these models was putatively
established by empirically testing their ability to predict or,
more accurately, “retrodict” using the methods of econometrics.
The last vestiges of the Mengerian approach thus disappeared from
the curricula of graduate economics programs and causal-realist
theoretical research was now completely banished from academic journals,
which had become the main, if not the only, research outlet for
mainstream economics.

Around the
same time as this sea change in economic theory and method, there
began to coalesce outside the formal institution of academic economics
a new intellectual movement that was directly inspired by Rothbard’s
reconstruction of the causal-realist theoretical organon in Man,
Economy, and State. This movement comprised mainly graduate
students and younger faculty members associated with US academic
institutions who were disaffected with the orthodox neoclassical
synthesis, which had begun to break down with the failure of the
Kennedy-Johnson “New Economic” policies to rein in the Vietnam War
inflation and the subsequent emergence of stagflation in the early
1970s.

By the mid-1970s
the new movement had grown to such an extent that the opportunity
presented itself to institutionalize and promote its existence by
means of a formal academic conference on Austrian economics, which
was held at South Royalton, Vermont, in June 1974. The appellation
“Austrian” was chosen for this new intellectual tendency mainly
for strategic reasons. Since the Rothbardian movement embraced a
method and body of doctrine that now shared very little common ground
with the entrenched positivist orthodoxy, the label at least provided
the movement with a recognizable affiliation with one of the great
streams of early marginalist thought that had fed into this modern
mainstream. The name also instantly endowed the movement with the
great cachet associated with the well-known names of the founding
members of the Austrian School, such as Carl Menger, Eugen von Böhm-Bawerk,
and Friedrich von Wieser and its later representatives Ludwig von
Mises and Friedrich A. Hayek. The prestige of the “Austrian” brand
name was further enhanced when Hayek became a corecipient of the
Nobel Prize in economics later in the year. The term had the additional
virtue of identifying the movement’s general theoretical orientation.

Rothbard and
his followers eagerly embraced the new designation and began to
refer to themselves as members or followers of the modern Austrian
School, which was now positioned as a heterodox challenger to “mainstream
economics.” Despite its significant short-run strategic virtues,
however, branding the school of thought that coalesced at the South
Royalton conference as “Austrian” has engendered a number of serious
problems in the long run. First, it has come to obscure the extent
to which the modern Austrian School was directly inspired by Rothbard.
Indeed it is no exaggeration to say that a large majority of the
thirty or so participants in the South Royalton conference adhered
to the body of causal-realist theory elaborated in Man, Economy,
and State. Second, it conceals the fact, noted above, that
in writing this treatise, Rothbard drew from a much broader range
of literature than that emanating from the original Austrian School
and its direct intellectual descendents. Third, the label diverts
attention from Rothbard’s primary mission in writing his treatise,
which was to purge modern economic science of its alien positivist
and mathematical-formalist elements and to reconstruct it along
consistently causal-realist lines.

It cannot be
stated too often or too emphatically that engineering a radical
break from standard economic theory and establishing a heterodox
school of thought that rejected all forms of equilibrium analysis
and the use of imaginary constructs was not Rothbard’s purpose in
writing Man, Economy, and State. Indeed, as we have seen,
one of Rothbard’s most important contributions in his treatise is
his painstaking explication of the content and the proper use of
fictitious constructs and imaginary states of the world in deriving
meaningful propositions about the causal determinants of observable
economic phenomena.

The last and
perhaps most significant disadvantage of applying the unqualified
term “Austrian” to the post–South Royalton economics movement is
the fact that it fosters a conflation of the very different and
conflicting research programs that have grown up under this opaque
semantic veil. Rothbard recognized and lamented this state of affairs
in the preface to the revised edition of Man, Economy, and State
published in 1993:

In fact,
the number of Austrians has grown so large, and the discussion
so broad, that differences of opinion and branches of thought
have arisen, in some cases developing into genuine clashes of
thought. Yet they have all been conflated and jammed together
by non-Austrians and even by some within the school, giving
rise to a great deal of intellectual confusion, lack of clarity,
and outright error. The good side of these developing disputes
is that each side has clarified and sharpened its underlying
premises and world-view. It has indeed become evident in recent
years that there are three clashing paradigms within Austrian
economics: the original Misesian or praxeological paradigm,
to which the present author adheres; the Hayekian paradigm,
stressing “knowledge” and “discovery” rather than praxeological
“action” and “choice,” and whose leading exponent now is Professor
Israel Kirzner; and the nihilistic view of the late Ludwig Lachmann,
an institutionalist anti-theory approach taken from the English
“subjectivist” Keynesian G.L.S. Shackle. (p. xiv)

While this
accurately describes the state of Austrian economics in the early
1990s, the situation has become even more contentious and muddled
since then. While the Lachmannian branch has waned somewhat in influence,
a new, wildly eclectic tendency has developed that proposes to agglomerate
indiscriminately selected elements of Menger, Mises, Hayek, Lachmann,
Kirzner, and Rothbard with random insights from Adam Smith’s economics,
Public Choice Theory, New Institutional Economics, transaction-costs
economics, game-theoretic modeling, hermeneutical economics, and
ethnographic and historical case studies, all under the rubric of
Austrian economics or “good economics.”

Needless to
say, the situation is even less satisfactory now than it was when
Rothbard penned the passage above. Those interested in pursuing
theoretical research in the Mengerian causal-realist tradition are
now viewed by the profession, thanks to the Austrian label, as part
of a splintered and feuding heterodox movement more interested in
discoursing on metaeconomic esoterica or devising “spontaneous-order”
explanations for obscure historical episodes than in analyzing the
“mundane” issues at the heart of mainstream economics – value
theory, price theory, capital theory, monetary theory, and business
cycles.

Fortunately,
Man, Economy, and State points the way out of this morass
of confusion, which threatens permanent and wholesale marginalization
of all branches of Austrian economics. Every page of Rothbard’s
treatise is imbued with a profound awareness that the causal-realist
theoretical system that he was expounding was in the mainstream
of an international economic tradition that originated in the Marginalist
Revolution. His treatise thus was not intended as the program for
a new heterodox movement or the revival of an old one; rather it
represented an endeavor to reconstruct orthodox economics on the
unshakeable foundation of the praxeological method and to use this
method to substantively advance the theory.

In a crucial
sense, economic science had temporarily lost its bearings and was
beginning to stray from its rich heritage, and Rothbard aimed at
setting it back on course. Consequently, he never conceded the mainstream
of economic science to the disciples of mathematical modeling and
the positivist method, whom he regarded as an irrationalist cult
that had hijacked economics and whose silly doctrines would sooner
or later wind up in the dustbin of intellectual history.

Rothbard has
been proven correct. Mathematical modeling has revealed itself to
be a vain and formalistic exercise incapable of explaining the international
currency crises, stock-market and real-estate bubbles, or the global
financial crises that have racked our world in the past two decades.
It is increasingly evident, even to professional economists, that
the tortuous positivist detour has led to an intellectual dead end.
Hence, bizarre heterodox sects, such as behavioral economics, experimental
economics, the “happiness” literature, neuro-economics, etc. now
abound. Some market-oriented economists have even abandoned modern
economic theory altogether for the less rigorous rhetoric and metaphors
of Adam Smith’s “invisible hand” and Hayek’s “spontaneous order.”[53]

The death knell
is now tolling for the mathematical and positivist pretenders to
the mainstream of economics. The time is ripe for Austrians to recover
their rightful position as the true representatives of the central
tendency of modern economic theory by affirming the praxeological
method as the research method of economics. The prodigious fruits
of this method stand before us in the integrated theoretical structure
expounded in Man, Economy, and State.

Notes

[1]
Rothbard to H. Cornuelle, June 28, 1952; Rothbard Papers. The
Introduction draws substantially on the information and resources
found in the Murray N. Rothbard Papers. The Rothbard Papers are
currently held at the Ludwig von Mises Institute, Auburn, Alabama,
and include, among other materials, Murray Rothbard’s letters
and correspondence (1940–1994), memos and unpublished essays (1945–1994),
and drafts of published works.

[2]
Rothbard to Mises, May 5, 1959; Rothbard Papers. In English, “It
is finished.”

[3]
Richard Cantillon, Essai sur la Nature du commerce en Général,
ed. and trans. Henry Higgs (New York: Augustus M. Kelley, 1964).

[4]
Carl Menger, Principles of Economics, trans. James Dingwall
and Bert E. Hoselitz (New York: New York University Press, 1981).
Menger had worked as an economic journalist and market analyst
for daily newspapers on and off for over a decade. For an overview
of Menger’s life and thought see Joseph T. Salerno, “Carl
Menger: The Founding of the Austrian School,” in Randall G.
Holcombe, ed., 15
Great Austrian Economists (Auburn, Ala.: Ludwig von Mises
Institute, 1999), pp. 71–100 and the sources cited therein.

[5]
Thus in his Preface to the book, Menger (Principles,
p. 49) wrote,

I have
devoted special attention to the investigation of the causal
connections between economic phenomena involving products
and the corresponding agents of production … for the purpose
of establishing a price theory based upon reality
and placing all price phenomena (including interest, wages,
ground rent, etc.) under one unified point of view … . (Emphasis
added)

[6]
For the factors underlying the rise and decline of the early Austrian
School, see Joseph T. Salerno, “The Place of Mises’s Human
Action in the Development of Modern Economic Thought,” Quarterly
Journal of Austrian Economics 2, no. 1 (Spring 1999): 35–65.

[7]
Indeed, in the preface to this treatise, Rothbard laments the
demise of “the old-fashioned treatise on economic ‘principles’”
after World War I and the ensuing progressive disintegration of
economics, including economic theory, into compartmentalized subdisciplines.
On the factors that exacerbated this fragmentation of economics
after World War II, see Joseph T. Salerno, “Economics:
Vocation or Profession,” Mises Daily (November 17, 2004).

[8]
Ludwig von Mises, Human
Action: A Treatise on Economics,
Scholar’s Edition (Auburn, Ala.: Ludwig von Mises Institute,
1998).

[9]
On the reasons for this, see Salerno “The Place of Mises’s Human
Action,” pp. 59–761. The books that molded postwar economics
were cut from a completely different cloth than Mises’s treatise
and dealt primarily with the formal techniques, rather than the
substance, of economic theory. These included, especially: J.R.
Hicks, Value and Capital: An Inquiry into Some Fundamental
Principles of Economics Theory, 2nd ed. (New York: Oxford
University Press, 1946); Paul A. Samuelson, Foundations of
Economic Analysis (Cambridge, Mass.: Harvard University Press,
1947); and George J. Stigler, The Theory of Price (New
York: Macmillan, 1947).

[10]
Rothbard’s central role in the modern revival of Austrian economics
is detailed in Joseph T. Salerno, “The Rebirth of Austrian Economics
– In Light of Austrian Economics,” Quarterly Journal
of Austrian Economics 5, no. 4 (Winter 2002): 111–28.

[11]
Rothbard to H. Cornuelle, June 28, 1952; Rothbard Papers.

[12]
Rothbard to H. Cornuelle, March 14, 1951; Rothbard Papers. “What
McCulloch did for Ricardo” refers to John Ramsay McCulloch’s Principles
of Political Economy (New York: Augustus M. Kelley, [1864]
1965).

[13]
Ibid.

[14]
Rothbard to R. Cornuelle, August 9, 1954; Rothbard Papers.

[15]
Rothbard to H. Cornuelle, June 28, 1952; Rothbard Papers.

[16]
Ludwig von Mises, “Man,
Economy and State: A New Treatise on Economics,” in idem,
Economic
Freedom and Interventionism: An Anthology of Articles and Essays,
ed. Bettina Bien Greaves (Irvington-on-Hudson, N.Y.: The Foundation
for Economic Education, 1990), pp. 155–56.

[17]
Ibid., pp. 156–57.

[18]
The following statement is indicative of Mises’s attitude in this
respect: “There never lived at the same time more than a score
of men whose work contributed anything essential to economics”
(Mises, Human Action, p. 869).

[19]
Rothbard to R. Cornuelle, memo: “Textbook or Treatise?”; Rothbard
Papers.

[20]
In Human Action, Mises avoided a deep analysis of the
time-spanning structure of production, perhaps because he associated
it with the concept of the backward-looking “average period of
production” in Böhm-Bawerk’s work, which he criticized (Mises,
Human Action, pp. 485–86).

[21]
Mises, Human Action, p. 3.

[22]
Ludwig von Mises, Epistemological
Problems of Economics, 3rd ed. (Auburn, Ala.: Ludwig
von Mises Institute, 2003), p. 228.

[23]
Ibid., p. 175.

[24]
Ludwig von Mises, The
Historical Setting of the Austrian School of Economics,
2nd ed. (Auburn, Ala.: Ludwig von Mises Institute, 1984), p. 41.

[25]
For an overview and critique of this nihilist turn in economics,
see David Gordon, Hermeneutics
Versus Austrian Economics (Auburn, Ala.: Ludwig von Mises
Institute, 1986); Hans-Hermann Hoppe, “In Defense of Extreme Rationalism:
Thoughts on Donald McCloskey’s The Rhetoric of Economics,”
Review of Austrian Economics 3 (1989): 179–214; and Murray
N. Rothbard, “The Hermeneutical
Invasion of Philosophy and Economics,” in idem, The Logic
of Action Two: Applications and Criticism from the Austrian School
(Lyme, N.H.: Edward Elgar, 1997), pp. 275–93.

[26]
Rothbard, Man, Economy, and State, p. xcii.

[27]
Ibid., p. 357.

[28]
Ibid., p. xciii.

[29]
Philip H. Wicksteed, The Common Sense of Political Economy
and Selected Papers and Reviews on Economic Theory,
ed. Lionel Robbins, 2 vols. (New York: Augustus M. Kelley, 1967);
Frank A. Fetter, The Principles of Economics with Applications
to Practical Problems (New York: The Century Co., 1910);
F.W. Taussig, Principles of Economics, 2 vols. (New York:
The Macmillan Company, 1911). Rothbard did not consider Human
Action an “old-style Principles” because “it assumes considerable
previous economic knowledge and includes within its spacious confines
numerous philosophic and historical insights” (Rothbard, Man,
Economy, and State, p. xciii).

[30]
Rothbard, Man, Economy, and State, p. xciii.

[31]
Ibid., p. xcii.

[32]
Mises, Human Action, p. 65.

[33]
Ibid., pp. 237–38.

[34]
Ibid., pp. 237–57.

[35]
While this construct is highly unrealistic, it is not unrealizable
like the evenly rotating economy (ERE), which abstracts completely
from change and uncertainty and is used to analytically isolate
interest income and the capitalist function that earns it from
entrepreneurial profit. Thus a world in which every factor is
suited for one and only one task is not inconceivable or logically
contradictory. In contrast, the ERE is indeed an unrealizable
and self-contradictory construct. It describes a world in which,
for example, the future is known with perfect certainty, but action
– which is always aimed at changing the future – occurs;
and agents hold money balances despite the absence of uncertainty
regarding the temporal pattern of their future receipts and expenditures.
This is not to imply that proximity to reality makes one imaginary
construct better or more useful than another; the sole test of
a construct’s usefulness is the aid it gives to thought in deducing
the causal laws operating in real markets.

[36]
For the explanation of this construct and its variations and the
elaboration of its implications, see Rothbard, Man, Economy,
and State, pp. 329–66.

[37]
This conclusion of the exhaustion of the income from production
among wages, rents, and interest receipts hold true only under
the assumption that future market conditions are known with certainty.
Once this assumption is dropped and the possibility is admitted
of overvaluation or undervaluation of the complements of specific
factors by capitalist investors, entrepreneurial profits and losses
enter the picture. However, in a world of purely specific factors,
such profits and losses would not have an allocative function
because, by definition, factors cannot shift between production
processes. More importantly, it becomes clear that such incomes
accrue to the capitalists alone and that, therefore, in the real
world of uncertainty, the functions of capitalist and entrepreneur
are integrated in the same agent.

[38]
Mises, Human Action, p. 238.

[39]
Rothbard, Man, Economy, and State, p. xcii. While Marshall
utilized the method of imaginary constructions, his aversion to
lengthy step-by-step deduction runs afoul of Mises’s warning:
that it is “a method very difficult to handle because it can easily
result in fallacious syllogisms. It leads along a sharp edge;
on both sides yawns the chasm of absurdity and nonsense” (Mises,
Human Action, p. 238).

[40]
Paul Samuelson, “My Life Philosophy: Policy Credos and Working
Ways,” in Michael Szenberg, ed., Eminent Economists: Their
Life Philosophies (New York: Cambridge University Press,
1993), p. 241.

[41]
Paul Samuelson, Foundations of Economic Analysis, 2nd
ed. (New York: Atheneum, 1976), p. 4.

[42]
Paul Samuelson, “International Factor Price Equalisation Once
Again,” in The American Economics Association, Readings in
International Economics (Homewood, Ill.: Richard D. Irwin,
1968), pp. 58; and idem, “My Life Philosophy,” p. 241.

[43]
Samuelson, “My Life Philosophy,” p. 243.

[44]
Ibid., p. 244

[45]
Milton Friedman, “The Methodology of Positive Economics,” in idem,
Essays in Positive Economics (Chicago: University of
Chicago Press, 1970), pp. 1–43. Some methodologists have argued
that Friedmanite-positivist methodology shares little more than
vocabulary with Popper’s philosophy of science. For example, see
Lawrence A. Boland, The Foundations of Economic Method
(Boston: Allen & Unwin, 1982), pp. 155–96.

[46]
Mark Blaug, Economic Theory in Retrospect, 4th ed. (New
York: Cambridge University Press, 1986), p. 3.

[47]
Actually some of the references in the present edition are to
works published after 1962, because this volume includes Power
and Market which was originally written as the third
volume of Man, Economy, and State, but was published
separately eight years later. For the story behind the editorial
decision to truncate Man, Economy, and State and publish
it as two volumes and Rothbard’s reaction to it, see Stromberg,
pp. lxv–lxxi.

[48]
André Gabor and I.F. Pearce, “A New Approach to the Theory
of the Firm,” Oxford Economic Papers 54 (October 1952):
252–65; idem, “The Place of Money Capital in the Theory of Production,”
Quarterly Journal of Economics 72 (November 1958): 537–57.

[49]
Roy Harrod, “Theory of Profit,” in idem, Economic Essays
(New York, Harcourt and Brace & Co., 1952), pp. 190–95. For
a detailed discussion of Rothbard’s concept of decision-making
rent and its significance for the theories of entrepreneurship
and the firm, see Joseph T. Salerno, “The Entrepreneur: Real and
Imagined,” Quarterly Journal of Austrian Economics 11,
no. 3 (Fall 2008).

[50]
Lawrence Abbott, Quality and Competition: An Essay on Economic
Theory (Westport, Conn.: Greenwood Press, 1973).

[51]
Rothbard, Man, Economy and State, p. 666, fn. 28.

[52]
Rothbard to R. Cornuelle, memo: “Textbook or Treatise?”; Rothbard
Papers.

[53]
Of course the concept of the “spontaneous order” was only one
of Hayek’s many contributions. Most of these contributions were
squarely in the Mengerian causal-realist tradition and dealt with
themes of mundane economics such as capital theory, business-cycle
theory, international monetary theory, and comparative monetary
institutions. For a collection of Hayek’s most important works
in these areas, see Prices
and Production and Other Works: F.A. Hayek on Money, the Business
Cycle, and the Gold Standard, ed. Joseph T. Salerno (Auburn,
Ala.: Ludwig von Mises Institute, 2008). Also see Peter G. Klein,
“The Mundane Economics of the Austrian School,” Quarterly
Journal of Austrian Economics 11, no. 3 (Fall 2008), for
the argument that the notion of spontaneous order, rightly understood,
has roots in Menger’s causal-realist economics.

This article
first appeared on Mises.org.

March
25, 2009

Joseph
Salerno [send him mail]
is a senior fellow at the Ludwig
von Mises Institute, professor of economics at Pace University,
and editor of the Quarterly
Journal of Austrian Economics.

DIGG THIS

Introduction
to Prices
and Production and Other Works by F.A. Hayek.

Friedrich
A. Hayek was barely out of his twenties in 1929 when he published
the German versions of the first two works in this collection, Monetary
Theory and the Trade Cycle and "The Paradox of Saving."
The latter article was a long essay that was to become the core
of his celebrated book and the third work in this volume, Prices
and Production, the publication of which two years later made him
a world-renowned economist by the age of thirty-two. But the young
Hayek did not pause to savor his success. He was already hard at
work on "Reflections on the Pure Theory of Money of Mr. J.M.
Keynes," a lengthy critical review of John Maynard Keynes’s
two-volume Treatise
on Money, which had been published in 1930. Hayek’s two-part
review appeared in late 1931 and 1932. There followed within a few
years the other three works collected in this volume. "The
Mythology of Capital" appeared in 1936 and was a response to
Frank Knight’s hostile criticisms of the Austrian theory of capital.
A short article on "Investment That Raises the Demand for Capital"
and the monograph Monetary Nationalism and International Stability
were published in 1937.

These seven
works taken together represent the first integration and systematic
elaboration of the Austrian theories of money, capital, business
cycles, and comparative monetary institutions, which constitute
the essential core of Austrian macroeconomics. Indeed these works
have profoundly influenced postwar expositions of Austrian or "capital-based"
macroeconomics down to the present day. The creation of such an
oeuvre would be a formidable intellectual feat over an entire lifetime;
it is an absolute marvel when we consider that Hayek had completed
it in the span of eight years (1929–1937) and still well shy
of his fortieth birthday.

Hayek’s
amazingly precocious intellect and creative genius are on full display
in these works. Thus, before the age of thirty, Hayek already had
fully mastered and begun to synthesize and build upon the major
contributions of his predecessors in the Austrian tradition. These
included, in particular: Eugen von Böhm-Bawerk’s theory of
capital and interest; Knut Wicksell’s further elaborations on Böhm-Bawerk’s
capital theory and his own insights into the "cumulative process"
of changes in money, interest rates and prices; Ludwig von Mises’s
groundbreaking theories of money and business cycles; and the general
analytical approach of the broad Austrian school from Menger onward
that focused on both the subjective basis and the dynamic interdependence
of all economic phenomena.

There is something
else about Hayek that becomes apparent when reading his contributions
in this volume. The young Hayek was a great economic controversialist,
perhaps the greatest of the twentieth century. His entire macroeconomic
system was forged within the crucible of the great theoretical controversies
of the era. His opponents were some of the great (and not so great)
figures in interwar economics: Keynes, W.T. Foster and W. Catchings,
Ralph Hawtrey, Irving Fisher, Frank Knight, Joseph Schumpeter, Gustav
Cassel, Alvin Hansen, A.C. Pigou, Arthur Spiethoff to name a few.
Hayek took on all comers without fear or favor and inevitably emerged
victorious. As Alan Ebenstein notes, "Hayek came to be seen
in Cambridge, as Robbins and LSE’s point man in intellectual combat
with Cambridge."

Read
the rest of the article

October
9, 2008

Joseph
Salerno [send him mail]
is a senior fellow at the Ludwig
von Mises Institute, professor of economics at Pace University,
and editor of the Quarterly
Journal of Austrian Economics.

DIGG THIS

Foreword
to The
Mystery of Banking, newly published this week by the Mises
Institute.

Long out of
print, The Mystery of Banking is perhaps the least appreciated
work among Murray Rothbard’s prodigious body of output. This is
a shame because it is a model of how to apply sound economic theory,
dispassionately and objectively, to the origins and development
of real-world institutions and to assess their consequences. It
is "institutional economics" at its best. In this book,
the institution under scrutiny is central banking as historically
embodied in the Federal Reserve System – the "Fed"
for short – the central bank of the United States.

The Fed has
long been taken for granted in American life and, since the mid-1980s
until very recently, had even come to be venerated. Economists,
financial experts, corporate CEOs, Wall Street bankers, media pundits,
and even the small business owners and investors on Main Street
began to speak or write about the Fed in awed and reverential terms.
Fed Chairmen Paul Volcker and especially his successor Alan Greenspan
achieved mythic stature during this period and were the subjects
of a blizzard of fawning media stories and biographies. With the
bursting of the high-tech bubble in the late 1990s, the image of
the Fed as the deft and all-seeing helmsman of the economy began
to tarnish. But it was the completely unforeseen eruption of the
wave of subprime mortgage defaults in the middle of this decade,
followed by the Fed’s panicky bailout of major financial institutions
and the onset of incipient stagflation, that has profoundly shaken
the widespread confidence in the wisdom and competence of the Fed.
Never was the time more propitious for the radical and penetrating
critique of the Fed and fractional-reserve banking that Rothbard
offers in this volume.

Before taking
a closer look at the book’s contents and contributions, a brief
account of its ill-fated publication history is in order. It was
originally published in 1983 by a short-lived and eclectic publishing
house, Richardson & Snyder, which also published around the
same time God’s Broker, the controversial book on the life
of Pope John Paul II by Antoni Gronowicz. The latter book was soon
withdrawn, which led to the dissolution of the company. A little
later, the successor company, Richardson & Steirman, published
the highly touted A Time for Peace by Mikhail Gorbachev,
then premier of the USSR. This publishing coup, however, did not
prevent this firm from also winding up its affairs in short order,
as it seems to have disappeared after 1988.

In
addition to its untimely status as an orphan book, there were a
number of other factors that stunted the circulation of The Mystery
of Banking. First, several reviewers of the original edition
pointedly noted the lax, or nonexistent, copy editing and inferior
production standards that disfigured its appearance. Second, in
an important sense, the book was published "before its time."
In 1983, its year of publication, the efforts of the Volcker Fed
to rein in the double-digit price inflation of the late 1970s had
just begun to show success. Price inflation was to remain at or
below 5 percent for the rest of the decade. During the 1990s, inflation,
as measured by the Consumer Price Index, declined even further and
hovered between 2 and 3 percent. This led the Greenspan Fed and
most professional monetary economists to triumphantly declare victory
over the inflation foe and even to raise the possibility of a return
of the deflation bogey.

Despite the
adverse circumstances surrounding its publication, however, The
Mystery of Banking has gone on to become a true underground
classic. At the time of this writing, four used copies are for sale
on Amazon.com for between $124.50 and $256.47. These prices are
many times higher than the pennies asked for standard money-and-banking
textbooks published in the 1980s and even exceed the wildly inflated
prices of the latest editions of these textbooks that are extracted
from captive audiences of college students. Such price discrepancies
are a good indication that Rothbard’s book is very different –
in content, style, and organization – from standard treatments
of the subject.

Read
the rest of the article

September
27, 2008

Joseph
Salerno [send him mail] is a senior fellow
at the Ludwig von Mises Institute, professor
of economics at Pace University, and editor of the Quarterly
Journal of Austrian Economics.

I
quickly became an ardent anti-Communist but knew little else about politics or
political philosophy until Barry Goldwater began to campaign for the Republican
nomination for President when I was 13 years old. His firebrand anti-Communism
greatly appealed to me at the time and after reading an article about him in Life
Magazine in late 1963, I became aware of the conservative-liberal political
spectrum and immediately proclaimed myself a conservative, much to my father's
chagrin. My conservatism was reinforced by reading Goldwater's book Conscience
of a Conservative and his biography, Barry
Goldwater: Freedom Is His Flight Plan by Stephen Shadegg. A voracious
reader of science fiction and political fiction, I also discovered the novels
of Ayn Rand and read Anthem
and Atlas
Shrugged at about the same time. By the time I entered high school, I
was a full-blown Goldwaterite conservative and Cold Warrior, who, inconsistently,
believed in the inviolability of the rights to liberty and property.

I
attended St. Joseph's High School, an all-boys Catholic institution, where, in
the fall semester of my freshman year, my teacher for both English and Speech
was a young former marine, Bill Murray, who also passionately detested Communism.
After I delivered a speech to the class mocking the military capabilities of the
People's Republic of China, he was so enthusiastic he expostulated: "Salerno,
you beautiful anti-communist, you." During the same semester, in my American
History class, the teacher organized a debate between the supporters of Goldwater
and the supporters of Lyndon Johnson. I was one of the seven students who self-consciously
fidgeted on the Goldwater side and faced down the horde of thirty or so Johnson
partisans, but we gave as a good as we got, at least according to the teacher's
assessment.

My
interest in political issues and my conservative convictions intensified during
my high school years. It was the mid-1960's, the era of free speech and Vietnam
War protests on college campuses, and just a few miles down the road at Rutgers
University Eugene Genovese was dismissed from the faculty for having publicly
dissented against the Vietnam war. The atmosphere at my high school was highly
charged politically. A few of the younger members of the Brothers of the Sacred
Heart, the order that administered and staffed the high school, were deeply committed
to Vatican II liberal Catholicism and New Frontier-Great Society political liberalism,
as were some of the younger lay faculty. They were also very eager to debate the
issues in the classroom and encouraged the airing of opposing points of view.
But the faculty was by no means ideologically monolithic and, in my sophomore
year, the school hired as head varsity basketball coach and English teacher a
hardcore member and chapter organizer of the John Birch Society. Bill Schreck
was very charismatic and articulate and influenced Mr. Murray, the anti-Communist
English teacher, to become a Bircher too. Mr. Schreck also openly propagated his
views to my class as our study hall proctor. He eventually persuaded me and some
other conservative students to attend a meeting of the local chapter of the Birch
Society. However, I quickly lost interest in Birchism when I heard that Mr. Schreck
had asserted in another class that the Beatles' music was manufactured by a communist
computer secreted in the English countryside with the aim of corrupting the minds
and morals of American youth. My English teacher in my sophomore year, Mr. Walko,
although he had no apparent association with Mr. Schreck or the Birchers and revealed
no political biases in class, initiated an extracurricular reading club that I
joined. The first book we discussed was None
Dare Call It Treason by Bircher John Stormer.

By
my junior year, I had become recognized among the faculty as one of the most outspoken
of the group of conservative students informally known as the "Lower Ten
Percent." This label emerged from a debate in Religion class over the Catholic
view of the Vietnam War wherein I called Pope Paul VI's position on the war "quixotic"
and another conservative referred to it as "asinine." This infuriated
our Religion teacher who abruptly halted the debate. The next class the Brother
informed us that there would be no more discussion of current events in class,
noting cryptically that in some bushels of apples the "lower ten percent"
begins to rot prematurely and threatens to spoil the rest. Of course we conservatives
perversely seized on his words and proudly touted them as our new moniker.

Late
in my junior year I tried to foment a petition drive among my fellow students
in the A class to protest the rumored integration of the A, B, C and D classes
in our senior year. When my cohort had entered as freshmen, we had been placed
according to our scores on special placement exams. Each class moved from subject
to subject (except for languages, I believe) en bloc. One significant result
of this rigidly hierarchical system, which had existed since the founding of the
institution, was that the classes competed ferociously with one another in intramural
sports. Most importantly the A class, which took mostly accelerated courses, was
supposed to have its grades more heavily weighted in calculating grade point average
for the purpose of class ranking in senior year. Needless to say my anti-egalitarian
and pro-tradition petition drive was ruthlessly quashed by the administration,
and a few of the smarter B class kids were seeded amongst us in senior year. However,
the administration did continue its policy of more heavily weighting grades for
accelerated courses, while we "native" A class students employed informal
methods of persuasion to ensure that the integrity of our intramural teams was
not breached.

It
was early in my senior year when I first became acquainted with the science of
economics. My economics teacher was an enthusiastic young adherent of Great Society
liberalism and the improbable brother-in-law of the Bircher Mr. Schreck. Mr. Mautner
assigned us to read John Kenneth Galbraith's The
Affluent Society and then parts of Adam Smith's Wealth
of Nations. Completely unacquainted with economics and distracted by Galbraith's
relentlessly sententious and laboriously styled prose, I could not follow and
did not care much for The Affluent Society. The Wealth of Nations was
another matter. I was enthralled by Smith's straightforward and non-moralizing
analysis of the free market economy and its social benefits. It dawned on me that
economics offered a scientific argument for the free society that complemented
the moral argument in its favor. By the time I finished reading the assigned passages
in Smith's book, I knew that I wanted to be an economist and I never really deliberated
upon the matter again.

There
was a pre-graduation tradition at St. Joseph's in which the senior class presented
a burlesque amiably mocking the speech, dress and mannerisms of its favorite –
and not so favorite – teachers and the faculty returned the favor by bestowing
frivolous legacies on selected seniors. My legacy read: "To Joseph Salerno,
leader of the Lower Ten Percent, we leave a pair of binoculars with which to look
down upon your fellow man."

In
1968, I enrolled – or rather my father enrolled me – in Boston College,
a Jesuit institution of higher education, which was actually a university not
located in Boston but in the toney suburb of Chestnut Hill. In my freshman year
I squirmed through the typically dreary two-semester principles of economics course
taught by a graduate student from Samuelson's Principles of Economics,
7th edition. However this experience did not deflect me from my career
goal and I declared economics as my major sometime during my freshman (or sophomore)
year. That year I also began reading the New Guard, a periodical published
by the conservative Young Americans for Freedom, where I encountered for the first
time the schism in the conservative movement between "traditionalists"
and "libertarians." I was impressed by the arguments presented by the
libertarian contributors and in short order jettisoned the Goldwater-Buckley conservatism
of my early adolescence and adopted the libertarian positions to abolish the draft,
legalize drugs and other victimless "crimes," and immediately end the
Vietnam War. In my sophomore year I began to read Rand's nonfiction works including
Capitalism:
The Unknown Ideal. It was in the latter work that I first saw a reference
to Ludwig von Mises, although I did not realize his significance at the time.

It
was in mid-April of my sophomore year that a general student boycott of classes
at Boston College began as a protest against a large tuition increase. Leaders
of the campus SDS quickly gained control of the amorphous movement and by early
May the boycott metamorphosed into a general student strike against the draft
and the Vietnam War. A few hardy souls defied the strike and continued to attend
classes – which attendance the squishy-soft liberal president of BC declared
to be "optional," with mid-term grades being the default final grade
for those who chose to strike – while most earnestly participated in the
innumerable informal "teach-ins" conducted by clueless liberal faculty
on the war, women's liberation, racism, ecology etc. I did neither. A select group
of more entrepreneurial students carrying midterm grades of B or higher alertly
seized the essentially "costless" opportunity to frolic and carouse
with like-minded students of other striking colleges, along the Charles River,
in the Boston Gardens and amidst other landmarks of lovely springtime Boston.

The
break from course work did not preclude me, however, from learning a very important
lesson concerning radical political change, although its importance and relevance
for libertarian strategy was clarified for me only many years later by Murray
Rothbard. One day during the strike, a coalition of left-wing organizations called
for a march to the Boston Commons where assorted Yippies, peaceniks, and left-wing
academics were to address an antiwar rally. Abbie Hoffman was there as, I vaguely
recollect, were Noam Chomsky and Jerry Rubin. Despite my deep personal disdain
for these men and for the mainly leftist hippie students who would turn out for
the demonstration, I participated because I was opposed to the war and because
I anticipated that many coeds of like mind would participate. The march commenced
on the outskirts of Boston composed mainly of disheveled, although reasonably
well-behaved, college students but as the crowd swept down Commonwealth Avenue,
a main artery into the downtown area, I noted young middle-class adults pouring
out of residences and office buildings to join us. As the demonstration was swelled
by what Murray Rothbard would later call "real people," – people
with real jobs and family responsibilities – a palpable change occurred in
the demeanor of the police monitoring the march. Initially coldly detached if
not mildly hostile, they began to appear progressively anxious and forlorn, unsure
of their positions as representatives of a State whose legitimacy was suddenly
being seriously questioned by tens of thousands of ordinary Americans. Some of
the younger officers even seemed as if they would have liked to shed their uniforms
and join us. At the rally itself the greatest response from the crowd occurred
when the clownish but charismatic Abbie Hoffman pointed to the John Hancock building
looming over the Commons and roared "John Hancock wasn't an insurance salesman,
he was a f—–g revolutionary."

The
ability of charismatic leaders to imbue ordinary middle-class Americans with a
radical anti-state mentality by demonstrating how specific government policies
exploited and victimized them and disrupted their families and communities was
actually brought home to me a year earlier when I attended a rally for George
Wallace at the same Boston Commons in the waning days of the Presidential campaign
of 1968. Campaigning on an anti-establishment third party ticket Wallace roused
the crowd by hammering on the absurdity of the despotic and unconstitutional judicial
mandate that prevented white and black students in Boston from attending schools
near their homes and coercively bused them to schools in strange and distant,
and sometimes dangerous, neighborhoods. At the end of his talk the feisty Wallace
waded into the dispersing crowd to shake hands and engage a gaggle of leftist
student hecklers in good-natured repartee. I was standing a few feet away from
Wallace when he jovially suggested to one of the students, "Why don't you
bring your sandal over here, hippie, and I'll autograph it for ya." After
the laughter abated Wallace surprised and disarmed his erstwhile hecklers by standing
among them and amiably responding to their questions and criticisms.

I
was deeply impressed by these two episodes, although at the time I could not have
articulated the reasons why, let alone recognized their general implications for
a coherent libertarian strategy of political change. It was only many years later
that I was enlightened on this matter by Murray Rothbard's analysis of the Joe
McCarthy phenomenon of the early 1950's. Rothbard delighted in standing the established
view of McCarthy on its head. The entire political and academic establishment,
from New Deal/Truman Democrats to Eisenhower Republicans, from moderate liberals
to moderate conservatives, concurred in the necessity of waging a Cold War to
contain the alleged Soviet conspiracy to take over the so-called "Free World"
and therefore were in explicit agreement with McCarthy's ultimate goals.
What they detested, they said, was McCarthy's means. Rothbard, in sharp
contrast, never believed that the Soviet Union, albeit a bloody and repressive
dictatorship, had the ability or intention of taking over the West. Rather he
argued that the Cold War was a ruse devised by the American ruling elite to justify
the continuation and expansion of the massive, tax-consuming, welfare-warfare
state built up during World War II at home and to rationalize postwar U.S. imperialist
ambitions for assorted military interventions abroad. While dismissing McCarthy's
ridiculous and contrived Cold War ideology – which, to repeat, he shared
with most of his respectable establishment detractors – Rothbard had a profound
appreciation for the means McCarthy employed. According to Rothbard (The
Irrepressible Rothbard, 2000, p. 13):

The
unique and glorious thing about McCarthy was not his goals or his ideology, but
precisely his radical, populist means. For McCarthy was able, for a few
years, to short-circuit the intense opposition of all the elites in American life:
from the Eisenhower-Rockefeller administration to the Pentagon and the military-industrial
complex to liberal and left media and academic elites – to overcome all that
opposition and reach and inspire the masses directly. And he did it through television,
and without any real movement behind him; he had only a guerrilla band of a few
advisers, but no organization and no infrastructure.

The
strategy of directly appealing to the exploited middle- and working-class masses
and short-circuiting the entrenched political and media elites is what later led
Rothbard to support the Presidential candidacies of Ross Perot and Pat Buchanan.

The
academic year following that of the student strike was my junior year. The concurrence
of a number of events marked it as a pivotal year in my intellectual development.
To start with, soon after my return from summer break I discovered that a chapter
of the Young Americans for Freedom (YAF) had begun operating on campus. Its eclectic
membership included Buckleyite traditionalist conservatives, fusionist libertarian-conservatives,
laissez-faire capitalist Randians and a few nearly pure libertarians. Although
I do not believe I joined the organization immediately, I began spending my spare
time in their office participating in informal discussions and debates. This marked
the first time that I had interacted with a group of my peers whose political
philosophy even loosely paralleled my own and I found the experience exhilarating.
Also, the friendly verbal sparring with thoughtful young "conservatives"
of various stripes helped clarify my own thinking and propelled me toward a progressively
more consistent and radical libertarian position.

My
transformation into a full-fledged libertarian was completed when, at the start
of my second semester, I read in a white heat the cover article of the New
York Times Magazine (1971) entitled "The
New Right Credo – Libertarianism." The authors, Stan Lehr and Louis
Rossetto, Jr. were seniors at Columbia University and their article presented
the first comprehensive account that I had read of the unadulterated libertarian
political philosophy, carefully differentiating it from both establishment liberalism
and conservatism as well as from the New Left, whose positions it shared on the
abolition of the draft and all drug laws and an immediate U.S. withdrawal from
Vietnam. The article also portrayed libertarianism as a vital and flourishing
political movement that drew inspiration from Rand and science fiction writer
Robert Heinlein, whose novels I had been reading since I began college. Jerome
Tuccille and former Goldwater speechwriter Karl Hess, unfamiliar names to me at
the time, were identified as leading publicists and pamphleteers for the movement
and their writings cited for their defense of radical libertarianism. More significantly,
from the standpoint of my academic interests, the article referred to "economists
of the Austrian school" – a school I had never been introduced to in
my two-and-half years as an undergraduate economics major – as having demonstrated
that recessions and depressions were not inherent defects of the free market but
the result of government and central bank manipulation of the money supply. The
article later quoted a passage from Man,
Economy and State by Murray N. Rothbard, explaining why state management
of the economy deprived of market prices was inevitably chaotic. As with the Austrian
school in general, I had never heard Rothbard's name mentioned by any of my economics
professors and had no idea who he was. By the time I finished reading the article
I had been converted to the pure libertarian position – a position the authors
designated by the then novel term "anarchocapitalism," – and my
curiosity about Austrian economics had been piqued.

Back
at the YAF office I mentioned my discovery of Austrian economics to my comrades.
Shortly thereafter, one of them, Gerald Uba, produced and placed in my hands an
odd-sized "minibook" (measuring 3.75" by 5") written by Rothbard
and entitled Depressions:
Their Cause and Cure. After reading Rothbard's thirty pages of clear
and scintillating prose, I knew I had learned more in one hour about business
cycles or "macroeconomic fluctuations" then I had absorbed from two
semesters of listening to lectures in Principles of Macroeconomics and Intermediate
Macroeconomics and of poring over the jargon filled, opaquely written, deadly
dull textbooks assigned in these courses. Moreover, my deep interest in economics
was now transformed into a burning passion for the subject.

Serendipitously,
in the same semester that I was introduced to Rothbard and modern Austrian business
cycle theory, I was enrolled in a History of Economic Thought course taught by
Robert Cheney, S.J. Father Cheney was a superb, if somewhat low-key, teacher and
near the end of the course he introduced the topic of the marginalist revolution.
Referring to the early Austrians, Carl Menger, Eugen von Böhm-Bawerk, and
the latter's brother-in-law, Friedrich von Wieser, he characterized the formation
of the Austrian school as a "unique event" in intellectual history.
Never before, he declared, had such brilliant men worked so closely together to
develop a common approach to economic phenomena. Father Cheney's enthusiastic
endorsement of the older Austrian school further bolstered my interest in learning
more about the school.

As
soon as I arrived back home that summer I began to devour all the libertarian
and Austrian books I could lay my hands on. Through my local bookstore I ordered
Jerome Tuccille's Radical
Libertarianism: A Right Wing Alternative. Although some of its illustrations
are now a bit dated and it contains a few minor "lifestyle libertarian"
confusions and deviations, it served, and still serves, as a compelling introduction
to the radical libertarian philosophy and movement.

I
next began to scour public libraries in the suburbs of central New Jersey for
books by Rothbard and the two Austrian business cycle theorists he had referred
to in his booklet, Mises and Hayek. Needless to say, I did not have much luck
at first. Desperate, I then decided to venture into the Plainfield Public Library.
Plainfield was a small city that, like Newark had been torn by race riots in 1967.
A city policeman chasing looters had been set upon by a black mob and beaten to
death with a shopping cart. The National Guard, which had then been sent in to
quell the riot, conducted an indiscriminate and warrant-less house-to-house search
for weapons that inflamed even the most peaceful black residents and left lingering
bitterness and racial hatred. Anyway, by the summer of 1971, "white flight"
from the beautiful Victorian houses and Dutch colonials that encircled the once
thriving shopping district of the city was almost complete leaving the large well-stocked
library, housed in a new glass-walled building next to the increasingly rowdy
high school, nearly always deserted. It was there one late spring evening that
I finally located musty copies of America's
Great Depression, The
Theory of Money and Credit, Human
Action, Monetary
Theory and the Trade Cycle, and Prices
and Production. Despite the fact that I was an out-of-towner I somehow
or other finagled a library card from the sympathetic and lonely librarian and
was able to withdraw the books.

That
summer I worked as a janitor at an engineering facility for AT&T. I always
completed my assigned tasks quickly and distinctly recall spending a great deal
of time ensconced in a stuffy broom closet with a naked overhead light bulb reading
America's Great Depression. Although the Mises and Hayek volumes presented
more of a challenge because of some unfamiliar terminology and stylistic idiosyncrasies,
by summer's end I had grasped enough of the substantive theory to consider myself
a reasonably well-informed student of Austrian business cycle theory.

As
my senior year began I discovered the Books for Libertarians catalogue
and ordered Rothbard's Man, Economy and State, Power
and Market, and What
Has Government Done to Our Money? as well as the first modern anarcho-capitalist
treatise, The
Market for Liberty by Morris and Linda Tannehill.

The
most memorable course my senior year was Political Economy taught by Professor
Barry Bluestone, a young Marxist economist and member of URPE (Union of Radical
Political Economists) newly hired by the department. Professor Bluestone knew
and had worked with David Friedman on an anti-draft coalition and was familiar
with Rothbard's writings. He was also somewhat conversant with the radical libertarian
position. One day, while explaining this position to the class, he stated with
a smirk that some libertarians actually believed that law could be enforced through
private competing police agencies, although even they conceded that the functions
of lawmaking and the judicial system would have to be monopolized by the State.
I immediately raised my hand and pointed out that there were libertarians, myself
included, who would relegate even these functions to private competition. I went
on to explain why, under competition, honest courts would drive the corrupt and
biased courts, such as he had told us existed in "Amerika," out of business.
A good speaker and teacher, never at a loss for words, he was momentarily struck
speechless.

After
graduation from Boston College I proceeded on to the graduate program in economics
at Rutgers University, just ten minutes away from my parents' home in New Jersey.
Graduate school was hugely entertaining owing to the eclectic mixture of the Rutgers
graduate economics faculty. The most noteworthy among the faculty included: Paul
Davidson, the prominent post-Keynesian who taught macro and monetary theory; Hugh
Rockoff, a Chicago Ph.D. and eminent economic historian who published a number
of seminal articles on the free banking era in the United States; Alexander Balinky,
a Marx scholar, who claimed the distinction of having been Joseph Schumpeter's
last graduate assistant and whose office was occasionally picketed by the Maoist
Progressive Labor party over some arcane point of Marxist dogma; Marc Miles, a
student of Arthur Laffer's, who later co-authored an international economics textbook
with Laffer and also published a book on supply-side monetary theory and policy;
and the prolific international economist, H. Peter Gray, a former student of William
Fellner's at Berkeley and a strict, but tolerant and well read, Keynesian who
was to become my dissertation adviser. To Professor Gray, I owe a debt of gratitude
for introducing me to the classical "monetary" approach to the balance
of payments and exchange rates, an approach that was later revived and elaborated
by Ludwig von Mises and that I investigated in my dissertation.

Overall,
I was quite pleased with my experience at Rutgers. The diversity among the faculty
led to my exposure to a broad range of literature and also to toleration of my
vigorously expressed Austro-libertarian views by my professors and peers alike.
My dissertation committee comprised a Keynesian, a monetarist and a supply-sider.
Perhaps as important, the transmogrifying of economics into a branch of applied
mathematics, which had begun in the 1960's in American economics, had not yet
progressed very far at Rutgers. Indeed, it was this trend that led to my enrolling
at Rutgers. After I had received my GRE (graduate record exam) results in my senior
year at BC, I went to see my faculty adviser to discuss my prospects for graduate
education. Having scored in the 99th percentile in the verbal part
of the exam and just below the 90th percentile in the economics part
and on track to graduate with honors from BC, I thought I could write my own ticket
to graduate school. I asked him what he thought of Princeton, where he had received
his Ph.D. He took one look at my mediocre score in the math part (76th
percentile) smiled indulgently, and said: "With that score you won't get
into Princeton and if you do, you won't make it through. I suggest you apply to
a school just up the road, Rutgers University." Although I was stunned and
dismayed at the time, I remain grateful today for his straightforward advice.

It
was while I was attending graduate school that I met Murray Rothbard. Shortly
before my first semester began I was involved with the founding of the New Jersey
Libertarian Party, of which I was subsequently elected Treasurer. Our first convention
was scheduled for February of 1973 and we required a keynote speaker. In November
1972, the President of the NJLP Bob Steiner and myself attended a libertarian
conference in New York City whose featured speakers included Rothbard, Bob Lefevre,
and Karl Hess, among others. It was the first time I had seen any of these giants
of the nascent libertarian movement in person and I was excited especially at
the prospect of hearing Rothbard speak. Rothbard followed LeFevre on the program
and, although I do not recall the precise topic of his talk that day, I was extremely
impressed with the joyfulness, affability, and sense of humor he projected. The
latter was especially on display during the question and answer period following
his talk. When someone asked him his view of the extreme pacifism of LeFevre's
"autarchist" philosophy – which prohibited any form of violence
even in self-defense – Rothbard replied: "Well, if someone was brandishing
a mallet at me and I had a gun, I'd plug him."

We
subsequently invited Rothbard to give the keynote address at the NJLP convention,
and he graciously agreed to do it for the rubber chicken dinner and paltry $75
we were able to offer him. Prior to his talk, I introduced myself to him and we
spoke for a while about libertarian issues before I mentioned that I was graduate
student in economics and was going through Frank Fetter's articles, the references
to which I had gleaned from reading Man, Economy, and State. I never expected
his reaction to my casual remark. His eyes immediately lit up and he seemed like
he could barely contain his enthusiasm. He feverishly searched for a pen and asked
me for my address and phone number and told me that he would pass on this information
to people in New Jersey who had formed an Austrian reading group. The following
Monday I received a call from a student member of this group who invited me to
attend the meetings of this reading circle, which was directed by Walter Grinder
and included another one of my libertarian heroes, Walter Block. In the year-and-one-half
that followed I enjoyed increasing personal contact with Murray Rothbard, including
visits to his home, meetings with him in his office at Brooklyn Polytechnic Institute,
and arranging for him to address the graduate economics faculty and students at
Rutgers. Rothbard also encouraged me to write a review essay on David Friedman's
book, The
Machinery of Freedom, for The Libertarian Forum, and this became
my first publication.1 Thus when I disembarked from
Don Lavoie's car in South Royalton, Vermont in June 1974 to attend the first Austrian
economics conference to be convened in the United States, I, like Don and most
of the other attendees, had arrived by way of Murray Rothbard.

Note

1. Joseph Salerno, "The Machinery of Friedman," The Libertarian Forum
   5 (December 1973), pp. 5–6.

June
23, 2005

Joseph
Salerno [send him mail] is a senior fellow
at the Ludwig von Mises Institute, professor
of economics at Pace University, and editor of the Quarterly
Journal of Austrian Economics.

Recent discussions
on Internet lists and in other informal settings has made it increasingly
evident that Austrian economists are deeply vexed and divided over
a number of important questions regarding the nature and extent
of progress in their discipline. These questions include: whether
Austrian economics has progressed much, if at all, during its modern
revival; what standards should be applied in appraising such progress;
and what the appropriate means are of ensuring such progress in
the future. In this lecture I propose to address these questions
and attempt to provide answers to them.

Before dealing
with these questions, however, it is necessary to bring to light
and resolve two related though more fundamental issues that have
long been the source of a tacit rift in the ranks of Austrian economists.
The first of these issues centers on the question of whether economics
is a profession or a vocation. The second involves the role played
in the modern Austrian rebirth by the South Royalton conference,
which was held a little more than thirty years ago. I will argue
that, generally, the position one takes on these two vital matters
strongly influences whether he believes that considerable progress
has been made in developing the Austrian paradigm during the last
three decades – as I emphatically do – or instead that
Austrian economics has blundered down blind alleys and is currently
stagnating, as some Austrians have recently maintained.

In what follows,
I will analyze each of these two basic issues in detail and try
to show how differing views on them yield profoundly different standards
by which the progress of Austrian economics is assessed. In light
of what I argue to be the correct standard, I will conclude by outlining
the case that Austrian economics has progressed by leaps and bounds,
especially in the last two decades, and is fulfilling the initial
promise of its founder, Carl Menger (1976, pp. 48–49), to discover
the essential causal laws governing the economic activities of human
beings – laws that are at once both realistic and exact.

2. ECONOMICS:
VOCATION OR PROFESSION?

The
New Shorter Oxford English Dictionary gives one definition
of “vocation” as “The work or function to which a person is called;
a mode of life or employment regarded as requiring dedication” (Brown
1993, vol. 2, p. 3595). The eminent semanticist S. I. Hayakawa also
emphasizes “dedication” as the distinctive feature of a vocation
which differentiates it from a profession. According to Hayakawa
(1994, p. 351):

Profession
suggests a position that cannot be attained without a considerable
amount of higher education, and that involves one creatively
in mental rather than manual labor. Profession once referred
to the three learned professions – law, medicine,
and theology – but it is now often used to confer status
upon many other ways of earning a livelihood . . . . Even when
profession is used more strictly, it need not suggest
dedication on the part of a member. By contrast one sense of
vocation specifically stresses this dedication. . . .
Moreover vocation stresses a long-term commitment to
something that is not necessarily equated with the earning of
a livelihood. . . .1

In praxeological
terms, a vocation involves what Ludwig von Mises (1998, pp. 584–85)
called “introversive” labor while a profession involves “extroversive”
labor. The essence of introversive labor is work undertaken solely
for its own sake and not as a means to a more remote end. Extroversive
labor, in contrast, is performed because the individual “prefers
the proceeds he can earn by working to the disutility of labor and
the pleasure of leisure” (Mises 1998, p. 585).

One of the
“two most conspicuous examples” of introversive labor, according
to Mises (1998, p. 584), is “the search for truth and knowledge
pursued for its own sake and not as a means of improving one's own
efficiency and skill in the performance of other kinds of labor
aiming at other ends.” The second is “genuine sport, practiced without
any design for reward and social success.” It is not that the effort
expended by the “truth seeker” or “mountain climber” does not involve
the disutility of labor, rather “it is precisely overcoming the
disutility of labor that satisfies him.” Thus genuine truth-seeking
in any scientific discipline qualifies economically as “consumption”
and its pursuit as a vocation.

It is important
to note moreover, as Mises (1998, p. 585) does, that the pursuit
of almost any vocation requires “not only the personal efforts of
the individuals concerned, but also the expenditure of material
factors of production and the produce of other peoples' extroversive
. . . labor that must be bought by the payment of wages.” In other
words, the search for new truth in economics, as in any pure science,
necessitates, in addition to introversive labor, an institutional
framework composed of a structure of complementary goods that has
been deliberately and rationally constructed by one or more property
owners.2

The founding
members of the Austrian school pursued economic research neither
for pecuniary gain nor because they sought professional recognition
or an influence on public policy. According to Mises (1984, p.18),
“When Menger, Böhm-Bawerk and Wieser began their scientific
careers . . . [t]hey considered it as their vocation to put
economic theory on a sound basis and they dedicated themselves
entirely to this cause [emphases are mine].” These three eminent
Austrians, therefore, were not economists by profession but by vocation.

The “vocational”
economist takes a position in academia or works in some other profession
such as banking, journalism, industry or government in order to
obtain the concrete means necessary to sustain and complement his
efforts to discover new truths or expound and apply established
truths in his economic research and writing. The “professional”
economist, in contrast, aims at earning a livelihood, eliciting
acclaim from peers, achieving public fame, shaping political policies
or, most likely, a combination of these ends. Thus the difference
between the vocational economist and the professional economist
is not their objective method of earning a living but the subjective
ends aimed at, which are unobservable. Nonetheless, despite the
subjective element involved, the two kinds of economists can be
readily distinguished from each other by scrutinizing the disparate
views they express toward economic research, particularly its truth
content and perceived rewards.

Vocational
economists like Murray Rothbard are not allergic to using the unfashionable
terms “truth” and “law” when characterizing the science of economics.
For Rothbard, economics is a substantive body of immutable and universal
causal laws that are logically deduced from the incontrovertible
fact that people employ means to attain their most desired ends.
As such, Rothbard (2004, p. 1360) held that “all these elaborated
laws [of economics] are absolutely true” and that “economics does
furnish . . . existential laws.” Furthermore, in the 1950's and
1960's, Rothbard was working on Austrian economics in obscurity
and virtual isolation. He did not obtain a full-time academic position
until 1966 and, before then, was earning a precarious living on
foundation grants while he soldiered on in building up the Austrian
theoretical edifice. Yet Rothbard (1990, p. 2) revealed in an interview
in 1990 that he had been quite content during this period: “Any
chance to write a book or meet new people was terrific.” These are
the views and the attitudes of the ideal vocational economist.

Paul Samuelson
is the exemplar of the modern professional economist. When Samuelson
(1988, p. 63) once grandiosely declared, “I can claim in talking
about modern economics I am talking about me,” he spoke truer than
he knew. In his approach to economic research Samuelson (1993, p.
242) is a self-proclaimed follower of the “views of Ernst Mach and
the crude logical positivists.” These so-called philosophers of
science contended, “good theories are simply economical descriptions
of the complex facts of reality that tolerably well replicate those
already-observed or still-to-be-observed facts.” Of course economic
theory formulated as a shorthand summary of a past sequence of observable
and non-repeatable historical facts cannot possibly elucidate the
immutable causal laws that operate and interact to produce a unique
and complex economic phenomenon at a later moment in history. Nonetheless,
Samuelson (1993, p. 242) embraces this view of economic theory:
“Not for philosophical reasons but purely out of long experience
in doing economics that other people will like and that I myself
will like. . . . When we are able to give a pleasingly satisfactory
“HOW” for the way of the world, that gives the only approach to
“WHY” that we shall ever attain.” Samuelson and Solow's formulation
of the now discredited stable Philip's Curve tradeoff between inflation
and unemployment is an example of such Machian theorizing in action.
Without doubt, the Philips Curve for a time was well liked by Samuelson,
Solow and other professional economists and even used by policymakers,
but its truth content in the face of the stagflation that developed
in the 1970's was exactly nil.

To be fair,
Samuelson does not dismiss all concern for truth in economic theory.
For example he confesses that at 20 years of age he had harbored
high hopes that anticipated progress in econometric methods would
“narrow down the uncertainties of our economic theories.” However,
as a septuagenarian, Samuelson (1993, p. 243) was forced to admit
that “it has turned out not to be possible to arrive at a close
approximation to indisputable truth.” The accumulation of econometric
findings by the1990's, it seemed to Samuelson, was not “convergent
on a testable truth.” Samuelson (1993, p. 294) rationalized this
state of affairs by arguing, “[T]ruth has many facets. Precision
in deterministic facts or in their probability laws can at best
be only partial and approximate.” In the introduction to his article
that was to become the template for modern economic modeling, Samuelson
was even more frank regarding the severe limitation of Machian economic
theory to embody a true conception of the causal relationships that
govern economic reality. Wrote Samuelson in this seminal article
(1968, p. 58): “I think it would be folly to come to any conclusions
on the basis of so simplified a model and such abstract reasoning;
but on the other hand, strong simple cases often point the way to
an element of truth present in a complex situation.”

Ultimately,
however, the professional economist need not fret overly much about
whether he can harvest a grain of truth from such unrealistic models,
because his reward for pursuing economic research lies elsewhere.
According to Samuelson (1970, p. 295), “In the long run the economic
scholar works for the only coin worth having – our own applause.”
Elsewhere, Samuelson (1988, p. 72) described scientists, including
professional economists, as being “as avaricious and competitive
as Smithian businessmen. The coin they seek is not apples, nuts,
and yachts; nor is it coin itself, or power as that term is ordinarily
used. Scholars seek fame. The fame they seek . . . is fame with
their peers – the other scientists whom they respect and whose
respect they strive for.”

Samuelson's
account of the extroversive reward sought after by modern professional
economists clearly – though perhaps unwittingly – reveals
that their research endeavors are not governed primarily by a search
for truth. Mises (1978, pp. 7–8; 1998, pp. 868–70) gives
a compelling sociological interpretation of why academic researchers
in the aprioristic sciences such as economics and philosophy are
diverted from seeking truth to striving after other ends. As universities
traditionally developed, the professors were not only supposed to
teach but also to make original contributions to their science.
Yet, as Mises noted, very few individuals living during any historical
epoch are endowed with such ability. In empirical sciences, whether
of the natural or historical variety, however, the illusion that
all academic researchers contribute something valuable to their
science can be plausibly sustained because there is no visible distinction
between the scientific methods employed by the creative genius and
those resorted to by the inferior researcher. As Mises (1998, p.
869) explained:

The great
innovator and the simple routinist resort in their investigations
to the same technical methods of research. They arrange laboratory
experiments or collect historical documents. The outward appearance
of their work is the same. Their publications refer to the same
subjects and problems.

Research in
economics is quite different: it requires sustained, rigorous and
systematic thinking, a faculty which very few possess and even fewer
are willing to exercise. This is true of both the creative genius
who constructs a great edifice of economic theory as well as those
who seek to refine, extend and apply his system to new problems.
His students and followers must also expend many years of their
life and a great deal of rigorous mental effort in mastering the
entire theoretical system before they can make even minor contributions
to economics. Therefore, Mises (1998, p. 869) concluded, in economics:

[T]here
is nothing that the routinist can achieve according to a more
or less stereotyped pattern. There are no tasks which require
the conscientious and painstaking effort of sedulous monographers.
There is no empirical research; all must be achieved by the
power to reflect, to meditate, and to reason. There is no specialization,
as all problems are linked with one another. In dealing with
any part of the body of knowledge one deals actually with the
whole.

Those aspiring
economics professors who lack the intellectual faculties or temperament
needed to conduct systematic theoretical research therefore must
find another field in which to make their required research contributions.
For example, in the German-language universities of the late nineteenth
and early twentieth centuries, these men turned to economic history
and descriptive economics. Mises's perceptive sociological analysis
explains the rise to dominance and entrenchment of the German historical
school in the universities as well as its hysterical antipathy toward
economic theory. According to Mises (1978 p. 8):

The fiction
that in the sciences all professors are equal does not tolerate
the existence of two types of professors in economics: those
who work independently in economics [as original theorists];
and those who come from economic history and description. The
inferiority complex of these “empiricists” gives them a prejudice
against theory.

By the 1920's
the German historical school was on its last legs but still ensconced
in the professorial chairs. The members of the third generation
of the school were a dull and undistinguished lot except for Werner
Sombart, who had been a student of Gustav Schmoller's, the leading
German historicist of the second generation. Mises, who knew Sombart
personally, portrayed him as the quintessential professional economist.
It is worthwhile quoting in full Mises's entertaining and eviscerating
description of Sombart, because the personality that emerges is
the antithesis of the vocational economist:

Werner Sombart
was the great master of his set. He was known as a pioneer in
economic history, economic theory, and sociology. And he enjoyed
a reputation as an independent man, because he had once aroused
Kaiser Wilhelm's anger. Professor Sombart really deserved the
recognition of his colleagues because to the greatest degree he
really combined in his person all their shortcomings. He never
knew any ambition other than to draw attention to himself and
to make money. His imposing work on modern capitalism is a historical
monstrosity. He was always seeking public applause. He wrote paradoxes
because he could then count on success. He was highly gifted,
but at no time did he endeavor to think and work seriously. Of
the occupational disease of German professors – delusions
of grandeur – he had acquired an elephantine share. When
it was fashionable to be a Marxian, he professed Marxism; when
Hitler came to power, he wrote that the Fuehrer receives his orders
from God! (Mises 1978, pp. 102–103)

Professionalist
aspirations and the culture it engenders are not only inconsistent
with truth-seeking in economics, however, they are positively antithetical
to it. For the professionalization of a scientific discipline, particularly
a social science like economics, almost always proceeds hand in
hand with the expansion of government interventionism. As Mises
(1998, p. 865) put it “The development of a profession of economists
is an offshoot of interventionism.” The reason for this inevitable
connection rests on two facts. On the one hand, the State requires
a class of intellectuals and specialists for designing, implementing,
and providing rationalizations for various interventions into the
market economy. On the other hand, those intellectuals who seek
the regular income and prestige that accompany the professionalization
of their discipline are ever ready to oblige, because the ability
of an intellectual to earn his living researching and writing in
his chosen field on the free market is always precarious at best.
As the interventionist State expands, it reinforces the need for
trained experts and the university system obtains increasing subsidies
from government to initiate and expand graduate programs that will
provide such personnel. The lucrative positions in these programs
are naturally bestowed on those economists who spearhead the drive
to professionalize and are, therefore, most active and outspoken
in their support of government interventionism.

In the U. S.
the most extreme and thoroughgoing instances of domestic interventionism
occurred during the two World Wars of the twentieth century. It
was therefore no surprise that the movement to professionalize American
economics, which began in the 1880's, experienced quantum leaps
during these war crises. For when the State goes to war it needs
professional expertise to plan and direct the massive mobilization
of the resources it requires. This translates into a cornucopia
of lucrative and prestigious jobs for economic experts and specialists
in the bureaus and advisory boards of the political planning apparatus
that centrally directs the war economy. In his brilliant book on
the professionalization of American economics, Michael Bernstein
(2001, p. 89) identifies the central role played by World War II
in the ultimate success of this movement, perceptively observing:

Under the
novel and unrelenting demands posed by national mobilization,
modern economic theory had proved its worth. . . . Not individualism
but rather statism provided the special circumstances within
which the high hopes and great expectations of generations of
professionalizers could be realized. . . . It is one of the
great ironies of this history that a discipline renowned for
its systematic portrayals of the benefits of unfettered, competitive
markets would first demonstrate its unique operability in the
completely regulated and controlled economy of total war.

Of course their
wartime experience led economists to recognize the potentially great
material benefits that would accrue to them from a permanent alliance
between their profession and the centralized American State. They
responded by formally reorganizing the discipline and reshaping
its educational methods and requirements so as to accommodate the
prospective needs of the emerging postwar “national security state.”
Bernstein (2001, pp. 89–90) gives an incisive account of how
the American economics profession finally established itself in
service to a centralized and interventionist leviathan State:

World War
II provided the first systematic demonstration of the beneficence
to be won from the largesse of the central government . . .
. As a matter of course, there emerged a determination to evaluate
and reconfigure educational programs in the field, more rigorously
stipulate its varieties of expertise and methodologies, and
pursue consensus about its central principles and policy orientations.
That is to say, that out of the crucible of national mobilization
came the beginnings of a professional identity and self-confidence
that, while resolutely sought after since the late nineteenth
century, had, up to that point, been elusive and fleeting.

Bernstein (2001,
pp. 91–108) goes on to identify some of the arcane sub-disciplines
within professionalized economics that were developed in response
to the needs of the emerging American super-state during the Cold
War era which helped to maintain it on a permanent war footing.
The “decision-making sciences” such as linear programming and operations
research were developed during World War II to solve the logistical
problems associated with supplying overseas troops in different
theaters of operation. Game theory was reoriented and refined to
assist in the solution of strategic military problems associated
with the Cold War conflict – with generous funding from the
Department of Defense and especially the Office of Naval Research.
And the development of both mathematical growth theory and the practical
application of Keynesian macroeconomics embodied in the Kennedy-era
New Economics were in large part stimulated by Cold War concerns.
As Bernstein (2001, p. 108) notes with regard to the Keynesian New
Economics: “American economists found themselves poised to participate
in the realization of some of the most significant statist aims
of the cold war era . . . a vigorous national economy was essential
both to equip the armed forces and to demonstrate the superiority
of American capitalism.”

The remarkable
proliferation of hyper-specialized fields that occurred during and
after World War II led to a disintegration of economic theory, signified
by the disappearance of the general economic treatise (Rothbard
2004, p. xc–xci). No longer was there an integrated system
of general economic principles that was held in common and applied
to the analysis of all policies and problems by those who called
themselves economists. Now each sub-field of research had it own
special theory which was more or less sealed off from general economic
theory. Even general theory itself was now compartmentalized into
microeconomics and macroeconomics.

This specialization
or, more accurately, disintegration of economics compounded by the
postwar trend toward a positivist approach to economic theory, whether
of the Samuelsonian or Friedmanite variants, destroyed the formidable
barrier that had previously confined professional economists with
no faculty or vocation for theoretical research to economic history
and descriptive economics. They now began to abandon these peripheral
areas and to invade what was once the domain of economics proper
in droves. Though failing to master the great praxeological system
of economic theory that had taken shape in the interwar years, these
postwar economists could now undertake research in the splintered,
ultra-specialized areas of growth theory, labor economics, industrial
organization, oligopoly theory and so on ad infinitum. However,
the unrealistic theoretical models constructed by professional economists
then and now can never elucidate the essential laws governing the
actual market phenomena associated with their disjointed fields
of research. For as Mises (1998, pp. 687) pointed out: “The economist
must never be a specialist. In dealing with any problem he must
always fix his gaze upon the whole system. . . . Economics does
not allow of any breaking up into special branches. It invariably
deals with the interconnectedness of all the phenomena of action.”

Our discussion
thus far leads to an important general point. The economics profession
is a fiat phenomenon in the same sense as inconvertible paper money.
Neither would or could exist on a market free of specific pattern
of government interventions. Government cannot directly command
and coerce a newly issued fiat money into circulation in the market
economy. As Rothbard (1990a) has taught us, government must first
impose a series of interventionist measures such as legal tender
laws, repeated suspension of convertibility between paper promissory
notes and the underlying gold money, the refusal to enforce gold
clauses in private contracts, the banning of the private ownership
of gold, etc. These interventions distort market processes and prepare
the way for the gradual emergence of fiat money. The same is true
of the emergence of the economics profession. Government has no
power to directly design and establish a profession with its peculiar
and intricately interwoven customs, conventions, research culture,
and institutional infrastructure. Nonetheless, a natural vocation
like economics can be transformed into a profession as a result
of the distortion of market processes and the disturbing of property
arrangements caused by wars, political usurpation and subsidization
of higher education, and the establishment of centralized bureaus
and agencies to implement and oversee economic interventions. The
medical profession is therefore a natural profession that
would exist on a free market because it has a natural clientele;
the economics profession, along with most other social science professions,
is a fiat profession that has no free market clientele and
would exist as a truth-seeking vocation in the absence of a particular
historical pattern of government interventions.3

To sum up:
the vocational economist strives to master the system of economic
theory as handed down by the great system builders and innovators
of the past. Once this mastery is achieved, then, depending on his
ability, he is poised either to expound and apply this theoretical
system, to contribute a few important innovations, or to present
a thoroughgoing reformulation that embodies a number of major advances.
There are very few individuals who are capable of successfully embarking
on even the first of these paths. Moreover, regardless of which
path is taken, the vocational economist is driven forward by a thirst
for truth which is never slaked. He seeks to know ever more about
what Rothbard (1997, p. 262) termed “the structure of reality as
embodied in economic law.” Furthermore the extroversive labor he
performs for a livelihood, regardless of the field, is merely a
means to this and other consumption ends that rank high on his value
scale. All other things equal, he is indifferent toward a position
in academia except as it provides a more efficient method of pursuing
his vocation. Public acclaim and the recognition of his peers, if
they come, are not sought after by him but are at most valued byproducts
of his activities. Finally, the vocational economist measures progress
in his discipline by the quantity and quality of minds that have
mastered economic theory, because his own search for truth is facilitated
by subjecting his work to the critical evaluation of others pursuing
the same calling.

Contrariwise,
the professional economist aims, in his research activities, at
a number of extroversive ends. These include the approbation of
his colleagues, public fame, intellectual influence in shaping government
policies, professional advancement and prestige, and, of course,
raw power and money. To a great extent, these ends are attainable
only with government subsidies and largesse and so he naturally
supports an expansive and interventionist state. His natural roosting
place, to which he continually returns after his lucrative stints
in government service, nonprofit think tanks, and international
bureaucracies are the large universities that are subsidized or
directly controlled by government. He views progress in economics
as a matter of the multiplication of its sub-disciplines and specialized
bodies of theory, the increase of the sheer number of bodies in
graduate programs, and especially the expansion of opportunities
to obtain lucre and positions of power in advising the interventionist,
Welfare-Warfare State. As Mises (1998, p. 865) perceptively noted
as early as 1949, professional economists “rival the legal profession
in the supreme conduct of political affairs. The eminent role they
play is one of the most characteristic features of our age of interventionism.”

After World
War II and before the modern Austrian revival had gathered a full
head of steam in the mid-1980's there were very few vocational economists
left who had mastered the praxeological system and were actively
contributing to economics. The most notable among them were Mises,
Rothbard, Israel M. Kirzner, Henry Hazlitt, Hans F. Sennholz and
William H. Hutt. Almost all others calling themselves economists
were professional economists in the mold of Werner Sombart and Paul
Samuelson.

3. The South
Royalton Conference: Boon or Bane?

As I have argued
in earlier work (Salerno 2002), the renascence of Austrian economics
began in 1962 with the publication of Murray Rothbard's Man,
Economy and State. This magisterial treatise contained a
systematically elaborated and realistic structure of economic theory
that incorporated the insights and theorems of dozens of earlier
economists of various nationalities who had worked in the Austrian
tradition from 1871 through the 1950's. With this work of creative
synthesis, Rothbard reshaped and advanced the praxeological paradigm
that originated in the works of Menger and Böhm-Bawerk and
was first clearly delineated by Mises. In fact Rothbard was the
first economist in the history of the discipline, including Mises
himself, to succeed in methodically deducing the entire corpus of
economic theory from the undeniable fact of purposive human action.
By proceeding in this matter, he discovered new truths about economic
reality. Rothbard (quoted in Stromberg 2004, pp. xxxiii–xxxiv,
xli) explained his goal and method in writing Man, Economy and
State in correspondence with the foundation funding his work:

The aim
I set myself was to fulfill the essence of Mises's structure
of praxiology [sic] by spelling it out, step by step, in one
coherent integrated structure. I realized that it is possible
to begin with one simple, self-evident assumption: human
existence, and deduce all propositions of economics from
it. The essence of human existence is human action, and
once action is defined, all further [economic] truths can be
deduced by logical implication. . . . However, as I have been
proceeding, the necessary elaborations on the sometimes sparse
framework of Mises has led inevitably to new and original presentations.
[The bracketed interpolations were supplied by the editor of
the correspondence.]

Perhaps Rothbard's
greatest achievement in this work was his presentation of an integrated
theory of production that embodied the pure time preference theory
of interest of Frank A. Fetter and Mises, the time structure of
capital analysis developed by Böhm-Bawerk, Knut Wicksell and
Friedrich Hayek, and the marginal productivity theory of factor
pricing expounded at the turn of the century by John Bates Clark
and Thomas Nixon Carver. This theory spanned five chapters, comprising
over 300 pages and almost 30 percent of the treatise. Rothbard had
very little guidance from his predecessors and contemporaries, including
Mises, in systematically elaborating production theory and had to
employ the step-by-step procedure of logical deduction from first
principles and realistically chosen subsidiary postulates provided
by the praxeological method. Wrote Rothbard (quoted in Stromberg
2004, xlix–l):

[A]s my work
evolved, I found that there was a lot of gaps in the economic
organon that I had to fill in myself. Going step by step in logical
progression turned out to involve a good deal of original contribution
on my own part. . . . Mises has very little detail on production
theory, and as a consequence it took me many false starts, and
lots of what turned out to be wasted effort, before I arrived
at what satisfied me as a good Production Theory. (It's involved
emancipation from 90 percent of current textbook material.)

It is clear
from his review of Man, Economy, and State that Mises (1990,
pp. 155–57) also saw Rothbard's work as a major advance in
and a new point of departure for praxeological economic theory:

The main
virtue of this book is that it is a comprehensive and methodical
analysis of all activities commonly called economic. . . . In
every chapter of his treatise, Dr. Rothbard adopting the best
of the teachings of his predecessors, and adding to them highly
important observations . . . develops the correct theory. .
. . Henceforth all essential studies in these [praxeological]
branches of knowledge will have to take full account of the
theories and criticisms expounded by Dr. Rothbard.

Rothbard (2000;
1990a) followed up this path-breaking treatise with two other works
one year later, America's
Great Depression and What
Has Government Done to Our Money. The former book applied
the Austrian theory of the business cycle to explaining the causes
of the Great Depression in the U.S. supplemented by a critique of
the perverse government policies that deepened and prolonged it.
The latter work was a slim booklet intended as a primer on Austrian
monetary theory, but containing an original praxeological-historical
explanation of the displacement of gold by paper fiat money. In
1970, Rothbard (2004) published Power
and Market, which presented a comprehensive praxeological
analysis of the entire range of government interventionism.

These four
books were directly responsible for rekindling interest in Austrian
economics among the generation of young academics and graduate students
who reached maturity from the mid-1960's to the early 1970's. These
young “Rothbardians” made up the majority of the thirty or so individuals
who gathered at a week-long conference in June 1974, in the small
rural town of South Royalton, Vermont, to listen to lectures by
Rothbard, Kirzner and Ludwig Lachmann. The “South Royalton conference,”
as it came to be called, was the first conference on Austrian economics
to be held in North America and was an exhilarating experience for
those attendees like myself who had been studying the great Austrian
texts in small groups or in isolation. We now had the chance for
the very first time to intermingle with a large group of our peers
and to meet and converse with the living masters of Austrian economics.
The personal relationships established at the conference with other
attendees and with the lecturers inspired many of us to pursue our
vocation with a renewed sense of purpose and enthusiasm. The vigorous
scholarly interchange both during and outside the formal lecture
sessions that repeatedly referred to the classic works of Austrian
economics also imbued us with an intangible but real sense that
we were part of a vital tradition, using the same intellectual means
to strive together toward the common goal of discovering truth.
The result was the coalescence of a self-conscious and living Austrian
movement, the first since the early 1930's.

However, while
these benefits should not be underestimated, the conference introduced
a serious distortion into the future development of Austrian economics
that went unrecognized for years. As I mentioned, by 1974 the Austrian
revival was already well under way, inspired by the works of Rothbard
who had reformulated and advanced the praxeological paradigm on
many fronts. The four lectures he presented at the conference aimed
at restating and refining the paradigm in the areas of methodology,
monetary theory, the prehistory of Austrian economics and the relationship
between economic theory and value judgments in the advocacy of economic
policy.4

Israel Kirzner
also had painstakingly mastered the praxeological system as Mises's
graduate assistant in the 1950's. He contributed substantially to
its advancement in two books. In The
Economic Point of View, published in 1960 and based on the
dissertation he had written under Mises, Kirzner (1976) carefully
compared and contrasted Mises's praxeological approach to economics
with all other approaches, past and present. In his 1973 volume
on Competition
and Entrepreneurship, Kirzner (1973) employed a reformulated
version of Mises's concept of entrepreneurship to demonstrate the
inadequacy of neoclassical price theory, which was based on static
equilibrium and offered no scope for the real world phenomena of
error, uncertainty and profit. Kirzner's mastery of both Austrian
economics and neoclassical price theory and his tactful yet unsparing
criticism of the latter served as a bridge to neoclassical economists
who wished to learn about and incorporate Austrian insights into
their own work. Following up on the strategy of this book, Kirzner's
lectures at South Royalton were oriented toward rendering Austrian
insights and critiques comprehensible and palatable to open-minded
neoclassical economists. To what extent this strategy has succeeded
cannot be considered here.

The third lecturer,
Ludwig Lachmann, although a highly intelligent and erudite man,
was not in any sense a master of systematic economic theory. Lachmann's
intellectual influences in economics were eclectic, even incongruous,
and included the historicist Werner Sombart his dissertation supervisor
and the brilliant sociologist Max Weber, a much more reasonable
adherent of the German historical school. He was also influenced
in capital and business cycle theory by Friedrich Hayek, whom he
served as a graduate assistant in the 1930's and by a fellow Hayek
graduate assistant, George Shackle (1983, p. 7), later a self-proclaimed
“nihilist” in economic theory. Lachmann also adopted Keynes's view
of expectations which conceived them as autonomous, volatile and
not rationally grounded in the entrepreneur's actual experiences
in the market process. In the 1950's, Lachmann (1978) did publish
a very valuable monograph on Capital
and Its Structure, which emphasized the essential heterogeneity
of capital goods and the role of the price system in guiding entrepreneurs
to continually recombine capital goods into new structures in response
to changes in the economic data.

Unfortunately,
Lachmann's lectures at South Royalton were devoted to propounding
a view of the market process as driven by uncaused, unpredictable
and “kaleidic” changes in the pattern of individuals' knowledge
as well as a wholesale rejection of the use of the general-equilibrium
concept in economic theory, even its limited and carefully circumscribed
role in praxeological analysis.

Thus the main
problem with the conference was that it served to elevate an eclectic
and idiosyncratic thinker with historicist leanings to the position
of a “master” of Austrian economics on a par with Rothbard and Kirzner.
This produced unforeseen and negative long-run consequences for
the Austrian revival. First, Lachmann's newly exalted status and
his personal charisma as an erudite, European-trained professor
gave his writings an undeserved prominence that diverted attention
away from the valuable works of established Austrian economists
who had demonstrated a clear and masterful grasp of the praxeological
system. These included especially Henry Hazlitt, Hans Sennholz,
and William Hutt.5 Hazlitt and Sennholz
were now dismissed as an “economic journalist” and a “popularizer,”
respectively. Hutt was relegated to the category of “semi-Austrian,”
despite the fact that that by 1963 he was writing economic theory
as a “praxeologist,” which he defined as “the economist who has
grasped the principal lesson of Mises' Human
Action” (Hutt 1963, p. 136).

A second and
more pernicious effect of Lachmann's unwarranted influence was that
some young Austrians abandoned their immersion in the rigorous study
of praxeological economic theory to write facile critiques of neoclassical
economics. It also led them to a nihilistic criticism of the use
of equilibrium constructs in the writings of Rothbard and Kirzner.
This resulted in an internecine controversy over the meaningless
question of whether equilibrating forces or disequilibrating shocks
dominated the market process.6 Worse
yet, the young Lachmannians navely believed that the neoclassical
establishment would see the light of reason and happily concede
the truth of their arguments. When they finally learned that the
neoclassical establishment would never abandon its attachment to
general equilibrium, they altered their strategy and began writing
articles attempting to integrate piecemeal Austrian theoretical
insights into specialized areas of neoclassical economics. Unfortunately,
the hyper-mathematization of neoclassical theory that began in the
early 1980's rendered this strategy lame.

After long
and bitter experience, these Austrians finally learned that there
was no place at the professional table for truth-seeking economists.
In the meantime they had failed to cultivate the mastery of praxeological
economics necessary to do serious work in the paradigm, which they
now declared to be a “closed system.” As a result, their goal imperceptibly
shifted from pursuing economics as a vocation to maneuvering for
a position in the economics profession. This was the unfortunate
legacy of the South Royalton conference: it transformed the goal
of many Austrians from seeking truth to seeking advancement in a
fiat profession; correspondingly, it revolutionized the standard
of progress for Austrian economics. Before the South Royalton conference,
the standard was clearly the number of independent thinkers who
had been stimulated to recognize and follow their inner vocation
to perform research into the structure of economic reality. As the
culture of Austrian economics evolved in the decade after South
Royalton, the standard of progress was gradually transformed into
the number of positions the South Royalton generation and their
students obtained in research universities. Of course, professional
advancement and positions at Ph.D.-granting institutions are desirable
to the vocational economist as means for awakening other
potential truth seekers to their vocation for economic research.

The generation
of Austrian economists that came immediately after the South Royalton
generation was even more prone to erroneously view economics as
a profession and to assess progress in Austrian economics as the
improbable acceptance of their ideas and writings by the statist
economics profession. The main reason for this was that they were
too young to have had direct exposure to the pre-South Royalton
milieu of the Austrian revival, whose formative influence was clearly
and overwhelmingly Rothbardian. To many of this generation, the
South Royalton conference and the awarding of the Nobel Prize in
economics to Hayek a few months later marked the inception of the
Austrian revival.

Ironically
members of the post-South Royalton generation are now counseling
younger Austrians to retreat from economics proper to the backwater
provinces of atheoretical economic history and descriptive economics
in order to “climb the professional ranks.” “Theory,” they say,
“is no longer something that attracts the best and the brightest.
Instead, the best and the brightest are attracted to empirical puzzles
and data analysis.” To be an “impact player” in the profession the
aspiring Austrian is advised to “look out the window and not at
the blackboard.” In other words, one must “jettison doing conceptual
economics and focus on applied and historical topics.” Thus from
now on Austrian economics is to be strictly “empirical economics,
which . . . means really good historical scholarship and contemporary
public policy.” Thus over one hundred years after the Austrian school
vanquished the German historical school in the Methodenstreit,
the heirs of Menger are advised to forsake their vocation and surrender
to Gustav Schmoller's ghost in order to become members of a fiat
profession like Werner Sombart and Paul Samuelson.

Instead of
an extended critique of this absurd and self-defeating strategy,
I will simply counter with the advice of the vocational economist
who reshaped the modern Austrian paradigm. When asked in an interview
“What should young Austrians be concentrating on?” Rothbard (1990b,
p. 15) replied, “Adding to the theoretical edifice…. Most importantly,
we should never stop refuting mainstream economics.”

4. The Grove
City Conference and the Death of the Professionalist Diversion

In fact there
has been a great deal of progress in Austrian economics in the last
twenty years thanks to the founding of the Mises Institute in 1983,
which has supplied the material resources and institutional infrastructure
required by those who pursue economics as a vocation and who wandered
in the wilderness in the decade after the South Royalton conference.
Even more importantly, the Institute's prodigious publications and
its plethora of conferences, workshops, fellowships and online resources
have assisted an ever growing number of young truth seekers from
all over the world in hearing and heeding their inner calling to
economic research. Judging by the last Austrian Scholars Conference
in March 2004, scholars from around the world who are performing
the introversive labor of advancing, applying or devising new methods
of expounding the praxeological paradigm number in the hundreds.
None is or need be another Ludwig von Mises or Murray Rothbard;
system builders in an aprioristic science are born once or twice
a century. But this is no cause for pessimism.

Contemporary
vocational economists who have painstakingly worked their way up
and onto the shoulders of Mises and Rothbard and who deserve to
be called masters of their subject are every day perceiving new
truths about complex and evolving politico-economic reality that
go significantly beyond these two great system builders. In fact,
far from constructing a “closed system,” as some Austrians have
claimed, Rothbard (1989) enthusiastically welcomed and endorsed
innovations in the praxeological paradigm that corrected or went
beyond his own work and that he began to happily witness in the
late 1980's. Thus he wrote in correspondence in 1989: “I welcome
change and advances in Austrian theory provided they are true, i.e.,
that they work from within the basic Misesian paradigm. So just
as I think I have advanced beyond Mises in developing the Misesian
paradigm, [other] people . . . have advanced the paradigm still
further and great!”

Moreover in
spite of – or perhaps because of – unswerving dedication
to their vocation many Austrian economists have obtained positions
in academia where they are in a position to awaken and guide more
young minds along their vocational path. The Austrian Student Scholars
Conference this weekend is living proof of the success of their
efforts. You are all here because you are eager to embark on a vocation
in Austrian economics. What from now on shall be called the Grove
City conference marks the demise of the professionalist diversion
in Austrian economics that grew out of the South Royalton conference
and that nearly destroyed the Austrian revival. It is only fitting
that Grove City host this historic event because it was the home
for so many years of Hans Sennholz, one of the greatest vocational
economists of our era.

REFERENCES

Bernstein,
Michael A. 2001. A
Perilous Progress: Economists and Public Purpose in Twentieth Century
America. Princeton, NJ: Princeton University Press.

Brown, Lesley,
ed. 1993. The
New Shorter Oxford English Dictionary on Historical Principles.
2 vols. New York: Clarendon Press.

Dolan, Edwin
G, ed. 1976. The
Foundations of Modern Austrian Economics. Kansas City: Sheed
and Ward, Inc.

Hayakawa, S.
I. 1994. Choose
the Right Word: A Contemporary Guide for Selecting the Precise Word
for Every Situation. 2nd ed. Ed. Eugene Ehrlich.
New York: Harper Collins Publishers.

Hutt, W. H.
1963. Keynesianism – Retrospect and Prospect: A Critical
Restatement of Basic Economic Principles. Chicago: Henry Regnery
Company.

Kirzner, Israel
M. 1973. Competition
and Entrepreneurship. Chicago: University of Chicago Press.

_____. 1976.
The
Economic Point of View: An Essay in the History of Economic Thought.
2nd ed. Ed. Laurence S. Moss. Kansas City: Sheed and
Ward, Inc.

Lachmann, Ludwig
M. 1978. Capital
and Its Structure. 2nd ed. Kansas City: Sheed
Andrews and McMeel, Inc.

Menger, Carl.
1981. Principles
of Economics. Trans. James Dingwall and Bert F. Hoselitz.
2nd ed. New York: New York University Press.

Mises, Ludwig
von. 1978. Notes
and Recollections. Trans. Hans F. Sennholz. South Holland,
IL: Libertarian Press.

_____. [1969]
1984. The
Historical Setting of the Austrian School of Economics.
Auburn AL: Ludwig von Mises Institute.

_____. [1962]
1990. “Man,
Economy and State: A New Treatise on Economics.” In idem,
Economic
Freedom and Interventionism: An Anthology of Articles and Essays,
ed. Bettina Bien Greaves. Irvington-on-Hudson, NY: The Foundation
for Economic Education. Pp. 154–58.

_____. 1998.
Human
Action: A Treatise on Economics. Scholar's ed. Ed. Jeffrey
M. Herbener, Hans-Hermann Hoppe, and Joseph T. Salerno. Auburn,
AL: Ludwig von Mises Institute.

Rothbard, Murray
N. 1989. Letter to author. March 28.

_____. [1963]
1990a. What
Has Government Done to Our Money? 4th ed. Auburn
AL: Ludwig von Mises Institute.

_____. 1990b.
“A Conversation
with Murray N. Rothbard.” Austrian Economics Newsletter
11 (Summer).

_____. [1972]
1997. Review of Economic
Means and Social Ends: Essays in Political Economics, Robert
L. Heilbroner, ed. (Englewood Cliffs, NJ: Prentice-Hall, 1969).
In idem, The
Logic of Action Two: Applications and Criticism from the Austrian
School. Lyme, NH: Edward Elgar. Pp. 260–68.

_____. 2000.
America's
Great Depression. 5th ed. Auburn AL: Ludwig von
Mises Institute.

_____. 2004.
Man,
Economy, and State: A Treatise on Economic Principles with Power
and Market: Government and the Economy. Scholar's ed. Auburn,
AL: Ludwig von Mises Institute.

Salerno, Joseph
T. 2002. “The
Rebirth of Austrian Economics – In Light of Austrian Economics.”
The Quarterly Journal of Austrian Economics 5 (Winter): 111–28.

Samuelson,
Paul A. [1949] 1968. “International Factor-Price Equalisation Once
Again.” In Richard E. Caves and Harry G. Johnson, eds., Readings
in International Economics. Homewood, IL: Richard D. Irwin,
Inc. Pp. 58–71.

_____. [1962]
1970. “Economists and the History of Ideas.” In Ingrid H. Rima,
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and Winston, Inc. Pp. 282–95.

_____. 1988.
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_____. 1993.
“My Life Philosophy: Policy Credos and Working Ways.” In Michael
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Shackle, G.L.S.
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Stromberg,
Joseph. 2004. Introduction to Murray N. Rothbard, Man,
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and Market: Government and the Economy, Scholar's ed. (Auburn,
AL: Ludwig von Mises Institute). Pp. xix–lxxxviii.

Footnotes

1. The italics
   and bolding in this passage appear in the original.
2. This point
   is argued in detail in Salerno
   2002.
3. I am very
   grateful to Guido Hülsmann for calling this general implication
   of my argument to my attention.
4. All the
   lectures given at the South Royalton conference and referred to
   in this paper were later published in Dolan 1976.
5. Some of
   the important contributions of these men to the Austrian canon
   are cited in Salerno
   2002.
6. I say "meaningless"
   because the real-world market economy is never in or moving toward
   the state of general equilibrium or what Austrians call the "evenly
   rotating economy," which is a fictional state imagined by
   the economist as an analytical convenience in solving the problem
   of distinguishing profit from interest. All that exists in reality
   is a market process unfolding in history, driven by entrepreneurs
   some of whom are more successful than others in anticipating and
   adjusting production to ceaseless changes in future market conditions.
   The incessant change and pervasive uncertainty that characterizes
   the market economy is not "disequilibrating," it is
   simply a brute existential fact; neither can the forecasts and
   price appraisements of entrepreneurs be termed "equilibrating"
   — they are simply right or wrong.

November
23, 2004

Joseph
T. Salerno [send him mail]
is professor of economics at the Lubin School of Business, Pace
University in New York, senior fellow at the Ludwig
von Mises Institute, and editor of The
Quarterly Journal of Austrian Economics. This
is a revised version of the Ludwig von Mises Lecture presented at
Austrian Student Scholars Conference, Grove City College, Grove
City, PA, November 5–6, 2004. Please do not quote without the
author's permission.