Memo To: Nate Lewis, Jude Wanniski, "Austrians," LewRockwell.com readers

Memo To: Nate Lewis, Jude Wanniski, "Austrians," LewRockwell.com readers
From: Gene Callahan
Re: Nathan Lewis and the "Supply-Siders"

Nathan Lewis, an economist belonging to a group that calls itself the "Supply-Siders," has posted a piece responding to Gary North's recent series of essays on LewRockwell.com.

I'll allow Dr. North to defend his scheme for monetary reform himself. (By the way, on first reading, I found myself in close agreement with his ideas.) But I'd like to address what I think is a totally unjustifiable interpretation of Mises on the part of Lewis.

Of course, supply-side ideas do not stand or fall based on whether Mises would have supported them. Supply-siders could be right and Mises wrong. But it is curious that Lewis goes to such lengths to attempt to (mis-)read Mises into the Supply-Side camp. We must suspect a rhetorical ploy: since both Rothbard and Hayek considered Mises as a significant mentor – Hayek once called him the "master of us all" – then if a writer can make a case that they got Mises completely wrong, it does make them look somewhat obtuse.

Of course, such ploys can backfire. This one does, as it is fairly trivial to demonstrate that it is Lewis's reading that is without reasonable textual support – indeed, that his reading is directly contradicted by Mises's own words.

Lewis begins by getting his history wrong, calling Mises one of the "original Austrians." But Mises was actually of the third generation of Austrian thinkers, first gaining prominence in economics over 40 years after the publication of Carl Menger's Principles of Economics, the Austrian School's founding book.

Lewis next claims that Mises was "at heart a classical economist," and that his work, The Theory of Money and Credit, "represents the pinnacle of 19th century classical monetary theory." I don't know whether Mises's heart was classical, but his views certainly were not. Mises expresses great admiration for the achievements of the classical economists, but considers himself an inheritor of the marginalist revolution of the 1870s and the subjectivism of Carl Menger. At the very beginning of Human Action, Mises points to the great defect of the classical school and its remedy by "modern subjectivist economics":

The classical economists met in the pursuit of their investigations an obstacle which they failed to remove, the apparent antinomy of value. Their theory of value was defective, and forced them to restrict the scope of their science. Until the late nineteenth century political economy remained a science of the "economic" aspects of human action, a theory of wealth and selfishness. It dealt with human action only to the extent that it is actuated by what was – very unsatisfactorily – described as the profit motive, and it asserted that there is in addition other human action whose treatment is the task of other disciplines. The transformation of thought which the classical economists had initiated was brought to its consummation only by modern subjectivist economics, which converted the theory of market prices into a general theory of human choice.

For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill. It is much more than merely a theory of the "economic side" of human endeavors and of man's striving for commodities and an improvement in his material well-being. It is the science of every kind of human action. (Human Action, Introduction)

In fact, the great achievement of The Theory of Money and Credit was that it brought subjectivist economics to monetary theory: it was a refutation of classical monetary theory!

As a "classical economist," Lewis contends that Mises was a "Value Theorist," which means that he was "concerned with maintaining a stable value of money." But Mises's actual work, as opposed to that of his doppelganger, "Supply-Side Lu," showed that no good can have a stable value, indeed, that the very notion of stable values is self-contradictory. Of course, under the classical gold standard, the value relationship of money to gold would not change, since gold was money! (Yes, there was fiduciary media in circulation, but the base money simply was gold, not something "linked" or "pegged" to gold.) There is nothing very profound in noting that the value of a good is identical to itself. But, since the value of gold fluctuated relative to other goods, we certainly did not have money with a "stable value." (Incidentally, what the Supply-Siders want to do is to have a money that is not gold, but whose value is "made stable" by its being pegged to gold – quite a different proposition from the classical gold standard.) Here is Mises on the idea of "stable money":

Exchange ratios are subject to perpetual change because the conditions which produce them are perpetually changing. The value that an individual attaches both to money and to various goods and services is the outcome of a moment's choice. Every later instant may generate something new and bring about other considerations and valuations. (HA, XII.3)

Stability, the establishment of which the program of [monetary] stabilization aims at, is an empty and contradictory notion. The urge toward action, i.e., improvement of the conditions of life, is inborn in man. Man himself changes from moment to moment and his valuations, volitions, and acts change with him. In the realm of action there is nothing perpetual but change. There is no fixed point in this ceaseless fluctuation other than the eternal aprioristic categories of action. It is vain to sever valuation and action from man's unsteadiness and the changeability of his conduct and to argue as if there were in the universe eternal values independent of human value judgments and suitable to serve as a yardstick for the appraisal of real action....

If all human conditions were unchangeable, if all people were always to repeat the same actions because their uneasiness and their ideas about its removal were constant, or if we were in a position to assume that changes in these factors occurring with some individuals or groups are always outweighed by opposite changes with other individuals or groups and therefore do not effect total demand and total supply, we would live in a world of stability. (HA, XII.4)

...rigidity in the monetary unit's purchasing power is unthinkable and unrealizable.... (HA, XII.5)

Lewis's sole textual justification for contending that Mises was what Lewis calls a "value theorist" is that he once titled a section of one of his books, "The Value of Money." Well, yes, the words 'value' and 'money' do occur together in that title. Employing "Lewisian hermeneutics," we may note that Mises once wrote an essay entitled, "Stones into Bread, the Keynesian Miracle," and consider that as sufficient evidence that Mises was a Keynesian, and recommended a policy of turning stones into bread.

Lewis opposes Mises to the misguided, later "Austrians," who believed that inflation should be defined as a large increase in the money supply, and deflation as a large decrease in it. But Mises points out that that is actually the older definition of inflation and deflation, that it is Lewis who is using a more recent definition, and that the more recent definition is a cause of great mischief:

The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.

First of all there is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy which you cannot name. Statesmen and writers no longer have the opportunity of resorting to a terminology accepted and understood by the public when they want to question the expediency of issuing huge amounts of additional money. They must enter into a detailed analysis and description of this policy with full particulars and minute accounts whenever they want to refer to it, and they must repeat this bothersome procedure in every sentence in which they deal with the subject. As this policy has no name, it becomes self-understood and a matter of fact. It goes on luxuriantly.

The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation – the rise in prices – are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. (HA, XVII.6)

You'd almost think it was the Supply-Siders whom Mises was writing about in that last paragraph!

Lewis goes on to criticize "Rothbardians" for not realizing that the post-WWII Bretton Woods regime is a kind of gold standard. Well, I suppose there is nothing wrong with calling it a kind of gold standard, since it does involve gold in the monetary system. But such a classification hardly means that anyone who supports the classical kind of gold standard must also support the Bretton Woods kind. We can reasonably classify both hang gliders and 747s as "air transport." Would Mr. Lewis therefore criticize me as inconsistent for my willingness to board a 747 but reluctance to hang glide?

The Supply-Siders are certainly under no obligation to agree with Mises on monetary theory. But since they disagree with him in such fundamental ways, intellectual honesty would seem to oblige them to stop trying to claim Mises as a supporter of their views.