Ambition of Rothbard's Treatise
by Joseph T. Salerno
Rothbard began work on this magnum opus on January 1, 1952.
On May 5, 1959 Rothbard wrote to his mentor, Ludwig von Mises, informing
him, "È finito!"
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.
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
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.
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.
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
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
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.
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.
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
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.
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
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
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
discovered that there existed "a lot of gaps" in Mises's "economic
organon" that he had to "fill in" himself.
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."
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
immediately recognized the profound originality and significance
of Rothbard's contribution. In his review of Man, Economy, and
State, Mises wrote
ranks of eminent economists by publishing a voluminous work,
a systematic treatise on economics
. In every chapter of his
adopt[s] the best teachings of his predecessors
and add[s] to them highly important observations
on to characterize Rothbard's work as
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.
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.
More importantly, Mises evidently viewed Rothbard's work as opening
a new epoch in modern economic science.
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,
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.)
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.
They were subsequently developed separately until Rothbard revealed
their inherent logical connection.
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.
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."
According to Mises,
and the Anglo-American Schools and the School of Lausanne
differ only in their mode of expressing the same fundamental
are divided more by their terminology and by peculiarities
of presentation than by the substance of their teachings.
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
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
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,
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.
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.
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.
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
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.
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."
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).
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."
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."
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.
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
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.
"The specific method of economics is the method of imaginary constructions
. [I]t is the only method of praxeological and economic inquiry."
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.
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
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.
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.
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.
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
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.
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.
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.
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,
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.
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.
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 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.
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.
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."
a retrospective, Samuelson lamented the lack of success of the crude
positive method in economics, writing,
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.
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."
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.
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
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.
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.
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.
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.
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.",
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
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.
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
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
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.
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
The last and
perhaps most significant disadvantage of applying the unqualified
term "Austrian" to the postSouth 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:
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)
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."
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
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.
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."
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.
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 (19401994), memos and unpublished essays (19451994),
and drafts of published works.
Rothbard to Mises, May 5, 1959; Rothbard Papers. In English, "It
Richard Cantillon, Essai sur la Nature du commerce en Général,
ed. and trans. Henry Higgs (New York: Augustus M. Kelley, 1964).
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. 71100 and the sources cited therein.
Thus in his Preface to the book, Menger (Principles,
p. 49) wrote,
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
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): 3565.
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).
Ludwig von Mises, Human
Action: A Treatise on Economics,
Scholar's Edition (Auburn, Ala.: Ludwig von Mises Institute,
On the reasons for this, see Salerno "The Place of Mises's Human
Action," pp. 59761. 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).
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): 11128.
Rothbard to H. Cornuelle, June 28, 1952; Rothbard Papers.
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, 
Rothbard to R. Cornuelle, August 9, 1954; Rothbard Papers.
Rothbard to H. Cornuelle, June 28, 1952; Rothbard Papers.
Ludwig von Mises, "Man,
Economy and State: A New Treatise on Economics," in idem,
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. 15556.
Ibid., pp. 15657.
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).
Rothbard to R. Cornuelle, memo: "Textbook or Treatise?"; Rothbard
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. 48586).
Mises, Human Action, p. 3.
Ludwig von Mises, Epistemological
Problems of Economics, 3rd ed. (Auburn, Ala.: Ludwig
von Mises Institute, 2003), p. 228.
Ibid., p. 175.
Ludwig von Mises, The
Historical Setting of the Austrian School of Economics,
2nd ed. (Auburn, Ala.: Ludwig von Mises Institute, 1984), p. 41.
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): 179214; 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. 27593.
Rothbard, Man, Economy, and State, p. xcii.
Ibid., p. 357.
Ibid., p. xciii.
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).
Rothbard, Man, Economy, and State, p. xciii.
Ibid., p. xcii.
Mises, Human Action, p. 65.
Ibid., pp. 23738.
Ibid., pp. 23757.
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.
For the explanation of this construct and its variations and the
elaboration of its implications, see Rothbard, Man, Economy,
and State, pp. 32966.
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.
Mises, Human Action, p. 238.
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).
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.
Paul Samuelson, Foundations of Economic Analysis, 2nd
ed. (New York: Atheneum, 1976), p. 4.
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.
Samuelson, "My Life Philosophy," p. 243.
Ibid., p. 244
Milton Friedman, "The Methodology of Positive Economics," in idem,
Essays in Positive Economics (Chicago: University of
Chicago Press, 1970), pp. 143. 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. 15596.
Mark Blaug, Economic Theory in Retrospect, 4th ed. (New
York: Cambridge University Press, 1986), p. 3.
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,
André Gabor and I.F. Pearce, "A New Approach to the Theory
of the Firm," Oxford Economic Papers 54 (October 1952):
25265; idem, "The Place of Money Capital in the Theory of Production,"
Quarterly Journal of Economics 72 (November 1958): 53757.
Roy Harrod, "Theory of Profit," in idem, Economic Essays
(New York, Harcourt and Brace & Co., 1952), pp. 19095. 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).
Lawrence Abbott, Quality and Competition: An Essay on Economic
Theory (Westport, Conn.: Greenwood Press, 1973).
Rothbard, Man, Economy and State, p. 666, fn. 28.
Rothbard to R. Cornuelle, memo: "Textbook or Treatise?"; Rothbard
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.
first appeared on Mises.org.
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.