Front Page Titles (by Subject) Fritz Machlup, Closing Remarks - The Economics of Ludwig von Mises: Toward a Critical Reappraisal
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Fritz Machlup, Closing Remarks - Lawrence S. Moss, The Economics of Ludwig von Mises: Toward a Critical Reappraisal 
The Economics of Ludwig von Mises: Toward a Critical Reappraisal, ed. with an Introduction by Laurence S. Moss (Kansas City: Sheed and Ward, 1976).
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Although the program lists me only as the chairman of this panel—and chairmen, as a rule, close a session by saying not much more than “thank you” to the participants—this time the chairman was asked by the organizers to serve also as a second discussion speaker. Professor Karen Vaughn has just done an excellent job of discussing the four papers. She did it with grace, intelligence, real understanding of the issues, and remarkable knowledge of the literature. Hence I feel a little superfluous; moreover, I have a propensity to leave the last word to a lady. These considerations, however, are counteracted by the thought that a liberated woman may not want to be treated as a lady and by my strong belief that promises should be kept. Thus I shall do what I have promised and make a few remarks on each of the four papers, even if some of my observations merely reinforce Professor Vaughn's pronouncements.
Professor Moss' paper deals with a large number of monetary problems. It is such a rich mine of interesting issues that I have a difficult time selecting one that I can discuss in but a few minutes. I choose to talk about some aspects of the demand for money, because this is where Mises probably made one of his greatest contribution. Later analysts have criticized Mises on a variety of points, though some have had the good sense of recognizing that pioneers should not be expected to come up with complete and accurately formulated statements of definitive findings. Some of the criticism has focused on the difference between the demand for nominal amounts of money and the demand for real balances. Let me invite you to think of a demand curve for holding money where we indicate (or plot) on the abscissa the nominal amounts of money and on the ordinate the purchasing power (real value) of a unit of money. If the horizontal distances show the amounts of money demanded for nominal balances, the rectangles inscribed under the curve, that is, the amounts of money multiplied by their real value, will show the real balances. If it is that easy to translate a demand curve for money balances into one for real balances, there can hardly be such a fundamental schism between the two theories.
The circularity problem was one that bothered many economists sixty years ago; that was before they fully comprehended the idea of mutual determination or interdependence. How could one explain general movements of prices by changes in the supply of, and demand for, money if one were blocked from grasping that the demand for money was in turn to be understood as a function of prices? We no longer see any difficulty with this type of interdependence, whether it be formulated in terms of a set of simultaneous equations or in terms of a sequence analysis of equilibrium positions. No doubt in 1911 the charge of circularity had to be taken seriously. That is the reason Mises resorted to a sequence analysis but interpreted it as a “historical link” between yesterday's prices and today's decisions. The term historical was a bit misleading, but the main thing was that the association of experience with expectations was established in the student's mind.
Of even greater significance was what Mises said about “abnormal situations,” in which expectation of future price increases may not be formed just by the experiences with yesterday's prices but also by announcements an expectations of governmental fiscal and monetary policies. If prices are expected to increase—not because they have risen in the past, but because of announcements, reports, authoritative interpretations, rumors, or what not—the resulting decline in the demand for money may well lead to an actual rate of price increase far in excess of what could be explained by the ongoing increase in the supply of money. Indeed the resulting decline in aggregate real balances may provide a good description of what goes on during a galloping price inflation.
Kirzner's paper on Mises' views on capital and interest is a gem—lucid, beautiful, and elegant. But I shall not dismiss it with this sincere praise; for I want to point to a few issues where he correctly presents the master's view but fails to warn that it may not be the last word. I think Mises would have wanted us to express any doubts we might have regarding his propositions. I shall select two of the issues on which I would not want my students and grand-students to stick to my teacher's formulations, as if they presented the only tenable statement on the problems in question:
1. Time preference as a universal phenomenon: For Mises time preference was not an empirical regularity but a “definite categorical element…operative in every instance of action.” Well, if time preference is seen as positive time preference, the claim that it is ever present in the decisions of each and every household may be true or false, and it is, therefore, an empirical proposition. On the other hand, since time preference may be large, small, zero, or even negative, we may assert that it is a universal characteristic of human action. If, when comparing present with future gratification, some individuals postpone consumption without the promise of a positive interest rate, their marginal rate of time preference is evidently zero. If, without receiving interest, they allocate their present and future availabilities in such a fashion that they may expect to consume equal amounts this year, next year, and in any future year, then their time preference in the schedule sense must be defined as being zero. But what the facts actually are remains an empirical question. People have different tastes, different incomes, different expectations of future income and needs, and different opportunities for trade-offs between present and future consumption.
2. The total capital stock: Mises was certainly correct when he objected to the ambiguous notion of a measurable stock of capital. Virtually all economists agree with this. He was also quite correct in distinguishing capital funds (money capital) and capital goods (real capital). And, again, he was correct in saying that anyone interested in a complete inventory taking of the totality of capital goods would have to resort to an enumeration of a huge pile of altogether different things, a compilation that would not be of any use to anyone. Incidentally, Böhm-Bawerk also rejected the relevance of the total of capital goods for problems of interest-rate determination and instead worked with the total of all goods and resources. He realized that the length of time an economy can wait for future consumer goods to become available (in time-taking production processes) depends not only on “produced means of production” (i.e., capital goods) but also on the amount of nonperishable consumer goods and the future services of exhaustible and nonexhaustible resources. Of course, none of these aggregates plays any direct role in the considerations and plans of individual decision makers. However, this is true not only in capital theory but also in price theory in general, where the stocks of available goods play an indirect role in the decisions of any individual: the size of such stocks affects the decisions of individual households and firms by way of the price mechanism.
In Rothbard's paper on economic calculation under socialism, I was especially intrigued by his statement that the central Planning Board in its decision making—without market prices to aid its calculation—is in the same position as a big business firm or any organization that is vertically integrated to such a large degree that markets disappear or market prices can be disregarded. This is an issue that I have tried to sell in several of my publications (the first time in a book that appeared in 1934 and most recently in a paper on international integration,1 ) but unfortunately not with sufficient success. Whenever a firm (or concern) supplies the output of one of its departments as an input to another of its departments instead of selling it in a competitive market at a price established by supply and demand, the problem of artificial transfer prices or off jumbled cost-and-revenue figures arises. There may still be calculations, but not according to the economic principle—or what Mises termed “economic calculations.”
The hope that large, vertically integrated firms will eventually disappear because they are inefficient and work with excessive production costs rests, I am sorry to say, on the assumption of degrees of competition that do not exist in our society. There may be cost advantages enabling the big firms to overcome the inefficiency of vertically integrated (and therefore “uneconomic”) calculations and dispositions, and there may even be offsetting marketing advantages enabling them to survive and even to prosper and grow.
The last paper, by Baumgarth, is admirable in its careful selection of significant quotations in the attempt to show how Mises' conceptions of the liberal order all hand together. I want to make only a brief comment on terminology. For the benefits of less widely read students, what Mises called “classical liberalism” should be carefully distinguished from the names that its exponents may have given to their ideas. To be sure, no one can call himself a “classic”—this is left to later generations looking back to some creators of paradigms. More interesting, however, is that the nineteenth-century writers who expounded “classical liberalism” rarely, if ever, referred to themselves as “liberals.” Nor did anyone at their time give them such a designation. They were regarded as progressives or radical reformers and given similar appellations. Liberal and liberalism were first used in Spain for a political party, and since that time these words have been used in a good many mutually contradictory meanings. We have only to think of “utilitarian liberalism,” “rational liberalism,” “individual liberalism,” “organic liberalism” “modern liberalism,” and American liberalism” to see rather fundamental contradictions. The failure to guard against this kind of confusion has lead to what I called “fuzzy liberalism,” which seems to be the prevalent species of liberalism in the United States.2 I would not go so far as to say that the word liberalism was “stolen” by illiberal demagogues, but one may reasonably suspect that most self-styled “liberals” have been untroubled by any knowledge of the literature on the subject.
More could and should be said on this paper and on any of the other three. Unfortunately, time does not allow it. All that I have time for is to thank the speakers for their fine performances. This session, I think, has been interesting as well as valuable to anyone who cares about economic theory and economic philosophy. I feel that even Mises himself would have enjoyed it.
Fritz Machlup, Führer durch die Krisenpolitik (Vienna: Julius Springer, 1934), pp. 209–14; in a French edition, Guide à les panacées economiques (Paris: Librairie de Médicis, 1938), pp. 309–16; in a most recent version, “integrationshemmende Integrationspolitik,” Bernhard-Harms-Vorlesungen, ed. Herbert Giersch (Kiel: institute für Weltwirtschaft, Universitat Kiel, 1974), pp. 42–45, 52–54.
Fritz Machlup, “Liberalism and the Choice of Freedoms,” in Roads to Freedom, ed. Erich Streissler (London: Routledge & Kegan Paul, 1969), pp. 117–46.