The Online Library of Liberty

A project of Liberty Fund, Inc.

• Acknowledgements
• Part One: Introduction
• Walter E. Grinder, In Pursuit of the Subjective Paradigm: Walter E. Grinder
• Austrian Economics In the Present Crisis of Economic Thought
• Part Two: Setting the Stage
• The Significance of the Austrian School of Economics In the History of Ideas
• The Role of Expectations In Economics As a Social Science
• Professor Shackle On the Economic Significance of Time
• The Science of Human Action
• Model Constructions and the Market Economy
• Part Three: the Market Process
• Some Notes On Economic Thought, 1933–1953
• Methodological Individualism and the Market Economy
• Economics As a Social Science1
• Ludwing Von Mises and the Market Process
• Part Four: Problems In Macroeconomic and Capital Theory
• Complementarity and Substitution In the Theory of Capital
• Mrs. Robinson On the Accumulation of Capital
• Sir John Hicks On Capital and Growth: (review Article)
• Sir John Hicks As a Neo-austrian: (review Article)
• A Reconsideration of the Austrian Theory of Industrial Fluctuations
• Part Five: On Economic Policy
• Causes and Consequences of the Inflation of Our Time
• The Market Economy and the Distribution of Wealth
• Cultivated Growth and the Market Economy
• Appendix: Economic Writings of Ludwig M. Lachmann

Methodological Individualism and the Market Economy

1.

For over a century and a half, from David Hume to Gustav Cassel, the defenders of the market economy were able to draw intellectual strength no less than moral comfort from the existence of a body of economic thought which supported their cause and which appeared to show that interference with the free play of market forces would, at least in the long run, do more harm than good and prove ultimately self-defeating. During this period an attitude favourable to “interventionism” almost invariably went together with an attitude critical of the doctrines of classical economics. In the Methodenstreit, Schmoller appears to have felt that what his opponents were really defending was not so much a methodological point of view as the principle of the market economy—”Das Manchestertum.“

In the course of this century all this has changed. Today economic theory, encapsulated in an artificial world of “perfect competition,” coherent plans, and instantaneous adjustments to change, has come to rest so heavily on the notion of equilibrium, embodied in a system of simultaneous equations, that the significance of its conclusions to the real world is more than dubious. In a sense it is easy to explain what has happened. The notion of equilibrium which makes very good sense when confined to individual agents, like household and firm, is less easily applied to the description of human interaction. It still has its uses when applied to a very simple type of market, such as Marshall's corn market. But “equilibrium of the industry” is a difficult concept to handle. Equilibrium of the “economic system” is a notion remote from reality, though Walras and Pareto showed its logical consistency. Equilibrium of an economic system in motion, “equilibrium growth,” borders on absurdity. What has happened is that a notion which makes good sense in the description of human plans, within the universe of action controlled by one mind, has illegitimately been extended to a sphere where it has, and can have, no meaning. A formalistic methodology which uses concepts without a proper understanding of their true meaning and natural limits is apt to defeat its own ends and bound to lead us to absurd conclusions.

Reprinted from Roads to Freedom:Essays in Honour of Friedrich A. von Hayek, ed. Erich Streissler et al. (London: Routledge & Kegun Paul, 1969), pp. 89–104.

Professors Mises and Hayek have taken a prominent part in emphasizing the implications of this unfortunate state of affairs. They have both underlined the shortcomings of the notion of equilibrium when employed out of context. Mises in 19401 described this notion as “an auxiliary makeshift employed by the logical economists as a limiting notion, the definition of a state of affairs in which there is no longer any action and the market process has come to a standstill.... A superficial analogy is spun out too long, that is all.”2

Hayek has twice dealt with the same problem. In Chapter II of The Pure Theory of Capital he pointed out why capital problems cannot be discussed within the framework of traditional stationary equilibrium theory.3 And in “The Meaning of Competition” we were told that “competition is by its nature a dynamic process whose essential characteristics are assumed away by the assumptions underlying static analysis.”4

Today the defenders of the market economy are finding themselves in a difficult position. The arsenal of economic thought, which served their fathers so well, no longer provides what they need. In fact it now often happens that what it has to supply proves more useful in the hands of their enemies than it does in their own. Their enemies will hardly fail to point out, for instance, that actual market competition, as distinct from “perfect competition,” is bound to fall short of the high ideal of “Pareto Optimality,” an equilibrium notion which occupies a prominent place in modern “welfare economics,” another spurious offshoot of contemporary economic thought.

In these circumstances upholders of the market economy are confronted with two tasks which are as unenviable as they are inevitable. They must, in the first place, be ready to turn themselves into stern and unbending critics of the economic doctrines currently in fashion, ever ready to point out the aridity of their conclusions, the unreality of their assumptions, the artificial nature of their procedure. Secondly, and even more important, they must henceforth be able to forge their own weapons. What follows in this paper is offered as a modest contribution toward the achievement of these aims.

2.

The fundamental question, i.e. in what form we should conceive of the market economy, once we have rejected the general equilibrium of the economic system, has already been answered by Mises and Hayek: The market is a process of continuous change, not a state of rest. It is also clear that what keeps this process in continuous motion is the occurrence of unexpected change as well as the inconsistency of human plans. Both are necessary conditions, since without the recurrence of the first, in a stationary world, it is likely that plans would gradually become consistent as men come to learn more and more about their environment. The recurrence of unexpected change by itself, on the other hand, would not suffice to generate a continuous process, since the elements of the system might respond to each change by a finite process of adjustment to it. We would then have an “open system” on which external change impinges in the form of “random shocks” each of which the system, possibly with variable time lags, contrives to “absorb.” But the existence of human action consciously designed to produce certain effects, prompted by expectations which may, and often do, fail, makes it impossible to look at the market process in this way. Conscious action oriented to a certain state of the market cannot possibly be conceived as a “random event.” Nor is the inconsistency of the plans of different agents, without which there can be no competition, to be regarded in this manner without doing violence to the facts. For such plans have to be drawn up and carried out with great care if they are to have a chance of success. To speak here of “random shocks” would mean to profess ignorance where we have knowledge.

We now have to consider the significance of these facts for the methodology of the social sciences. It seems to us that they provide the justification for “methodological individualism” and the “compositive method.”5

Let us retrace our steps. We have rejected the conception of the market economy as a closed system in a state of equilibrium, or at least with an inherent tendency towards it. We are unable to conceive of it as an open system on which random shocks impinge from “outside.” Mere outside shocks without the inconsistency of plans would not necessarily generate a continuous process, certainly not the market process with which we are all familiar. This requires the inconsistency of plans prompted by divergent expectations, an inevitable concomitant of human action in an uncertain world. But in these plans the future as image affects the present as action in a way which makes nonsense of the notion of “random events.” Hence, if we wish to explain the nature of the forces which propel the market process, we have to explain the nature of the relationship between action geared to the future and plans embodying a mental picture of the future.

The case for methodological individualism, for the method which seeks to explain human action in terms of plans conceived before action is actually taken, thus rests on a positive as well as a negative reason. The negative reason is, of course, that an event designed to take place in a certain situation, but not otherwise, cannot be regarded as a random event. The positive reason, on the other hand, is that in the study of human action we are able to achieve something which must for ever remain beyond the purview of the natural sciences, viz. to make events intelligible by explaining them in terms of the plans which guide action.

The scope of this principle of explanation is, of course, much wider than the area of significant action in a market economy. Needless to say, the fact that plans often fail and hardly ever are completely successful, provides no argument at all against our postulate. In fact it is only by comparing the outcome of action with the plan which guided it that we are able to judge success, another achievement which is beyond the reach of the natural sciences. The alternative principle of explanation is, of course that of “response to stimulus.” It is perhaps unnecessary to stress that the kind of entrepreneurial action mainly responsible for keeping the market process in motion, i.e. innovation and the formation and dissolution of specific capital combinations, does not lend itself to this type of explanation. Spontaneous mental action is not a “response” to anything pre-existent. Neither is it a random event. One might think otherwise of the process in the course of which, in a market economy, large numbers of producers are “learning by doing,” and gradually find out more and more efficient, and cheaper, methods of producing goods, or ways of improving the quality of their products. Here, a formalist would speak of “adding a time dimension to the production function.” But in reality this process is no more a response to stimulus than is spontaneous action in the form of innovation. The process is part and parcel of the general process of competition in the course of which even those who were unsuccessful in improving their own methods of production can benefit by adopting those of their more successful rivals. In any case, the continuous nature of the process reflects continuous acts of human will and effort, and emulation of the successful is here just as important as in the process by which innovations are diffused.

The method which explains human action in terms of plans, constituted by mental acts and linking an imagined future to an active present, has two aspects of which one is forward-looking while the other is backward-looking.

What Hayek has called the “Compositive Method”6 denotes the forward-looking aspect. Here we start with the plans of the individuals, those mental schemes in which purposes, means and obstacles are welded together into a whole and, as it were, projected on a screen. We then ask whether the plans made by different individuals are consistent with one another. If so, the conditions of success do exist, a “general equilibrium” is possible, though in reality, of course, for a large number of reasons it may never actually be reached. If not, inconsistency of plans is bound to generate further changes. In this case we have to argue from the divergence of plans to their disappointment and hence to their revision. But while we can say that disappointed expectations will lead to a revision of plans, we never can tell what new expectations the acting individual will substitute for those which were frustrated by the course of events. It may be impossible to use a durable capital good for the purpose for which it was designed. That may happen for a large number of reasons. It will then have to be turned to “second best” purpose. But what this will be depends on the new expectations of its owner at the moment of the turning decision, and about that we can say nothing.

But we can also employ the method in the reverse order. Instead of asking what are the implications of a number of plans simultaneously carried out, we can reverse the procedure and ask what constellation of plans has given rise to an existing situation. This is the real meaning of the method of Verstehen, which is also, of course, the historical method. There appears to be no reason why the theoretical social sciences, when they pursue their enquiries into the typical causes of typical social phenomena, should not make use of it.

Methodological individualism, then, in its backward-looking form, means simply that we shall not be satisfied with any type of explanation of social phenomena which does not lead us ultimately to a human plan. This entails that explanations couched in terms of so-called “behaviour variables” are not satisfactory explanations of human conduct. We have it on Hayek's own authority that the main task of the theory of capital is to explain why existing capital goods are used in the way they are. But we may also enquire how the existing capital structure came into existence, i.e. in the pursuit of which plans the existing capital resources came to assume their present form. In fact, it is hardly possible to explain present use without answering these questions. But this means that we analyse an observed phenomenon in terms of the plans in the pursuit of which it came into existence. This is the obverse of the compositive method.

Such analysis of observed phenomena in terms of pre-existent plans has nothing to do with psychology. We are here concerned with purposes, not with motives, with plans, not with the psychic processes which give rise to them, with acts of our conscious minds, not with what lies behind them. As soon as our thoughts have assumed the firm outline of a plan and we have taken the decision to carry it out over a definite period of future time, we have reached a point outside the realm of psychology, a point which we can use either as the starting point or as the final goal of our enquiry. In the former case we make use of it as the starting point of the application of the compositive method, in the latter as the final point to which we carry the method of Verstehen. In neither case are we trespassing on the domain of psychology.

3.

We must now make an attempt to look at our principle of explanation (hereafter referred to as Subjectivism)7 in the perspective of the history of economic thought.

Hayek has given it as his view that “it is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism.”8 Naturally one thinks of marginal utility and expectations. But in exactly the same way as in writing the history of a realm an historian would not be entitled to confine himself to reciting the triumphs of its kings, soldiers, and statesmen, but must also deal with the vicissitudes they faced and the failures they suffered, the historian of thought has to record the defeats as well as the triumphs of subjectivism.

It seems to us that, from the point of view of methodology, the history of economic thought of the last 100 years has to be seen as a continuous struggle between subjectivism and its opponent (hereafter referred to as Formalism). In this long drawn-out battle success has by no means always been on the side of the subjectivists. They confronted a formidable foe with whose general character we are already familiar. The same late classical formalism which, as we saw, has brought about the alienation of modern economic theory from the market economy, is also responsible for the vicissitudes of subjectivism. Acts of the mind do not fit easily into the formal apparatus of a body of thought the main purpose of which is to produce a closed system within which it is possible to assign numerical values to a large number of magnitudes. But plans are products of mental activity which is oriented no less to an imagined future than to an experienced present. No wonder there were difficulties.

The story of the “subjective revolution” of the 1870s offers an instructive example of the vicissitudes which befell subjectivism. Its main thrust was directed against the classical theory of labour value. To the Ricardians value was a kind of economic “substance,” a property common to all economic goods. The subjectivists were able to show that value is not a property inherent in goods, but constitutes a relationship between an appraising mind and the object appraised, a manifestation of mental activity. But most of the fruits of their victory were subsequently lost when neoclassical economics contrived to “absorb” subjective utility within the framework of its formal apparatus. “Tastes” were embodied in its system as a class of “data,” a status which they came to share with resources and technical knowledge. Naturally the successful counter-revolution of neoclassical formalism raised problems of its own. Tastes can, and often will, change in an unpredictable fashion. Whenever this happens, the other elements of the system, i.e. the dependent variables, must adjust themselves accordingly. To be able to speak at all of “the system having an inherent tendency towards equilibrium,” we should therefore have to assume that the velocity with which the other elements adjust themselves to changes in tastes is always so high that no new change will occur before a full adjustment to the previous change has taken place. It is difficult to imagine such circumstances.

From our point of view it is most important to realize that formalism, by assuming all tastes to be “given,” whether in the form of utility functions or of indifference curves, is in fact evading the whole problem of how plans are made, a problem which is of crucial significance to subjectivism. The indifference curves which are imputed to consumers are in reality comprehensive lists of alternative plans to be put into operation if and when opportunity offers. In other words, what is really assumed here is that individuals never need make actual plans, because from the start they are equipped with such a large number of alternative plans that all contingencies are covered! The question how these lists of alternative plans ever came into existence is then ruled out of order as falling outside the sphere of economic questions! The whole purpose of the subjectivist revolt, which was to show that prices and quantities are the indirect results of the decision-making acts of millions of individuals who are renewing or revising their plans every day, is thus thwarted. Consumers' preferences, separated from the mental acts which daily shape and modify them, are turned into independent variables of a system in which there is no scope for planning and plan revision. Spontaneous action has been transformed into a response to stimulus. The formalists are able to claim that they have incorporated into their system the contribution of subjectivism, albeit in an emasculated form.9 Robertson's famous bon mot on Keynes's theory of interest fully applies to the formalist theory of consumers' action: “The organ which secretes it has been amputated, and yet it somehow still exists—a grin without a cat.”10

When we turn to expectations, our second instance of subjectivist success during the last 100 years, we see a very different picture.

In the first place, the problem of expectations did not make its appearance on the stage of economic thought in one thrust, as did marginal utility between 1871 and 1874, but rather by gradual infiltration. As a result it is virtually impossible to date its appearance. If we were to set the date e.g. in 1930 (“bullishness” and “bearishness” in Keynes's Treatise), we should be ignoring the fact that the problem was clearly foreshadowed in the work of Schumpeter and Knight, as well as in the early writings of Lindahl and Myrdal in the 1920s. But on the other hand, before 1930, at least in Anglo-Saxon economics, the problem was hardly recognized at all. It remains true that it began to make its impact in the 1930s.

From our point of view, the crucial significance of the emergence of expectations as a problem rests in the fact that, by contrast to what happened to utility, they have thus far proved refractory to all attempts to incorporate them into the formal apparatus of the late classical economics of our time. The reason is not far to seek. Expectations refer to processes of change. (In the stationary world of Walras-Paretian equilibrium they are in any case of no significance.) It is hard to see how they can be treated as elements of a system. They are not constants, since they are bound to change, while tastes can at least be conceived of as constants. Expectations, that is, always refer to a future point of time which we approach more closely as time passes. But neither can they be treated as variables. We cannot regard them as dependent variables since we cannot specify any mechanism of response. Different men's expectations will react differently to the occurrence of the same event. And if we regard them as independent variables, very little will be left of the rest of the system. Changes in expectations would then come to overshadow all other causes of change.11 J. Schumpeter12 and E. Lundberg13 saw this very clearly already in the 1930s and reacted with characteristic vigour.

This does not mean that, if we compress our period of decision-making to a point of time, to “market day equilibrium,” expectations could not be used and regarded as data. In this case they clearly can, but any conception of equilibrium over time, of “moving equilibrium,” is incompatible with changing expectations. It is therefore hardly surprising that most of the authors of those macro-economic growth models which have gained prominence in recent years, such as Sir Roy Harrod and Joan Robinson, have on the whole preferred to keep the problem of expectations at arm's length. Only G. L. S. Shackle has been a vigorous and indefatigable exponent and student of its implications.

It is of some interest to cast a cursory glance at Keynes's contribution in the perspective of the continuous struggle between subjectivism and formalism. Fundamentally, Keynes was a subjectivist, aware of the contrast between the variability of expectations and the determinateness required of any formal system, such as his own short-term equilibrium model.14 He mocked at long-period equilibrium (“In the long run we are all dead”), but then had to use what Marshallian tools lay most readily at hand for the purpose of giving unity to his thought. So he cast it in the mould of a short-period equilibrium system. Moreover, the General Theory was largely written as a polemic against what Keynes regarded as the neo-classical orthodoxy of his day. Since his argument relied so heavily on expectations, the polemical effect would certainly have been marred had the contrast between the rather indistinct character of the expectations he used to support his argument and the ostensible rigour of his model been too clearly revealed. In these circumstances he found himself compelled somewhat to “underplay” the significance of expectations. He introduced them where he needed them for his immediate purpose, as e.g., in the theory of investment and in liquidity preference theory, but left them out where he did not, as in multiplier theory.

But, when seen in the historical perspective which concerns us here, Keynes certainly was on the side of the subjectivists. As Professor Shackle has said so well:

The whole spirit of Keynes' book insists on the unfathomable subtlety, complexity and mutability of the influences which bear upon the decision to invest. To build a self-contained dynamic model would have been, for him, to contradict the very essence of what he was trying to say, namely, that it is uncertainty, the feeling of a helpless inability to know with assurance how a given course of action will turn out, that inhibits enterprise and the giving of full employment.15

No wonder that his successors found themselves somewhat embarrassed when they attempted to distil macro-economic growth models from his work.

Within the confines of this paper we are unable to do more than record a few episodes of the great struggle mentioned. But one such episode of recent years, which constitutes quite a remarkable success of subjectivism, should not go unrecorded.

In 1965 Sir John Hicks, who for many years had been one of the foremost exponents of formal analysis and one of its most skilful practitioners, appears to have changed sides. In an attempt to define the limits of the static method, which is of course the method of formalism, he showed that this method is incompatible with the existence of any planned action. “In statics there is no planning; mere repetition of what has been done before does not need to be planned. It is accordingly possible, in static theory, to treat the single period as a closed system, the working of which can be examined without reference to anything that goes on outside it (in the temporal sense). But this is not possible in dynamics.”16

The implications of this passage are far-reaching and intimately concern the matters pursued in this paper. Sir John has not only made clear why it is that expectations, which must transcend the single period, cannot be fitted into any model which employs the static method. He has at the same time shown within what narrow limits the instruments of formalism can be at all usefully employed. And in doing so he has opened up a vast new area for economic research, an area which is of paramount importance to us. For the world “outside the single period,” the world in which men have to act with a sense of the future and a memory of the past, the world of action and not merely of reaction, this world is none other than the realm of the market economy.

4.

At the end of our first section we promised to make a contribution to the arsenal of the market economy. The reader may well be wondering how far the methodological reflections presented in our second and third sections can be said to have furthered this cause. But what we in fact have done is to lay the ground for an attempt to cast what we hope will be new light on two notable features of the market economy which are all too often misunderstood—and not only by its critics.

The first of these is the Stock Exchange, perhaps the most characteristic of all the institutions of the market economy. In fact it is hardly an exaggeration to say that without a Stock Exchange there can be no market economy. What really distinguishes the latter from a socialist economy is not the size of the “private sector” of the economy, but the ability of the individual freely to buy and sell shares in the material resources of production. Their inability to exercise their ingenuity in this respect is perhaps the most important disability suffered by the citizens of socialist societies, however large their incomes might be, however wide the range of choice of consumption goods that may be available to them.

In the traditional view the chief function of the Stock Exchange is to serve as a channel through which savings flow before they become transformed into additions to the capital stock. Keynes taught us to regard the apportioning of the flow of savings to various investments as a function subsidiary to the constant turnover of an existing stock of securities prompted by divergent expectations. Thus, seeing the importance of expectations in asset markets, and disliking the implications of what he saw, he launched his famous diatribe on the Stock Exchange as a “casino.”

The Stock Exchange consists of a series of markets for assets, i.e., future yield streams. In each market supply and demand are brought into equality every market day. Demand and supply reflect the divergent expectations of buyers and sellers concerning future yields. Transactions take place between those whose expectations diverge from the current market price. Since as much must be bought as is sold, we may say that the equilibrium price in an asset market reflects the “balance of expectations.” As without divergence of expectations there can be no market at all, we can say that this divergence provides the substrate upon which the market price rests.

Since all assets traded on a Stock Exchange are substitutes, albeit imperfect substitutes, for one another, these markets form a “system.” And as equilibrium is attained simultaneously in each market which forms part of it, our system is free of those problems which in the Walrasian system are apt to arise when equilibrium is reached in some markets before it is attained in others.

In this way the market economy accomplishes daily a consistent, because simultaneous, valuation of all its major productive assets. The practical importance of this fact is that it makes possible, whether in the form of “take-over bids” or otherwise, the transfer of the control of material resources from pessimists to optimists, i.e. to those who believe they can make better use of them than others can. Critics of the market economy who scoff at the continuous and often violent day-to-day fluctuations of share prices, have failed to notice that an equilibrium price which rests on a balance of expectations is bound to be flexible since it must change every time the substrate of this balance changes. For precisely the same reason for which equilibrium in an asset market is reached so smoothly and speedily, it cannot last longer than one day. For expectations rest on imperfect knowledge, and not even a day can pass without a change in the mode of diffusion of knowledge.

The methodological significance of these fats, which is of interest to us here, even transcends their practical importance for the market economy, great as this is. For we are now able to see that the market process in asset markets has a more restricted function than is the case in commodity markets. In the latter, as we said above, the market process is kept in continuous motion by the occurrence of unexpected change as well as the incoherence of human plans. But in asset markets, in which equilibrium is established every day, human plans are made coherent every day. Here the lapse of time between market days serves only to diffuse new knowledge and facilitate the re-orientation of expectations. It does not have to serve to display the inconsistency of, for instance, production plans, which is what must happen between “market days” in commodity markets if such are to exist. Equilibrium in asset markets, as in the Marshallisn corn market, makes sense because it is confined to the exchange of existing stocks. Where these conditions do not exist, as in a flow market, and a fortiori in the relations between such markets, it makes no sense, and all there exists in fact is the continuous market process.

The formalists, in extending the equilibrium concept from asset markets, where it makes sense, to the Walrasian system of commodity markets, where it does not, have not only rendered a poor service to economic thought. They have rendered an even poorer service to the market economy by blurring one of its distinctive features. But in doing so, they have unwittingly provided the friends of the market economy with an instructive lesson that they must henceforth forge their own weapons.

A second feature of the market economy, with which we shall deal even more briefly here, is the fact that quantities produced and prices paid apparently depend on the distribution of wealth. We are, for instance, often told that “the Invisible Hand will only maximize total social utility provided the state intervenes so as to make the initial distribution of dollar votes ethically proper.“17 We shall refrain from comment on the ethical propriety of such statements. But it is perhaps clear that the nature of the market process, which is a continuous process that cannot be interrupted, has here been misconceived. There is, of course, no such thing as an “initial distribution” before the market process starts. The distribution of wealth in terms of asset values at any point of time is the cumulative result of the market process of the past. In the asset markets, the sources of income streams are revalued every day in accordance with the prevailing balance of expectations, giving capital gains to some, inflicting capital losses upon others. What reason is there to believe that interference with this market process is any less detrimental than interference with the production and exchange of goods and services? Those who believe that such a reason does exist (and most of our contemporary “welfare economists” do!) must assume that asset holders, like Ricardian landlords, somehow stand outside all market processes and “get rich in their sleep.” Nothing we have said about differences in the modus operandi of the market process, in asset and commodity markets respectively, can impair the validity of the simple truth that all these processes form part of an integrated whole.18

NOTES

[[1]]In the original German edition of Human Action.

[[2]]L. von Mises, Human Action (New Haven: Yale University Press, 1949), p. 352.

[[3]]F. A. Hayek, The Pure Theory of Capital (London: Routledge & Kegan Paul, 1941), p. 14.

[[4]]Individualism and Economic Order (London: Routledge & Kegan Paul, 1949), p. 94.

[[5]]F. A. Hayek, The Counter-Revolution of Science (Glencoe, III.: Free Press of Glencoe, 1955), pp. 38–39.

[[6]]The Counter-Revolution of Science, loc. cit., pp. 39, 212.

[[7]]The Counter-Revolution of Science, loc. cit., p. 38.

[[8]]Ibid., p. 31.

[[9]]The Austrians alone stubbornly resisted this trend and retained a wholesome distrust of indifference curves in particular and the whole Lausanne approach in general. Unfortunately, they never were able to show, with the cogency their case required, the incompatibility between the idea of planned action, the very core of Austrian economic thought, and an analytical model which knows no action, but only reaction.

See Hans Mayer, Der Erhenntniswert der funktionellen Preistheorien (Vienna, 1932).

See also Ludwig M. Lachmann, “Die geistesgeschichtliche Bedeutung der österreichischen Schule in der Volkswirtschaftslehre,” Zeitschrift für Nationalökonomie 26 (January 1966): 158–62.

[[10]]D. H. Robertson, Essays in Monetary Theory (London and New York, 1948), p. 25.

[[11]]This is, of course, what happened to Keynes's liquidity preference theory.

[[12]]Business Cycles, 2 vols. (New York and London, 1939), 1:140.

[[13]]Studies in the Theory of Economic Expansion (London: Allen & Unwin, 1937), p. 175.

[[14]]“There is an arresting contrast between the method and the meaning of Keynes' book. The method is the analysis of equilibrium, the endeavour to account for men's actions as a rational, calculated and logically justifiable response to circumstances which in all relevant essentials they thoroughly know. The meaning is that such rationality is in the nature of things impossible and baseless, because men confront an unknown and unknowable future.” G. L. S. Shackle, A Scheme of Economic Teory (Cambridge: Cambridge University Press, 1965), p. 44.

[[15]]Ibid., p. 98.

[[16]]John Hicks, Capital and Growth (Oxford: Oxford University Press, 1965), p. 32.

[[17]]Paul A. Samuelson, Collected Scientific Papers, 3 vols. (Cambrige, Mass.: M.I.T. Press, 1966), 2:1410. (Italics in the original.)

[[18]]“There is no distributional process apart from the production and exchange processes of the market; hence the very concept of ‘distribution’ becomes meaningless on the free market. Since ‘distribution’ is simply the result of the free exchange process, and since this process benefits all participants on the market and increases social utility, it follows directly that the ‘distributional’ results of the free market also increase social utility.” Murray N. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” in On Freedom and Free Enterprise, ed. Mary Sennholz (New York: D. Van Nostrand, 1956), p. 251.