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Essays by Murray N. Rothbard

Scattered throughout the Online Library of Liberty are several essays by the Austrian economist, historian and political theorist, Murray N. Rothbard. In this Reading List we bring them all together in one place for the sake of convenience.

For further reading see:

• School of Thought: The Austrian School of Economics

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  1: Austrian Definitions of the Supply of Money

  Louis M. Spadaro, New Directions in Austrian Economics, ed. Louis M. Spadaro (Kansas City: Sheed Andrews and McMeel, 1978). Chapter: Murray N. Rothbard, Austrian Definitions of the Supply of Money

  Accessed from oll.libertyfund.org/title/106/6057 on 2009-05-21

  This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.

  ---

  Austrian Definitions of the Supply of Money

  Murray N. Rothbard

  • Polytechnic Institute of New York

  I.

  THE DEFINITION OF THE SUPPLY OF MONEY

  The concept of the supply of money plays a vitally important role, in differing ways, in both the Austrian and the Chicago schools of economics. Yet, neither school has defined the concept in a full or satisfactory manner; as a result, we are never sure to which of the numerous alternative definitions of the money supply either school is referring.

  The Chicago School definition is hopeless from the start. For, in a question-begging attempt to reach the conclusion that the money supply is the major determinant of national income, and to reach it by statistical rather than theoretical means, the Chicago School defines the money supply as that entity which correlates most closely with national income. This is one of the most flagrant examples of the Chicagoite desire to avoid essentialist concepts, and to “test” theory by statistical correlation; with the result that the supply of money is not really defined at all. Furthermore, the approach overlooks the fact that statistical correlation cannot establish causal connections; this can only be done by a genuine theory that works with definable and defined concepts.1

  In Austrian economics, Ludwig von Mises set forth the essentials of the concept of the money supply in his Theory of Money andCredit, but no Austrian has developed the concept since then, and unsettled questions remain (e.g., are savings deposits properly to be included in the money supply?).2 And since the concept of the supply of money is vital both for the theory and for applied historical analysis of such consequences as inflation and business cycles, it becomes vitally important to try to settle these questions, and to demarcate the supply of money in the modern world. In The Theory of Money and Credit, Mises set down the correct guidelines: money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods on the market.

  In contemporary economics, definitions of the money supply range widely from cash + demand deposits (M₁) up to the inclusion of virtually all liquid assets (a stratospherically high M). No contemporary economist excludes demand deposits from his definition of money. But it is useful to consider exactly why this should be so. When Mises wrote The Theory of Money and Credit in 1912, the inclusion of demand deposits in the money supply was not yet a settled question in economic thought. Indeed, a controversy over the precise role of demand deposits had raged throughout the nineteenth century. And when Irving Fisher wrote his Purchasing Power of Money in 1913, he still felt it necessary to distinguish between M (the supply of standard cash) and M¹, the total of demand deposits.3 Why then did Mises, the developer of the Austrian theory of money, argue for including demand deposits as part of the money supply “in the broader sense”? Because, as he pointed out, bank demand deposits were not other goods and services, other assets exchangeable for cash; they were, instead, redeemable for cash at par on demand. Since they were so redeemable, they functioned, not as a good or service exchanging for cash, but rather as a warehouse receipt for cash, redeemable on demand at par as in the case of any other warehouse. Demand deposits were therefore “money-substitutes” and functioned as equivalent to money in the market. Instead of exchanging cash for a good, the owner of a demand deposit and the seller of the good would both treat the deposit as if it were cash, a surrogate for money. Hence, receipt of the demand deposit was accepted by the seller as final payment for his product. And so long as demand deposits are accepted as equivalent to standard money, they will function as part of the money supply.

  It is important to recognize that demand deposits are not automatically part of the money supply by virtue of their very existence; they continue as equivalent to money only so long as the subjective estimates of the sellers of goods on the market think that they are so equivalent and accept them as such in exchange. Let us hark back, for example, to the good old days before federal deposit insurance, when banks were liable to bank runs at any time. Suppose that the Jonesville Bank has outstanding demand deposits of $1 million; that million dollars is then its contribution to the aggregate money supply of the country. But suppose that suddenly the soundness of the Jonesville Bank is severely called into question; and Jonesville demand deposits are accepted only at a discount, or even not at all. In that case, as a run on the bank develops, its demand deposits no longer function as part of the money supply, certainly not at par. So that a bank’s demand deposit only functions as part of the money supply so long as it is treated as an equivalent substitute for cash.4

  It might well be objected that since, in the era of fractional reserve banking, demand deposits are not really redeemable at par on demand, that then only standard cash (whether gold or fiat paper, depending upon the standard) can be considered part of the money supply. This contrasts with 100 percent reserve banking, when demand deposits are genuinely redeemable in cash, and function as genuine, rather than pseudo, warehouse receipts to money. Such an objection would be plausible, but would overlook the Austrian emphasis on the central importance in the market of subjective estimates of importance and value. Deposits are not in fact all redeemable in cash in a system of fractional reserve banking; but so long as individuals on the market think that they are so redeemable, they continue to function as part of the money supply. Indeed, it is precisely the expansion of bank demand deposits beyond their reserves that accounts for the phenomena of inflation and business cycles. As noted above, demand deposits must be included in the concept of the money supply so long as the market treats them as equivalent; that is, so long as individuals think that they are redeemable in cash. In the current era of federal deposit insurance, added to the existence of a central bank that prints standard money and functions as a lender of last resort, it is doubtful that this confidence in redeemability can ever be shaken.

  All economists, of course, include standard money in their concept of the money supply. The justification for including demand deposits, as we have seen, is that people believe that these deposits are redeemable in standard money on demand, and therefore treat them as equivalent, accepting the payment of demand deposits as a surrogate for the payment of cash. But if demand deposits are to be included in the money supply for this reason, then it follows that any other entities that follow the same rules must also be included in the supply of money.

  Let us consider the case of savings deposits. There are several common arguments for not including savings deposits in the money supply: (1) they are not redeemable on demand, the bank being legally able to force the depositors to wait a certain amount of time (usually 30 days) before paying cash; (2) they cannot be used directly for payment. Checks can be drawn on demand deposits, but savings deposits must first be redeemed in cash upon presentation of a passbook; (3) demand deposits are pyramided upon a base of total reserves as a multiple of reserves, whereas savings deposits (at least in savings banks and savings and loan associations) can only pyramid on a one-to-one basis on top of demand deposits (since such deposits will rapidly “leak out” of savings and into demand deposits).

  Objection (1), however, fails from focusing on the legalities rather than on the economic realities of the situation; in particular, the objection fails to focus on the subjective estimates of the situation on the part of the depositors. In reality, the power to enforce a thirty-day notice on savings depositors is never enforced; hence, the depositor invariably thinks of his savings account as redeemable in cash on demand. Indeed, when, in the 1929 depression, banks tried to enforce this forgotten provision in their savings deposits, bank runs promptly ensued.5

  Objection (2) fails as well, when we consider that, even within the stock of standard money, some part of one’s cash will be traded more actively or directly than others. Thus, suppose someone holds part of his supply of cash in his wallet, and another part buried under the floorboards. The cash in the wallet will be exchanged and turned over rapidly; the floorboard money might not be used for decades. But surely no one would deny that the person’s floorboard hoard is just as much part of his money stock as the cash in his wallet. So that mere lack of activity of part of the money stock in no way negates its inclusion as part of his supply of money. Similarly, the fact that passbooks must be presented before a savings deposit can be used in exchange should not negate its inclusion in the money supply. As I have written elsewhere, suppose that for some cultural quirk—say widespread revulsion against the number “5”—no seller will accept a five-dollar bill in exchange, but only ones or tens. In order to use five-dollar bills, then, their owner would first have to go to a bank to exchange them for ones or tens, and then use those ones or tens in exchange. But surely, such a necessity would not mean that someone’s stock of five-dollar bills was not part of his money supply.6

  Neither is Objection (3) persuasive. For while it is true that demand deposits are a multiple pyramid on reserves, whereas savings bank deposits are only a one-to-one pyramid on demand deposits, this distinguishes the sources or volatility of different forms of money, but should not exclude savings deposits from the supply of money. For demand deposits, in turn, pyramid on top of cash, and yet, while each of these forms of money is generated quite differently, so long as they exist each forms part of the total supply of money in the country. The same should then be true of savings deposits, whether they be deposits in commercial or in savings banks.

  A fourth objection, based on the third, holds that savings deposits should not be considered as part of the money supply because they are efficiently if indirectly controllable by the Federal Reserve through its control of commercial bank total reserves and reserve requirements for demand deposits. Such control is indeed a fact, but the argument proves far too much; for, after all, demand deposits are themselves and in turn indirectly but efficiently controllable by the Fed through its control of total reserves and reserve requirements. In fact, control of savings deposits is not nearly as efficient as of demand deposits; if, for example, savings depositors would keep their money and active payments in the savings banks, instead of invariably “leaking” back to checking accounts, savings banks would be able to pyramid new savings deposits on top of commercial bank demand deposits by a large multiple.7

  Not only, then, should savings deposits be included as part of the money supply, but our argument leads to the conclusion that no valid distinction can be made between savings deposits in commercial banks (included in M₂) and in savings banks or savings and loan associations (also included in M₃).8 Once savings deposits are conceded to be part of the money supply, there is no sound reason for balking at the inclusion of deposits of the latter banks.

  On the other hand, a genuine time deposit—a bank deposit that would indeed only be redeemable at a certain point of time in the future, would merit very different treatment. Such a time deposit, not being redeemable on demand, would instead be a credit instrument rather than a form of warehouse receipt. It would be the result of a credit transaction rather than a warehouse claim on cash; it would therefore not function in the market as a surrogate for cash.

  Ludwig von Mises distinguished carefully between a credit and a claim transaction: a credit transaction is an exchange of a present good (e.g., money which can be used in exchange at any present moment) for a future good (e.g., an IOU for money that will only be available in the future). In this sense, a demand deposit, while legally designated as credit, is actually a present good—a warehouse claim to a present good that is similar to a bailment transaction, in which the warehouse pledges to redeem the ticket at any time on demand.

  Thus, Mises wrote:

  It is usual to reckon the acceptance of a deposit which can be drawn upon at any time by means of notes or cheques as a type of credit transaction and juristically this view is, of course, justified; but economically, the case is not one of a credit transaction. If credit in the economic sense means the exchange of a present good or a present service against a future good or a future service, then it is hardly possible to include the transactions in question under the conception of credit. A depositor of a sum of money who acquires in exchange for it a claim convertible into money at any time which will perform exactly the same service for him as the sum it refers to has exchanged no present good for a future good. The claim that he has acquired by his deposit is also a present good for him. The depositing of the money in no way means that he has renounced immediate disposal over the utility it commands.9

  It might be, and has been, objected that credit instruments, such as bills of exchange or Treasury bills, can often be sold easily on credit markets—either by the rediscounting of bills or in selling old bonds on the bond market; and that therefore they should be considered as money. But many assets are “liquid,” i.e., can easily be sold for money. Blue-chip stocks, for example, can be easily sold for money, yet no one would include such stocks as part of the money supply. The operative difference, then, is not whether an asset is liquid or not (since stocks are no more part of the money supply than, say, real estate) but whether the asset is redeemable at a fixed rate, at par, in money. Credit instruments, similarly to the case of shares of stock, are sold for money on the market at fluctuating rates. The current tendency of some economists to include assets as money purely because of their liquidity must be rejected; after all, in some cases, inventories of retail goods might be as liquid as stocks or bonds, and yet surely no one would list these inventories as part of the money supply. They are other goods sold for money on the market.10

  One of the most noninflationary developments in recent American banking has been the emergence of certificates of deposit (CDs), which are genuine time and credit transactions. The purchaser of the CD, or at least the large-demonination CD, knows that he has loaned money to the bank which the bank is only bound to repay at a specific date in the future; hence, large-scale CDs are properly not included in the M₂ and M₃ definitions of the supply of money. The same might be said to be true of various programs of time deposits which savings banks and commercial banks have been developing in recent years: in which the depositor agrees to retain his money in the bank for a specified period of years in exchange for a higher interest return.

  There are worrisome problems, however, that are attached to the latter programs, as well as to small-denomination CDs; for in these cases, the deposits are redeemable before the date of redemption at fixed rates, but at penalty discounts rather than at par. Let us assume a hypothetical time deposit, due in five years’ time at $10,000, but redeemable at present at a penalty discount of $9,000. We have seen that such a time deposit should certainly not be included in the money supply in the amount of $10,000. But should it be included at the fixed though penalty rate of $9,000, or not be included at all? Unfortunately, there is no guidance on this problem in the Austrian literature. Our inclination is to include these instruments in the money supply at the penalty level (e.g., $9,000), since the operative distinction, in our view, is not so much the par redemption as the ever-ready possibility of redemption at some fixed rate. If this is true, then we must also include in the concept of the money supply federal savings bonds, which are redeemable at fixed, though penalty rates, until the date of official maturation.

  Another entity which should be included in the total money supply on our definition is cash surrender values of life insurance policies; these values represent the investment rather than the insurance part of life insurance and are redeemable in cash (or rather in bank demand deposits) at any time on demand. (There are, of course, no possibilities of cash surrender in other forms of insurance, such as term life, fire, accident, or medical.) Statistically, cash surrender values may be gauged by the total of policy reserves less policy loans outstanding, since policies on which money has been borrowed from the insurance company by the policyholder are not subject to immediate withdrawal. Again, the objection that policyholders are reluctant to cash in their surrender values does not negate their inclusion in the supply of money; such reluctance simply means that this part of an individual’s money stock is relatively inactive.11

  One caveat on the inclusion of noncommercial bank deposits and other fixed liabilities into the money supply: just as the cash and other reserves of the commercial banks are not included in the money supply, since that would be double counting once demand deposits are included; in the same way, the demand deposits owned by these noncommercial bank creators of the money supply (savings banks, savings and loan companies, life insurance companies, etc.) should be deducted from the total demand deposits that are included in the supply of money. In short, if a commercial bank has demand deposit liabilities of $1 million, of which $100,000 are owned by a savings bank as a reserve for its outstanding savings deposits of $2 million, then the total money supply to be attributed to these two banks would be $2.9 million, deducting the savings bank reserve that is the base for its own liabilities.

  One anomaly in American monetary statistics should also be cleared up: for a reason that remains obscure, demand deposits in commercial banks or in the Federal Reserve Banks owned by the Treasury are excluded from the total money supply. If, for example, the Treasury taxes citizens by $1 billion, and their demand deposits are shifted from public accounts to the Treasury account, the total supply of money is considered to have fallen by $1 billion, when what has really happened is that $1 billion worth of money has (temporarily) shifted from private to governmental hands. Clearly, Treasury deposits should be included in the national total of the money supply.

  Thus, we propose that the money supply should be defined as all entities which are redeemable on demand in standard cash at a fixed rate, and that, in the United States at the present time, this criterion translates into:

  M_a (a = Austrian) = total supply of cash-cash held in the banks + total demand deposits + total savings deposits in commercial and savings banks + total shares in savings and loan associations + time deposits and small CDs at current redemption rates + total policy reserves of life insurance companies—policy loans outstanding—demand deposits owned by savings banks, saving and loan associations, and life insurance companies + savings bonds, at current rates of redemption.

  M_a hews to the Austrian theory of money, and, in so doing, broadens the definition of the money supply far beyond the narrow M₁, and yet avoids the path of those who would broaden the definition to the virtual inclusion of all liquid assets, and who thus would obliterate the uniqueness of the money phenonemon as the final means of payment for all other goods and services.

  II.

  THE MONEY SUPPLY AND CREDIT EXPANSION TO BUSINESS

  In contrast to the Chicago School, the Austrian economist cannot rest content with arriving at the proper concept of the supply of money. For while the supply of money (M_a) is the vitally important supply side of the “money relation” (the supply of and demand for money) that determines the array of prices, and is therefore the relevant concept for analyzing price inflation, different parts of the money supply play very different roles in affecting the business cycle. For the Austrian theory of the trade cycle reveals that only the inflationary bank credit expansion that enters the market through new business loans (or through purchase of business bonds) generates the over-investment in higher-order capital goods that leads to the boom-bust cycle. Inflationary bank credit that enters the market through financing government deficits does not generate the business cycle; for, instead of causing overinvestment in higher-order capital goods, it simply reallocates resources from the private to the public sector, and also tends to drive up prices. Thus, Mises distinguished between “simple inflation,” in which the banks create more deposits through purchase of government bonds, and genuine “credit expansion,” which enters the business loan market and generates the business cycle. As Mises writes:

  In dealing with the [business cycle] we assumed that the total amount of additional fiduciary media enters the market system via the loan market as advances to business ...

  There are, however, instances in which the legal and technical methods of credit expansion are used for a procedure catallactically utterly different from genuine credit expansion. Political and institutional convenience sometimes makes it expedient for a government to take advantage of the facilities of banking as a substitute for issuing government fiat money. The treasury borrows from the bank, and the bank provides the funds needed by issuing additional banknotes or crediting the government on a deposit account. Legally the bank becomes the treasury’s creditor. In fact the whole transaction amounts to fiat money inflation. The additional fiduciary media enter the market by way of the treasury as payment for various items of government expenditure ... They affect the loan market and the gross market rate of interest, apart from the emergence of a positive price premium, only if a part of them reaches the loan market at a time at which their effects upon commodity prices and wage rates have not yet been consummated.12

  Mises did not deal with the relatively new post—World War II phenomenon of large-scale bank loans to consumers, but these too cannot be said to generate a business cycle. Inflationary bank loans to consumers will artificially deflect social resources to consumption rather than investment, as compared to the un-hampered desires and preferences of the consumers. But they will not generate a boom-bust cycle, because they will not result in “over” investment, which must be liquidated in a recession. Not enough investments will be made, but at least there will be no flood of investments which will later have to be liquidated. Hence, the effects of diverting consumption investment proportions away from consumer time preferences will be asymmetrical, with the overinvestment-business cycle effects only resulting from inflationary bank loans to business. Indeed, the reason why bank financing of government deficits may be called simple rather than cyclical inflation is because government demands are “consumption” uses as decided by the preferences of the ruling government officials.

  In addition to M_a, then, Austrian economists should be interested in how much of a new supply of bank money enters the market through new loans to business. We might call the portion of new M_a that is created in the course of business lending, M_b (standing for either business loans or business cycle). If, for example, a bank creates $1 million of deposits in a given time period, and $400,000 goes into consumer loans and government bonds, while $600,000 goes into business loans and investments, then M_b will have increased by $600,000 in that period.

  In examining M_b on the American financial scene, we can ignore savings banks and savings and loan associations, whose assets are almost exclusively invested in residential mortgages. Savings bonds, of course, simply help finance government activity. We are left, then, with commercial banks (as well as life insurance investments). Commercial bank assets are comprised of reserves, government bonds, consumer loans, and business loans and investments (corporate bonds). Their liabilities consist of demand deposits, time deposits (omitting large CDs), large CDs, and capital. In trying to discover movements of M_b with any precision, we founder on the difficulty that it is impossible in practice to decide to what extent any increases of business loans and investments have been financed by an increase of deposits, thus increasing M_b, and how much they have been financed by increases of capital and large CDs. Looking at the problem another way, it is impossible to determine how much of an increase in deposits (increase in M_a) went to finance business loans and investments, and how much went into reserves or consumer loans. In trying to determine increases in M_b for any given period, then, it is impossible to be scientifically precise, and the economic historian must act as an “artist” rather than as an apodictic scientist. In practice, since bank capital is relatively small, as are bank investments in corporate bonds, the figure for commercial bank loans to business can provide a rough estimate of movements in M_b.

  With the development of the concepts of M_a (total supply of money) and M_b (total new money supply going into business credit), we have attempted to give more precision to the Austrian theory of money, and to the theoretical as well as historical Austrian analysis of monetary and business cycle phenomena.

  NOTES

  [1]In a critique of the Chicago approach, Leland Yeager writes: “But it would be awkward if the definition of money accordingly had to change from time to time and country to country. Furthermore, even if money defined to include certain near-moneys does correlate somewhat more closely with income than money narrowly defined, that fact does not necessarily impose the broad definition. Perhaps the amount of these near-moneys depends on the level of money-income and in turn on the amount of medium of exchange ... More generally, it is not obvious why the magnitude with which some other magnitude correlates most closely deserves overriding attention ... The number of bathers at a beach may correlate more closely with the number of cars parked there than with either the temperature or the price of admission, yet the former correlation may be less interesting or useful than either of the latter” (Leland B. Yeager, “Essential Properties of the Medium of Exchange,” Kyklos [1968], reprinted in Monetary Theory, ed. R. W. Clower [London: Penguin Books, 1969], p. 38). Also see, Murray N. Rothbard, “The Austrian Theory of Money,” in E. Dolan, ed., The Foundations of Modern Austrian Economics (Kansas City, Kansas: Sheed & Ward, 1976), pp. 179–82.

  [2]Ludwig von Mises, The Theory of Money and Credit, 3rd ed. (New Haven: Yale University Press, 1953).

  [3]Irving Fisher, The Purchasing Power of Money (New York: Macmillan, 1913).

  [4]Even now, in the golden days of federal deposit insurance, a demand deposit is not always equivalent to cash, as anyone who is told that it will take 15 banking days to clear a check from California to New York can attest.

  [5]On the equivalence of demand and savings deposits during the Great Depression, and on the bank runs resulting from attempts to enforce the 30-day wait for redemption, see Murray N. Rothbard, America’s Great Depression, 3rd ed. (Kansas City, Kansas: Sheed & Ward, 1975), pp. 84, 316. Also see Lin Lin, “Are Time Deposits Money?” American Economic Review (March 1937), pp. 76–86.

  [6]Rothbard, “The Austrian Theory of Money,” p. 181.

  [7]In the United States, the latter is beginning to be the case, as savings banks are increasingly being allowed to issue checks on their savings deposits. If that became the rule, moreover, Objection (2) would then fall on this ground alone.

  [8]Regardless of the legal form, the “shares” of formal ownership in savings and loan associations are economically precisely equivalent to the new deposits in savings banks, an equivalence that is universally acknowledged by economists.

  [9]Mises, Theory of Money and Credit, p. 268.

  [10]For Mises’ critique of the view that endorsed bills of exchange in early nineteenth-century Europe were really part of the money supply, see ibid., pp. 284–86.

  [11]For hints on the possible inclusion of life insurance cash surrender values in the supply of money, see Gordon W. McKinley, “Effects of Federal Reserve Policy on Nonmonetary Financial Institutions,” in Herbert V. Prochnow, ed., The Federal Reserve System (New York: Harper & Bros., 1960), p. 217n; and Arthur F. Burns, Prosperity without Inflation (Buffalo: Economica Books, 1958), p. 50.

  [12]Ludwig von Mises, Human Action, 3rd rev. ed. (Chicago: Henry Regnery, 1966), p. 570.

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  2: The Austrian Theory of Money

  Edwin G. Dolan, The Foundations of Modern Austrian Economics, ed. with an Introduction by Edwin G. Dolan (Kansas City: Sheed and Ward, 1976). Chapter: Murray N. Rothbard, The Austrian Theory of Money

  Accessed from oll.libertyfund.org/title/104/23621 on 2009-05-21

  This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.

  ---

  The Austrian Theory of Money

  Murray N. Rothbard

  The Austrian theory of money virtually begins and ends with Ludwig von Mises’s monumental Theory of Money and Credit, published in 1912.1 Mises’s fundamental accomplishment was to take the theory of marginal utility, built up by Austrian economists and other marginalists as the explanation for consumer demand and market price, and apply it to the demand for and the value, or the price, of money. No longer did the theory of money need to be separated from the general economic theory of individual action and utility, of supply, demand, and price; no longer did monetary theory have to suffer isolation in a context of “velocities of circulation,” “price levels,” and “equations of exchange.”

  In applying the analysis of supply and demand to money, Mises used the Wicksteedian concept: supply is the total stock of a commodity at any given time; and demand is the total market demand to gain and hold cash balances, built up out of the marginal-utility rankings of units of money on the value scales of individuals on the market. The Wicksteedian concept is particularly appropriate to money for several reasons: first, because the supply of money is either extremely durable in relation to current production, as under the gold standard, or is determined exogenously to the market by government authority; and, second and most important, because money, uniquely among commodities desired and demanded on the market, is acquired not to be consumed, but to be held for later exchange. Demandto-hold thereby becomes the appropriate concept for analyzing the uniquely broad monetary function of being held as stock for later sale. Mises was also able to explain the demand for cash balances as the resultant of marginal utilities on value scales that are strictly ordinal for each individual. In the course of his analysis Mises built on the insight of his fellow Austrian Franz Cuhel to develop a marginal utility that was strictly ordinal, lexicographic, and purged of all traces of the error of assuming the measurability of utilities.

  The relative utilities of money units as against other goods determine each person’s demand for cash balances, that is, how much of his income or wealth he will keep in cash balance as against how much he will spend. Applying the law of diminishing (ordinal) marginal utility to money and bearing in mind that money’s “use” is to be held for future exchange, Mises arrived implicitly at a falling demand curve for money in relation to the purchasing power of the currency unit. The purchasing power of the money unit, which Mises also termed the “objective exchange-value” of money, was then determined, as in the usual supply-and-demand analysis, by the intersection of the money stock and the demand for cash balance schedule. We can see this visually by putting the purchasing power of the money unit on the y-axis and the quantity of money on the x-axis of the conventional two-dimensional diagram corresponding to the price of any good and its quantity. Mises wrapped up the analysis by pointing out that the total supply of money at any given time is no more or less than the sum of the individual cash balances at that time. No money in a society remains unowned by someone and is therefore outside some individual’s cash balance.

  While, for purposes of convenience, Mises’s analysis may be expressed in the usual supply-and-demand diagram with the purchasing power of the money unit serving as the price of money, relying solely on such a simplified diagram falsifies the theory. For, as Mises pointed out in a brilliant analysis whose lessons have still not been absorbed in the mainstream of economic theory, the purchasing power of the money unit is not simply the inverse of the so-called price level of goods and services. In describing the advantages of money as a general medium of exchange and how such a general medium arose on the market, Mises pointed out that the currency unit serves as unit of account and as a common denominator of all other prices, but that the money commodity itself is still in a state of barter with all other goods and services. Thus, in the premoney state of barter, there is no unitary “price of eggs”; a unit of eggs (say, one dozen) will have many different “prices”: the “butter” price in terms of pounds of butter, the “hat” price in terms of hats, the “horse” price in terms of horses, and so on. Every good and service will have an almost infinite array of prices in terms of every other good and service. After one commodity, say gold, is chosen to be the medium for all exchanges, every other good except gold will enjoy a unitary price, so that we know that the price of eggs is one dollar a dozen; the price of a hat is ten dollars, and so on. But while every good and service except gold now has a single price in terms of money, money itself has a virtually infinite array of individual prices in terms of every other good and service. To put it another way, the price of any good is the same thing as its purchasing power in terms of other goods and services. Under barter, if the price of a dozen eggs is two pounds of butter, the purchasing power of a dozen eggs is, inter alia, two pounds of butter. The purchasing power of a dozen eggs will also be one-tenth of a hat, and so on. Conversely, the purchasing power of butter is its price in terms of eggs; in this case the purchasing power of a pound of butter is a half dozen eggs. After the arrival of money, the purchasing power of a dozen eggs is the same as its money price, in our example, one dollar. The purchasing power of a pound of butter will be fifty cents, of a hat ten dollars, and so forth.

  What, then, is the purchasing power, or the price, of a dollar? It will be a vast array of all the goods and services that can be purchased for a dollar, that is, of all the goods and services in the economy. In our example, we would say that the purchasing power of a dollar equals one dozen eggs, or two pounds of butter, or one-tenth of a hat, and so on, for the entire economy. In short, the price, or purchasing power, of the money unit will be an array of the quantities of alternative goods and services that can be purchased for a dollar. Since the array is heterogeneous and specific, it cannot be summed up in some unitary price-level figure.

  The fallacy of the price-level concept is further shown by Mises’s analysis of precisely how prices rise (that is, the purchasing power of money falls) in response to an increase in the quantity of money (assuming, of course, that the individual demand schedules for cash balances or, more generally, individual value scales remain constant). In contrast to the hermetic neoclassical separation of money and price levels from the relative prices of individual goods and services, Mises showed that an increased supply of money impinges differently upon different spheres of the market and thereby ineluctably changes relative prices.

  Suppose, for example, that the supply of money increases by 20 percent. The result will not be, as neoclassical economics assumes, a simple across-the-board increase of 20 percent in all prices. Let us assume the most favorable case—what we might call the Angel Gabriel model, that the Angel Gabriel descends and overnight increases everyone’s cash balance by precisely 20 percent. Now all prices will not simply rise by 20 percent; for each individual has a different value scale, a different ordinal ranking of utilities, including the relative marginal utilities of dollars and of all the other goods on his value scale. As each person’s stock of dollars increases, his purchases of goods and services will change in accordance with their new position on his value scale in relation to dollars. The structure of demand will therefore change, as will relative prices and relative incomes in production. The composition of the array constituting the purchasing power of the dollar will change.

  If relative demands and prices change in the Angel Gabriel model, they will change much more in the course of real-world increases in the supply of money. For, as Mises showed, in the real world an inflation of money is alluring to the inflators precisely because the injection of new money does not follow the Angel Gabriel model. Instead, the government or the banks create new money to be spent on specific goods and services. The demand for these goods thereby rises, raising these specific prices. Gradually, the new money ripples through the economy, raising demand and prices as it goes. Income and wealth are redistributed to those who receive the new money early in the process, at the expense of those who receive the new money late in the day and of those on fixed incomes who receive no new money at all. Two types of shifts in relative prices occur as the result of this increase in money: (1) the redistribution from late receivers to early receivers that occurs during the inflation process and (2) the permanent shifts in wealth and income that continue even after the effects of the increase in the money supply have worked themselves out. For the new equilibrium will reflect a changed pattern of wealth, income, and demand resulting from the changes during the intervening inflationary process. For example, the fixed income groups permanently lose in relative wealth and income.2

  If the concept of a unitary price level is a fallacious one, still more fallacious is any attempt to measure changes in that level. To use our previous example, suppose that at one point in time the dollar can buy one dozen eggs, or one-tenth of a hat, or two pounds of butter. If, for the sake of simplicity, we restrict the available goods and services to just these three, we are describing the purchasing power of the dollar at that time. But suppose that, at the next point in time, perhaps because of an increase in the supply of dollars, prices rise, so that butter costs one dollar a pound, a hat twelve dollars, and eggs three dollars a dozen. Prices rise but not uniformly, and all that we can now say quantitatively about the purchasing power of the dollar is that it is four eggs, or one-twelfth of a hat, or one pound of butter. It is impermissible to try to group the changes in the purchasing power of the dollar into a single average index number. Any such index conjures up some sort of totality of goods whose relative prices remain unchanged, so that a general averaging can arrive at a measure of changes in the purchasing power of money itself. But we have seen that relative prices cannot remain unchanged, much less the valuations that individuals place upon these goods and services.3

  Just as the price of any good tends to be uniform, so the price, or purchasing power of money as Mises demonstrated, will tend to be uniform throughout its trading area. The purchasing power of the dollar will tend to be uniform throughout the United States. Similarly, in the era of the gold standard, the purchasing power of a unit of gold tended to be uniform throughout those areas where gold was in use. Critics who point to persistent tendencies for differences in the price of money between one location and another fail to understand the Austrian concept of what a good or a service actually is. A good is not defined by its technological properties but by its homogeneity in relation to the demands and wishes of the consumers. It is easy to explain, for example, why the price of wheat in Kansas will not be the same as the price of wheat in New York. From the point of view of the consumer in New York, the wheat, while technologically identical in the two places, is in reality two different commodities: one being “wheat in Kansas” and the other “wheat in New York.” Wheat in New York, being closer to his use, is a more valuable commodity than wheat in Kansas and will have a higher price on the market. Similarly, the fact that a technologically similar apartment will not have the same rental price in New York City as in rural Ohio does not mean that the price of the same apartment commodity differs persistently; for the apartment in New York enjoys a more valuable and more desirable location and hence will be more highly priced on the market. The “apartment in New York” is a different and more valuable good than the “apartment in rural Ohio,” since the respective locations are part and parcel of the good itself. At all times, a homogeneous good must be defined in terms of its usefulness to the consumer rather than by its technological properties.

  To extend the analysis, the fact that the cost of living may be persistently higher in New York than in rural Ohio does not negate the tendency for a uniform purchasing power of the dollar throughout the country. For the two locations constitute a different set of goods and services, New York providing a vastly wider range of goods and services to the consumer. The higher costs of living in New York are the reflection of the greater locational advantages, of the more abundant range of goods and services available.4

  In his valuable history of the theory of international prices, C. Y. Wu emphasized the Mises contribution and pointed out that Mises’s explanation was in the tradition of Ricardo and Nassau Senior, who “was the first economist to give a clear explanation of the meaning of the classical doctrine that the value of money was everywhere the same and to demonstrate that differences in the prices of goods of similar composition in different places were perfectly reconcilable with the assumption of an equality of the value of money.”5 Pointing out that Mises arrived at this concept independently of Senior, Wu then developed Mises’s application to the alleged locational differences in the cost of living. As Wu stated, “To him [Mises] those who believe in national differences in the value of money have left out of account the positional factor in the nature of economic goods; otherwise they should have understood that the alleged differences are explicable by differences in the quality of the commodities offered and demanded.” Wu concluded with a quote from Mises’s Theory of Money and Credit: “The exchange-ratio between commodities and money is everywhere the same. But men and their wants are not everywhere the same, and neither are commodities.”6

  If the tendency of the purchasing power of money is to be everywhere the same, what happens if one or more moneys coexist in the world? By way of explanation, Mises developed the Ricardian analysis into what was to be called the purchasing-power-parity theory of exchange rates, namely, that the market exchange rate between two independent moneys will tend to equal the ratio of their purchasing powers. Mises showed that this analysis applies both to the exchange rate between gold and silver—whether or not the two circulate side by side within the same country—and to independent fiat currencies issued by two nations. Wu explained the difference between Mises’s theory and the unfortunately better known version of the purchasing-power-parity theory set forth a bit later by Gustav Cassel. The Cassel version ignores the Austrian emphasis on locational differences in accounting for differences in value of technologically similar goods, and this in turn complements the broader Austrian and classical position that the purchasing power of money is an array of specific goods. This contrasts with Cassel and the neoclassicists, who think of the purchasing power money as the inverse of a unitary price level. Thus Wu stated:

  The purchasing power parity theory is that the rate of exchange would be in equilibrium when the “purchasing power of the moneys” is equal in all trading countries. If the term purchasing power refers to the power of purchasing commodities, which are not only similar in technological composition, but also in the same geographical situation, the theory becomes the classical doctrine of comparative values of moneys in different countries and is a sound doctrine. But unfortunately the term purchasing power in connection with the theory sometimes implies the reciprocal of the general price level in a country. While so interpreted the theory becomes that the equilibrium point for the foreign exchanges is to be found at the quotient between the price levels of the different countries. That is . . . an erroneous version of the purchasing power parity theory.7

  Unfortunately, Cassel, instead of correcting the error in his concept of purchasing power, soon abandoned the full-parity doctrine in favor of a different and highly attenuated contention that only changes in exchange rates reflect changes in respective purchasing power—perhaps because of his desire to use measurement and index numbers in applying the theory.8

  When he set out to apply the theory of marginal utility to the price of money, Mises confronted the problem that was later to be called “the Austrian circle.” In short, when someone ranks eggs or beef or shoes on his value scale, he values these goods for their direct use in consumption. Such valuations are, of course, independent of and prior to pricing on the market. But people demand money to hold in their cash balances, not for eventual direct use in consumption, but precisely in order to exchange those balances for other goods that will be used directly. Thus, money is not useful in itself but because it has a prior exchange value, because it has been and therefore presumably will be exchangeable in terms of other goods. In short, money is demanded because it has a preexisting purchasing power; its demand not only is not independent of its existing price on the market but is precisely due to its already having a price in terms of other goods and services. But if the demand for, and hence the utility of, money depends on its preexisting price or purchasing power, how then can that price be explained by the demand? It seems that any Austrian attempt to apply marginal utility theory to money is inextricably caught in a circular trap. For that reason mainstream economics has not been able to apply marginal utility theory to the value of money and has therefore gone off in multicausal (or noncausal) Walrasian directions.

  Mises, however, succeeded in solving this problem in 1912 in developing his so-called regression theorem. Briefly, Mises held that the demand for money, or cash balances, at the present time—say day X—rests on the fact that money on the previous day, day X−1, had a purchasing power. The purchasing power of money on day X is determined by the interaction on day X of the supply of money on that day and that day’s demand for cash balances, which in turn is determined by the marginal utility of money for individuals on day X. But this marginal utility, and hence this demand, has an inevitable historical component: the fact that money had prior purchasing power on day X − 1, and that therefore individuals know that this commodity has a monetary function and will be exchangeable on future days for other goods and services. But what then determined the purchasing power of money on day X−1? Again, that purchasing power was determined by the supply of, and demand for, money on day X−1, and that in turn depended on the fact that the money had had purchasing power on day X−2. But are we not caught in an infinite regression, with no escape from the circular trap and no ultimate explanation? No. What we must do is to push the temporal regression to that point when the money commodity was not used as a medium of indirect exchange but was demanded purely for its own direct consumption use. Let us go back logically to the second day that a commodity, say gold, was used as a medium of exchange. On that day, gold was demanded partly because it had a preexisting purchasing power as a money, or rather as a medium of exchange, on the first day. But what of that first day? On that day, the demand for gold again depended on the fact that gold had had a previous purchasing power, and so we push the analysis back to the last day of barter. The demand for gold on the last day of barter was purely a consumption use and had no historical component referring to any previous day; for under barter, every commodity was demanded purely for its current consumption use, and gold was no different. On the first day of its use as a medium of exchange, gold began to have two components in its demand, or utility: first, a consumption use as had existed in barter and, second, a monetary use, or use as a medium of exchange, which had a historical component in its utility. In short, the demand for money can be pushed back to the last day of barter, at which point the temporal element in the demand for the money commodity disappears, and the causal forces in the current demand and purchasing power of money are fully and completely explained.

  Not only does the Mises regression theorem fully explain the current demand for money and integrate the theory of money with the theory of marginal utility, but it also shows that money must have originated in this fashion—on the market—with individuals on the market gradually beginning to use some previously valuable commodity as a medium of exchange. No money could have originated either by a social compact to consider some previously valueless thing as a “money” or by sudden governmental fiat. For in those cases, the money commodity could not have a previous purchasing power, which could be taken into account in the individual’s demands for money. In this way, Mises demonstrated that Carl Menger’s historical insight into the way in which money arose on the market was not simply a historical summary but a theoretical necessity. On the other hand, while money had to originate as a directly useful commodity, for example, gold, there is no reason, in the light of the regression theorem, why such direct uses must continue afterward for the commodity to be used as money. Once established as a money, gold or gold substitutes can lose or be deprived of their direct use function and still continue as money; for the historical reference to a previous day’s purchasing power will already have been established.9

  In his comprehensive 1949 treatise, Human Action, Mises successfully refuted earlier criticisms of the regression theorem by Anderson and Ellis.10 Subsequently criticisms were leveled at the theory by J. C. Gilbert and Don Patinkin. Gilbert asserted that the theory fails to explain how a new paper money can be introduced when the previous monetary system breaks down. Presumably he was referring to such examples as the German Rentenmark after the runaway inflation of 1923. But the point is that the new paper was not introduced de novo; gold and foreign currencies had existed previously, and the Rentenmark could and did undergo exchange in terms of these previously existing moneys; furthermore, it was introduced at a fixed relation to the previous, extremely depreciated mark.11 Patinkin criticized Mises for allegedly claiming that the marginal utility of money refers to the marginal utility of the goods for which money is exchanged rather than the marginal utility of holding money itself; he also charged Mises with inconsistently holding the latter view in the other parts of The Theory of Money and Credit. But Patinkin was mistaken; Mises’s concept of the marginal utility of money always refers to the utility of holding money. Mises’s point in the regression theorem is a different one, namely, that the marginal utility-to-hold is itself based on the prior fact that money can be exchanged for goods, that is, on the prior purchasing power of money in terms of goods. In short, that money prices of goods, the purchasing power of money, has first to exist in order for money to have a marginal utility to hold, hence the need for the regression theorem to break out of the circularity.12

  Modern orthodox economics has abandoned the quest for causal explanation in behalf of a Walrasian world of “mutual determination” suitable for the current fashion of mathematical economics. Patinkin himself feebly accepted the circular trap by stating that in analyzing the market (“market experiment”) he began with utility while in analyzing utility he began with prices (“individual experiment”). With characteristic arrogance, Samuelson and Stigler each attacked the Austrian concern with escaping circularity in order to analyze causal relations. Samuelson fell back on Walras, who developed the idea of “general equilibrium in which all magnitudes are simultaneously determined by efficacious interdependent relations,” which he contrasted to the “fears of literary writers” (that is, economists who write in English) about circular reasoning.13 Stigler dismissed Böhm-Bawerk for his “failure to understand some of the most essential elements of modern economic theory, the concepts of mutual determination and equilibrium (developed by the use of the theory of simultaneous equations). Mutual determination . . . is spurned for the older concept of cause and effect.” Stigle added the snide note that “Böhm-Bawerk was not trained in mathematics.”14 Thus, orthodox economists reflect the unfortunate influence of the mathematical method in economics. The idea of mutual functional determination—so adaptable to mathematical presentation—is appropriate in physics, which tries to explain the unmotivated motions of physical matter. But in praxeology, the study of human action, of which economics is the best elaborated part, the cause is known: individual purpose. In economics, therefore, the proper method is to proceed from the causing action to its consequent effects.

  In Human Action, Mises advanced the Austrian theory of money by delivering a shattering blow to the very concept of Walrasian general equilibrium. To arrive at that equilibrium, the basic data of the economy—values, technology, and resources—must all be frozen and understood by every participant in the market to be frozen indefinitely. Given such a magical freeze, the economy would sooner or later settle into an endless round of constant prices and production, with each firm earning a uniform rate of interest (or, in some constructions, a zero rate of interest). The idea of certainty and fixity in what Mises called “the evenly rotating economy” is absurd, but what Mises went on to show is that in such a world of fixity and certainty no one would hold cash balances. Everyone’s demand for cash balances would fall to zero. For since everyone would have perfect foresight and knowledge of his future sales and purchases, there would be no point in holding any cash balance at all. Thus, the man who knew he would be spending $5,000 on 1 January 1977 would lend out all his money to be returned at precisely that date. As Mises stated:

  Every individual knows precisely what amount of money he will need at any future date. He is therefore in a position to lend all the funds he receives in such a way that the loans fall due on the date he will need them . . . When the equilibrium of the evenly rotating economy is finally reached, there are no more cash holdings.15

  But if no one holds cash and the demand for cash balances falls to zero, all prices rise to infinity, and the entire general equilibrium system of the market, which implies the continuing existence of monetary exchange, falls apart. As Mises concluded:

  In the imaginary construction of an evenly rotating economy, indirect exchange and the use of money are tacitly implied . . . . Where there is no uncertainty concerning the future, there is no need for any cash holding. As money must necessarily be kept by people in their cash holdings, there cannot be any money . . . . But the very notion of a market economy without money is self-contradictory.16

  The very notion of a Walrasian general equilibrium is not simply totally unrealistic, it is conceptually impossible, since money and monetary exchange cannot be sustained in that kind of system. Another corollary contribution of Mises in this analysis was to demonstrate that, far from being only one of many “motives” for holding cash balances, uncertainty is crucial to the holding of any cash at all.

  That such problems are now troubling mainstream economics is revealed by F. H. Hahn’s demonstration that Patinkin’s wellknown model of general equilibrium can only establish the existence of a demand for money by appealing to such notions as an alleged uncertainty of the exact moments of future sales and purchases, and to “imperfections” in the credit market—neither of which, as Hahn pointed out, is consistent with the concept of general equilibrium.17

  With respect to the supply of money, Mises returned to the basic Ricardian insight that an increase in the supply of money never confers any general benefit upon society. For money is fundamentally different from consumers’ and producers’ goods in at least one vital respect. Other things being equal, an increase in the supply of consumers’ goods benefits society since one or more consumers will be better off. The same is true of an increase in the supply of producers’ goods, which will be eventually transformed into an increased supply of consumers’ goods; for production itself is the process of transforming natural resources into new forms and locations desired by consumers for direct use. But money is very different: money is not used directly in consumption or production but is exchanged for such directly usable goods. Yet, once any commodity or object is established as a money, it performs the maximum exchange work of which it is capable. An increase in the supply of money causes no increase whatever in the exchange service of money; all that happens is that the purchasing power of each unit of money is diluted by the increased supply of units. Hence there is never a social need for increasing the supply of money, either because of an increased supply of goods or because of an increase in population. People can acquire an increased proportion of cash balances with a fixed supply of money by spending less and thereby increasing the purchasing power of their cash balances, thus raising their real cash balances overall. As Mises wrote:

  The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power. As the operation of the market tends to determine the final state of money’s purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or a deficiency of money. Each individual and all individuals together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great or small. Changes in money’s purchasing power generate changes in the disposition of wealth among the various members of society. From the point of view of people eager to be enriched by such changes, the supply of money may be called insufficient or excessive, and the appetite for such gains may result in policies designed to bring about cash-induced alterations in purchasing power. However, the services which money renders can be neither improved nor impaired by changing the supply of money . . . . The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.18

  A world of constant money supply would be one similar to that of much of the eighteenth and nineteenth centuries, marked by the successful flowering of the Industrial Revolution with increased capital investment increasing the supply of goods and with falling prices for these goods as well as falling costs of production.19 As demonstrated by the notable Austrian theory of the business cycle, even an inflationary expansion of money and credit merely offsetting the secular fall in prices will create the distortions of production that bring about the business cycle.

  In the face of overwhelming arguments against inflationary expansion of the money supply (including those not detailed here), what accounts for the persistence of the inflationary trend in the modern world? The answer lies in the way new money is injected into the economy, in the fact that it is most definitely not done according to the Angel Gabriel model. For example, a government does not multiply the money supply tenfold across the board by issuing a decree adding another zero to every monetary number in the economy. In any economy not on a 100 percent commodity standard, the money supply is under the control of government, the central bank, and the controlled banking system. These institutions issue new money and inject it into the economy by spending it or lending it out to favored debtors. As we have seen, an increase in the supply of money benefits the early receivers, that is, the government, the banks, and their favored debtors or contractors, at the expense of the relatively fixed income groups that receive the new money late or not at all and suffer a loss in real income and wealth. In short, monetary inflation is a method by which the government, its controlled banking system, and favored political groups are able to partially expropriate the wealth of other groups in society. Those empowered to control the money supply issue new money to their own economic advantage and at the expense of the remainder of the population. Yield to government the monopoly over the issue and supply of money, and government will inflate that supply to its own advantage and to the detriment of the politically powerless. Once we adopt the distinctively Austrian approach of “methodological individualism,” once we realize that government is not a superhuman institution dedicated to the common good and the general welfare, but a group of individuals devoted to furthering their economic interests, then the reason for the inherent inflationism of government as money monopolist becomes crystal clear.

  As the Austrian analysis of money shows, however, the process of generated inflation cannot last indefinitely, for the government cannot in the final analysis control the pace of monetary deterioration and the loss of purchasing power. The ultimate result of a policy of persistent inflation is runaway inflation and the total collapse of the currency. As Mises analyzed the course of runaway inflation (both before and after the first example of such a collapse in an industrialized country, in post-World-War-I Germany), such inflation generally proceeds as follows: At first the government’s increase of the money supply and the subsequent rise in prices are regarded by the public as temporary. Since, as was true in Germany during World War I, the onset of inflation is often occasioned by the extraordinary expenses of a war, the public assumes that after the war conditions including prices will return to the preinflation normal. Hence, the public’s demand for cash balances rises as it awaits the anticipated lowering of prices. As a result, prices rise proportionately and often substantially less than the money supply, and the monetary authorities become bolder. As in the case of the assignats during the French Revolution, here is a magical panacea for the difficulties of government: pump more money into the economy, and prices will rise only a little! Encouraged by the seeming success, the authorities apply more of what has worked so well, and the monetary inflation proceeds apace. In time, however, the public’s expectations and views of the economic present and future undergo a vitally important change. They begin to see that there will be no return to the prewar norm, that the new norm is a continuing price inflation—that prices will continue to go up rather than down. Phase two of the inflationary process ensues, with a continuing fall in the demand for cash balances based on this analysis: “I’d better spend my money on X, Y, and Z now, because I know full well that next year prices will be higher.” Prices begin to rise more than the increase in the supply of money. The critical turning point has arrived.

  At this point, the economy is regarded as suffering from a money shortage as evidenced by the outstripping of monetary expansion by the rise in prices. What is now called a liquidity crunch occurs on a broad scale, and a clamor arises for greater increases in the supply of money. As the Austrian school economist Bresciani-Turroni wrote in his definitive study of the German hyperinflation:

  The rise of prices caused an intense demand for the circulating medium to arise, because the existing quantity was not sufficient for the volume of transactions. At the same time the State’s need of money increased rapidly . . . the eyes of all were turned to the Reichsbank. The pressure exercised on it became more and more insistent and the increase of issues, from the central bank, appeared as a remedy . . . .

  The authorities therefore had not the courage to resist the pressure of those who demanded ever greater quantities of paper money, and to face boldly the crisis which . . . would be, undeniably, the result of a stoppage of the issue of notes. They preferred to continue the convenient method of continually increasing the issues of notes, thus making the continuation of business possible, but at the same time prolonging the pathological state of the German economy. The Government increased salaries in proportion to the depreciation of the mark, and employers in their turn granted continual increases in wages, to avoid disputes, on the condition that they could raise the prices of their products . . . .

  Thus was the vicious circle established; the exchange depreciated; internal prices rose; note-issues were increased; the increase of the quantity of paper money lowered once more the value of the mark in terms of gold; prices rose once more; and so on . . . .

  For a long time the Reichsbank—having adopted the fatalistic idea that the increase in the note-issues was the inevitable consequence of the depreciation of the mark—considered as its principal task, not the regulation of the circulation, but the preparation for the German economy of the continually increasing quantities of paper money, which the rise in prices required. It devoted itself especially to the organization, on a large scale, of the production of paper marks.20

  The sort of thinking that gripped the German monetary authorities at the height of the hyperinflation may be gauged from this statement by the president of the Reichsbank, Rudolf Havenstein:

  The wholly extraordinary depreciation of the mark has naturally created a rapidly increasing demand for additional currency, which the Reichsbank has not always been able fully to satisfy. A simplified production of notes of large denominations enabled us to bring ever greater amounts into circulation. But these enormous sums are barely adequate to cover the vastly increased demand for the means of payment, which has just recently attained an absolutely fantastic level . . . .

  The running of the Reichsbank’s note-printing organization, which has become absolutely enormous, is making the most extreme demands on our personnel.21

  The United States seems to be entering phase two of inflation (1975), and it is noteworthy that economists such as Walter Heller have already raised the cry that the supply of money must be expanded in order to restore the real cash balances of the public, in effect to alleviate the shortage of real balances. As in Germany in the early 1920s, the argument is being employed that the quantity of money cannot be the culprit for inflation since prices are rising at a greater rate than the supply of money.22

  Phase three of the inflation is the ultimate runaway stage: the collapse of the currency. The public takes panicky flight from money into real values, into any commodity whatever. The public’s psychology is not simply to buy now rather than later but to buy anything immediately. The public’s demand for cash balances hurtles toward zero.

  The reason for the enthusiasm of Mises and other Austrian economists for the gold standard, the purer and less diluted the better, should now be crystal clear. It is not that this “barbaric relic” has any fetishistic attraction. The reason is that a money under the control of the government and its banking system is subject to inexorable pressures toward continuing monetary inflation. In contrast, the supply of gold cannot be manufactured ad libitum by the monetary authorities; it must be extracted from the ground, by the same costly process as governs the supply of any other commodities on the market. Essentially the choice is: gold or government. The choice of gold rather than other market commodities is the historical experience of centuries that gold (as well as silver) is uniquely suitable as a monetary commodity—for reasons once set forth in the first chapter of every money-and-banking textbook.

  The criticism might be made that gold, too, can increase in quantity, and that this rise in supply, however limited, would also confer no benefit upon society. Apart from the gold versus government choice, however, there is another important consideration: an increase in the supply of gold improves its availability for nonmonetary uses, an advantage scarcely conferred by the fiat currencies of government or the deposits of the banking system.

  In contrast to the Misesian “monetary overinvestment” theory of business cycles, on which considerable work has been done by F. A. Hayek and other Austrian economists, almost nothing has been done on the theory of money proper except by Mises himself. There are three cloudy and interrelated areas that need further elaboration. One is the route by which money can be released from government control. Of primary importance would be the return to a pure gold standard. To do so would involve, first, raising the “price of gold” (actually, lowering the definition of the weight of the dollar) drastically above the current pseudoprice of $42.22 an ounce and, second, a deflationary transformation of current bank deposits into nonmonetary savings certificates or certificates of deposit. What the precise price or the precise mix should be is a matter for research. Initially, the Mises proposal for a return to gold at a market price and the proposal of such Austrian monetary theorists as Jacques Rueff and Michael Heilperin for a return at a deliberately doubled price of $70 an ounce seemed far apart. But the current (1975) market price of approximately $160 an ounce brings the routes of a deliberately higher price and the market price much closer together.23

  A second area for research is the matter of free banking as against 100 percent reserve requirements for bank deposits in relation to gold. Mises’s Theory of Money and Credit was one of the first works to develop systematically the way in which the banks create money through an expansion of credit. It was followed by Austrian economist C.A. Phillips’s famous distinction between the expansionary powers of individual banks and those of the banking system as a whole. However, one of Mises’s arguments has remained neglected: that under a regime of free banking, that is, where banks are unregulated but held strictly to account for honoring their obligations to redeem notes or deposits in standard money, the operations of the market check monetary expansion by the banks. The threat of bank runs, combined with the impossibility of one bank’s expanding more than a competitor, keeps credit expansion at a minimum. Perhaps Mises underestimated the possibility of a successful bank cartel for the promotion of credit expansion; it seems clear, however, that there is less chance for bank-credit expansion in the absence of a central bank to supply reserves and to be a lender of last resort.24

  Finally, there is the related question, which Mises did not develop fully, of the proper definition of the crucial concept of the money supply. In current mainstream economics, there are at least four competing definitions, ranging from M₁ to M₄. Of one point an Austrian is certain: the definition must rest on the inner essence of the concept itself and not on the currently fashionable but question-begging methodology of statistical correlation with national income. Leland Yeager was trenchantly critical of such an approach:

  One familiar approach to the definition of money scorns any supposedly a priori line between money and near-moneys. Instead, it seeks the definition that works best with statistics. One strand of that approach . . . seeks the narrowly or broadly defined quantity that correlates most closely with income in equations fitted to historical data . . . . But it would be awkward if the definition of money accordingly had to change from time to time and country to country. Furthermore, even if money defined to include certain near-moneys does correlate somewhat more closely with income than money narrowly defined, that fact does not necessarily impose the broad definition. Perhaps the amount of these near-moneys depends on the level of money-income and in turn on the amount of medium of exchange . . . . More generally, it is not obvious why the magnitude with which some other magnitude correlates most closely deserves overriding attention . . . . The number of bathers at a beach may correlate more closely with the numbers of cars parked there than with either the temperature or the price of admission, yet the former correlation may be less interesting or useful than either of the latter. The correlation with national income might be closer for either consumption or investment than for the quantity of money.25

  Money is the medium of exchange, the asset for which all other goods and services are traded on the market. If a thing functions as such a medium, as final payment for other things on the market, then it serves as part of the money supply. In his Theory of Money and Credit, Mises distinguished between standard money (money in the narrow sense) and money substitutes, such as bank notes and demand deposits, which function as an additional money supply. It should be noted, for example, that in Irving Fisher’s non-Austrian classic, The Purchasing Power of Money, written at about the same time (1913), M consisted of standard money only, while M¹ consisted of money substitutes in the form of bank demand deposits redeemable in standard money at par. Today no economist would think of excluding demand deposits from the definition of money. But if we ponder the problem, we see that if a bank begins to fail, its deposits are no longer equivalent to money; they no longer serve as money on the market. They are only money until a bank’s imminent collapse.

  Furthermore, in the same way that M¹ (currency plus demand deposits) is broader than the narrowest definition, we can establish even broader definitions by including savings deposits of commercial banks, savings bank deposits, shares of savings and loan banks, and cash surrender values of life insurance companies, which are all redeemable on demand at par in standard money, and therefore all serve as money substitutes and as part of the money supply until the public begins to doubt that they are redeemable. Partisans of M₁ argue that commercial banks are uniquely powerful in creating deposits and, further, that their deposits circulate more actively than the deposits of other banks. Let us suppose, however, that in a gold-standard country, a man has some gold coins in his bureau and others locked in a bank vault. His stock of gold coins at home will circulate actively and the ones in his vault sluggishly, but surely both are part of his stock of cash. And, if it also be objected that the deposits of savings banks and similar institutions pyramid on top of commercial bank deposits, it should also be noted that the latter in turn pyramid on top of reserves and standard money.

  Another example will serve to answer the common objection that a savings bank deposit is not money because it cannot be used directly as a medium of exchange but must be redeemed in that medium. (This is apart from the fact that savings banks are increasingly being empowered to issue checks and open up checking accounts.) Suppose that, through some cultural quirk, everyone in the country decided not to use five-dollar bills in actual exchange. They would only use ten-dollar and one-dollar bills, and keep their longer-term cash balances in five-dollar bills. As a result, five-dollar bills would tend to circulate far more slowly than the other bills. If a man wanted to spend some of his cash balance, he could not spend a five-dollar bill directly; instead, he would go to a bank and exchange it for five one-dollar bills for use in trade. In this hypothetical situation, the status of the five-dollar bill would be the same as that of the savings deposit today. But while the holder of the five-dollar bill would have to go to a bank and exchange it for dollar bills before spending it, surely no one would say that his five-dollar bills were not part of his cash balance or of the money supply.

  A broad definition of the money supply, however, excludes assets not redeemable on demand at par in standard money, that is, any form of genuine time liability, such as savings certificates, certificates of deposit whether negotiable or nonnegotiable, and government bonds. Savings bonds, redeemable at par, are money substitutes and hence are part of the total supply of money. Finally, just as commercial bank reserves are properly excluded from the outstanding supply of money, so those demand deposits that in turn function as reserves for the deposits of these other financial institutions would have to be excluded as well. It would be double counting to include both the base and the multiple of any of the inverted money pyramids in the economy.

  NOTES

  [1.]Ludwig von Mises, Theorie des Geldes und der Umlaufsmittel (1912); see the third English edition, The Theory of Money and Credit (New Haven: Yale University Press, 1953).

  [2.]On the changes in relative prices attendant on an increase in the money supply, see Mises, Theory of Money and Credit, pp. 139–45.

  [3.]For more on the fallacies of measurement and index numbers, see Mises, Theory of Money and Credit, pp. 187–94; idem, Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949), pp. 221–24; Murray N. Rothbard, Man, Economy, and State (Princeton: D. Van Nostrand, 1962), 2:737–40; Bassett Jones, Horses and Apples: A Study of Index Numbers (New York: John Day & Co., 1934); and Oskar Morgenstern, On the Accuracy of Economic Observations 2d ed. rev. (Princeton: Princeton University Press, 1963).

  [4.]See Mises, Theory of Money and Credit, pp. 170–78.

  [5.]Chi-Yuen Wu, An Outline of International Price Theories (London: George Routledge & Sons, 1939), p. 126.

  [6.]Wu, Outline, p. 284; Mises, Theory of Money and Credit, p. 178. Mises’s development of the theory was independent of Senior’s because the latter was only published in 1928 in Industrial Efficiency and Social Economy (New York, 1928), pp. 55–56; see Wu, Outline, p. 127 n.

  [7.]Wu, Outline, p. 250; Mises’s formulation is in Theory of Money and Credit, pp. 179–88.

  [8.]See Wu, Outline, pp. 251–60.

  [9.]Mises’s regression theorem may be found in Theory of Money and Credit, pp. 97–123. For an explanation and a diagrammatic representation of the regression theorem, see Rothbard, Man, Economy, and State, pp. 231–37. Menger’s insight into the origin of money on the market may be found in Carl Menger, Principles of Economics (Glencoe, Ill.: Free Press, 1950), pp. 257–62. On the relationship between Menger’s approach and the regression theorem, see Mises, Human Action, pp. 402–4.

  [10.]Mises, Human Action, pp. 405–7. The regression analysis was either adopted by or arrived at independently by William A. Scott in Money and Banking, 6th ed. (New York: Henry Holt & Co., 1926), pp. 54–55.

  [11.]J. C. Gilbert, “The Demand for Money: The Development of an Economic Concept,” Journal of Political Economy 61(April 1953):149.

  [12.]Don Patinkin, Money, Interest, and Prices (Evanston, Ill.: Row, Peterson & Co., 1956), pp. 71–72, 414.

  [13.]Paul A. Samuelson, Foundations of Economic Analysis (Cambridge: Harvard University Press, 1947), pp. 117–18.

  [14.]George J. Stigler, Production and Distribution Theories: The Formative Period (New York: Macmillan Co., 1946), p. 181; also see the similar, if more polite, attack on Menger by Frank H. Knight, “Introduction,” in Menger, Principles, p. 23. For a contrasting discussion by the mathematical economist son of Menger, Karl Menger, see “Austrian Marginalism and Mathematical Economics,” in Carl Menger and the Austrian School of Economics, ed. John R. Hicks and Wilhelm Weber (Oxford: Clarendon Press, 1973), pp. 54–60.

  [15.]Mises, Human Action, p. 250.

  [16.]Ibid., pp. 249–50, 414.

  [17.]F. H. Hahn, “On Some Problems of Proving the Existence of an Equilibrium in a Monetary Economy,” in The Theory of Interest Rates, ed. F. H. Hahn and F. P. R. Breckling (London: Macmillan & Co., 1965), pp. 128–32.

  [18.]Mises, Human Action, p. 418.

  [19.]On the advantages of a secularly falling price “level,” see C. A. Phillips, T. F. McManus, and R. W. Nelson, Banking and the Business Cycle (New York: Macmillan Co., 1937), pp. 186–88, 203–7.

  [20.]Costantino Bresciani-Turroni, The Economics of Inflation (London: George Allen & Unwin, 1937), pp. 80–82; also see Frank D. Graham, Exchange, Prices, and Production in Hyper-inflation: Germany 1920–23 (New York: Russell & Russell, 1930), pp. 104–7. For an analysis of hyperinflation, see Mises, Theory of Money and Credit, pp. 227–30; and idem, Human Action, pp. 423–25.

  [21.]Rudolf Havenstein, Address to the Executive Committee of the Reichsbank, 25 August 1923, translated in Fritz K. Ringer, ed., The German Inflation of 1923 (New York: Oxford University Press, 1969), p. 96.

  [22.]See Denis S. Karnofsky, “Real Money Balances: A Misleading Indicator of Monetary Actions,” Federal Reserve Bank of St. Louis Review 56(February 1974):2–10.

  [23.]market price of approximatelyTheory of Money and Credit, pp. 448–57; also see Michael A. Heilperin, Aspects of the Pathology of Money (Geneva: Michael Joseph, 1968); and Jacques Rueff, The Monetary Sin of the West (New York: Macmillan Co., 1972).

  [24.]See Mises, Human Action, pp. 431–45.

  [25.]Leland B. Yeager, “Essential Properties of the Medium of Exchange,” Kyklos (1968), reprinted in Monetary Theory, ed. R. W. Clower (London: Penguin Books, 1969), p. 38.

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  3: The Fallacy of the “Public Sector”

  Ralph Raico, New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981). Chapter: MURRAY N. ROTHBARD, The Fallacy of the “ Public Sector ”

  Accessed from oll.libertyfund.org/title/2136/195260 on 2009-05-21

  The copyright to this publication is held by Liberty Fund, Inc. The New Individualist Review is prohibited for use in any publication, journal, or periodical without written consent of J. M. Cobb, J. M. S. Powell, or David Levy.

  ---

  The Fallacy of the “Public Sector”

  MURRAY N. ROTHBARD*

  WE HAVE HEARD a great deal in recent years of the “public sector,” and solemn discussions abound through the land on whether or not the public sector should be increased vis-a-vis the “private sector.” The very terminology is redolent of pure science, and indeed it emerges from the supposedly scientific, if rather grubby, world of “national income statistics.” But the concept is hardly wertfrei; in fact, it is fraught with grave, and questionable, implications.

  In the first place, we may ask: “public sector” of what? Of something called the “national product.” But note the hidden assumptions: that the national product is something like a pie, consisting of several “sectors,” and that these sectors, public and private alike, are added to make the product of the economy as a whole. In this way, the assumption is smuggled into the analysis that the public and private sectors are equally productive, equally important, and on an equal footing altogether, and that “our” deciding on the proportions of public to private sector is about as innocuous as any individual’s decision on whether to eat cake or ice cream. The State is considered to be an amiable service agency, somewhat akin to the corner grocer, or rather to the neighborhood lodge, in which “we” get together to decide how much “our government” should do for (or to) us. Even those neo-classical economists who tend to favor the free market and free society, often regard the State as a generally inefficient, but still amiable, organ of social service, mechanically registering “our” values and decisions.

  One would not think it difficult for scholars and laymen alike to grasp the fact that government is not like the Rotarians or the Elks; that it differs profoundly from all other organs and institutions in society; namely, that it lives and acquires its revenues by coercion and not by voluntary payment. The late Joseph Schumpeter was never more astute than when he wrote: “The theory which construes taxes on the analogy of club dues or of the purchase of the services of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind.”1

  Apart from the public sector, what constitutes the productivity of the “private sector” of the economy? The productivity of the private sector does not stem from the fact that people are rushing around doing something, anything, with their resources; it consists in the fact that they are using these resources to satisfy the needs and desires of the consumers. Businessmen and other producers direct their energies, on the free market, to producing those products which will be most rewarded by the consumers, and the sale of these products may therefore roughly “measure” the importance which the consumers place upon them. If millions of people bend their energies to producing horses-and-buggies, they will, in this day and age, not be able to sell them, and hence the productivity of their output will be virtually zero. On the other hand, if a few million dollars are spent in a given year on Product X, then statisticians may well judge that these millions constitute the productive output of the X-part of the “private sector” of the economy.

  ONE OF THE most important features of our economic resources is their scarcity: land, labor, and capital goods factors are all scarce, and may all be put to varied possible uses. The free market uses them “productively” because the producers are guided, on the market, to produce what the consumers most need: automobiles, for example, rather than buggies. Therefore, while the statistics of the total output of the private sector seem to be a mere adding of numbers, or counting units of output, the measures of output actually involve the important qualitative decision of considering as “product” what the consumers are willing to buy. A million automobiles, sold on the market, are productive because the consumers so considered them; a million buggies, remaining unsold, would not have been “product” because the consumers would have passed them by.

  Suppose now, that into this idyll of free exchange enters the long arm of government. The government, for some reasons of its own, decides to ban automobiles altogether (perhaps because the many tailfins offend the aesthetic sensibilities of the rulers) and to compel the auto companies to produce the equivalent in buggies instead. Under such a strict regimen, the consumers would be, in a sense, compelled to purchase buggies because no cars would be permitted. However, in this case, the statistician would surely be purblind if he blithely and simply recorded the buggies as being just as “productive” as the previous automobiles. To call them equally productive would be a mockery; in fact, given plausible conditions, the “national product” totals might not even show a statistical decline, when they had actually fallen drastically.

  And yet the highly-touted “public sector” is in even worse straits than the buggies of our hypothetical example. For most of the resources consumed by the maw of government have not even been seen, much less used, by the consumers, who were at least allowed to ride their buggies. In the private sector, a firm’s productivity is gauged by how much the consumers voluntarily spend on its product. But in the public sector, the government’s “productivity” is measured—mirabile dictu—by how much it spends! Early in their construction of national product statistics, the statisticians were confronted with the fact that the government, unique among individuals and firms, could not have its activities gauged by the voluntary payments of the public—because there were little or none of such payments. Assuming, without any proof, that government must be as productive as anything else, they then settled upon its expenditures as a gauge of its productivity. In this way, not only are government expenditures just as useful as private, but all the government need to do in order to increase its “productivity” is to add a large chunk to its bureaucracy. Hire more bureaucrats, and see the productivity of the public sector rise! Here, indeed, is an easy and happy form of social magic for our bemused citizens.

  The truth is exactly the reverse of the common assumptions. Far from adding cozily to the private sector, the public sector can only feed off the private sector; it necessarily lives parasitically upon the private economy. But this means that the productive resources of society—far from satisfying the wants of consumers—are now directed, by compulsion, away from these wants and needs. The consumers are deliberately thwarted, and the resources of the economy diverted from them to those activities desired by the parasitic bureaucracy and politicians. In many cases, the private consumers obtain nothing at all, except perhaps propaganda beamed to them at their own expense. In other cases, the consumers receive something far down on their list of priorities—like the buggies of our example. In either case, it becomes evident that the “public sector” is actually anti-productive: that it subtracts from, rather than adds to, the private sector of the economy. For the public sector lives by continuous attack on the very criterion that is used to gauge productivity: the voluntary purchases of consumers.

  We may gauge the fiscal impact of government on the private sector by subtracting government expenditures from the national product. For government payments to its own bureaucracy are hardly additions to production; and government absorption of economic resources takes them out of the productive sphere. This gauge, of course, is only fiscal; it does not begin to measure the anti-productive impact of various government regulations, which cripple production and exchange in other ways than absorbing resources. It also does not dispose of numerous other fallacies of the national product statistics. But at least it removes such common myths as the idea that the productive output of the American economy increased during World War II. Subtract the government deficit instead of add it, and we see that the real productivity of the economy declined, as we would rationally expect during a war.

  IN ANOTHER of his astute comments, Joseph Schumpeter wrote, concerning anti-capitalist intellectuals: “. . . capitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it, whatever the defense they may hear; the only success victorious defense can possible produce is a change in the indictment.”2 The indictment has certainly been changing. In the 1930’s, we heard that government must expand because capitalism had brought about mass poverty. Now, under the aegis of John Kenneth Galbraith, we hear that capitalism has sinned because the masses are too affluent. Where once poverty was suffered by “one third of a nation,” we must now bewail the “starvation” of the public sector.

  By what standards does Dr. Galbraith conclude that the private sector is too bloated and the public sector too anemic, and therefore that government must exercise further coercion to rectify its own malnutrition? Certainly, his standard is not historical. In 1902, for example, net national product of the United States was $22.1 billion; government expenditure (Federal, state, and local) totalled $1.66 billion or 7.1% of the total product. In 1957, on the other hand, net national product was $402.6 billion, and government expenditures totalled $125.5 billion, or 31.2% of the total product. Government’s fiscal depredation on the private product has therefore multiplied from four to five-fold over the present century. This is hardly “starvation” of the public sector. And yet, Galbraith contends that the public sector is being increasingly starved, relative to its status in the non-affluent nineteenth century!

  What standards, then, does Galbraith offer us to discover when the public sector will finally be at its optimum? The answer is, nothing but personal whim:

  There will be question as to what is the test of balance—at what point may we conclude that balance has been achieved in the satisfaction of private and public needs. The answer is that no test can be applied, for none exists. . . . The present imbalance is clear. . . . This being so, the direction in which we move to correct matters is utterly plain.3

  To Galbraith, the imbalance of today is “clear.” Clear why? Because he looks around him and sees deplorable conditions wherever government operates. Schools are overcrowded, urban traffic is congested and the streets littered, rivers are polluted; he might have added that crime is increasingly rampant and the courts of justice clogged. All of these are areas of government operation and ownership. The one supposed solution for these glaring defects is to siphon more money into the government till.

  But how is it that only government agencies clamor for more money and denounce the citizens for reluctance to supply more? Why do we never have the private-enterprise equivalents of traffic jams (which occur on government streets), mismanaged schools, water shortages, etc.? The reason is that private firms acquire the money that they deserve from two sources: voluntary payment for the services by consumers, and voluntary investment by investors in expectation of consumer demand. If there is an increased demand for a privately-owned good, consumers pay more for the product, and investors invest more in its supply, thus “clearing the market” to everyone’s satisfaction. If there is an increased demand for a publicly-owned good (water, streets, subway, etc.), all we hear is annoyance at the consumer for wasting precious resources, coupled with annoyance at the taxpayer for balking at a higher tax load. Private enterprise makes it its business to court the consumer and to satisfy his most urgent demands; government agencies denounce the consumer as a troublesome user of their resources. Only a government, for example, would look fondly upon the prohibition of private cars as a “solution” for the problem of congested streets. Government’s numerous “free” services, moreover, create permanent excess demand over supply and therefore permanent “shortages” of the product. Government, in short, acquiring its revenue by coerced confiscation rather than by voluntary investment and consumption, is not and cannot be run like a business. Its inherent gross inefficiencies, the impossibility for it to clear the market, will insure its being a mare’s nest of trouble on the economic scene.4

  In former times, the inherent mismanagement of government was generally considered a good argument for keeping as many things as possible out of government hands. After all, when one has invested in a losing proposition, one tries to refrain from pouring good money after bad. And yet, Dr. Galbraith would have us redouble our determination to pour the taxpayer’s hard-earned money down the rathole of the “public sector,” and uses the very defects of government operation as his major argument!

  Professor Galbraith has two supporting arrows in his bow. First, he states that, as people’s living standards rise, the added goods are not worth as much to them as the earlier ones. This is standard knowledge; but Galbraith somehow deduces from this decline that people’s private wants are now worth nothing to them. But if that is the case, then why should government “services,” which have expanded at a much faster rate, still be worth so much as to require a further shift of resources to the public sector? His final argument is that private wants are all artificially induced by business advertising which automatically “creates” the wants that it supposedly serves. In short, people, according to Galbraith, would, if let alone, be content with non-affluent, presumably subsistence-level living; advertising is the villain that spoils this primitive idyll.

  Aside from the philosophical problem of how A can “create” B’s wants and desires without B’s having to place his own stamp of approval upon them, we are faced here with a curious view of the economy. Is everything above subsistence “artificial”? By what standard? Moreover, why in the world should a business go through the extra bother and expense of inducing a change in consumer wants, when it can profit by serving the consumer’s existing, un-“created” wants? The very “marketing revolution” that business is now undergoing, its increased and almost frantic concentration on “market research,” demonstrates the reverse of Galbraith’s view. For if, by advertising, business production automatically creates its own consumer demand, there would be no need whatever for market research—and no worry about bankruptcy either. In fact, far from the consumer in an affluent society being more of a “slave” to the business firm, the truth is precisely the opposite: for as living standards rise above subsistence, the consumer gets more particular and choosy about what he buys. The businessman must pay even greater court to the consumer than he did before: hence the furious attempts of market research to find out what the consumers want to buy.

  There is an area of our society, however, where Galbraith’s strictures on advertising may almost be said to apply—but it is in an area that he curiously never mentions. This is the enormous amount of advertising and propaganda by government. This is advertising that beams to the citizen the virtues of a product which, unlike business advertising, he never has a chance to test. If Cereal Company X prints a picture of a pretty girl declaiming that “Cereal X is yummy,” the consumer, even if doltish enough to take this seriously, has a chance to test that proposition personally. Soon his own taste determines whether he will buy or not. But if a government agency advertises its own virtues over the mass media, the citizen has no direct test to permit him to accept or reject the claims. If any wants are artificial, they are those generated by government propaganda. Furthermore, business advertising is, at least, paid for by investors, and its success depends on the voluntary acceptance of the product by the consumers. Government advertising is paid for by means of taxes extracted from the citizens, and hence can go on, year after year, without check. The hapless citizen is cajoled into applauding the merits of the very people who, by coercion, are forcing him to pay for the propaganda. This is truly adding insult to injury.

  IF PROFESSOR GALBRAITH and his followers are poor guides for dealing with the public sector, what standard does our analysis offer instead? The answer is the old Jeffersonian one: “that government is best which governs least.” Any reduction of the public sector, any shift of activities from the public to the private sphere, is a net moral and economic gain.

  Most economists have two basic arguments on behalf of the public sector, which we may only consider very briefly here. One is the problem of “external benefits.” A and B often benefit, it is held, if they can force C into doing something. Much can be said in criticism of this doctrine; but suffice it to say here that any argument proclaiming the right and goodness of, say three neighbors, who yearn to form a string quartet, forcing a fourth neighbor at bayonet point to learn and play the viola, is hardly deserving of sober comment. The second argument is more substantial; stripped of technical jargon, it states that some essential services simply cannot be supplied by the private sphere, and that therefore government supply of these services is necessary. And yet, every single one of the services supplied by government has been, in the past, successfully furnished by private enterprise. The bland assertion that private citizens cannot possibly supply these goods is never bolstered, in the works of these economists, by any proof whatever. How is it, for example, that economists, so often given to pragmatic or utilitarian solutions, do not call for social “experiments” in this direction? Why must political experiments always be in the direction of more government? Why not give the free market a county or even a state or two, and see what it can accomplish?

  New Individualist Review welcomes contributions for publication from its readers. Essays should not exceed 3,000 words, and should be type-written. All manuscripts will receive careful consideration.

  [* ] Murray N. Rothbard received his Ph.D. in economics from Columbia University and is presently a consulting economist in New York City. His forthcoming book, Man, the Economy, and the State, will be published this year.

  [1 ] In the preceding sentences, Schumpeter wrote: “The friction or antagonism between the private and the public sphere was intensified from the first by the fact that . . . the state has been living on a revenue which was being produced in the private sphere for private purposes and had to be deflected from these purposes by political force.” Precisely. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York; Harper and Bros., 1942), p. 198.

  [2 ] Schumpeter, op. cit., p. 144.

  [3 ] John Kenneth Galbraith, The Affluent Society (Boston: Houghton Mifflin, 1958), pp. 320-21.

  [4 ] For more on the inherent problems of government operations, see Murray N. Rothbard, “Government in Business,” in Essays on Liberty, Volume IV (Irvington-on-Hudson: Foundation for Economic Education, 1958), pp. 183-87.

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  4: Herbert Clark Hoover: A Reconsideration

  Ralph Raico, New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981). Chapter: MURRAY N. ROTHBARD, Herbert Clark Hoover: A Reconsideration

  Accessed from oll.libertyfund.org/title/2136/195433 on 2009-05-21

  The copyright to this publication is held by Liberty Fund, Inc. The New Individualist Review is prohibited for use in any publication, journal, or periodical without written consent of J. M. Cobb, J. M. S. Powell, or David Levy.

  ---

  Herbert Clark Hoover: A Reconsideration

  MURRAY N. ROTHBARD*

  THE AMERICAN PEOPLE have been subjected to a battery of political and historical myths; of these one of the most virulent has been the Hoover Myth. During the Great Depression, the Democrats held Herbert Hoover aloft as the wretched symbol of poverty and iniquity; but with the passing of the Depression, new times and new issues evaporated the old Democratic antagonism. The field was thereby cleared for the Hoover hagiographers, who have rushed in, unopposed (to paraphrase Mencken’s immortal comment on the Woodrow Wilson idolators), to nominate Herbert Clark Hoover for the first vacancy in the Trinity. We have been regaled ad infinitum with the wisdom, the individualism, the sagacity, the lovability, and the glory of Herbert Hoover; and we have countless times been instructed on the horrors of the smear campaign waged against him by Charlie Michelson and the Democratic National Committee during his Administration. Throughout the Right-wing, numberless pilgrimages were made to Hoover’s suite in the Waldorf Towers, and countless Right-wingers have been honored to refer to him as “The Chief.” It is high time to redress the balance.

  The hand-wringing over the Michelson smear campaign may be disposed of at the start. Any public official, any politician, must expect to be subject to vigorous attacks, some justified, some not. Every president since Washington has been subjected to such attacks, and thus the public has been kept alert and vigilant to possible error and wrongdoing. Why should Hoover enjoy a special exemption from criticism? It is curious to see the same people who distributed with zeal and relish A Texan Looks at Lyndon bewail the tragedy of Hoover’s ordeal. Despite the repeated harangues of his idolators that Hoover was not a “politician” and should therefore not have been treated as such, Hoover was a politician and cannot be allowed to escape the responsibility for his chosen profession.

  THE MYSTERY OF Herbert Hoover begins, not in 1928 or 1932, but in 1919, when he was boomed for the Democratic nomination for the Presidency by such left-wing Democrats as Louis Brandeis, Herbert Croly, Ray Stannard Baker, Colonel Edward Mandell House, and Franklin D. Roosevelt. Yet, less than two years later, the Left-wing of the Republican Party was able to force Hoover on a reluctant Harding as a Secretary of Commerce whose powers had been vastly enlarged. What manner of man was this to be so beloved by both parties? It might be said that Hoover’s greatness or goodness was so evident as to lead to his being courted by both parties; but to the wiser and more skeptical this story is suspiciously familiar. If a hard-core member of the Establishment may be defined as someone who somehow manages to land in a high government post whichever party is in power, Herbert Hoover may be considered to be the first ur-Establishment man of modern American politics.

  It must be noted at the outset that any definitive study of Hoover at this point in time is almost impossible, but the blame for this situation must lie largely with Hoover himself. Hoover never released his papers for study by the scholarly public; hence the only information about his career has come from Hoover’s own Memoirs—almost unbearably self-righteous and free from acknowledgment of error, even for political memoirs—and from Hoover’s friends and supporters. As a result, critics have been discouraged from writing about Hoover, and we are left with a flood of worshippers, none of whom acknowledges a single error or flaw in their hero. Franklin D. Roosevelt, at least, had his John T. Flynn; where is Hoover’s?

  One significant example will give much of the flavor of the Hoover reminiscences. Hoover’s recent book on Woodrow Wilson in the war and post-war years of World War I is almost as worshipful of Wilson as recent biographies have been of Hoover; or, rather, the book is a series of paeans to Wilson by Hoover, interspersed with paeans to Hoover by Wilson. Virtually the only act of Wilson’s disapproved by Hoover was his famous call for a Democratic Congress in 1918, a call that angered the American public in its repudiation of the Wilsonian Republicans (such as Hoover) who had joined ardently in the war policy. Naturally, Hoover was shocked at this brusque slap at Republicans who had subordinated themselves to Mr. Wilson’s war. How did Hoover react? In his book, he registers his sharp disapproval of the Wilson appeal; and yet, at the time, Hoover not only did not attack the Wilson plea; instead, he publicly rallied to the President’s support, understandably angering Republicans in the process. Hoover states:

  Deeply as I believed that this appeal was a mistake and a wholly unwarranted reflection on many good men, . . . I addressed a letter to . . . a Republican friend, in which I supported the President’s appeal for a Congress favorable to him. I did so because I believed that the President’s hand in the Treaty negotiations would be greatly weakened if the election went against him. The publication of this letter created a storm around my head. The Chairman of the Republican National Committee denounced me violently.1

  There is no hint of apology, no hint of remorse for Hoover’s act; instead, there is, characteristicaly, only the proud reference to Woodrow Wilson’s praise of Hoover’s deed:

  My dear Hoover:

  Your letter . . . has touched me very deeply, and I want you to know not only how proud I am to have your endorsement and your backing given in such generous fashion, but also what serious importance I attach to it, for I have learned to value your judgment and have the greatest trust in all your moral reactions. . . .2

  And that is all of Hoover’s reference to the matter; for Herbert Clark Hoover, at least, wrapped securely in the mantle of morality and the enthusiasm of Woodrow Wilson, the case is closed.

  THE HERBERT HOOVER story begins in 1899, when Hoover, a very young mining engineer and manager, was sent to China by his employers, the London mine consulting firm of Bewick, Moreing and Co. It is fitting that Herbert Hoover launched his career in enterprise, not on the free market, but in the midst of a mercantilistic struggle among claimants for mixed governmental and private property. Moreing had joined forces with a wily operator and recipient of special privilege in China, one Chang Yen Mao, who conveniently held the simultaneous posts of head of the Chinese Bureau of Mines in two provinces, and head of the “private” Chinese Engineering and Mining Company. Hoover became Yang’s deputy in managing the mines in both of Yang’s capacities, public and private. Herbert Hoover emerged from years of competition among numerous foreign powers for the Chinese prize with the first leg up on his mining fortune.

  The next years of Hoover’s life, during which he built a multi-million dollar mining fortune, have not been generally detailed, and they are badly in need of scholarly work. Suffice it to say that Hoover’s high qualities as a mining manager were undoubtedly primarily responsible for the amassing of the fortune, and enabled him to strike out on his own as an international mining consultant in 1908.

  HOOVER SOON BEGAN TO display the ignorance of economics and predilection for statism that was to mark his public career. In 1904, at the age of thirty, he informed the Transvaal Chamber of Commerce that he had achieved lower mining costs in Australia because labor had been paid higher wages; thus, Hoover had already adopted the egregious fallacy that wage rates are determined by the good or ill will of the employer rather than by the competitive market, and that high wage rates lead to greater efficiency and lower costs rather than the other way round. Four years later, Hoover reiterated these views, and, in his Principles of Mining, went further to embrace the institution of labor unions. Unions, he declaimed, “are normal and proper antidotes for unlimited capitalistic organization. . . . The time when the employer could ride roughshod over his labor is disappearing with the doctrine of ‘laissez faire’ on which it is founded. The sooner the fact is recognized, the better for the employer.”3 He went on to challenge, in a neo-Marxist manner, the orthodox laissez faire view that labor is a “commodity” and that wages are to be governed by laws of supply and demand. It is not surprising that, in 1912, Herbert Hoover enthusiastically supported and voted for Theodore Roosevelt’s Progressive Party, for Hoover had become the very model of an “enlightened” left-wing Republican, a man of the Establishment Superficially, his views might be called “socialistic”; but it would be more precise to term them “mercantilist” or “state capitalist” or “monopoly capitalist,” for Hoover, like his fellow Establishment liberals then and since, was not about to abandon state power to a dictatorship of the proletariat or even to Fabian social workers.4 In the house of statism there are many mansions.

  By 1914, Herbert Hoover, having made a substantial fortune in mining, was eager to try his hand at “public service.” The First World War brought him his chance, and it was Hoover’s luck that the opportunities that came his way were such as to lend him that mantle of saintliness and advanced morality which he was always able to wrap around his political activities more snugly than most of his fellows.

  When Belgium was occupied in the fall of 1914, a group of American businessmen resident in London and Brussels formed a Commission for the Relief of Belgium, and Hoover agreed to serve as its head. The massive relief effort to Belgium, continuing throughout the war, gained Hoover immense publicity, and “The Chief” and “The Great Engineer” had now become “The Great Humanitarian.” Actually, while it was no doubt admirable that Hoover and the group of wealthy American businessmen serving as his top aides accepted no compensation for their efforts, the operation was in no sense true charity. Neither was it really humanitarian and apolitical, as Hoover and its eulogists maintained.

  In the first place, to be truly charity, aid must be voluntary and not compulsory; and yet the overwhelming bulk of contributions to Belgian relief came not from private citizens but from Western governments. Secondly, from the beginning the C.R.B. was tied in with governmental policy, particularly of the supposedly neutral American, and the definitely warring Belgian, governments. On the American side, Hugh Gibson, secretary of the American Legation at Brussels, was one of the main originators of this unusual Commission. Belgian officials were vital leaders of the whole operation, and the notoriously Anglophiliac Walter Hines Page, the American Ambassador to London, was strongly committed to the whole idea.

  The curious point about the C.R.B., and one that highlights the spuriousness of its neutrality and divorce from politics, is the question, why Belgium? Why a massive relief program to Belgium (and Northern France), and none anywhere else in war-torn Europe? The evident answer is that the C.R.B. was conceived as an extremely clever device to focus the continuous attention of the American people on the supposedly unique sufferings of Belgium, and thereby to lead people to keep focussing on the allegedly heinous crime of Germany in warring against “poor little Belgium.” The “poor little Belgium” line was the main focal point of the mendacious propaganda of Great Britain, especially in sentimental and poorly-informed America, and it was undoubtedly instrumental in sucking America into perhaps the most senseless and ill-conceived war in which it has ever engaged. Certainly, it was a war with unprecedently bad consequences, for America and for Europe. As Walter Millis has put it:

  When the appeals for aid for the starving Belgians began to come in, offering a sudden practical outlet for the overwrought American emotions, the response was immediate—and the Allies found themselves in possession of still another incomparable propaganda weapon. That the relief of suffering could in any way compromise our neutrality hardly occurred to the Americans who poured out their contributions; but the Allied leaders understood very well that every request for funds in that cause was a conceded demonstration of German brutality and every answering . . . penny doing its part to cement the emotional alliance with the Entente Powers.5

  Of course, few Americans stopped to realize that the major cause of starvation in Belgium—and in the rest of Europe—was the brutal British blockade, which cut off even such non-contraband items as food from the people of the Continent.

  THE IMAGE OF Herbert Hoover as an “isolationist” is as distorted as that of Hoover as an individualist. While apparently originally opposed to American entry into the war, by the Spring of 1917 Hoover had gone over to the pro-war camp, and sent Wilson a warm telegram of congratulations for his war message. Hoover promptly returned to the United States to take a leading part in the “war socialism” which marked America and the leading European participants in World War I.

  It is almost impossible to exaggerate the fateful consequences, for America and the world, of the collectivism and central planning engaged in by the leading countries in the First World War. Here was the watershed of our time; and here was the model of collectivism, in a great many of its features: for fascism and naziism; for the central planning of the early New Deal years and during World War II; and for the “military-industrial complex” of the present day. The totalitarian changes of our age began in the impact of World War I, and Herbert Hoover played a large part in their inception.

  Being “The Great Humanitarian,” Hoover was appointed Food Administrator (also known as “Food Czar” or “Food Dictator”) by President Wilson. In accepting, Hoover insisted that he alone have full authority, unhampered by boards or commissions. So eager indeed was Hoover to get started that he set up the Food Administration illegally, several months before it was authorized by Congress. Hoover urged Wilson to set up single Czars in every field, and was also responsible for Wilson’s creation of the War Council, which served as the overall organ for the central planning of the economy.

  Hoover’s food-control act imposed the strictest control of any area of war planning. As the historian of government price control in World War I put it, the act “was the most important measure for controlling prices which the United States took during the war or had ever taken.”6 The measure set the pattern for twentieth century American collectivism: Behind a facade of demagogy about the necessity for keeping prices down and regulating business, the Federal government organized a gigantic cartellizing program to keep prices up and “stabilize” business under the guidance of government. Thus, the masses would come to think of the Federal government as their proconsul in control of business, while in reality it was the servant of those business interests who wanted monopoly privilege and a quieter life against the rigors of a competitive market.

  TWO OUTSTANDING examples were the Hoover wheat and sugar control programs during World War I. Wheat price control was organized as a result of propaganda that the government must step in to see that wicked “speculators” did not push the price too high; but somehow, the government never got around to fixing maximum prices; instead the prices it fixed were minima, and these minima were systematically pushed higher in order to maintain the bloated wartime wheat prices after the end of the war. The method of such control was through a gigantic licensing system, under which every food manufacturer and dealer had to be licensed—and to keep its license—from the Federal government. Profits were guaranteed at “reasonable” amounts by fixing cost-plus margins, and any overly greedy competitor who dared to raise his profits above pre-war levels by cutting his prices were severely cracked down on. Hoover organized a Grain Corporation, “headed by practical grain men,” which purchased most of the wheat in the country and sold it to the flour mills, all the while undertaking to guarantee millers against loss, and to maintain the relative position of all the mills in the industry. Wilson and Hoover also kept the industry happy by requiring all bakers to mix inferior products with wheat flour at a fixed ratio, something which the bakers were of course happy to do since they were assured that all their competitors were being forced to do likewise. All this was initiated in the name of “conserving” wheat for the war effort.

  The fiercely-conducted drive to keep down sugar prices, in contrast, was far more sincere—sincere because the raw sugar came largely from Cuba, and the sugar refiners were in the United States and other allied countries. The fact that increased sugar demand should have raised sugar prices by the workings of the free market made no impression on the sugar refining interests or on the Allied governments. Hoover and the governments of the Allies therefore organized an International Sugar Committee, which undertook to buy all of the sugar demanded in those nations at an artificially low price, and then to allocate the sugar, in the manner of a giant cartel, to the various refiners. On the other hand, of course, the price of sugar could not be forced too low, since then the marginal American cane and beet sugar producers would not be getting their divinely-appointed “fair return.” Therefore, the Federal government set up the Sugar Equalization Board to keep the price of sugar low to the Cuban producers while keeping it high enough to the American sugar refiners; the Board would buy the Cuban sugar at the low price and then resell at the agreed-upon higher price. Since an excessively low price of sugar would have caused high public consumption, production was directly ordered to be cut, and consumption by the public was severely rationed.

  The food industry, as well as other industries in the Wilson-Baruch program of war collectivism, were delighted with the cartellizing and “stabilizing” (part of which was accomplished by enforcing compulsory standardization of parts and tools, a standardization which eliminated many small specialty businesses in machine tool and other industries, and forced production into a smaller number or bigger firms). Thus, Hoover

  . . . maintained, as a cardinal policy from the beginning, a very close and intimate contact with the trade. The men, whom he chose to head his various commodity sections and responsible positions, were in a large measure tradesmen. . . . The determination of policies of control within each branch of the food industry was made in conference with the tradesmen of that branch, meeting at intervals in Washington. It might be said . . . that the framework of food control, as of raw material control, was built upon agreements with the trade. The enforcement of the agreements once made, moreover, was intrusted in part to the cooperation of constituted trade organizations. The industry itself was made to feel responsible for the enforcement of all rules and regulations.7

  DURING HIS LONG REIGN as Secretary of Commerce in the 1920’s, Herbert Hoover carried forth the principles of advancing governmental cartellization of business, production was restricted and cartellized as much as possible by appeals to “elimination of waste,” trade associations of business were promoted, export industries were encouraged and promoted abroad, “standardization” was furthered. It was this encouragement of industrial self-regulation, with the governmental mailed fist kept in the background to crack down on the maverick competitor, that launched the characteristic Hoover emphasis on “voluntary” action, and that enabled him to establish specious distinctions later between his own “voluntary” program and the compulsory measures of FDR. Also typical of Hoover’s “voluntarism” was heavy emphasis on propagandizing the public. Thus, in his program as Food Czar in the First World War:

  The basis of all efforts toward control exercised by the Food Administration was the educational work which preceded and accompanied its measures of conservation and regulation. Mr. Hoover was committed thoroughly to the idea that the most effective method to control foods was to set every man, woman, and child in the country at the business of saving food. . . . The country was literally strewn with millions of pamphlets and leaflets designed to educate the people to the food situation. No war board at Washington was advertised as widely as the United States Food Administration. There were Food Administration insignia for the coat lapel, store window, the restaurant, the train, and the home. A real stigma was placed upon the person who was not loyal to Food Administration edicts through pressure by schools, churches, women’s clubs, public libraries, merchants’ associations, fraternal organizations, and other social groups.8

  Perhaps Herbert Hoover’s outstanding “accomplishment” as Secretary of Commerce was to impose socialism on the radio industry. Even though the courts were working out a satisfactory system, based on private property rights in radio frequencies—under which one frequency owner could not interfere in the radio signals of another9 —Hoover by sheer administrative fiat and the drumming up of “voluntary cooperation” was able to control and dictate to the radio industry and keep the airwaves nationalized until he could secure pasage of the Radio Act of 1927. The act established the government as inalienable owner of the airwaves, the uses of which were then granted to designated licensed favorites, the favorites being kept in line by the Federal Radio Commission’s unchallenged control of the licensing power. If private “squatters’ rights” had been permitted in radio (and subsequently in television) frequencies, we would have had a genuinely free press in the airwaves. As it is, we have had an air medium totally regulated and integrated into the Federal Establishment. More than anyone else we have Herbert Hoover to thank for government ownership and regulation of radio and television.

  Hoover was also the first great proponent of Federal dams, and was the initiator of the Grand Coulee, Hoover Dam, and Muscle Shoals projects. Improvement of navigation or reclamation was to be at the expense of the taxpayer and of the flooded private property owners, for the benefit of the recipients of cheap water and cheap power. Hoover was insistent, however, that the Federal government should not itself go into the power business; instead, it should thoughtfully build the plants and then lease them to private enterprise. Here is another example of state monopoly capitalism: the active use of the Federal government to promote monopoly and subsidize privilege.

  UNDOUBTEDLY THE SINGLE most collectivist and despotic governmental action during the ascendancy of Herbert Hoover was Prohibition. It is characteristic of Herbert Hoover that he was one of Prohibition’s most ardent supporters. Prohibition, of course, should be quite congenial to modern conservatism. All the arguments for prohibition of narcotics and gambling apply here too: Statistics show that people under the influence of liquor commit more crimes; let a workingman spend his money on liquor and he will become attached to it and waste his money there rather than spend it on nourishing and wholesome food for his children, etc.

  Hoover acted in all this like a typical conservative, i. e., glorifying the State and its sacrosanct Laws over the liberty of the individual. His definitive statement on Prohibition as a whole: “Our country has deliberately undertaken a great social and economic experiment, noble in motive and far-reaching in purpose. It must be worked out constructively.”10 Whereas the only way to break down Prohibition was to destroy its enforcement, Hoover maintained that violation of one law destroys respect for all laws, and greatly expanded the nefarious institution of the Federal Prohibition Agent, attempting to make him incorruptible. To the very last, Hoover stood fast for the “noble experiment.”

  As befitting one of the major leaders in the twentieth century drive for replacing quasi-laissez faire by a tightly controlled and cartellized system, Herbert Hoover favored trade unionism, and the dragooning of the worker into large, “responsible” unions that could be integrated into the New Order. Thus, during 1919/20, Hoover directed for President Wilson a Federal conference on labor-management relations. Under Hoover’s aegis, the conference, which included “forward looking” industrialists such as Julius Rosenwald, Oscar Straus, and Owen D. Young, as well as labor leaders and economists, adopted Hoover’s recommendations, wider collective bargaining, attacks on company unions, abolition of child labor, national old-age insurance, and government arbitration boards for labor disputes. In 1920, Hoover arranged a meeting of leading industrialists of “advanced views” to try to persuade them to tie in more closely with the American Federation of Labor; Hoover, incidentally, was always close to the A.F.L. leadership.

  Hoover committed two striking acts of pro-union interventionism during the 1920’s. One was his movements against the steel industry: Steel was operating on a twelve hour day, and groups of Social Gospel ministers suddenly found Biblical sanction for the alleged immorality of any working day over eight hours. Hoover assumed the mantle of evangelical cum secular power to force steel to grant an eight hour day. Conducting a skilful propaganda campaign, Hoover induced President Harding to launch several bitter attacks on the steel industry. Finally, in June 1923, Hoover wrote a letter for President Harding to send to Judge Gary of U.S. Steel, sternly chastising the steel companies. This Presidential pressure turned the tide and forced the steel companies to capitulate.

  Hoover also played a large role in helping to bring about the compulsory unionization of the railroad industry, and did so long before the Wagner Act. The railroad unions had waxed fat as a result of Federal government favoritism during World War I, when the government had temporarily nationalized the railroads (the government operated the roads, and the old owners reaped the profits which the government turned over to them). During the severe (though short-lived) depression of 1921, the railroads asked for wage cuts, and the unions angrily hit back by calling a nation-wide strike. When Attorney General Daugherty acted to preserve person and property by obtaining an injunction against union violence, Herbert Hoover, winning Secretary of State Hughes to his side, persuaded the weak-willed Harding to withdraw the injunction.

  Despite Hoover’s actions, the unions lost the strike, and so they decided to use the power of Federal coercion to establish themselves in the industry. They finally achieved this goal in the Railway Labor Act of 1926, which guaranteed compulsory unionism (collective bargaining for all) to the railway unions, and imposed compulsory arbitration. Most of the railroads went along with the plan because railroad strikes were now outlawed; but the bill was drafted by union lawyers Donald Richberg and David E. Lilienthal, and by Herbert Hoover.

  HOOVER WAS ALSO THE victim of a terribly inadequate grasp of economics, leading him to accept the popular “new economics” of the 1920’s.11 The “new economics” stood economics on its head, whereas economics saw that high wage rates in prosperous countries came about as a result of capital investment and high productivity, the “new” thinkers concluded that American prosperity had come about because employers paid high wage rates. In reality, the market determines wages, and not the goodheartedness or the wisdom of the employer. The employer in modern India who decided, out of the goodness of his heart and/or from reading economic nonsense peddled by Hoover or old Henry Ford, to triple his wage payments would quickly find himself bankrupt. Hoover deduced from this the union slogan that during depressions the worst thing that could happen was lower wage rates. It was this lowering that helped wipe out unemployment and end previous depressions relatively quickly; and it was Hoover’s personal use of the mailed fist in the velvet glove to prevent such lowering that kept wage rates increasingly and disastrously above market wages during the years 1929-33. This intervention insured that the Depression could not be relieved by natural market forces, or unemployment be lowered from disastrous Depression-born levels.

  It was indeed as a depression-fighter that the nation came to know Herbert Hoover best. In all previous depressions, the Federal government had pursued a laissez faire attitude, keeping hands off and letting market forces bring about recovery quickly; and the recovery always came, no matter how steep the depression at the start.12 But Hoover had long determined that he was not going to pursue such a “reactionary, Neanderthal” course. He would rush in, to plan, to inflate, to push up wages and prices and insure purchasing power. He had determinde that he would plan, that he would use the full resources of government, all the modern tools of the new economics, to push the economy out of the Depression. And he did just that, except that the results were not quite what the Great Engineer had anticipated.

  In pushing through his program, Herbert Hoover created virtually all the lineaments of the New Deal; the New Deal was in fact Herbert Hoover’s creation, and historians, now removed from the partisan squabbles of the New Deal period, are increasingly coming to recognize this fact. Massive public works programs, government relief, inflation and cheap money on a grand scale, government deficits, higher taxes, government loans to shaky businesses, farm price supports, propping up of wage rates, monopolizing the oil industry and restricting production, war against the stock market and stock speculation—all these crucial facets of the New Deal program were launched con brio by President Hoover.13

  Hoover’s method of forcing wage rates to remain high was typical of his pseudo-“voluntarism.” He lost no time; as soon as the stock market crash broke, Hoover, in November 1929, called all the major industrialists to the White House and told them that they must pledge to keep wage rates up; that, whatever happened, the brunt of the Depression must fall on profits, not wages. This is precisely what did happen; wages were bravely kept up, especially in the larger firms, profits collapsed, and losses, bankruptcies, and mass unemployment ensued and remained unresolved. Since prices continued to fall, fixed wage rates meant that real wages (in terms of purchasing power) rose, aggravating the unemployment problem still further. Only in the small firms, hidden from public view, could quiet and secret wage cuts be agreed upon, and the workers continue to be employed. This was indeed the first severe depression in history in which real wage rates rose rather than fell: with the result that the Depression was intensified and rendered quasi-permanent. Even when wage cuts finally came, hesitantly, after several years of steep depression, they were so designed as to have little effect. For “humanitarian” reasons, they were largely put through in the higher income brackets and among executives: this, of course, could have little effect in stimulating employment where it was needed: among the lower-income, rank-and-file workers.

  Addressing the White House conference, Hoover described his wage-floor agreements as an

  . . . advance in the whole conception of the relationship of businesses to public welfare. You represent the business of the United States, undertaking through your own voluntary action to contribute something very definite to the advancement of stability and progress in our economic life. This is a far cry from the arbitrary and dog-eat-dog atttiude of the business world of some thirty or forty years ago.14

  The American Federation of Labor was ecstatic over this new era in combatting depressions: “The President’s conference has given industrial leaders a new sense of their responsibilities. . . . Never before have they been called upon to act together. . . .” The United States, it proclaimed, would “go down in history as the creator of [an] . . . epoch in the march of civilization—high wages.”15

  One of the most irritating facets of Herbert Hoover was his unshakable conviction that he had never committed a serious mistake. He had entered the White House at the peak of economic prosperity; he had left it, after a new departure in economic planning, in the midst of the most intense and long-lasting depression the United States had ever known. Yet not once, either then or later, did Herbert Hoover falter in his absolute conviction that his every act was precisely what should have been done. In his acceptance speech for renomination, Hoover proclaimed:

  We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.16

  Indeed he did, and “utter ruin” was precisely the result. Yet never once did Hoover falter in his attacks against all criticism, from left or right. Neither was this simply campaign oratory, for never once in his later years, when he was considered by friend and foe alike as a living symbol of laissez faire, did Herbert Hoover fail to look back upon every one of his disastrous deeds, from fighting the Depression to bolstering Prohibition, without finding them right and good. Every four years, Hoover could be depended upon to issue a campaign manifesto proving proudly and conclusively that the Republican Administrations, far from being exemplars of laissez faire, pioneered in the burgeoning statism of the twentieth century.

  THERE SEEM TO BE several important lessons embedded in the story of the Hoover myth. One, of course, is the great dimensions of the myth, of the total misinterpretation, on all sides, of the Hoover record. Far from being a libertarian, Hoover was a statist par excellence, in economics and in morals; and his only difference from FDR was one of degree, not of kind: FDR only built upon the foundations laid by Hoover. Secondly, the very pervasiveness of the myth poses some sharp questions about the Right-wing that has so earnestly fostered it. There can be only two explanations of this phenomenon: Either the Right-wing shows itself monumental in stupidity, by mistaking statism for laissez faire; and/or, more significantly, the Right-wing’s professed devotion to free enterprise and the free market is only rhetorical, and it will cheerfully welcome a statism slanted in typically conservative directions. A third lesson is that anyone genuinely devoted to freedom and the free market must, once and for all, discard the whole putrescent world-view of the unique diabolism of Franklin Roosevelt and his New Deal. The plain fact is that the New Deal was rooted far back in the past, in the Hoover Administration, and further back into the Progressive period and beyond. Genuine believers in freedom and a free market must cease to regard the American system as having been a grand and splendid one until an unaccountable break came in the 1930’s. They have to realize that they must be far more “radical” than they have ever remotely conceived.

  With the current issue, Winter 1966, the single copy price of New Individualist Review has been raised from 50 cents to 75 cents. Our subscription rate has been increased proportionately to $3.00 and $5.75 for one- and two-year non-student subscriptions, and to $1.50 and $2.75 for one- and two-year student subscriptions. This increase has been made necessary by the expansion of the magazine to its present size.

  Readers who have entered their subscriptions prior to February 1, 1966, will continue to receive New Individualist Review under the previous subscription rates. No change has been made in the duration of existing subscriptions.

  [* ] Murray N. Rothbard is the author of America’s Great Depression, Man, Economy, and State, and other books and articles. He is currently editor of the journal Left and Right, and working on a history of the United States.

  [1 ] H. Hoover, The Ordeal of Woodrow Wilson (New York: McGraw-Hill, 1958), p. 17.

  [2 ]Ibid.

  [3 ]Principles of Mining (New York: McGraw-Hill, 1909), pp. 167-68.

  [4 ] This, of course, has nothing to do with the attempt of such “libertarian Trotskyites” as Tony Cliff and Raya Dunayevskaya to dub the Soviet Union “state capitalist,” which is true only in the jejune sense that under socialism the state is the owner of the country’s capital. On the contrary, the term is most aptly used to describe the mercantilist, interventionist policies of modern capitalist countries, and to distinguish them from socialism.

  [5 ] W. Millis, Road to War (Boston: Houghton Mifflin, 1935), pp. 73-74. Also see H. C. Peterson, Propaganda for War (Norman, Okla.: Oklahoma University Press, 1939), p. 66.

  [6 ] P. W. Garrett, Government Control Over Prices (Washington, D. C.: Government Printing Office, 1920), p. 42.

  [7 ]Ibid., pp. 55-56.

  [8 ]Ibid.

  [9 ] See R. H. Coase, “The Federal Communications Commission,” The Journal of Law and Economics, II (Oct. 1959), 30-31.

  [10 ]Memoirs (New York: Macmillan, 1952), Vol. II, p. 201.

  [11 ] This movement is not to be confused with the Keynesian “new economics” of the 1930’s.

  [12 ] The government’s key role in producing depressions in the past is a question which cannot be gone into here. For a discussion of this aspect of the problem, see M. N. Rothbard, America’s Great Depression (Princeton, N. J.: Van Nostrand, 1963), Part I.

  [13 ] For a more extensive discussion and analysis of the Hoover New Deal, see ibid., Part III.

  [14 ] W. S. Myers and W. H. Newton, The Hoover Administration (New York: Scribners, 1936), p. 34.

  [15 ]The American Federationist (March 1930), p. 344.

  [16 ] E. Lyons, Herbert Hoover, A Biography (New York: Doubleday, 1964), p. 300.

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  5: Introduction to Frank A. Fetter, Capital, Interest, and Rent

  Frank A. Fetter, Capital, Interest, and Rent: Essays in the Theory of Distribution, ed. with an Introduction by Murray N. Rothbard (Kansas City: Sheed Andrews and McMeel, 1977). Chapter: Murray N. Rothbard, Introduction

  Accessed from oll.libertyfund.org/title/88/23638 on 2009-05-21

  This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.

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  Introduction

  1.

  Frank Albert Fetter (1863–1949) was the leader in the United States of the early Austrian school of economics. Born in rural Indiana, Fetter was graduated from the University of Indiana in 1891. After earning a master's degree at Cornell University, Fetter pursued his studies abroad and received a doctorate in economics in 1894 from the University of Halle in Germany. Fetter then taught successively at Cornell, Indiana, and Stanford universities. He returned to Cornell as professor of political economy and finance (1901–1911) and terminated his academic career at Princeton University (1911–31), where he also served as chairman of the department of economics.

  Fetter is largely remembered for his views on business “monopoly” (see his Masquerade of Monopoly [New York: Harcourt, Brace and Co., 1931]). But long before he published his work on monopoly in the 1930s, he developed a unified and consistent theory of distribution that explained the relationship among capital, interest, and rent. While Fetter's theoretical work, like much of capital and interest theory in recent decades, has been generally neglected, much of it is still valuable and instructive today. In my opinion, microeconomic analysis has a considerable way to go to catch up to the insight that we find in Fetter's writings in the first decade and a half of this century.

  Apart from his two lucidly written treatises (The Principles of Economics [New York: The Century Co., 1904]; and Economic Principles [New York: The Century Co., 1915]), Fetter's major contributions to distribution theory appeared in the series of journal articles and shorter papers that I have collected to form this volume. It was difficult for me to classify Fetter's work into the categories of “capital,” “rent,” and “interest,” because his was an unusually systematic and integrated theory of distribution, all areas of analysis being interrelated.

  Fetter's point of departure was the Austrian insights that (1) prices of consumer goods are determined by their relative marginal utility to consumers; and (2) that factor prices are determined by their marginal productivity in producing these consumer goods. In other words, the market system imputes consumer goods prices (determined by marginal utility) to the factors of production in accordance with their marginal productivities.

  While the early Austrian and neoclassical schools of economics adopted these insights to explain prices of consumer goods and wages of labor, they still left a great many lacunae in the theories of capital, interest, and rent. Rent theory was in a particularly inchoate state, with rent being defined either in the old-fashioned sense of income per year accruing to land, or in the wider neo-Ricardian sense of differential income between more and less productive factors. In the latter case, rent theory was an appendage to distribution theory. If one worker earns $10 an hour and another, in the same occupation, earns $6, and we say that the first man's income contains a “differential rent” of $4, rent becomes a mere gloss upon income determined by principles completely different from those used to determine the rent itself.

  Frank Fetter's imaginative contribution to rent theory was to seize upon the businessman's commonsense definition of rent as the price per unit service of any factor, that is, as the price of renting out that factor per unit time. But if rent is simply the payment for renting out, every unit of a factor of production earns a rent, and there can be no “no-rent” margin. Whatever any piece of land earns per year or per month is rent; whatever a capital good earns per unit time is also a rent. Indeed, while Fetter did not develop his thesis so far as to consider the wage of labor per hour or per month as a “rent,” it is, as becomes clear if we consider the economics of slavery. Under slavery, slaves are either sold as a whole, as “capital,” or are rented out to other masters. In short, slave labor has a unit, or rental, price as well as a capital value. Rent then becomes synonymous with the unit price of any factor; accordingly, a factor's rent is, or rather tends to be, its marginal productivity. For Fetter the marginal productivity theory of distribution becomes the marginal productivity theory of rent determination for every factor of production. In this way, Fetter generalized the narrow classical analysis of land rent into a broader theory of factor pricing.

  But if every factor earns a rent in accordance with its marginal product, where is the interest return to capital? Where does interest fit in? Here Fetter made his second vital and still unappreciated contribution to the theory of distribution. He saw that the Austrian Eugen von Böhm-Bawerk, in the second volume of his notable Capital and Interest, inconsistently returned to the productivity theory of interest after he had demolished that theory in the first volume. After coming to the brink of replacing the productivity theory by a time-preference theory of interest, Böhm-Bawerk withdrew from that path and tried to combine the two explanations—an eclecticism that capital and interest theory (in its “real” form) has followed ever since.

  Fetter approached the problem this way: If every factor earns a rent, and if therefore every capital good earns a rent, what is the source of the extra return for interest (or “long-run normal profit,” as it is sometimes called)? In short, if a machine is expected to earn an income, a rent, of $10,000 a year for the next ten years, why does not the market bid up the selling price of the machine to $100,000? Why is the current market price considerably less than $100,000, so that in fact a firm that invests in the machine earns an interest return over the ten-year period? The various proponents of productivity theory answer that the machine is “productive” and therefore should be expected to earn a return for its owner. But Fetter replied that this is really beside the point. The undoubted productivity of the machine is precisely the reason it will earn its $10,000 annual rent; however, there is still no answer to the question why the market price of the machine at present is not bid high enough to equal the sum of expected future rents. Why is there a net return to the investor?

  Fetter demonstrated that the explanation can only be found by separating the concept of marginal productivity from that of interest. Marginal productivity explains the height of a factor's rental price, but another principle is needed to explain why and on what basis these rents are discounted to get the present capitalized value of the factor: whether that factor be land, or a capital good, or the price of a slave. That principle is “time preference”: the social rate at which people prefer present goods to future goods in the vast interconnected time market (present/future goods market) that pervades the entire economy.

  Each individual has a personal time-preference schedule, a schedule relating his choice of present and future goods to his stock of available present goods. As his stock of present goods increases, the marginal value of future goods rises, and his rate of time preference tends to fall. These individual schedules interact on the time market to set, at any given time, a social rate of time preference. This rate, in turn, constitutes the interest rate on the market, and it is this interest rate that is used to convert (or “discount”) all future values into present values, whether the future good happens to be a bond (a claim to future money) or more specifically the expected future rentals from land or capital.

  Thus, Fetter was the first economist to explain interest rates solely by time preference. Every factor of production earns its rent in accordance with its marginal product, and every future rental return is discounted, or “capitalized,” to get its present value in accordance with the overall social rate of time preference. This means that a firm that buys a machine will only pay the present value of expected future rental incomes, discounted by the social rate of time preference; and that when a capitalist hires a worker or rents land, he will pay now, not the factor's full marginal product, but the expected future marginal product discounted by the social rate of time preference.

  A glance at any prominent current textbook will show how far economics still is from incorporating Fetter's insights. The textbook discussion typically begins with an exposition of the marginal productivity theory applied to wage determination. Then, as the author shifts to a discussion of capital, “interest” suddenly replaces “factor price” on the y-axis of the graph, and the conclusion is swiftly reached that the marginal productivity theory explains the interest rate in the same way that it explains the wage rate. Yet the correct analog on the y-axis is not the interest rate but the rental price, or income, of capital goods. The interest rate only enters the picture when the market price of the capital good as a whole is formed out of its expected annual future incomes. As Fetter pointed out, interest is not, like rent or wages, an annual or monthly income, an income per unit time earned by a factor of production. Interest, on the contrary, is a rate, or ratio, between present and future, between future earnings and present price or payment.

  Fetter's theory makes it impossible to say that capital “earns,” or generates an interest return. On the contrary, the very concept of capital value implies a preceding process of capitalization, a summing up of expected future rental incomes from a good, discounted by a rate of interest. Rent, or productivity, and interest, or time preference, are logically prerequisite to the determination of capital value.

  2.

  Frank A. Fetter's earliest article in this collection, a review of Frank W. Taussig's Wages and Capital: An Examination of the Wages Fund Doctrine (New York: D. Appleton, 1896), was written in 1897 and sets the pace for the articles in the first part of this book. Here Fetter criticized Taussig's attempt to revive the classical notion of the “wage fund.” Rather than attempting to explain aggregate wage payments, Fetter recommended explaining individual wage rates.

  Fetter's first full-length article on capital was his “Recent Discussion of the Capital Concept” (1900). In it he compared the theories of capital offered by Böhm-Bawerk, John Bates Clark, and Irving Fisher. Fetter did less than full justice to Böhm-Bawerk's subtle insistence on the defects of the idea of capital as merely a fund, especially in comparing or measuring concrete capital goods that differ from each other. Above all, Fetter, in properly concentrating on a fund of capital value as an attribute of all durable productive goods, never fully realized the importance between land (the original producer's good) and capital goods (created or produced producer's goods). In fact, Fetter's idea of capital as a fund of value and the Austrian view of capital as concrete capital goods are not inconsistent; they play roles in different areas of capital theory.

  Of special interest is Fetter's charge that Böhm-Bawerk's intention was to establish a labor theory of property in capital goods. Furthermore, when Fetter declared that Böhm-Bawerk was inconsistent in classifying man-made improvements permanently incorporated into the land as “land” itself, he apparently did not realize that for Austrian economists the crucial criterion for classifying a good as “land” is not its original nature-given state but its permanence as a resource (or, more precisely, its nonreproducibility). Goods that are permanent, or nonreproducible, earn a net rent, whereas capital goods, which have to be produced and maintained, only earn a gross rent, absorbed by costs of production and maintenance. Here is a vital distinction between land and capital goods that Fetter completely misunderstood (see my Man, Economy, and State, 2 vols. [New York: D. Van Nostrand, 1962], 2:502–4).

  Fetter, however, took his stand squarely with Böhm-Bawerk and against Clark when he denied that capital is a permanent fund and that production ever becomes “synchronous,” thereby eliminating the time dimension between input and output. This same controversy was to reappear dramatically in the 1930s in publications of Frank H. Knight (advancing the Clark position) and those of Friedrich A. Hayek and Fritz Machlup (representing the Austrian view).

  On the other hand, Fetter praised Irving Fisher's theory of capital (The Rate of Interest: Its Nature, Determination, and Relation to Economic Phenomena [New York: Macmillan Co., 1907]) in places where it deviated from the Austrian view and criticized it where it conformed to the Austrian position. Thus, Fisher's distinction between capital and income (based on the differences between stock and flow measurements) is commended because it eliminates the need for distinguishing between land and capital goods. On the other hand, Fetter objected to Fisher's highly sensible insistence that the concept of concrete physical capital goods is logically prerequisite to the concept of abstract capital as a fund of value. Furthermore, Fetter objected to the Austrian view, also in Fisher, that capital goods are way stations on the path to producing more consumer goods, and that they are therefore “used up” in production. Fetter cited machines and land (“natural agents”) as goods that do not advance toward the status of consumer goods. But machines advance toward consumer goods precisely by being impermanent, that is, by being used up in the march of production toward the goal of consumption; and the fact that land is not used up in this way is precisely the reason for distinguishing it from capital goods.

  In his 1902 review of Böhm Bawerk's Einige strittige Fragen der Capitalstheorie Fetter quite properly pointed to the major textual contradiction in Böhm-Bawerk's theory of interest: Böhm-Bawerk's initial finding that interest stems from time preference for present over future goods is contradicted by his later claim that the greater productivity of roundabout production processes is what accounts for interest. However, when criticizing Böhm-Bawerk's productivity theory of interest, it was not necessary for Fetter to dismiss Böhm-Bawerk's important conception of roundaboutness or the period of production. Roundaboutness is an important aspect of the productivity of capital goods. However, while this productivity may increase the rents to be derived from capital goods, it cannot account for an increase in the rate of interest return, that is, the ratio between the annual rents derived from these capital goods and their present price. That ratio is strictly determined by time preference.

  “The Nature of Capital and Income” (1907) offered a review of Irving Fisher's book of the same title. Fetter hailed Fisher's use of the capitalization concept of capital as well as Fisher's abandonment of his previous view that the stock/flow concept of capital and income applied to the same concrete goods. Here, Fisher shifted to an abstract and generalized conception of stocks and flows. But, as Fetter noted, this very abstraction rendered the whole stock/flow dichotomy untenable. Fisher's treatment of income as strictly psychic income, to the virtual exclusion of money income, is properly criticized, as is the corollary that only consumption is income, and therefore capital gains are not income and should not be subject to an income tax. Finally, Fetter, who had himself been working on an integrated theory of income distribution, found that Fisher's theory of capital and income had an ad hoc flavor because it had been developed separately from the remainder of Fisher's distribution theory.

  In “Are Savings Income—Discussion?” (1908), Fetter elaborated on his criticism of Fisher's view that savings, or rather additions to capital, are not income, and that the term income should be limited to consumption expenditure only. Fetter correctly pointed out that Fisher confused the concept of ultimate psychic income, which indeed consists only of consumption, with the concept of monetary incomes acquired in the market, which are partially saved and partially consumed.

  Two decades later (1927) Fetter returned to the theory of capital in his contribution to the Festschrift honoring John Bates Clark. In the course of reviewing Clark's contributions to the theory of capital, Fetter praised Clark for treating capital as a fund rather than as an array of heterogeneous capital goods and for offering a general definition of rent as the income from all capital goods and not just the income from land. Böhm-Bawerk is criticized once again for clinging to the identification of capital and interest (instead of realizing how interest permeates the entire time-value market), but this cogent criticism is again misleadingly linked to an attack on Böhm-Bawerk for maintaining a distinction between land and capital goods. In this article, F. W. Taussig is criticized for allegedly maintaining that only land, and not capital, is productive. But here Taussig was not simply in the throes of the labor theory of value; rather, he was adopting the subtle Böhm-Bawerkian insight that, while capital goods are evidently productive, they are not ultimately productive, for they have to be produced and reproduced by labor, land, and time, so that capital goods earn gross rent, but not net rents, which go only to labor and land factors. Hence again we encounter the importance of the land-capital goods distinction. As for interest, it is entirely the result of time preference; in the case of a capital good, interest depends on first producing the capital good by combining labor and land and then on reaping the fruits of this combination at a later time. The very distinction between land and capital goods so resisted by Fetter was thus used by Böhm-Bawerk to pave the way for Fetter's own theory of interest!

  Of particular importance in this 1927 essay is Fetter's critique of Alfred Marshall's capital theory. Always an unsparing logician, Fetter relentlessly criticized the myriad of inconsistencies, confusions, and contradictions in Marshall's discussion. Fetter also added to his previous criticisms of Fisher's capital theory a review of the inconsistency in adopting a wealth-at-one-time/services-at-one-time distinction between capital and income on top of his previous stock/flow dichotomy.

  Fetter's contribution entitled “Capital,” which appeared in the Encyclopedia of the Social Sciences (1930–35), is a convenient summation of his views on capital as well as his criticisms of alternative theories. It is clear that his exclusive concern with capital as a fund, or as “the market value [of] the present worths of...individual claims to incomes,” is a consequence of his dissatisfaction with the productivity theories of interest and his desire to establish “capital value” as simply the capitalized sum of expected future rental incomes.

  3.

  Frank A. Fetter's pioneering development of the pure time-preference theory of interest began with his article “The ‘Roundabout Process’ in the Interest Theory” (1902). Here Fetter hailed Böhm-Bawerk as the first to state properly the central problem of interest theory: To explain why present goods are valued more highly than future goods. But after starting out with time preference as the proper explanation, Böhm-Bawerk introduced his “third ground” for interest—the greater productivity of roundabout processes of production—and argued that it was the most important reason present goods had higher values than future goods.

  When offering his detailed critique of Böhm-Bawerk's “third ground,” Fetter explained how Böhm-Bawerk had failed to separate the undoubted increase in physical productivity, resulting from an increase in capital, from a claimed increase in the “value” productivity of capital. Fetter noted that an increase in the value of capital (as distinct from its physical amount) will increase the value productivity of capital if and only if the interest rate remains constant. In other words, Böhm-Bawerk's productivity explanation of interest makes use of the concept of the present value of capital and therefore assumes that the interest rate is already given, since it is needed to determine the present value of capital. Thus, Böhm-Bawerk's productivity explanation of interest involved circular reasoning. Similarly, Fetter noted that one determinant of the degree of capitalization, or the degree of roundaboutness of production processes in the economy, is precisely the interest rate—the rate of present capitalization of future rents. Here is still another example of circular reasoning.

  For the remainder of his 1902 article, Fetter elaborated on his critique (outlined above) of the Austrian separation of land and capital goods, and the idea of the period of production. Here it might be noted that Fetter's perfectly valid point about land capitalization in the market by way of the interest rate does not negate the Austrian distinction between land and capital goods. According to the Austrian school “capital” and “capital goods” are separate and distinct concepts. Furthermore, Fetter's repeated attempts to attribute a labor theory of capital value to Böhm-Bawerk are contradicted by his own admission that both land and time enter into the Austrian view of the production of capital. Fetter, however, made an important point in criticizing Böhm-Bawerk's formulation of the “average period of production,” especially the idea of ex post averaging of the various periods of production throughout the economy. Fetter also cogently attacked Böhm-Bawerk's attempt to leap from the increased physical productivity of roundabout processes to value productivity by the use of purely arithmetical tables. Here Fetter levelled a (characteristically Austrian) critique of the use of mathematics in economics against an economist who was himself a leading critic of the mathematical method.

  In his 1902 article, Fetter offered another brilliant criticism of Böhm-Bawerk's “third ground.” Böhm-Bawerk tried to use the greater productivity of capital to explain why these “present goods” are worth more than “future goods” when the capital comes to fruition as consumer goods. But, as Fetter pointed out, since capital instruments only mature into consumer goods at various times in the future, capital goods are really future goods, not present goods. If, then, we concentrate on utility to consumers, capital goods are seen to be future goods, and the “third ground” for an extra return to these (future) capital goods as being more productive “present goods” becomes totally invalid.

  We may apply Fetter's insight to the current textbook explanations of interest rate determination in the market for productive loans. The supply curve of loanable funds is conventionally explained by time preference, while the demand curve for loans by business firms is explained by reference to the “marginal productivity of capital”—in short, by the “natural” rate of interest embodied in the long-term normal rate of profit. But the firm that borrows money in order to hire workers or to buy capital goods is really buying future goods in exchange for a present good, money. In short, the business borrower, like the saver-creditor who lends him money, is buying a future good whenever he makes an investment. If we assume, for example, that there are no business loans but only stock investment, this point is easier to understand. When a man saves and invests in a productive process, he pays workers and other factors now in exchange for services that will yield a product, and therefore an income, at some future time. In short, the capitalist-entrepreneur hires or invests in factors now and pays out money (a present good)in exchange for productive services that are future goods. It is for his service in paying factors now, in advance of the fruits of production, that the capitalist normally earns an interest return, a return for time preference. In sum, every factor of production (whether labor, land, or capital goods) earns, not its marginal value productivity, according to the current conventional explanation, but its marginal productivity discounted by the interest rate or time preference; and the capitalist earns the discount.

  Fetter also cogently argued that Böhm-Bawerk in effect used one explanation (the “third ground”) for interest on producer goods and another (the notion of time preference) for interest on consumer loans. Since interest must have a unitary explanation, Böhm-Bawerk's analysis is something of a retrogression.

  Fetter stressed the basic weakness of all productivity explanations of interest. It is not enough, he pointed out, to show that more capital is productive in physical or even value terms; the problem is to explain why the value of capital on the market today is low enough to generate a surplus value return tomorrow. The productivity of capital has nothing to do with the solution to this problem. As Fetter wrote:

  The essence of the interest problem is to explain a surplus of value over the value of capital employed. It is not enough to show that more capital (or a more roundabout process) will produce more products, or to show that the aggregate of products has a greater value than those secured before. The value of capital being derived from the value of the products, the more the products (in value), the more the capital (value), unless the interest rate (the thing to be explained) keeps the capital from increasing proportionately.

  Fetter pointed out ironically that Böhm-Bawerk himself, in criticizing earlier productivity theories of interest, had raised precisely the same point. Even conceding that very long roundabout processes may be physically highly productive, Fetter pointed out that the question remained unresolved in Böhm-Bawerk why these processes are not then always preferred to less productive, but more immediately fruitful, processes.

  Fetter concluded by reiterating his unique position on the relationship between interest and rent. Rent reflects the (marginal) productivity of scarce factors of production, and interest reflects the present valuation of future services and therefore depends, not at all on roundaboutness, but on the postponement of use. The theory of interest, Fetter concluded, “must set in their true relation the theory of rent as the income from the use of goods in any given period, and interest as the agio or discount on goods of whatever sort, when compared throughout successive periods.”

  In the presentation of his theory before the American Economic Association, “The Relations between Rent and Interest” (1904), Fetter pointed out the confusions and inconsistencies of previous writers on the theory of rent and interest. In place of the classical distinction between rent as income from land and interest as income from capital goods, Fetter proposed that all factors of production, whether land or capital goods, be considered either “as yielding uses,...as [a] bearer of rent,” or as “salable at their present worth,...as [a] discounted sum of rents,” as “wealth” or “capital.” As a corollary, rent must be conceived of as an absolute amount (per unit time), whereas interest is a ratio (or percentage) of a principal sum called capital value. Rent becomes the usufruct from any material agent or factor—the use of the agent considered apart from using it up. But then there is no place for the idea of interest as the yield of capital goods. Rents from any durable good accrue at different points in time, at different dates in the future. The capital value of any good then becomes the sum of its expected future rents, discounted by the rate of time preference for present over future goods, which is the rate of interest. In short, the capital value of a good is the “capitalization” of its future rents in accordance with the rate of time preference or interest. Therefore, marginal utility accounts for the valuations and prices of consumer goods; the rent of each factor of production is determined by its productivity in eventually producing consumer goods; and interest arises in the capitalization, in accordance with time preference, of the present worth of the expected future rents of durable goods. Such is Fetter's lucid, systematic, and unique vision of the relative place of rent, interest, and capital value in the theory of distribution.

  Fetter's paper was considered so important that nine economists were assigned to discuss it. As Fetter indicated in his reply, few of his commentators demonstrated that they understood his positive theory, and many were only interested in defending the classical school against Fetter's criticisms. To Thomas Nixon Carver's major point that since land, in contrast to other factor services, need not be supplied, land rent does not enter into cost, Fetter replied: (1) that the same sort of surplus, or no-cost, elements may be said to permeate all factors of production, and (2) that land, like other factors, must also be served, maintained, and allocated efficiently. Furthermore, several of the commentators, as Fetter pointed out, mistakenly identified Fetter's theory with that of John Bates Clark and proceeded to criticize Clark's assimilation of rent and interest, despite the fact that Fetter held an almost diametrically opposed view.

  A decade later Fetter returned to the theory of interest, in “Interest Theories, Old and New” (1914), as part of a critique of Irving Fisher's recantation from his previous adherence to pure time-preference theory, a position he had approached in his The Rate of Interest (1907), and one that influenced Fetter in developing his own theory. But now Fisher was taking the path of Böhm-Bawerk and returning to a partial productivity explanation. Moreover, Fetter discovered that the seeds of error were in Fisher's publication of 1907. Fisher had stated that valuations of present and future goods imply a preexisting money rate of interest, thereby suggesting that a pure time-preference explanation of interest involves circular reasoning. By way of contrast, and in the course of explaining his own pure timepreference, or “capitalization,” theory of interest, Fetter showed that time valuation is prerequisite to the determination of the market rate of interest. The market rate of interest on loans is, for Fetter, a reflection of a general rate of time preference in the economy, a capitalization process that discounts, in the present prices of durable goods and factors of production, the future uses of these goods. Consumers evaluate directly enjoyable consumer goods, then evaluate durable factors according to their productivity in making these goods, and then discount these future uses to the present in accordance with their time preferences. The first step yields the prices of consumer goods; the second, the incomes or rents of producer goods; the last, the “underestimation” of, or the rate of interest yielded by, the producer goods.

  Again restating his case, this time in criticizing the views of Henry R. Seager, Fetter pointed to the crucial problem: why does entrepreneurial purchase of factors seem to contain within itself a net surplus, an interest return? The productivity of capital goods does not explain why the value of this expected productivity is discounted in their present price, which in turn permits the entrepreneurs to pay interest on loans with which to buy or hire these factors of production. As Fetter stated: “The amount of interest which ‘enterprisers estimate’ they can afford to pay...is the difference between the discounted, or present, worth of products imputable to these agents and their worth at the time they are expected to mature.” Fetter added that there of course must be productivity to account for the expected future income, just as there must be people and markets; but there would be no rate of interest if the future value of the products were not discounted. Market interest can be paid out of a value surplus that emerges from an antecedent time discount of the “value-productivity” of the factors of production. Or, putting it another way, Fetter readily admitted that productivity of capital goods brings greater value to the final product. “But the value-productivity which furnishes the motive to the enterpriser to borrow and gives him the power, regularly, to pay contract interest, is due, not to the fact that these products will have value when they come into existence, but to the fact that their expected value is discounted in the price of the agents bought at an earlier point of time.”

  Fetter also sharpened the contrast between his own theory and the productivity theory of interest in another way. The productivity theorists assert that as capital grows the economy becomes more productive, and that the interest rate increases owing to the greater productivity of capital. But Fetter countered with the insight that, as the economy advances and more present goods are produced, the preference for present goods is lowered, and the interest rate therefore may be expected to fall. Or, as it might be put more elaborately, everyone has a time-preference schedule relating his supply of present goods with his preference for the present over the future. A greater supply of present goods would move to the right and down along a given time-preference schedule, so that the marginal utility of present goods would fall in relation to future goods. As a result, on the given schedules, the rate of time preference, of degree of choice of present over future, would tend to fall and so therefore would the interest rate.

  Fetter also anticipated Frank Knight's classic distinction, in Risk, Uncertainty, and Profit (1921), between interest, or long-run normal profits, on the one hand and short-run profits and losses earned by superior, or suffered by inferior, entrepreneurs on the other—superiority or inferiority defined in terms of the ability to forecast the uncertain future. Why does an entrepreneur borrow at all if in so doing he will bid up the loan rate of interest to the rate of time preference as reflected in his long-run normal rate of profit (or his “natural rate of interest,” to use Austrian terminology)? The reason is that superior forecasters envision making short-run profits whenever the general loan rate is lower than the return they expect to obtain. This is precisely the competitive process, which tends, in the long run, to equalize all natural and loan rates in the time market. Those entrepreneurs “with superior knowledge and superior foresight,” wrote Fetter, “are merchants, buying when they can in a cheaper and selling in a dearer capitalization market, acting as the equalizers of rates and prices.”

  Fetter also pointed out, quite correctly, that the process of capitalization and time discount applies as fully and equally to land as it does to capital goods. From the point of view of capitalization, there is no fundamental distinction between land and produced means of production. In fact, Fetter might have pointed out that under slavery, where laborers are owned, they, too, become capitalized, and the present price of slaves becomes the capitalized value of expected future earnings (or “rents”) of slaves, discounted by the social rate of time preference. But the fact that slaves, too, can be capitalized does not justify obliterating for other purposes any and all distinctions between slaves and capital goods.

  Not only is Fetter's pure time-preference, or capitalization, theory the only one that offers an integrated explanation of interest on slaves, land, and capital goods, but it is also, as he pointed out, the only one that provides an integrated explanation of interest on consumption loans and on productive loans. For even the productivity theorists had to concede that at least in the case of consumer loans interest was occasioned by time preference.

  In Fetter's final and extensive treatment of interest, “Interest Theory and Price Movements” (1927), pessimism has replaced his optimism of earlier years; for after an illuminating discussion of early interest theories (in which he rescued Turgot from the deprecation of Böhm-Bawerk), Fetter sadly noted that his insight into interest theory had been ignored. The old productivity theory of interest, having at last conquered Böhm-Bawerk and Irving Fisher, survived as the dominant explanation of interest in the eclectic theory of Alfred Marshall. Among English and American economists, productivity remained the major explanation of interest on productive capital, and time preference was relegated to an explanation of consumer lending.

  Fetter proceeded to a particularly extended discussion of the nature of time preference and the time market. Time preference enters into primitive, Crusoe-type valuations, which predate the development of barter as well as the emergence of money loans and a money economy. The rates of time preference reflect all the conditions, the interactions, and the choices of human beings. In almost all cases, present goods are preferred to future goods, and this preference is most marked in primitive man. But, Fetter added, with the development of civilization, the advent of thrift generally means a lowering of the premiums placed on present goods and hence of the rate of time preference.

  In the money economy, just as the utility scales of individuals interact to bring about uniform prices on the market, individual time-preference schedules through exchange bring all time preferences into conformity. The consequence is a social rate of time preference, a “general, average rate of premium of present dollars over future dollars which has resulted from leveling out...a great part of the individual differences.” Through arbitrage time-preference rates tend to be equalized throughout the time market. The price of a durable factor of production is derived from the expected price of its products, being the present discount, or capitalized sum, of all of its future products. This capitalization process precedes, rather than follows, the existence of an interest rate on money loans. The time-preference rate that capitalizes future incomes emerges as the long-run normal, or natural, rate of profit of business firms. Short-run deviations from this norm are caused by special circumstances and by entrepreneurial skills. Profit rates tend to be equalized throughout the market through a continuing reevaluation of the prices of durable agents—those capital goods providing a profit being recapitalized upward and those suffering losses being recapitalized downward. This process of recapitalization and reevaluation tends to bring about uniform profit rates, Fetter noted, rather than according to the conventional theory, uniform costs of producing new durable agents. For Fetter, the interest rate on productive money loans and the normal rate of profit tend to equality because they have a common cause: capitalization of time preferences throughout the time market. As Fetter stated:

  The normal profit-making “productivity of capital” (where goods containing future uses rise toward parity with present uses) is thus nothing but the reversal of the former discount-valuation applied to distant incomes. It is a psychological, valuation process, not a physical, technological process. Thus profits no more explain interest than interest explains profits. They offer alternative investment opportunities but neither is the cause of the other. Both opportunities result from discounts and premiums permeating the existing system of prices, and these are traceable to the fundamental factor of time-preference exercised by men individually and collectively.

  Having thus elaborated his concept of time preference and the time market, Fetter applied his pure theory to the complexities of determining interest in the real world. In the first place, interest rates, in addition to being determined by time preference, vary in accordance with different degrees of risk, entrepreneurial skill, the cost of making loans, different habits, and legal restrictions. Furthermore, as Fetter pointed out, changes in the price level slow up the market process of equilibrating interest rates and lead to widespread errors of overcapitalization and undercapitalization.

  In a discussion of money and price levels in relation to the interest rate, Fetter incorporated into his analysis Fisher's insight, now being rediscovered, that interest rates tend to rise during a boom and fall during a recession in response to expected changes in price levels. Rising price levels lower the purchasing power of the creditor's return, and interest rates tend to rise during inflations to compensate for this loss. Conversely, interest rates tend to fall below time-preference rates during a recession to offset the increased real rate of return.

  But Fetter was not content to stop there. Noting that empirically interest rates do not rise continually during booms, Fetter developed a monetary theory of the business cycle, one that came close to the Mises-Hayek “monetary malinvestment” theory that was being developed in Austria at about the same time (see my America's Great Depression [Kansas City: Sheed & Ward, 1975]).

  Fetter explained that a currency inflation from increased government spending raises the price level, which in the long run is determined by movements in the supply of money. But increasing the money supply via bank credit expansion has far more complex consequences. Continuing bank credit expansion not only will bring about a boom and higher prices but also will increase the money supply via a massive increase in the supply of loanable funds emitted by the banks. The increased money supply will keep the rate of interest below the free-market rate, at least until later stages in the boom, and will bring about an overcapitalization of durable and producers’ goods. Owing to the increase in product prices combined with the artificially low rates of interest, businessmen are led into numerous unsound investments. When the banks are finally forced to stop their credit expansion, the overestimation of capital values is suddenly reversed, and the boom is quickly succeeded by a recession. Business failures, monetary losses, and lowering of capital values bring the various parts of the system of prices and values on the market once more into harmony. In particular, that part of the market not influenced by bank credit is brought into harmony with the remainder of the economy. Such is the function of the recession in response to the distortions generated by the bank credit expansion of the preceding boom.

  Criticizing the theory that bank credit should simply be responsive to the “needs of business,” Fetter properly pointed out that during a boom business overestimates its “needs” in response to rising prices and the seemingly greater opportunities for profit. In this way, bank credit expansion stimulates those very business “needs” that are supposed to furnish a rigorous criterion for bank credit policy.

  Fetter also provided a useful critique of the Swedish economist Knut Wicksell's theory that if banks should continue to hold the interest rate below the natural, or free-market, rate, the price level would rise indefinitely. Fetter pointed out that this could only be true if the lowering of the discount rate was accompanied by a continuous expansion of bank credit.

  Fetter concluded this discussion of interest theory by applying it to the economics of war. During wartime there is a sharp increase in rates of time preference, in the demand for present goods immediately usable for war purposes. Consequently, there is a substantial rise in wartime of free-market interest rates. Fetter was therefore highly critical of the common attempts by governments to keep interest rates low during wartime, thus creating economic distortions and preventing high interest rates from smoothly shifting resources from civilian industries to war industries, which have a higher immediate demand for funds.

  4.

  Fetter's major article on the theory of rent, “The Passing of the Old Rent Concept” (1901), was one of his most notable essays. It is a detailed critique of the several mutually contradictory rent theories found in Alfred Marshall's Principles of Economics. First is the Ricardian notion that rent is the return to land. The problem of “explaining” rent becomes equivalent to defining what land is and why it is different from capital. Fetter attacked the distinction made between land and capital by criticizing the idea that land can be distinguished from capital in terms of its alleged inelasticity of supply. Fetter argued that both land and capital can be increased in the long run, while in the short run the supply of capital goods can be as inelastic as the supply of land.

  Fetter next turned his attention to the influential doctrine of quasi-rents. According to Marshall, land (as well as other nonreproducible goods, such as paintings and rare jewelry) is permanently fixed in supply and therefore earns a true rent. Capital goods, however, are fixed in supply only in the short run, and therefore their income, while similar to land rent, is only temporary, hence the term “quasi-rent.” Fetter uncovered the crucial error in Marshall's claim that quasi-rents are not part of the cost of production. In making this claim, Marshall had quietly shifted his discussion from the entrepreneur to the owner of the capital good who “earns an income” rather than “pays a cost.” Thus instead of being a costless surplus to the entrepreneur, rent “is essentially that payment which, as a part of [money] costs, prevents the [entrepreneur] from getting any surplus which can be attributed to the rented agents.”

  At the base of the Marshallian error in the quasi-rent doctrine, stated Fetter, is a confusion between money costs and the rather mystical concept of “real costs.” Money costs of production do not consist of “real” costs; they are simply the market value of the factors of production that the business firm contracts to put to use. To make rent a “surplus” over real cost is tantamount to abandoning the basic notion of rent as a regularly accruing income produced by way of market exchange.

  Fetter criticized Marshall's adherence to the classical notion that rent is the one income payment that does not enter into the money cost of production, or into the supply price of factors of production. Fetter noted that the rent of land enters into money costs as does any other contractual payment, as any land-renting farmer or businessman can attest. The Marshallian reply that land is employed up until the no-rent margin and therefore has no effect on decisions to produce a little more or less of the product is dismissed by Fetter's demonstration that the same could be said about any factor payment whatsoever by way of generalizing the law of diminishing returns into the law of variable proportions. There is simply nothing special about land rent in this regard. Furthermore, Fetter pointed out that no producer ever pushes a factor as far as the “no-rent” margin; here economic reality contradicts the infinitesimally small units of mathematical economics. For so long as a factor remains productive at all, it will pay a rent in accordance with that productivity, no matter how small. And, furthermore, the supply of any good is determined fully as much by rent-bearing as by marginal units. In sum, land is priced in the same way as labor or capital in terms of the value of its marginal product.

  In his “Comment on Rent under Increasing Returns” (1930), Fetter demolished the idea of increasing returns and called for an extension of the concept that rent accrues to land to the notion that rent accrues to the separable uses of any kind of durable good whatsoever. Finally in his article on “Rent” in the Encyclopedia of Social Sciences, Fetter traced the history of the notion of rent and defined rent in the common-sense meaning of “renting-out”: the amount paid for the separable uses of a durable agent “entrusted by the owner to a borrower, to be returned in equally good condition.”

  5.

  It may be that the hallmark of Frank A. Fetter's approach to economic theory was his “radicalism”—his willingness to discard the entire baggage of lingering Ricardianism. In distribution theory his most important contributions are still too radical to be accepted into the corpus of economic analysis. These are: (1) his eradication of all productivity elements from the theory of interest and his development of a pure time-preference, or capitalization, theory and (2) his eradication of everything pertaining to land, whether it be scarcity or some sort of margin over cost, in the theory of rent, in favor of rent as the “renting out” of a durable good to earn an income per unit time. Guided by Alfred Marshall and by eventual retreats toward the older view by Böhm-Bawerk and Fisher, microeconomic theory has chosen a more conservative route.

  Despite the attention and the enthusiasm accorded to his writings at the time, Fetter's contributions to distribution theory have fallen into neglect and disuse. It is to be hoped that this collection of essays will bring Fetter's contributions and his lucid and systematic economic vision to the attention of contemporary economists.

  BIBLIOGRAPHICAL NOTE

  For a recent appreciation of Fetter's contributions to economic thought, see John Appleby Coughlan, “The Contributions of Frank Albert Fetter (1863–1949) to the Development of Economic Theory” (Ph.D. diss., Catholic University of America, 1965). For an early summary of his theoretical system that apparently received Fetter's approval, see Robert F. Hoxie, “Fetter's Theory of Value,” Quarterly Journal of Economics 19 (February 1905): 210–30. Hoxie concluded that Fetter (in his Principles of Economics: With Applications to Practical Problems [New York: Century Co., 1904]) had created a “system which, for logical consistency, is without precedent; a system through which with clearness there runs one essential chain of thought...and as successive links of which the problems of the value of consumption goods, rents, wages, and profits, the value of productive agents, and interest are successively solved” (ibid., p. 230). General discussions of Fetter's contribution may be found in Joseph Dorfman, The Economic Mind in American Civilization, 5 vols. (New York: Viking Press, 1959), 3:360–65, 385–86; 5:464–79; and Wesley C. Mitchell, Types of Economic Theory: From Mercantilism to Institutionalism, 2 vols. (New York: Augustus M. Kelley, 1969) 2:251–300. I have included a bibliography of, Fetter's works at the end of this volume.

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  6: Lange, Mises and Praxeology: The Retreat from Marxism

  Friedrich August von Hayek, Toward Liberty: Essays in Honor of Ludwig von Mises on the Occasion of his 90th Birthday, September 29, 1971, vol. 2, ed. F.A. Hayek, Henry Hazlitt, Leonrad R. Read, Gustavo Velasco, and F.A. Harper (Menlo Park: Institute for Humane Studies, 1971). Chapter: Lange, Mises and Praxeology: The Retreat from Marxism, Murray N. Rothbard

  Accessed from oll.libertyfund.org/title/1663/37642 on 2009-05-21

  This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.

  ---

  Lange, Mises and Praxeology: The Retreat from Marxism
  Murray N. Rothbard

  Most economists are familiar with the controversy on the possibility of economic calculation under socialism, and with the fact that Ludwig von Mises and Oscar Lange were the two major protagonists of that debate.1 Many are also familiar with Lange's ironic gibe that, for having posed the problem which Lange believed that socialism could readily solve, “a statue of Professor Mises ought to occupy an honorable place in the great hall of the Ministry of Socialization or of the Central Planning Board of the socialist state.”2 In the light of the rapid retreat from socialist central planning and toward a free market in the Eastern Europe of recent years, it seems that Lange's irony might well have boomeranged.

  Far less known, however, is a parallel retreat from Marxist economic theory in Oskar Lange's last years, a retreat, furthermore, made in long strides toward the economic theory and the methodology of none other than his old opponent. Mises' most distinctive contribution to economics was his concept and elaboration of economic theory as praxeology (or praxiology), the formal, general logic of human action, of human purposive activity using scarce means to achieve the most preferred ends.3 As a leading Polish economist, Lange was very familiar with the praxeological theories of the distinguished contemporary Polish philosopher, Tadeusz Kotarbinski. While Kotarbinski's specific conception of praxeology differs considerably from Mises, stressing analysis of efficient as well as hostile action, they unite in emphasizing the essence of praxeology as a general theory of rational action.45 In his final, posthumous work, designed as the first of a multi-volume treatise on economics, Oskar Lange devoted a great deal of time to the painful acknowledgement that economics must encompass praxeology as well as Marxism. The particular irony is that Lange devoted a great amount of attention to an economic theory of his old antisocialist rival which still remains almost unknown in conventional Western economic thought.

  Lange entitled Chapter 5 of his posthumous Political Economy, “The Principle of Economic Rationality. Political Economy and Praxiology.” He begins the chapter with the decidedly un-Marxist but praxeological statement that “Human economic activity is conscious and purposive activity”, that “consists in the realization of given ends by the use of certain means.”6 He proceeds to point out that the capitalist market economy had not only developed gainful activity, but that this gainful activity was a rational one, quantifying ends and means through a calculation in terms of money. Here Lange is implicitly harking back to the old calculation controversy. The economic calculation made possible by money and the invention of double-entry bookkeeping in the capitalist market, enabled action toward the maximizing of money profit and income, and thereby toward the most efficient realization of man's ends. In this way, maximization of profit under capitalism is accomplished by following the economic principle or principle of economic rationality, a principle enabling the maximum degree of realization of one's ends per given outlay, as well as the minimal outlay of means for a given degree of realization of one's ends. The former variant is the “principle of greatest efficiency”; the latter, the “principle of minimum outlay, or economy, of means”, or mimimum cost.7 The rational use of means, according to these criteria, is their optimum use; any other use of means Lange agrees to consider a waste. In support of these economic principles, Lange cites Kotarbinski's general praxeological concept: “The more valuable the product of a given experience the more productive is behavior; on the other hand, the less the outlay in the achievement of a given aim, the more economical is behavior.”

  Lange proceeds to pay tribute to the great achievement of the capitalist market economy in arriving at this rational economic principle. Despite the prevailing private rather than “social” rationality, and despite such problems as the business cycle, Lange declares that “the rationalization of economic activity within the capitalist enterprise, the practice of proceeding according to the principle of economic rationality, and especially the consciousness of this principle in human thought, all constitute an achievement of historic significance ... on a par with the imposing advance in material technique made within the capitalist mode of production ... itself closely connected with the application of the principle of economic rationality in enterprise.”8

  After rather perfunctorily asserting that socialism will proceed to expand this rationality to social planning, and to such areas of action as input-output analysis, technology, and military strategy and tactics,9 Lange goes on to identify this study of the rational principles of action as praxeology, the logic of rational activity, and details the history of this concept. From Mises, Lange had discovered that the term “praxeology” was first used by the French historian Alfred Espinas in 1890.1011

  Proceeding to the more developed praxeological work of Kotarbinski, Lange criticizes the Polish philosopher's narrow and technological treatment of the concept as the science of effective or efficient activity; instead, notes Lange, praxeology is really a broader “methodological rationality”, a doing of one's best according to one's knowledge, so that it is better to define praxeology as the science of rational activity. In opting for this broader, more formal, and more general concept, Lange goes a long way from the Kotarbinskian and toward the Misesian formulation of the theory. Praxeology, adds Lange, encompasses under this rubric of rational activity such categories as: ends and means, method, action, plan, efficiency, and economy. Praxeological principles of behavior comprise the relations between the praxeological categories, and the principle of economic rationality (or the “economic principle”) is one of these praxeological principles of behavior. In this way, Lange agrees with Mises that the economic principle is itself embedded in the wider praxeological principles of general human action. Furthermore, he agrees that the praxeological principles had until now been elaborated only in the field of economics, as Mises affirms, and in ethics as well.

  Lange, however, now found himself at the brink of a precarious position: the Mises thesis that praxeology had so far been elaborated only in economic theory, and that therefore economics and praxeology, while conceivably of different scope in the future, are now virtually identical. To take such a position would mean, for Lange, being close to becoming a Misesian and an Austrian School economist. Drawing back from this precipice, Lange hastens to add that praxeology includes, not only Mises-type economic theory, but also the general theory of statistical decisions, operations research, programming, input-output analysis, and cybernetics. Lange did not seem to realize that by rushing to include these disciplines, along with economic theory, in the rubric of praxeology, he was returning to the very different technological concept—the technological manipulation of means to reach a given end—that Lange had already rejected in Kotarbinski.12 Remembering suddenly to pay his respects to Marxism, Lange adds as an afterthought that dialectical materialism partly bases its cognition on the “praxeological principle” of proceeding according to the “criterion of practice.”13

  From the praxeological principles of behavior, and especially the economic principle, adds Lange, a considerable edifice of economic laws can be deduced: such as a general attempt to maximize profit and investing capital at the highest rate of profit, thereby leading to a tendency toward a uniform rate of profit throughout the economy. In this way, Lange accepts the essential deductive Misesian methodology for economic theory: beginning with broadly general praxeological principles as axioms, and from these elaborating necessary laws by logical deduction. While Lange attempts to qualify this agreement by stating that empirical testing is needed to see whether various economic actions are “rational” or “customary-traditional”, his basic alignment with Misesian methodology still remains.

  Later in the book, Lange returns to grapple with praxeology through a critique of subjective utility theory, itself a topic that usually rates little or no space in Marxian works.14 He begins with a history of value theory, and of the basis of economics in the nineteenth century, that is perfectly acceptable to any modern economist: from the classical “economic man” to Benthamite utilitarianism and hedonism to Bastiat's exchange of services and on to the subjective, marginal utility school. The latter began with Jevonian hedonism and then developed into the Austrian, praxeological interpretation of utility not as “pleasure”, but as the realization one's aim of economic activity, regardless of the nature of that aim. The aim may be pleasure, money, power, health, or whatever; the Austrian view simply states that economic activity has some aim, or preference, that forms the goal of action. As Lange correctly concludes: “In this praxiological interpretation, the subjectivist trend leaves aside all psychological considerations and transforms itself into a logic of ‘rational choice’ aimed at the maximization of preference.”15

  Lange then proceeds to a history of the development of this general, formal theory of utility as ordinal preference. He sees that the Austrian School (Menger, Wieser, Böhm-Bawerk) was far more thoroughgoing in its application of subjective marginal utility theory than the currently far more influential Lausanne School (Walras, Pareto) or than Alfred Marshall. For the Austrians applied marginal utility theory to all gainful activity, whereas the latter applied it only to consumers. In the Austrian and praxeological view, both the consumers' aim of maximizing utility and the producers' aim of maximizing money income or profit fall under the single rubric of maximizing preferences and of marginal utility. Lange's history here is deficient in identifying Pareto partially with the Austrian approach while totally neglecting the praxeological role of Pareto's Italian opponent Benedetto Croce. Moreover, he also neglects the adoption of a general and purely ordinal concept of marginal utility by the Czech Austrian School economist Franz Čuhel, and following Čuhel by Ludwig von Mises in 1912, long before the famous Hicks and Allen article of 1934.16 Lange is correct, however, in citing a praxeological interpretation of utility by Max Weber as early as 1908, in which Weber stated that marginal utility should be formulated, not in such psychological terms as pleasure, but in such “pragmatic” categories as ends and means.17

  Thus far our Marxian was willing to go with praxeological economics. But here Lange confronted a precipice even steeper than before: for just as it was important for him to deny that praxeology might be confined to economics, so it was still more important for him to deny that all of economic theory is a subset of praxeology. For if that were really the case, where would that leave Marxism? And so Lange separates himself from the final step in the development of praxeological economics: the transformation of economics into a branch of praxeology. Separated now from concrete objects, economic analysis became a formal science of rational behavior, of the maximization of magnitudes. Conversely, the formal aspects of all rational behavior became analyzable by the economic principle.18

  For this transformation of economics into a branch of praxeology, Lange cites Lionel Robbins and his well-known depiction of economics as a certain aspect of all activity, namely the relation between scarce means and alternative ends, and the choice among those ends.19 He also devotes attention to the Austrian economist Hans Mayer, and to Max Weber, who had originated the Robbinsian distinction between economics as choice of means between ends and technology as the choice of means to realize a given end.20 While this distinction is rather simplistic - neglecting, for example, the point that economic as well as technological considerations enter even into the choice of means toward a single end - Lange is incorrect in charging that the distinction is meaningless because the hierarcy of alternative ends are all aimed toward one principal end: the maximization of utility. Lange does not realize that “utility”, for the praxeological school, is not a thing or an entity in itself, but is simply the label placed upon the preference rankings which everyone makees among his vrious ends. “Maximizing utility” simply means the formal principle that a man attempts to attain his highest ranking, his most preferred, rather than his less preferred end.21

  Lange than points out that this transformation of economics into a branch of the universal science of praxeology culminated in Ludwig von Mises' Human Action in 1949. Classical political economy was now fully transformed into a general theory of human action, of the acts of choice. Economics becomes no longer an empirical science with “real” phenomena, but a formal logic of choice, where the only criterion of truth is agreement with the original axioms. The economic theory becomes empirically true insofar as any concrete action is governed by the economic principle. Lange is particularly critical because all of the laws of praxeological, subjective economics are considered by Mises and the preceding Austrians to be applicable to Crusoe economics as well as to the exchange economy. Lange's hostility to this “unrealism” stems precisely from the fact, as he points out, that application to Crusoe economics implies that the laws of economics are universal and apodictic for every time and place, regardless of the concrete content of social relations or economic activity. By means of praxeology, economics, like the natural sciences, has transcended the concrete and changing data of history and has assumed the character of a universal and apodictic science. As Lange characterizes this position: “Historically conditioned social relations may influence the concrete form in which these laws manifest themselves but they cannot change their basic character.”22 While Lange is willing to concede this universal and trans-historical character to praxeology, he is not willing to concede economics to be only a subset of praxeology and therefore to take on the same timeless character. For if he were, Marxism, with its proclaimed laws of historical determinism, would have to be completely abandoned.

  The characteristic method of the praxeological economists in developing their analysis, Lange points out, is to begin with the economics of an isolated Robinson Crusoe, an analysis which elucidates the basic laws of men in relation to things. Then, other people are brought in, and exchanges between these individuals explained as each person choosing to give up something he wants less in order to obtain something he wants more. Exchanges thus become the resultants of the subjective attitudes and preferences of the participating individuals. Lange complains that this process of beginning with man vis à vis nature is the opposite of the Marxian conception, which concentrates on “economic relations among men - relations of production and relations of distribution.” He further quotes from the Marxist Rudolf Hilferding, in his charge that the Austrian School economics of Böhm-Bawerk “takes as the starting point of its system the individual relation of man to things. It conceives relations from a psychological point of view, as subject to natural invariable laws; it excludes socially determined relations of production, and ... development of the economic process according to definite laws is quite foreign to it.”23 This, to be sure, is the liquidation of the classical “political economy.”

  But while Lange accuses subjectivist economics of ignoring real economic relations between men, he also correctly asserts that this school of thought treats the economic categories of capitalism “as general praxeological categories, categories of rational human activity ...”24 Wages, capital, profit become universal categories independent of the historical shaping of society, and therefore capitalism becomes a universal requirement of rational economic activity. Lange sees that this leads to the heart of the Mises-Lange calculation controversy on whether rational economic activity requires the private ownership of the means of production.25 But then Lange can hardly be correct in charging that praxeological economics ignores concrete social and economic relations; on the contrary, his real complaint is that from these abstract, universal economic laws may be deduced the very real necessity for market capitalism in order to sustain a rational economy.

  Thus, while Lange is willing to concede the universality of the economic principle, and the achievement of subjectivist economics in discovering a praxeology that can be applied to political economy and to other fields, he is of course not willing to concede that economics is exclusively praxeological. The remainder of Lange's discussion is an unsatisfactory attempt to outline what Marxism or any other economic theory might add to praxeology in the formation of economics. He mentions institutional discussions of the social organization of production, of the State, labor, national income, etc., but the unanswered question is the role of these categories in economic theory as compared to an accumulation of institutional data to which that theory can be applied. Lange also approvingly cites the attack on the subjectivist Austrian School by the Polish economist Stanislaw Brzozowski, who charged that the Austrians merely analyzed the relations between man and given things, and comprised a theory of consumption rather than a “complete theory of society.” In the first place, this contradicts Lange's previous insight that the Austrians, in contrast to Marshall and the Lausanne School, had extended their subjectivist analysis from consumption to production and the productive factors; the “given things” constituted only the first step in their complete analysis. Secondly, why should it be a defect of praxeological economics that it does not offer a “complete theory of society?” Is physics to be condemned because it is not chemistry? Has a complete and correct theory of society been offered by any sphere of economics or social science?

  Lange proceeds to unworthy and rather absurd attempts to subject the Austrian School economists to a Marxian “sociology of knowledge.” The Austrian School, he asserts, is the economics of pensioners and tax officials, because it discusses only consumption and not production; and Nikolai Bukharin is cited in asserting that the Austrian School, with its concentration on consumption, is the “rentier's political economy.”26 Not only does this contradict Lange's own previous concession to the Austrian integration of production and consumption, but it also leaves us with the puzzle of how to “explain” such consumption-oriented economics as that of John A. Hobson or J.M.Keynes? Are they too to be dismissed as “rentiers”, even the Keynes who called for the “euthanasia” of that very class? Lange's second attempt is to “explain” the abstract and unrealistic Austrian methodology as the product of the professionalization of economics in the universities in the late nineteenth century, which thereupon developed in “isolation from the productive process.”27 But while the earlier classical economists may not have been as professionalized, they were also - apart from Ricardo - not businessmen, and thus were equally “cut off” from the productive process. Neither the university professor Adam Smith nor the civil servant Mill were any closer to the productive process than Menger or Böhm-Bawerk. Furthermore, a bit later in the book Lange turns around and salutes the professionalization of all scientific research in the past century as leading to an autonomy of science, a critical attitude toward the social system, and a science that “becomes independent of the social milieu which produces” it.28

  Lange declares that since the bourgeoisie had to know what was actually happening in the economy, they couldn't pursue completely the Austrian path of liquidating political economy. Therefore, the more “realistic” Anglo-American neo-classicists continued to study such important economic problems as money, business cycles, growth, and international trade. What Lange ignores here is that the Austrian subjectivists have studied and come to a position on all of these important questions, so that what he sees as their abstract “isolation” applies only to the fundamental laws and not to the more developed and applied branches of the theory. One need only mention the Mises-Hayek “monetary malinvestment” theory of the business cycle to see how praxeological economics has been applied to vital and realistic economic problems. The problem, however, is that Lange cannot be very happy with the policy conclusions of the Austrians in these areas: ultra hard money, the gold standard, laissez-faire capitalism. Again, the problem is not so much the relevance of the method as the kind of conclusions that are obtained.

  Lange's remarkable adoption of Misesian praxeology as the major base for economics, onto which Marxian and other approaches were then hastily grafted, met predictably mixed reaction in Marxian circles. Most striking was the laudatory critique of Lange by Ronald Meek, the distinguished English historian of economic thought.29 Professor Meek, summarizing Lange's lengthy chapter on the Principle of Economic Rationality, notes that “significantly, the references to Marx's work become purely incidental.”30 Meek considers it “interesting and paradoxical” that praxeology, which “has now become an indispensable adjunct to Marxian economics”, was the culmination of a violently anti-Marxist subjectivist trend in “bourgeois” economics.31 The paradox might well be put the other way round: that of a leading Marxian economist adopting the economics of his own and Marxism's major opponents, and then rather desperately trying to insist that there is still room for Marxian and institutional approaches in the wider rubric of political economy.

  To Marxian “fundamentalists”, on the other hand, the Lange-Meek movement is seen for what it genuinely is: a massive “revisionist” retreat from Marxism. In his review of Meek, Ben Brewster despairingly writes: “... for if the relations of production is a general principle governing society the latter becomes merely the totality of human social interaction; there is no specificity of the economic level at all and the distinction between base and superstructure breaks down. The result is that in the last essay in the book (the title essay), Meek apparently falls for the most general principle of society and the most bourgeois ideology of them all, von Mises' “Praxiology” (the principle of all rational action) in Lange's purely ideological attempt to graft Marxist and Neoclassical economics.”32

  And so, as Marxian economic thought joins the actual economies of Eastern Europe in a headlong flight from Marxism and socialist central planning to Western and capitalistic modes of thought and economic systems, Oskar Lange's original irony is truly beginning to boomerang: Perhaps the freemarket, capitalist economy of a future Poland will erect a statue of Lange alongside the monument to his old antagonist?

  Footnotes

  [[1]]See Ludwig von Mises, Socialism (New Haven: Yale University Press, 1951); F.A.von Hayek, ed., Collectivist Economic Planning (London: George Routledge and Sons, 1935); and Oskar Lange and Fred M. Taylor, On the Economic Theory of Socialism (New York: McGraw-Hill, 1964). For a summary and critique of the controversy, see Trygve J.B. Hoff, Economic Calculation in the Socialist Society (London: William Hodge and Co., 1949).

  [[2]]Lange and Taylor, pp. 57-58

  [[3]]See particularly Ludwig von Mises, Human Action (New Haven: Yale University Press, 1949). For a discussion of Mises' praxeology and its relation to previous economic methodologies, see Israel M. Kirzner, The Economic Point of View (Princeton, N.J.: D. Van Nostrand, 1960).

  [[4]]For Mises on Kotarbinski, see Ludwig von Mises, The Ultimate Foundation of Economic Science (Princeton, N.J.: D. Van Nostrand, 1962), pp. 42, 135. Most accessible of Kotarbinski's writings is his “Idée de la methodologie genérale praxeologic,” Travaux du IXe Congres International de Philosophie (Paris, 1937), IV, 190-94.

  [[5]]Oskar Lange, Political Economy (New York: Macmillan, 1963).

  [[6]]Lange, p.148.

  [[7]]Lange here explicitly accepts the modern concept that the ultimate end is not cardinal or quantifiable, but rather an ordered, ordinal set of preferences. Lange, pp. 167-68.

  [[8]]Lange, p.176.

  [[9]]Kotarbinski's early work was on praxeology as applied to the theory of hostile action. See Mises, Ultimate Foundation, pp.42, 135.

  [[10]]In Espinas' article, “Les Origines de la technologie,” Revue Philosophique, XVth year (July-December, 1890), pp. 114-15, and in his book with the same title, published in Paris in 1897. See Mises, Human Action, p. 3n.

  [[11]]Eugen Slutsky, “Ein Betrag zür formalpraxeologischen Grundlegung der Oekonomik,” in Annales de la classe des sciences sociales-economiques, Academie Oukranienne des Sciences, Vol. 4 (Kiev, 1926).

  [[12]]On the economic vs. the technological principles, see Lionel Robbins, The Nature and Significance of Economic Science (London: Macmillan, 1935), a work heavily under the influence of Mises, Richard Strigl and others of the Austrian School; and Kirzner, pp. 108-45. Also see Rutledge Vining, Economics in the United States of America (Paris: UNESCO, 1956), pp. 1-37.

  [[13]]Lange, p. 190n.

  [[14]]Lange, pp. 229ff.

  [[15]]Lange, p. 236.

  [[16]]Croce's decidedly praxeological contributtion to economics may be found in his fascinating debate with the positivist Pareto on economic methodology, written in 1900 and 1901. See Benedetto Croce, “On the Economic Principle,” in International Economic Papers, No. 3 (1953), pp. 172-79, 197-202. For an appreciation of Croce's work, see Giorgio Tagliacozzo, “Croce and the Nature of Economic Science,” Quarterly Journal of Economics (May, 1945), and Kirzner, pp. 155ff.
  
  Čuhel's great contribution was his Zür Lehre von der Bedurfnissen (Innsbruck, 1907). On Cuhel, see Eugen von Böhm-Bawerk, Capital and Interest (South Holland, Ill.: Libertarian Press, 1959), II, 191, 193-94, 423, 431-32; III, 124-36, 232-33. Mises' development of Cuhel is in his Theory of Money and Credit (New Haven: Yale University Press, 1953), pp. 38ff.

  [[17]]In Max Weber, “Die Grenznutzlehre und das ‘psychophysische Grundgesetz’, “Gesammelte Aufsatze zür Wissenschaftslehre (2nd ed., Tubingen, 1951), pp. 364ff. On the Weber article, see Emil Kauder, A History of Marginal Utility Theory (Princeton, N.J.: Princeton University Press, 1965), pp. 116-17 136-37.

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  7: Ludwig von Mises and Economic Calculation Under Socialism

  Lawrence S. Moss, The Economics of Ludwig von Mises: Toward a Critical Reappraisal, ed. with an Introduction by Laurence S. Moss (Kansas City: Sheed and Ward, 1976). Chapter: Murray N. Rothbard, Ludwig von Mises and Economic Calculation Under Socialism

  Accessed from oll.libertyfund.org/title/109/30542 on 2009-05-21

  This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.

  ---

  Ludwig von Mises and Economic Calculation Under Socialism

  Murray N. Rothbard

  What might be called the “orthodox,” or textbook, version of the famous economic calculation debate under socialism goes somewhat as follows:

  Ludwig von Mises first raised the question of Socialist economic calculation in 1920 by asserting that socialism could not calculate economically because of the absence of a price system for the factors of production. Enrico Barone “then” showed (the fact that he had done so twelve years earlier is laid to accidents of timing and translation) that this was not a theoretical problem because all the equations existed for a solution. F. A. Hayek then retreated to a second line of attack by conceding the “theoretical” solution to economic calculation in a Socialist state but challenging its “practical” possibility. Finally, Oskar Lange, Abba Lerner, and others “demonstrated” the practical solution by advancing the concept of “market” socialism, in which the Planning Board arrives at market clearing prices through trial and error. Q. E. D. and Socialist planning has been salvaged, replete with Lange's ironic tribute to Mises for raising the problem for Lange and other Socialists to solve. If the actual record of Communist economies is brought into the discussion at all, it is usually done as a vindication of the Lange-Lerner thesis in practice.

  That there are numerous holes in this neat and triumphal saga should be immediately clear. One example is that the “market socialism” in Yugoslavia and, less so, in the other East European countries has nothing to do with the alleged Lange-Lerner “market”; for while firms in Yugoslavia engage in genuine exchanges and therefore in a genuine price system, the Lange-Lerner Planning Boards were to be central planners who manipulated prices as a pure accounting device and in no sense allowed “markets” at all. Another example is that Barone, in the course of his alleged “theoretical” solution to the problem of Socialist calculation, himself ridiculed the idea that planning by means of his equations was in any sense workable, especially when we consider the continuing economic variability of the technical coefficients involved.1

  But a particularly important flaw in the orthodox story is, as Hayek tried to make clear during the debate, the curious disjunction between the “theoretical” and the “practical.” It is not simply that Barone and his mentor Pareto scoffed at the workability of the theoretical equations under Socialist planning. More important is the point that Mises and Hayek were implicitly attacking the relevance of the entire concept of Walrasian general equilibrium from which these equations flowed. For Mises and Hayek there was no disjunction between the “theoretical” and the “practical”; following the Austrian tradition, a theory that necessarily violated practical reality was an unsound theory. The fact that in a changeless world of perfect knowledge and general equilibrium a Socialist Planning Board could “solve” equations of prices and production was for Mises a worse than useless demonstration. Clearly, as Hayek would later develop at length, if complete knowledge of economic reality is assumed to be “given” to all, including a Planning Board, there is no problem of calculation or, indeed, any economic problem at all, whatever the economic system. The Mises demonstration of the impossibility of economic calculation under socialism and of the superiority of private markets in the means of production applied only to the real world of uncertainty, continuing change, and scattered knowledge.

  In his monumental Human Action, the 1949 treatise that contained his final rebuttal to his Socialist critics, Mises emphasized the sterility of the mathematical approach:

  The mathematical economists…formulate equations and draw curves which are supposed to describe reality. In fact they describe only a hypothetical and unrealizable state of affairs, in no way similar to the catallactic problems in question. They substitute algebraic symbols for the determinate terms of money as used in economic calculation and believe that this procedure renders their reasoning more scientific…

  In the imaginary construction of the evenly rotating economy all factors of production are employed in such a way that each of them renders the most valuable service…It is, of course, possible to describe this imaginary state of the allocation of resources in differential equations and to visualize it graphically in curves. But such devices do not assert anything about the market process. They merely mark out an imaginary situation in which the market process would cease to operate…

  Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease. But the logical economist knows much more than that. He shows how the activities of enterprising men, the promoters and speculators, eager to profit from discrepancies in the price structure, tend toward eradicating such discrepancies and thereby also toward blotting out the sources of entrepreneurial profit and loss…The mathematical description of various states of equilibrium is mere play. The problem is the analysis of the market process…

  The problems of process analysis, i.e., the only economic problems that matter, defy any mathematical approach.2

  In developing this approach, Hayek engaged in a searching critique of Schumpeter's assertion that socialism suffers from no problem of economic calculation, because, to quote Schumpeter, the “consumers, in evaluating (‘demanding’) consumers' goods ipso facto also evaluate the means of production…”3 Hayek pointed out, however, that this easy step would only follow “to a mind to which all these facts were simultaneously known…The practical problem, however, arises precisely because these facts are never so given to a single mind…instead, we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge.” Hayek concluded that “any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people's knowledge corresponds with objective facts of the situation, systematically leaves out what is our main task to explain.”4

  Proceeding to an explicit refutation of the Lange-Lerner approach, Mises in Human Action scoffed at the idea that the Socialist managers will be instructed to “play market as children play war, railroad, or school.” Specifically, the Socialists leave out the crucial function of shareholding, capital allocation, and entrepreneurship in their concentration on the purely managerial role:

  The cardinal fallacy implied in this and all kindred proposals is that they look at the economic problem from the perspective of the subaltern clerk whose intellectual horizon does not extend beyond subordinate tasks. They consider the structure of industrial production and the allocation of capital to the various branches and production aggregates as rigid, and do not take into account the necessity of altering this structure in order to adjust it to changes in conditions. What they have in mind is a world in which no further changes occur and economic history has reached its final stage. They fail to realize that the operations…of the managers, their buying and selling, are only a small segment of the totality of market operations. The market of the capitalist society also performs all those operations which allocate the capital goods to the various branches of industry. The entrepreneurs and capitalists establish corporations and other firms, enlarge or reduce their size, dissolve them or merge them with other enterprises; they buy and sell the shares and bonds of already existing and of new corporations; they grant, withdraw, and recover credits; in short they perform all those acts the totality of which is called the capital and money market. It is these financial transactions of promoters and speculators that direct production into those channels in which it satisfies the most urgent wants of the consumers in the best possible way.…

  The role that the loyal corporation manager plays in the conduct of business is…only a managerial function, a subsidiary assistance granted to the entrepreneurs and capitalists.…It can never become a substitute for the entrepreneurial function. The speculators, promoters, investors and moneylenders, in determining the structure of the stock and commodity exchanges and of the money market, circumscribe the orbit within which definite minor tasks can be entrusted to the manager's discretion.…

  The capitalist system is not a managerial system; it is an entrepreneurial system.…Nobody has ever suggested that the socialist commonwealth could invite the promoters and speculators to continue their speculations and then deliver their profits to the common chest. Those suggesting a quasi-market for the socialist system have never wanted to preserve the stock and commodity exchanges, the trading in futures, and the bankers and money-lenders.…One cannot play speculation and investment. The speculators and investors expose their own wealth, their own destiny. This fact makes them responsible to the consumers.…if one relieves them of this responsibility, one deprives them of their very character.5

  Mises also refuted the idea that a Socialist Planning Board would arrive at correct pricing through trial and error, through clearing the market. While this could be done for already produced consumer goods, for which a market would presumably continue to exist, it would be precisely impossible in he realm of capital goods, where there would be no genuine market; hence, any sort of rational decisions on the kinds and amounts of the production of capital and of consumer goods could not be made. In short, the process of trial and error works on the market because the emergence of profit and loss conveys vital signals to the entrepreneur, whereas such apprehensions of genuine profit and loss could not be made in the absence of a real market for the factors of production.

  A common attempt to rebut Mises has been the simple empirical pointing to the existence of central planning in the Soviet Union and the other Communist states. But, in the first place, this argument is a two-edged sword, (1) because of the blatant failures of early War Communism in its abolition of the market, and (2) because the evident failures and breakdowns of central planning have led the Communist countries in East Europe, especially in Yugoslavia, to move rapidly away from socialism toward a genuine, and not a Lange-Lerner type of pseudo, market economy. But, more importantly, Mises pointed out that the Soviet Union and the other Socialist countries are not fully Socialist, since they still operate within a world market environment and are at least roughly able to use world capital and commodity prices on which to base their economic calculations.6 That Communist planners base their calculations on world market prices is now generally acknowledged and is illustrated by an amusing encounter of Professor Peter Wiles with Polish communist planners:

  What actually happens is that ‘world prices,’ i.e. capitalist world prices, are used in all intra- block trade. They are translated into rubles…and entered in bilateral clearing accounts. To the question, ‘What would you do if there were no capitalist world?’ came only the answer ‘We'll cross that bridge when we come to it.’ In the case of electricity the bridge is already under their feet: there has been great difficulty in pricing it since there is no world market.7

  Mises' followers in the debate have continued to develop his basic critique of the impossibility of economic calculation under socialism. Thus, the attempted Lange-Lerner criterion of pricing in accordance with “marginal cost” has been attacked on what are essentially Austrian grounds, namely, that costs are not “given” and objective but are subjective estimates by various individuals of future selling prices and other economic conditions. Thus Hayek wrote that

  excessive preoccupation with the conditions of a hypothetical state of stationary equilibrium has led modern economics…to attribute to the notion of costs in general a much greater precision and definiteness than can be attached to any cost phenomenon in real life…[A]s soon as we leave the realm of…a stationary state and consider a world where most of the existing means of production are the product of particular processes that will probably never be repeated; where, in consequence of incessant change, the value of most of the more durable instruments of production has little or no connection with the costs which have been incurred in their production but depends only on the services which they are expected to render in the future, the question of what exactly are the costs of production of a given product is a question of extreme-difficulty which cannot be answered…without first making some assumption as regards the prices of the products in the manufacture of which the same instruments will be used. Much of what is usually termed cost of production is not really a cost element that is given independently of the price of the product but a quasi-rent, or a depreciation quota which has to be allowed on the capitalized value of expected quasi-rents, and is therefore dependent on the prices which are expected to prevail.8

  At another place, Hayek added that Lange and others “speak about ‘marginal costs’ as if they were independent of the period for which the manager can plan. Clearly, actual costs depend in many instances, as much as on anything, on buying at the right time. In no sense can costs during any period be said to depend solely on prices during that period. They depend as much on whether these prices have been correctly foreseen as on the views that are held about future prices.”9 And Paul Craig Roberts, while writing generally from a different perspective, pointed out that “under real-world conditions characterized by the passage of time, the marginal rule gives no clear guidance to those directed to organize production in accordance with it. Introducing the element of time brings in uncertainty and requires the exercise of judgment. Neither uncertainty nor judgment is present in the formulation of perfect competition from which Lange took his idea of the marginal rule.”10 Moreover, the outstanding critique of the marginal cost as well as of other authoritarian rules imposed on the entrepreneur was by G. F. Thirlby, who pointed out that costs are wrapped up inextricably in subjective estimates by the individual capitalists and entrepreneurs of alternative choices that are forgone, and since these alternatives are usually never undertaken, they can never be “objectively” determined by outside observers.11

  The subjectivist Austrian critique of the modern concept of costs and its relevance to the question of Socialist calculation were neatly summed up by Professor Buchanan:

  Confusion arises…when the properties of equilibrium, as defined for markets, are transferred as criteria of optimization in nonmarket or political settings. It is here that the critical distinction between the equilibrium of the single decision-maker and that attained through market interaction, the distinction stressed by Hayek, is absolutely essential…The theory of social interaction, of the mutual adjustment among the plans of separate human beings, is different in kind from the theory of planning, the maximization of some objective function by a conceptualized omniscient being. The latter is equivalent, in all respects, to the problems faced by Crusoe or by any individual decision-maker. But this is not the theory of markets, and it is artificial and basically false thinking that makes it out to be.…Shadow prices are not market prices, and the opportunity costs that inform market decisions are not those that inform the choices of even the omniscient planner. These appear to be identical only because of the false objectification of the magnitudes in question.…

  Simply considered, cost is the obstacle or barrier to choice, that which must be got over before choice is made. Cost is the underside of the coin, so to speak, cost is the displaced alternative, the rejected opportunity. Cost is that which the decision-maker sacrifices or gives up when he selects one alternative rather than another. Cost consists therefore in his own evaluation of the enjoyment or utility that he anticipates having to forego as a result of choice itself. There are specific implications to be drawn from this choice-bound definition of opportunity cost:

  • 1.Cost must be borne exclusively by the person who makes decisions; it is not possible for this cost to be shifted to or imposed on others.
  • 2.Cost is subjective; it exists only in the mind of the decision-maker or chooser.
  • 3.Cost is based on anticipations; it is necessarily a forward-looking or ex ante concept.
  • 4.Cost can never be realized because of the fact that choice is made; the alternative which is rejected can never itself be enjoyed.
  • 5.Cost cannot be measured by someone other than the chooser since there is no way that subjective mental experience can be directly observed.…

  In any general theory of choice cost must be reckoned in a utility rather that in a commodity dimension. From this it follows that the opportunity cost involved in choice cannot be observed and objectified and, more importantly, it cannot be measured in such a way as to allow comparisons over wholly different choice settings. The cost faced by the utility-maximizing owner of a firm, the value that he anticipates having to forego in choosing to produce an increment to current output, is not the cost faced by the utility-maximizing bureaucrat who manages a publicly owned firm, even if the physical aspects of the two firms are in all respects identical.12

  There is one vital but neglected area where the Mises analysis of economic calculation needs to be expanded. For in a profound sense, the theory is not about socialism at all! Instead, it applies to any situation where one group has acquired control of the means of production over a large area—or, in a strict sense, throughout the world. On this particular aspect of socialism, it doesn't matter whether this unitary control has come about through the coercive expropriation brought about by socialism or by voluntary processes on the free market. For what the Mises theory focuses on is not simply the numerous inefficiencies of the political as compared to the profit-making market process, but the fact that a market for capital goods has disappeared. This means that, just as Socialist central planning could not calculate economically, no One Big Firm could own or control the entire economy. The Mises analysis applies to ay situation where a market for capital goods has disappeared in a complex industrial economy, whether because of socialism or because of a giant merger into One Big Firm or One Big Cartel.

  If this extension is correct, then the Mises analysis also supplies us the answer to the age-old criticism leveled at the unhampered, unregulated free-market economy: what if all firms banded together into one big firm that would exercise a monopoly over the economy equivalent to socialism? The answer would be that such a firm could not calculate because of the absence of a market, and therefore that it would suffer grave losses and dislocations. Hence, while a Socialist Planning Board need not worry about losses that would be made up by the taxpayer, One Big Firm would soon find itself suffering severe losses and would therefore disintegrate under this pressure. We might extend this analysis even further. For it seems to follow that, as we approach One Big Firm on the market, as mergers begin to eliminate capital goods markets in industry after industry, these calculation problems will begin to appear, albeit not as catastrophically as under full monopoly. In the same way the Soviet Union suffers calculation problems, albeit not so severe as would be the case were the entire world to be absorbed into the Soviet Union with the disappearance of the world market. If, then, calculation problems begin to arise as markets disappear, this places a free-market limit, not simply on One Big Firm, but even on partial monopolies that eradicate markets. Hence, the free market contains within itself a built-in mechanism limiting the relative size of firms in order to preserve markets throughout the economy. This point also serves to extend the notable analysis of Professor Coase on the market determinants of the size of the firm, or of the relative extent of corporate planning within the firm as against the use of exchange and the price mechanism. Coase pointed out that there are diminishing benefits and increasing costs to each of these two alternatives, resulting, as he put it, in an “‘optimum’ amount of planning” in the free market system.”13 Our thesis adds that the costs of internal corporate planning become prohibitive as soon as markets for capital goods begin to disappear, so that the free-market optimum will always stop well short not only of One Big Firm throughout the world market but also of any disappearance of specific markets and hence of economic calculation in that product or resource. Coase stated that the important difference between planning under socialism and within business firms on the free market is that the former “is imposed on industry while firms arise voluntarily beasuse they represent a more efficient method of organizing production.”14 If our view is correct, then, this optimal free-market degree of planning also contains within itself a built-in safeguard against eliminating markets, which are so vital to economic calculation.

  In fact, we may turn the question around to ask the Socialists: if, indeed, central planning is more efficient than, or even equally efficient to, the free-market economy, then why has central planning never come about through the creation of One Big Firm by the voluntary market process? The fact that One Big Firm has never arisen on the market and that it needs the coercive might of the State to establish such central planning under socialism demonstrates that the latter could not be the most efficient method of organizing the economy.15

  In our expanded form, then, not only is Mises' insight into the irrationality of socialism in an industrial economy confirmed but so also is the self-subsistence and continuing optimality and rationality of the free-market economy.

  NOTES

  [1]See Enrico Barone, “The Ministry of Production in the Collectivist State,” in Collectivist Economic Planning, ed. Friedrich A. Hayek (London: George Routledge & Sons, 1935), p. 286. See also Trygve J. B. Hoff, Economic Calculation in the Socialist Society (London: William Hodge & Co., 1949), pp. 140–43.

  [2]Ludwig von Mises, Human Action (Chicago: Henry Regnery, 1966), pp. 353–56.

  [3]Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper & Bros., 1942), p. 175.

  [4]Friedrich A. Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 90–91.

  [5]Miles, Human Action, pp. 707–9. See also Dominic T. Armentano, “Resource Allocation Problems under Socialism,” in Theory of Economic Systems, ed. W. P. Snavely (Columbus, Ohio: Charles E. Merrill Co., 1969), pp. 127–39. On the importance of the stock market in he free-market economy, see Ludwig M. Lachmann, Capital and Its Structure (London: London School of Economics and Political Science, 1956), pp. 67–71.

  [6]On Socialist countries operating within a world market environment, see Mises, Human Acton, pp. 698–99. On the rapid breakdown of War Communism, see Boris Brutzkus, Economic Planning in Soviet Russia Alienation and the Soviet Economy (Albuquerque, N.M.: University of New Mexico Press, 1971), pp. 20–47.

  [7]P. J. D. Wiles, “Changing Economic Thought in Poland,”Oxford Economic Papers 9 (June 1957): 202–3.

  [8]Friedrich A. Hayek, “The Present State of the Debate,” in Collectivist Economic Planning, pp. 226–27.

  [9]Hayek, Individualism and Economic Order, p. 198.

  [10]Roberts, Alienation and the Soviet Economy, p. 97.

  [11]G. F. Thirlby, “The Ruler” in L.S.E. Essays on Cost, ed. J. M. Buchanan and G. F. Thirlby (London: London School of Economics and Political Science, 1973), pp. 163–200.

  [12]James M. Buchanan, “Introduction: L.S.E. Cost Theory in Retrospect,” in L.S.E. Essays on Cost, pp. 4–5, 14–15.

  [13]Ronald H. Coase, “The Nature of the Firm,”Economica 4 (November 1937): 384–405; reprinted in American Economic Association, Readings in Price Theory (Homewood, III.: Richard D. Irwin, 1952), p. 335n.

  [14]Ibid.

  [15]See Murrray N. Rothbard, Man, Economy, and State (Los Angeles Nash Publishing Co., 1970), 2: 547–50, 585.

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  8: Modern Historians Confront the American Revolution

  Leonard P. Liggio, Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio. Chapter: Bibliographic Essay: Murray N. Rothbard, Modern Historians Confront the American Revolution

  Accessed from oll.libertyfund.org/title/907/99472 on 2009-05-21

  This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.

  ---

  Bibliographic Essay

  Modern Historians Confront the American Revolution

  by Murray N. Rothbard

  I.

  Basic Causes of the Revolution

  The historian must be more than a chronicler, a mere lister of events. For his real task is discovering and setting forth the causal connections between events in human history, the complex chain of human purposes, choices, and consequences over time that have shaped the fate of mankind. Investigating the causes of such a portentous event as the American Revolution is more, then, than a mere listing of preceding occurrences; for the historian must weigh the causal significance of these factors, and select those of overriding importance.

  Constitutional Conflict Historians

  What, then, were the basic and overarching causes of the American Revolution? The older view, dominant in the first two or three decades of the twentieth century, laid greatest emphasis on the conflict of constitutional ideas, on the fact that the American colonists saw the actions of Great Britain after 1763 as interfering with their constitutional rights as Englishmen. Typical of these works were Charles H. McIlwain, The American Revolution: A Constitutional Interpretation; Randolph G. Adams, Political Ideas of the American Revolution: Britannic-American Contributions to the Problem of Imperial Organization, 1765–1775; and Claude H. Van Tyne, The Causes of the War of Independence. While constitutional interpretations and conflicts played a role, the entire emphasis came to seem to historians—and properly so—to be stodgy and unsatisfactory: for what event as wrenching and even cataclysmic as a revolution is ever launched on the basis of mere legalisms, and legalisms that were often dubious at that? The “Constitutionalists,” and other early writers, were closer to the mark in noting the influence of John Locke's libertarian natural rights philosophy. Locke's influence was particularly stressed in Carl L. Becker's The Declaration of Independence: A Study in the History of Political Ideas and at least mentioned by the other writers. But while the assertion of the natural rights of man could far better stir the passions than mere legal and constitutional differences, there was still a vital missing link: for how many colonists indeed sat down to read the abstract philosophy of John Locke?

  The Progressive Historians and the Economic Dimension

  The “Progressive” historians, dominant in the later 1920s and the 1930s, added another, and exciting dimension to the analysis of the causes of the American Revolution. For they added the important economic dimension—the struggles over the British attempt to impose taxes, mercantile restrictions, and a monopoly over the importation of tea into the colonies. But the Progressive historians did more. Inspired by the overall work on American history of Charles A. Beard, the Progressives also posed a contrast to the constitutional or philosophic American motivations asserted by the older historians: namely, economic motivation and class interests. In short, the American leaders, in particular the wealthy merchants, struggled on behalf of their economic interests, against British restrictions and tax levies.

  Believing in the inevitability of class conflict, and seeing only the merchants as driven by their economic interests toward rebellion, the Progressives then had to explain two things: the continuing recourse to ideas and ideology by the American leaders, and the adoption of this ideology by the mass of the public. To explain this, the Progressives fell back on the theory of “propaganda” popular in the 1920s and 1930s: that the ideology propounded by the leaders was mere windy rhetoric which they never believed. The “propaganda,” they claimed, was used to dupe the masses into going along with the revolutionary agitation.

  The result was a curious “left-right” agreement between the Progressives and the minority of American historians of the “Imperial” school. The latter maintained that the American Revolution was the result of the unwarranted propaganda of sinister agitators who succeeded in duping the masses to break their beneficent ties with the British Empire. The major works of the “Imperial” school are Lawrence H. Gipson, The British Empire Before the American Revolution, and George L. Beer, British Colonial Policy, 1754–1765.

  The writings of the Progressive historians are legion, ranging from such popular but poorly researched books as John C. Miller, Origins of the American Revolution, to Philip G. Davidson, Propaganda and the American Revolution, 1763–1783, to the thorough and scholarly work by Arthur M. Schlesinger, Sr., The Colonial Merchants and the American Revolution, 1763–1776. The last gasp of the Progressive interpretation in diluted form is Merrill Jensen, The Founding of a Nation: A History of the American Revolution, 1763–1776.

  But ideas do count in human motivation. It is impossible to read the letters, or the published writings of the leaders, as well as of the American public, and doubt the passionate sincerity with which they held their revolutionary ideas. Furthermore, the Progressives overlooked several other important points.

  First, while the economic interpretation is often insightful in gauging the motivations for State action, particularly by small groups of pullers of the levers of State power, it is highly inadequate in explaining the motives of mass actions, especially revolutionary actions, against the State—whether by leaders or by the public. For a revolution is a passionate and radical, indeed a revolutionary act. It is difficult to believe that a people will wrench themselves out of their habitual lives to risk at a blow “their lives, their fortunes, and their sacred honor,” from a mere chafing at a tax or at mercantile restrictions. There must be more to it than that.

  And secondly, the economic interpretation overlooked the very nature of the libertarian ideology that moved the revolutionaries. This ideology integrated moral, political and economic liberty. Therefore it integrated all of these revulsions against what these libertarians saw as British invasions of their rights. Neither the Constitutionalists, stressing the legal and philosophic, nor the Progressives, stressing the economic grievances, saw the nature of the integrated whole of American revolutionary ideology.

  The Consensus Interpretation

  Neither did the “Consensus” school of historians, who became ascendant in the 1940s and 1950s. Just as the Progressives reflected the Marxian outlook of American intellectuals of the 1930s, so the Consensus school reflected the neo-Conservative “American celebration” that typified intellectuals in post-World War II America. The Consensus historians were anxious to see consensus rather than conflict in American history. And since both ideology and economic interests can cause conflicts, both were discarded as causal factors in the American past. Instead, the Consensus school saw American history as guided not by “doctrinaire” ideas nor by economic interests but rather by a flexible, pragmatic, ad hoc approach to problem-solving. Since a revolution can hardly be a flexible approach to consensus, the American Revolution had to be written off as a mere localized “conservative” resistance to the British government. Furthermore, by deprecating the revolutionary nature of the American Revolution, the Consensus school could isolate it from the indisputably radical French Revolution and other modern upheavals, and continue to denounce the latter as ideological and socially disruptive while seeming to embrace the founding heritage of America. The leading Consensus historians were Daniel J. Boorstin and Clinton Rossiter. On the American Revolution, their works include: Boorstin, The Lost World of Thomas Jefferson and The Americans: The Colonial Experience; and Rossiter, Seedtime of the Republic: the Origins of the American Tradition of Political Liberty. Also in this school, stressing in particular the alleged “democracy” of the American colonies, is Robert E. Brown, Middle-Class Democracy and the Revolution in Massachusetts, 1691–1780.

  Thus, by the end of the 1950s, American historians were further away than ever from appreciating the fact that the American revolution was truly revolutionary. They did not perceive that it was largely animated by a passionately held and radical libertarian ideology that integrated the moral, political, and economic reasons for rebelling against the British imperial regime. But the Consensus historians did make one important contribution. They restored the older idea of the American Revolution as a movement of the great majority of the American people. It replaced the view held by Progressives and Imperialists alike that the revolution was a minority action imposed on a reluctant public. Particularly important in developing this position was the judicious work by John Richard Alden, The American Revolution, 1775–1783, still the best one volume book on the revolutionary war period. On the left, the Marxian historian Herbert Aptheker also advanced this position. He chided the 1930s Progressives for their opposition to the revolution as a minority class movement in The American Revolution, 1763–1783.

  In the stifling atmosphere of Consensus history, an important advance came with the publication of the first volume of the monumental two-volume work of Robert R. Palmer, The Age of the Democratic Revolution: A Political History of Europe and America, 1760–1800, Vol. I: The Challenge. Weaving together a scintillating tapestry of trans-Atlantic history, Palmer vindicated the radicalism of the American Revolution. He pointed to its decisive inspirational effect on the succeeding European revolutions of the late eighteenth century, as well as to the similarity of goals and ideologies. Palmer thereby restored the older tradition of linking these revolutions on both sides of the Atlantic, as did Jacques Godechot in France and the Atlantic Revolution of the 18th Century. Palmer also showed that, by one important criterion, the American Revolution was more radical than the French, since proportionately far more Tories were driven out of America than aristocrats were to be exiled from France. As a “European” historian, however, Palmer was not read by the hermetically specialized guild of “American” historians.

  Bailyn's Crucial Breakthrough

  The crucial breakout from the miasma of American historiography of the Revolution came from one man. He was able by sheer force of scholarship to overthrow the Consensus and Progressive views and to establish a new interpretation of the causes of the American Revolution. This was Harvard Professor Bernard Bailyn, who, breaking through the hermetic separation of European and American historians, found his inspiration in the great work of Caroline Robbins, The Eighteenth Century Commonwealthman. For Bailyn realized that Professor Robbins had discovered the “missing link” in the transmission of radical libertarian thought after John Locke. She had found it in a group of dedicated writers, inspired by the English Revolution of the seventeenth century, who continued to reject the centrist Whig settlement of the eighteenth century. These writers carried forward the ideals of natural rights and individual liberty. In the course of editing a volume of Revolutionary pamphlets, Bailyn discovered that Americans were indeed influenced, on a massive scale, by these libertarian articles and pamphlets. Many of these publications were reprinted widely in the American colonies, and clearly influenced the revolutionary leaders. The most important shaper of this libertarian viewpoint was Cato's Letters, a series of newspaper articles in England in the early 1720s written by John Trenchard and his young disciple Thomas Gordon. The collected Cato's Letters were republished many times in eighteenth century England and America.

  Trenchard and Gordon, and the other libertarian writers, transmuted John Locke's abstract and often guarded political philosophy into a trenchant, hard-hitting, and radical libertarian creed. Not only did men have natural rights of life, liberty, and property, which governments must not invade, but “Cato” and the other writers declared that government—power—was always and ever the great enemy of liberty, and stood ready to aggress against it. Hence, power must always be diminished as far as possible. Men must watch it continually with utmost hostility and vigilance, lest it break its bonds, and destroy the rights of the individual. “Cato” particularly denounced the propensity for tyranny of the British government of the day. This message found an eager reception in the American colonies.

  Thus, Bernard Bailyn established the American Revolution as at one and the same time genuinely radical and revolutionary. He showed that it was motivated largely by firmly and passionately held libertarian ideology, summed up in the phrase “the transforming libertarian radicalism” of the American Revolution. Bailyn's findings were first presented in the “General Introduction” to his edition of Pamphlets of the American Revolution, 1750–1776, Vol. 1, 1750–1765. The only volume of pamphlets yet published in the series, it included the works of such revolutionary leaders as the Rev. Jonathan Mayhew, Thomas Fitch, James Otis, Oxenbridge Thacher, Daniel Dulany, and John Dickinson.

  An expanded version was published as Bailyn, The Ideological Origins of the American Revolution. Also see the companion volume by Bailyn, The Origins of American Politics, which offered an excellent explanation for the British royal governors being weak in the eighteenth century at the same time that the King was dominant at home. A useful summary of the Bailyn thesis is provided by Bailyn's “The Central Themes of the American Revolution: An Interpretation,” in S. Kurtz and J. Hutson, eds., Essays on the American Revolution. The scintillating writings of “Cato” have been collected in an excellently edited volume by David L. Jacobson, The English Libertation Heritage.

  One problem with the generally correct Bailyn thesis is its exclusive emphasis on ideology, as it affected the minds and hearts of the Americans. Historians find it easy to slip into the view that the deep ideologically motivated hostility to Britain, while genuinely felt, was merely an expression of “paranoia.” Indeed, Bailyn himself almost fell into this trap in his recent overly sympathetic biography of the leading Massachusetts Tory, Thomas Hutchinson. One of the best historians of this period, Edmund Morgan, in the New York Review of Books duly noted and warned against the trap in his review of this work.

  An excellent corrective to this exclusive concentration on the subjective is the work of the most important political (as contrasted to ideological) historians of the pre-Revolutionary period. In the definitive history of the Stamp Act crisis of 1765–1766, Edmund and Helen Morgan demonstrated the majority nature of the revolutionary movement. They attacked, as well, the actual depredations of Great Britain on American political and economic rights. Edmund and Helen Morgan, The Stamp Act Crisis: Prologue to Revolution. Also see the companion source book of documents, Edmund S. Morgan, ed., Prologue to Revolution: Sources and Documents on the Stamp Act Crisis, 1764–1766. Particularly important is the monumental and definitive, though densely written, two volume political history of the coming of the American Revolution by Bernhard Knollenberg, Origins of the American Revolution: 1759–1765; and Growth of the American Revolution, 1766–1775. By examining British archives, Knollenberg shows that the supposed paranoia and “conspiracy theories” of the American colonists were all too accurate. The British officials were indeed conspiring to invade the liberties of the American colonies after the “salutary neglect” of the pre-1763 period.

  II.

  The Pre-Revolutionary Period

  Political and Economic Conflicts

  We are now fortunate in having the two-volume Knollenberg work, which supplies by far the best political history of the events leading up to the outbreak of the Revolutionary War. Historians had long set 1763 as the date for the beginning of conflict between Britain and the colonies. Knollenberg's Origins pushes the date back to 1759, toward the end of the American phase of the Seven Years War between Britain and France.

  Jack P. Greene has shown that the Board of Trade, headed by the imperialist Lord Halifax, had tried abortively to impose British restrictions on the colonies in the late 1740s and early 1750s. The Board's attempt was finally halted by the outbreak of war with France. See Jack P. Greene, “An Uneasy Connection: An Analysis of the Preconditions of the American Revolution,” in Kurtz and Hutson, eds., Essays on the American Revolution.

  John Shy's Toward Lexington: The Role of the British Army in the Coming of the American Revolution is a judicious discussion of British army policies and conflicts in this period, although favorable to the British position. Howard H. Peckham's Pontiac and the Indian Uprising now replaces the venerable classic by Francis Parkman, The Conspiracy of Pontiac as the best account of Pontiac's notable uprising.

  The Western lands were highly important in the politics of this period. The best accounts of the intricate connection between government policy, land speculation, and Western conquest are still Clarence W. Alvord, Mississippi Valley in British Politics: A Study of the Trade, Land Speculation, and Experiments in Imperialism Culminating in the American Revolution and the later Thomas Perkins Abernathy, Western Lands and the American Revolution. A pro-British view is provided by Jack M. Sosin, Whitehall and the Wilderness: The Middle West in British Colonial Policy, 1760–1775. The important activities of the swindler, land speculator, and Indian trader George Croghan are covered in the definitive account by Nicholas B. Wainwright, George Croghan: Wilderness Diplomat. A lively and vivid account of Indian relations on the frontier appears in Dale Van Every, Forth to the Wilderness: the First American Frontier, 1754–1774.

  As noted above, an excellent study of American resistance to the Stamp Act is Edmund and Helen Morgan, The Stamp Act Crisis, with supporting documents in Edmund Morgan, ed., Prologue to Revolution. The Boston Massacre has now been treated fully in Hiller B. Zobel, The Boston Massacre, and the Boston Tea Party in Benjamin W. Labaree, The Boston Tea Party. Labaree emphasizes the importance of the role of the monopoly East India Company, in administering the tea tax in America, in the final development of American fears of the loss of traditional liberty. The company's tax looting in Bengal had caused a disastrous famine which was widely reported in the American press. The English beneficiaries of the exploitation of Bengal returned to England with their loot and purchased seats in Parliament. A recent study of these “Nabobs” is P. J. Marshall's East India Fortunes: The British in Bengal in the Eighteenth Century.

  Disgracefully, there has been very little work done on two vital revolutionary organizations and institutions in the pre-Revolutionary period: the committees of correspondence, and the Sons of Liberty. The only overall study of the committees of correspondence is the old and brief work by Edward D. Collins, Committees of Correspondence of the American Revolution. The role of the Boston Committee of Correspondence has been recently studied in Richard D. Brown, Revolutionary Politics in Massachusetts: The Boston Committee of Correspondence and the Towns, 1772–1774. There is no overall study of the Sons of Liberty, but there are some valuable sectional accounts. The best is Richard Walsh, Charleston's Sons of Liberty: A Study of the Artisans, 1763–1789. The New York Sons are studied in Roger J. Champagne, “The Military Association of the Sons of Liberty,” New York Historical Society Quarterly, 41 (1957); Champagne, “Liberty Boys and Mechanics of New York City, 1764–1774,” Labor History, 8 (1967); and, from a Marxian perspective, Herbert M. Morais, “The Sons of Liberty in New York,” in Richard B. Morris, ed., The Era of the American Revolution. A realistic and thorough history of the use of mobs in the American resistance is now available, however; in Pauline Maier, From Resistance to Revolution: Colonial Radicals and the Development of American Opposition to Britain, 1765–1776.

  Several excellent studies deal with various aspects of mercantilist restrictions and enforcement by Britain as causes of the American resistance. Oliver M. Dickerson's The Navigation Acts and the American Revolution deals with the Navigation Acts. Carl Ubbelohde treats the Admiralty courts in The Vice-Admiralty Courts and the American Revolution. And Joseph J. Malone covers the White Pines Acts in Pine Trees and Politics: The Naval Stores and Forest Policy in Colonial New England, 1691–1775. On the same subject is Robert G. Albion, Forests and Sea Power: The Timber Problem of the Royal Navy, 1652–1862.

  While marred by its consistently Progressive interpretation, Arthur M. Schlesinger, Sr., The Colonial Merchants and the American Revolution, 1763–1776 is an important, thorough and still definitive account of the merchants and the various movements and struggles for nonimportation boycotts of England. Beverly W. Bond, Jr., The Quit Rent System in the American Colonies, stands as the only work on the feudal quitrents which provided a continuing source of irritation in the colonies.

  The Role of Ideas in the Revolution

  The best works on the influence of libertarian ideology on the budding American revolutionaries are the Bailyn and other works mentioned earlier. George Rudé studies the radical libertarian Wilkite movement in England in Wilkes and Liberty: A Social Study of 1763 to 1774. And Pauline Maier examines the relations between the English Wilkites and the American radical libertarians in “John Wilkes and American Disillusionment with Britain,” William and Mary Quarterly, 20 (1963); as does Jack P. Greene in “Bridge to Revolution: the Wilkes Fund Controversy in South Carolina, 1769–1775,” Journal of Southern History, 29 (1963).

  Thomas Hollis was an English libertarian who dedicated his life to reprinting and disseminating libertarian works throughout the world, and particularly in the American colonies, and in corresponding with like-minded people. He has been studied in Caroline Robbins, “The Strenuous Whig: Thomas Hollis of Lincoln's Inn,” William and Mary Quarterly, 7 (1950). The impact of American revolutionary thought upon English radicalism has received thorough examination in Colin Bonwick's English Radicals and the American Revolution.

  The influence of French libertarian thought can be found in Howard Mumford Jones, American and French Culture, 1750–1848. Also see Jones, O Strange New World: American Culture, The Formative Years. The most recent study of the impact of French eighteenth century thought on American revolutionary developments is Henry F. May, The Enlightenment in America.

  Religion played an important role in the development of revolutionary and libertarian ideas. The great radical Massachusetts minister Jonathan Mayhew has found his biographer in Charles W. Akers, Called unto Liberty: A Life of Jonathan Mayhew, 1720–1766. The best work on the “black regiment” of Congregationalist ministers in New England is Alice M. Baldwin, The New England Clergy and the American Revolution. While scarcely definitive, Herbert M. Morais, Deism in Eighteenth Century America has produced the only work on the significant role of deism.

  Part of religion's role in generating a revolutionary spirit resulted from the general American fear of England's placing Anglican bishops in the American colonies. Arthur L. Cross has produced the classic work on this subject in The Anglican Episcopate and the American Colonies. It is now partially superseded by Carl Bridenbaugh, Mitre and Sceptre: Transatlantic Faiths, Ideas, Personalities, and Politics, 1689–1775.

  An admirable treatment of the role of the American press in revolutionary agitation is Arthur M. Schlesinger, Sr., Prelude to Independence: The Newspaper War on Britain, 1764–1776. It happily supersedes the volume by Philip G. Davidson, Propaganda and the American Revolution, 1763–1783, which was fatally marred by the Progressive view that all ideology is mere “propaganda” rhetoric.

  Michael G. Kammen studies the vital role of American colonial agents to London in A Rope of Sand: The Colonial Agents, British Policies, and the American Revolution. See also: Jack Sosin, Agents and Merchants: British Colonial Policy and the Origins of the American Revolution, 1763–1875. The letters of the most important of these agents, and a leading pro-American British Whig, are included in Ross J. S. Hoffman, ed., Edmund Burke, New York Agent, with his Letters to the New York Assembly and Intimate Correspondence with Charles O'Hara, 1761–1776.

  The best treatment of British politics in relation to the developing American resistance is Charles R. Ritcheson, British Politics and the American Revolution. Rudé discusses the Whig and radical opposition to British imperial designs and to Tory government at home in Wilkes and Liberty, mentioned earlier. Also see Eugene C. Black, The Association: British Extraparliamentary Political Organization, 1769–1793; Archibald S. Foord, His Majesty's Opposition, 1714–1830; George H. Guttridge, English Whiggism and the American Revolution; Lucy S. Sutherland, The City of London and the Opposition to Government, 1768–1774: A Study in the Rise of Metropolitan Radicalism; and Maurice R. O'Connell, Irish Politics and Social Conflict in the Age of American Revolution.

  Several recent works examine the great English Whig, the Duke of Newcastle, and his policy of “salutary neglect.” But none are satisfactory. The definitive political biography of his successor, the Marquis of Rockingham, is difficult reading. It assumes a detailed knowledge of English politics of the period; it is Ross J. S. Hoffman, The Marquis: A Study of Lord Rockingham, 1730–1782.

  The most relevant discussion of Edmund Burke's views and activities in this period is Carl B. Cone's Burke and the Nature of Politics, Vol. I. The Age of the American Revolution. Several works detail the Tory, or “Namierite,” point of view on English politics in this period, the most famous being Sir Lewis Bernstein Namier, England in the Age of the American Revolution.

  Revolutionary Accounts of Cities and States

  Boston was the heartland of the revolutionary movement, but there is no history of the Boston or even Massachusetts movement per se. Robert E. Brown, Middle-Class Democracy and the Revolution in Massachusetts, 1691–1780 is a basic work on Massachusetts in the eighteenth century. But the author's naive consensus view of colonial “democracy” badly mars the book. The Boston Massacre and Tea Party have been covered in the books cited above.

  The premier leader of the revolutionary movement, Samuel Adams, has been ill-served by historians; no satisfactory biography has been published. John C. Miller's Sam Adams: Pioneer in Propaganda is hostile and vituperative, under the influence of the Progressive “propaganda” theory. Of the numerous biographies and studies of John Adams, best for this period, though not always reliable, is Catherine Drinker Bowen, John Adams and the American Revolution. Though mired in detail, Page Smith's John Adams, 1735–1826 handles Adams's political and economic thought weakly.

  The heroic and often neglected Dr. Joseph Warren is in John Cary, Joseph Warren: Physician, Politician, Patriot. William T. Baxter studies the Hancock family, as well as the life of Boston merchants of the period, in The House of Hancock, Business in Boston, 1724–1774. For non-Boston merchants, see Benjamin W. Labaree, Patriots and Partisans: the Merchants of Newburyport, 1764–1815.

  Robert J. Taylor has written an important work on rural Massachusetts: Western Massachusetts in the Revolution. Also see Lee N. Newcomer's The Embattled Farmers: A Massachusetts Countryside in the American Revolution. A major revolutionary leader in Western Massachusetts receives a biography in E. Francis Brown, Joseph Hawley: Colonial Radical.

  The outstanding work on Connecticut in this period is Oscar Zeichner, Connecticut's Years of Controversy, 1750–1776. A sensible work on Rhode Island politics, placing the Ward and Hopkins camps as sectional factions rather than embodiments of a class struggle, is David S. Lovejoy, Rhode Island Politics and the American Revolution, 1760–1776. On the same theme, see also Mack F. Thompson, “The Ward-Hopkins Controversy and the American Revolution in Rhode Island: An Interpretation,” William and Mary Quarterly, 16 (1959).

  The classic work on New Hampshire, Richard F. Upton, Revolutionary New Hampshire, has now been supplemented by Jere R. Daniel, Experiment in Republicanism: New Hampshire Politics and the American Revolution, 1741–1794.

  Vermont was unique in that its own guerrilla rebellion against New York rule and land grants merged easily into the Revolutionary War. Frederic Van de Water, The Reluctant Republic: Vermont, 1724–1791 contains a lively account of the Green Mountain Boys and of the Vermont rebellion. John Pell's Ethan Allen, a biography of the Green Mountain Boys' great leader, has now been supplemented by Charles A. Jellison's Ethan Allen. Darlene Shapiro's “Ethan Allen: Philosopher-Theologian to a Generation of American Revolutionaries,” William and Mary Quarterly, 21 (1964), is a particularly good account of the influence of the libertarian and Deist thought of the guerrilla leader.

  Despite its age and its Beardian interpretation, Carl Lotus Becker, The History of Political Parties in the Province of New York 1760–1776 is still the best work on the political struggles in New York in the pre-Revolutionary era. Alternative interpretations can be found in Bernard Mason, The Road to Independence: The Revolutionary Movement in New York, 1773–1777, and in the later chapters of Patricia Updegraff Bonomi, A Factious People: Politics and Society in Colonial New York. However, the neo-Beardian approach to New York politics, especially in the correct stress on the continuity of the major conflicting groups in the pre- and post-Revolutionary periods, is found in the splendid work of Alfred F. Young, The Democratic Republicans of New York: The Origins, 1763–1797.

  The tenant risings in the Hudson Valley of New York are treated in the only full-scale work on the subject: Irving Mark, Agrarian Conflicts in Colonial New York, 1711–1775. This should be supplemented by the accounts in the early chapter of Bonomi, A Factious People, and in Chapter III of Staughton Lynd, Anti-Federalism in Dutchess County, New York: A Study of Democracy and Class Conflict in the Revolutionary Era. Dorothy Dillon looks at The New York Triumvirate: A Study of the Legal and Political Careers of William Livingston, John Morin Scott, William Smith, Jr.

  No works are devoted to New Jersey for this period. Donald L. Kemmerer offers the best approach in Path to Freedom: The Struggles for Self-Government in Colonial New Jersey, 1703–1776. Although missing the dimension of political and constitutional ideology, the political conflict in New Jersey after 1763 is detailed in Larry R. Gerlach, Prologue to Independence: New Jersey in the Coming of the American Revolution.

  The best work on Pennsylvania politics in this period is Theodore Thayer, Pennsylvania Politics and the Growth of Democracy, 1740–1776. No book fully replaces Charles H. Lincoln, The Revolutionary Movement in Pennsylvania, 1760–1776. Carl and Jessica Bridenbaugh have written a valuable social history in Rebels and Gentlemen: Philadelphia in the Age of Franklin. Frederick B. Tolles offers an excellent account of the leading Philadelphia merchants of the period in Meeting House and Counting House: The Quaker Merchants of Colonial Philadelphia.

  Most of the rebel leaders of Pennsylvania remain unknown and untreated by historians. An early liberal leader, John Dickinson, now has a good biography, in David L. Jacobson, John Dickinson and the Revolution in Pennsylvania, 1764–1776. The only radical leader to be the subject of a biography is an old one by Burton A. Konkle, George Bryan and the Constitution of Pennsylvania, 1731–1791. There is a good article on the vitally important Charles Thomson, John J. Zimmerman, “Charles Thomson, The Sam Adams of Philadelphia”; Mississippi Valley Historical Review, 45 (1958).

  Of the innumerable works on the opportunistic Tory Benjamin Franklin, most are adulatory and uncritical. This includes the standard account by Carl Van Doren, Benjamin Franklin. There is some good material, nevertheless, in Verner W. Crane, Benjamin Franklin and a Rising People. Most objective and illuminating on Franklin's machinations in colonial politics, is William S. Hanna, Benjamin Franklin and Pennsylvania Politics.

  There is nothing good on Delaware in this period. Here we must still fall back on the old and unsatisfactory John T. Scharf et al., History of Delaware, 1609–1888.

  For an overall account of the South in this period, John R. Alden, The South in the Revolution, 1763–1789 is excellent. Charles A. Barker covers Maryland's unique political and social structure in The Background of the Revolution in Maryland. This should be supplemented with James Haw, “Maryland Politics on the Eve of Revolution: The Provincial Controversy, 1770–1773,” Maryland Historical Magazine, 65 (1970).

  The best and most thorough history of colonial Virginia is Richard L. Morton, Colonial Virginia; and the latter chapters of Volume II deal with the Parsons' Cause and other Virginia grievances down to 1763. No one has made a specific study of Virginia in the pre-Revolutionary period. But Charles S. Syndors' Gentlemen Freeholders: Political Practices in Washington's Virginia, is an excellent study of Virginia's political and social structure in the colonial period. Robert E. and B. Katherine Brown's Virginia, 1705–1786: Democracy or Aristocracy? is an absurd attempt to apply the Browns' “democratic” model, designed for Massachusetts, to a colony where it can scarcely be relevant. Two important revisionist articles demolish the myth that Virginia's planters were exploited by being indebted to British merchants. They find this grievance was not of critical importance in the Virginia revolutionary movement. See James H. Soltow, “Scottish Traders in Virginia, 1750–1775,” Economic History Review, 21 (1959); and Emory G. Evans, “Planter Indebtedness and the Coming of the Revolution in Virginia,” William and Mary Quarterly, 19 (1962).

  On Patrick Henry see Robert D. Meade's Patrick Henry, Vol. 1. Though old, Moses Coit Tyler's Patrick Henry contains long excerpts from Henry's famous speeches. On that other great radical leader, Richard Henry Lee, see Oliver P. Chitwood's Richard Henry Lee, Statesman of the Revolution.

  As in the case of Franklin, the historiography of the conservative rebel leader George Washington suffers from uncritical adulation. Among these, the definitive biography is Douglas Southall Freeman's George Washington: A Biography. While a disorganized collection of essays, Bernhard Knollenberg's George Washington: The Virginia Period, 1732–1775 contains valuable revisionist insights.

  The literature on North Carolina is sparse, old and unsatisfactory. Robert D.W. Connor, History of North Carolina, Vol. I deals with the entire colonial and revolutionary period. Hugh T. Lefler and Albert R. Newsome, North Carolina, is a rehash.

  For South Carolina the venerable general history is Edward McCrady's The History of South Carolina Under the Royal Government, 1719–1776. The standard modern work is David D. Wallace, History of South Carolina, Vol. I. Richard Maxwell Brown has written an excellent history of the South Carolina Regulators in The South Carolina Regulators. The advance to revolution in South Carolina has now been covered in Robert M. Weir, “A Most Important Epocha”: The Coming of the Revolution in South Carolina.

  The only thorough history of the Sons of Liberty in any area is Richard Walsh, Charleston's Sons of Liberty: A Study of the Artisans, 1763–1789. Unfortunately no biographer has chronicled the great radical rebel leader, Christopher Gadsden. But Richard Walsh has collected his writings: Christopher Gadsden, Writings, 1746–1805.

  On the coming of the Revolution in Georgia, see Kenneth Coleman, The American Revolution in Georgia, 1763–1789. On the royal government of Georgia in this period, William W. Abbot's The Royal Governors of Georgia, 1754–1775, is particularly valuable.

  III.

  1775 and After

  Revolutionary Warfare

  A concise, judicious, overall summary of the military, political, social, and economic history of the American Revolution is fortunately available in John R. Alden, The American Revolution, 1775–1783.

  The most important and dramatic change in interpreting the history of the American Revolutionary War has come about very recently: the realization that the Americans won because, and insofar as, they were conducting a massive guerrilla war. They fought a “people's war” against the superior firepower and orthodox military strategy and tactics of the British imperial power. With modern guerrilla war coming into focus since the late 1960s, recent historians have begun to apply its lessons to the American Revolution, not only to the tactics of individual battles but also in basic strategic insights. For example, they realize that guerrilla war can only succeed if the great majority of the populace back the guerrillas. This was the condition during the American Revolution. The valuable military histories of the Revolution, therefore, can be grouped into two categories: those which antedated and those which have incorporated modern insights into the nature and potential of guerrilla warfare.

  Thus, the best detailed history of the military conflict, devoting keen analysis to each battle, is Christopher Ward's The War of the Revolution. Willard M. Wallace has prepared a useful and relatively brief one-volume military history: Appeal to Arms: A Military History of the American Revolution. More specifically for the standard military history of the first year of the war, see Allen French, The First Year of the American Revolution. And Arthur B. Tourtellot describes the initial battle of Lexington and Concord in William Diamond's Drum.

  None of these books, however, was written recently enough to incorporate modern insights on the importance of guerrilla as opposed to conventional war. But an important one-volume military history does so: Don Higginbotham, The War of American Independence: Military Attitudes, Policies, and Practices, 1763–1789. Two books edited by George Athan Billias are particularly important, both for guerrilla insights and for penetrating “revisionist” studies of particular generals and their strategies and tactics: George Washington's Generals and George Washington's Opponents: British Generals and Admirals in the American Revolution. Particularly important in the former volume is George A. Billias, “Horatio Gates: Professional Soldier,” about a general who used guerrilla strategy and tactics against Burgoyne, culminating at Saratoga. In the same volume, Don Higgenbotham's “Daniel Morgan: Guerrilla Fighter,” apologizes for the fact that his valuable biography of the war's greatest guerrilla tactician had been written before the advent of his own and general interest in guerrilla warfare (Higgenbotham, Daniel Morgan: Revolutionary Rifleman.) Particularly see John W. Shy, “Charles Lee: the Soldier as Radical,” in which Shy looks with favor at the outstanding military libertarian and guerrilla theorist, as well as strategist and general, of the American Revolution. Lee, who had been drummed out of his number two post of command and court-martialled unfairly by George Washington, is favorably reassessed in a biography by John R. Alden, Charles Lee: Traitor or Patriot?

  Professor Shy, who of all historians has the best grasp on the importance of guerrilla warfare in this period, brilliantly interprets the various phases of British strategy during the war (from police action to conventional war to counter-guerrilla attempts at “pacification” in the South) in his “The American Revolution: The Military Conflict Considered as A Revolutionary War,” in Kurtz and Hutson, Essays on the American Revolution. John Shy, A People Numerous and Armed: Reflections on the Military Struggle for American Independence is a collection of Shy's essays on military history, some of which contribute to a positive reevaluation of the importance of the militia in defensive warfare. R. Arthur Bowler, Logistics and the Failure of the British Army in America, 1775–1783 shows that the hostility of the local populations contributed to the failure of food supplies. This hostility was compounded by British attempts to seize the food they could not purchase.

  For the political direction of the war, see Gerald S. Brown, American Secretary: Colonial Policy of Lord George Germain. An important volume on militia and guerrilla warfare as against the orthodox deployment of the Continental army in a local area is Adrian C. Leiby, The Revolutionary War in the Hackensack Valley: The Jersey Dutch and the Neutral Ground, 1775–1783.

  On the fierce guerrilla vs. counter-guerrilla conflicts in South Carolina during the last phase of the war, see Russell F. Weigley, The Partisan War: The South Carolina Campaign of 1780–1782.

  The essay by Ira D. Gruber, “Richard Lord Howe: Admiral as Peacemaker,” in Billias, George Washington's Opponents indicates clearly that one of the major reasons for the British failure to crush Washington's army in the first two years of the war was the Howe brothers' treasonous opposition (as dedicated Whigs) to the British war effort against the Americans. On the British view of the war, see Piers Mackesy, The War for America, 1775–1783; and William B. Willcox, Portrait of a General: Sir Henry Clinton in the War of Independence on the best British general, who suffered from an inability to work well with his colleagues.

  The most recent general history of the American Revolution, Page Smith, A New Age Begins: A People's History of the American Revolution incorporates many detailed insights about guerrilla warfare from primary sources.

  Political History of the Revolution

  On the political history of the American Revolution, Edmund C. Burnett, The Continental Congress remains a thorough and definitive history of that national political institution. Merrill Jensen, The Articles of Confederation: An Interpretation of the Social-Constitutional History of the American Revolution, 1774–1781 is an excellent study of the struggles around the Articles and the attempt to carry Nationalism even further. Despite its age, Allan Nevins, The American States During and After the Revolution, 1775–1789 remains by far the best, indeed the only satisfactory, state-by-state political history of the revolutionary period. In an unfortunate attempt to replace Nevins, Jackson Turner Main, The Sovereign States, 1775–1783 is sketchy and overly schematic, while Main's Political Parties Before the Constitution is a tangled statistical web based on a fallacious and unenlightening division between alleged “localists” and “cosmopolitans.”

  Carl Lotus Becker's The Declaration of Independence: A Study in the History of Political Ideas is a well-written and valuable study of the Declaration. Curtis P. Nettels, George Washington and American Independence demonstrates Washington's early devotion to independence. Eric Foner's Tom Paine and Revolutionary America is an excellent and sympathetic study of the great sparkplug of independence as a libertarian and laissez-faire radical. None of the full-scale biographies of Paine do him justice. Best is David Freeman Hawke's Paine.

  For a valuable Beardian study of state politics during the Revolution see Elisha P. Douglass, Rebels and Democrats: The Struggle for Equal Political Rights and Majority Rule During the American Revolution. A thorough documentary history of the struggle over a Massachusetts state constitution during the war is presented in Robert J. Taylor, ed., Massachusetts, Colony to Commonwealth: Documents on the Formation of its Constitution, 1775–1789. The older view that confiscated Tory land in New York did not devolve upon the tenants of the feudal landlords is set forth in Harry B. Yoshpe's The Disposition of Loyalist Estates in the Southern District of the State of New York. Staughton Lynd refutes this view in Anti-Federalism in Dutchess County as does Beatrice G. Reubens, “Pre-Emptive Rights in the Disposition of a Confiscated Estate: Philipsburgh Manor, New York,” William and Mary Quarterly, 22 (1965).

  Pennsylvania, the most radically libertarian state during the war, is examined in Robert L. Brunhouse, The Counter-Revolution in Pennsylvania, 1776–1790. John P. Selsam deals with its radical constitution specifically in The Pennsylvania Constitution of 1776. A valuable general work on Western Pennsylvania politics in the revolutionary and post-revolutionary periods is Russell J. Ferguson, Early Western Pennsylvania Politics. Maryland is studied in Philip A. Crowl, Maryland During and After the Revolution.

  The Revolutionary Leaders

  In addition to the biographies of American revolutionary leaders mentioned above, one of the numerous Jefferson biographies stands out: the magisterial study by Dumas Malone, Jefferson and His Time, of which see here Volume I: Jefferson the Virginian. There is no wholly satisfactory biography of the great George Mason, whose Virginia Declaration of Rights inspired both the Declaration of Independence and the Bill of Rights. But Robert A. Rutland, George Mason: Reluctant Statesman provides a brief but useful account. Also see Robert A. Rutland, ed., George Mason, Papers, 1725–1792 and Helen Hill Miller, George Mason: Gentleman Revolutionary.

  The radical Pennsylvania leader, the astronomer David Rittenhouse, is studied in Brooke Hindle's David Rittenhouse. And two leading New York conservative rebels receive biographies in Frank Monaghan's John Jay, and George Dangerfield's excellent Chancellor Robert R. Livingston of New York, 1746–1831. For a biography of General Nathanael Greene, see Theodore Thayer's Nathanael Greene, Strategist of the American Revolution. A moderate Pennsylvania leader receives an important biography in Kenneth R. Roseman, Thomas Mifflin and the Politics of the American Revolution. New York's great wartime governor is studied in Ernest W. Spaulding, His Excellency George Clinton (1739–1812): Critic of the Constitution.

  Economic and Social Aspects

  On the economic and financial history of the war, E. James Ferguson, The Power of the Purse: A History of American Public Finance, 1776–1790 is a superb account of the machinations of Robert Morris and the Nationalists during and after the war, including the expropriation of public funds for private purposes by Morris and his associates, and the drive for a strong central government to consolidate and extend those and similar privileges. This should be supplemented by Ferguson's study of the first Nationalist drive, which, though failing, prefigured the later push for the Constitution: E. James Ferguson, “The Nationalists of 1781–1783 and the Economic Interpretation of the Constitution,” Journal of American History, 56 (1969). For a useful biography of Morris see Clarence L. Ver Steeg's Robert Morris; Revolutionary Financier: With an Analysis of His Earlier Career. There is no overall study of inflation during the war, but Anne Bezanson, “Inflation and Controls, Pennsylvania, 1774–1779,” Journal of Economic History Supplement, 8 (1948) is a careful statistical study

  Special groups in relation to the American Revolution are treated in Charles H. Metzger, Catholics and the American Revolution: A Study in Religious Climate and in the excellent work by Benjamin Quarles, The Negro in the American Revolution. Jesse Lemisch's rather quixotic program for writing history “from the bottom up” works in a particular case where data are fortunately available. See his article, “Jack Tar in the Streets: Merchant Seamen in the Politics of Revolutionary America,” William and Mary Quarterly, 25 (1968). Scholars have shown increased interest in recent years in the fate of Tories during the Revolution. Among the best works are William H. Nelson, The American Tory and Paul H. Smith, Loyalists and Redcoats: A Study in British Revolutionary Policy. Also see Mary Beth Norton, The British-Americans: The Loyalist Exiles in England 1774–1789; Carol Berkin, Jonathan Sewall: Odyssey of An American Loyalist; and Robert M. Calhoun, The Loyalists in Revolutionary America, 1760–1781.

  Foreign Policy

  The classic work on the foreign policy of the American revolutionaries is Samuel Flagg Bemis's The Diplomacy of the American Revolution. A far more revisionist work, treating the origins of the American Empire and focusing on internal and external policies of European states rather than on strictly diplomatic history, is Richard W. Van Alstyne's Empire and Independence; The International History of the American Revolution. The detailed work on the negotiations of the Peace of Paris is Richard B. Morris's The Peacemakers: The Great Powers and American Independence. But Cecil B. Currey, Code Number 72/ Ben Franklin: Patriot or Spy? provides a fascinating corrective. Currey not only demonstrates Franklin's participation in Robert Morris's peculations during his ministry in Paris; he also offers newly discovered evidence of Franklin's probable role as a double agent on behalf of Great Britain. Currey describes Franklin's shift to a pro-French role during the peace negotiations, as well as the well-founded distrust of Franklin by Arthur Lee, John Adams and John Jay.

  Meaning and Consequences of the Revolution

  There is no space here to deal with the numerous works on the nature and consequences of the American Revolution, or on the vitally important topic of the relationship between the Revolution and the Constitution. Here we will mention Gordon S. Wood's careful and important study of the way in which libertarian ideology was conservatized during and especially after the Revolution: The Creation of the American Republic, 1776–1787. Richard B. Morris has many judicious insights in his The American Revolution Reconsidered. He treats the American Revolution more fully as the first war of national liberation and independence from European colonialism in his The Emerging Nations and the American Revolution. Also see Richard L. Park and Richard D. Lambert, eds., The American Revolution Abroad.

  Perhaps the most important controversy was on how radical and how revolutionary were the nature and consequences of the American Revolution. We have seen Robert R. Palmer's challenge to the consensus view in his monumental The Age of the Democratic Revolution. J. Franklin Jameson produced the classic Beardian view on the social radicalism of the American Revolution in The American Revolution Considered as a Social Movement. This thesis was attacked and seemingly refuted during the Consensus period of American historiography, particularly by Frederick B. Tolles, “The American Revolution Considered as a Social Movement: A Reevaluation,” American Historical Review, 55 (1954–1955); and by Clarence Ver Steeg, “The American Revolution Considered as an Economic Movement,” Huntington Library Quarterly, 20 (1957). But Robert A. Nisbet, in a brilliant article, has now rehabilitated the thesis of the American Revolution as having radical consequences, not in a Beardian, but in a libertarian direction. In his The Social Impact of the Revolution, Nisbet shows that the Revolution had a radical libertarian impact on American society: in abolishing feudal land tenure, in establishing religious freedom, and in beginning the process of the abolition of slavery. Thus, to Bailyn's insight on the libertarian sources of the Revolution, Nisbet adds his conclusion on its libertarian consequences.

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  • Taylor, Robert J. Western Massachusetts in the Revolution. Providence, Rhode Island: Brown University, 1954.
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  • Thayer, Theodore. Pennsylvania Politics and the Growth of Democracy, 1740–1776. Harrisburg: Pennsylvania Historical & Museum Commission, 1953.
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  • ———. Meeting House and Counting House: the Quaker Merchants of Colonial Philadelphia. Chapel Hill: University of North Carolina Press, 1948.
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• Back to Top

  9: The Negro Revolution

  Ralph Raico, New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981). Chapter: MURRAY N. ROTHBARD, The Negro Revolution

  Accessed from oll.libertyfund.org/title/2136/195367 on 2009-05-21

  The copyright to this publication is held by Liberty Fund, Inc. The New Individualist Review is prohibited for use in any publication, journal, or periodical without written consent of J. M. Cobb, J. M. S. Powell, or David Levy.

  ---

  The Negro Revolution

  MURRAY N. ROTHBARD*

  DESPITE INCREASING USE of the term, it is doubtful that most Americans have come to recognize the Negro crisis as a revolution, possessed of all the typical characteristics and stigmata of a revolutionary movement and a revolutionary situation. Undoubtedly, Americans, when they think of “revolution,” only visualize some single dramatic act, as if they would wake up one day to find an armed mob storming the Capitol. Yet this is rarely the way revolutions occur. Revolution does not mean that some sinister little group sit around plotting “overthrow of the government by force and violence,” and then one day take up their machine guns and make the attempt. This kind of romantic adventurism has little to do with genuine revolution.

  Revolution, in the first place, is not a single, isolated event, to be looked at as a static phenomenon. It is a dynamic, open-ended process. One of its chief characteristics, indeed, is the rapidity and acceleration of social change. Ordinarily, the tempo of social and political change is slow, meandering, inconsequential: in short, the typical orderly America of the political science textbooks. But, in a revolution, the tempo of change suddenly speeds up enormously; and this means change in all relevant variables: in the ideas governing the revolutionary movement, in its growth and in the character of its leadership, and in its impact on the rest of society. Another crucial aspect of Revolution is its sudden stress on mass action. In America, social and political action has taken place for a long while in smoke-filled rooms of political parties, in quiet behind-the-scenes talks of lobbyists, Congressmen, and executive officials, and in the sober, drawn-out processes of the courts. Outside of football games, the very concept of mass action has been virtually unknown in the United States. But all this has been changed with the onset, this year, of the Negro Revolution.

  As in the case of most revolutions, the Negro Revolution began with a change in the ruling values and ideas of American intellectuals. At the turn of the century, and through the 1920’s, most American intellectuals were fundamentally “racist,” i.e., they upheld two guiding postulates: (1) that the white race in general, and the Anglo-Saxon wing of that race in particular, are inherently superior, intellectually and morally, to other races and ethnic groups, and particularly the brown and black races; and (2) that therefore the superior races had the right and perhaps even the duty to exercise political power over the inferior. Although (2) does not at all follow from (1), few people, whether pro- or anti-racist, have seen that this political conclusion is a non sequitur.

  In the 1930’s and 1940’s, an enormous change occurred among American intellectuals on the race question. Influenced partly by the racist excesses of Hitler and the atmosphere of World War II, American intellectuals, during the 1930’s and ’40’s, swung around to almost the opposite position. In their anxiety to preclude a racist brand of statism, the intellectuals adopted the opposite brand of egalitarianism. Their two new guiding postulates became: (1) all races and ethnic groups are intellectually and morally equal or identical, and (2) that therefore no one should be allowed to treat anyone else as if they were not equal, i.e., that the State should be used to compel absolute equality of treatment among the races. Here again, few people noticed that another non sequitur was being employed.

  It should be noted that this shift is by no means identical to the well-known shift (sometimes attributed by conservatives to a Fabian “conspiracy”) of intellectuals from laissez-faire liberalism to interventionism and socialism. That shift occurred decades earlier, and the racist postulates were as common among American socialists and progressives as among conservatives. This shift by intellectuals from racism to egalitarianism then began to filter down, inevitably, to the rest of the population. And this had two crucial effects: it inspired the Negroes to begin to struggle, at long last, for their rights as they saw them; and it disarmed the whites from offering any effective opposition to such a change.

  NOW THE PATTERN of racism in America, of course, has been political and therefore enforced by police power in the South; voluntary and therefore much looser in the North. The focus of the Negro movement thus had to be the South And even though the Negroes are a submerged minority in the South, the growth of education and therefore receptivity to intellectual influences, has led the white majority to agree that the Negroes are right, that morality, at least, is on the side of the Negro people. Here we have the indispensable condition for success of a minority revolution; for even though Negroes are a minority in this country, general white agreement on the righteousness of the Negro cause has provided the framework for majority support.

  The first step, then, was an ideological conversion of the intellectuals and then the bulk of the people; the second was the stirring of the Negroes themselves against segregation and for egalitarian goals. Since the outstanding racist center is the South, the drive began there, and proceeded in the most “moderate,” non-revolutionary way possible: through the orderly, staid processes of the government and its courts. This was the way of the oldest and by far the most conservative of the leading Negro organizations, the NAACP. Financed largely by wealthy whites, the NAACP’s technique was to employ the power of the Federal Government—its courts and hopefully its legislature, to change conditions in the South. That the NAACP is moderate and non-revolutionary, incidentally, does not mean that it is less statist than more radical Negro groups. On the contrary, the hallmark of the NAACP technique has been to use the “courts instead of the streets,” i.e., to confine the Negro movement to State processes, instead of direct action by the masses. It is precisely action outside and against the State apparatus that forms the hallmark of a social revolution.

  The NAACP went ahead, slowly and gradually, and its use of the Federal arm bore fruit; but the processes of gradualism and legalism, typified by the snail’s pace of school desegregation years after the Supreme Court’s decision in Brown v. Board of Education, began to make the Negroes restive, and understandably so. If they were indeed right, as almost everyone up to the Supreme Court was proclaiming, why shouldn’t right prevail quickly, even immediately? How long were the Negroes to wait for what nearly everyone, since the previous “revolution” in values, now conceded was their right and due?

  There then began among the Negroes a series of sporadic, isolated, uncoordinated actions: beginning with the Montgomery bus boycott in 1955, and continuing with sit-ins, Freedom Rides, etc. The significant points about this third phase of the Negro movement are: (1) that they were direct mass actions, actions “in the streets,” voluntary actions by Negroes themselves, casting off dependence on the quiet and seemingly peaceful operations of the State; and (2) as such, they quickly went beyond the established NAACP framework. Because the NAACP was not geared for this type of revolutionary action, new, far more radical organizations began to replace the NAACP in the leadership of the demonstrations. As in the French Revolution, each succeeding wave of organizations able to capture the leadership of this dynamic movement is more radical than the one before: has to be, in order to gain and keep that leadership. And, as the process accelerates, each succeeding organization takes the risk of being tagged with that chilling label “Uncle Tom,” apologist for white domination. And, therefore, the older organizations, in this fierce inter-group competition for the loyalty and leadership of the increasingly radicalized Negro masses, themselves become more radical or claim to; thus the NAACP, until recently an opponent of mass demonstrations, now must take a stand in favor of them—or lose all standing in the Negro community.

  The Reverend Martin Luther King brought to the Negro movement the truly revolutionary concept of non-violent mass action. The Gandhian concept of non-violent action had several advantages for the Negro movement, especially in that relatively early stage. For one thing, it imbued the movement with the prestige of a “philosophy,” however shaky much of the philosophy was; it was able to make use of the common Christianity of the country to appeal to the great Christian tradition of nonviolence; it placed a great moral advantage in the hands of the non-violent demonstrators as against their armed opponents; and, finally, it was the most practical course for an oppressed, unarmed minority facing the armed brutality of the Southern police. Probably, the most important of these advantages is the moral: for, nothing could be more potent in mobilizing support throughout the country, among Negroes and whites, than the news or pictures of unarmed and helpless Negroes beaten or clubbed by armed whites. And this despite the philosophical fuzziness of the King concept of “non-violence;” for mass invasion of private restaurants, or mass blocking of street entrances is, in the deepest sense, also violence. But, in the generally statist atmosphere of our age, violence against property is not considered “violence;” this label goes only to the more obvious violence against persons.

  AS MORE AND MORE Negroes participated in mass action, the ideology and especially the tactics of the Negroes became increasingly radical and militant. But in the main the King type of strategy prevailed. As this process grew, however, and as the non-violent strategy met defeats as in Albany, Georgia, a new and far different voice began to emerge—with a far different strategy. This newest and most revolutionary movement, as yet still waiting in the wings, is typified, in their different ways, by Robert F. Williams and by the Black Muslims. Essentially, men like Williams and the Muslims asked of the Kings a very intelligent question: why must only the Negroes exercise non-violence? Why may the white oppressors, whether in the form of Ku Klux Klan-type mobs or as armed police, be armed and violent, while only the Negroes must remain meek and disarmed? Why not preach non-violence to the whites for a change? In short, these radicals asserted the perfectly incontrovertible thesis: everyone has the right to defend himself against violence with violence; and therefore the Negroes have the right to defend themselves with violence agains armed attacks. The views of Williams and the Muslims have generally been distorted in the press as advocating aggressive violence against whites; but they have been quite clear that they would only use violence defensively (although they, too, of course, would not consider such acts as sit-ins to be “violence”).

  The leading white advocate of this extreme left, Truman Nelson, cites as reflecting his views the following quote from William Lloyd Garrison’s review of Uncle Tom’s Cabin:

  That all slaves of the South ought to repudiate all carnal weapons, shed no blood, be obedient to their masters, wait for peaceful deliverance and abstain for all insurrectionary movements is everywhere taken for granted, because the victims are black! . . . . They are required by the Bible to put away all wrath, to submit to every conceivable outrage without resistance. None of their advocates may seek to inspire them to imitate the example of the Greeks, the Poles, the Hungarians, our revolutionary sires, for such teaching would evince a most un-Christian and blood-thirsty disposition. But for those whose skin is of a different complexion, the case is materially altered. Talk not to the whites of peacefully submitting, of overcoming evil with good when they are spit upon and buffeted, outraged and oppressed. . . . Oh no, for them it is, let the blood of the tyrants flow! Is there one law of submission for the black man and another law of rebellion and conflict for the white man?1

  Against whom would this militant revolutionary wing direct its defensive violence? Not, to be sure, against such private citizens as store-keepers or owners of golf courses; their rights are already invaded, in a “non-violent” manner, by the established Negro “Center.” The proposed revolutionary violence would be directed against two groups: (a) white armed mobs, of the Ku Klux Klan variety, and (b) the armed forces of (white) governments, specifically the Southern police.

  By the spring of 1963, the “Negro liberation movement” had grown steadily, in numbers and intensity, with the dominant motif one of disciplined non-violence, but with advocates of defensive violence gaining in strength around the fringes. But the movement, though developing, was not yet a revolutionary one in the truest sense; its mass demonstrations were still sporadic, limited, and largely confined to a majority of students and other dedicated groups.

  IT IS POSSIBLE to pinpoint the time and place when the Negro movement became a revolution: the time, May, 1963, the place, Birmingham, Alabama. In the Birmingham struggle, the stories and pictures of masses of women and small children non-violently refusing “to be moved,” and being set upon by fire hoses and police dogs, galvanized the Negro cause throughout the country. This spectacle provided the spark for an amazingly rapid and thorough-going radicalization of the Negro masses. Since that date, the Negro masses throughout the country have become revolutionized, are willing and even eager to demonstrate, sit-down, even fill the jails, and, in some cases, to fight back violently. Not only are the Negro masses eager to join in the fight, but they have since Birmingham exhibited a remarkable alienation and thoroughgoing disgust that is essential to the flourishing of any revolutionary movement. James Baldwin’s words which so shocked Robert Kennedy, that the Negroes will not fight for “their” country against, e.g. Cuba, as long as they do not receive their full rights, typifies this growing, radical alienation.

  But the Birmingham crisis-point needs to be analyzed in more detail. For the Birmingham struggle took place in two phases: the first phase, of the non-violent children, was on behalf of desegregation, and also compulsory integration of restaurants and forced hiring of Negroes in various jobs. This phase ended with the negotiated agreement of May 10. In retaliation for the Negroes’ success, white gangs resorted to violence: to the bombing of a leading Negro motel and the house of the Rev. King’s brother. It was this act that provoked an entirely different set of Negroes to action: to committing retaliatory violence on the night of May 11-12. These were not the sober, church-going, lower middle-class Negroes committed to the Rev. King and non-violence. These were the poorest strata of the Negro workers, the economically submerged who help to form that group which suffers from unemployment at a depression-rate, a rate twice the average for American workers as a whole. Interestingly and significantly enough, their aim was not compulsory integration, nor was their particular target the white employer or restaurant-owner. No, it was the police.

  A reporter for the New York Post described these militants:

  They were not the fresh-faced youngsters who paraded so solemnly for justice last week.

  They were not those parents who stood proudly by as they saw their children off to jail.

  No, instead they are Birmingham’s dispossessed, and the truth is that they will remain non-privileged even when the new day dawns. . . . They will not benefit from Birmingham’s new deal because they will never be qualified, or acceptable, for jobs as clerks or salesmen.

  They have known only two kinds of white men—the boss and the cop. The boss is none too good. . . . But the cop is much worse. The cop accosts them at any hour and arrests them on any pretext.

  In every town there’s gossip of what cops do in the back room. There was no need for a backroom in Birmingham. The cops often beat Negroes senseless in full public view on the street. . . .

  They had always cowered before the cops and held back their hatred—to protect their skulls. But suddenly, without forewarning, for they had been in no church rallies and ridden in no freedom rides, they saw Negroes defying the hated cop.

  So, the non-privileged decided to make it a fight of their own. . . .2

  Demonstrating Negroes have taken to a favorite chant: “What do we want? Freedom! When do we want it? Now!” An admirable sentiment, but “freedom,” at best a word of fuzzy meaning in recent decades, is a vague portmanteau, and hopelessly ambiguous word as used by the Negro movement. To some groups it means desegregation, to others compulsory integration, to yet others a racial quota system in all jobs, to still others, as we have seen, the ousting of the Southern police and the Southern sheriff from arbitrary rule over Negro citizens (and whites as well). And to still more radical groups, as we shall see, it means a “Negro nation” in the Black Belt of the South. But the very vagueness of the term adds fuel to the dynamics of the revolution. For it makes the goals of the Negroes open-ended, distant, ever-receding into the future. In short, the very fuzziness of the goal permits the Negroes to accelerate and increase their own demands without limit regardless of how many demands are met. No movement with strictly limited goals can ever become revolutionary; it is the very sweep and vagueness of the demands that make the movement insatiable, and hence ever-open to rapid growth.

  ONCE THE REVOLUTIONARY crisis-point is passed, the revolution becomes almost unbeatable, because: (1) if the white governments yield to the stated demands, this adds fuel to the revolutionary movement and induces them to increase their demands; but (2) if savagely repressive measures are taken, as at Birmingham, this will make martyrs out of the Negro victims, multiply their revolutionary fervor, and greatly intensify support of the revolution throughout the country, among white and Negro alike. Indeed, it was this treatment, as we have seen, that made the Negro cause a revolution. In short, the governments are now damned if they do and damned if they don’t. With the Negro movement now in a revolutionary situation, it seems therefore impossible for the governments to stop or defeat it.

  This does not mean, however, that the Negro Revolution will inevitably be victorious. There are two ways by which it might be crippled and defeated. First, the retaliatory creation of a white counter-revolutionary mass movement, equally determined and militant. In short, by the re-creation of the kind of Ku Klux Klan that smashed Reconstruction and the Negro movement in the late 19th century. Since whites are in the majority, they have the capacity to do this if they have the will. But the will, in my opinion, is gone; this is not the 19th century, nor even the 1920’s. White opinion, as we have seen, has drastically shifted from racism to egalitarianism; even the Southern whites, particularly the educated leadership, concede the broad merit of the Negro cause; and, finally, mob action no longer has respectability in our society. There have been attempts, to be sure, at mass counter-revolutionary white action: the Ku Klux leader in Georgia told a rally that “we must fight poison with poison,” armed conflict between white and Negro mobs has broken out in Cambridge, Maryland, and white hoodlums have repeatedly assaulted Negro pickets in the Bronx. But all this is a feeble replica of the kind of white action that would be necessary to defeat the revolution; and it seems almost impossible for action to be generated on the required scale.

  There is a second, and far more subtle, method by which the Negro Revolution might be tamed and eventually crippled: through a “sellout” by the Negro leadership itself. It has happened time and again in the history of unsuccessful revolts that the masses, after having been indoctrinated and radicalized by their leadership, are then betrayed by the leadership itself, and left floundering and inchoate, finally to collapse from lack of direction or guidance. Betrayals occur for a variety of reasons, but usually from a combination of venality and timorousness; and because it is much easier for counter-revolutionaries to put pressure on the leadership, the few who stand out from the crowd, than on the broad base of the masses themselves.

  There are very strong indications that this betrayal-process has already begun; for so radicalized were the Negro masses by the events of May that they have now outstripped almost all of the Negro leadership, even those considered the “crackpot” fringe only a year ago. In particular, we are seeing more and more the openly expressed fear on the part of all the established Negro organizations that the Negro masses will get out of hand, will pass beyond the safe-and-sane limits desired by the leadership, and begin to “resort to violence” against the government. Desperately fearful of violence and hence of genuine militancy, all these established organizations, from NAACP to CORE to SNCC, have banded together in the Council for United Civil Rights Leadership, heavily financed by equally fearful white Liberals, to keep the Negro masses “under control.”

  Of course, the Negro Establishment will not be able to dump their own revolution quickly and abruptly, else they would be totally repudiated by their followers. The strategy, on the contrary, appears to be as follows: to pressure for the “safe-and-sane” course of Federal intervention and civil rights bills, and, with the plum of this concession to the Negro masses, to keep the damper down on mass demonstrations.

  The following quotes indicate the dimensions of this attempt to cripple the revolution and channel it into “safe,” orderly statist directions:

  Administration and Negro leaders view the passage this year of the Kennedy civil rights bill, with the “public accommodations” section relatively intact, as absolutely essential to keep the fire under control.

  “If we don’t get the public accommodations section, the Negroes won’t talk to us any more,” said one important Administration figure. “If we can’t talk to them, advise them, there’s no telling what might happen.”3

  Why are white religious, business and civic leaders so anxious to deal with men like [the leaders of the Council for United Civil Rights Leadership]. . . . “You should see what’s waiting in the wings to take over, if these non-violent people fail,” said one influential white private citizen. . . .4

  It seems clear, furthermore, that President Kennedy’s sudden decision for allout action on civil rights legislation and his intervention in general were caused precisely by the new revolutionary mood of the Negro people. It was immediately after the Negro violence of the night of May 11-12, that the President decided to send Federal troops to Alabama—causing Malcolm X, articulate young spokesman for the radical Black Muslims, to comment acidly that Kennedy only intervened after the onset of Negro violence. Nothing had been done by the Federal government, he added, when white (government) violence had been rampant in Birmingham.

  OUR PROGNOSIS FOR the Negro problem in this country depends on whether or not the Establishment strategy for curbing and containing the Negro Revolution will succeed. Success for this strategy depends upon two factors: (a) whether Congress will pass a “tough” civil rights bill this year, and (b) whether the Negro masses will find a leadership willing at least to keep up with the radical temper of the masses or even to go beyond it. If Congress does pass the civil rights bill, and no popular radical leaders emerge among the Negroes, then it is fairly certain that the Negro Revolution will be curbed, will be satisfied with limited concessions, and will finally simmer down or perhaps fizzle out. But if, on the other hand, the civil rights bill is stopped by a filibuster, and a popular radical leadership comes to the fore, then a full-scale Negro Revolution seems inevitable. Should one of the conditions hold and not the other, then the outcome becomes doubtful.

  As to the second condition for the continuation of the Revolution, it is rare that a revolution has succeeded without truly radical leaders to constitute a vanguard. But as yet, the Negro Revolution has not found its Lenin, its Castro, or its Hitler. Who are the “extremist” groups “waiting in the wings”? So far, they consist largely of the followers of Robert F. Williams and the Black Muslims, with smaller groupings around the Trotskyites and the Maoist “Hammer and Steel.” There are also new and so far small groups of militants such as the Uhuru and GOAL movements in Detroit.

  The Black Muslims have a substantial following, but largely limited to the poorer working class in the Northern cities. The Muslims are a highly interesting movement, which received favorable publicity years ago in the ultra-right-wing Right magazine. The Muslims have a far more libertarian program than the other Negro organizations, opposed to compulsory integration. Indeed, as a Negro nationalist movement, they favor voluntary segregation of the races, preferably in a Negro nation in the “Black Belt” of the South, or in a Negro return to Africa. The Muslims have also been able, paradoxically, to do a remarkable job in instilling the “Protestant ethic” into the most criminal groups of the Negro population. The Muslims, however, have not been able to attract any Negro support in the South; and, at the most, its Muslim religion would limit its mass base. Malcolm X will never be the “Lenin” of the Negro Revolution; at the most, the Muslims could be a co-operating but subsidiary organization in such a struggle.

  Robert F. Williams had a substantial following in the South, but he fled to Cuba after being charged with kidnapping, and it is doubtful if he commands any organizational support at present. William Worthy is emphatically on the left of the Negro movement, but again, he is an independent journalist without an organizational base.

  The fact that no over-riding leaders are in sight, however, does not mean that they will not emerge. For one of the main characteristics of a revolutionary situation is that change is unprecedentedly swift. As long as the situation continues to be revolutionary, a prominent radical leader and organization could emerge out of the blue in a matter of months.

  Suppose that the Establishment strategy fails, and the Negro Revolution succeeds, what form might we expect it to take? Here again, prognosis is risky, but we might expect several developments. In the first place, there seems no doubt that a revolutionary leadership would be generally “leftist,” i.e., for some form of socialism at home, and opposed to the Cold War foreign policies of the United States. We can infer this from the fact that the current radical leadership, each in its separate way, has a strong tendency to identify “white oppression” at home with “white American imperialism” abroad, especially against the “colored countries” of Asia and Africa.

  As an example of this trend of thought, we may take the Negro journalist William Worthy. In a speech in Harlem on June 1, Worthy called for a Negro “third party” in America (toward which the Muslims and others are also sympathetic) to “co-ordinate . . . unsung local heroes into one gigantic effective national movement.” A Negro party, added Worthy, would wield the political balance of power, and upset the entire “white power structure” of the country. It would also “change the nuclear-racistcolonialist course of American history, and thereby the destiny of the entire world.”

  A revolutionary Negro leadership would concentrate, as we have indicated, far more on direct opposition to all levels of government, especially the local police. That this would be true North as well as South is seen by the recent prominence of new, militant groups in protesting police brutality in Detroit. Protesting the killing of an alleged Negro prostitute by a white policeman, were none of the established organizations; only radical groups participated, including the Black Muslims, Uhuru and GOAL.

  Another factor has already served to radicalize all sectors of the Negro movement. More and more reference appears, in the Negro literature, to the “white power structure;” Negroes were highly impressed with the fact that negotiations in Birmingham were conducted, not so much with the elected public officials, as with the leading businessmen of the community. This has caused many Negroes, of varying political stripe, to adopt the radical view that the “real rulers” of government are not the elected officials, but the big businessmen of the community or, in the final analysis, of the country. We can expect that many of them will draw Marxist conclusions from this premise; and the Marxists near and among the radical Negro groups will do their best to see to it that these conclusions are drawn.

  Many conservatives are irretrievably convinced that the Communists are somehow “behind” the whole Negro Revolution. Paradoxically, however, in the spectrum of Negro organizations that we have outlined, the Communist Party can best be described as “moderately left of center.” Their main idol is the Rev. Martin Luther King, and they wax almost as hysterical over the possibility of Negro violence as do the most determined racists. Anyone considering this far-fetched is invited to turn to a lengthy article by the Negro editor of The Worker, James E. Jackson, on the Negro question. Jackson devotes a large part of his article to a savagely vituperative attack on the Black Muslims, calling them “ultra-reactionary forces . . . with the strategic assignment to sow ideological confusion . . . a leach on the Negro freedom movement—sucking its blood. . . .” Jackson is particularly bitter that Malcolm X dared to attack the Rev. King as an “Uncle Tom.” Jackson even goes on to denounce militant, revolutionary Negroes in general as self-glorifiers and ignorant egotists. The radical Liberator magazine is denounced for daring to criticize the Rev. King, and even Robert F. Williams is bitterly attacked for his “utterly irresponsible attacks upon . . . Negro leaders and their allies. . . .”5

  In denouncing the Muslim proposal for a Black nation in the South, James Jackson carefully refrained from pointing out that this was the Communist Party line several decades ago. Still holding to this program, however, is perhaps the “furthest out” and most radical of all the revolutionary organizations in and around the Negro Left: Hammer and Steel. A Maoist splinter group of men formerly in the Communist Party, Hammer and Steel considers the Negro movement to be a “national liberation movement,” which “must be prepared to answer violence with greater violence directed at Wall Street and their agents.” Non-violence might have worked against relatively civilized Britain, says Hammer and Steel, but could not work against “brutal and genocidal” American imperialism. To have true civil rights, the “Negro nation” must have its “freedom” and self-determination in the South, and “special rights” must be granted the Negro minority in the North and West. “A Free Negro nation will determine whether its best interest lie [sic] in separation or as an autonomous part of the U. S.” As for the best means of attaining this goal, Hammer and Steel envisages a “national liberation front” in the South similar to the fronts in Viet Nam and Algeria. Hammer and Steel ends its discussion with a series of slogans for our time: “Disarm the White Oppressors in the South!”, “Arms for the Negro People!”, and “Self-Determination, State Power for the Negro Nation!”6

  TO PASS BRIEFLY from the analytical to the evaluative, what should be the libertarian position on the Negro movement? Perhaps the most important point to make here is that the issue is a complex one; the Negro Revolution has some elements that a libertarian must favor, others that he must oppose. Thus, the libertarian opposes compulsory segregation and police brutality, but also opposes compulsory integration and such absurdities as ethnic quota systems in jobs. The ethnic quota is no less objectionable than Hitler’s numerus clausus; if 25% of bricklayers must be Negro, must not the proportion of Jewish doctors be forcibly reduced to 3%? Must every occupation in the land have its precise quota of Armenians, Greeks, Montenegrans, etc. ad infinitum?

  For his over-all estimate of the Negro movement, the libertarian must weigh and formulate his conclusions according to what he believes to be the most important priorities. In doing so, incidentally, he should not overlook a generally neglected point: some Negroes are beginning to see that the heavy incidence of unemployment among Negro workers is partially caused by union restrictionism keeping Negroes (as well as numerous whites) out of many fields of employment. If the Negro Revolution shall have as one of its consequences the destruction of the restrictive union movement in this country, this, at least, will be a welcome boon.

  [* ] Murray N. Rothbard, a consulting economist in New York City, is the author of several books on economic subjects: Man, Economy and State (2 vols.), The Panic of 1819, and, most recently. The Great Depression.

  [1 ] Quoted in Robert F. Williams, Negroes with Guns (New York: Marzani and Munsell, 1962), p. 22.

  [2 ]New York Post, May 13, 1963.

  [3 ]New York Daily News, July 26, 1963.

  [4 ]New York Daily News, July 25, 1963.

  [5 ] James E. Jackson, “A Fighting People Forging New Unity,” The Worker, July 7, 1963.

  [6 ]Hammer and Steel Newsletter, June, 1963.

• Back to Top

  10: New Light on the Prehistory of the Austrian School

  Edwin G. Dolan, The Foundations of Modern Austrian Economics, ed. with an Introduction by Edwin G. Dolan (Kansas City: Sheed and Ward, 1976). Chapter: Murray N. Rothbard, New Light on the Prehistory of the Austrian School

  Accessed from oll.libertyfund.org/title/104/23593 on 2009-05-21

  This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.

  ---

  New Light on the Prehistory of the Austrian School

  Murray N. Rothbard

  The most notable development in the historiography of the Austrian school in the post-World War II era has been the drastic reevaluation of what might be called its prehistory and, as a corollary, a fundamental reconsideration of the history of economic thought itself. This reevaluation may be summarized by briefly outlining the orthodox prewar paradigm of the development of economic thought before the advent of the Austrian school. The Scholastic philosophers were brusquely dismissed as medieval thinkers who totally failed to understand the market, and who believed on religious grounds that the just price was one that covered either the cost of production or the quantity of labor embodied in a product. After briefly outlining the bullionist and antibullionist discussion among the English mercantilists and lightly touching on a few French and Italian economists of the eighteenth century, the historian of economic thought pointed with a flourish to Adam Smith and David Ricardo as the founders of economic science. After some backing and filling in the mid-nineteenth century, marginalism, including the Austrian school, arrived in another great burst in the 1870s. Apart from the occasional mention of one or two English precursors of the Austrians, such as Samuel Bailey in the early nineteenth century, this completed the basic picture. Typical was the encyclopedic text of Lewis Haney: the Scholastics were described as medieval, dismissed as hostile to trade, and declared believers in the labor and cost-of-production theories of the just price.1 It is no wonder that in his famous phrase, R. H. Tawney could call Karl Marx “the last of the Schoolmen.”2

  The remarkably contrasting new view of the history of economic thought burst upon the scene in 1954 in the monumental, though unfinished, work of Joseph Schumpeter.3 Far from mystical dunderheads who should be skipped over to get to the mercantilists, the Scholastic philosophers were seen as remarkable and prescient economists, developing a system very close to the Austrian and subjective-utility approach. This was particularly true of the previously neglected Spanish and Italian Scholastics of the sixteenth and seventeenth centuries. Virtually the only missing ingredient in their value theory was the marginal concept. From them filiations proceeded to the later French and Italian economists. In the Schumpeterian view, the English mercantilists were half-baked, polemical pamphleteers rather than essential milestones on the road to Adam Smith and the founding of economic science. In fact, the new view saw Smith and Ricardo, not as founding the science of economics, but as shunting economics onto a tragically wrong track, which it took the Austrians and other marginalists to make right. Until then, only the neglected anti-Ricardian writers kept the tradition alive. As we shall see, other historians, such as Emil Kauder, further demonstrated the Aristotelian (and hence Scholastic) roots of the Austrians amidst the diverse variants of the marginalist school. The picture is almost the reverse of the earlier orthodoxy.

  It is not the purpose of this paper to dwell on Schumpeter’s deservedly well-known work, but rather to assess the contributions of writers who carried the Schumpeterian vision still further and who remain neglected by most economists, possibly from a failure to match Schumpeter in constructing a general treatise. The best development of the new history must be sought in fugitive articles and brief pamphlets and monographs.

  The other relatively neglected contributions began contemporaneously with Schumpeter. One of the most important, and probably the most neglected, was The School of Salamanca by Marjorie Grice-Hutchinson, who suffered in the economics profession from being a professor of Spanish literature. Moreover, the book bore the burden of a misleadingly narrow subtitle: Readings in Spanish Monetary Theory.4 In fact, the book was a brilliant discovery of the pre-Austrian subjective-value-and-utility views of the late sixteenth-century Spanish Scholastics. But first Grice-Hutchinson showed that the works of even earlier Scholastics as far back as Aristotle contained a subjective-value analysis based on consumer wants alongside the competing objective conception of the just price based on labor and costs. In the early Middle Ages, Saint Augustine (354–430) developed the concept of the subjective-value scales of each individual. By the High Middle Ages, the Scholastic philosophers had largely abandoned the cost-of-production theory to adopt the view that the market’s reflection of consumer demand really sets the just price. This was particularly true of Jean Buridan (1300–58), Henry of Ghent (1217–93), and Richard of Middleton (1249–1306). As Grice-Hutchinson observed:

  Medieval writers viewed the poor man as consumer rather than producer. A cost-of-production theory would have given merchants an excuse for over-charging on the pretext of covering their expenses, and it was thought fairer to rely on the impersonal forces of the market which reflected the judgment of the whole community, or, to use the medieval phrase, the “common estimation.” At any rate, it would seem that the phenomena of exchange came increasingly to be explained in psychological terms.5

  Even Henry of Langenstein (1325–83), who of all the Scholastics was the most hostile to the free market and advocated government fixing of the just price on the basis of status and cost, developed the subjective factor of utility as well as scarcity in his analysis of price. But it was the sixteenth-century Spanish Scholastics who developed the purely subjective and profree-market theory of value. Thus, Luis Saravia de la Calle (c. 1544) denied any role to cost in the determination of price; instead the market price, which is the just price, is determined by the forces of supply and demand, which in turn are the result of the common estimation of consumers on the market. Saravia wrote that, “excluding all deceit and malice, the just price of a thing is the price which it commonly fetches at the time and place of the deal.” He went on to point out that the price of a thing will change in accordance with its abundance or scarcity. He proceeded to attack the cost-of-production theory of just price:

  Those who measure the just price by the labour, costs, and risk incurred by the person who deals in the merchandise or produces it, or by the cost of transport or the expense of travelling . . . or by what he has to pay the factors for their industry, risk, and labour, are greatly in error, and still more so are those who allow a certain profit of a fifth or a tenth. For the just price arises from the abundance or scarcity of goods, merchants, and money . . . and not from costs, labour, and risk. If we had to consider labour and risk in order to assess the just price, no merchant would ever suffer loss, nor would abundance or scarcity of goods and money enter into the question. Prices are not commonly fixed on the basis of costs. Why should a bale of linen brought overland from Brittany at great expense be worth more than one which is transported cheaply by sea? . . . Why should a book written out by hand be worth more than one which is printed, when the latter is better though it costs less to produce? . . . The just price is found not by counting the cost but by the common estimation.6

  Similarly the Spanish Scholastic Diego de Covarrubias y Leiva (1512–77) a distinguished expert on Roman law and a theologian at the University of Salamanca, wrote that the “value of an article” depends “on the estimation of men, even if that estimation be foolish.” Wheat is more expensive in the Indies than in Spain “because men esteem it more highly, though the nature of the wheat is the same in both places.” The just price should be considered not at all with reference to its original or labor cost but only with reference to the common market value where the good is sold, a value, Covarrubias pointed out, that will fall when buyers are few and goods are abundant and that will rise under opposite conditions.7

  The Spanish Scholastic Francisco Garcia (d. 1659) engaged in a remarkably sophisticated analysis of the determinants of value and utility. The valuation of goods, Garcia pointed out, depends on several factors. One is the abundance or scarcity of the supply of goods, the former causing a lower estimation and the latter an increase. A second is whether buyers or sellers are few or many. Another is whether “money is scarce or plentiful,” the former causing a lower estimation of goods and the latter a higher. Another is whether “vendors are eager to sell their goods.” The influence of the abundance or the scarcity of a good brought Garcia almost to the brink, but not over it, of a marginal utility analysis of valuation.

  For example, we have said that bread is more valuable than meat because it is more necessary for the preservation of human life. But there may come a time when bread is so abundant and meat so scarce that bread is cheaper than meat.8

  The Spanish Scholastics also anticipated the Austrian school in applying value theory to money, thus beginning the integration of money into general value theory. It is generally believed, for example, that in 1568 Jean Bodin inaugurated what is unfortunately called “the quantity theory of money” but which would more accurately be called the application of supply-and-demand analysis to money. Yet he was anticipated twelve years earlier by the Salamanca theologian the Dominican Martin de Azpilcueta Navarro (1493–1587), who was inspired to explain the inflation brought about by the importation of gold and silver by the Spaniards from the New World. Citing previous Scholastics, Azpilcueta declared that “money is worth more where it is scarce than where it is abundant.” Why? Because “all merchandise becomes dearer when it is in great demand and short supply, and that money, in so far as it may be sold, bartered, or exchanged by some other form of contract, is merchandise and therefore also becomes dearer when it is in great demand and short supply.” Azpilcueta noted that “we see by experience that in France, where money is scarcer than in Spain, bread, wine, cloth, and labour are worth much less. And even in Spain, in times when money was scarcer, saleable goods and labour were given for very much less than after the discovery of the Indies, which flooded the country with gold and silver. The reason for this is that money is worth more where and when it is scarce than where and when it is abundant.”9

  Furthermore, the Spanish Scholastics went on to anticipate the classical-Mises-Cassel purchasing-power parity theory of exchange rates by proceeding logically to apply the supply-and-demand theory to foreign exchanges, an institution that was highly developed by the early modern period. The influx of specie into Spain depreciated the Spanish escudo in foreign exchange, as well as raised prices within Spain, and the Scholastics had to deal with this startling phenomenon. It was the eminent Salamanca theologian the Dominican Domingo de Soto (1495–1560) who in 1553 first fully applied the supply-and-demand analysis to foreign exchange rates. De Soto noted that “the more plentiful money is in Medina the more unfavourable are the terms of exchange, and the higher the price that must be paid by whoever wishes to send money from Spain to Flanders, since the demand for money is smaller in Spain than in Flanders. And the scarcer money is in Medina the less he need pay there, because more people want money in Medina than are sending it to Flanders.”10 What de Soto was saying is that as the stock of money increases, the utility of each unit of money to the population declines and vice versa; in short, only the great stumbling block of failing to specify the concept of the marginal unit prevented him from arriving at the doctrine of the diminishing marginal utility of money. Azpilcueta, in the passage quoted above, applied the de Soto analysis of the influence of the supply of money on exchange rates, at the same time that he set forth a theory of supply and demand in determining the purchasing power of money within a country.

  The de Soto-Azpilcueta analysis was spread to the merchants of Spain by the Dominican friar Tomás de Mercado (d. 1585), who in 1569 wrote a handbook of commercial morality in Spanish, in contrast to the Scholastic theologians, who invariably wrote in Latin. It was followed by García and endorsed at the end of the sixteenth century by the Salamanca theologian the Dominican Domingo de Bañez (1527–1604) and by the great Portuguese Jesuit Luís de Molina (1535–1600). Writing near the turn of the century, Molina set forth the theory in an elegant and comprehensive manner:

  There is another way in which money may be worth more in one place than in another; namely, because it is scarcer there than elsewhere. Other things being equal, wherever money is most abundant, there will it be least valuable for the purpose of buying goods and comparing things other than money.

  Just as an abundance of goods causes prices to fall (the quantity of money and number of merchants being equal), so does an abundance of money cause them to rise (the quantity of goods and number of merchants being equal). The reason is that the money itself becomes less valuable for the purpose of buying and comparing goods. Thus we see that in Spain the purchasing-power of money is far lower, on account of its abundance, than it was eighty years ago. A thing that could be bought for two ducats at that time is nowadays worth 5, 6, or even more. Wages have risen in the same proportion, and so have dowries, the price of estates, the income from benefices, and other things.

  We likewise see that money is far less valuable in the New World (especially in Peru, where it is most plentiful), than it is in Spain. But in places where it is scarcer than in Spain, there will it be more valuable. Nor will the value of money be the same in all other places, but will vary: and this will be because of variations in its quantity, other things being equal . . . . Even in Spain itself, the value of money varies: it is usually lowest of all in Seville, where the ships come in from the New World and where for that reason money is most abundant.

  Wherever the demand for money is greatest, whether for buying or carrying goods, . . . or for any other reason, there its value will be highest. It is these things, too, which cause the value of money to vary in course of time in one and the same place.11

  The outstanding revisionist work on the economic thought of the medieval and later Scholastics is that of Raymond de Roover. Basing his work in part on the Grice-Hutchinson volume, de Roover published his first comprehensive discussion in 1955.12 For the medieval period, de Roover particularly pointed to the early fourteenth-century French Ockhamite Scholastic Jean Buridan and to the famous early fifteenth-century Italian preacher San Bernardino of Siena (1380–1444). Buridan insisted that value is measured by the human wants of the community of individuals, and that the market price is the just price. Furthermore, he was perhaps the first to make clear in a pre-Austrian manner that voluntary exchange demonstrates subjective preferences, since he stated that the “person who exchanges a horse for money would not have done so, if he had not preferred money to a horse.”13 He added that workers hire themselves out because they value the wages they receive higher than the labor they have to expend.14

  De Roover then discussed the sixteenth-century Spanish Scholastics, centered at the University of Salamanca, the queen of the Spanish universities of the period. From Salamanca the influence of this school of Scholastics spread to Portugal, Italy, and the Low Countries. In addition to summarizing Grice-Hutchinson’s contribution and adding to her bibliography, de Roover noted that both de Soto and Molina denounced as “fallacious” the notion of the late thirteenth-century Scholastic John Duns Scotus (1266–1308) that the just price is the cost of production plus a reasonable profit; instead that price is the common estimation, the interaction of supply and demand, on the market. Molina further introduced the concept of competition by stating that competition among buyers will drive prices up, while a scarcity of purchasers will pull them down.15

  In a later article, de Roover elaborated on his researches into the Scholastic theory of the just price. He found that the orthodox view of the just price as a station-in-life, cost-of-production price was based almost solely on the views of fourteenth-century Viennese Scholastic Henry of Langenstein. But Langenstein, de Roover pointed out, was a follower of the minority views of William of Ockham and outside the dominant Thomist tradition; Langenstein was rarely cited by later Scholastic writers. While some of their passages are open to a conflicting interpretation, de Roover demonstrated that Albertus Magnus (1193–1280) and his great pupil Thomas Aquinas (1226–74) held the just price to be the market price. In fact, Aquinas considered the case of a merchant who brings wheat to a country where there is a great scarcity; the merchant happens to know that more wheat is on the way. May he sell his wheat at the existing price, or must he announce to everyone the imminent arrival of new supplies and suffer a fall in price? Aquinas unequivocally answered that he may justly sell the wheat at the current market price, even though he added as an afterthought that it would be more virtuous of him to inform the buyers. Furthermore, de Roover pointed to the summary of Aquinas’s position by his most distinguished commentator, the late fifteenth-century Scholastic Thomas de Vio, Cardinal Cajetan (1468–1534). Cajetan concluded that for Aquinas the just price is “the one, which at a given time, can be gotten from the buyers, assuming common knowledge and in the absence of all fraud and coercion.”16

  The cost-of-production theory of just price held by the Scotists was trenchantly attacked by the later Scholastics. San Bernardino of Siena, de Roover pointed out, declared that the market price is fair regardless of whether the producer gains or loses, or whether it is above or below cost. The great early sixteenth-century jurist Francisco de Victoria (c. 1480–1546), founder of the school of Salamanca, as well as his followers insisted that the just price is set by supply and demand regardless of labor costs or expenses; inefficient producers or inept speculators must bear the consequences of their incompetence and poor forecasting. Furthermore, de Roover made clear that the general Scholastic emphasis on the justice of “common estimation” (communis aestimatio) is identical to “market valuation” (aestimatio fori), since the Scholastics used these two Latin expressions interchangeably.17

  De Roover noted, however, that this acceptance of market price did not mean that the Scholastics adopted a laissez-faire position. On the contrary, they were often willing to accept governmental price fixing instead of market action. A few prominent Scholastics, however, led by Azpilcueta and including Molina, opposed all price fixing; as Azpilcueta put it, price controls are unnecessary in times of plenty and ineffective or positively harmful in times of dearth.18

  In a comment on de Roover’s paper, David Herlihy noted that, in the northern Italian city-states of the twelfth and thirteenth centuries, the birthplace of modern commercial capitalism, the market price was generally considered just because it was “true” and “real,” if it was “established or utilized without deceit or fraud.” As Herlihy summed it up, the just price of an object is its “true value as determined by one of two ways: for objects that were unique, by honest negotiation between seller and purchaser; for staple commodities by the consensus of the market place established in the absence of fraud or conspiracy.”19

  John W. Baldwin’s definitive account of the theories of just price during the High Middle Ages of the twelfth and thirteenth centuries amply confirmed de Roover’s revisionist insight. Baldwin pointed out that there were three important and influential groups of medieval writers: the theologians (whom we have been examining), the Roman lawyers, and the canon lawyers. For their part, the Romanists, joined by the canonists, held staunchly to the principle of Roman private law that the just price is whatever is arrived at by free bargaining between buyers and sellers. Baldwin demonstrated that even the theologians of the High Middle Ages before Aquinas accepted the current market price as the just price.21

  Several years later, de Roover turned to the views of the Scholastics on the broader issue of trade and exchange.22 He conceded the partial validity of the older view that the medieval Church frowned on trade as endangering personal salvation; or rather that, while trade can be honest, it presents great temptation for sin. However, he pointed out that, as trade and commerce grew after the tenth century, the Church began to adapt to the idea of the merits of trade and exchange. Thus, while it is true that the twelfth-century Scholastic Peter the Lombard (c. 1100–60) denounced trade and soldiering as sinful occupations per se, a far more benevolent view of trade was set forth during the thirteenth century by Albertus Magnus and his student Thomas Aquinas, as well as by Saint Bonaventure (1221–74) and Pope Innocent V (1225–76). While trade presents occasions for sin, it is not sinful per se; on the contrary, exchange and the division of labor are beneficent in satisfying the wants of the citizens. Moreover, the early fourteenth-century Scholastic Richard of Middleton developed the idea that both the buyer and the seller gain by exchange, since each demonstrates that he prefers what he receives in exchange to what he gives up. Middleton also applied this idea to international trade, pointing out that both countries benefit by exchanging their surplus products. Since the merchants and citizens of each country benefit, neither party is exploiting the other.

  At the same time, Aquinas and other theologians denounced “covetousness” and love of profit, mercantile gain being only justifiable when directed toward the “good of others”; furthermore, Aquinas attacked “avarice” as attempting to improve one’s “station in life.” But, as de Roover pointed out, the great early sixteenth-century Italian Thomist Cardinal Cajetan corrected this view by demonstrating that, if this were true, every person would have to be frozen in his current occupation and income. On the contrary, asserted Cajetan, people with unusual ability should be able to rise in the world. In contrast to such northern Europeans as Aquinas, Cajetan was quite familiar with the commerce and upward social mobility in the Italian cities. Furthermore, even Aquinas explicitly rejected the idea that prices should be determined by one’s station in life, pointing out that the selling price of any good tends to be the same whether the entrepreneur is poor or wealthy.

  De Roover hailed the early fifteenth-century Scholastic San Bernardino of Siena as being the only theologian who dealt in detail with the economic function of the entrepreneur. San Bernardino wrote of the uncommon qualities and abilities of the successful entrepreneur, including effort, diligence, knowledge of the market, and calculation of risks, with profit on invested capital justifiable as compensation for the risk and effort of the entrepreneur. The acceptance of profit was immortalized in a motto in a thirteenth-century account book: “In the name of God and of profit.”23

  De Roover’s final work in this area was a booklet on San Bernardino and his contemporary Sant’ Antonino (1389–1459) of Florence.24 In San Bernardino’s views of trade and the entrepreneur, the occupation of trade may lead to sin, but so may all other occupations, including that of bishops. As for the sins of traders, they consist of such illicit activity as fraud, misrepresentation of products, the sale of adulterated products, and the use of false weights and measures, as well as keeping creditors waiting for their money after a debt is due. As to trade, there are several kinds of useful merchants, according to San Bernardino: importer-exporters, warehousemen, retailers, and manufacturers.

  San Bernardino described the rare qualities and virtues that go into the making of successful businessmen. One is efficiency (industria), which includes knowledge of qualities, prices, and costs and the ability to assess risks and estimate profit opportunities, which, he declared, “indeed very few are capable of doing.” Entrepreneurial ability therefore includes the willingness to assume risks (pericula). Businessmen must be responsible and attentive to detail, and trouble and toil are also necessary. The rational and orderly conduct of business, also necessary to success, is another virtue lauded by San Bernardino, as are business integrity and the prompt settlement of accounts.

  Turning again to the Scholastic view of value and price, de Roover pointed out that, as early as Aquinas, prices were treated as determined, not by their philosophic rank in nature, but by the degree of the usefulness or utility of the respective products to man and to human wants. As de Roover wrote of Aquinas, “These passages are clear and unambiguous; value depends upon utility, usefulness, or human wants. There is nowhere any mention of labor as the creator or the measure of value.”25 A century before the Spanish Scholastics and a century and a half before the sophisticated formulation of Francisco Garcia, San Bernardino had demonstrated that price is determined by scarcity (raritas), usefulness (virtuositas), and pleasurability or desirability (complacibilitas). Greater abundance of a good will cause a drop in its value and greater scarcity a rise. To have value, furthermore, a good must have usefulness, or what we may call “objective utility”; but within that framework, the value is determined by the complacibilitas, or “subjective utility,” that it has to individual consumers. Again, only the marginal element is lacking for a full-scale pre-Austrian theory of value. Coming to the brink of the later Austrian solution to the classical economists’ “paradox of value,” San Bernardino noted that a glass of water to a man dying of thirst would be so valuable as to be almost priceless, but fortunately water, though absolutely necessary to human life, is ordinarily so abundant that it commands either a low price or even no price at all.

  Correcting Schumpeter’s ascription of the founding of subjective utility to Sant’ Antonino and observing that he had derived it from San Bernardino, de Roover showed further that recent scholarship demonstrates that Bernardino derived his own analysis almost word for word from a late thirteenth-century Provencal Scholastic, Pierre de Jean Olivi (1248–98). Apparently, Bernardino did not give credit to Olivi because the latter, coming from another branch of the Franciscan order, was at that time suspected of heresy.26

  Turning to the concept of the “just price,” de Roover made it clear that San Bernardino, following Olivi, held that price of a good or service to be “the estimation made in common by all the citizens of the community.” This he held explicitly to be the valuation of the market, since he defined the just price as “the one which happens to prevail at a given time according to the estimation of the market, that is, what the commodities for sale are then commonly worth in a certain place.”27

  Wages were treated by the two Italian friars as equivalent to the prices of goods. For San Bernardino, “The same rules which apply to the prices of goods also apply to the price of services with the consequence that the just wage will also be determined by the forces operating in the market or, in other words, by the demand for labor and the available supply.” An architect is paid more than a ditchdigger, asserted Bernardino, because “the former’s job requires more intelligence, greater ability, and longer training and that, consequently, fewer qualify . . . . Wage differentials are thus to be explained by scarcity because skilled workers are less numerous than unskilled and high positions require even a very unusual combination of skills and abilities.”28 And Sant’ Antonino concluded that the wage of a laborer is a price which, like any other, is properly determined by the common estimation of the market in the absence of fraud.

  During and after the sixteenth century, the Roman Catholic church and Scholastic philosophy came under increasingly virulent attack, first from Protestants and then from rationalists, but the result was not so much to eliminate any influence of Scholastic philosophy and economics as to mask that influence, since their proclaimed enemies would often fail to cite their writings. Thus, the great early seventeenth-century Dutch Protestant jurist Hugo Grotius (1583–1645) adopted much of Scholastic doctrine, including the emphasis on want and utility as the major determinant of value, and the importance of the common estimation of the market in determining price. Grotius, in fact, explicitly cited the Spanish Scholastics Azpilcueta Navarro and Covarrubias. Even more explicitly following the Spanish Scholastics of the sixteenth century were the Jesuit theologians of the following century, including the highly influential Flemish Jesuit Leonardus Lessius (1554–1623), a friend of Luis de Molina, and the even more influential Spanish Jesuit Cardinal Juan de Lugo (1583–1660), whose treatise was originally published in 1642 and was reprinted many times in the next three centuries. Also explicitly following the Scholastics and the Salamanca school in the seventeenth century was the Genoese philosopher and jurist Sigismundo Scaccia (c. 1618), whose treatise was widely reprinted, as well as Antonio de Escobar (c. 1652), author of a moral manual.

  To return to what would be the dominant Protestant trend for later economic thought, Grotius’s legal and economic doctrines were followed closely in the later seventeenth century by the Swedish Lutheran jurist Samuel Pufendorf (1632–94). While Pufendorf followed Grotius on utility and scarcity and the common estimation of the market in determining value and price, and while he certainly consulted the writings of the Spanish Scholastics, it is the rationalist Pufendorf who dropped all citations to these hated Scholastic influences upon his teacher. Hence, when Grotian doctrine was brought to Scotland by the early eighteenth-century professor of moral philosophy at Glasgow Gershom Carmichael (1672–1729), who translated Pufendorf into English, knowledge of Scholastic influences was lost. Hence, with Carmichael’s great student and successor Francis Hutcheson, utility began to be weakened by labor and cost-of-production theories of value, until finally by the time Hutcheson’s student Adam Smith (1723–90) wrote the Wealth of Nations, pre-Austrian Scholastic influence had unfortunately dropped out altogether. Hence the view of Schumpeter, de Roover, and others that Smith and later Ricardo shunted economics onto a wrong track, which the later marginalists (including the Austrians) had to correct.

  Scholastic doctrine had a more lasting influence on economists on the Continent, particularly in Catholic countries. Thus, the brilliant mid-eighteenth-century Italian the Abbé Ferdinando Galiani (1728–87) is often credited by historians with inventing full-blown the concept of utility and scarcity as the determinants of price. No one wished to stress Scholastic writings in that rationalistic age, but strong Scholastic influence is detectable in Galiani’s work, whose section on value even contains an explicit citation to the Salamanca Scholastic Diego Covarrubias y Leiva. Galiani’s uncle Celestino, who brought up the youthful economist, had been professor of moral theology before becoming an archbishop and was therefore undoubtedly familiar with the Scholastic literature on the subject, which filled the Italian libraries of the eighteenth century. Galiani’s contemporary Italian economist Antonio Genovesi (1712–69) was also directly influenced by Scholastic thought; he had served as professor of ethics and moral philosophy at the University of Naples.

  From Galiani the central role of utility, scarcity, and the common estimation of the market spread to France, to the late eighteenth-century French abbé Étienne Bonnot de Condillac (1714–80), as well as to that other great abbé Robert Jacques Turgot (1727–81). Knowing only Galiani as his predecessor, Turgot echoed the Salamanca school in holding the prices of goods and the value of money, as the result of the “common estimation” of the market, to be built up out of the subjective valuations of individuals in that market. Francois Quesnay (1694–1774) and the eighteenth-century French physiocrats—often considered to be the founders of economic science—were also heavily influenced by the Scholastics, both in their natural law theory and in their emphasis on consumption and subjective value. Scholastic doctrine even appears in the fiercely anti-Catholic Encyclopedie, including the doctrine of natural law, as well as the analysis of price as determined by the current common estimation of the market. Even during the nineteenth century strong traces of Condillac and Turgot appear in Jean Baptiste Say (1767–1832), who upheld a utility model for the future.29

  At about the same time as Schumpeter, Grice-Hutchinson, and de Roover published their researches, Emil Kauder set forth a similar revisionist viewpoint. Kauder traced the connection between the Scholastics and Galiani, first to the mid-sixteenth-century Italian politician Gian Francesco Lottini (1512–72).30 He showed that Lottini first worked out a rudimentary concept of time preference: that people estimate present wants higher than future. The next link was the late sixteenth-century Italian merchant Bernardo Davanzati (1529–1606), who applied subjective-value theory to money in 1588. Indeed, Schumpeter was soon to point out that Davanzati also solved the “paradox of value,” that water is very useful but not valuable on the market because it is highly abundant. Whether or not Davanzati was influenced by San Bernardino is not known.31 He was followed almost a century later by the Italian mathematics professor Geminiano Montanari (1633–87). Galiani was then definitely influenced by Davanzati.

  Kauder then developed in an original way the great contributions of Galiani. For not only did Galiani comprehensively set forth the familiar theory of utility and scarcity as determinants of price—which lacked only the marginal principle to arrive at the Austrian theory—but he also went on to apply the utility theory to the value of labor and other factors of production. For the value of labor is, in turn, determined by the utility and scarcity of the particular kind of labor being considered. The highly skilled are paid much more than the common laborer, since nature produces only a small number of able men. But not only that; for Galiani it is not labor costs that determine value, but value—and consumer choice—that determines labor cost. Furthermore, Galiani touched on a pre-Böhm-Bawerk theory of interest, with interest being the difference between present and future money.32 Turgot then anticipated the Austrians in applying Galiani’s utility theory to a detailed analysis of isolated exchange, showing that both parties benefit in utility from the exchange. Turgot, furthermore, as Schumpeter pointed out, developed a time analysis of production and worked out a pre-Austrian general analysis of the law of eventually diminishing returns that was not to be matched until the end of the nineteenth century. Quite justly Schumpeter wrote that “it is not too much to say that analytic economics took a century to get where it could have got in twenty years after the publication of Turgot’s treatise had its content been properly understood and absorbed by an alert profession.”33 Instead, as Kauder pointed out, it was left to Condillac to offer a last-ditch and neglected defense of Galiani’s utility theory against the rising tide of British cost theory. In Condillac’s trenchant phrase, “A thing does not have value because it costs, as people suppose; instead it costs because it has a value.”34

  In a fascinating companion article, Kauder speculated on the persistence of utility-and-subjective-value theory on the Continent, as compared to the rise and dominance of a quantity-of-labor-and-cost-of-production theory in Great Britain.35 He was particularly intrigued by the fact that the pre-nineteenth-century French and Italian subjectivists were all Catholics (and, of course, he might have added the medieval and sixteenth century Scholastics as well), while the British economists were all Protestants, or, more precisely, Calvinists. Kauder speculated that it was their Calvinist training that led John Locke and particularly Adam Smith to reject the Continental tradition (Smith knew Turgot and read Grotius) and to emphasize a labor theory of value. The Calvinists believed that work or labor was divine; could not this imprint have led Smith and the others to adopt a labor theory of economic value? Furthermore, Kauder pointed out that until the middle of the eighteenth century the French and Italian universities were dominated by Aristotelian philosophy, particularly as transmitted by the Jesuits and other religious orders. Kauder added that, in contrast to Calvinism, Aristotelian-Thomist philosophy did not glorify work or labor per se as divine; work may be necessary, but “moderate pleasure-seeking and happiness”—in short, utility—”form the center of economic actions.” Kauder concluded that “if pleasure in a moderate form is the purpose of economics, then following the Aristotelian concept of the final cause, all principles of economics including valuation must be derived from it.”36

  Kauder admitted that his is a conjecture that cannot be proved, and also that it does not particularly hold for the nineteenth century. However, he did offer an intriguing explanation for Alfred Marshall’s failure to adopt the full marginal utility theory and, instead, his shunting of the theory aside in favor of a recrudescence of Ricardo’s objective cost-of-production theory. That explanation lies in Marshall’s undoubtedly strong Evangelical and Calvinist background.37

  Finally, Emil Kauder convincingly demonstrated the direct influence of Aristotelian philosophy on the founders of the Austrian school and contrasted the result with the other marginalist schools of the late nineteenth century. First, in contrast to Jevons and Walras, who believed that economic laws are hypotheses dealing with social quantities, Carl Menger and his followers held that economics investigates, not the quantities of phenomena, but the underlying essences of such real entities as value, profit, and the other economic categories. The belief in underlying essences inherent in superficial appearances is Aristotelian, and Kauder pointed out that Menger studied and cited Aristotle extensively in his methodological work. He also noted the similarities discovered by Oskar Kraus between the Austrian and the Aristotelian theories of imputation. Kauder also pointed out that Menger applied the fundamental Aristotelian distinction between matter and form to economic theory: economic theory deals with the underlying form of events, while history and statistics deal with the concrete matter. The concrete historical cases are the exemplifications of general regularities, the Aristotelian matter that contains potentialities, while the economic laws “are the Aristotelian forms which actualize the potential, i.e., they provide the laws and concepts valid for all times and places.”38

  Secondly, Menger held, in contrast to Jevons and Walras, that economic laws as expressed in mathematical equations are only arbitrary statements; on the contrary, genuine economic laws are “exact,” in Menger’s terminology meaning fixed laws that describe sequences invariable to time and place. Thus, Menger and the Austrians build up an “eternal structure of economics . . . stripped of all historical peculiarities.” In short, Menger and, following him, Böhm-Bawerk were Aristotelian social ontologists, maintaining the absolute and apodictic reality of economic laws. Kauder perceptively pointed out that in contemporary economics, “only von Mises, the most faithful student of the three [Austrian] pioneers, maintains the ontological character of economic laws. His theory of human action . . . is a ‘reflection about the essence of action.’ Economic laws provide ‘ontological facts.’”39

  Finally, the Jevons-Walras mathematical method necessarily deals with “functions of interdependent phenomena,” whereas, for Menger and the Austrians, economic laws are genetic and causal, proceeding from the utility and the action of the consumer to the market result. As Kauder put it:

  For Marshall, value and cost, supply and demand are interdependent factors whose functional connection can be explained in an equation or a geometrical figure. For Wieser, Menger, and especially for Böhm-Bawerk the wants of the consumer are the beginning and the end of the causal nexus. The purpose and the cause of economic action are identical. There is no difference between causality and teleology, claims Böhm-Bawerk. He knew the Aristotelian origin of his argument.40

  Kauder also pointed out that the characteristically Austrian method of proceeding by words from a Robinson Crusoe model and then proceeding step by step to a fully developed economy accords with the Aristotelian concept of entelechy, in which “the motion from the potentiality to the actualization determines not only the structure of the system but also the presentation of the thoughts.”41

  In attempting to explain the Austrian choice among all the marginalists for philosophical realism and social ontology, Kauder pointed to the late nineteenth-century influences on the Austrian intellectual climate of Aristotle, Thomas Aquinas, and other schools of realistic philosophy. Most influential was Aristotle, who was studied carefully down to the middle of the nineteenth century, and who was often taught in the secondary schools in Austria. And while realism gave way to empiricism in the Austrian schools by the turn of the twentieth century, “the Viennese Schottengymnasium, the intellectual nursery of many famous Austrians including Wieser, required, even after 1918, the students to read Aristotle’s metaphysics in the original Greek.”42 In contrast, of course, the influence of Aristotelian philosophy in Britain or even France during the nineteenth century was virtually nil.

  In recent decades, the revisionist scholars have clearly altered our knowledge of the prehistory of the Austrian school of economics. We see emerging a long and mighty tradition of proto-Austrian Scholastic economics, founded on Aristotle, continuing through the Middle Ages and the later Italian and Spanish Scholastics, and then influencing the French and Italian economists before and up till the day of Adam Smith. The achievement of Carl Menger and the Austrians was not so much to found a totally new system on the framework of British classical political economy as to revive and elaborate upon the older tradition that had been shunted aside by the classical school.

  NOTES

  [1.]Lewis H. Haney, History of Economic Thought, 4th ed. (New York: Macmillan Co., 1949), pp. 106–8.

  [2.]R. H. Tawney, Religion and the Rise of Capitalism (New York: New American Library, 1954), pp. 38–39.

  [3.]Joseph A. Schumpeter, A History of Economic Analysis (New York: Oxford University Press, 1954).

  [4.]Marjorie Grice-Hutchinson, The School of Salamanca: Readings in Spanish Monetary Theory, 1544–1605 (Oxford: Clarendon Press, 1952).

  [5.]Ibid., p. 27.

  [6.]Luis Saravia de la Calle, Instruccion de mercaderes (1544), in Grice-Hutchinson, School of Salamanca, pp.79–82.

  [7.]Ibid., p. 48.

  [8.]Francisco Garcia, Tratado utilisimo y muy general de todos los contractos (1583), in Grice-Hutchinson, School of Salamanca, pp. 104–5.

  [9.]Martin de Azpilcueta Navarro, Comentario resolutorio de usuras (1556), in Grice-Hutchinson, School of Salamanca, pp. 94–95.

  [10.]Domingo de Soto, De Justitia et Jure (1553), in Grice-Hutchinson, School of Salamanca, p. 55.

  [11.]Luis de Molina, Disputationes de Contractibus (1601), in Grice-Hutchinson, School of Salamanca, pp. 113–14; Tomás de Mercado, Tratos y contratos de mercaderes (1569), ibid., pp. 57–58 and; Domingo de Bañez, De Justitia et Jure (1594), ibid., pp. 96–103.

  [12.]Raymond de Roover, “Scholastic Economics: Survival and Lasting Influence from the Sixteenth Century to Adam Smith,” Quarterly Journal of Economics 69(May 1955): 161–90; reprinted in idem, Business, Banking, and Economic Thought (Chicago: University of Chicago Press, 1974), pp. 306–35.

  [13.]Ibid., p. 309.

  [14.]Raymond de Roover, “Joseph A. Schumpeter and Scholastic Economics,” Kyklos 10(1957):128. De Roover traced the concept of mutual benefit as exhibited in exchange back to Aquinas, who wrote that “buying and selling seem to have been instituted for the mutual advantage of both parties, since one needs something that belongs to the other, and conversely” (ibid., p. 128).

  [15.]De Roover, Business, pp. 312–14. Elsewhere de Roover noted that the Scotists were a small minority among medieval and later Scholastics, whereas the Scholastics discussed here were in the mainstream of Thomist tradition.

  [16.]Raymond de Roover, “The Concept of the Just Price: Theory and Economic Policy,” Journal of Economic History 18(December 1958):422–23.

  [17.]De Roover, “Just Price,” p. 424.

  [18.]Ibid., p. 426.

  [19.]David Herlihy, “The Concept of the Just Price: Discussion,” Journal of Economic History 18(December 1958):437.

  [21.]In particular, the theologians at the great center at the University of Paris in the early thirteenth century: Alexander of Hales and Aquinas’s teacher, Albertus Magnus (ibid., p. 71). Baldwin further pointed out that theological treatment of such practical questions as the just price in the Middle Ages only began with the development of university centers at the end of the twelfth century (ibid., p. 9).

  [22.]Raymond de Roover, “The Scholastic Attitude toward Trade and Entrepreneurship,” Explorations in Entrepreneurial History 2(1963):76–87; reprinted in idem, Business, pp. 336–45.

  [23.]De Roover, here and in his other writings, pointed to the great deficiency in Scholastic analysis of the market: the belief that any interest on a pure loan (a mutuum) constituted the sin of usury. The reason is that while the Scholastic understood the economic functions of risk and opportunity cost, they never arrived at the concept of time preference. On the Scholastics and usury, see the magisterial work of John T. Noonan, Jr., The Scholastic Analysis of Usury (Cambridge: Harvard University Press, 1957); see also Raymond de Roover, “The Scholastics, Usury, and Foreign Exchange,” Business History Review. 41(1967):257–71.

  [24.]Raymond de Roover, San Bernardino of Siena and Sant’ Antonino of Florence: The Two Great Economic Thinkers of the Middle Ages (Boston: Kress Library of Business and Economics, 1967).

  [25.]Ibid., p. 17.

  [26.]On the originality of Olivi, see ibid., p. 19.

  [27.]Ibid., p. 20.

  [28.]Ibid., pp. 23–24.

  [29.]On the later influence of the Scholastics, see Schumpeter, History, pp. 94–106; Grice-Hutchinson, School of Salamanca, pp. 59–78; de Roover, Business, pp. 330–35; and de Roover, “Joseph Schumpeter,” p. 128–29.

  [30.]Emil Kauder, “Genesis of the Marginal Utility Theory: From Aristotle to the End of the Eighteenth Century,” Economic Journal 63(September 1953):638–50.

  [31.]Schumpeter, History, p. 300.

  [32.]Kauder, “Genesis,” p. 645.

  [33.]Schumpeter, History, p. 249; see also ibid., pp. 259–61, 332–33.

  [34.]In Kauder “Genesis,” p. 647. Kauder and Schumpeter also noted the early eighteenth-century French mathematician Daniel Bernoulli (1738), who outside the stream of economic thought developed a mathematical version of the diminishing marginal utility of money (ibid., pp. 647–50: Schumpeter, History, pp. 302–5).

  [35.]Emil Kauder, “The Retarded Acceptance of the Marginal Utility Theory,” Quarterly Journal of Economics 67 (November 1953):564–75.

  [36.]Ibid., p. 569.

  [37.]Ibid., pp. 570–71. These two articles are essentially represented in Emil Kauder, A History of Marginal Utility Theory (Princeton: Princeton University Press, 1965), pp. 3–29.

  [38.]Emil Kauder, “Intellectual and Political Roots of the Older Austrian School,” Zeitschrift für Nationalökonomie 17(December 1957):411–25.

  [39.]Ibid., p. 417.

  [40.]Ibid., p. 418.

  [41.]Ibid.

  [42.]Ibid., p. 420; see also Kauder, History of Marginal Utility, pp. 90–100. On Menger as Aristotelian, also see T. W. Hutchison, “Some Themes from Investigations into Method,” in Carl Menger and the Austrian School of Economics, ed. J. R. Hicks and Wilhelm Weber (Oxford: Clarendon Press, 1973), pp. 17–20.

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  11: Praxeology: The Methodology of Austrian Economics

  Edwin G. Dolan, The Foundations of Modern Austrian Economics, ed. with an Introduction by Edwin G. Dolan (Kansas City: Sheed and Ward, 1976). Chapter: Murray N. Rothbard, Praxeology: The Methodology of Austrian Economics

  Accessed from oll.libertyfund.org/title/104/23586 on 2009-05-21

  This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.

  ---

  Praxeology: The Methodology of Austrian Economics

  Murray N. Rothbard

  Praxeology is the distinctive methodology of the Austrian school. The term was first applied to the Austrian method by Ludwig von Mises, who was not only the major architect and elaborator of this methodology but also the economist who most fully and successfully applied it to the construction of economic theory.1 While the praxeological method is, to say the least, out of fashion in contemporary economics—as well as in social science generally and in the philosophy of science—it was the basic method of the earlier Austrian school and also of a considerable segment of the older classical school, in particular of J. B. Say and Nassau W. Senior.2

  Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals. This concept of action contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals. The praxeological method spins out by verbal deduction the logical implications of that primordial fact. In short, praxeological economics is the structure of logical implications of the fact that individuals act. This structure is built on the fundamental axiom of action, and has a few subsidiary axioms, such as that individuals vary and that human beings regard leisure as a valuable good. Any skeptic about deducing from such a simple base an entire system of economics, I refer to Mises’s Human Action. Furthermore, since praxeology begins with a true axiom, A, all the propositions that can be deduced from this axiom must also be true. For if A implies B, and A is true, then B must also be true.

  Let us consider some of the immediate implications of the action axiom. Action implies that the individual’s behavior is purposive, in short, that it is directed toward goals. Furthermore, the fact of his action implies that he has consciously chosen certain means to reach his goals. Since he wishes to attain these goals, they must be valuable to him; accordingly he must have values that govern his choices. That he employs means implies that he believes he has the technological knowledge that certain means will achieve his desired ends. Let us note that praxeology does not assume that a person’s choice of values or goals is wise or proper or that he has chosen the technologically correct method of reaching them. All that praxeology asserts is that the individual actor adopts goals and believes, whether erroneously or correctly, that he can arrive at them by the employment of certain means.

  All action in the real world, furthermore, must take place through time; all action takes place in some present and is directed toward the future (immediate or remote) attainment of an end. If all of a person’s desires could be instantaneously realized, there would be no reason for him to act at all.3 Furthermore, that a man acts implies that he believes action will make a difference; in other words, that he will prefer the state of affairs resulting from action to that from no action. Action therefore implies that man does not have omniscient knowledge of the future; for if he had such knowledge, no action of his would make any difference. Hence, action implies that we live in a world of an uncertain, or not fully certain, future. Accordingly, we may amend our analysis of action to say that a man chooses to employ means according to a technological plan in the present because he expects to arrive at his goals at some future time.

  The fact that people act necessarily implies that the means employed are scarce in relation to the desired ends; for, if all means were not scarce but superabundant, the ends would already have been attained, and there would be no need for action. Stated another way, resources that are superabundant no longer function as means, because they are no longer objects of action. Thus, air is indispensable to life and hence to the attainment of goals; however, air being superabundant is not an object of action and therefore cannot be considered a means, but rather what Mises called a “general condition of human welfare.” Where air is not superabundant, it may become an object of action, for example, where cool air is desired and warm air is transformed through air conditioning. Even with the absurdly unlikely advent of Eden (or what a few years ago was considered in some quarters to be an imminent “postscarcity” world), in which all desires could be fulfilled instantaneously, there would still be at least one scarce means: the individual’s time, each unit of which if allocated to one purpose is necessarily not allocated to some other goal.4

  Such are some of the immediate implications of the axiom of action. We arrived at them by deducing the logical implications of the existing fact of human action, and hence deduced true conclusions from a true axiom. Apart from the fact that these conclusions cannot be “tested” by historical or statistical means, there is no need to test them since their truth has already been established. Historical fact enters into these conclusions only by determining which branch of the theory is applicable in any particular case. Thus, for Crusoe and Friday on their desert island, the praxeological theory of money is only of academic, rather than of currently applicable, interest. A fuller analysis of the relationship between theory and history in the praxeological framework will be considered below.

  There are, then, two parts to this axiomatic-deductive method: the process of deduction and the epistemological status of the axioms themselves. First, there is the process of deduction; why are the means verbal rather than mathematical logic?5 Without setting forth the comprehensive Austrian case against mathematical economics, one point can immediately be made: let the reader take the implications of the concept of action as developed so far in this paper and try to place them in mathematical form. And even if that could be done, what would have been accomplished except a drastic loss in meaning at each step of the deductive process? Mathematical logic is appropriate to physics—the science that has become the model science, which modern positivists and empiricists believe all other social and physical sciences should emulate. In physics the axioms and therefore the deductions are in themselves purely formal and only acquire meaning “operationally” insofar as they can explain and predict given facts. On the contrary, in praxeology, in the analysis of human action, the axioms themselves are known to be true and meaningful. As a result, each verbal step-by-step deduction is also true and meaningful; for it is the great quality of verbal propositions that each one is meaningful, whereas mathematical symbols are not meaningful in themselves. Thus Lord Keynes, scarcely an Austrian and himself a mathematician of note, leveled the following critique at mathematical symbolism in economics:

  It is a great fault of symbolic psuedo-mathematical methods of formalising a system of economic analysis, that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed: whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep “at the back of our heads” the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differentials “at the back” of several pages of algebra which assume that they all vanish. Too large a proportion of recent “mathematical” economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.6

  Moreover, even if verbal economics could be successfully translated into mathematical symbols and then retranslated into English so as to explain the conclusions, the process makes no sense and violates the great scientific principle of Occam’s Razor of avoiding unnecessary multiplication of entities.7

  Furthermore, as political scientist Bruno Leoni and mathematician Eugenio Frola pointed out,

  It is often claimed that translation of such a concept as the maximum from ordinary into mathematical language, involves an improvement in the logical accuracy of the concept, as well as wider opportunities for its use. But the lack of mathematical precision in ordinary language reflects precisely the behavior of individual human beings in the real world . . . . We might suspect that translation into mathematical language by itself implies a suggested transformation of human economic operators into virtual robots.8

  Similarly, one of the first methodologists in economics, Jean-Baptiste Say, charged that the mathematical economists

  have not been able to enunciate these questions into analytical language, without divesting them of their natural complication, by means of simplifications, and arbitrary suppressions, of which the consequences, not properly estimated, always essentially change the condition of the problem, and pervert all its results.9

  More recently, Boris Ischboldin has emphasized the difference between verbal, or “language,” logic (“the actual analysis of thought stated in language expressive of reality as grasped in common experience”) and “construct” logic, which is “the application to quantitative (economic) data of the constructs of mathematics and symbolic logic which constructs may or may not have real equivalents.”10

  Although himself a mathematical economist, the mathematician son of Carl Menger wrote a trenchant critique of the idea that mathematical presentation in economics is necessarily more precise than ordinary language:

  Consider, for example, the statements (2) To a higher price of a good, there corresponds a lower (or at any rate not a higher) demand.

  (2′) If p denotes the price of, and q the demand for, a good, then Those who regard the formula (2′) as more precise or “more mathematical” than the sentence (2) are under a complete misapprehension . . . . The only difference between (2) and (2′) is this: since (2′) is limited to functions which are differentiable and whose graphs, therefore, have tangents (which from an economic point of view are not more plausible than curvature), the sentence (2) is more general, but it is by no means less precise: it is of the same mathematical precision as (2′).11

  Turning from the deduction process to the axioms themselves, what is their epistemological status? Here the problems are obscured by a difference of opinion within the praxeological camp, particularly on the nature of the fundamental axiom of action. Ludwig von Mises, as an adherent of Kantian epistemology, asserted that the concept of action is a priori to all experience, because it is, like the law of cause and effect, part of “the essential and necessary character of the logical structure of the human mind.”12 Without delving too deeply into the murky waters of epistemology, I would deny, as an Aristotelian and neo-Thomist, any such alleged “laws of logical structure” that the human mind necessarily imposes on the chaotic structure of reality. Instead, I would call all such laws “laws of reality,” which the mind apprehends from investigating and collating the facts of the real world. My view is that the fundamental axiom and subsidiary axioms are derived from the experience of reality and are therefore in the broadest sense empirical. I would agree with the Aristotelian realist view that its doctrine is radically empirical, far more so than the post-Humean empiricism which is dominant in modern philosophy. Thus, John Wild wrote:

  It is impossible to reduce experience to a set of isolated impressions and atomic units. Relational structure is also given with equal evidence and certainty. The immediate data are full of determinate structure, which is easily abstracted by the mind and grasped as universal essences or possibilities.13

  Furthermore, one of the pervasive data of all human experience is existence; another is consciousness, or awareness. In contrast to the Kantian view, Harmon Chapman wrote that

  conception is a kind of awareness, a way of apprehending things—or comprehending them—and not an alleged subjective manipulation of so-called generalities or universals solely “mental” or “logical” in their provenience and non-cognitive in nature.

  That in thus penetrating the data of sense, conception also synthesizes these data is evident. But the synthesis here involved, unlike the synthesis of Kant, is not a prior condition of perception, an anterior process of constituting both perception and its object, but rather a cognitive synthesis in apprehension, that is, a uniting or “comprehending” which is one with the apprehending itself. In other words, perception and experience are not the results or end products of a synthetic process a priori, but are themselves synthetic or comprehensive apprehensions whose structured unity is prescribed solely by the nature of the real, that is, by the intended objects in their togetherness and not by consciousness itself whose (cognitive) nature is to apprehend the real—as it is.14

  If, in the broad sense, the axioms of praxeology are radically empirical, they are far from the post-Humean empiricism that pervades the modern methodology of social science. In addition to the foregoing considerations, (1) they are so broadly based in common human experience that once enunciated they become self-evident and hence do not meet the fashionable criterion of “falsifiability”; (2) they rest, particularly the action axiom, on universal inner experience, as well as on external experience, that is, the evidence is reflective rather than purely physical; and (3) they are therefore a priori to the complex historical events to which modern empiricism confines the concept of “experience”.15

  Say, perhaps the first praxeologist, explained the derivation of the axioms of economic theory as follows:

  Hence the advantage enjoyed by every one who, from distinct and accurate observation, can establish the existence of these general facts, demonstrate their connection and deduce their consequences. They as certainly proceed from the nature of things as the laws of the material world. We do not imagine them; they are results disclosed to us by judicious observation and analysis . . . .

  Political economy . . . is composed of a few fundamental principles, and of a great number of corollaries or conclusions, drawn from these principles . . . that can be admitted by every reelecting mind.16

  Friedrich A. Hayek trenchantly described the praxeological method in contrast to the methodology of the physical sciences, and also underlined the broadly empirical nature of the praxeological axioms:

  The position of man . . . brings it about that the essential basic facts which we need for the explanation of social phenomena are part of common experience, part of the stuff of our thinking. In the social sciences it is the elements of the complex phenomena which are known beyond the possibility of dispute. In the natural sciences they can only be at best surmised. The existence of these elements is so much more certain than any regularities in the complex phenomena to which they give rise, that it is they which constitute the truly empirical factor in the social sciences. There can be little doubt that it is this different position of the empirical factor in the process of reasoning in the two groups of disciplines which is at the root of much of the confusion with regard to their logical character. The essential difference is that in the natural sciences the process of deduction has to start from some hypothesis which is the result of inductive generalizations, while in the social sciences it starts directly from known empirical elements and uses them to find the regularities in the complex phenomena which direct observations cannot establish. They are, so to speak, empirically deductive sciences, proceeding from the known elements to the regularities in the complex phenomena which cannot be directly established.17

  Similarly, J. E. Cairnes wrote:

  The economist starts with a knowledge of ultimate causes. He is already, at the outset of his enterprise in the position which the physicist only attains after ages of laborious research . . . . For the discovery of such premises no elaborate process of induction is needed . . . for this reason, that we have, or may have if we choose to turn our attention to the subject, direct knowledge of these causes in our consciousness of what passes in our own minds, and in the information which our senses convey . . . to us of external facts.18

  Nassau W. Senior phrased it thus:

  The physical sciences, being only secondarily conversant with mind, draw their premises almost exclusively from observation or hypothesis . . . . On the other hand, the mental sciences and the mental arts draw their premises principally from consciousness. The subjects with which they are chiefly conversant are the workings of the human mind. [These premises are] a very few general propositions, which are the result of observation, or consciousness, and which almost every man, as soon as he hears them, admits, as familiar to this thought, or at least, included in his previous knowledge.19

  Commenting on his complete agreement with this passage, Mises wrote that these “immediately evident propositions” are “of aprioristic derivation . . . unless one wishes to call aprioristic cognition inner experience.”20 To which Marian Bowley, the biographer of Senior, justly commented:

  The only fundamental difference between Mises’ general attitude and Senior’s lies in Mises’ apparent denial of the possibility of using any general empirical data, i.e., facts of general observation, as initial premises. This difference, however, turns upon Mises’ basic ideas of the nature of thought, and though of general philosophic importance, has little special relevance to economic method as such.21

  It should be noted that for Mises it is only the fundamental axiom of action that is a priori; he conceded that the subsidiary axioms of the diversity of mankind and nature, and of leisure as a consumers’ good, are broadly empirical.

  Modern post-Kantian philosophy has had a great deal of trouble encompassing self-evident propositions, which are marked precisely by their strong and evident truth rather than by being testable hypotheses, that are, in the current fashion, considered to be “falsifiable”. Sometimes it seems that the empiricists use the fashionable analytic-synthetic dichotomy, as the philosopher Hao Wong charged, to dispose of theories they find difficult to refute by dismissing them as necessarily either disguised definitions or debatable and uncertain hypotheses.22 But what if we subject the vaunted “evidence” of modern positivists and empiricists to analysis? What is it? We find that there are two types of such evidence to either confirm or refute a proposition: (1) if it violates the laws of logic, for example, implies that A = −A; or (2) if it is confirmed by empirical facts (as in a laboratory) that can be checked by many persons. But what is the nature of such “evidence” but the bringing, by various means, of propositions hitherto cloudy and obscure into clear and evident view, that is, evident to the scientific observers? In short, logical or laboratory processes serve to make it evident to the “selves” of the various observers that the propositions are either confirmed or refuted, or, to use unfashionable terminology, either true or false. But in that case propositions that are immediately evident to the selves of the observers have at least as good scientific status as the other and currently more acceptable forms of evidence. Or, as the Thomist philosopher John J. Toohey put it,

  Proving means making evident something which is not evident. If a truth or proposition is self-evident, it is useless to attempt to prove it; to attempt to prove it would be to attempt to make evident something which is already evident.23

  The action axiom, in particular, should be, according to Aristotelian philosophy, unchallengeable and self-evident since the critic who attempts to refute it finds that he must use it in the process of alleged refutation. Thus, the axiom of the existence of human consciousness is demonstrated as being self-evident by the fact that the very act of denying the existence of consciousness must itself be performed by a conscious being. The philosopher R. P. Phillips called this attribute of a self-evident axiom a “boomerang principle,” since “even though we cast it away from us, it returns to us again.”24 A similar self-contradiction faces the man who attempts to refute the axiom of human action. For in doing so, he is ipso facto a person making a conscious choice of means in attempting to arrive at an adopted end: in this case the end, or goal, of trying to refute the axiom of action. He employs action in trying to refute the notion of action.

  Of course, a person may say that he denies the existence of self-evident principles or other established truths of the real world, but this mere saying has no epistemological validity. As Toohey pointed out,

  A man may say anything he pleases, but he cannot think or do anything he pleases. He may say he saw a round square, but he cannot think he saw a round square. He may say, if he likes, that he saw a horse riding astride its own back, but we shall know what to think of him if he says it.25

  The methodology of modern positivism and empiricism comes a cropper even in the physical sciences, to which it is much better suited than to the sciences of human action; indeed, it particularly fails where the two types of disciplines interconnect. Thus, the phenomenologist Alfred Schutz, a student of Mises at Vienna, who pioneered in applying phenomenology to the social sciences, pointed out the contradiction in the empiricists’ insistence on the principle of empirical verifiability in science, while at the same time denying the existence of “other minds” as unverifiable. But who is supposed to be doing the laboratory verification if not these selfsame “other minds” of the assembled scientists? Schutz wrote:

  It is . . . not understandable that the same authors who are convinced that no verification is possible for the intelligence of other human beings have such confidence in the principle of verifiability itself, which can be realized only through cooperation with others.26

  In this way, the modern empiricists ignore the necessary presuppositions of the very scientific method they champion. For Schutz, knowledge of such presuppositions is “empirical” in the broadest sense,

  provided that we do not restrict this term to sensory perceptions of objects and events in the outer world but include the experiential form, by which common-sense thinking in everyday life understands human actions and their outcome in terms of their underlying motives and goals.27

  Having dealt with the nature of praxeology, its procedures and axioms and its philosophical groundwork, let us now consider what the relationship is between praxeology and the other disciplines that study human action. In particular, what are the differences between praxeology and technology, psychology, history, and ethics—all of which are in some way concerned with human action?

  In brief, praxeology consists of the logical implications of the universal formal fact that people act, that they employ means to try to attain chosen ends. Technology deals with the contentual problem of how to achieve ends by the adoption of means. Psychology deals with the question of why people adopt various ends and how they go about adopting them. Ethics deals with the question of what ends, or values, people should adopt. And history deals with ends adopted in the past, what means were used to try to achieve them—and what the consequences of these actions were.

  Praxeology, or economic theory in particular, is thus a unique discipline within the social sciences; for, in contrast to the others, it deals not with the content of men’s values, goals, and actions—not with what they have done or how they have acted or how they should act—but purely with the fact that they do have goals and act to attain them. The laws of utility, demand, supply, and price apply regardless of the type of goods and services desired or produced. As Joseph Dorfman wrote of Herbert J. Davenport’s Outlines of Economic Theory (1896):

  The ethical character of the desires was not a fundamental part of his inquiry. Men labored and underwent privation for “whiskey, cigars, and burglars’ jimmies,” he said, “as well as for food, or statuary or harvest machinery.” As long as men were willing to buy and sell “foolishness and evil,” the former commodities would be economic factors with market standing, for utility, as an economic term, meant merely adaptability to human desires. So long as men desired them, they satisfied a need and were motives to production. Therefore economics did not need to investigate the origin of choices.28

  Praxeology, as well as the sound aspects of the other social sciences, rests on methodological individualism, on the fact that only individuals feel, value, think, and act. Individualism has always been charged by its critics—and always incorrectly—with the assumption that each individual is a hermetically sealed “atom,” cut off from, and uninfluenced by, other persons. This absurd misreading of methodological individualism is at the root of J. K. Galbraith’s triumphant demonstration in The Affluent Society (Boston: Houghton Mifflin Co., 1958) that the values and choices of individuals are influenced by other persons, and therefore—supposedly—that economic theory is invalid. Galbraith also concluded from his demonstration that these choices, because influenced, are artificial and illegitimate. The fact that praxeological economic theory rests on the universal fact of individual values and choices means, to repeat Dorfman’s summary of Davenport’s thought, that economic theory does “not need to investigate the origin of choices.” Economic theory is not based on the absurd assumption that each individual arrives at his values and choices in a vacuum, sealed off from human influence. Obviously, individuals are continually learning from and influencing each other. As F. A. Hayek wrote in his justly famous critique of Galbraith, “The Non Sequitur of the ‘Dependence Effect’”:

  Professor Galbraith’s argument could be easily employed, without any change of the essential terms, to demonstrate the worthlessness of literature or any other form of art. Surely an individual’s want for literature is not original with himself in the sense that he would experience it if literature were not produced. Does this then mean that the production of literature cannot be defended as satisfying a want because it is only the production which provokes the demand?29

  That Austrian-school economics rested firmly from the beginning on an analysis of the fact of individual subjective values and choices unfortunately led the early Austrians to adopt the term psychological school. The result was a series of misdirected criticisms that the latest findings of psychology had not been incorporated into economic theory. It also led to misconceptions such as that the law of diminishing marginal utility rests on some psychological law of the satiety of wants. Actually, as Mises firmly pointed out, that law is praxeological rather than psychological and has nothing to do with the content of wants, for example, that the tenth spoonful of ice cream may taste less pleasurable than the ninth spoonful. Instead, it is a praxeological truth, derived from the nature of action, that the first unit of a good will be allocated to its most valuable use, the next unit to the next most valuable, and so on.30 On one point, and on one point alone, however, praxeology and the related sciences of human action take a stand in philosophical psychology: on the proposition that the human mind, consciousness, and subjectivity exist, and therefore action exists. In this it is opposed to the philosophical base of behaviorism and related doctrines and joined with all branches of classical philosophy and with phenomenology. On all other questions, however, praxeology and psychology are distinct and separate disciplines.31

  A particularly vital question is the relationship between economic theory and history. Here again, as in so many other areas of Austrian economics, Ludwig von Mises made the outstanding contribution, particularly in his Theory and History.32 It is especially curious that Mises and other praxeologists, as alleged “a priorists”, have commonly been accused of being “opposed” to history. Mises indeed held not only that economic theory does not need to be “tested” by historical fact but also that it cannot be so tested. For a fact to be usable for testing theories, it must be a simple fact, homogeneous with other facts in accessible and repeatable classes. In short, the theory that one atom of copper, one atom of sulfur, and four atoms of oxygen will combine to form a recognizable entity called copper sulfate, with known properties, is easily tested in the laboratory. Each of these atoms is homogeneous, and therefore the test is repeatable indefinitely. But each historical event, as Mises pointed out, is not simple and repeatable; each event is a complex resultant of a shifting variety of multiple causes, none of which ever remains in constant relationships with the others. Every historical event, therefore, is heterogeneous, and therefore historical events cannot be used either to test or to construct laws of history, quantitative or otherwise. We can place every atom of copper into a homogeneous class of copper atoms; we cannot do so with the events of human history.

  This is not to say, of course, that there are no similarities among historical events. There are many similarities, but no homogeneity. Thus, there were many similarities between the presidential election of 1968 and that of 1972, but they were scarcely homogeneous events, since they were marked by important and inescapable differences. Nor will the next election be a repeatable event to place in a homogeneous class of “elections”. Hence no scientific, and certainly no quantitative, laws can be derived from these events.

  Mises’s radically fundamental opposition to econometrics now becomes clear. Econometrics not only attempts to ape the natural sciences by using complex heterogeneous historical facts as if they were repeatable homogeneous laboratory facts; it also squeezes the qualitative complexity of each event into a quantitative number and then compounds the fallacy by acting as if these quantitative relations remain constant in human history. In striking contrast to the physical sciences, which rest on the empirical discovery of quantitative constants, econometrics, as Mises repeatedly emphasized, has failed to discover a single constant in human history. And given the ever-changing conditions of human will, knowledge, and values and the differences among men, it is inconceivable that econometrics can ever do so.

  Far from being opposed to history, the praxeologist, and not the supposed admirers of history, has profound respect for the irreducible and unique facts of human history. Furthermore, it is the praxeologist who acknowledges that individual human beings cannot legitimately be treated by the social scientist as if they were not men who have minds and act upon their values and expectations, but stones or molecules whose course can be scientifically tracked in alleged constants or quantitative laws. Moreover, as the crowning irony, it is the praxeologist who is truly empirical because he recognizes the unique and heterogeneous nature of historical facts; it is the self-proclaimed “empiricist” who grossly violates the facts of history by attempting to reduce them to quantitative laws. Mises wrote thus about econometricians and other forms of “quantitative economists”:

  There are, in the field of economics, no constant relations, and consequently no measurement is possible. If a statistician determines that a rise of 10 per cent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 per cent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or in another time. He has not “measured” the “elasticity of demand” of potatoes. He has established a unique and individual historical fact. No intelligent man can doubt that the behavior of men with regard to potatoes and every other commodity is variable. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions . . . .

  The impracticability of measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations . . . . Economics is not, as . . . positivists repeat again and again, backward because it is not “quantitative.” It is not quantitative and does not measure because there are no constants. Statistical figures referring to economic events are historical data. They tell us what happened in a nonrepeatable historical case. Physical events can be interpreted on the ground of our knowledge concerning constant relations established by experiments. Historical events are not open to such an interpretation . . . .

  Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. Statistics is a method for the presentation of historical facts . . . . The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics. All economic quantities we know about are data of economic history . . . . Nobody is so bold as to maintain that a rise of a percent in the supply of any commodity must always—in every country and at any time—result in a fall of b per cent in price. But as no quantitative economist ever ventured to define precisely on the ground of statistical experience the special conditions producing a definite deviation from the ratio a:b, the futility of his endeavors is manifest.33

  Elaborating on his critique of constants Mises added:

  The quantities we observe in the field of human action . . . are manifestly variable. Changes occurring in them plainly affect the result of our actions. Every quantity that we can observe is a historical event, a fact which cannot be fully described without specifying the time and geographical point.

  The econometrician is unable to disprove this fact, which cuts the ground from under his reasoning. He cannot help admitting that there are no “behavior constants.” Nonetheless, he wants to introduce some numbers, arbitrarily chosen on the basis of a historical fact, as “unknown behavior constants.” The sole excuse he advances is that his hypotheses are “saying only that these unknown numbers remain reasonably constant through a period of years.”34 Now whether such a period of supposed constancy of a definite number is still lasting or whether a change in the number has already occurred can only be established later on. In retrospect it may be possible, although in rare cases only, to declare that over a (probably rather short) period an approximately stable ratio—which the econometrician chooses to call a “reasonably” constant ratio—prevailed between the numerical values of two factors. But this is something fundamentally different from the constants of physics. It is the assertion of a historical fact, not of a constant that can be resorted to in attempts to predict future events.35 The highly praised equations are, insofar as they apply to the future, merely equations in which all quantities are unknown.36

  In the mathematical treatment of physics the distinction between constants and variables makes sense; it is essential in every instance of technological computation. In economics there are no constant relations between various magnitudes. Consequently all ascertainable data are variables, or what amounts to the same thing, historical data. The mathematical economists reiterate that the plight of mathematical economics consists in the fact that there are a great number of variables. The truth is that there are only variables and no constants. It is pointless to talk of variables where there are no invariables.37

  What, then, is the proper relationship between economic theory and economic history or, more precisely, history in general? The historian’s function is to try to explain the unique historical facts that are his province; to do so adequately he must employ all the relevant theories from all the various disciplines that impinge on his problem. For historical facts are complex resultants of a myriad of causes stemming from different aspects of the human condition. Thus, the historian must be prepared to use not only praxeological economic theory but also insights from physics, psychology, technology, and military strategy along with an interpretive understanding of the motives and goals of individuals. He must employ these tools in understanding both the goals of the various actions of history and the consequences of such actions. Because understanding diverse individuals and their interactions is involved, as well as the historical context, the historian using the tools of natural and social science is in the last analysis an “artist”, and hence there is no guarantee or even likelihood that any two historians will judge a situation in precisely the same way. While they may agree on an array of factors to explain the genesis and consequences of an event, they are unlikely to agree on the precise weight to be given each causal factor. In employing various scientific theories, they have to make judgments of relevance on which theories applied in any given case; to refer to an example used earlier in this paper, a historian of Robinson Crusoe would hardly employ the theory of money in a historical explanation of his actions on a desert island. To the economic historian, economic law is neither confirmed nor tested by historical facts; instead, the law, where relevant, is applied to help explain the facts. The facts thereby illustrate the workings of the law.

  The relationship between praxeological economic theory and the understanding of economic history was subtly summed up by Alfred Schutz:

  No economic act is conceivable without some reference to an economic actor, but the latter is absolutely anonymous; it is not you, nor I nor an entrepreneur, nor even an “economic man,” as such, but a pure universal “one.” This is the reason why the propositions of theoretical economics have just that “universal validity” which gives them the ideality of the “and so forth” and “I can do it again.” However, one can study the economic actor as such and try to find out what is going on in his mind; of course, one is not then engaged in theoretical economics but in economic history or economic sociology . . . . However, the statements of these sciences can claim no universal validity, for they deal either with the economic sentiments of particular historical individuals or with types of economic activity for which the economic acts in question are evidence . . . .

  In our view, pure economics is a perfect example of an objective meaning-complex about subjective meaning-complexes, in other words, of an objective meaning-configuration stipulating the typical and invariant subjective experiences of anyone who acts within an economic framework . . . . Excluded from such a scheme would have to be any consideration of the uses to which the “goods” are to be put after they are acquired. But once we do turn our attention to the subjective meaning of a real individual person, leaving the anonymous “anyone” behind, then of course it makes sense to speak of behavior that is atypical . . . . To be sure, such behavior is irrelevant from the point of view of economics, and it is in this sense that economic principles are, in Mises’ words, “not a statement of what usually happens, but of what necessarily must happen.”38

  NOTES

  [1.]See in particular Ludwig von Mises, Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949); also see idem, Epistemological Problems of Economics, trans. George Reisman (Princeton: D. Van Nostrand, 1960).

  [2.]See Murray N. Rothbard, “Praxeology as the Method of Economics,” in Phenomenology and the Social Sciences, ed. Maurice Natanson, 2 vols. (Evanston: Northwestern University Press, 1973), 2: 323–35; also see Marian Bowley, Nassau Senior and Classical Economics (New York: Augustus M. Kelley, 1949), pp 27–65; and T. W. Hutchison, “Some Themes from Investigations into Method,” in Carl Menger and the Austrian School of Economics, ed. J. R. Hicks and Wilhelm Weber (Oxford: Clarendon Press, 1973), pp. 15–31.

  [3.]In answer to the criticism that not all action is directed to some future point of time, see Walter Block, “A Comment on ‘The Extraordinary Claim of Praxeology’ by Professor Gutierrez,” Theory and Decision 3(1973): 381–82.

  [4.]See Mises, Human Action, pp. 101–2; and esp., Block, “Comment,” p. 383.

  [5.]For a typical criticism of praxeology for not using mathematical logic, see George J. Schuller, “Rejoinder,” American Economic Review 41(March 1951):188.

  [6.]John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace & Co., 1936), pp.297–98.

  [7.]See Murray N. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” in On Freedom and Free Enterprise, ed. M. Sennholz (Princeton: D. Van Nostrand, 1956), p.227; idem, Man, Economy and State, 2 vols. (Princeton: D. Van Nostrand, 1962), 1:65–66. On mathematical logic as being subordinate to verbal logic, see René Poirier, “Logique,” in Vocabulaire technique et critique de la philosophie, ed. André Lalande, 6th ed. rev. (Paris: Presses Universitaires de France, 1951), pp. 574–75.

  [8.]Bruno Leoni and Eugenio Frola, “On Mathematical Thinking in Economics” (unpublished manuscript privately distributed), pp.23–24; the Italian version of this article is “Possibilita di applicazione della matematiche alle discipline economiche,” Il Politico 20(1955).

  [9.]Jean-Baptiste Say, A Treatise on Political Economy (New York: Augustus M. Kelley, 1964), p. xxvi n.

  [10.]Boris Ischboldin, “A Critique on Econometrics,” Review of Social Economy 18(September 1960): 11 n.; Ischboldin’s discussion is based on the construction of I. M. Bochenski, “Scholastic and Aristotelian Logic,” Proceedings of the American Catholic Philosophical Association 30(1956): 112–17.

  [11.]Karl Menger, “Austrian Marginalism and Mathematical Economics,” in Carl Menger, p.41.

  [12.]Mises, Human Action, p. 34.

  [13.]John Wild, “Phenomenology and Metaphysics,” in The Return to Reason: Essays in Realistic Philosophy, ed. John Wild (Chicago: Henry Regnery, 1953), pp. 48, 37–57.

  [14.]Harmon M. Chapman, “Realism and Phenomenology,” in Return to Reason, p. 29. On the interrelated functions of sense and reason and their respective roles in human cognition of reality, see Francis H. Parker, “Realistic Epistemology,” ibid., pp. 167–69.

  [15.]See Murray N. Rothbard, “In Defense of ‘Extreme Apriorism,’” Southern Economic Journal 23(January 1957): 315–18. It should be clear from the current paper that the term extreme apriorism is a misnomer for praxeology.

  [16.]Say, Treatise, pp. xxv-xxvi, xlv.

  [17.]Friedrich A. Hayek, “The Nature and History of the Problem,” in Collectivist Economic Planning, ed. F. A. Hayek (London: George Routledge & Sons, 1935), p. 11.

  [18.]John Elliott Cairnes, The Character and Logical Method of Political Economy, 2d ed. (London: Macmillan & Co., 1875), pp. 87–88 (Cairnes’s italics).

  [19.]Bowley, Nassau Senior, pp. 43, 56.

  [20.]Mises, Epistemological Problems, p. 19.

  [21.]Bowley, Nassau Senior, pp. 64–65.

  [22.]Hao Wong, “Notes on the Analytic-Synthetic Distinction,” Theoria 21(1955):158; see also John Wild and J. L. Cobitz, “On the Distinction between the Analytic and the Synthetic,” Philosophy and Phenomenological Research 8(June 1948):651–67.

  [23.]John J. Toohey, Notes on Epistemology, rev. ed. (Washington, D.C.: Georgetown University, 1937), p. 36 (Toohey’s italics).

  [24.]R. P. Phillips, Modern Thomistic Philosophy (Westminster, Md.: Newman Bookshop, 1934–35) 2:36–37; see also Murray N. Rothbard, “The Mantle of Science,” in Scientism and Values, ed. Helmut Schoeck and J. W. Wiggins (Princeton: D. Van Nostrand, 1960), pp. 162–65.

  [25.]Toohey, Notes on Epistemology, p. 10 (Toohey’s italics).

  [26.]Alfred Schutz, Collected Papers of Alfred Schutz, vol. 2, Studies in Social Theory, ed. A. Brodersen (The Hague: Nijhoff, 1964), p. 4; see also Mises, Human Action, p. 24.

  [27.]Ibid., vol. 1, The Problem of Social Reality, p. 65. On the philosophical presuppositions of science, see Andrew G. Van Melsen, The Philosophy of Nature (Pittsburg: Duquesne University Press, 1953), pp. 6–29. On common sense as the groundwork of philosophy, see Toohey, Notes on Epistemology, pp. 74, 106–13. On the application of a similar point of view to the methodology of economics, see Frank H. Knight, “’What is Truth’ in Economics,” in On the History and Method of Economics (Chicago: University of Chicago Press, 1956), pp. 151–78.

  [28.]Joseph Dorfman, The Economic Mind in American Civilization, 5 vols. (New York: Viking Press, 1949) 3:376.

  [29.]Friedrich A. Hayek, “The Non Sequitur of the ‘Dependence Effect,’” in Studies in Philosophy, Politics, and Economics, ed. Friedrich A. Hayek (Chicago: University of Chicago Press, 1967), pp. 314–15.

  [30.]Mises, Human Action, p. 124.

  [31.]See Rothbard, “Toward a Reconstruction,” pp. 230–31.

  [32.]Ludwig von Mises, Theory and History (New Haven: Yale University Press, 1957).

  [33.]Mises, Human Action, pp. 55–56, 348.

  [34.]Cowles Commission for Research in Economics, Report for Period, January 1, 1948-June 30, 1949 (Chicago: University of Chicago Press, 1949), p. 7, quoted in Mises, Theory and History, pp. 10–11.

  [35.]Ibid., pp. 10–11.

  [36.]Ludwig von Mises, “Comments about the Mathematical Treatment of Economic Problems” (unpublished manuscript), p. 3; the German language version of this essay is “Bemerkungen über die mathematische Behandlung nationalökonomischer Probleme,” Studium Generale 6 (1953): 662–65.

  [37.]Mises, Theory and History, pp. 11–12; see also Leoni and Frola, “On Mathematical Thinking,” pp. 1–8; and Leland B. Yeager, “Measurement as Scientific Method in Economics,” American Journal of Economics and Sociology 16(July 1957): 337–46.

  [38.]Alfred Schutz, The Phenomenology of the Social World (Evanston: Northwestern University Press, 1967), pp. 137, 245; also see Ludwig M. Lachmann, The Legacy of Max Weber (Berkeley, Calif.: The Glendessary Press, 1971), pp. 17–48.

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  12: Praxeology, Value Judgments, and Public Policy

  Edwin G. Dolan, The Foundations of Modern Austrian Economics, ed. with an Introduction by Edwin G. Dolan (Kansas City: Sheed and Ward, 1976). Chapter: Murray N. Rothbard, Praxeology, Value Judgments, and Public Policy

  Accessed from oll.libertyfund.org/title/104/23601 on 2009-05-21

  This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.

  ---

  Praxeology, Value Judgments, and Public Policy

  Murray N. Rothbard

  Ethics is the discipline, or what is called in classical philosophy the “science,” of what goals men should or should not pursue. All men have values and place positive or negative value judgments on goods, people, and events. Ethics is the discipline that provides standards for a moral critique of these value judgments. In the final analysis, either such a discipline exists and a rational or objective system of ethics is possible, or else each individual’s value judgments are ultimately arbitrary and solely a creature of individual whim. It is not my province to try to settle one of the great questions of philosophy here. But even if we believe, as I do, that an objective science of ethics exists, and even if we believe still further that ethical judgments are within the province of the historian or social scientist, one thing is certain: praxeology, economic theory, cannot itself establish ethical judgments. How could it when it deals with the formal fact that men act rather than with the content of such actions? Furthermore, praxeology is not grounded on any value judgments of the praxeologist, since what he is doing is analyzing the fact that people in general have values rather than inserting any value judgments of his own.

  What, then, is the proper relationship of praxeology to values or ethics? Like other sciences, praxeology provides laws about reality, laws that those who frame ethical judgments disregard only at their peril. In brief, the citizen, or the “ethicist,” may have framed, in ways which we cannot deal with here, general ethical rules or goals. But in order to decide how to arrive at such goals, he must employ all the relevant conclusions of the various sciences, all of which are in themselves value-free. For example, let us suppose that a person’s goal is to improve his health. Having arrived at this value—which I would consider to be rational and others would consider purely emotive and arbitrary—the person tries to discover how to reach his goal. To do so, he must employ the laws and findings, value-free in themselves, of the relevant sciences. He then extends the judgment of “good,” as applied to his health, on to the means he believes will further that health. His end, the improvement of his health, he pronounces to be “good”; he then, let us say, adopts the findings of medical science that x grams of vitamin C per day will improve his health; he therefore extends the ethical pronouncement of “good”—or, more technically, of “right”—to taking vitamin C as well. Similarly, if a person decides that it is “good” for him to build a house and adopts this as his goal, he must try to use the laws of engineering—in themselves value-free—to figure out the best way of constructing that house. Felix Adler put the relationship clearly, though we may question his use of the term social before science in this context:

  The . . . end being given, the ethical formula being supplied from elsewhere, social science has its most important function to discharge in filling in the formula with a richer content, and, by a more comprehensive survey and study of the means that lead to the end, to give to the ethical imperatives a concreteness and definiteness of meaning which otherwise they could not possess. Thus ethical rule may enjoin upon us to promote . . . health, . . . but so long as the laws of hygiene remain unknown or ignored, the practical rules which we are to adopt in reference to health will be scanty and ineffectual. The new knowledge of hygiene which social science supplies will enrich our moral code in this particular. Certain things which we freely did before, we now know we may not do; certain things which we omitted to do, we now know we ought to do.1

  Praxeology has the same methodological status as the other sciences and the same relation to ethics. Thus, to take a deliberately simple example: if our end is to be able to find gasoline when we pull up to the service station, and value-free praxeological law tells us—as it does—that, if the government fixes a maximum price for any product below then free-market price, a shortage of that product will develop, then (unless other goals supervene) we will make the ethical pronouncement that it is “bad” or “wrong” for the government to impose such a measure. Praxeology, like the other sciences, is the value-free handmaiden of values and ethics.

  To our contention that the sciences, including praxeology, are in themselves value-free, it might be objected that it is values or ethics that directs the interest of the scientist in discovering the specific laws of his discipline. There is no question about the fact that medical science is currently far more interested in discovering a cure for cancer than in searching for a cure for some disease that might only have existed in parts of the Ukraine in the eighteenth century. But the unquestioned fact that values and ethics are important in guiding the attention of scientists to specific problems is irrelevant to the fact that the laws and disciplines of the science itself are value-free. Similarly, Crusoe on his desert island may not be particularly interested in investigating the science of bridge building, but the laws of that science itself are value-free.

  Ethical questions, of course, play a far smaller role in applied medicine than they do in politics or political economy. A basic reason for this is that generally the physician and his patient agree—or are supposed to agree—on the end in view: the advancement of the patient’s health. The physician can advise the patient without engaging in an intense discussion of their mutual values and goals. Of course, even here, the situation is not always that clear-cut. Two examples will reveal how ethical conflicts may arise: first, the patient needs a new kidney to continue to live; is it ethical for the physician and/or the patient to murder a third party and extract his kidney? Second, is it ethical for the physician to pursue medical research for the possible good of humanity while treating his patient as an unwitting guinea pig? These are both cases where valuational and ethical conflicts enter the picture.

  In economic and political questions, in contrast, ethical and value conflicts abound and permeate the society. It is therefore impermissible for the economist or other social scientist to act as if he were a physician, who can generally assume complete agreement on values and goals with his patient and who can therefore prescribe accordingly and with no compunction. Since, then, praxeology provides no ethics whatsoever but only the data for people to pursue their various values and goals, it follows that it is impermissible for the economist qua economist to make any ethical or value pronouncements or to advocate any social or political policy whatsoever.

  The trouble is that most economists burn to make ethical pronouncements and to advocate political policies—to say, in effect, that policy X is “good” and policy Y “bad.” Properly, an economist may only make such pronouncements in one of two ways: either (1) to insert his own arbitrary, ad hoc personal value judgments and advocate policy clearly on that basis; or (2) to develop and defend a coherent ethical system and make his pronouncement, not as an economist, but as an ethicist, who also uses the data of economic science. But to do the latter, he must have thought deeply about ethical problems and also believe in ethics as an objective or rational discipline—and precious few economists have done either. That leaves him with the first choice: to make crystal clear that he is speaking not as an economist but as a private citizen who is making his own confessedly arbitrary and ad hoc value pronouncements.

  Most economists pay lip service to the impermissibility of making ethical pronouncements qua economist, but in practice they either ignore their own criteria or engage in elaborate procedures to evade them. Why? We can think of two possible reasons. One is the disreputable reason that, if Professor Doakes advocates policy X and basically does so as an economics professor, he will be listened to and followed with awe and respect; whereas if he advocates policy X as plain Joe Doakes, the mass of the citizenry may come to the perfectly valid conclusion that their own arbitrary and ad hoc value judgments are just as good as his, and that therefore there is no particular reason to listen to him at all. A second and more responsible reason might be that the economist, despite his professed disbelief in a science of ethics, realizes deep down that there is something unfortunate—we might even say bad—about unscientific and arbitrary value judgments in public policy, and so he tries desperately to square the circle, in order to be able to advocate policy in some sort of scientific manner.

  While squaring this circle is impossible, as we shall consider further, I believe that this putative uneasiness at making arbitrary value judgments is correct. While it is surely admirable (ethical?) for an economist to distinguish clearly and carefully between the value-free science and his own value judgments, I contend further that it is the responsibility of any scientist, indeed any intellectual, to refrain from any value judgment whatever unless he can support it on the basis of a coherent and defensible ethical system. This means, of course, that those economists who, on whatever grounds, are not prepared to think about and advance an ethical system should strictly refrain from any value pronouncements or policy conclusions at all. This position is of course itself an ethical one. But it relates to the ethical system that is the precondition of all science; for, even though particular scientific laws are themselves value-free, the very procedures of science rest on the ethical norm of honesty and the search for truth; that norm, I believe, includes the responsibility to lend coherence and system to all one’s pronouncements including valuational ones. I might add in passing that anyone conceding the necessity of honesty in science ipsofacto becomes willy-nilly a believer in objective ethics, but I will leave that point to the ethical subjectivists to grapple with.2

  Let me clarify with an example. Henry C. Simons, after trenchantly criticizing various allegedly scientific arguments for progressive taxation, came out flatly in favor of progression as follows:

  The case for drastic progression in taxation must be rested on the case against inequality—on the ethical or aesthetic judgment that the prevailing distribution of wealth and income reveals a degree (and/or kind) of inequality which is distinctly evil or unlovely.3

  My point is that, while it was surely admirable for Simons to make the distinction between his scientific and his personal value judgments crystal clear, that is not enough for him to escape censure. He had, at the very least, the responsibility of analyzing the nature and implications of egalitarianism and then attempting to defend it as an ethical norm. Flat declarations of unsupported value judgments should be impermissible in intellectual, let alone scientific, discourse. In the intellectual quest for truth it is scarcely sufficient to proclaim one’s value judgments as if they must be accepted as tablets from on high and not be themselves subject to intellectual criticism and evaluation.

  Suppose, for example, that Simons’s ethical or esthetic judgment was not on behalf of equality but of a very different social ideal. Suppose that instead he had come out in favor of the murder of all short people, of all adults under five feet six inches in height. And suppose that his sole defense of this proposal were the following:

  The case for the liquidation of all short people must be rested on the case against the existence of short people—on the ethical or aesthetic judgment that the prevailing number of short adults is distinctly evil or unlovely.

  One wonders if the reception accorded to Simons’s remarks by his fellow economists or social scientists would have been quite the same.4 Yet, of course, the logic of his stance would have been precisely the same.

  More usual is an attempt by the economist to place himself in the status of the physician of our foregoing example, that is, as someone who is merely agreeing to or ratifying the values either of a majority in society or of every person in it. But even in these cases, it must be remembered that the physician is in no sense value-free, though he is simply sharing the value of his patient, and that the value of health is so deeply shared that there is no occasion for making it explicit. Nevertheless, the physician does make a value judgment, and, even if every person in society shares the same value and goal, the economist who goes along with such a value is still making a value judgment, even if indeed universally shared. He is still illegitimately going beyond the bounds of the economist per se, and his value judgments must still be supported by rational argument.

  The weakest path to an economist’s adoption of social values is to appeal to the majority. Thus, John F. Due commented on the progressive income tax in his text on public finance:

  The strongest argument for progression is the fact that the consensus of opinion in society today regards progression as necessary for equity. This is, in turn, based on the principle that the pattern of income distribution, before taxes, involves excessive inequality (which) can be condemned on the basis of inherent unfairness in terms of the standards accepted by society.

  But once again the fact that the majority of society might hold market inequality to be “unfair” does not absolve Due of the fact that, in ratifying that judgment, he himself made that value judgment and went beyond the province of the economist. Furthermore, on scientific standards, the ad hoc and arbitrary value judgments of the majority are no better than those of one person, and Due, like Simons, failed to support that judgment with any sort of argumentation. Furthermore, when we ratify the majority, what of the rights or the utilities of the minority? Felix Adler’s strictures against the utilitarian ethic clearly apply here:

  Other sociologists frankly express their ideals in terms of quantity and, in the fashion of Bentham, pronounce the greatest happiness of the greatest number to be the social end, although they fail to make it intelligible why the happiness of the greater number should be cogent as an end upon those who happen to belong to the lesser number.6

  Again, with Due as with Simons, one wonders about the treatment of such a position by the American intellectual community if his imprimatur on the “consensus of opinion in society today” had been applied instead to the treatment of the Jews in Germany in the 1930s.

  Just as the physician who advises his client commits himself to the ethic of good health, so the economist who advises a client is not, much as he would like to think so, a mere technician who is not commiting himself to the value judgment of his client and his client’s goals. By advising a steel company on how to increase its profits, the economist is thereby committed to share in the steel entrepreneur’s value judgment that his greater profit is a desirable goal. It is even more important to make this point about the economist who advises the State. In so doing, he commits himself to the value judgments, not simply of the majority of the society as in the case of Due, but to the value judgments of the rulers of the State apparatus. To take a deliberately dramatic example, let us suppose that an economist is hired by the Nazis to advise the government on the most efficient method of setting up concentration camps. By agreeing to help make more efficient concentration camps, he is agreeing to make them “better,” in short, he is committing himself willy-nilly to concentration camps as a desirable goal. And he would, again, still be doing so even if this goal were heartily endorsed by the great majority of the German public. To underscore this point, it should be clear that an economist whose value system leads him to oppose concentration camps might well give such advice to the German government as to make the concentration camps as inefficient as possible, that is to sabotage their operations. In short, whatever advice he gives to his clients, a value commitment by the economist, either for or against his clients’ goals, is inescapable.7

  A more interesting variant of the economist’s attempt to make value-free value judgments is the “unanimity principle,” recently emphasized by James M. Buchanan. Here the idea is that the economist can safely advocate a policy if everyone in the society also advocates it. But, in the first place, the unanimity principle is still subject to the aforementioned strictures: that, even if the economist simply shares in everyone else’s value judgment, he is still making a value judgment. Furthermore, the superficial attractiveness of the unanimity principle fades away under more stringent analysis; for unanimity is scarcely sufficient to establish an ethical principle. For one thing, the requirement of unanimity for any action or change begins with and freezes the status quo. For an action to be adopted, the justice and ethical propriety of the status quo must first be established, and of course economics can scarcely be prepared to do that. The economist who advocates the unanimity principle as a seemingly value-free pronouncement is thereby making a massive and totally unsupported value judgment on behalf of the status quo. A stark but not untypical example was the debate in the British Parliament during the early nineteenth century on the abolition of slavery, when early adherents of the “compensation principle” variant of the unanimity principle (which has its own additional and grave problems) maintained that the masters must be compensated for the loss of their investment in slaves. At that point, Benjamin Pearson, a member of the Manchester school, declared that “he had thought it was the slaves who should have been compensated.”8 Here is a striking example of the need in advocating public policy of some ethical system, of a concept of justice. Those ethicists among us who hold that slavery is unjust would always oppose the idea of compensating the masters and would rather think in terms of reparations to compensate the slaves for their years of oppression. But what is there for the value-free economist qua economist to say?

  There are other grave problems with the compensation principle as a salvaging attempt to make it possible for value-free economists to advocate public policy. For the compensation principle assumes that it is conceptually possible to measure losses and thereby to compensate losers. But since praxeology informs us that “utility” and “cost” are purely subjective (psychic) concepts and therefore cannot be measured or even estimated by outside observers, it become impossible for such observers to weigh “social costs” and “social benefits” and to decide that the latter outweigh the former for any public policy, much less to make the compensations involved so that the losers are no longer losers. The usual attempt is to measure psychic losses in utility by the monetary price of an asset; thus, if a railroad damages the land of a farmer by smoke, it is assumed that the farmer’s loss can be measured by the market price of the land. But this ignores the facts that the farmer may have a psychic attachment to the land that puts its value far above the market price and that—especially in this kind of situation that does not involve direct action and exchange by the individuals—it is impossible to find out what the farmer’s psychic attachment to the land may be worth. He may say, for example, that his attachment to the land requires the compensation of $10 million, even though the market price is $100,000, but of course he may be lying. However, the government or other outside observer has no scientific way of finding out one way or another.9 Furthermore, the existence in the society of just one militant anarchist, whose psychic grievance against government is such that he cannot be compensated for his psychic disutility from the existence of government, is enough by itself to destroy the social-utility and compensation-principle case for any government action whatever. And surely at least one such anarchist exists.

  Can praxeological economics, then, say nothing about social utility? Not quite. If we define an “increase in social utility” in the Paretian manner as a situation where one or more persons gain in utility while nobody loses, then praxeology finds a definite, but restricted, role for the concept. But it is a role where social utilities remain unmeasurable and incomparable between persons. Briefly, praxeology maintains that when a person acts, his utility, or at least his ex ante utility, increases; he expects to enjoy a psychic benefit from the act, otherwise he would not have done it. When, in a voluntary free-market exchange, for example, I buy a newspaper from a newsdealer for 15 cents, I demonstrate by my action that I prefer (at least ex ante) the newspaper to the 15 cents, while the newsdealer demonstrates by his action the reverse order of preference. Since each of us is better off by the exchange, both the newsdealer and I have demonstrably gained in utility, while nothing has demonstrably happened to anyone else. Elsewhere I have called this praxeological concept “demonstrated preference,” in which action demonstrates preference, in contrast to various forms of psychologizing, which tries to measure other person’s value scales apart from action, and to behaviorism, which assumes that such values or preferences do not exist.10 The compensation principle that I have been criticizing rests on the illegitimate psychologizing notion that a scientific economist-observer can know anything about someone else’s value scale except as it is demonstrated through such action as the purchase or sale of a newspaper. And since the compensation principle is necessarily divorced from demonstrated preference, it cannot be employed by the scientific economist. Incidentally, I might note here that “demonstrated preference” is very different from Samuelson’s famous concept of “revealed preference,” for Samuelson, in illegitimate psychologizing fashion, assumed the existence of an underlying preference scale that forms the basis of a person’s action and that remains constant in the course of his actions over time. There is, however, no warrant for the scientific economist to make any such assumption. All we can say is that an action, at a specific point of time, reveals some of a person’s preferences at that time. There is no warrant for assuming that such preference orderings remain constant over time.11

  Now since praxeology shows, by the concept of demonstrated preference, that both the newsdealer and I gain in utility from the exchange, and nothing has demonstrably happened to anyone else, we can conclude scientifically, as praxeological economists, that social utility has increased from the sale and purchase of the newspaper—since we have defined social utility in the Paretian manner. It is true, of course, that third parties may well be grinding their teeth in hatred at the exchange. There may be people, for example, who through envy suffer a psychic loss because the newspaper dealer and/or I have gained. Therefore, if we employ the Paretian definition of “social utility” in the usual psychologizing sense, we can say nothing about social utility one way or the other. But if we confine the concept to its strict scientific compass in demonstrated preference, then we can state that social utility increases from the exchange. Still further, we may know as historians, from interpretive understanding of the hearts and minds of envious neighbors, that they do lose in utility. But we are trying to determine in this paper precisely what scientific economists can say about social utility or can advocate for public policy, and since they must confine themselves to demonstrated preference, they must affirm that social utility has increased.

  Conversely, since every act of the State involves coercion, at least the coercion of taxation, and since in its every act there is at least one demonstrable loser in utility, we must also conclude that no act whatever of the State can increase social utility. Here, of course, is another good reason why the economic scientist cannot use the concept of “social utility” to establish any sort of unanimity principle or any other case for government action. It has been pointed out that, similarly, we cannot say that any action of the State decreases social utility, at least in the short run, and that too is correct.

  We must emphasize, however, that the praxeological conclusion that the free market maximizes social utility is not sufficient to enable the praxeological economist to advocate the free market while abstaining from value judgments or from an ethical system. In the first place, why should an economist favor increasing social utility? This in itself requires an ethical or value judgment. And, secondly, the social-utility concept has many other failings, including the fact that while the envious and the egalitarian or the admirer of coercion per se may not be included in the social-utility concept, the contemporary historian knows that he is there, lurking in the wings; it therefore requires an ethical judgment, which cannot be supplied by praxeology, to overrule him. Furthermore, many of the strictures against the unanimity principle apply here too; for example, should we really be eager to preserve the utility of the slaveholder against loss? And if so, why?

  Let us now turn to the position of Ludwig von Mises on the entire matter of praxeology, value judgments, and the advocacy of public policy. The case of Mises is particularly interesting, not only because he was a leader in the modern Austrian school and in praxeology, but also because he was, of all the economists in the twentieth century, the most uncompromising and passionate adherent of laissez-faire and at the same time the most rigorous and uncompromising advocate of value-free economics and opponent of any sort of objective ethics. How then did he attempt to reconcile these two positions?12

  Essentially, Mises offered two very different solutions to this problem. The first is a variant of the unanimity principle. Essentially this variant affirms that an economist per se cannot say that a given governmental policy is “good” or “bad.” However, if a given policy will lead to consequences, as explained by praxeology, that every one of the supporters of the policy will agree is bad, then the value-free economist is justified in calling the policy a “bad” one. Thus, Mises wrote:

  An economist investigates whether a measure a can bring about the result p for the attainment of which it is recommended, and finds that a does not result in p but in g, an effect which even the supporters of the measure a consider undesirable. If the economist states the outcome of his investigation by saying that a is a bad measure, he does not pronounce a judgment of value. He merely says that from the point of view of those aiming at the goal p, the measure a is inappropriate.13

  And again:

  Economics does not say that . . . government interference with the prices of only one commodity . . . is unfair, bad, or unfeasible. It says, that it makes conditions worse, not better, from the point of view of the government and those backing its interference.14

  Now this is surely an ingenious attempt to allow pronouncements of “good” or “bad” by the economist without making a value judgment; for the economist is supposed to be only a praxeologist, a technician, pointing out to his readers or listeners that they will all consider a policy “bad” once he reveals its full consequences. But ingenious as it is, the attempt completely fails. For how could Mises know what the advocates of the particular policy consider desirable? How could he know what their value scales are now or what they will be when the consequences of the measure appear? One of the great contributions of praxeology, as I have pointed out above, is that the praxeologist, the economist, doesn’t know what anyone’s value scales are except as those value preferences are demonstrated by a person’s concrete action. In the case of my purchase of the newspaper, historians or psychologists may make more or less informed estimates of the newsdealer’s or my value scales through the process of interpretive understanding, but all that the economist can know scientifically and with certainty is the preferences relative to 15 cents or the newspaper as demonstrated through concrete action. Mises himself emphasized that

  one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. The only source from which our knowledge concerning these scales is derived is the observation of a man’s actions. Every action is always in perfect agreement with the scale of values or wants because these scales are nothing but an instrument for the interpretation of a man’s acting.15

  Given Mises’s own analysis, then, how can the economist know what the motives for advocating various policies really are or how people will regard the consequences of these policies?

  Thus, Mises, qua praxeologist, might show that price control (to use his example) will lead to unforeseen shortages of a good to the consumers. But how could Mises know that some advocates of price control do not want shortages? They may, for example, be socialists, anxious to use the controls as a step toward full collectivism. Some may be egalitarians who prefer shortages because the rich will not be able to use their money to buy more of the product than poorer people. Some may be nihilists, eager to see shortages of goods. Others may be one of the legion of contemporary intellectuals who are eternally complaining about the excessive affluence of our society or about the great waste of energy; they may all delight in the shortages of goods. Still others may favor price control, even after learning of the shortages, because they or their political allies will enjoy well-paying jobs or power in a price-control bureaucracy. All sorts of such possibilities exist, and none of them are compatible with the assertion of Mises, as a value-free economist, that all supporters of price control—or of any other government intervention—must concede, after learning economics, that the measure is “bad.” In fact, once Mises conceded that even a single advocate of price control or any other interventionist measure may acknowledge the economic consequences and still favor it, for whatever reason, then, as a praxeologist and economist, he could no longer call any of these measures “bad” or “good” or even “appropriate” or “inappropriate” without inserting into his economic policy pronouncements the very value judgments that he himself held to be in admissible in a scientist of human action.16 He would no longer be a technical reporter to all advocates of a certain policy but an advocate participating on one side of a value conflict.

  Moreover, there is another fundamental reason for advocates of “inappropriate” policies to refuse to change their minds even after hearing and acknowledging the praxeological chain of consequences. For praxeology may indeed show that all types of government policies will have consequences that most people, at least, will tend to abhor. But, and this is a vital qualification, most of these consequences take time, some a great deal of time. No economist has done more than Ludwig von Mises to elucidate the universality of time preference in human affairs—the praxeologic law that everyone prefers to attain a given satisfaction sooner than later. And certainly Mises, as a value-free scientist, could never presume to criticize anyone’s rate of time preference, to say that A’s was “too high” and B’s “too low.” But, in that case, what about the high-time-preference people in society who retort to the praxeologist: “Perhaps this high tax and subsidy policy will lead to a decline of capital; perhaps even the price control will lead to shortages, but I don’t care. Having a high time preference, I value more highly the short-run subsidies, or the short-run enjoyment of buying the current good at cheaper prices, than the prospect of suffering the future consequences.” And Mises, as a value-free scientist and opponent of any concept of objective ethics, could not call them wrong. There is no way that he could assert the superiority of the long run over the short run without overriding the values of the high-time-preference people; and that could not be cogently done without abandoning his own subjectivist ethics.

  In this connection, one of Mises’s basic arguments for the free market is that, on the market, there is a “harmony of the rightly understood interests of all members of the market society.” It is clear from his discussion that he could not merely mean “interests” after learning the praxeological consequences of market activity or of government intervention. He also, and in particular, meant people’s long-run interests. As he stated, “For ‘rightly understood’ interests we may as well say interests ‘in the long run.’”17 But what about the high-time-preference folk, who prefer to consult their short-run interests? How can the long run be called “better” than the short run? Why is “right understanding” necessarily the long run?

  We see, therefore, that Mises’s attempt to advocate laissez-faire while remaining value-free, by assuming that all of the advocates of government intervention will abandon their position once they learn of its consequences, falls completely to the ground. There is another and very different way, however, that Mises attempted to reconcile his passionate advocacy of laissez-faire with the absolute value-freedom of the scientist. This was to take a position much more compatible with praxeology, by recognizing that the economist qua economist can only trace chains of cause and effect and may not engage in value judgments or advocate public policy. In so doing, Mises conceded that the economic scientist cannot advocate laissez-faire but then added that as a citizen he can do so. Mises, as a citizen, proposed a value system but it is a curiously scanty one. For he was here caught in a dilemma. As a praxeologist he knew that he could not as an economic scientist pronounce value judgments or advocate policy. Yet he could not bring himself simply to assert and inject arbitrary value judgments. And so, as a utilitarian (for Mises, along with most economists, was indeed a utilitarian in ethics, although a Kantian in epistemology), he made only one narrow value judgment: that he desired to fulfill the goals of the majority of the public (happily, in this formulation, Mises did not presume to know the goals of everyone).

  As Mises explained in his second variant:

  Liberalism (i.e., laissez-faire liberalism) is a political doctrine . . . . As a political doctrine liberalism (in contrast to economic science) is not neutral with regard to values and ultimate ends sought by action. It assumes that all men or at least the majority of people are intent upon attaining certain goals. It gives them information about the means suitable to the realization of their plans. The champions of liberal doctrines are fully aware of the fact that their teachings are valid only for people who are committed to their valuational principles. While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness . . . abundance to poverty. It teaches men how to act in accordance with these valuations.18

  In this second variant, Mises successfully escaped the self-contradiction of being a value-free praxeologist advocating laissez-faire. Granting in this variant that the economist may not make such advocacy, he took his stand as a citizen willing to make value judgments. But he was not willing, as Simons was, to simply assert an ad hoc value judgment; presumably he felt that a valuing intellectual must present some sort of system to justify such value judgments. But for Mises the utilitarian, his system is a curiously bloodless one; even as a valuing laissez-faire liberal, he was only willing to make the one value judgment that he joined the majority of the people in favoring their common peace, prosperity, and abundance. In this way, as an opponent of objective ethics, and uncomfortable as he must have been with making any value judgments even as a citizen, he made the minimal possible degree of such judgments; true to his utilitarian position his value judgment is the desirability of fulfilling the subjectively desired goals of the bulk of the populace.

  A full critique of this position must involve a critique of utilitarian ethics itself, and this cannot be done here. But a few points may be made. In the first place, while praxeology can indeed demonstrate that laissez-faire will lead to harmony, prosperity, and abundance, while government intervention leads to conflict and impoverishment,19 and while it is probably true that most people value the former highly, it is not true that these are their only goals or values. The great analyst of ranked value scales and diminishing marginal utility should have been more aware of such competing values and goals. For example, many people, whether through envy or a misplaced theory of justice, may prefer far more equality of income than will be attained on the free market. Many people, pace the aforementioned intellectuals, may want less abundance in order to whittle down our allegedly excessive affluence. Others, as I have mentioned, may prefer to loot the capital of the rich or the businessman in the short run, while acknowledging but dismissing the long-run ill effects, because they have a high time preference. Probably very few of these people will want to push statist measures to the point of total impoverishment and destruction—although this may happen, as in the case of Communist China. But a majority coalition of the foregoing might well opt for some reduction in wealth and prosperity on behalf of these other values. They may well decide that it is worth sacrificing a modicum of wealth and efficient production because of the high opportunity cost of not being able to enjoy an alleviation of envy, or a lust for power, or a submission to power, or, for example, the thrill of “national unity,” which they might enjoy from a (short-lived) economic crisis.

  What could Mises reply to a majority of the public who have indeed considered all the praxeological consequences and still prefer a modicum—or, for that matter, even a drastic amount—of statism in order to achieve some of their competing goals? As a utilitarian, he could not quarrel with the ethical nature of their chosen goals: for he had to confine himself to the one value judgment that he favored the majority’s achieving their chosen goals. The only reply that Mises could make within his own framework was to point out that government intervention has a cumulative effect, that eventually the economy must move either toward the free market or toward full socialism, which praxeology shows will bring chaos and drastic impoverishment, at least to an industrial society. But this, too, is not a fully satisfactory answer. While many programs of statist intervention—especially price controls—are indeed cumulative, others are not. Furthermore, the cumulative impact takes such a long time that the time preferences of the majority would probably lead them, in full acknowledgment of the consequences, to ignore the effect. And then what?

  Mises attempted to use the cumulative argument to answer the contention that the majority of the public prefer egalitarian measures even knowingly at the expense of a portion of their own wealth. Mises’s comment was that the “reserve fund” was on the point of being exhausted in Europe, and therefore that any further egalitarian measures would have to come directly out of the pockets of the masses through increased taxation. Mises assumed that once this became clear, the masses would no longer support interventionist measures.20 In the first place, this is no argument against the previous egalitarian measures or in favor of their repeal. But secondly, while the masses might be convinced, there is certainly no apodictic certainty involved; the masses have in the past and presumably will in the future continue knowingly to support egalitarian and other statist measures on behalf of others of their goals, despite the knowledge that their income and wealth would be reduced. Thus, as William E. Rappard pointed out in his thoughtful critique of Mises’s position:

  Does the British voter, for instance, favor confiscatory taxation of large incomes primarily in the hope that it will redound to his material advantage, or in the certainty that it tends to reduce unwelcome and irritating social inequalities? In general, is the urge towards equality in our modern democracies not often stronger than the desire to improve one’s material lot?21

  Rappard also noted that in his own country, Switzerland, the urban industrial and commercial majority of the country have repeatedly, and often at popular referendums, endorsed measures to subsidize the minority of farmers in a deliberate effort to retard industrialization and the growth of their own incomes. The urban majority did not do so in the “absurd belief that they were thereby increasing their real income.” Instead, “quite deliberately and expressly, political parties have sacrificed the immediate material welfare of their members in order to prevent, or at least somewhat to retard, the complete industrialization of the country. A more agricultural Switzerland, though poorer, such is the dominant wish of the Swiss people today.”22 The point here is that Mises, not only as a praxeologist but also as a utilitarian liberal, could have no word of criticism against these statist measures once the majority of the public take their praxeological consequences into account and choose them anyway on behalf of goals other than wealth and prosperity.

  Furthermore, there are other types of statist intervention that clearly have little or no cumulative effect and that may even have very little effect in diminishing production or prosperity. Let us, for example, assume—and this assumption is not very farfetched in view of the record of human history—that the great majority of a society hate and revile redheads, perhaps, to cite Simons again, because they find redheads “evil or unlovely.” Let us further assume that there are very few redheads in the society. This large majority then decide that they would like very much to murder all redheads. Here they are; the murder of redheads is high on the value scales of the great majority of the public; there are few redheads so that there will be little loss in production on the market. How could Mises rebut this proposed policy either as a praxeologist or as a utilitarian liberal? I submit that he could not do so.

  Mises made one further attempt to establish his position, but it was even less successful. Criticizing the arguments for state intervention on behalf of equality or other moral concerns, he dismissed them as “emotional talk.” After reaffirming that “praxeology and economics . . . are neutral with regard to any moral precepts,” and asserting that “the fact that the immense majority of men prefer a richer supply of material goods to a less ample supply is a datum of history; it does not have any place in economic theory,” he concluded by insisting that “he who disagrees with the teachings of economics ought to refute them by discursive reasoning, not by . . . the appeal to arbitrary, allegedly ethical standards.”23

  But I submit that this will not do; for Mises would have to concede that no one can decide upon any policy whatever unless he makes an ultimate ethical or value judgment. But since this is so, and since according to Mises all ultimate value judgments or ethical standards are arbitrary, how then could he denounce these particular ethical judgments as “arbitrary”? Furthermore, it was hardly correct for Mises to dismiss these judgments as “emotional,” since for him as a utilitarian, reason cannot establish ultimate ethical principles, which can therefore only be established by subjective emotions. It was pointless for Mises to call for his critics to use “discursive reasoning” since he himself denied that discursive reasoning can be used to establish ultimate ethical values. Furthermore, the man whose ultimate ethical principles would lead him to support the free market could also be dismissed by Mises as equally “arbitrary” and “emotional,” even if he takes the laws of praxeology into account before making his ultimately ethical decision. And we have seen above that the majority of the public very often have other goals which they hold, at least to a certain extent, higher than their own material well-being.

  The burden of this paper has been to show that, while praxeological economic theory is extremely useful for providing data and knowledge for framing economic policy, it cannot be sufficient by itself to enable the economist to make any value pronouncements or to advocate any public policy whatsoever. More specifically, Ludwig von Mises to the contrary notwithstanding, neither praxeological economics nor Mises’s utilitarian liberalism is sufficient to make the case for laissez-faire and the free-market economy. To make such a case, one must go beyond economics and utilitarianism to establish an objective ethics that affirms the overriding value of liberty and morally condemns all forms of statism, from egalitarianism to the murder of redheads, as well as such goals as the lust for power and the satisfaction of envy. To make the full case for liberty, one cannot be a methodological slave to every goal that the majority of the public might happen to cherish.

  NOTES

  PART 3

  APPLICATIONS

  [1.]Felix Adler, “The Relation of Ethics to Social Science,” in Congress of Arts and Science, ed. H.J.Rogers(Boston: Houghton Mifflin Co., 1906), 7:678.

  [2.]See the critique of the inconsistency of the championing of intellectual honesty by the great opponent of objective ethics, Max Weber, in Leo Strauss, Natural Right and History (Chicago: University of Chicago Press, 1953), pp. 47–48.

  [3.]Henry C. Simons, Personal Income Taxation (1938), pp. 18–19, cited by Walter J. Blum and Harry Kalven, Jr., The Uneasy Case for Progressive Taxation (Chicago: University of Chicago Press, 1953), p. 72.

  [4.]Murray N. Rothbard, Egalitarianism as a Revolt against Nature, and Other Essays (Washington, D. C.: Libertarian Review Press, 1974), pp. 2–3.; also see idem, Power and Market (Menlo Park, Calif.: Institute for Humane Studies, 1970), pp. 157–160.

  [6.]Adler, “Relation of Ethics,” p. 673.

  [7.]Murray N. Rothbard, “Value Implications of Economic Theory,” The American Economist 17 (Spring 1973), pp. 38–39.

  [8.]William D. Grampp, The Manchester School of Economics (Stanford: Stanford University Press, 1960), p. 59; also see Rothbard, “Value Implications,” pp. 36–37.

  [9.]For a further analysis of this question, see Walter Block, “Coase and Demsetz on Private Property Rights: A Comment” (unpublished manuscript, privately distributed).

  [10.]Murray N. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” in On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises, ed. Mary Sennholz (Princeton: D. Van Nostrand, 1956), pp. 224–32, 243–62.

  [11.]Rothbard, “Toward a Reconstruction,” pp. 228–30; also see Ludwig von Mises, Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949), pp. 102–4. Samuelson’s views may be found, among other places, in Paul A. Samuelson, “The Empirical Implications of Utility Analysis,” Econometrica 6 (October 1938):344–56; and idem, Foundations of Economics (Cambridge: Harvard University Press, 1947), pp. 146–63.

  [12.]For a posing of this question, see William E. Rappard, “On Reading von Mises,” in On Freedom and Free Enterprise, ed. Sennholz, pp. 17–33.

  [13.]Mises, Human Action, p. 879.

  [14.]Ibid., p. 758 (Mises’s italics).

  [15.]Ibid., p. 95.

  [16.]Mises himself conceded at one point that a government or a political party may advocate policies for “demagogic,” i.e., for hidden and unannounced, reasons (ibid., p. 104 n.).

  [17.]Ibid., pp. 670, 670 n.

  [18.]Ibid., pp. 153–54.

  [19.]Rothbard, Power and Market, pp. 194–96.

  [20.]Mises, Human Action, pp. 851–55.

  [21.]Rappard, “On Reading von Mises,” pp. 32–33.

  [22.]Ibid., p. 33.

  [23.]Ludwig von Mises, “Epistemological Relativism in the Sciences of Human Action,” in Relativism and the Study of Man, ed. Helmut Schoeck and J. W. Wiggins (Princeton: D. Van Nostrand, 1961), p. 133.

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  13: H. L. Mencken: The Joyous Libertarian

  Ralph Raico, New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981). Chapter: MURRAY N. ROTHBARD, H. L. Mencken: The Joyous Libertarian

  Accessed from oll.libertyfund.org/title/2136/195322 on 2009-05-21

  The copyright to this publication is held by Liberty Fund, Inc. The New Individualist Review is prohibited for use in any publication, journal, or periodical without written consent of J. M. Cobb, J. M. S. Powell, or David Levy.

  ---

  H. L. Mencken: The Joyous Libertarian

  MURRAY N. ROTHBARD*

  The extortions and oppressions of government will go on so long as such bare fraudulence deceives and disarms the victims—so long as they are ready to swallow the immemorial official theory that protesting against the stealings of the archbishop’s secretary’s nephew’s mistress’ illegitimate son is a sin against the Holy Ghost.

  —H. L. Mencken

  IT IS TYPICAL of American Kultur that it was incapable of understanding H. L. Mencken. And it was typical of H. L. Mencken that this didn’t bother him a bit; in fact, quite the contrary, for it confirmed his estimate of his fellow-countrymen. It is difficult for Americans to understand a merger of high-spirited wit and devotion to principle; one is either a humorist, gently or acidly spoofing the foibles of one’s age, or else one is a serious and solemn thinker. That a man of ebullient wit can be, in a sense, all the more devoted to positive ideas and principles is understood by very few; almost always, he is set down as a pure cynic and nihilist. This was and still is the common fate of H. L. Mencken; but it is no more than he would have cheerfully expected.

  Any man who is an individualist and a libertarian in this day and age has a difficult row to hoe. He finds himself in a world marked, if not dominated, by folly, fraud, and tyranny. He has, if he is a reflecting man, three possible courses of action open to him: (1) he may retire from the social and political world into his private occupation: in the case of Mencken’s early partner, George Jean Nathan, he can retire into a world of purely esthetic contemplation; (2) he can set about to try to change the world for the better, or at least to formulate and propagate his views with such an ultimate hope in mind; or, (3) he can stay in the world, enjoying himself immensely at this spectacle of folly. To take this third route requires a special type of personality with a special type of judgment about the world. He must, on the one hand, be an individualist with a serene and unquenchable sense of self-confidence; he must be supremely “inner-directed” with no inner shame or quaking at going against the judgment of the herd. He must, secondly, have a supreme zest for enjoying life and the spectacle it affords; he must be an individualist who cares deeply about liberty and individual excellence, but who can—from that same dedication to truth and liberty—enjoy and lampoon a society that has turned its back on the best that it can achieve. And he must, thirdly, be deeply pessimistic about any possibility of changing and reforming the ideas and actions of the vast majority of his fellow-men. He must believe that boobus Americanus is doomed to be boobus Americanus forevermore. Put these qualities together, and we are a long way toward explaining the route taken by Henry Louis Mencken.

  Of course, Mencken had other qualities, too: enormous gusto, a sparkling wit, a keen and erudite appreciation of many fields of knowledge, a zest for the dramatic events of the everyday world that made him a born journalist. Despite his omnivorous passion for intellectual fields and disciplines, he had no temperament for fashioning rigorous systems of thought—but then, how many people have? All these qualities reinforced his bent for what he became.

  A serene and confident individualist, dedicated to competence and excellence and deeply devoted to liberty, but convinced that the bulk of his fellows were beyond repair, Mencken carved out a role unique in American history: he sailed joyously into the fray, slashing and cutting happily into the buncombe and folly he saw all around him, puncturing the balloons of pomposity, gaily cleansing the Augean stables of cant, hypocrisy, absurdity, and cliche, “heaving,” as he once put it, “the dead cat into the temple” to show bemused worshippers of the inane that he would not be struck dead on the spot. And in the course of this task, rarely undertaken in any age, a task performed purely for his own enjoyment, he exercised an enormous liberating force upon the best minds of a whole generation.

  It is characteristic of Mencken that one of the things he enjoyed the most was a Presidential convention, which he almost never failed to attend. Here he plunged into the midst of the teeming, raucous and absurd throng: into all the hilarity and inanity and excitement of the great American political process itself, his jacket off, swigging beer, partaking of all the fun while missing none of the folly. And then he would write up what he saw, slashing at the cant, hypocrisy, and concentrated nonsense of our governors in action. No one truly immersed in Mencken could emerge quite the same again; no one could retain the same faith in our “statesmen” or in the democratic political process itself, no one could ever be quite the same sucker for all manner of ideological, social, and political quackery, the same worshipper of solemn nonsense.

  Mencken’s liberating force, of course, was exerted not on the mass of men, but on the scattered but intelligent few who could appreciate and be influenced by what he had to say; in short, like his old friend and fellow-libertarian, Albert Jay Nock, Mencken wrote for (and liberated) The Remnant who would understand.

  The style is truly the man, and not the least of Mencken’s deeds of liberation was the shattering impact of his style. A scholar in the English—or the American—language, Mencken had a love for the language, for precision and clarity of the word, a deep respect for his craft, that few writers have possessed. It was not hyperbole when the eminent critic and essayist Joseph Wood Krutch referred to Mencken as “the greatest prose stylist of the twentieth century;” this, too, has gone unrecognized because Americans are generally incapable of taking a witty writer seriously.

  The tragedy—for us, not for Mencken himself—is that most of The Remnant didn’t understand either; the bulk of his supposed followers made the same mistake as everyone else in presuming wit and serious purpose cannot be joined; blinded by the wit, they did not realize the positive values which should have been evident in his work. And so those who happily joined Mencken in scoffing at Babbittry, at Prohibition and the Anti-Saloon League, at the wowsers and the Uplift of the 1920’s, abandoned Mencken to enlist in the ranks of the intensified Uplift and the more extravagant wowsers of the 1930’s. The very scorners of the politicians and political nostrums of the ’twenties, promptly and fiercely subscribed to the far more pernicious nostrums of the political quacks of the New Deal. The same Menckenians who clear-sightedly saw the folly of America’s immersion into World War I, beat the drums loudly and with no trace of humor or hesitation for the equal or greater folly of our entry into World War II. The failure of Mencken’s would-be followers to understand his “message” (a concept he would have abhorred) certainly did not depress Mencken; it only confirmed him in his judgment of the pervasiveness of the “booboisie.” But it was a calamity for the country.

  If Mencken was not a nihilist, what positive values did he hold? His values included a devoted dedication to his craft—to his work as editor, journalist, linguist. This in turn reflected his thorough-going and pervasive individualism, with its corollary devotion to individual excellence and to individual liberty. They included a life-long passion for music. They included a perhaps excessive zeal for science, the scientific method, and medical orthodoxy; along with the zeal for science came a mechanistic type of determinism which undoubtedly helped to shape his pessimistic view of the possibility of changing the ideas and actions of men.

  Mencken’s pervasive individualist Weltanschauung gave an unappreciated consistency to his views on many different subjects. It gave a system to his superficially piecemeal forays into innumerable fields. Let us take, for example, such a supposedly “non-political” field as folk-music. It is not accidental that both the Socialist Left and the Nationalist Right—those twin enemies of individualism—in our century have made a virtual fetish of the “people’s” folk-song. Mencken cut to the heart of the matter in his inimitable review of Dr. Louise Pound’s Poetic Origins and the Ballad:

  Dr. Pound’s book completely disposes of the theory upon which ninetenths of all the pedagogical discussions of the ballad and its origins are based. This is the theory that the ballads familiar to all of us . . . are the product, not of individual authors, but of whole herds of minnesingers working together . . . in brief, that the primitive balladists first joined in a communal hoofing, then began to moan and hum a tune, and finally fitted words to it. It is difficult to imagine anything more idiotic, and yet this doctrine is cherished as something almost sacred by whole droves of professors and rammed annually into the skulls of innumerable candidates for the Ph.D. Dr. Pound proves . . . that the ballads really did not originate that way at all—that they were written, on the contrary, by individual poets with talents . . . and that most of them first saw the light, not at vulgar shindigs on the village green, but at fashionable and even intellectual ale-parties in castle halls.

  The notion that any respectable work of art can have a communal origin is wholly nonsensical. The plain people, taking them together, are quite as incapable of a coherent esthetic impulse as they are of courage, honesty, or honor. The cathedrals of the Middle Ages were not planned and built by whole communities, but by individual men; and all the communities had to do with the business was to do the hard work, reluctantly and often badly. So with folk-song, folk-myth, folk-balladry. . . . German folk-song . . . used to be credited to a mysterious native talent in the German yokelry, but scientific investigation reveals that some of the songs regarded as especially characteristic of the folk-soul were actually written by the director of music at the University of Tubingen, Prof. Dr. Friedrich Silcher. . . .

  The English ballads are to be accounted for in the same way. Dr. Pound shows that some of the most famous of them, in their earliest forms, are full of concepts and phrases that would have been as incomprehensible to the English peasantry of Elizabeth’s time as the Ehrlich hypothesis of immunity—that it is a sheer impossibility to imagine them being composed by a gang of oafs whooping and galloping around a May pole, or even assembled solemnly in an Eisteddfod or Allgemeinesangerfest. More, she shows the process of ballad making in our own time—how a song by a Paul Dresser or a Stephen Foster is borrowed by the folk, and then gradually debased.1

  The myth of Mencken as a mocking nihilist has pervaded literary criticism; it was with surprise and much admiration, then, that the eminent critic Samuel Putnam read Mencken’s great collection of short pieces—selected and edited by himself—the Mencken Chrestomathy. In a perceptive review, Putnam wrote that it was now evident that Mencken was a “Tory anarchist.” “Tory anarchist” is indeed an excellent summation of Mencken’s life-long worldview.

  Mencken’s guiding passion was individual liberty. To his good friend Hamilton Owens, he once solemnly declared: “I believe in only one thing and that thing is human liberty. If ever a man is to achieve anything like dignity, it can happen only if superior men are given absolute freedom to think what they want to think and say what they want to say. I am against any man and any organization which seeks to limit or deny that freedom . . . [and] the superior man can be sure of freedom only if it is given to all men.”2 At another time he wrote that he believed in absolute individual liberty “up to the limit of the unbearable, and even beyond.” In a privately written “Addendum on Aims,” Mencken wrote that “I am an extreme libertarian, and believe in absolute free speech. . . . I am against jailing men for their opinions, or, for that matter, for anything else.”3 And in a letter to one of his biographers, Ernest Boyd, Mencken wrote: “So far as I can make out, I believe in only one thing: liberty. But I do not believe in even liberty enough to want to force it upon anyone. That is, I am nothing of the reformer, however much I may rant against this or that great curse or malaise. In that ranting there is usually far more delight than indignation.”4

  The Chrestomathy contains some brilliant writing on what Mencken captioned as the “inner nature” of government:

  All government, in its essence, is a conspiracy against the superior man; its one permanent object is to oppress him and cripple him. If it be aristocratic in organization, then it seeks to protect the man who is superior only in law against the man who is superior in fact; if it be democratic, then it seeks to protect the man who is inferior in every way against both. One of its primary functions is to regiment men by force, to make them as much alike as possible and as dependent upon one another as possible, to search out and combat originality among them. All it can see in an original idea is potential change, and hence an invasion of its prerogatives. The most dangerous man, to any government, is the man who is able to think things out for himself, without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane and intolerable, and so, if he is romantic, he tries to change it. And even if he is not romantic personally he is very apt to spread discontent among those who are. . . .

  The average man, whatever his errors otherwise, at least sees clearly that government is something lying outside him and outside the generality of his fellow-men—that it is a separate, independent and often hostile power, only partly under his control, and capable of doing him great harm. In his romantic moments, he may think of it as a benevolent father or even as a sort of jinn or god, but he never thinks of it as part of himself. In time of trouble he looks to it to perform miracles for his benefit; at other times he sees it as an enemy with which he must do constant battle. Is it a fact of no significance that robbing the government is everywhere regarded as a crime of less magnitude than robbing an individual? . . .

  What lies behind all this, I believe, is a deep sense of the fundamental antagonism between the government and the people it governs. It is apprehended, not as a committee of citizens chosen to carry on the communal business of the whole population, but as a separate and autonomous corporation, mainly devoted to exploiting the population for the benefit of its own members. Robbing it is thus an act almost devoid of infamy. . . . When a private citizen is robbed a worthy man is deprived of the fruits of his industry and thrift; when the government is robbed the worst that happens is that certain rogues and loafers have less money to play with than they had before. The notion that they have earned that money is never entertained; to most sensible men it would seem ludicrous. They are simply rascals who, by accidents of law, have a somewhat dubious right to a share in the earnings of their fellow men. When that share is diminished by private enterprise the business is, on the whole, far more laudable than not.

  This gang is well-nigh immune to punishment. Its worst extortions, even when they are baldly for private profit, carry no certain penalties under our laws. Since the first days of the Republic, less than a dozen of its members have been impeached, and only a few obscure understrappers have ever been put into prison. The number of men sitting at Atlanta and Leavenworth for revolting against the extortions of government is always ten times as great as the number of government officials condemned for oppressing the taxpayers to their own gain. . . . There are no longer any citizens in the world; there are only subjects. They work day in and day out for their masters; they are bound to die for their masters at call. . . . On some bright tomorrow, a geological epoch or two hence, they will come to the end of their endurance. . . .5

  Mencken had little faith in the ability of revolutions to effect an overthrow on behalf of liberty: “Political revolutions do not often accomplish anything of genuine value; their one undoubted effect is simply to throw out one gang of thieves and put in another. After a revolution, of course, the successful revolutionists always try to convince doubters that they have achieved great things, and usually they hang any man who denies it. But that surely doesn’t prove their case.” This blend of libertarian doctrine and pessimism on achieving it was summed up by Mencken: “The ideal government of all reflective men . . . is one which lets the individual alone—one which barely escapes being no government at all. This ideal, I believe, will be realized in the world twenty or thirty centuries after I have passed from these scenes and taken up my public duties in Hell.”6

  Mencken saw clearly the fallacy of treating government officials as uniquely motivated by the public weal:

  These men, in point of fact, are seldom if ever moved by anything rationally describable as public spirit; there is actually no more public spirit among them than among so many burglars or street-walkers. Their purpose, first, last and all the time, is to promote their private advantage, and to that end, and that end alone, they exercise all the vast powers that are in their hands. . . . Whatever it is they seek, whether security, greater ease, more money or more power, it has to come out of the common stock, and so it diminishes the shares of all other men. Putting a new job-holder to work decreases the wages of every wage-earner in the land. . . . Giving a job-holder more power takes something away from the liberty of all of us. . . .

  Mencken goes on to add, on the nature of government and attempts to stem its incursions:

  It is, perhaps, a fact provocative of sour mirth that the Bill of Rights was designed trustfully to prohibit forever two of the favorite crimes of all known governments: the seizure of private property without adequate compensation and the invasion of the citizen’s liberty without justifiable cause. . . . It is a fact provocative of mirth yet more sour that the execution of these prohibitions was put into the hands of courts, which is to say, into the hands of lawyers, which is to say, into the hands of men specifically educated to discover legal excuses for dishonest, dishonorable and anti-social acts.7

  One of the major forces keeping governmental tyranny unchecked, Mencken pointed out, was the credulity of the masses of men: “The State is not force alone. It depends upon the credulity of man quite as much as upon his docility. Its aim is not merely to make him obey, but also to make him want to obey.”8

  Is government sometimes useful? Answered Mencken:

  So is a doctor. But suppose the dear fellow claimed the right, every time he was called in to prescribe for a bellyache or a ringing in the ears, to raid the family silver, use the family tooth-brushes, and execute the droit de seigneur upon the housemaid?9

  Neither did Mencken have any greater affection for the military caste than for the civilian bureaucracy:

  The military caste did not originate as a party of patriots, but as a party of bandits. The primeval bandit chiefs eventually became kings. Something of the bandit character still attaches to the military professional. He may fight bravely and unselfishly, but so do gamecocks. He may seek no material rewards, but neither do hunting dogs. His general attitude of mind is stupid and antisocial. It was a sound instinct in the Founding Fathers that made them subordinate the military establishment to the civil power. To be sure, the civil power consists largely of political scoundrels, but they at least differ in outlook and purpose from the military. . . .10

  NO ONE EXCELLED MENCKEN in what he called “Utopian flights”—hilarious and magnificent projects for libertarian reform of government, or of society in general. Thus, in a piece written in 1924, before, as he put it, “the New Deal afflicted the country with a great mass of new administrative law and extra-tyrannical jobholders,” Mencken proposed a searching reform in our system of administrative law. He begins by saying that “in the immoral monarchies of the continent of Europe, now happily abolished by God’s will, there was, in the old days of sin, an intelligent and effective way of dealing with delinquent officials.” Not only, he adds, were they subjects to ordinary criminal law, but also to special courts for “offenses . . . peculiar to their offices.” Prussia maintained a court where any citizen was free to lodge a complaint against an official, and a guilty official could be punished in many ways—forced to pay damages against a victimized citizen, removed from office, and/or sent to jail. “Had a Prussian judge in those far-off days of despotism, overcome by a brainstorm of kaiserliche passion, done any of the high-handed and irrational things that our own judges, Federal and State, do almost every day, an aggrieved citizen might have hailed him before the administrative court and recovered heavy damages from him. . . .” Furthermore, the law “specifically provided that responsible officials should be punished, not more leniently than subordinate or ordinary offenders, but more severely. If a corrupt policeman got six months a corrupt chief of police got two years. More, these statutes were enforced with Prussian barbarity; and the jails were constantly full of errant officials.”

  Mencken adds that he does not precisely propose, “of course,” the Prussian system for the United States:

  As a matter of fact, the Prussian scheme would probably prove ineffective in the Republic, if only because it involved setting up one gang of jobholders to judge and punish another gang. It worked very well in Prussia before the country was civilized by force of arms because, as everyone knows, a Prussian official was trained in ferocity from infancy, and regarded every man arraigned before him, whether a fellow official or not, as guilty ipso facto; in fact, any thought of a prisoner’s possible innocence was abhorrent to him as a reflection upon the Polizei, and by inference, upon the Throne, the whole monarchical idea, and God. But in America . . . judge and prisoner would often be fellow Democrats or fellow Republicans, and hence jointly interested in protecting their party against scandal and its members against the loss of their jobs.

  “What is needed,” concluded Mencken, “is a system (a) that does not depend for its execution upon the good-will of fellow jobholders, and (b) that provides swift, certain and unpedantic punishments, each fitted neatly to its crime.” Mencken’s proposed remedy

  provides that any [citizen] . . . having looked into the acts of a jobholder and found him delinquent, may punish him instantly and on the spot, and in any manner that seems appropriate and convenient—and that, in case this punishment involves physical damage to the jobholder, the ensuing inquiry by the grand jury or coroner shall confine itself strictly to the question whether the jobholder deserved what he got. In other words, I propose that it shall no longer be malum in se for a citizen to pummel, cowhide, kick, gouge, cut, wound, bruise, maim, burn, club, bastinado, flay or even lynch a jobholder, and that it shall be malum prohibitum only to the extent that the punishment exceeds the jobholder’s desserts. The amount of this excess, if any, may be determined very conveniently by a petit jury, as other questions of guilt are now determined. . . . If it decides that the jobholder deserves the punishment inflicted upon him, the citizen who inflicted it is acquitted with honor. If, on the contrary, it decides that the punishment was excessive, then the citizen is adjudged guilty of assault, mayhem, murder, or whatever it is, in a degree apportioned to the difference between what the jobholder deserved and what he got, and punishment for that excess follows in the usual course. . . .

  The advantages of this plan, I believe, are too patent to need argument. At one stroke it removes all the legal impediments which now make the punishment of a recreant jobholder so hopeless a process. . . . Say a citizen today becomes convinced that a certain judge is a jackass—that his legal learning is defective, his sense of justice atrophied and his conduct of cases before him tyrannical and against decency. As things stand, it is impossible to do anything about it. . . . Nor is anything to be gained by denouncing him publicly and urging all good citizens to vote against him when he comes up for re-election, for his term may run for ten or fifteen years, and even if it expires tomorrow and he is defeated the chances are good that his successor will be quite as bad, and maybe even worse.

  But now imagine any citizen free to approach him in open court and pull his nose. Or even, in aggravated cases, to cut off his ears, throw him out of the window, or knock him in the head with an ax. How vastly more attentive he would be to his duties! How diligently he would apply himself to the study of the law! How careful he would be about the rights of litigants before him!11

  Mencken’s concern for the parlous state of liberty in America, and with the virtual immunity granted to its oppressors, was never expressed with more hilarity or bitter irony than in his article on “The Nature of Liberty”—written in the early 1920’s but in no sense out of date. His theme is the police vs. the individual citizen. He begins in irony: “Every time an officer of the constabulary, in the execution of his just and awful powers under American law, produces a compound fracture of the occiput of some citizen in his custody, with hemorrhage, shock, coma and death, there comes a feeble, falsetto protest from specialists in human liberty.” “Is it a fact without significance,” Mencken continues, “that this protest is never supported by the great body of American freemen, setting aside the actual heirs and creditors of the victim? I think not.” For the plain people understand that policemen are given night-sticks “for the purpose of cracking the skulls of the recalcitrant plain people, Democrats and Republicans alike.”

  It is clear, therefore, Mencken continued to spoof, that this minority of intellectuals concerned with civil liberty and individual rights as against the police are subversive and un-American:

  The specialists aforesaid are the same fanatics who shake the air with sobs every time the Postmaster-General of the United States bars a periodical from the mails because its ideas do not please him, and every time some poor Russian is deported for reading Karl Marx, and every time a Prohibition enforcement officer murders a bootlegger who resists his levies, and every time agents of the Department of Justice throw an Italian out of the window, and every time the Ku Klux Klan or the American Legion tars and feathers a Socialist evangelist. In brief, they are Radicals, and to scratch one with a pitchfork is to expose a Bolshevik. They are men standing in contempt of American institutions and in enmity to American idealism. . . .

  What ails them primarily is . . . that . . . having mastered . . . the theoretical principles set forth in the Bill of Rights, they work themselves into a passionate conviction that those principles are identical with the rules of law and justice, and ought to be enforced literally, and without the slightest regard for circumstance and expediency.

  They did not realize, added Mencken, that the Bill of Rights as originally

  adopted by the Fathers of the Republic . . . was gross, crude, idealistic, a bit fanciful and transcendental. It specified the rights of a citizen, but it said nothing whatever about his duties. Since then, by the orderly processes of legislative science and by the even more subtle and beautiful devices of juridic art, it has been kneaded and mellowed into a far greater pliability and reasonableness. On the one hand, the citizen still retains the great privilege of membership in the most superb free nation ever witnessed on this earth. On the other hand, as a result of countless shrewd enactments and sagacious decisions, his natural lusts and appetites are held in laudable check, and he is thus kept in order and decorum. . . . Once a policeman, he is protected by the legislative and judicial arms in the peculiar rights and prerogatives that go with his high office, including especially the right to jug the laity at his will, to sweat and mug them, to subject them to the third degree, and to subdue their resistance by beating out their brains. Those who are unaware of this are simply ignorant of the basic principles of American jurisprudence, as they have been exposed times without number by the courts of first instance and ratified in lofty terms by the Supreme Court of the United States.12

  Mencken’s devoted services to civil liberty, his opposition to censorship as editor of the American Mercury, are too well-known to need repeating here. But less known is Mencken’s searching dissection of the myth of Mr. Justice Holmes as, in his dissenting opinions, a great civil libertarian. Mencken keenly pointed out that “it is impossible to see how . . . [Holmes’ opinions] can conceivably promote liberty.” It was misleading to consider Holmes an advocate of the rights of man; rather,

  he was actually no more than an advocate of the rights of law-makers. There, indeed, is the clue to his whole jurisprudence. He believed that the law-making bodies should be free to experiment almost ad libitum, that the courts should not call a halt upon them until they clearly passed the uttermost bounds of reason, that everything should be sacrificed to their autonomy, including, apparently, even the Bill of Rights. If this is Liberalism, then all I can say is that Liberalism is not what it was when I was young.13

  Mencken had no particular interest in economic matters, but he saw clearly that capitalism, the consequent of individual liberty in the economic sphere, was the most productive and rational economic system. He bitterly opposed the New Deal for being anti-capitalist as well as anti-libertarian. Of capitalism, Mencken wrote:

  We owe to it almost everything that passes under the general name of civilization today. The extraordinary progress of the world since the Middle Ages has not been due to the mere expenditure of human energy, nor even to the flights of human genius, for men have worked hard since the remotest times, and some of them had been of surpassing intellect. No, it has been due to the accumulation of capital. That accumulation . . . provided the machinery that gradually diminished human drudgery, and liberated the spirit of the worker, who had formerly been almost indistinguishable from a mule.14

  His old friend, Hamilton Owens, writes of Mencken’s vehement anger at Roosevelt’s taking America off the gold standard. “With all the vehemence of which he was capable he insisted it was downright robbery. He talked about taking court action in person.”15 In correspondence with the famous socialist, Upton Sinclair, who had evidently plied him with the old well-tested bromide on the supposed efficiency of government post offices, fire departments, public health services, etc., Mencken, instead of hastily retreating and compromising, as most conservatives do when faced with similar challenges, riposted:

  Your questions are easy. The government brings my magazine to you only unwillingly. It tried to ruin my business, [The American Mercury] and failed only by an inch. It charges too much for postal orders, and loses too many of them. A corporation of idiot Chinamen could do the thing better. Its machine for putting out fires is intolerably expensive and inefficient. It seldom, in fact, actually puts out a fire; they burn out. . . . The Army had nothing to do with the discovery of the cause of yellow fever. Its bureaucrats persecuted the men who did the work. They could have done it much more quickly if they had been outside the Army. It took years of effort to induce the government to fight mosquitoes, and it does the work very badly today.16

  And, in a significant but forgotten review of the individualist Sir Ernest Benn’s The Confessions of A Capitalist, Mencken wrote that Benn

  devotes most of his book to proving what the majority of Americans regard as axiomatic: that the capitalistic system, whatever its defects, yet works better than any other system so far devised by man. The rest of his space he gives over to proofs that government is inevitably extravagant and wasteful—that nothing it does is ever done as cheaply and efficiently as the same thing might be done by private enterprise. I see nothing to object to here.

  And Mencken immediately adds:

  Even the most precious functions of government—say, collecting taxes or hanging men—would be better done if the doing of them were farmed out to Ford.17

  The great individualist Albert Jay Nock has written that, while in the 1920’s he was generally considered a flaming “radical,” and in the 1930’s as a bitter “reactionary,” his political philosophy remained, in these decades, exactly the same. The same might be said of his friend Mencken, who also remained, throughout, an individualist and a libertarian. In the 1920’s, Mencken directed his fire against the tariff and other special privileges to favored business groups, against laws and edicts against free speech and other personal liberties, and especially against the monstrous tyranny of Prohibition. In the 1930’s, Mencken directed his major attacks against the major threat to liberty of that era: the New Deal. The former Menckenites of the 1920’s and his newfound conservative champions of the 1930’s, each, in believing that Mencken had now shifted from Left to Right, showed that they understood neither Mencken nor the principles of liberty. Often, what was mistaken for anti-capitalism was simply a cultural and esthetic distaste that Mencken had for the bulk of businessmen (“Babbitts”) as persons—a distaste which they shared with the common run—the “mass-men”—of other occupations. But Mencken’s antipathy to the cultural tastes of individual capitalists must not be confused—as he never did—with opposition to capitalism as such.

  Looking back on the two eras as early as 1934, Mencken wrote to a friend:

  If I really believed that I had Left a Mark upon my Time I think I’d leap into the nearest ocean. This is no mere fancy talk. It is based on the fact that I believe the American people are more insane today than they were when I began to write. Certainly the Rotarians at their worst never concocted anything as preposterous as some of the inventions of the Brain Trust. They were harmless fools, seeking to formulate a substitute for the Christianity that was slipping from them. But the Brain Trusters, at least in large part, are maniacal fanatics, and will lead us down to ruin if they are not soon suppressed.18

  One of the delightful aspects of Mencken, indeed, is the constancy of his views. As he once, at the age of sixty, playfully wrote to a friend: “On all known subjects, ranging from aviation to xylophone-playing, I have fixed and invariable ideas. They have not changed since I was four or five years old.”19

  In his charming, mellow, affectionate, and witty autobiography on his life as a child, Happy Days, Mencken recalls imbibing his “reactionary” views at his father’s knee:

  His moral system, as I try to piece it together after so many years, seems to have been predominantly Chinese. All mankind, in his sight, was divided into two great races: those who paid their bills, and those who didn’t. The former were virtuous, despite any evidence that could be adduced to the contrary; the latter were unanimously and incurably scoundrels.

  He had a very tolerant view of all other torts and malfeasances. He believed that political corruption was inevitable under democracy, and even argued, out of his own experience, that it had its uses. One of his favorite anecdotes was about a huge swinging sign that used to hang outside his place of business in Paca street. When the building was built, in 1885, he simply hung out the sign, sent for the city councilman of the district, and gave him $20. This was in full settlement forevermore of all permit and privilege fees, easement taxes, and other such costs and imposts. The city councilman pocketed the money, and in return was supposed to stave off any cops, building inspectors or other functionaries who had any lawful interest in the matter, or tried to horn in for private profit. Being an honorable man according to his lights, he kept his bargain, and the sign flapped and squeaked in the breeze for ten years. But then, in 1895, Baltimore had a reform wave, the councilman was voted out of office, and the idealists in the City Hall sent word that a license to maintain the sign would cost $62.75 a year. It came down the next day.

  This was proof to my father that reform was mainly only a conspiracy of prehensile charlatans to mulct tax-payers. I picked up this idea from him, and entertain it to the present day. I also picked up his doctrine that private conduct had better not be inquired into too closely—with the exception, of course, of any kind involving beating a creditor.20

  The firmness of Mencken’s libertarianism may also be gauged by the numerous quotations from libertarian and even unknown anarchist authors in his New Dictionary of Quotations.21 Thus, in his section on the “State,” the great bulk of the quotations are anti-State, and the remainder are so extremely pro-State that the effect on the reader is emphatically ironic. An example of the latter is “The National Socialist party is the state—Adolf Hitler.” And the anti-State quotations are taken largely from highly individualist or anarchist sources: Emerson, Max Stirner, Thoreau, Bakunin, William Graham Sumner, Kropotkin, Tolstoy, and Benjamin R. Tucker. It is doubtful if someone not highly sympathetic with these authors would (1) know their writings with such familiarity, and (2) “pack” such sections with their quotations. The section on “Speech, Free” is, again, almost exclusively filled with pro-free speech quotations, including not only Macaulay, Jefferson, James Mill, and various judges, but also the quasi-anarchistic English individualist, Auberon Herbert.

  H. L. MENCKEN’s contempt for democracy is well-known. It stemmed largely from his primary devotion to individual liberty, and his insight that the bulk of men—the democratic majority—is generally inclined to suppress rather than defend the liberty of the individual. Mencken once summed up his view of the nature of democracy, the common man, and the State in this eight-word definition of “democracy”: “Democracy is the worship of jackals by jackasses.” Other Menckenian definitions: “Democracy is the theory that the common people know what they want, and deserve to get it good and hard.” “If x is the population of the United States and y is the degree of imbecility of the average American, then democracy is the theory that x times y is less than y.” All of democracy’s axioms “resolve themselves into thundering paradoxes, many amounting to downright contradictions in terms. The mob is competent to rule the rest of us—but it must be rigorously policed itself. There is a government, not of men, but laws—but men are set upon benches to decide finally what the law is and may be.”22 On democracy’s inherent tendency to suppress liberty, Mencken wrote in a private letter:

  All appeals to any intrinsic love of free speech are futile. There is no such passion in the people. It is only an aristocracy that is ever tolerant. The masses are invariably cocksure, suspicious, furious and tyrannical. This, in fact, is the central objection to democracy: that it hinders progress by penalizing innovation and non-conformity.23

  Mencken’s atheism is, again, well-known, but for him passionate hostility was reserved for those religious groups which persisted in imposing their moral codes by coercion upon the rest of the population. In Mencken’s day, the prime example was Prohibition: and therefore Mencken’s hostility was directed chiefly toward the Methodists and Baptists. In contrast, Mencken had no particular animus against the Roman Catholics (especially the non-Irish sections): “Catholics are not Prohibitionists, they have more humor than the Methodists,” he is supposed to have said once, and he was apparently friendly with quite a few members of the Catholic clergy.

  The linkage in Mencken’s thought between religious coercion of morals, democracy, the common man, and tyranny over the individual, may be seen in one of his most uproarious articles—his blistering attack upon the American farmer:

  The same mountebanks who get to Washington by promising to augment his [the farmer’s] gains and make good his losses devote whatever time is left over from that enterprise to saddling the rest of us with oppressive and idiotic laws, all hatched on the farm. There, where the cows low through the still night, and the jug of Peruna stands behind the stove, and bathing begins, as at Biarritz, with the vernal equinox—there is the reservoir of all the nonsensical legislation which makes the United States a buffoon among the great nations. It was among country Methodists, practitioners of a theology degraded almost to the level of voodooism, that Prohibition was invented, and it was by country Methodists . . . that it was fastened upon the rest of us, to the damage of our bank accounts, our dignity and our viscera. What lay under it, and under all the other crazy enactments of its category, was no more and no less than the yokel’s congenital and incurable hatred of the city man—his simian rage against everyone who, as he sees it, is having a better time than he is.24

  Mencken’s view of the hostility of the common man toward liberty was also expressed in his insight into the truly puzzling question: How did the overwhelming majority of conscripts manage to adjust so readily to the enslavement of Army life?

  All save a small minority of them came from environments a great deal less comfortable than an Army camp. . . . At one stroke they were relieved of that haunting uncertainty about subsistence which is the curse of all poor and ignorant young men, and also of all need to experiment and decide for themselves. They were fed and clothed at the public expense . . . and could engage freely in sports and other divertissements forbidden in their native places. Their lives, in brief, were not unlike those of the inmates of a well-run prison, but with . . . the constant expectation of release on some near tomorrow—not as wards of nosey cops and parole officers, but as heroes. . . . Not only did someone else decide what they should wear, where they should sleep, when they should get up and when they should go to bed, and what they should eat and when: all these accommodations were provided for them plentifully, and at no expense to themselves. In brief, the burden of responsibility was lifted from them altogether. . . .

  The average soldier . . . found in the Army a vastly more spacious life, with many of the privileges of a chartered libertine. . . . If he did a little stealing it was one of his privileges as a savior of humanity. If he was rough and brutal it was a sign of his fighting spirit. Moreover, he could look forward to distinction and respect for the rest of his life, with a long list of special privileges. In every community in America, however small, there are local notables whose notability rests wholly on the fact that they were once drafted into some war or other. . . . Their general intelligence is shown by the kind of ideas they advocate. They are, in the main, bitter enemies of the liberty of the individual, and are responsible for some of the worst corruptions of politics. The most grasping of all politicians is the war veteran.25

  Mencken, in fact, was an arch “isolationist” who bitterly opposed American entry into both World Wars I and II. He often remarked that he was opposed to intervention in both wars, but that if America had to intervene, it should have intervened on the other side. In April, 1942, he wrote jocularly to a friend: “The coming summer promises to provide Christian men with the best show seen on earth since the Crusades. I am looking forward to it with the most eager anticipations. I only hope that if the Japs actually take California they are polite to you.”26 And to his old friend Harry Elmer Barnes, Mencken wrote, in September, 1943, that “I am so constituted that I have to either Tell It All or stay silent altogether. In this war, as in the last, it seems to me to be most rational to save up what I have to say until it can be said freely.”27

  Mencken’s reaction to the dropping of the atom bomb was understandably bitter. Two years after the event, he wrote to Julian Boyd that

  The atom bomb, I have long preached, is the greatest invention that Yahweh has made since leprosy. Certainly it has given great glory to the Christian physicists of this country. Try to imagine a decent cannibal throwing it on a town full of women and children.28

  Mencken was particularly concerned with the well-nigh absolute suppression of civil liberties that seems inevitably to stem from participation in war, and in the conduct of World War I he saw the exemplar of his jaundiced view of democracy, the State, foreign intervention, and the common man. One of Mencken’s funniest “buffooneries” was his proposal to decorate lavishly the “home front” heroes of World War I:

  What I propose is a variety of the Distinguished Service Medal for civilians . . . to mark off varying services to democracy. . . . for the university president who prohibited the teaching of the enemy language in his learned grove, heaved the works of Goethe out of the university library, cashiered every professor unwilling to support Woodrow for the first vacancy in the Trinity, took to the stump for the National Security League, and made two hundred speeches in moving picture theaters—for this giant of loyal endeavor let no 100 per cent American speak of anything less than the grand cross of the order, with a gold badge in stained glass, a baldric of the national colors, a violet plug hat with a sunburst on the side, the privilege of the floor of Congress, and a pension of $10,000 a year. . . .

  Palmer and Burleson I leave for special legislation. If mere university presidents, such as Nicholas Murray Butler, are to have the grand cross, then Palmer deserves to be rolled in malleable gold from head to foot, and polished until he blinds the cosmos. . . .29

  There is no space here to discuss Mencken’s other notable contributions—his dissections of Veblen, Wilson, and Theodore Roosevelt, his being the first person to write books on Nietzsche or George Bernard Shaw, his. . . . But let it suffice to say that America desperately needs another Mencken, and that the reader should consider the above a tantalizing sample of Menckeniana to spur him toward more of the rich and copious product available. There is no better way of concluding than to turn to Mencken’s noble and moving Credo, written for a “What I Believe” series in a leading magazine:

  I believe that no discovery of fact, however trivial, can be wholly useless to the race, and that no trumpeting of falsehood, however virtuous in intent, can be anything but vicious.

  I believe that all government is evil, in that all government must necessarily make war upon liberty, and that the democratic form is as bad as any of the other forms. . . .

  I believe in complete freedom of thought and speech—alike for the humblest man and the mightiest, and in the utmost freedom of conduct that is consistent with living in organized society.

  I believe in the capacity of man to conquer his world, and to find out what it is made of, and how it is run.

  I believe in the reality of progress. I—

  But the whole thing, after all, may be put very simply. I believe that it is better to tell the truth than to lie. I believe that it is better to be free than to be a slave. And I believe that it is better to know than to be ignorant.30

  [* ] Murray N. Rothbard is the author of Man, Economy, and State, a systematic treatment of economics. He received his Ph.D. in economics from Columbia University and is presently a consulting economist in New York City.

  [1 ] H. L. Mencken, A Mencken Chrestomathy (New York: Knopf, 1949), pp. 471-72.

  [2 ] Guy J. Forgue, ed., Letters of H. L. Mencken (New York: Knopf, 1961), p. xiii.

  [3 ]Ibid., p. 189.

  [4 ]Ibid., p. 281.

  [5 ]Mencken Chrestomathy, pp. 145-48.

  [6 ]Ibid., p. 146.

  [7 ] H. L. Mencken, Prejudices: A Selection, ed. by James T. Farrell (New York: Vintage Books, 1958), pp. 180-82.

  [8 ] H. L. Mencken, Minority Report: H. L. Mencken’s Notebooks (New York: Knopf, 1956), p. 217.

  [9 ] Mencken, Prejudices, p. 187.

  [10 ] Mencken, Minority Report, p. 217.

  [11 ] Mencken Chrestomathy, pp. 384-387.

  [12 ] Mencken, Prejudices, pp. 138-43.

  [13 ] Mencken Chrestomathy, p. 259.

  [14 ]Ibid., p. 294.

  [15 ] Mencken, Letters, p. xii.

  [16 ]Ibid., p. 295.

  [17 ] [H. L. Mencken], “Babbitt as Philosopher,” The American Mercury (September, 1926), pp. 126-27. For a definitive bibliography of Mencken’s writings, see Betty Adler, comp., H. L. M.: The Mencken Bibliography (Baltimore: Johns Hopkins Press, 1961).

  [18 ] Mencken, Letters, pp. 374-75.

  [19 ]Ibid., p. 444.

  [20 ] H. L. Mencken, The Days of H. L. Mencken (New York: Knopf, 1947), pp. 251-52.

  [21 ] H. L. Mencken, A New Dictionary of Quotations: On Historical Principles from Ancient and Modern Sources (New York: Knopf, 1942).

  [22 ]Mencken Chrestomathy, pp. 167-68.

  [23 ] Mencken, Letters, p. 109.

  [24 ] Mencken Chrestomathy, pp. 363-64.

  [25 ]Ibid., pp. 93-95.

  [26 ] Mencken, Letters, p. 463.

  [27 ]Ibid., p. 476.

  [28 ]Ibid., p. 501.

  [29 ]Mencken Chrestomathy, pp. 601-05.

  [30 ] H. L. Mencken, “What I Believe,” The Forum (September, 1930), p. 139.

• Back to Top

  14: Review of Leoni’s On Freedom and the Law

  Ralph Raico, New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981). Chapter: MURRAY N. ROTHBARD, On Freedom and the Law

  Accessed from oll.libertyfund.org/title/2136/195297 on 2009-05-21

  The copyright to this publication is held by Liberty Fund, Inc. The New Individualist Review is prohibited for use in any publication, journal, or periodical without written consent of J. M. Cobb, J. M. S. Powell, or David Levy.

  ---

  On Freedom and the Law1

  MURRAY N. ROTHBARD*

  WHILE AT LEAST a corporal’s guard of libertarian economists exists in America today, the situation in the other disciplines of human action is indeed bleak. Most political scientists, for example, are either engaged in spinning fallacious scientistic “models” or in solemnly recording the empirical minutiae of the workings of government bureaucracy. The small minority of political philosophers (those who still grapple with such basic questions as the nature and proper function of the State) trumpet the alleged glories of Order, Tradition, Community, the “Leap in Being,” and Good Manners, but somehow remain silent about the liberty of the individual. This pervading miasma makes all the more welcome the publication of a notable series of lectures by Professor Bruno Leoni, eminent jurist and political scientist of the University of Pavia, Italy. For here at last is a political scientist with strong libertarian inclinations.

  Professor Leoni’s major thesis is that even the staunchest free-market economists have unwisely admitted that laws must be created by governmental legislation; this concession, Leoni shows, provides an inevitable gateway for State tyranny over the individual. The other side of the coin to increasing intervention by government in the free market has been the burgeoning of legislation, with its inherent coercion by a majority—or, more often, by an oligarchy of pseudo-“representatives” of a majority—over the rest of the population. In this connection, Leoni presents a brilliant critique of F. A. Hayek’s recent writings on the “rule of the law.” In contrast to Hayek, who calls for general legislative rules as opposed to the vagaries of arbitrary bureaucracy or of “administrative law,” Leoni points out that the real and underlying menace to individual freedom is not the administrator but the legislative statute that makes the administrative ruling possible.2 It is not enough, demonstrates Leoni, to have general rules applicable to everyone and written down in advance; for these rules themselves may—and generally do—invade freedom.

  Leoni’s great contribution is to point out to even our staunchest laissez-faire theorists an alternative to the tyranny of legislation. Rather than accept either administrative law or legislation, Leoni calls for a return to the ancient traditions and principles of “judge-made law” as a method of limiting the State and insuring liberty. In the Roman private law, in the Continental Civil Codes, in the Anglo-Saxon common law, “law” did not mean what we think today: endless enactments by a legislature or executive. “Law” was not enacted but found or discovered; it was a body of customary rules that had, like languages or fashions, grown up spontaneously and purely voluntarily among the people. These spontaneous rules constituted “the law”; and it was the works of experts in the law—old men of the tribe, judges, or lawyers—to determine what the law was and how the law would apply to the numerous cases in dispute that perpetually arise.

  If legislation is replaced by such judge-made law, says Leoni, fixity and certainty (one of the basic requirements of the “rule of law”) will replace the capriciously changing edicts of statutory legislation. The body of judge-made law changes very slowly; furthermore, since judicial decisions can only be made when parties bring cases before the courts, and since decisions properly apply only to the particular case, judge-made law—in contrast to legislation—permits a vast body of voluntary, freely-adopted rules, bargains, and arbitrations to proliferate as needed in society. Leoni brilliantly shows the analogy between these free rules and bargains, which truly express the “common will” of all participants, and the voluntary bargains and exchanges of the free market.3 The twin of the free market economy, then, is not a democratic legislature ever grinding out new diktats for society, but a proliferation of voluntary rules interpreted and applied by experts in the law.

  While Leoni is vague and wavering on the structure that his courts would take, he at least indicates the possibility of privately competing judges and courts. To the question: who would appoint the judges. Leoni answers with the question: who now “appoints” the leading doctors or scientists in society? They are not appointed, but gain general and voluntary acceptance on their merits. Similarly, while in some passages Leoni accepts the idea of a governmental supreme court which he admits becomes itself a quasi-legislature,4 he does call for the restoration of the ancient practice of separation of government from the judicial function. If for no other reason, Professor Leoni’s work is extremely valuable for raising, in our State-bemused age, the possibility of a workable separation of the judicial function from the State apparatus.

  A GREAT DEFECT in Leoni’s thesis is the absence of any criterion for the content of the judge-made law. It is a happy accident of history that a great deal of private law and common law is libertarian, that they elaborate the means of preserving one’s person and property against “invasion.” But a good deal of the old law was anti-libertarian, and certainly custom can not always be relied on to be consistent with liberty. Ancient custom, after all, can be a frail bulwark indeed; if customs are oppressive of liberty, must they still serve as the legal framework permanently, or at least for centuries? Suppose ancient custom decrees that virgins be sacrificed to the gods by the light of the full moon, or that red-heads be slaughtered as demons? What then? May not custom be subject to a higher test—reason? The common law contains such anti-libertarian elements as the law of “conspiracy,” and the law of “seditious libel” (which outlawed criticism of the government), largely injected into the law by kings and their minions. And perhaps the weakest aspect of the volume is Leoni’s veneration for the Roman law; if the Roman law provided a paradise of liberty, how account for the crushing taxation, the periodic inflation and currency debasement, the repressive network of controls and “welfare” measures, the unlimited imperial authority, of the Roman Empire?

  Leoni offers several different criteria for the content of the law, but none are very successful. One is unanimity. But while superficially plausible, even explicit unanimity is not necessarily libertarian; for, suppose that there are no Moslems in a country, and everyone unanimously decides—and it passes into custom—that all Moslems should be put to death. And what if, later, a few Moslems should appear in the land? Further, as Leoni recognizes, there is the problem of the criminal; certainly he does not join in favoring his own punishment. Here Leoni falls back on a tortured construction of implicit unanimity, i.e., that, in such a case as murder or theft, the criminal would agree to the punishment if anyone else were the criminal, so that he really agrees to the justice of the law. But suppose that this criminal, or others in the community, have the philosophical belief that certain groups of people (be they red-heads, Moslems, landlords, capitalists, generals, or whatnot) deserve to be murdered. If the victim is a member of one of these abhorred groups, then neither the criminal nor others holding this belief would agree to the justice of either the general law against murder or to the punishment of this particular murderer. On this ground alone, the implicit unanimity theory must fall.

  A second proffered criterion for the content of the law is the negative Golden Rule: “Do not unto others what you would not wish them to do unto you.” But this too is unsatisfactory. For one thing, some acts generally considered criminal would still pass the negative Golden Rule test: thus, a sado-masochist can torture another person, but since he would be delighted to be tortured, his act, under the negative Golden Rule, could not be considered criminal. On the other hand, the Golden Rule is much too wide a criterion; many acts would be condemned as criminal which should certainly not be. Thus, the Rule decrees that men shouldn’t lie to each other (a man would not want to be lied to) and yet few would urge that all lies be outlawed. Also, the Golden Rule would decree that no man should turn his back on a beggar, because the former would not want the beggar to turn his back on him were they to change places—and yet, it is hardly libertarian to outlaw the refusing of alms to a beggar.5

  Leoni hints at a much more promising criterion: that freedom be defined as the absence of constraint or coercion—except against constrainers. In this case, the initiation of coercion is outlawed, and the “governmental” function becomes strictly limited to coercing the coercers. But, most unfortunately, Leoni falls into the very same trap that snared Hayek in his Constitution of Liberty: “coercion” or “constraint” is not defined in a proper or cogent manner.6 At first, Leoni gives promise of a correct understanding of coercion when he says that a man cannot be said to “constrain” another when he refuses to buy the latter’s goods or services, or when he refuses to save a drowning man. But then, in his unfortunate Chapter 8, Leoni concedes that constraint may occur when a religiously devout person feels “constrained” because another man does not observe the former’s religious practices. And this feeling of constraint may appear to justify such invasions of liberty as Sunday blue laws. Here again, Leoni errs in placing his test of constraint or coercion, not on the objective acts of the defendant, but on the subjective feelings of the plaintiff. Surely this is an extremely wide highroad for tyranny!

  Furthermore, Leoni apparently does not see that taxation is a prime example of coercion, and is hardly compatible with his own picture of the free society. For if coercion is to be confined to the coercers, then surely taxation is the unjust coercive extraction of property from a vast body of non-coercing citizens. How, then, is it to be justified? Leoni, again in chapter 8, also concedes the existence of some legislation in his ideal society, including, mirabile dictu, some nationalized industries!7 One specific nationalization favored by Leoni is the lighthouse industry. His argument is that a lighthouse could not charge individual consumers for its service, and that therefore it should be supplied by government. The basic answers to this argument are threefold: (1) the taxation for lighthouses imposes coercion and is therefore an invasion of freedom; (2) even if the lighthouse could not charge individuals, what prevents shipping lines from constructing or subsidizing their own lighthouses? The usual reply is that then various “free riders” would benefit from the service without paying. But this is universally true in any society. If I make myself a better person, or if I tend my garden better, I am adding to the benefits enjoyed by other people. Am I then entitled to levy tribute upon them because of this happy fact? (3) In fact, lighthouses could easily charge ships for their services, if they were permitted to own those surfaces of the sea which they transform by their illumination. A man who takes unowned land and transforms it for productive use is readily granted ownership of that land, which can henceforth be used economically; why should not the same rule apply to that other natural resource, the sea? If the lighthouse-owner were granted ownership of the sea-surface that he illuminates, he could then charge each ship as it passes through. The deficiency here is a failure, not of the free market, but of the government and the society in not granting a property right to the rightful owner of a resource.

  On the necessity of taxing for government lighthouses and other services, Leoni adds the astonishing comment that “in these cases the principle of free choice in economic activities is not abandoned or even put in doubt.” (p. 171) Why? Because “it is admitted” that people would be willing to pay for these services anyway, if available on the market. But who admits it, and to what extent? And which people would pay?

  Our problem can be solved, however; a cogent criterion does exist for the content of libertarian law. That criterion defines coercion or constraint, simply, as: the initiation of violence, or the threat thereof, against another person. It then becomes clear that the use of coercion (violence) must be confined to coercing the initiators of violence against their fellow-men. One reason for confining our attention to violence is that the unique weapon employed by government (or by any other enforcing agency against crime) is precisely the threat of violence. To “outlaw” any action is precisely to threaten violence against anyone who commits it. Why not then use violence only to inhibit those who are initiating violence, and not against any other action or non-action that somebody might choose to define as “coercion” or “constraint”? And yet, the tragic puzzle is that so many quasi-libertarian thinkers have, over the years, failed to adopt this definition of constraint or have failed to limit violence to counteracting violence, and have, instead opened the door to statism by using such vague, jumbled concepts as “harm”, “interference”, “feelings of constraint”, etc. Decree that no violence may be initiated against another man, and all the loopholes for tyranny which even such men as Leoni concede: blue laws, government lighthouses, taxation, etc., would be swept away.

  In short, there exists another alternative for law in society, an alternative not only to administrative decree or statutory legislation, but even to judge-made law. That alternative is the libertarian law, based on the criterion that violence may only be used against those who initiate violence, and based therefore on the inviolability of the person and property of every individual from “invasion” by violence. In practice, this means taking the largely libertarian common law, and correcting it by the use of man’s reason, before enshrining it as a permanently fixed libertarian code or constitution. And it means the continual interpretation and application of this libertarian law code by experts and judges in privately competitive courts. Professor Leoni concludes his highly stimulating and important book by saying that “law-making is much more a theoretical process than an act of will.” (p. 189) But certainly a “theoretical process” implies the use of man’s reason, to establish a code of law that will be an unbreachable and unflawed fortress for human liberty.

  [1 ] A review of Bruno Leoni, Freedom and the Law (Princeton: D. Van Nostrand, 1961).

  [* ] Murray N. Rothbard received his Ph.D. in economics from Columbia University. He is the author of Man, Economy and State, recently published by Van Nostrand.

  [2 ] Leoni also presents an effective critique of Hayek’s defense of special “administrative courts.” If there is to be one law for bureaucrats and yet another for ordinary citizens, then there is no equality under the law for everyone, and therefore there is no genuine “rule of law.” Here, as elsewhere, Leoni rehabilitates the stringent rule of law championed by the great nineteenth century English jurist, A. V. Dicey, as contrasted to the weaker modern versions of Hayek and C. K. Allen.

  [3 ] This contrasts to the mocking claim of “democratic” legislatures which coercively impose their rules upon dissenters, to be expressions of the “common will.” To be “common,” Leoni points out, the common will must be a unanimous one.

  [4 ] At one point, Leoni seems to believe that the requirement of unanimity on the Supreme Court bench for any change over previous rulings would approximately establish the “Leoni model” on the American scene. But here all depends on the “zero point” at which a unanimity requirement is introduced. In the present heavily State-ridden world, a unanimity requirement for change would tend to fasten our Statist regulations permanently upon society.

  [5 ] A critical error—in this and other places—is Leoni’s tendency to make the test of criminality the subjective feelings of participants, rather than their objective actions.

  [6 ] For an excellent critique of Hayek’s conception of coercion, see Ronald Hamowy, “Hayek’s Concept of Freedom: A Critique,” New Individualist Review, (April, 1961), pp. 28-31.

  [7 ] Thus, Leoni asserts that, in those fuzzy cases where criminality or constraint cannot be objectively determined, there exists room for coercive legislation on the subject. But surely the proper—and libertarian—rule is that fuzzy cases be decided in favor of “laissez-faire”—of letting the activity go on.