Mises’s “Originary Interest”: Another Useless Real Theory of the Interest Rate

Mises’s definition is as follows:

“Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future. It manifests itself in the market economy in the discount of future goods as against present goods. It is a ratio of commodity prices, not a price in itself. There prevails a tendency toward the equalization of this ratio for all commodities. In the imaginary construction of the evenly rotating economy the rate of originary interest is the same for all commodities” (Mises 2008: 523).

First, this is quite clearly a real theory of the interest rate, in which present real goods exchange for future real goods, or in other words where loans are imagined as occurring in natura. The “originary interest” is a ratio. Mises describes it as the “discount of future goods as against present goods” (Mises 2008: 521).

In terms of capital goods, the “originary interest rate” arising in Mises’s equilibrium world called the “evenly rotating economy” (ERE) would be the same as the Wicksellian natural rate of interest.

Mises asserts that there is “a tendency toward the equalization of this ratio for all commodities,” but this is unconvincing. Nor can there ever be a single “originary interest rate” outside of purely imaginary equilibrium states.

Mises has his own monetary or market rate of interest on loans called the “gross money rate of interest” (Mises 2008: 534). Mises conceives the “gross money rate of interest” as being determined by other factors in addition to originary interest, as follows:

(1) the entrepreneurial component: interest determined by the speculative element in money lending and the dangers involved (Mises 2008: 536–538).

(2) the price premium: an additional element in interest to take account of expected changes in inflation or the general price level (Mises 2008: 538–542).

In Austrian theory, unfettered market interest rates – or ideal laissez faire gross money rates of interest – are supposed to gravitate towards an “originary interest rate” or Wicksellian natural rate of interest, and thereby allocate resources effectively in an intertemporal sense. By this process, a monetary interest rate is supposed to move towards a natural rate of interest so that his coordinates resources and provides intertemporal coordination of investment projects with real resources.

But the natural rate of interest can only be a single rate inside general equilibrium (or in some other equilibrium state such as Mises’s “final state of rest” or the ERE). Outside of general equilibrium, there can be as many natural rates as there are capital goods commodities lent out. No monetary system where capital goods investments are made by means of money can hit the right multiple natural interest rates either on each in natura loan of various capital goods, because even though the banks’ monetary interest rates – even in a free banking system – might converge in a spread, there could be vast differences between the spread of banks rates and many individual commodity natural rates.

The Austrian theory of interest rates – either the monetary rate or the (alleged) real rate – is grossly unrealistic and flawed.

First, in any advanced capitalist economy, people are generally lending and borrowing money, not real goods. How can a convergence to a “real” originary rate on goods emerge when borrowing is not in barter loans, but in terms of money?

Secondly, the nature of monetary interest rates in a market economy, and even hypothetical free market ones, is not described by time preference theory.

In any capitalist economy, there will generally be a stock of money used to buy and sell assets on secondary markets (whether real or financial markets). This money can be diverted to use in lending or clearing of loans for capital goods investments. Even if one were to use loanable funds model, a decrease in liquidity preference can increase funds available for lending without a corresponding decrease in consumption, since it might be merely money previously used on secondary asset markets or dishoarded. Such shifts are merely just changes in the liquidity of assets held in a person’s portfolio, not changes in time preference. Therefore changes in monetary interest rates even in some hypothetical free market system need not necessarily communicate any significant information about time preference or even any meaningful information at all.

Even when people abstain from consumption and save money, it does not follow that their saving now will entail a consumption expenditure in the future. Resources may not have been consumed now, but it does not follow that the eventual output of those resources in a capital goods project will be demanded in the future.

To sum up, one can say that:

(1) a decision to save money now does not entail a future consumption purchase;

(2) saved money now need not be invested in capital goods projects, and may be used to buy secondary assets (either real or financial). A large stock of money is at any one time tied up in purchases and sales of secondary assets;

(3) money made available for capital goods investments may have simply been shifted from purchasing of secondary assets (either real or financial) and not from abstention from consumption, and there need be no change in time preference, only liquidity preference.

(4) changes in monetary interest rates, even in hypothetical free market economies, need signal no reliable information and indeed no information at all about time preference or real resource availability.

BIBLIOGRAPHY
Maclachlan, Fiona C. 1993. Keynes’ General Theory of Interest: A Reconsideration. Routledge, London.

Mises, L. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

Observations on the Pure Time Preference Theory of Interest

First, Tyler Cowen has a brief comment here:

“... Austrian economists, such as Mises, Rothbard, and Kirzner, have advocated a ‘pure time preference’ theory. Most advocates of the pure time preference theory, however, do not dispute that real world interest rates are determined by many of the features identified by the loanable funds theory (Kirzner 1993; see also Pellengahr 1986). The advocates of the pure time preference theory wish to isolate one component of the interest rate — the time preference component — as ‘essential’ to the nature of interest. In this regard the Misesian theory is consistent with the loanable funds approach, even if nonessentialists, such as myself, find the special emphasis on time preference to be tautologous or superfluous.” (Cowen 1997: 65, n. 11).

So Austrian supporters of the pure time preference theory of interest apparently do not dispute the neoclassical loanable funds theory as an alleged explanation of real world money interest rates. They just add an additional theory along with it.

The sense in which the expression “time preference” itself is used by Austrians is described by Robert Murphy. Murphy notes that there are at least “two distinct meanings of the term, yet many Austrians conflate them” (Murphy 2003: 65):

“In sense (i), time preference refers to the greater valuation, on the margin, of a present good over a future good, or of present ‘consumption’ over future ‘consumption.’ It is the “nub and kernel” of Böhm-Bawerk’s theory of interest. If an individual possesses time preference in sense (i), then he values a present apple at time t₁ more than he values a risk-free claim (given to him at t₁) for an apple that will be delivered in t₂. In a Fisher diagram, the slope of an indifference curve (with present and future “real income” on the two axes) at a particular point corresponds to the degree of time preference (or “impatience”) in sense (i) for the respective levels of income. In a neoclassical model, an agent possessing time preference in sense (i) has a marginal rate of substitution of present for future goods that is less than one; i.e. he would have to be promised a greater number of future units in order to sacrifice one present unit of the good. Time preference in sense (i) is an endogenous concept, since it can be affected by factors such as the relative provision of goods in different time periods. In particular, under certain (perhaps unusual) circumstances, time preference in sense (i) can be negative—for example, it is possible that two present units of a good exchange for one future unit of the same good.

In sense (ii), time preference refers to the discounting of future utility per se, according to its remoteness from the present, solely because it is in the future. Time preference in sense (ii) corresponds to Böhm-Bawerk’s “second cause” for the agio on present goods. If an individual possesses time preference in sense (ii), then at t₁ he values a claim for an apple to be delivered in t₂ less than he will value that apple when it is delivered. In a Fisher diagram, the closest thing to time preference in sense (ii) would be the slope(s) of the indifference curves along the 45-degree line, that is, when all ‘other things’ (in the diagram) are held equal. In a neoclassical model, an agent possessing time preference in sense (ii) will discount (often by a constant factor denoted by β) future utils in order to compute the present marginal utility of expected future consumption; time preference in sense (ii) thus corresponds to the marginal rate of substitution between present and future units of utility (not goods). Time preference in sense (ii) is often treated as an exogenous, ‘given’ feature of individuals’ preferences. In particular, it is usually considered to be completely independent of the supply of goods in each period, and is almost always treated as universally positive, regardless of other circumstances.” (Murphy 2003: 65–67).

So in these senses we must distinguish between:

(1) the valuing of a good now more than it would be valued at a point in the future, and

(2) the present subjective valuation of a good below that which would be experienced at the point in the future when it would be consumed.

In Mises’s Human Action, time preference is defined in abstract terms like the law of demand in neoclassical economics:

“Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future. Present goods are more valuable than future goods. Time preference is a categorial requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not — other things being equal — preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.” (Mises 2008: 480–481).

The sign of extreme abstraction from reality is the ceteris paribus (“other things being equal”) qualification.

Here Mises is saying that positive time preference is a universal, a priori state of human action. Some critics doubt this.

Of all people, the Austrian economist Robert P. Murphy does. Murphy argues:

“... Mises ... claims, “The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant” ... This observation is true, but it overlooks the fact that there could have been a preceding interval of delayed gratification, throughout which the (in that interval) future satisfaction had been preferred.

In a similar vein, Mises states that, “He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction” (1966, p. 484). Again, this is perfectly true, but Mises conveniently neglects to mention that he who saves a nonperishable good instead of consuming thereby reveals a higher valuation of later satisfaction. Both possibilities are equally plausible; there are real world cases of people who consume nonperishable goods, as well as real world cases of people who save them. If the former individuals demonstrate the existence of [time preference], why don’t the latter demonstrate the existence of negative [time preference]? (Murphy 2003: 65–67).”

Let us look again at this argument of Mises:

“If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.” (Mises 2008: 481).

Murphy’s response to this is worth quoting at length:

“This argument is valid only when the “other things” that must be held equal are construed quite broadly. Mises has in mind an omniscient, immortal agent who behaves mechanistically according to external stimuli. If such an agent decides to postpone consumption in t₁ and (by construction) all relevant factors are the same in t₂, then the agent (to be consistent) must postpone consumption again. This is the sense in which Mises believes that valuing a good implies, ceteris paribus, the desire to consume it sooner rather than later.

The first thing to note about this argument is that it is quite odd from an Austrian point of view. Austrians usually deplore the mainstream approach of modeling agents as automatons who maximize given utility functions, yet this is merely a formalization of the approach Mises takes in the above quotation. Elsewhere in his book Mises says that even intransitivity of ordinal preference rankings is not evidence of irrationality, since preferences may change between acts of choice ... . Yet in the above argument, Mises must hold preferences constant for eternity.

Second, strictly speaking Mises has only proven that an agent cannot prefer to postpone consumption. For if an agent were indifferent and every period flipped a coin to decide whether or not to consume, he would eventually consume (technically, ‘with a probability of one’). Another purist quibble is that the agent could conceivably base his consumption decisions on the time index itself. Since we are dealing with an immortal being, who can say that the agent wouldn’t prefer to consume everything on February 25, 2525? In this contrived example, today’s decision to postpone consumption would not prohibit eventual consumption, even holding everything else equal.

But the most serious drawback to Mises’ argument is that it only proves the apodictic necessity of time preference for such an immortal (and in essence, timeless) being. Mises has not shown that actual human beings must exhibit time preference in his sense. On the contrary, Mises’ argument doesn’t even rule out universally negative time preference. That is, suppose that every human being prefers, other things equal, to postpone all consumption as long as possible. Does this entail an immediate cessation of consumption? Not at all! People still need to eat, or else they will starve and miss out on their planned future consumption. Moreover, people on a sinking ship will consume all they have, since other things will not be equal if they delay their gratifications. In fact, once we seriously consider the conditions of human life as they really are, there is nothing to rule out the present world as one characterized by universally negative [time preference] in the Misesian sense. Since other things are never equal, we do not need to fear the absurdity of all consumption postponed forever. The above analysis of Mises’ arguments demonstrates that, at best, he has proven the universal validity of “time preference” only when the term is couched in an entirely vacuous sense, in which, say, present hot dogs are preferred to future hot dogs because one can only eat a hot dog in the present. Needless to say, [time preference] in this sense does not bear any relation to interest theory: It does not explain the discount on goods (such as hot dogs) available in the future, since even a decision to postpone current consumption would be viewed in this sense as “positive time preference” (at the eventual moment of consumption).” (Murphy 2003: 93–95).

So, in essence, the universality of Mises’ “positive time preference” can be proven only for “an immortal (and in essence, timeless) being”!

Those skeptical of Austrian economics from the outset will be tempted to regard the concept of universal “positive time preference” defined as “a categorial requisite of human action” as just another piece of irrelevant Austrian metaphysics.

If reformulated as an empirical statement, that (for example) people tend generally to want any particular good x now rather than later, it could be tested empirically. Whether it is true or not, its truth would be a posteriori, and if true would be just another trivially true fact about human want satisfaction, with many exceptions.


BIBLIOGRAPHY
Cowen, Tyler. 1997. Risk and Business Cycles: New and Old Austrian Perspectives. Routledge, London.

Mises, L. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest. PhD dissert., Department of Economics, New York University.

John Kenneth Galbraith on Administered Prices

John Kenneth Galbraith’s The New Industrial State (1985) is a classic book, and rightly so. It is not just that Galbraith provided an insightful (old) Institutionalist perspective on economics (with a nice dose of heterodox Keynesianism), but he was also a wordsmith.

I summarise Galbraith’s analysis of prices here. One must remember that some of Galbraith’s observations were written with respect to the US economy of the 1970s.

Galbraith notes the many US markets are oligopolistic and prices set by businesses based on costs with relatively inflexible prices (Galbraith 1985: 188).

Galbraith argues that

“Once established, industrial prices tend to remain fixed for considerable periods of time. None supposes that prices of basic steel, aluminum, automobiles, machinery, chemicals, petroleum products, containers or like products of the planning system will be sensitive to the changes in cost or demand which cause constant price readjustments for commodities, such as lesser agricultural products, where producers are still subject to control by the market. This stability of prices, in face of changing costs and demand, is a further indication, it may be noted, that in the short run the mature corporation pursues goals other than profit maximization.

Stable prices reflect, in part, the need for security against price competition.” (Galbraith 1985: 202).

Today we tend to call these “administered prices,” and how they are not confined to market oligopolies. Of course, Galbraith himself also knew that major changes in costs (above all, wages and energy) do have an important role in driving changes in administered prices (Galbraith 1985: 203).

Crucially, Galbraith himself stressed the importance of this idea for his work:

“[The New Industrial State] is built on the notion not of monopoly prices but broadly speaking of administered prices. It is administration which provides the certainty which the modern, very large technocratic organization requires. I have gone on from administration of prices to the management of the other economic parameters including that of consumer demand.” (J. K. Galbraith, Letter to Gardiner C. Means, August 19, 1970, as quoted in Lee 1998: 68, n. 2).

Galbraith famously called the industrial and corporate structure of America a “planning system,” because of the widespread existence of anti-market planning by these institutions, of which “price control”/administered prices was a fundamental element.

The first benefit of administered prices to a firm is stability of profit, and a minimum profit level (Galbraith 1985: 200). Truly flexible prices or price wars are shunned by many businesses as a grave threat to stability of profit.

The second benefit of administered prices is that they are a private sector method of reducing uncertainty. A truly flexible price system as dictated by the dynamics of supply and demand curve, as in neoclassical theory, introduces a high level of uncertainty into business life. But businesses don’t like this much. And administered prices provide a degree of predictability in the future planning of business production, estimation of profit level, and even costs (since one firm’s administered prices are another’s costs of production) (Galbraith 1985: 202).

Thirdly, relatively stable profits also allow stable capital investment, often important for productivity growth. On this point, Galbraith notes that government price regulation of certain agricultural commodities (as, for example, price floors) in advanced nations, far from being some “unnatural” practice, mimics the behaviour of private fixprice corporations, by providing stable income to farmers and allowing increased capital investments with new technology and strong improvements in productivity and greater output (Galbraith 1985: 199, n. 1).

In place of attempts to stimulate demand by cutting prices (which, we might note, evidence suggests do not always work anyway), fixprice businesses have developed other methods for increasing demand: advertising (Galbraith 1985: 208). This is a complex process, and for many businesses involves market research, creating a base of loyal customers and brand recognition (Galbraith 1985: 214).

If sales slip, in place of price cutting, generally a different strategy is employed:

“When a firm is enjoying patronage by its existing customers and recruiting new ones, the existing sales strategy, broadly defined, will usually be considered satisfactory. The firm will not quarrel with success. If sales are stationary or slipping, a change in selling methods, advertising strategy, product design or even in the product itself is called for. Testing and experiment are possible. Sooner or later, a new formula that wins a suitable response is obtained.

This brings a countering action by the firms that are then failing to make gains. This process of action and response, which belongs to the field of knowledge known as game theory, leads to a rough equilibrium between the participating firms. Each may win for a time or lose for a time but the game is played within a narrow range of such gain or loss.” (Galbraith 1985: 215).

In short, in place of price competition is another form of inducement of demand: business “demand management” by advertising, promotion, and product redesign.


Further Reading
“Early Literature on Administered Pricing,” May 8, 2013.

“Gardiner Means on Administered Prices,” June 20, 2013.

“Lachmann on Hicks on Fixprices,” May 13, 2013.

“Lachmann and Post Keynesianism on Prices,” August 1, 2012.

“Mises versus Lachmann on Equilibrium Prices,” December 17, 2012.

“Caldwell on Lachmann on Equilibrium Prices,” November 6, 2012.

“Kaldor on Economics without Equilibrium,” March 9, 2013.


BIBLIOGRAPHY
Galbraith, J. K. 1985. The New Industrial State (4th edn.). Houghton Mifflin, Boston.

Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.

Marshall on Menger’s Orders of Capital Goods

Carl Menger and Austrians generally classify goods into various orders, as follows:

(1) first order goods: consumption goods, which provide direct utility to consumers;

(2) second order goods: capital goods which are used to produce consumer goods (first order goods);

(3) third order goods: capital goods which are used to produce second order capital goods;

(4) fourth order capital goods: capital goods which are used to produce third order capital goods, and so on.

That is, consumer goods are “first order goods,” and capital goods are “higher order” goods, and in various orders as removed from the final consumer goods output.

How useful is this classification system for capital goods?

Alfred Marshall was sceptical:

“Goods have been divided into Consumers’ goods (called also Consumption goods, or again goods of the first Order), such as food, clothes, &c., which satisfy wants directly; and Producers goods (called also Production goods, or again Instrumental, or again Intermediate goods), such as ploughs and loom’s and raw cotton, which satisfy wants indirectly by contributing towards the production of the first class of goods. The line of division between the two classes is however vague, is drawn in different places by different writers; and the terms can seldom be used safely without special explanation.⁽¹⁾

[Footnote]
⁽¹⁾ Thus flour to be made into a cake when already in the house of the consumer, is treated by some as a Consumers’ good; while not only the flour, but the cake itself is treated as a Producers’ good when in the hand of the confectioner. Prof. Carl Menger (Volksivirthschqftslelire, ch. i. § 2) says bread belongs to the first order, flour to the second, a flour mill to the third order and so on. It appears that a railway train carrying people on a pleasure excursion, also some tins of biscuits, and milling machinery and some machinery that is used for making milling machinery, is at one and the same time a good of the first, second and fourth orders. But such subtleties are of little use. (Marshall 1895: 133–134, with n. 1, Chapter III).

On the one hand, I think Marshall was too extreme in implying that there was no useful distinction between (1) consumption goods and (2) capital goods generally, but his last point in the footnote (highlighted in yellow) was a sound one.

When capital goods are divided into different orders (as by Austrians), many can simultaneously belong to multiple orders at once. Alternatively, a capital good might belong to one order in the morning and another in the afternoon, or might be easily switched between orders.

While some capital goods might be capable of falling into one order or another, how many exceptions are there?

The Austrian system of classification of capital goods cannot be considered a universal, clear cut, or strictly useful one, if many capital goods’ classification is simultaneously to be included under different orders.

Also, the classification system obscures another point about capital: while capital goods are heterogeneous, many can have a significant degree of substitutability, flexibility and durability. A capitalist economy in which we find some important degree of adaptability, versatility and durability in the nature of capital goods also means that the Austrian capital theory underlying the Austrian business cycle theory (ABCT) is not a realistic vision of modern economies.

Vienneau (2006 and 2010) provides further discussion of this topic.


BIBLIOGRAPHY
Marshall, Alfred. 1895. Principles of Economics (3rd edn.). Macmillan, London.

Menger, C. 2011. Principles of Economics (trans. Grundsätze der Volkswirtschaftslehre [1st edn. 1871] by J. Dingwall and B. F. Hoselitz), Terra Libertas, Eastbourne, UK.

Vienneau, R. L. 2006. “Some Fallacies of Austrian Economics,” September
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=921183

Vienneau, R. L. 2010. “Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory,” September 4
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1671886

Vaughn on the Early History of the Austrian School

Karen I. Vaughn’s book Austrian Economics in America: The Migration of a Tradition (Cambridge and New York, 1994) provides an accessible history of the early Austrian school.

I summarise that early history in what follows. Carl Menger (1840–1921) was the founder of the school, and Eugen von Böhm-Bawerk (1851–1914) and Friedrich von Wieser (1851–1926) were the two most important followers of Menger, although they were not Menger’s students, but colleagues.

The early Austrians are usually divided into two generations, as follows:

First Generation of the Austrian School
Carl Menger 1840–1921
Eugen von Böhm-Bawerk 1851–1914
Friedrich von Wieser 1851–1926
Eugen von Philippovich 1858–1917

Second Generation of the Austrian School
Ludwig von Mises 1881–1973
Joseph Schumpeter 1883–1950 (who became a neoclassical)
Karl Schlesinger 1889–1938
Hans Mayer 1879–1955, professor at Vienna
Richard von Strigl 1891–1942
Leo Illy (Leo Shönfeld) 1888–1952

Carl Menger made his mark as an economist with his book Grundsätze der Volkswirtschaftslehre (Principles of Economics; 1871). This was intended to be a four-part series on economics, but the other three volumes were never written (Vaughn 1994: 27). A posthumous second and expanded edition of the Grundsätze der Volkswirtschaftslehre was published by his son, but this has never been translated into English (Vaughn 1994: 12, n. 2). Even more surprising is that Menger refused to allow reprintings of his Grundsätze to be published during his lifetime, and many economists did not read his treatise, and his ideas were mainly transmitted by his followers (Vaughn 1994: 12–13).

Menger’s main contribution to economics was the development of a subjective value and diminishing marginal utility theory (Vaughn 1994: 13), along with other neoclassical founders such as William Stanley Jevons and Leon Walras. To this extent, his project, like that of Jevons and Walras, was to refute the Classical labour theory of value.

Other contributions were more original, such as Menger’s theory of higher and lower orders of goods, which was later developed in Austrian capital theory.

From the 1970s, there was a reassessment of Menger’s originality and relation to neoclassical theory (Hicks and Weber 1973; Lachmann 1978; Jaffé 1976). Some would see Menger as an “incomplete neoclassical” (Vaughn 1994: 17–19). Indeed, Menger’s notion of an “economic price” is analogous to the neoclassical concept of an “equilibrium price,” even though Menger thought that it was doubtful that “economic prices” will be seen in the real world (Vaughn 1994: 29).

Menger’s views on economic methodology set him at loggerheads with the German Historical School. Menger held that there are laws of economics (not in the same category as scientific laws) but that these cannot be refuted by pointing to contrary empirical evidence (Vaughn 1994: 28). Indeed, by the time of the Methodenstreit (Menger’s debate with Gustav Schmoller), Menger was associated with an extreme a priorist theorising (Vaughn 1994: 32).

Menger’s followers continued the Austrian tradition. Friedrich von Wieser (1851–1926) expanded Menger’s subjective theory of value into a more detailed diminishing marginal utility theory and a theory of opportunity cost (Vaughn 1994: 34).

Eugen von Böhm-Bawerk (1851–1914) developed a time preference conception of interest and an extended theory of capital. Strangely, Menger is reported to have said that Böhm-Bawerk’s theory of capital and interest was “one of the greatest errors ever committed” (Vaughn 1994: 35, quoted from Schumpeter).

What is most interesting of all is that by the 1920s,

“[m]ost economists, including the Austrians themselves, believed that there was no longer any discernibly different Austrian school … All of the major contributions of the Austrians were either easily absorbed into the mainstream of neoclassical thought or served as topics for family feuds.” (Vaughn 1994: 37).

Clearly, then, the controversies and developments by which Austrians distinguished themselves from mainstream neoclassical theorists happened at a later period.

BIBLIOGRAPHY
Hicks, J. R. and W. Weber (eds.). 1973. Carl Menger and the Austrian School of Economics. Clarendon Press, Oxford.

Jaffé, William. 1976. “Menger, Jevons, and Walras Dehomogenized,” Economic Inquiry 14.4: 511–524.

Lachmann L. 1978. “Carl Menger and the Incomplete Revolution of Subjectivism,” Atlantic Economic Journal: 6.3: 57–59.

Menger, C. 2011. Principles of Economics (trans. Grundsätze der Volkswirtschaftslehre [1st edn. 1871] by J. Dingwall and B. F. Hoselitz), Terra Libertas, Eastbourne, UK.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition. Cambridge University Press, Cambridge and New York.

Steve Keen Demonstrates Minsky Program

Short and to the point!

Salerno on Market-Clearing Prices in Austrian Theory

Joseph T. Salerno describes it here in his comments on the role of “price coordination”:

“Price coordination must not be confused with plan coordination, a concept originally formulated by Friedrich von Hayek. In his article ‘Economics and Knowledge,’ which has heavily influenced modern Austrian writers, Hayek suggested a concept of equilibrium based on ‘coordination of plans’ as a substitute for the concept of equilibrium based on ‘constancy of the data.’ In contrast, price coordination, as I elaborate the concept below, is the indispensable complement to the concept of an evenly rotating economy based on constant data. As Ludwig von Mises has repeatedly emphasized, the evenly rotating economy, although an imaginary state which can never be realized in the unfolding of the historical market process, is yet indispensable to the identification and analysis of the entrepreneurial function of the real world.

Entrepreneurs, however, can formulate and execute production plans only in a world in which economic calculation is possible, that is, in which catallactic competition generates market-clearing prices which, at every moment of calendar time and without fail, reflect, promote, and coordinate those uses of the available scarce resources that are expected to be the most highly valued by consumers. Price coordination, therefore, is not a phenomenon associated with an unrealizable state of equilibrium, however the latter is conceived; rather, price coordination is the essential characteristic of the plain state of rest, which, as Mises tells us, ‘… is not an imaginary construction but the adequate description of what happens again and again on every market.’” (Salerno 2010: 182–183).

The absurdity of this passage takes one’s breath away.

First, although there is sometimes confusion about whether Austrian price theory is meant to be merely an ideal or prescriptive vision of economic coordination, here it seems that flexible prices moving towards their market clearing values is meant to be a descriptive theory describing how real world markets actually function (although of course it can be a prescriptive and ideal vision at the same time, as, for example, when Austrian think governments or unions are supposed to interfere with the system of flexible prices).

Secondly, can entrepreneurs “formulate and execute production plans only in a world in which economic calculation is possible, that is, in which catallactic competition generates market-clearing prices”? Of course, Salerno’s phrase “generates market-clearing prices” can be understood to mean prices that move towards their market-clearing values (or the “equilibrium prices” at which demand and supply are equal), and not that all prices do indeed reach such equilibrium values, since he rejects the real world existence of equilibrium states (such as Walrasian general equilibrium or the Misesian final state of rest).

But is successful capitalist production only possible in a world generating and moving towards market-clearing prices? The answer is, of course, no.

So much of any real world capitalist economy consists of fixprice markets with administered prices, where private businesses shun flexible prices in the conventional sense. Yet production continues, economies can have strong and indeed historically unprecedented real GDP growth, employment can be high, living standards and real wages can rise significantly, and productivity growth can be strong. We need only think of the golden age of capitalism from the 1946–1970s period.

The Austrian notion that capitalist economies can only work successfully with flexible prices and a tendency to market clearing prices is wrong, absurd and contrary to empirical reality.

BIBLIOGRAPHY
Salerno, Joseph T. 2010. Money, Sound and Unsound. Ludwig von Mises Institute, Auburn, Ala.

Greg Hill on “The Moral Economy: Keynes’s Critique of Capitalist Justice”

Hill (1996) is an important article on the fundamental economic issues in Keyes’s General Theory, and it set off an epic debate with the Austrian economist Steve Horwitz that can be read in Horwitz (1996), Hill (1996a), Horwitz (1998), and Hill (1998).

I will concentrate below on Keynes’s view of saving and loanable funds theory.

Hill (1996: 34) points out that, while Keynes certainly was a supporter of capitalism in the general sense of allocating scarce factor inputs to provide consumer goods, he argued that capitalist economies do not necessarily provide a high enough level of private investment and employment, nor that all income distribution generated by capitalism is just.

Thus Keynes’s argument for managed capitalism is both an economic and a moral case.

At the heart of Walrasian neoclassical economics is the price system. Walras’s metaphor for modeling a capitalist economy is that of the auctioneer who can announce quantities and prices of goods, and adjust prices in the process of tâtonnement until a set of market clearing prices is discovered to achieve equilibrium (Hill 1996: 35). The metaphor is utterly unrealistic, since the auctioneer must have perfect or near perfect information about different plans and trades, all expectations are fulfilled, the process is almost timeless, and stripped of the fundamental uncertainty which characterises economic life.

Under such a theoretical framework, neoclassical economics envisages a just earning of all wages, profits, and interest from all work, investment, and thrift respectively (Hill 1996: 36).

Keynes strongly challenged this paradigm.

First, the link between saving and investment. It is assumed in the neoclassical theory that saving will induce capital goods investment (Hill 1996: 38). Real resources “saved” in the sense of not being used to make consumption goods consumed today will be used in capital goods projects to make goods in the future.

But the link is not automatic nor reliable. Hill quotes a classic a passage on the general theory on the reality of any act of saving:

“An act of individual savings means –so to speak – a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day's dinner without stimulating the business of making ready for some future act of consumption.” (Keynes 1936: 210).

There is no necessary reason why an act of saving of money today must entail a future act of consumption (Hill 1996: 40), either in nominal money terms or real purchasing power terms. Money income may be spent on (1) goods and services, (2) second hand assets (whether real or financial), or (3) hoarded.

Certainly as a person’s income rises, they are more likely to spend money on (2), rather than (1).

Furthermore, the inducement to investment is complex and a function of demand, expected demand and expectations. Saving may well result in reduced demand and expected demand, and in reduced capital expenditures.

Of course, loanable funds theory gives capitalist apologists an imagined escape hatch here, as Hill notes:

“Neoclassical and Austrian economists reject this deflationary interpretation of the act of saving. In their version of Keynes’s parable, when someone reduces his consumption spending (e.g., by no longer dining out), the total supply of savings rises, and the rate of interest falls. This reduction in the cost of borrowing increases the number of profitable investment projects, and, in response, entrepreneurs increase their level of investment spending. In short, the act of saving supplies the wherewithal necessary for investment, and the falling rate of interest, which signals the public’s desire to trade current for future consumption, assures a commensurate increase in investment.” (Hill 1996: 40).

Keynes’s own critique of this was, firstly, that an individual act of saving may in fact decrease the aggregate level of savings: one saving decision reduces the incomes and hence saving of a business, and then has knock-on effects as that business reduces its own spending and hence savings of other businesses (Hill 1996: 40).

This brings out the well known fallacy of composition called the paradox of thrift: if everyone increases their savings, then the aggregate effect may be in fact decreased income and ultimately saving and investment (Hill 1996: 40).

A secondary criticism is the alleged coordinating role of interest rates in loanable funds:

“suppose that there is a flow of saving per year, and a flow of investment per year, and that the rate of interest adjusts so as to bring these two flows into balance. Now, if the interest rate were only required to equilibrate these flows of new lending and borrowing, it might well be able to perform the coordinating role assigned to it by the neoclassical school. There is, however, another important dimension to the problem, for the market in which new bonds are issued is the same market in which existing bonds are traded. And the very same scheme of interest rates that must balance the supply and demand for new bonds must also balance the supply and demand for old bonds. What would happen, then, if there were a conflict between 1) the rate of interest that would balance the flows of new saving and investment and 2) the rate of interest that would balance the supply and demand for existing bonds? According to Keynes’s account, the outcome will be determined by decisions concerning the existing stock of bonds because, at any given moment in time, the quantity of old bonds that can be released onto the market dwarfs the quantity of new bonds entering the market, just as the stock of money being held in anticipation of a fall in bond prices dwarfs the quantity of new additions to savings. Against the massive, preexisting stocks of old bonds and of money poised to enter the market in response to a change in the interest rate, the relatively small flows of new lending and borrowing can have little effect. It is because the rate of interest must balance these great stocks of existing wealth that it cannot, at the same time, effectively coordinate the flow of saving and investment.” (Hill 1996: 41–42).

The crucial issue here is the way interest rates in a real world capitalist economy involve much more than just some equating of investment with saving. There is vast stock of money and a vast stock of secondary financial assets bought with money as well as lending for capital goods projects.

Once one adds to this the possibility that business expectations can be shattered, it follows that lowering interest rates will not necessarily induce sufficient investment to create high employment and growth. A better solution is increasing demand and expected demand by greater spending.

In short, Keynes “turned the virtue of thrift on its head” (Hill 1996: 43) and undermined the classical argument for inequality of wealth.


BIBLIOGRAPHY
Hill, Greg. 1996. “The Moral Economy: Keynes’s Critique of Capitalist Justice,” Critical Review 10: 411–434.

Hill, Greg. 1996a. “Capitalism, Coordination, and Keynes: Rejoinder to Horwitz,” Critical Review 10: 373–387.

Hill, Greg. 1998. “An ultra-Keynesian Strikes Back: Rejoinder to Horwitz,” Critical Review 12: 113–126.

Horwitz, S. 1996. “Keynes on Capitalism: Reply to Hill,” Critical Review 10.3: 353–372.

Horwitz, S. 1998. “Keynes and Capitalism One More Time: A Further Reply to Hill,” Critical Review 12: 95–111.

Keynes, J. M. 1964 [1936]. The General Theory of Employment, Interest, and Money. Harvest/HBJ Book, New York and London.

Gardiner Means on Administered Prices

Gardiner C. Means was a US Institutionalist economist and researcher who did important early work on administered prices.

Means (1972) was a study of the empirical evidence on administered prices written towards the end of his career.

Means (1972: 292) first noted that the simultaneous occurrence of recession and inflation in the early 1970s (the beginning of stagflation) presented a problem to neoclassical price theory based on marginal cost or marginal revenue, but presented no such problem to administered price theory.

Administered price theory was developed in the early 1930s, and noted how many industrial prices are deliberately set by private businesses, tend to be relatively inflexible with respect to demand changes, and during recessions tend not to fall to the same extent as flexprices (Means 1972: 292).

In fact, during a business expansion or recession, it is entirely possible for an administered price to

(1) remain unchanged;

(2) move cyclically but to a far lesser extent than flexprices, and

(3) move counter-cyclically.

The crucial point is that administered prices generally show relative inflexibility with respect to flexprices (Means 1972: 294).

Means drew on the data compiled by a US National Bureau of Economic Research report on price movements during a number of business cycles called The Behavior of Industrial Prices (Stigler and Kindahl 1970).

After correcting the misunderstanding of administered price theory contained in the report, Means demonstrated how its data provided a strong empirical confirmation of the administered price thesis.

Means’ conclusions are worth quoting:

“... the actual behavior of administration-dominated prices … tends to differ so sharply from the behaviour to be expected from classical theory as to challenge the basic conclusions of that theory. However well the theory may apply to market-dominated prices, it would not seem to apply to the bulk of the administration-dominated prices in the sample or to that part of the industrial world which they typify. Until economic theory can explain and take into account the implications of this nonclassical behavior of administered prices, it provides a poor basis for public policy. The challenge which administered prices make to classical economics is as fundamental as that made by the quantum to classical physics.” (Means 1972: 304).

Administered price behaviour in real world economies really does lead to revolutionary conclusions for economic theory: so much of neoclassical economics and Austrian economic theory simply collapses and must be abandoned once one understands its implications.

Disequilibrium prices are deliberately created and maintained by fixprice enterprises in a vast swathe of the economy, simply because they prefer it that way. Such businesses are not generally in the habit of using flexible prices as their normal method of clearing supply, or equating demand with supply.

Even if many markets were deregulated or government interventions ended, with administered prices dominating modern economies, the private sector itself would no doubt still overwhelmingly shun the flexible price system required in the ideal and almost utopian vision of neoclassical price theory and Austrian economics.

For example, massive coercion and force would be needed to make private businesses conform to flexible price setting based on supply and demand curves, but how could Austrian ideologues accept this as a policy when they demand laissez faire as the solution to everything? Of course, they could not, and they would have to face the reality that market price setting largely does not work in the way they think it does.


BIBLIOGRAPHY
Means, G. C. 1972. “The Administered Price Thesis Reconfirmed,” American Economic Review 62: 292–306.

Stigler, G. J. and J. K. Kindahl. 1970. The Behavior of Industrial Prices. New York.

MMT vs. the Austrian School Debate

I do not think this is the final high-quality video of the debate, but a version of the raw video. The debate begins at 22.30.





I will write some extended comments at another time, but some random comments here.

Right on cue at 34.36, we get Bob Murphy giving us the Austrian view of prices: flexible prices are fundamental communicators of economic knowledge, and (presumably) like other Austrians he thinks that flexible prices moving towards their market-clearing values equate demand with supply, to allow a market economy to achieve economic coordination. This is a misguided and ignorant view of real world market economies. All one has to do is point out the fundamental importance of administered prices and fixprices in a market economy to show how deluded and far from reality Austrian price theory and its view of economic coordination is.

At 36.00, Murphy says that a “market interest rate” is a fundamental economic value, and government interference with it disastrous. But what does he mean by “market interest rate”? Does he mean a Wickellian natural interest rate? If so, such a thing does not exist and is completely irrelevant to any real world market economy outside of imaginary equilibrium states. Strangely, Murphy himself acknowledges the non-existence of the natural interest rate.

If Murphy means a “market clearing interest rate” as in loanable funds theory, this is also unacceptable and a wrong theory of interest rates. For example, if business expectations are subjective and can be shattered, loanable funds theory does not work, because lower interest rates will not induce the necessary investment to clear the money market.

Murphy’s simple blaming of the Fed for the asset bubbles of 1990s and 2000s is also unacceptable. Asset bubbles existed long before central banks and even under commodity standards. In poorly or minimally regulated financial systems, asset bubbles were endemic, and even when the collapse of an asset bubble causes disaster, this does not stop asset market gamblers some years later from doing the same thing and unregulated financial systems from providing the credit for doing so.

Steve Keen on Monetary Macroeconomics

Steve Keen gives a lecture here on monetary macroeconomics, held (I think) in May 2013 in Seattle. The sound is not the best, and the actual talk begins around 34.00.

Bill Mitchell on the British IMF Loan of 1976

Bill Mitchell has two posts here examining the background to the UK’s government IMF loan of 1976:

Bill Mitchell, “Case Study – British IMF loan 1976 – Part 1,” Billy Blog, June 7, 2013.

Bill Mitchell, “Case Study – British IMF loan 1976 – Part 2,” Billy Blog, June 14, 2013.

His series of posts is not yet complete, however.

As Mitchell notes, this was the “defining moment in the struggle between the existing Keynesian macroeconomic orthodoxy and the emerging Monetarist rival.”

But it is misunderstood and there are myths about it. Required reading.

Mario Rizzo Interview

An interview with the Austrian economist Mario Rizzo is available here and makes interesting reading:

“Austrians Need to Make Some Noise (and They Are!),” ThinkMarkets, June 14, 2013.

At one point, Rizzo describes one of the purposes of The Economics of Time and Ignorance (a book which holds interest for some Post Keynesians), as follows:

“We also wanted to draw connections with other schools of though – especially some aspects of Post Keynesianism and other version of subjectivist economics. We saw that, behind political or ideological differences, we had some fundamental ideas that we could share and discuss with these people. We wanted to make clear that Austrian economics is not coextensive with classical liberalism. We were not propagandists for capitalism.”

But the political views or prescriptive anti-government ideology of Austrians is precisely what gets in the way of mutual dialogue, since all Austrians appear to be either minimal state liberals or anarcho-capitalists.

For example, can anyone name a modern Austrian economist who is pragmatic on government interventions in economic life? While Hayek appears to have endorsed some government interventions in the mature phase of his career, there is no doubt he was still in essence strongly opposed to government intervention.

But what are the similarities between (some) versions of Austrian economics and Post Keynesianism?

One might list them as follows:

(1) the importance of time in economic life in a dynamic sense and fundamental uncertainty (more or less the same as Knightian uncertainty);

(2) many events of the future relevant for economic life and decision making today cannot be calculated with objective probability scores.

(3) from (1) and (2) it follows that expectations are subjective, not “rational” in the neoclassical sense;

(4) a rejection of the neoclassical view that markets converge towards general equilibrium states. But here some Austrians have their own substitutes for Walrasian general equilibrium, such as the Misesian final state of rest, plan coordination, or pattern coordination, and accept other (alleged) equilibrating processes such as the Wicksellian natural rate of interest, loanable funds theory, and equilibrium prices, so it is perhaps only the Lachmannian radical subjectivists with whom Post Keynesians are in agreement on the lack of equilibrium tendencies in market economies.

(5) a belief that the quantity theory of money is unsatisfactory, but for different reasons, and the Post Keynesian rejection of the quantity theory is much stronger.

But even with these similarities there are important differences.

Post Keynesian price theory is radically different from Austrian theory and stresses the importance of administered prices, while Austrian price theory is not much more than a development of neoclassical price theory. Aggregate demand is seen as a fundamental driving force of investment and production in Post Keynesianism (along with business expectations), while Austrians seem to see the driving force as saving, even with some version of Say’s law.

The Austrian business cycle theory is unacceptable to Post Keynesians, and inflation is seen as driven by factor input and wage cost increases (cost push inflation) and not just demand-pull inflation, and so on.

And another fundamental difference is political outlook: Post Keynesians have no dogmatic hostility to government intervention, as their theory tells them (and rightly so) that market economies are in need of macroeconomic steering and regulation.

S. B. Saul on the Profit Deflation of the 1873–1896 Period

S. B. Saul’s book The Myth of the Great Depression, 1873–1896 (London 1985) is frequently cited by defenders of price deflation. Though it is indeed an important book, the deflation advocates ought to read it more carefully, for I contend that it does not really support their case.

Saul comments on the UK economy during the long period of price deflation from 1873 to 1896:

“one major source of finance for industry was industrial profits and variations in their level were of high importance in determining the trends in industrial investment. Evidence for the years after 1870 suggests that such investment varied more than proportionately with changes in profits. When profits fell, for instance, industrial investment declined to a greater extent. Probably at those times entrepreneurs used such profits as they made to buy foreign securities or to maintain dividends. Now, as we have already seen, a major feature of the British economy after 1876 was the low level of such profits.” (Saul 1985: 41).

Even more interesting is Saul’s conclusion about the
UK:

“Lower prices squeezed profits to the benefit of wages and probably this led to lower industrial investment.” (Saul 1985: 53).

So here price deflation’s effects may have been good for real wages of labour at certain times, but bad for business, which in the end only decreased aggregate investment and employment.

So much for the great claims made for this period of late 19th century deflation! Business seems to have hated it and the deflation depressed their expectations and investment levels.

BIBLIOGRAPHY

Saul, S. B. 1985. The Myth of the Great Depression, 1873–1896 (2nd edn.). Macmillan, London.

The Profit Deflation of the 1890s

The phenomenon of “profit deflation” in the 1890s is described in this fascinating analysis by H. Clark Johnson:

“The international deflation of 1891–96 directly compressed profits. The extent of actual price decline was less than for the two income deflations considered above. From 1890 through 1896, Sauerbeck’s British wholesale price index declined by 18 percent and The Economist’s index dropped by 14 percent. British money wages, however, actually rose by several percentage points, so the rise in real wages was striking. The rate of investment dropped sharply; new capital issues averaged £102 million during 1880–89 and £154 million during 1889-90 but fell to an average level of £70 million during 1891–96. (These data depict a trend; investment need not be financed through new issues.) The rate of saving was high and increased from perhaps £150 million annually in 1880 to £200 million annually in 1896. Aggregate savings deposits grew greatly during the 1890s, both at the Post Office and at private banks. As investment declined despite the increase in savings, the second term of the price equation turned negative, while the first term increased slightly but steadily — reflecting the rigidity of input costs.

The pattern in the United States was similar. During 1893–96, the wholesale price index declined by 2.4 percent annually, compared to a decline of 1.1 percent annually during 1879–92. Unlike wages during the deflation of the 1870s, hourly wages were steady in nominal terms and hence rose in real terms. (Evidence on British and American wage levels during the 1890s undermines frequent assertions that wages were flexible during the period of the prewar gold standard.) Whereas the (nominal) volume of New York City bank clearings was steady during the deflation of the 1870s, it decreased abruptly during 1892–94. Tobin’s q declined moderately from 1892 through 1896, which was significant in part because it followed a full decade of stagnation in real stock prices. The annualized stock index level of 1881 was not exceeded until 1899.

The 1890s saw intense agitation for inflationary policies, and a central plank of William Jennings Bryan’s Democratic party platform of 1896 was that the gold standard should be abandoned in favor of bimetallism. When the Republicans won the election, the gold standard was again perceived as being secure. This conclusion was soon reinforced by rising world gold output and the beginning of a mild international inflation, which weakened the political attraction of bimetallism.” (Johnson 1997: 20).

There are two issues here, although the second is more important for my purposes:

(1) the idea that the 19th century was a period of relatively flexible wages, and

(2) the effects of the price deflation from 1873 to 1896, and in particular on profits and the level of investment.

First, it appears wages were not as flexible in the 1890s, during this later era of the gold standard, as some economists think.

Secondly, it appears that profit deflation, from the price deflation, with relative wage rigidity, induced a fall in investment. That was part of the economic crisis in the 1890s.

Now some neoclassical Marshallian economists at Cambridge University had their own pre-Keynesian theory about the causes of the late 19th century economic problems in the 1880s.

John Neville Keynes, John Maynard Keynes’s father, gave his own evidence to the UK “Royal Commission on the Depression of Trade and Industry” (whose final report was published in 1886).

He saw price deflation as having the following undesirable effects, as described by Skidelsky:

“These linkages were brought out by Neville Keynes in his evidence to the Royal Commission on the Depression of Trade and Industry (1886). The depression in trade was ‘partly but not wholly due’ to the rise in the value of gold relative to other commodities. This discouraged enterprise for five reasons:

(a) because a fall in price between the start and the completion of a transaction involved the trader in loss;

(b) because the trader tended to exaggerate his own loss by not taking sufficient account of the general fall in prices,

(c) because the profits of enterprise were temporarily diminished on account of increased depreciation of fixed capital;

(d) because the ratio of profits to wages fell as a result of the fall in money wages lagging behind the fall in prices, and

(e) because the fall in prices increased the burden of debt, transferring wealth from borrowers to lenders.

Such evidence was not intended to challenge the now orthodox quantity theory, merely to point to the difficulties of adjusting from one price level to another. Its implication was that monetary policy should be used to raise prices, and thereafter stabilise the price level. Out of such considerations developed the movement for bimetallism, which was an attempt to increase the amount of legal tender money by obliging the central bank to mint both gold and silver on demand at a fixed ratio.” (Skidelsky 1983: 231).

So John Neville Keynes anticipated modern concerns about debt deflation and also identified profit deflation as one of the causes of decreased private investment during this period of deflation.


BIBLIOGRAPHY
Johnson, H. Clark. 1997. Gold, France, and the Great Depression, 1919–1932. Yale University Press, New Haven and London.

Skidelsky, R. J. A. 1983. John Maynard Keynes: Hopes Betrayed 1883–1920 (vol. 1). Macmillan, London.

Alfred Marshall’s Judgement on the “Depression” of 1873–1896

To expand on a point in the last post, between 1873 and 1896 nations on the gold standard had a protracted period of deflation.

I will repeat here some comments I have made before.

In the 19th century, people tended to use the term “depression” loosely to refer to contractions in real output often accompanied by deflation. In the Oxford English Dictionary, we get a general definition:

“5. a. A lowering in quality, vigour, or amount; the state of being lowered or reduced in force, activity, intensity, etc. In mod. use esp. of trade; spec. the Depression, the financial and industrial ‘slump’ of 1929 and subsequent years.”(Oxford English Dictionary [2nd edn. 1989], s.v. “depression,” 5.a.).

The earliest use of the word in this sense cited in the Oxford English Dictionary is from an 1827 publication, where we read that the

“commencement of the present year was marked by a continuance of that depression in manufactures and commerce, which had prevailed at the close of the preceding [year]” (The Annual Register: Or a View of the History, Politics, and Literature, of the Year 1826, 1827, p. 1).

In the 19th century, when people referred to output contractions (normally with price deflation), they spoke of a “slump in trade,” “depression of commerce” or “depression of trade and industry”, and so on. Sometimes writers spoke of a “depression” in certain particular sectors as well. That is, “depression” was used in the modern sense of a “recession” accompanied by price deflation.

The later 1870s, 1880s and 1890s (down to 1896) were widely spoken of at the time as decades marked by “depression,” partly because of the persistent price deflation, decline in profits, and business pessimism in these years.

But we now know that actually there were several business cycles in these years, and real output was higher in 1896 than in 1873. The whole period was clearly not a “depression” or “recession” in the modern sense.

Nevertheless, there were still economic problems in these years, as follows:

(1) a serious financial crisis and recession around 1873 in many countries and serious economic stagnation in some countries like the US for almost the rest of the decade.

(2) financial crises and a serious recession in the early 1890s and economic problems in the later 1890s in some nations such as the US.

(3) a dissatisfaction with deflation from various classes of people, above all business people and debtors. In the US, this period coincided with the free silver movement and bimetallist political movement that opposed the gold standard.

In the UK and other European countries, there was also a pessimistic outlook in the business press and feelings that something was not right. Farmers were also complaining of depression.

The UK “Royal Commission on the Value of Gold and Silver” was instituted in 1887 after a report on the “depression of trade.” The commission was to investigate the question of changes in the value of gold and silver and the effects on trade and production.

Alfred Marshall was called to give evidence and this exchange with Henry Chaplin is interesting:

“[Henry Chaplin, MP:] Do you share the general opinion that during the last few years we have been passing through a period of severe depression? …

[Marshall]: 9823. Yes, of severe depression of profits.

[Henry Chaplin, MP:] 9824. And that has been during a period of abnormally low prices? …

[Marshall]: A severe depression of profits and of prices. I have read nearly all the evidence that was given before the Depression of Trade and Industry Commission, and I really could not see that there was any very serious attempt to prove anything else than a depression of prices, a depression of interest, and a depression of profits; there is that undoubtedly. I cannot see any reason for believing that there is any considerable depression in any other respect.” (Court 1965: 20).

So according to Marshall there was a “severe depression of profits.”

With price deflation, there was a squeeze on profits, as deflated prices meant lower profits in nominal terms and perhaps even in real terms when wages did not fall enough as well. Labour apparently often had rising real wages in this period, as wages did not fall as rapidly as prices. When business tried to cut wages, that provoked labour disputes (Livingston 1986: 34).

There is, strangely, also evidence of declining productivity growth in the 1880s and early 1890s (Livingston 1986: 34), and in the US price deflation, with rising real wages and insufficient labour productivity growth (Livingston 1986: 38).

The falling profits caused pessimistic businesses expectations and that, most probably, meant a reduced aggregate level of investment, since the level of investment is very much dependent on expectations, as well as aggregate demand.

Can we find any evidence for this in the economic data? I would say, yes.

Let us take the UK as an example. First, the real GDP data from 1873:

Year | GDP* | Growth Rate
Millions of international Geary-Khamis dollars
1873 | 108266 | 2.33%
1874 | 110063 | 1.66%
1875 | 112758 | 2.45%
1876 | 113881 | 0.99%
1877 | 115004 | 0.99%
1878 | 115454 | 0.39%
1879 | 115004 | -0.39%
1880 | 120395 | 4.69%
1881 | 124663 | 3.54%
1882 | 128257 | 2.88%
1883 | 129155 | 0.70%
1884 | 129380 | 0.17%
1885 | 128706 | -0.52
1886 | 130728 | 1.57%
1887 | 135894 | 3.95%
1888 | 141959 | 4.46%
1889 | 149596 | 5.38%
1890 | 150269 | 0.45%
1891 | 150269 | 0%
1892 | 146676 | -2.39%
1893 | 146676 | 0%
1894 | 156559 | 6.74%
1895 | 161500 | 3.15%
1896 | 168239 | 4.17%
1897 | 170485 | 1.33%
1898 | 178796 | 4.87%
1899 | 186208 | 4.14%
(Maddison 2003: 47).

This doesn’t look so bad at first. The worst recession was from 1891 to 1893, and mild recessions in 1879 and 1885.

But when we turn to UK unemployment from 1873 to 1896, we see something interesting:

Year | Unemployment Rate
1873 | 2.8%
1874 | 3.3%
1875 | 4.0%
1876 | 4.8%
1877 | 6.6%
1878 | 7.9%
1879 | 9.1%
1880 | 6.6%
1881 | 5.7%
1882 | 5.0%
1883 | 4.9%
1884 | 6.3%
1885 | 8.0%
1886 | 7.9%
1887 | 7.1%
1888 | 5.8%
1889 | 4.3%
1890 | 4.0%
1891 | 4.9%
1892 | 6.1%
1893 | 7.3%
1894 | 7.0%
1895 | 7.3%
1896 | 6.1%
1897 | 5.9%
1898 | 4.9%
1899 | 4.3%
1900 | 4.3%
(Boyer and Hatton 2002: 667).

Some particularly bad periods of unemployment were 1876–1880, 1884–1888 and 1892–1896. The 1876–1880 unemployment figures are very strange, because the real GDP estimates for this period show real output growth in all years but 1879.

What is fascinating is that the period of high unemployment from 1884–1887 comes at just the right time when the Royal Commission on the Value of Gold and Silver was set up. The fears of a depression in these years were not unjustified, given the high unemployment. Alfred Marshall was wrong to think there was no evidence of depression, apart from “a depression of prices, a depression of interest, and a depression of profits” (but, then, of course there were no proper national unemployment estimates in those days).

But why the high unemployment? That there was insufficient private investment seems a reasonable answer. But why insufficient private investment?

If profits were depressed and this caused business expectations to become pessimistic, then the underlying cause was deflation. Moreover, it is likely that debt deflationary dynamics were at work.

The 1890s look like a good candidate for another serious economic crisis (as was the case in the US), and, as noted above, there was a serious recession in the UK from 1891 to 1893.


BIBLIOGRAPHY
Boyer, George R. and Timothy J. Hatton. 2002. “New Estimates of British Unemployment, 1870–1913,” The Journal of Economic History 62.3: 643–667.

Court, W. H. B. 1965. British Economic History, 1870–1914: Commentary and Documents. Cambridge University Press, Cambridge.

Johnson, H. Clark. 1997. Gold, France, and the Great Depression, 1919–1932. Yale University Press, New Haven and London.

Livingston, James. 1986. Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890–1913. Cornell University Press, Ithaca, N.Y. and London.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.

George Selgin on Deflation

An interesting and stimulating talk here by George Selgin at the Adam Smith Institute, called “Could Deflation be Salvation?”





Some comments:

(1) The idea of steep price falls and perhaps general deflation this century owing to strong productivity growth is not unrealistic.

Now Selgin makes the case for “good” and “bad” deflation. But is the so-called “good” deflation really good? Specific price falls in individual goods (but not general deflation) that occur from productivity growth are no doubt a good thing. But even here it does not follow that general price deflation, even when solely from productivity growth, is a good thing.

The idea that, since the price fall of an individual good from productivity growth is positive, then general price deflation from the same cause will be positive as well is a fallacy of composition, despite Selgin’s protestations that it is not (from 13.20). It fails to consider the macroeconomic effects of general price deflation, and, above all, debt deflation. This issue is very briefly touched on at 13.05–13.20 and 38.23–40.20. However, I do not see any strong counterargument against the debt deflation objection. What is being assumed is that deflation from productivity growth will not result in involuntary unemployment and downward pressure on wages (see (4) below).

Strangely, Selgin defends by his position by accusing his opponents of being guilty of a “vast reverse fallacy of composition,” whatever this means.

(2) On the so-called Great Depression of 1873 to 1896, I agree it was not a depression in the conventional sense (see Capie and Wood 1997; Saul 1985). It was a period of several businesses cycles, and certainly real GDP in all nations was higher in 1896 than in 1873. Selgin argues that these 19th century periods of deflation from productivity growth were not “harmful,” and that “nobody back” in that century was aware of a depression from 1873 to 1896. While one can recognise that there is a kind of myth about 1873 to 1896, nevertheless I think that these claims are doubtful. I dispute that nobody then thought there was any kind of economic crisis in these years. There was concern from various groups in the years from 1873 to 1896: business people who saw their profits fall, European farmers who saw a real depression (Capie and Wood 1997: 188), and debtors hit by debt deflation.

On the specific economics problems of the 1870s and 1890s, see here:

“US Unemployment in the 1890s,” January 24, 2012.

“US Unemployment, 1869–1899,” January 26, 2012.

“Per Capita GDP Growth Rates During the Gold Standard Era,” September 11, 2012.

“Rothbard on the US Economy in the 1870s: A Critique,” September 24, 2012.

(3) But if the price reductions from productivity growth are not of the type that cause significant falls in the need for labour (unlikely, in my view), then that can only put strong downward pressure on wages as profit margins are squeezed. Selgin denies this (from 15.15) and protests that he is not advocating wage deflation.

But, if wages are cut, then that would induce debt deflation pressures, as the real burden of nominally fixed debts soars.

Even if one wants to assume that there are no really no wage falls, then we still have (4) below.

(4) Alternatively, and more likely, if the productivity growth causes sharp falls in the need for labour and serious unemployment, then, despite the prices falls, involuntary unemployment will result in an aggregate demand problem. Moreover, debt deflation is still a problem for the unemployed, even assuming the employed face no wage reductions. A market economy does not automatically adjust to full employment, and there is no reason to think that large-scale structural unemployment would not cause macroeconomic problems.

BIBLIOGRAPHY
Capie F. H. and G. H. Wood, 1997, “Great Depression of 1873-1896,” in D. Glasner et al. (eds), Business Cycles and Depressions: An Encyclopedia. Garland Pub., New York, 287–289.

Saul, S. B. 1985. The Myth of the Great Depression, 1873–1896 (2nd edn.). Macmillan, London.

Was Medieval Iceland an Example of Anarcho-Capitalism?

Some people appear to believe that it was:

“Medieval Iceland is perhaps the closest approximation of an anarchist or libertarian republic that the world is likely to see. Founded in the years between 870 and 930. when its Althing and legal system were established, Iceland was settled by people unwilling to submit to a more coercive and, as the sages describe it, tyrannical Norwegian monarchy.” (Pencak 1995: 1).

I will reserve the question of how close medieval Iceland really was to some kind of anarcho-capitalism system for another post.

But let us assume, for the sake of argument, that it was.

David Friedman (1979) studies the system of private law in medieval Iceland as an example of a real world “privatised” justice system.

However, Friedman appears to admit that “public” crimes existed in Icelandic society (a slight difficulty!). Furthermore, as far as I can see, the actual courts seem to have set up in a rather democratic manner as quasi-“public service” institutions, rather than as fee-taking private businesses.

But, again, let put these concerns aside for the moment.

Iceland had a system of wergild, a private custom and legal procedure by which a murder only results in the perpetrator paying a fine to the kin or family of the victim. I would contend that such a practice means that the rich can literally get away with murder.

And, lo and behold!, we read from Friedman himself that this is what actually happened:

“A second objection is that the rich (or powerful) could commit crimes with impunity, since nobody would be able to enforce judgment against them. Where power is sufficiently concentrated this might be true; this was one of the problems which led to the eventual breakdown of the Icelandic legal system in the thirteenth century. But so long as power was reasonably dispersed, as it seems to have been for the first two centuries after the system was established, this was a less serious problem.”
http://www.daviddfriedman.com/Academic/Iceland/Iceland.html

I am sorry, but did I read that correctly?

The private Icelandic legal system broke down by the 13th century as (presumably) inequalities of power and wealth resulted in just the type of problem critics complain would happen.

Apparently a real world privatised justice system would require a high degree of equality of power and wealth, which I submit to you is grossly unrealistic.

A final comment on the level of violence in medieval societies. I freely admit that I do not have proper estimates at hand for Iceland, but other evidence suggests that medieval societies were extremely violent by modern standards in the absence of strong state-based law enforcement and widespread private tort law.

Friedman himself actually cites a crude calculation of per capita homicide rates in medieval Iceland on the basis of some mere epic fictions, the “Sturlung sagas.” But that is an incredibly naive and unconvincing method of calculating real world historical homicide rates.

BIBLIOGRAPHY
Friedman, D. 1979. “Private Creation and Enforcement of Law – A Historical Case,” Journal of Legal Studies 8.2: 399–415.
http://www.daviddfriedman.com/Academic/Iceland/Iceland.html

Pencak, William. 1995. The Conflict of Law and Justice in the Icelandic Sagas. Rodopi, Amsterdam and Atlanta, GA.

Gold in a Bear Market?

It is starting to look like that, even though temporary rallies have happened and may continue to happen. At least, as far as I can see, there is a notable lack of triumphant crowing from the usual suspects about the imminent collapse of fiat money and the rise of gold.

Presumably a lot of smug smiles have been wiped off faces, along the values of portfolios!

Steve Keen on TalkingStickTV

A nice Steve Keen interview here, with some history of his career, comments on the Cambridge capital controversy, Hyman Minsky, and neoclassical economics. What a tragedy his university was a victim of austerity!

Rothbardian Private Law is a License for the Rich to Commit Crimes

That follows from Rothbard’s legal ideas:

“The only civil or criminal system consonant with libertarian legal principles is to have judges (and/or juries and arbitrators) pursuing charges of torts by plaintiffs made against defendants.

It should be underlined that in libertarian legal theory, only the victim (or his heirs and assigns) can legitimately press suit against alleged transgressors against his person or property. District attorneys or other government officials should not be allowed to press charges against the wishes of the victim, in the name of ‘crimes’ against such dubious or nonexistent entities as ‘society’ or the ‘state.’ If, for example, the victim of an assault or theft is a pacifist and refuses to press charges against the criminal, no one else should have the right to do so against his wishes. For just as a creditor has the right to ‘forgive’ an unpaid debt voluntarily, so a victim, whether on pacifist grounds or because the criminal has bought his way out of a suit or any other reason, has the right to ‘forgive’ the crime so that the crime is thereby annulled.” (Rothbard 2011: 407).

The crucial point is that anarcho-capitalism abolishes the state and all state-based criminal law. There would no longer be any criminal laws.

All crimes – even the worst possible – would simply become offences only punishable under a system of private tort law. In “common law” nations, a tort is a wrongful or harmful act against a person other than breach of contract (in “civil law” nations torts are generally called “delicts”). Under tort law, the victim can obtain redress or justice only if they privately bring a law suit or legal action against the perpetrator or aggressor.

It is perfectly obvious that if a victim cannot afford legal services and the fees to bring a private law suit under tort law, then no trials or punishments of many criminals will ever happen.

More importantly, the principle of refusing to investigate or punish heinous crimes – crimes so serious that we deem them against the interests of all citizens – when a criminal can simply buy off his victim strongly suggests that the rich and super-rich in Rothbard’s world will simply have a licence to commit crimes and bribe victims to stop prosecution.

So, as I noted in the last post, Rothbardian “justice” would be a mockery of that term, a travesty of any effective and impartial legal system.


BIBLIOGRAPHY
Rothbard, M. N. 2011. Economic Controversies. Ludwig von Mises Institute, Auburn, Ala.

Rothbard on Private Protection Agencies and Justice in his Libertarian World

The state of affairs Rothbard imagines is described here:

“Let us, then, examine in a little more detail what a free-market defense system might look like. It is, we must realize, impossible to blueprint the exact institutional conditions of any market in advance, just as it would have been impossible 50 years ago to predict the exact structure of the television industry today. However, we can postulate some of the workings of a freely competitive, marketable system of police and judicial services. Most likely, such services would be sold on an advance subscription basis, with premiums paid regularly and services to be supplied on call. Many competitors would undoubtedly arise, each attempting, by earning a reputation for efficiency and probity, to win a consumer market for its services. Of course, it is possible that in some areas a single agency would outcompete all others, but this does not seem likely when we realize that there is no territorial monopoly and that efficient firms would be able to open branches in other geographical areas. It seems likely, also, that supplies of police and judicial service would be provided by insurance companies, because it would be to their direct advantage to reduce the amount of crime as much as possible.

One common objection to the feasibility of marketable protection (its desirability is not the problem here) runs as follows: Suppose that Jones subscribes to Defense Agency X and Smith subscribes to Defense Agency Y. (We will assume for convenience that the defense agency includes a police force and a court or courts, although in practice these two functions might well be performed by separate firms. ) Smith alleges that he has been assaulted, or robbed, by Jones; Jones denies the charge. How, then, is justice to be dispensed?

Clearly, Smith will file charges against Jones and institute suit or trial proceedings in the Y court system. Jones is invited to defend himself against the charges, although there can be no subpoena power, since any sort of force used against a man not yet convicted of a crime is itself an invasive and criminal act that could not be consonant with the free society we have been postulating. If Jones is declared innocent, or if he is declared guilty and consents to the finding, then there if no problem on this level, and the Y courts then institute suitable measures of punishment. But what if Jones challenges the finding? In that case, he can either take the case to his X court system, or take it directly to a privately competitive Appeals Court of a type that will undoubtedly spring up in abundance on the market to fill the great need for such tribunals. Probably there will be just a few Appeals Court systems, far fewer than the number of primary courts, and each of the lower courts will boast to its customers about being members of those Appeals Court systems noted for their efficiency and probity. The Appeals Court decision can then be taken by the society as binding. Indeed, in the basic legal code of the free society, there probably would be enshrined some such clause as that the decision of any two courts will be considered binding, i.e., will be the point at which the court will be able to take action against the party adjudged guilty.

Every legal system needs some sort of socially-agreed-upon cutoff point, a point at which judicial procedure stops and punishment against the convicted criminal begins. But a single monopoly court of ultimate decision-making need not be imposed and of course cannot be in a free society; and a libertarian legal code might well have a two-court cutoff point, since there are always two contesting parties, the plaintiff and the defendant.” (Rothbard 2009: 1051–1053).

So here we have a world where there are multiple competing protection services. Some protection services might have an in-house police force and law courts, although in practice these two functions might well be performed by separate firms.

The hypothetical scenario of privately provided justice that Rothbard envisages faces a bizarre problem:

“Jones is invited to defend himself against the charges, although there can be no subpoena power, since any sort of force used against a man not yet convicted of a crime is itself an invasive and criminal act that could not be consonant with the free society we have been postulating.”

In fact, there are two problems here.

Consider Rothbard’s defence of torture:

“ ... police may use such coercive methods provided that the suspect turns out to be guilty, and provided that the police are treated as themselves criminal if the suspect is not proven guilty. For, in that case, the rule of no force against non-criminals would still apply. Suppose, for example, that police beat and torture a suspected murderer to find information (not to wring a confession, since obviously a coerced confession could never be considered valid). If the suspect turns out to be guilty, then the police should be exonerated, for then they have only ladled out to the murderer a parcel of what he deserves in return; his rights had already been forfeited by more than that extent. But if the suspect is not convicted, then that means that the police have beaten and tortured an innocent man, and that they in turn must be put into the dock for criminal assault. In short, in all cases, police must be treated in precisely the same way as anyone else; in a libertarian world, every man has equal liberty, equal rights under the libertarian law. There can be no special immunities, special licenses to commit crime. That means that police, in a libertarian society, must take their chances like anyone else; if they commit an act of invasion against someone, that someone had better turn out to deserve it, otherwise they are the criminals.

As a corollary, police can never be allowed to commit an invasion that is worse than, or that is more than proportionate to, the crime under investigation. Thus, the police can never be allowed to beat and torture someone charged with petty theft, since the beating is far more proportionate a violation of a man’s rights than the theft, even if the man is indeed the thief.” (Rothbard 1998: 82–83).

But how can such torture of mere non-convicted suspects be consistent with Rothbard’s principle that “any sort of force used against a man not yet convicted of a crime is itself an invasive and criminal act that could not be consonant with the free society we have been postulating”? Apparently in the Rothbardian paradise a private law court cannot enforce or even issue a subpoena for a person against whom a suit has been brought or charge filed, but police can torture such a person! We have here a glaring, not to mention grotesque, contradiction.

The second problem is this. If Smith files charges against Jones with Defense Agency Y and their court system, but Jones simply refuses to appear or even respond to the charges, what can Defense Agency Y do to settle the dispute? The idea that a court can fairly and rightfully declare Jones innocent or guilty without Jones defending himself or responding to the charges is absurd (or perhaps trials in absentia will be a normal practice in Rothbard’s anarcho-capitalist world). Yet if Jones simply refuses to recognise the law court and accept its authority, the law court cannot issue a subpoena or force Jones to appear, since “any sort of force used against a man not yet convicted of a crime is itself an invasive and criminal act that could not be consonant with the free society we have been postulating”! We have a toothless and probably useless justice system.

Suppose the private law court finds Jones guilty in his absence and issues some punishment. But then Jones goes to his own law court and manages to get a ruling of “not guilty.” At the point, it is not clear that anything can be done. For which court’s ruling should be followed?

According to Rothbard, in the “basic legal code of the free society, there probably would be enshrined some such clause as that the decision of any two courts will be considered binding, i.e., will be the point at which the court will be able to take action against the party adjudged guilty.” In this case, if there are two court rulings of “guilty” against Jones, then supposedly force can now be used. But it will presumably only be attempted by the court system or private protection agencies that Smith hires. No other court system or private protection agencies will bother bringing Jones to justice, for they have not been paid to do so.

Furthermore, suppose that Jones is a very wealthy and powerful man with his own private security. He could use force and violence to fend off any attempt to bring him to justice with private security personnel. What is to be done? Already this is a world that could collapse into violence and anarchy as those sufficiently rich enough simply refused to submit to specific private law courts or private protections agencies that ruled against them. It is more likely to be a world where the very rich and powerful are simply able to evade justice and those not wealthy enough will not be able to obtain justice.

On the latter point, we must also remember that in Rothbard’s anarcho-capitalist system there is no longer any criminal law in the current sense. All crimes, even the most heinous, would be mere matters for civil or private law, in which plaintiffs sue, or bring action for redress, under tort or contract law.

Any person who commits a crime under current criminal law would become a mere tortfeasor under Rothbard’s anarcho-capitalist justice system, and there would then be no obligation on society at large or any institution to arrest, try, or punish any criminal unless a plaintiff is willing and able to pay for a private law suit or tort (Rothbard 2011: 417). Needless to say, if any prospective plaintiff is too poor to afford legal fees, then no justice can be obtained. Even the worst crimes imaginable – murder, assault with grievous bodily harm, rape and so on – will not be punished if victims lack the money to bring a suit under private law. Hence the Rothbardian “justice” system would not even deserve that title. It would be a grotesque parody of justice.

Even more fundamentally, if you cannot even afford the cost of protection services, then you cannot even obtain basic police protection or basic protection under whatever private laws exist.

And what are we to make of this?:

“Of course, it is possible that in some areas a single agency would outcompete all others, but this does not seem likely when we realize that there is no territorial monopoly and that efficient firms would be able to open branches in other geographical areas.” (Rothbard 2009: 1052).

If there is a protection agency in some areas that outcompetes “all others” it is not difficult to see how such an agency would obtain a monopoly or near monopoly on “protection services” in that area, driving its competitors out of business. The barriers to entry in that area might make it highly unlikely that “efficient firms would be able to open branches” there. That can only mean that in certain areas there would have a de facto government, the very thing that Rothbardians say is the ultimate evil. The only difference is that, if cannot or do not want to pay the monopoly protection agency, you get no basic police or justice services, which means we would have a strange de facto government only interested in those rich enough to afford its services.

In fact, Rothbard’s theory of monopoly is a strange one. Rothbard thinks that true “monopoly” is really only a right of exclusive production granted by the state to some entity (Rothbard 2009: 670). But this effectively means that if, in an anarcho-capitalist system, exclusive production of private protection emerged by one business, we would have a de facto government, but, strictly speaking, according to Rothbard, it isn’t really an objectionable monopoly because it emerged on a free market. Therefore even Rothbardian libertarians could not really object to such a de facto government emerging in their utopian world.


BIBLIOGRAPHY

Rothbard, M. N. 1998. The Ethics of Liberty, New York University Press. New York, N.Y. and London.

Rothbard, M. N. 2009. Man, Economy, and State with Power and Market. The Scholar’s Edition (2nd edn.). Mises Institute, Auburn, Ala.

Rothbard, M. N. 2011. Economic Controversies. Ludwig von Mises Institute, Auburn, Ala.