How Noah Smith Should Have Criticised Austrian Economics

Updated

Noah Smith and Robert Murphy have engaged in a debate on Austrian economics here:

(1) Noah Smith, “Austrian Economists, 9/11 Truthers and Brain Worms,” Bloombergview.com, July 2, 2014.

(2) Robert P. Murphy, “Noah Smith Boldly Goes Where Thousands of Austrian Critics Have Gone Before,” Mises Canada, July 4th, 2014.

(3) Noah Smith, “Austrianism, Wrong? Inconceivable!,” Noahpinion, July 17, 2014.

(4) Robert P. Murphy, “Continuing My Chats With Noah Smith,” Mises Canada, July 19th, 2014.

Certainly, Noah Smith makes some good points against Austrian economics here and there. Unfortunately, he also misunderstands Austrian theory and makes a number of errors too.

What is a better critique of Austrian economics?

And what, to begin with, is a justifiable and proper economics for modern capitalist economies anyway? I contend it is Post Keynesian economics, and my remarks below follow from Post Keynesian theory.

First, we should recognise that the broad group of economists – both today and in the past – who self-identify as “Austrians” is heterogeneous, not some homogeneous group. We should not expect complete consistency between Austrians, because not all Austrian theories are consistent.

In my view, a useful general, though not definitive or exhaustive, division of modern Austrians would be as follows:

(1) The Anarcho-capitalists
E.g., Murray Rothbard, Hans-Hermann Hoppe and Jörg Guido Hülsmann;

(2) The minimal state/classical liberal Austrians in the tradition of Mises
This variety often supports praxeology and utilitarianism;

(3) Moderate subjectivist Austrians
E.g., Israel Kirzner and Roger Garrison;

(4) Hayek’s economics, with a minimal state, and with an empirical (or Popperian) approach to economic method, in place of praxeology;

(5) Radical subjectivists like Ludwig M. Lachmann (1906–1990), and Austrians influenced by him.

Some Austrians hold theories that are far more objectionable than others (and it is also an open question whether many free bankers really self-identify as Austrians), and not all Austrians agree on all fundamental points: for example, the Austrian school is divided even on the issue of methodology.

Some like Hayek and certain moderate subjectivist Austrians accept a broadly empiricist method for economics and reject Misesian apriorism. Others, following Mises, adopt an apriorist praxeological method.

Before we get to the critique, are there are any points of agreement? Indeed there are.

The Radical subjectivist group of Austrians following Ludwig M. Lachmann is the least objectionable and I suspect Post Keynesians can appreciate Lachmann’s work and even respect certain aspects of it.

It is even possible to point out that both Austrians and Post Keynesians share a number of common beliefs about economics, as follows:

(1) both think money is always non-neutral, whereas neoclassical economists think that money is neutral in either (a) both the long-run and short-run (as in the fantasy world models of the New Classical Chicago school) or (b) at least in the long-run (as in New Keynesian and monetarist theory);

(2) both Post Keynesians and (at least some) Austrians have criticisms of the quantity theory of money; while the Austrians criticise the quantity theory on the basis of Cantillon effects, the Post Keynesian critique is much more radical;

(3) both Post Keynesians and Austrians reject rational expectations and think expectations are subjective;

(4) both Post Keynesians and Austrians stress the role of irreversible time and fundamental uncertainty in economics, and the limitations of probability theory in economic decision making (indeed some Austrians see Keynes’ and Mises’ views on probability as complementary);

(5) both Post Keynesians and Austrians have criticisms of the neoclassical theory of capital, though they part company on exactly what that the critique is.

So what are the serious problems with Austrian theory?

Let us present a case below of some issues point by point:

(1) Misesian apriorist praxeology
Misesian apriorist praxeology as a method for economics is severely flawed.

Mises needed synthetic a priori knowledge and a type of Kantian epistemology to justify his praxeology, but the arguments for synthetic a priori knowledge are unconvincing and must be rejected. Misesian praxeology does not yield universally and necessarily true empirical statements about economic reality.

Furthermore, not even the human action axiom can be known a priori: it is clearly a synthetic a posteriori proposition.

In addition, the very idea that Mises in Human Action succeeded in deducing all his theories by deductive logic is manifestly untrue, and Misesians and Rothbardians have never answered the challenge of George J. Schuller to set out Human Action in a formal symbolic form in which all axioms, premises, and deductions are shown formally and proven.

Even modern Kantians have rejected Mises’ attempt to ground his praxeology on Kant’s epistemology.

There has also arisen amongst modern Austrians a feeble and ignorant belief that Mises was not really using a synthetic a priori epistemology. This is simply untrue, as I have shown here and here, and even if it were true and praxeology were simply analytic a priori, then it would follow logically that praxeology cannot give necessary truth about the real world.

Further Reading
“Limits of the Human Action Axiom,” February 28, 2011.

“Hayek on Mises’ Apriorism,” May 23, 2011.

“What is the Epistemological Status of Praxeology and the Action Axiom?,” July 27, 2013.

“Barrotta’s Kantian Critique of Mises’s Epistemology,” July 28, 2013.

“David Friedman versus Robert Murphy,” August 4, 2013.

“Mises Fails Philosophy of Mathematics 101,” August 30, 2013.

“Bob Murphy All At Sea on Geometry and Economic Epistemology,” August 31, 2013.

“Mises’s Non Sequitur on synthetic a priori Knowledge,” September 2, 2013.

“Hoppe’s Caricature of Empiricism,” September 10, 2013.

“Hoppe on Euclidean Geometry,” September 11, 2013.

“Robert Murphy gets Mises’s Epistemology Wrong,” September 13, 2013.

“Hoppe on Euclidean Geometry, Part 2,” September 14, 2013.

“Mises on Kant and Praxeology,” September 15, 2013.

“Mises was Confused about the Analytic–Synthetic Distinction,” September 15, 2013.

“Schuller’s Challenge to Misesian Apriorists has never been answered,” December 7, 2013.

“Mises versus Ayer on Analytic Propositions and a priori Reasoning,” March 16, 2014.

“David Gordon on Praxeology and the Austrian Method: A Critique,” March 13, 2014.

“Why Mises’s Praxeological Theories are not Necessarily True of the Real World,” March 15, 2014.

“Mises and Empiricism,” April 17, 2014.

“Why Should we reject the Existence of Synthetic a priori Knowledge?,” May 23, 2014.

(2) the Rothbardian interpretation of fractional reserve banking
The Rothbardian interpretation of fractional reserve banking is flawed and ignorant.

The idea that fractional reserve banking is inherently fraudulent or results in two property titles to the same money is false. Demand deposits and indeed all callable loans in the legal systems of Western civilisation are based on the mutuum contract, which is not, and has never been, the same thing as a bailment (or depositum regulare).

The callable mutuum (or loan for consumption) consists of a contract in which a lender transfers ownership of goods/money to a borrower, who then becomes the sole legal owner of that good/money and has the right to dispose of it in whatever way they wish. In return, the lender gets a debt/credit/IOU owed to them by the borrower: the promise to repay the debt on demand. This rules out any situation where the money is jointly owned by two people, as the Rothbardian ignorantly claim.

The anti-fractional reserve banking Austrians also have a horrendously poor and shoddy understanding of history and legal history. Jesús Huerta de Soto utterly misunderstands the historical definitions of mutuum, depositum regulare, and depositum irregulare, and is wrong to claim that the Romans banned fractional reserve banking.

The hostility of Rothbardians to fractional reserve banking via their ignorance of its legal nature arguably makes Rothbardians highly anti-capitalist ideologues, for they wish to ban a non-fraudulent practice which is at the heart of all developed capitalist economies and financial systems.

Further Reading
“Why is the Fractional Reserve Account a Mutuum, not a Bailment?,” December 17, 2011.

“Hoppe on Fractional Reserve Banking: A Critique,” December 11, 2011.

“If Fractional Reserve Banking is Fraudulent, Why isn’t the Insurance Industry Fraud?,” September 29, 2011.

“The Mutuum Contract in Anglo-American Law,” September 30, 2011.

“Rothbard Mangles the Legal History of Fractional Reserve Banking,” October 1, 2011.

“More Historical Evidence on the Mutuum Contract,” October 1, 2011.

“What British Law Says about the Mutuum Contract,” October 2, 2011.

“If Fractional Reserve Banking is Voluntary, Where is the Fraud?,” October 3, 2011.

“Huerta de Soto on the Mutuum Contract: A Critique,” August 11, 2012.

“A Simple Question for Opponents of Fractional Reserve Banking,” August 17, 2012.

“Chapter 1 of Huerta de Soto’s Money, Bank Credit and Economic Cycles: A Critique,” August 31, 2012.

“Huerta de Soto on Justinian’s Digest 16.3.25.1,” September 1, 2012.

“Huerta de Soto on Banking in Ancient Rome: A Critique,” September 2, 2012.

(3) The Austrian business cycle theory
The Austrian business cycle theory (ABCT) is intellectually bankrupt.

First, the ABCT requires the untenable Wicksellian loanable funds theory. In this theory, the unique Wicksellian natural rate of interest has a crucial coordinating role: if the bank rate falls below the natural rate and monetary inflation continues on a large enough scale, this is supposed to cause an unsustainable lengthening of the structure of production.

But the Wicksellian natural rate cannot even be defined or identified outside of a world with one commodity, as Piero Sraffa long ago pointed out (Sraffa 1932a and 1932b; Rogers 1989: 32 with n. 6; 43). The only viable model in which the Wicksellian interest theory is possible is one which assumes a one commodity world where that single commodity can function both as a capital good or a consumption good, such as the “corn” economy model (Rogers 1989: 32, n. 6).

That is, the natural rate can only be defined in a one commodity world, but not in a world with heterogeneous capital goods (Rogers 1989: 32, 43). The consequence is that only the monetary rate of interest in the loanable funds model is left after the untenable natural rate is cut out, and that the money rate of interest is cut free of the real forces of productivity and thrift (Rogers 1989: 43).

What is especially strange here is that Robert Murphy – one of the popular Austrian bloggers – not only understands Sraffa’s critique but concedes that it is true. Hardly any other Austrians seem even aware of it, or the devastating consequences it has for their business cycle theory.

I direct readers to these fascinating writings by Murphy:

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
https://files.nyu.edu/rpm213/public/files/Dissertation.pdf

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Murphy’s paper “Multiple Interest Rates and Austrian Business Cycle Theory” makes candid remarks about Hayek’s debate with Piero Sraffa:

“In his brief remarks, Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 [1941]) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it.

“Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 [1949]) continued to talk of ‘the’ originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 [1962]) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).

Murphy then discusses Lachmann’s (1994: 154) solution to Sraffa’s critique, but finds it wanting:

“Lachmann’s demonstration—that once we pick a numéraire, entrepreneurship will tend to ensure that the rate of return must be equal no matter the commodity in which we invest—does not establish what Lachmann thinks it does. The rate of return (in intertemporal equilibrium) on all commodities must indeed be equal once we define a numéraire, but there is no reason to suppose that those rates will be equal regardless of the numéraire. As such, there is still no way to examine a barter economy, even one in intertemporal equilibrium, and point to ‘the’ real rate of interest.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 14).

How Murphy can continue to defend the classical Austrian business cycle theory using the Wicksellian natural rate remains a profound mystery, for clearly Sraffa’s critique alone is sufficient to refute it.

But, as it happens, there are also numerous other problems with the ABCT: with the collapse of the natural rate as a viable concept, all that is left of Wicksellian loanable funds theory is the monetary rate of interest, and that – contrary to Austrians – is not explained by time preference, nor does it communicate reliable information about future consumption plans.

The decision to investment – especially in new or more lengthy capital projects – cannot be reduced to some simplistic function of interest rates, and one can only laugh at how crude and stupid the Austrian models underlying the ABCT are, given the extremely important role of expectations and uncertainly in the investment decision.

Above all, the empirical evidence shows us that business people do not really respond to interest rates in the way the ABCT predicts: interest rates do not much affect production decisions in already established firms (Kuehn 2013: 505, citing Tullock 1987 and Akerlof et al. 2000: 505), especially if they have excess capacity.

The finding of Davis, Haltiwanger, and Schuh (1996) “suggests that most job creation (and destruction) happens at large, mature establishments which are presumably primarily making capacity-utilization decisions rather than new capital-expenditure decisions” (Kuehn 2013: 506). That is, capitalist business cycles are driven mainly by changes in capacity utilisation, which in turn are driven by changes in aggregate demand.

Furthermore, the assumptions of Austrian capital theory underlying the ABCT are wrong. The belief that capital goods can be classified into universal, clear-cut orders as removed from the final consumer goods output must be highly doubtful. Many capital goods can simultaneously belong to multiple orders at once. Even though capital goods are heterogeneous, there can also be a significant degree of durability, substitutability, adaptability, and versatility in the capital structure of any real world market economy – and this makes any modern capitalist economy considerably more robust then the Austrian view.

As for the lengthening of the capital structure concept, although this has some validity, the empirical evidence suggests that the capital structure actually “lengthens and contracts as a consequence of the business cycle, rather than as its cause” (Kuehn 2013: 523).

Further Reading
“The Natural Rate of Interest: A Wicksellian Fable,” June 6, 2011.

“Austrian Business Cycle Theory: The Various Versions and a Critique,” June 21, 2011.

“Mises’s “Originary Interest Rate” Theory,” June 21, 2011.

“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.

“Robert P. Murphy on the Pure Time Preference Theory of the Interest Rate,” July 13, 2011.

“Hayek’s Natural Rate on Capital Goods, Sraffa and ABCT,” December 27, 2011.

“Hayek’s Trade Cycle Theory, Equilibrium, Knowledge and Expectations,” January 4, 2012

“Some Critical New Work on the Austrian Business Cycle Theory,” October 9, 2012.

“Repapis on Hayek’s Business Cycle Theory,” October 10, 2012.

“Hayek on his Simplified Capital Theory Assumptions in Prices and Production,” October 15, 2012.

“The Natural Rate of Interest in the ABCT: A Definition and Analysis,” February 26, 2013.

“Marshall on Menger’s Orders of Capital Goods,” June 24, 2013.

“Why the Austrian Business Cycle Theory is Wrong (in a Nutshell),” August 3, 2013.

“Daniel Kuehn on the Austrian Business Cycle Theory,” December 5, 2013.

(4) Austrian price theory
The problem with the failed and hysterical Austrian predictions of hyperinflation is that their underlying price theory is obsolete and intellectually bankrupt too, just like their business cycle theory.

First, many Austrians subscribe to a naïve exogenous theory of money supply and the money multiplier myth. In reality, modern money supply is endogenous: the central banks normally just accommodate the demand for high-powered money from banks. To that extent, they are passive, with respect to the quantity of money a capitalist economy creates. Central banks do not directly control the broad quantity of money, and the conventional money multiplier idea is also utterly flawed.

Instead, the primary cause of money supply growth is demand for credit and the creation of credit and “demand deposit money” by banks. But even the demand for credit is not a simple nor straightforward function of interest rates, nor of market clearing of some mythical loanable funds market.

Banks do not lend out your money as in loanable funds theory: the banks use it in their fund of reserves for clearing their obligations to depositors/creditors, other banks and financial institutions, and central banks, and simply create “demand deposit money” whenever they grant credit. Loans create new “demand deposits,” and such “demand deposits” constitute new broad money. But of course such new loans also require that there be demand for credit, and that is determined by many factors, not just interest rates.

Hence, when central banks in the UK and the US engaged in their unprecedented experiments in quantitative easing, they were able to increase the quantity of high-powered money and reserves to a great extent, but they could not induce a corresponding demand for credit by these actions, nor cause the banks to vastly increase lending and spending throughout the economy.

But even if there had been a great increase in spending it is still unlikely that this would have led to uncontrollable inflation, and here we must look at how flexible prices are in the real world.

The fact that the satisfaction or utility that humans derive from consuming goods is indeed subjective, and that there is a great deal of empirical evidence that subjective utility diminishes as a person consumes each additional unit of the same good does not prove that prices are therefore naturally or normally set in a flexible manner and are highly responsive to demand, by mutual haggling or in auction-like markets where the prices have a tendency to move to market clearing levels.

Most prices are not set in this manner, but by a very different method.

Virtually all Austrians, apart from a few like Lachmann (1986: 134; 1994: 165–166) and Reisman (1996: 167–169, 200–201, 414–417), have utterly failed to understand the reality and nature of administered prices/mark-up prices, and how the prevalence of such prices is utterly devastating to their economic theories.

Most prices are set by sellers or producers on the basis of their total average unit costs plus a profit mark-up at some estimated or projected sales or production quantity, and are, generally speaking, not responsive to demand changes. Demand-side inflation is consequently an overrated source of inflation in the modern world. The more important type of inflation is supply-side inflation caused by changes in firms’ total unit costs.

At this point, the empirical evidence is in, and it shows us that most prices in modern developed market economies are administered prices/mark-up prices.

For example, Govindarajan and Anthony (1986) and Shim and Sudit (1995) are two marketing surveys that found that from the 1980s to the 1990s mark-up pricing accounted for roughly 70% to 85% of US industrial prices.

Blinder et al. (1998: 200–201) found that 56.8% of the firms they surveyed said that the idea that prices and price changes depend mainly on costs of production ranked as “very important” (38.8%) or moderately important (18%).

The wide-ranging survey of Fabiani et al. (2006 and 2007) on prices in the Eurozone from many central bank studies finds that the average for mark-up pricing throughout the Eurozone is 54% – a majority of firm prices.

In industrial goods markets in Germany, the largest economy in Europe, a strikingly high 73% of firms have administered prices (Fabiani et al. 2006: 18, Table 4).

A survey of Canadian firms found that an impressive 67.1% of firms surveyed attributed price inflexibility to “cost-based pricing” – that is, to mark-up pricing (Amirault, Kwan, and Wilkinson 2004: 21).

Have Austrians come to grips with this important reality of real world price setting? They have not, and the sole exception, as far as I can see, was Ludwig Lachmann.

Lachmann understood the extent and significance of mark-up pricing and said the following:

“Hence, while Marshall’s was a world of flexible prices, even though not of ‘perfect competition,’ ours is a ‘fixprice world’ with prices set on a ‘cost plus’ basis and wage rates as ultimate price determinants. …. Hence we have to look for another method of dynamic analysis. To find it we must move nearer to Keynes and his successors who are here given credit for having understood, earlier than others, that a fixprice world requires a fixprice method of analysis.” (Lachmann 1977: 238–239).

(5) Misesian economic coordination and prices
The flexible price and wage system is the fundamental equilibrating mechanism in Misesian economics:

“Mises conceives the market process as coordinative, ‘the essence of coordination of all elements of supply and demand.’ This means that the structure of realized (disequilibrium) prices, which continually emerges in the course of the market process and whose elements are employed for monetary calculation, performs the indispensable function of clearing all markets and, in the process, coordinating the productive employments and combinations of all resources with one another and with the anticipated preferences of consumers.” (Salerno 1993: 124).

But following from (4), the Austrian view that modern market economies have some natural or normal tendency to supply and demand equilibrium via flexible prices is untrue.

In reality, supply and demand in most markets is not equated by price flexibility, but by direct changes to production and output: increases in aggregate demand cause greater production and employment, and falls in aggregate demand cause reduced production and employment. This supports the Keynesian view of modern economies, not the Austrian one.

A detailed discussion of problems for Austrian theory caused by the reality of administered prices is given here.

Further Reading
“Salerno on Mises’s View of Coordination in Market Economies,” March 23, 2013.

“Hayek on the ‘Use of Knowledge in Society,’” March 30, 2013.

“Misesian Economic Calculation and Coordination in Market Economies: An Overview and Critique,” May 11, 2013.

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

“Administered Prices Discredit the Austrian Economic Theories of Mises,” December 10, 2013.

(6) The definition of inflation
This is, in the grand scheme of things, really a minor point, but I raise it because it is relevant to the original debate.

The Austrians have an obsession with the definition of the word “inflation.” They claim that the original and legitimate definition of “inflation” is as an increase in the money supply, instead of (as people normally use it) a general increase in prices.

In reality, there is precious little evidence for this view. The word “inflation” began to be used in an economic sense from the early 19th century: but it was nearly always qualified by additional words such as “inflation of the currency,” “inflation in (the) currency,” “inflation of credit,” “inflation of prices” or “inflation in prices.”

It is extremely difficult to see how either sense was the “original” or formally correct usage.

In fact, the expressions “inflated prices” and “inflated price” seem to appear at the same time, so that the word “inflate” and its derived forms were clearly connected with prices from an early date.

There are explicit examples of this usage in the 1821 English translation of Jean Baptiste Say’s A Treatise on Political Economy:

“We have hitherto regarded the inflated price of grain as the only evil to be apprehended. But England, in 1815, was alarmed by a prospect of an opposite evil; viz, that its price would be reduced too low, by the influx of foreign grain.”
Say, Jean Baptiste. 1821. A Treatise on Political Economy; or, The Production, Distribution, and Consumption of Wealth (vol. 1; trans. by C. R. Prinsep from 4th French edn.). Longman, Hurst, Rees, Orme, and Brown, London. p. 296.

“The experience of English commerce has, however, proved, that a casual inflation of the price of domestic, and depression of that of external products, may be the basis of permanent commerce.”
Say, Jean Baptiste. 1821. A Treatise on Political Economy; or, The Production, Distribution, and Consumption of Wealth (vol. 1; trans. by C. R. Prinsep from 4th French edn.). Longman, Hurst, Rees, Orme, and Brown, London. p. 176.

If we turn to a major 19th-century economist like William Stanley Jevons, we find that he used “inflation” in both senses in his writings too:

“While the elasticity of credit, then, may certainly, as it seems, give prices a more free flight, the inflation of credit must be checked by the well defined boundary of available capital, … .”
Jevons, William Stanley. 1863. A Serious Fall in the Value of Gold Ascertained, and its Social Effects Set Forth. E. Stanford, London. p. 13.

“A revulsion occasioned by a failure of the national capital must, cause, not only a collapse of credit, and of any inflation of prices due to credit;”
Jevons, William Stanley. 1863. A Serious Fall in the Value of Gold Ascertained, and its Social Effects Set Forth. E. Stanford, London. p. 14.

Admittedly, this was also one of the points where Noah Smith was wrong.

Smith asserted:

“The Austrians’ next defense [after 2011] was to redefine reality. Inflation doesn’t mean a rise in prices, they said -- it means an increase in the monetary base. QE wasn’t causing inflation, it was inflation itself.”

Of course, the Austrians did not turn to this definition in the early 2010s: they have been peddling this pedantry for decades, but, as we have seen, the evidence does not support them.

Further Reading
“Austrians and the Definition of ‘Inflation’ Again,” July 8, 2014.

“Austrians and the Definition of ‘Inflation,’” August 8, 2013.

Finally, the above is hardly an exhaustive list, and the indeed Austrian theory shares many errors with mainstream neoclassical theory, such as the following:

(1) belief in a real world tendency to some kind of equilibrium state (in Austrian theory, this tends to be Mises’ final state of rest), via flexible wages and prices and competition supposedly driving prices towards marginal cost, and profits towards zero;

(2) the belief that, if only prices and wages were perfectly flexible, then economies would adjust to full employment equilibrium.

(3) the gross substitution axiom;

(4) the law of demand as a universal law;

(5) the law of diminishing marginal utility as a universal law;

(6) the law of diminishing marginal productivity as a significant limit on real world firms;

(7) the belief that firms equate price with marginal cost or move price towards marginal cost, and the associated marginalist explanation of why and how much firms produce, and

(8) the belief that involuntary unemployment is fundamentally caused by inflexible wages and that the wage is itself determined by marginal product of labour.

BIBLIOGRAPHY
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Amirault, D., Kwan, C. and G. Wilkinson. 2004. “A Survey of the Price-Setting Behaviour of Canadian Companies,” Bank of Canada Review 2004/2005: 29–40.
http://www.bankofcanada.ca/2006/09/publications/research/working-paper-2006-35/

Blinder, A. S. et al. (eds.). 1998. Asking about Prices: A New Approach to Understanding Price Stickiness. Russell Sage Foundation, New York.

Davis, S. J., Haltiwanger, J. C. and S. Schuh. 1996. Job Creation and Destruction. MIT Press, Cambridge, Mass.

Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl and A. Stokman. 2006. “What Firms’ Surveys tell us about Price-Setting Behavior in the Euro Area,” International Journal of Central Banking 2.3: 3–47.

Fabiani, Silvia, Suzanne Loupias, Claire, Monteiro Martins, Fernando Manuel and Roberto Sabbatini. 2007. Pricing Decisions in the Euro Area: How Firms set Prices and Why. Oxford University Press, New York.

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Lachmann, Ludwig M. 1994. “The Salvage of Ideas: Problems of the Revival of Austrian Economic Thought,” in D. Lavoie (ed.), Expectations and the Meaning of Institutions: Essays in Economics. Routledge, London. 159–178.

Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
https://files.nyu.edu/rpm213/public/files/Dissertation.pdf

Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge.

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Shim, Eunsup, and Ephraim Sudit. 1995. “How Manufacturers Price Products,” Management Accounting 76.8: 37–39.

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