Mises answers Robert Murphy on War Debt: Was Mises a Secret Keynesian?!

And, yes, before I get absurd comments below: the last question is facetious.

The issue is as follows. The Austrian economist Robert Murphy asks Keynesians a question about war and government bonds:

Robert P. Murphy, “A Sincere Question for the ‘We Owe It to Ourselves’ Camp,” Free Advice, 14 February, 2015.

The crucial questions Murphy asks are these:

“Why do governments issue savings bonds to their own citizens during wars?

To be sure, a Krugmanite would totally understand why a government in a wartime crisis would issue bonds to foreign capitalists in order to suck outside real resources into the country. But why–using the “we owe it to ourselves” mentality–would a government decide to finance a war through bonds issued to its own citizens, rather than levying higher taxes? Either way, the people alive “pay for” the war effort, right? The next generation as a whole is totally indifferent to whether they inherit $0 in government bonds or $1 trillion in government bonds, right?”
Robert P. Murphy, “A Sincere Question for the ‘We Owe It to Ourselves’ Camp,” Free Advice, 14 February, 2015.

Well, let that notorious socialist, statist, progressive fanatic Ludwig von Mises provide a provisional answer:

“A good case can be made out for short-term government debts under special conditions. Of course, the popular justification of war loans is nonsensical. All the materials needed for the conduct of a war must be provided by restriction of civilian consumption, by using up a part of the capital available and by working harder. The whole burden of warring falls upon the living generation. The coming generations are only affected to the extent to which, on account of the war expenditure, they will inherit less from those now living than they would have if no war had been fought. Financing a war through loans does not shift the burden to the sons and grandsons. It is merely a method of distributing the burden among the citizens. If the whole expenditure had to be provided by taxes, only those who have liquid funds could be approached. The rest of the people would not contribute adequately. Short-term loans can be instrumental in removing such inequalities, as they allow for a fair assessment on the owners of fixed capital.” (Mises 1998: 213).

I will come to the issue of why it is better to issue a certain amount of government debt in wartime below.

But, first of all, note how Mises clearly rejects the idea that government debt per se to finance war impoverishes future generations: “[f]inancing a war through loans does not shift the burden to the sons and grandsons.”

I suppose that sends chills down many Austrian spines, for Mises sounds like he was channelling Abba Lerner here (to least to some extent). As Abba Lerner said,

“A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.” (Lerner 1948: 256).

“In attempts to discredit the argument that we owe the national debt to ourselves it is often pointed out that the ‘we’ does not consist of the same people as the ‘ourselves’. The benefits from interest payments on the national debt do not accrue to every individual in exactly the same degree as the damage done to him by the additional taxes made necessary. That is why it is not possible to repudiate the whole national debt without hurting anybody. While this is undoubtedly true, all it means is that some people will be better off and some people will be worse off. Such a redistribution of wealth is involved in every significant happening in our closely interrelated economy, in every invention or discovery or act of enterprise. If there is some good general reason for incurring debt, the redistribution can be ignored because we have no more reason for supposing that the new distribution is worse than the old one than for assuming the opposite. That the distribution will be different is no more an argument against national debt than it is an argument in favor of it.

8. The growth of national debt may not only make some people richer and some people poorer, but may increase the inequality of distribution. This is because richer people can buy more government bonds and so get more of the interest payments without incurring a proportionately heavier burden of the taxes. Most people would agree that this is bad. But it is no necessary effect of an increasing national debt. If the additional taxes are more progressive — more concentrated on the rich — than the additional holdings of government bonds, the effect will be to diminish the inequality of income and wealth.” (Lerner 1948: 260–261).

But to return to Mises, on p. 96 of Robert P. Murphy and Amadeus Gabriel’s Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition (2008), they apparently were aware that Mises held a view like Lerner’s:

“On page 228, Mises critiques the popular claim that war bonds allow the costs of a war to be shunted onto future generations. This is silly because all of the tanks, bombers, etc. consumed by the war effort obviously come out of current production. Of course, a war impoverishes future generations, but only because they inherit a smaller stockpile of capital goods than they otherwise would have.” (Murphy and Gabriel 2008: 96).

Did Murphy forget what Mises also said in the same passage?

Mises also said this:

“Financing a war through loans does not shift the burden to the sons and grandsons. It is merely a method of distributing the burden among the citizens. If the whole expenditure had to be provided by taxes, only those who have liquid funds could be approached. The rest of the people would not contribute adequately. Short-term loans can be instrumental in removing such inequalities, as they allow for a fair assessment on the owners of fixed capital.” (Mises 1998: 213).

The meaning is not immediately clear, but we have some very good clarification from Mises’s earlier writings during WWI (Mises 2012 [1918]) as examined by Richard M. Ebeling:

“To give one more indication of Mises’s thinking on specific policy alternatives and choices, there is a passage in Human Action in which he says, rather cryptically in passing, that there may be good reasons under certain circumstances to fund some government spending through short-term borrowing. One only understands what he meant by this by reading a lecture he delivered in 1916 on the problem of funding the costs of the government's war expenses.

In this lecture, which is included in the forthcoming volume 1 of the Selected Writings of Ludwig von Mises, he praises the military successes of the Austrian army and the industriousness of Austrian businessmen in providing the manufactured goods required to fight the war. Mises reminds his listeners that borrowing does not enable the current generation to shift any part of the costs of a war to a future generation. Current consumption could only come out of current production, and this applied no less to consumption of finished goods designed for and used in war. Whether the war was financed by taxes or borrowing, the citizenry paid for it today by foregoing all that could have been produced and used if not for the war.

Then he explains to his audience what today often is referred to as the Ricardian equivalence theorem, named after the early 19th century British economist, David Ricardo. In his 1820 essay on the ‘Funding System,’ Ricardo argued that all that the borrowing option entailed was a decision whether to be taxed more in the present or more in the future, since all that was borrowed now would have to be paid back plus interest at a later date through future taxes; therefore in terms of their financial burden the two funding methods can be shown to be equivalent, under specified conditions. Ricardo, however, also pointed out that due to people’s perceptions and evaluations of costs in the present versus the future, they were rarely equivalent in their minds.

But Mises raised a different point in favor of certain benefits to debt financing for the government’s war expenditures. Many who would not have the liquid assets to pay lump-sum wartime taxes would either have to sell off less liquid properties to pay their tax obligation, or would have to borrow the required sum to pay the tax. In the first case, a sizeable number of citizens might have to liquidate properties more or less all at the same time to improve their cash positions, which would put exceptional downward pressure on the market prices of those assets. This would impose a financial loss on those forced to sell these properties and assets to the benefit of those who were able to buy them at prices that would not have been so abnormally low if not for the war and the need for ready cash to pay the tax obligation.

Secondly, to the extent that some citizens would need to borrow to cover their wartime tax payments, the private individual’s creditworthiness undoubtedly would be much lower than that of the government’s. As a consequence, the rates of interest these private individual's would have to pay would be noticeably higher than the rate at which the government could finance its borrowing. Thus, the interest burden from government borrowing that would have to be paid for out of future taxes would be less for the citizenry than the financial cost from them having to borrow the money in the present to cover all the costs of war through current taxation. Hence, it was both patriotic and cost-efficient, Mises said to those listening to his lecture, to buy war bonds in support of the war effort.

Thus, we find Ludwig von Mises explaining why, given the reality of government spending, under certain circumstances government deficit spending may be more desirable (from the taxpayers’ perspective) than a fully tax-funded balanced budget!”
Ebeling, Richard M. 2010. “The ‘Other’ Ludwig von Mises: Economic-Policy Advocate in an Interventionist World,” Mises Daily, March 26
http://mises.org/library/other-ludwig-von-mises-economic-policy-advocate-interventionist-world

So that was Mises’ view, and most of it seems quite reasonable to me, and one can refer to Mises’ essay “On Paying For the Costs of War and War Loans” (Mises 2012 [1918]) to see his views on this in full.

Post Keynesians would go much further than Mises, of course.

I suppose they would say the following:

(1) pure taxation has severe disadvantages for the reasons Mises notes, but also because the rich and ultra-rich will still be left with a lot of income and ability to consume goods. Given the problems of war, a mixture of taxation, bond issues, direct central bank purchasing of Treasury debts, rationing and wage and price controls is a better, fairer and more effective way to control consumption, finance deficits and to ensure that there is a just distribution of scarce wartime goods. In fact, this is what Western nations, by and large, did in WWII, and it worked well.

(2) Murphy asks:

“The next generation as a whole is totally indifferent to whether they inherit $0 in government bonds or $1 trillion in government bonds, right?”

Perhaps the next generation might be indifferent, but the current generation who live during the war are not indifferent.

Taxation takes spending power and reduces it permanently: bond issues allow repayment of spending power at a future date and offer a very safe asset in return for current abstinence from consumption. Obviously, wartime would require a very high and punishing level of pure taxation (if there were no bond issues at all), but the more bond issues a government can make, the less it needs to rely on excessive taxation. A policy of bond issues to current domestic citizens is a fairer and better method than pure taxation.

(3) following from (2), wartime bond issues – especially to the middle class and poor (via their bank and savings accounts) – have the great benefit of providing an asset that can provide spending power after a war: more spending on goods and services will create more aggregate demand and more investment and higher employment in the peacetime years that follow war. This is important since there may well be a danger of a collapse in aggregate demand. And in fact this is what happened after WWII in the US: when expectations had become optimistic, there was a private investment and consumption boom, which was in part fuelled by the drawing down of savings as corporations and businesses liquidated their bonds.

Even in WWI, Mises noted that a great deal of Austro-Hungarian state debt was held by poor classes:

“The war loans [sc. of Austria-Hungary] are in the hands of domestic creditors, and so are most of the older Austrian and Hungarian government loans. It is erroneous to assume that only rich capitalists own state obligations. Our government securities were not issued solely to the rich and wealthy segments of the population. Directly or indirectly, their owners are largely the poor and poorest. The assets of savings banks and cooperatives are mainly invested in government securities, so that even the smallest savers have a stake, via the savings banks, in the continued servicing of the government’s debts.” (Mises 2012 [1918]: 224)

So it is better to offer government bonds to banks and other financial institutions, at which the middle classes and poor hold their money, than hitting them all with punishing taxes. That is correct.

(4) Murphy asks:

“The level of the debt they inherit just affects the volume of the transfer payments among them, but can’t make the next generation poorer, right?”

It does not necessarily make them poorer in terms of real resources, unless, as Lerner notes (Lerner 1948: 256), foreigners own a lot of the debt and use their spending power to buy real resources in the future that reduce the domestic consumption of those resources.

Further Reading
“The Post-1945 Boom in America,” July 15, 2011.

“Why Did WWII Lift America Out of Depression?,” August 21, 2013.

“Mises on War Debt: Not What you would Expect,” May 9, 2013.

“Lerner on ‘The Burden of the National Debt,’” October 23, 2012.

BIBLIOGRAPHY
Ebeling, Richard M. 2010. “The ‘Other’ Ludwig von Mises: Economic-Policy Advocate in an Interventionist World,” Mises Daily, March 26
http://mises.org/library/other-ludwig-von-mises-economic-policy-advocate-interventionist-world

Lerner, A. P. 1948. “The Burden of the National Debt,” in Lloyd A. Metzler et al. (eds.), Income, Employment and Public Policy, Essays in Honour of Alvin Hanson. W. W. Norton, New York. 255–275.

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

Mises, Ludwig von. 2012 [1918]. “On Paying For the Costs of War and War Loans,” in Richard M. Ebeling (ed.), Selected Writings of Ludwig von Mises: Monetary and Economic Problems Before, During, and After the Great War (vol. 1). Liberty Fund, Indianapolis. 216–226.

Murphy, Robert P. and Amadeus Gabriel. 2008. Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

Are all Facts Theory-Laden?

If we define “fact” as a synthetic a posteriori proposition, then it would appear that nearly all facts are to some extent “theory-laden,”* but that does not vindicate apriorism or Kant’s synthetic a priori knowledge, nor does it discredit the moderate form of empiricism that is rightly at the heart of modern methodology and epistemology in the natural and social sciences.

When we interpret some data or fact in the natural and social sciences ordinarily we will clearly pre-suppose a number of theories when we make interpretations of the facts.

But the standard theories we presuppose in either the natural sciences and social sciences have already been justified empirically, by experience, inductive argument and inference to the best explanation (which is just another non-deductive, or inductive form of reasoning) by long debates and arguments in philosophy or in the natural and social sciences too.

At the most basic level, there are all sorts of theories we do have about the world in which we exist and we make when we do natural and social sciences (including economics), such as the following:

(1) the real existence of other human minds;

(2) the real existence of an external world of matter and energy that is the causal origin of our sensory data (= an indirect realist ontology);

(3) that the past had real existence (and is not some figment of our imagination);

(4) the existence of a set of physical and chemical laws that have been discovered by the natural sciences that account for the order and nature of the universe;

(5) the view that our earth is about 4.54 billion years old;

(6) the view that all livings things on our earth are the product of a Darwinian process of evolution by natural selection (and, if one wants to be technical, also by (i) sexual selection and (ii) artificial selection by humans);

(7) the human mind is the product of the physical activity of the brain, and so on.

And of course we can keep listing such theories too as we move from natural science to the social sciences. (And note I use the word “theory” in the sense of a hypothesis that has been confirmed or justified by evidence.)

Theories (1) to (3) belong to the philosophical sub-disciplines we call ontology and epistemology. The theory that other human minds really exist and that an external world exists can only be justified empirically by inductive argument by analogy and inference to the best explanation. There are no a priori or deductive arguments that can establish the necessary truth of these ideas. In fact, you cannot prove they are necessarily true at all: they are synthetic a posteriori propositions whose truth is extremely probable at best, and we know this only by experience, induction or inference to the best explanation.

Exactly the same thing can be said of propositions (4) to (7): these are empirical propositions of the natural sciences that are synthetic a posteriori: their truth is extremely probable at best and is confirmed by experience, induction or inference to the best explanation.

We could continue listing “prior” theories that a social scientist like an economist assumes when interpreting some data or facts, but we would also find that these too are nothing but empirical propositions whose truth can be believed because we have good empirical evidence to do so. We will also encounter useful concepts that are formulated to categorise and classify objects and phenomena in the world which are analytic a priori (or true by definition because we define them in such-and-such a way). While this does presuppose a further type of “theory” when looking at data or facts, the ultimate test of whether a system of analytic classifications and definitions is useful and appropriate is how well it can classify and describe the world, so the actual justification for its use is not divorced from empiricism.

At some point of course we will start to encounter bad and false empirical theories or assumptions in some disciplines, such as in neoclassical economics. But even here the only way to know if a theory about the real world is true or false is by experience, induction or inference to the best explanation. You are not going to do it by armchair apriorism.

So what is the substantive point here?

Mises claimed that the German Historical School and the logical positivist empiricists of his time thought that they could take facts without recourse to any theory. Perhaps they did. They were wrong, and modern empiricism has since moved on.

And clearly heterodox economists of the non-neoclassical Institutionalist and Post Keynesian schools seem to accept that facts are theory-laden too (e.g., see Hodgson 1999: 146; Lawson 1997: 295).

But the lazy comment that all facts are “theory-laden” is still used by apriorists like Austrian economists to attack modern empiricism in their attempts to vindicate the intellectually bankrupt method called Mises’ praxeology.

It is an absurd exercise in vain, for the admission that “all facts are theory-laden” does not vindicate epistemological apriorism in either the natural or social sciences and not in economics either, and does not refute a more moderate version of empiricism that accepts that we do indeed have many prior theories but that they are also justified empirically.

The “all facts are theory-laden” mantra does not discredit the modern empirical method. Nor does it refute the observation that we have no good reason to think that all of our knowledge of the real world is anything but empirical and justified empirically: we have no good reason to think epistemological apriorism is a viable or necessary method in our study of the world in all of its complexity, from the natural world to the complex world of human societies.

Any given datum or fact may indeed presuppose a long list of prior theories or propositions. But we will find that these theories or propositions are themselves also empirical and have been justified too by some other social or natural scientist or philosopher who asked the question “how do we know such-and-such is true” and justified its truth convincingly a posteriori by experience, induction or inference to the best explanation.

Note
* The only possible exception I can think of is Descartes’s cogito ergo sum (or cogito) argument, but on closer inspection probably many would argue that it is not free from a prior theory/assumption that there is an “I” that must be understood as a discrete conscious entity and perceiving subject that perceives objects of perception.

On a related point if the cogito argument is reformulated to conclude that some perceptions, sensations or thinking exist or are occurring, then it might possibly be considered an ontologically and epistemologically necessary a posteriori truth (but there are also arguments against this), and even if it were it takes you nowhere epistemologically: it is a dead end and cannot be used as a secure foundation for apriorism, nor to deduce any necessary truth in the natural and social sciences.

BIBLIOGRAPHY
Hodgson, Geoffrey M. 1999. Economics and Utopia: Why the Learning Economy is not the End of History. Routledge, London and New York.

Lawson, Tony. 1997. Economics and Reality. Routledge, London and New York.

David Glasner on Mises on War and Conscription in Self Defence

David Glasner has an interesting post here:

David Glasner, “Ludwig von Mises Explains (and Solves) Market Failure,” Uneasy Money, November 16, 2014.

In it, he quotes a surprising passage from Human Action (4th rev. edn. 1963) in which Mises says that war by a government in legitimate self-defence and even conscription are justified:

“From this point of view one has to deal with the often-raised problem of whether conscription and the levy of taxes mean a restriction of freedom. If the principles of the market economy were acknowledged by all people all over the world, there would not be any reason to wage war and the individual states could live in undisturbed peace. But as conditions are in our age, a free nation is continually threatened by the aggressive schemes of totalitarian autocracies. If it wants to preserve its freedom, it must be prepared to defend its independence. If the government of a free country forces every citizen to cooperate fully in its designs to repel the aggressors and every able-bodied man to join the armed forces, it does not impose upon the individual a duty that would step beyond the tasks the praxeological law dictates. In a world full of unswerving aggressors and enslavers, integral unconditional pacifism is tantamount to unconditional surrender to the most ruthless oppressors. He who wants to remain free, must fight unto death those who are intent upon depriving him of his freedom. As isolated attempts on the part of each individual to resist are doomed to failure, the only workable way is to organize resistance by the government. The essential task of government is defense of the social system not only against domestic gangsters but also against external foes. He who in our age opposes armaments and conscription is, perhaps unbeknown to himself, an abettor of those aiming at the enslavement of all.

The maintenance of a government apparatus of courts, police officers, prisons, and of armed forces requires considerable expenditure. To levy taxes for these purposes is fully compatible with the freedom the individual enjoys in a free market economy. To assert this does not, of course, amount to a justification of the confiscatory and discriminatory taxation methods practiced today by the self-styled progressive governments. There is need to stress this fact, because in our age of interventionism and the steady ‘progress’ toward totalitarianism the governments employ the power to tax for the destruction of the market economy.

Every step a government takes beyond the fulfillment of its essential functions of protecting the smooth operation of the market economy against aggression, whether on the part of domestic or foreign disturbers, is a step forward on a road that directly leads into the totalitarian system where there is no freedom at all.” (Mises 1996 [1963]: 282).

Even though Mises still condemns what he calls “confiscatory and discriminatory taxation methods practiced today by the self-styled progressive governments,” he still asserts that:

“The maintenance of a government apparatus of courts, police officers, prisons, and of armed forces requires considerable expenditure. To levy taxes for these purposes is fully compatible with the freedom the individual enjoys in a free market economy.” (Mises 1996 [1963]: 282).

And on the subject of war, it is extraordinary to see Mises defend conscription:

“The essential task of government is defense of the social system not only against domestic gangsters but also against external foes. He who in our age opposes armaments and conscription is, perhaps unbeknown to himself, an abettor of those aiming at the enslavement of all.” (Mises 1996 [1963]: 282).

These statements show how far Mises was from the extremist and ridiculous Rothbardian anarcho-capitalists who plague the Austrian movement these days.

Finally, Mises ends with his famously incoherent view that every step a government takes beyond its limited classical liberal “nightwatchman” role is a move towards totalitarianism:

“Every step a government takes beyond the fulfillment of its essential functions of protecting the smooth operation of the market economy against aggression, whether on the part of domestic or foreign disturbers, is a step forward on a road that directly leads into the totalitarian system where there is no freedom at all.” (Mises 1996 [1963]: 282).

The view that restrictions on what Mises sees as “market freedom” lead inevitably to “socialism” or “chaos” was brilliantly shown to be ridiculous by George J. Schuller a long time ago when he reriewed Human Action.

Schuller makes the following point:

“What does ‘interventionist measures logically lead to’ mean? Either Mises believes that interventionism is cumulative and necessarily leads toward socialism and into ‘chaos’ (another undefined term), or he does not. If he does, can he explain how western nations reversed mercantilist intervention and established partially free markets in the 18th and 19th centuries, or how they accomplished partial decontrol after World Wars I and II? Can he explain how the purely free market is ever to be attained? On the other hand, if interventionism need not be cumulative (and Rothbard says it logically leads to the free market as well as to socialism) then is it necessarily incoherent, unstable, and transitory? If interventionism logically points in two opposite directions (toward zero and infinity), does it have to continue in either until it reaches respectively Elysium or chaos?” (Schuller 1951: 190).

We need only think of how there was significant mercantilist intervention in the early modern period in Europe as well as numerous other restrictions on private enterprise. But this period did not end in “chaos” or “socialism” (if by “socialism” we mean a command economy, and not some absurd, nebulous term of abuse that gets applied to every system where government intervention exists). Rather than “chaos” or “socialism,” there was order and mostly orderly reform of economic systems, as, for example, free trade or at least much less restrictive trade was adopted in the 19th century and economies became more laissez faire.

Curiously, it seems that Hayek in regard to his book The Road to Serfdom gets unfairly blamed for the ridiculous, extremist view that in fact was held by Mises. For in The Road to Serfdom Hayek seems to distance himself from Mises, at least by the time of the preface to the 1976 edition:

“The reader will probably ask whether this means that I am still prepared to defend all the main conclusions of this book, and the answer to this is on the whole affirmative. The most important qualification I must add is that during the interval of time terminology has changed and for this reason what I say in the book may be misunderstood. At the time I wrote, socialism meant unambiguously the nationalization of the means of production and the central economic planning which this made possible and necessary. In this sense Sweden, for instance, is today very much less socialistically organized than Great Britain or Austria, though Sweden is commonly regarded as much more socialistic. This is due to the fact that socialism has come to mean chiefly the extensive redistribution of incomes through taxation and the institutions of the welfare state. In the latter kind of socialism the effects I discuss in this book are brought about more slowly, indirectly, and imperfectly. I believe that the ultimate outcome tends to be very much the same, although the process by which it is brought about is not quite the same as that described in this book.

It has frequently been alleged that I have contended that any movement in the direction of socialism is bound to lead to totalitarianism. Even though this danger exists, this is not what the book says. What it contains is a warning that unless we mend the principles of our policy, some very unpleasant consequences will follow which most of those who advocate these policies do not want.” (preface, Hayek, The Road to Serfdom 1976 edn.).

Further Reading
“Mises on Mixed Economies and Socialism: He is Incoherent,” March 24, 2013.

“Rothbard on Mises’ Utilitarianism: Why the Systems of Mises and Rothbard both Collapse,” October 8, 2010.

“Was Mises a Socialist?: Why Mises Refutes Himself on Government Intervention,” October 7, 2010.

“Mises on War Debt: Not What you would Expect,” May 9, 2013.

BIBLIOGRAPHY
Mises, L. von. 1996 [1963]. Human Action. A Treatise on Economics (4th rev. edn.). Fox & Wilkes, San Francisco.

Schuller, G. J. 1951. “Mises’ ‘Human Action’: Rejoinder,” American Economic Review 41.1: 185–190.

Mises’ “Unhampered Market” Fantasy World

A statement by Mises in his explanation of labour markets and what causes demand for labour, and in the context of the Great Depression:

“Wage rates are market phenomena, just as interest rates and commodity prices are. Wage rates are determined by the productivity of labor. At the wage rates toward which the market is tending, all those seeking work find employment and all entrepreneurs find the workers they are seeking. However, the interrelated phenomena of the market from which the ‘static’ or ‘natural’ wage rates evolve are always undergoing changes that generate shifts in wage rates among the various occupational groups. There is also always a definite time lag before those seeking work and those offering work have found one another. As a result, there are always sure to be a certain number of unemployed.

Just as there are always houses standing empty and persons looking for housing on the unhampered market, just as there are always unsold wares in markets and persons eager to purchase wares they have not yet found, so there are always persons who are looking for work. However, on the unhampered market, this unemployment cannot attain vast proportions. Those capable of work will not be looking for work over a considerable period—many months or even years—without finding it.” (Mises 2006 [1931]: 164–165).

This view is hardly unique to Austrian economics of course; many streams of neoclassical theory think labour demand is wholly or mainly a function of the wage rate (and this is why they are obsessed with labour market deregulation and wage flexibility).

The trouble is: it is not true. That is to say, the main cause of demand for labour is aggregate demand for output, and wages rates are very much a secondary phenomenon. Of course, nobody denies that if wage rates get too high, it will probably reduce demand for labour, or that in some markets wage rates might be the determining factor. But in most markets wages are relatively inflexible downwards, and a high degree of wage stickiness is a persistent and omnipresent characteristic of modern advanced economies.

The empirical evidence that has accumulated over the years shows that people in general object to having their nominal wages cut, and workers are not generally, nor do they tend to be, paid their marginal labour product. In fact, very often workers simply do not know what their marginal product even is, and managers/employers find it difficult to calculate it (Bewley 1999: 82, 407). In many cases, such as when output is produced by a large number of workers with different roles, it is probably not even possible to calculate the marginal labour product of an individual worker.

But it is worse than this, because there is a great deal of evidence that even managers and capitalists often dislike pay cuts. Recent studies suggest that employers avoid pay cuts because they diminish workers’ morale, and then falling morale reduces productivity, amongst many other reasons (Bewley 1999; see a nice summary of Bewley’s work on wages here). There is even evidence that by the late 19th century downwards nominal wage rigidity was already a serious fact of life in the American manufacturing sector (Hanes 1993). This type of significant wage stickiness has clearly been around for a long time, and certainly it existed in the golden age of capitalism (1946–1973), yet in that period unemployment was historically low and it was not due to wage rates adjusting rapidly to allegedly clear labour markets.

Even when demand shocks are severe enough to cause wage and price deflation (as in the early 1930s), in an environment of high private debt, this would cause a severe debt deflationary crisis in a capitalist economy.

Mises’ “unhampered market” is a fantasy world of little relevance to an empirical economics, and the central element in it – that wage rates would be the primary determinant of demand for labour and would be flexible enough to ensure that involuntary unemployment never reaches significant levels – is hardly credible as a condition that we would see in the real world.

Further Reading
“Post Keynesian Labour Market Theory: A Summary,” August 21, 2014.

“Two Summaries of Bewley’s Why Don’t Wages Fall During a Recession?,” June 17, 2014.

“James Galbraith on the Essence of Keynes’ View of Labour Demand,” May 2, 2014.

“Keynes on Nominal Wage Flexibility,” June 7, 2014.

“The Essence of Post Keynesian Theory of Unemployment,” May 16, 2013.

“Steve Keen, Debunking Economics, Chapter 6: Wages,” February 12, 2014.

“Were Nominal Wages Flexible in 1890s and Early 1900s America?,” January 31, 2014.

BIBLIOGRAPHY
Bewley, T. F. 1999. Why Wages Don’t Fall During a Recession. Harvard University Press, Cambridge, MA.

Hanes, Christopher. 1993. “The Development of Nominal Wage Rigidity in the Late 19th Century,” The American Economic Review 83.4: 732–756.

Mises, Ludwig von. 2006 [1931]. “The Causes of the Economic Crisis,” in Percy L. Greaves (ed.). The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression. Ludwig von Mises Institute, Auburn, Ala.

How did Wicksell, the early Austrians and Keynes define the Natural Rate of Interest?

There appears to be two ways in which Wicksell defined the natural rate of interest, as pointed out by Klausinger (2003: 73). In what follows, I will look at the following points:

(1) how Wicksell defined the “natural rate of interest”;

(2) how it was defined by Mises and Hayek in their early trade cycle theory, and

(3) how Keynes defined it in his pre-General Theory work.

First, how did Wicksell define the “natural rate of interest”? The first definition is given in Geldzins und Güterpreise (Wicksell 1898). We can quote from the English translation of this called Interest and Prices (trans. R. F. Kahn; 1936).

In the context of a discussion about excessive money supply and inflation, Wicksell has this to say about the interest rate:

“The rate of interest charged for loans can clearly never be either high or low in itself, but only in relation to the return which can, or is expected to, be obtained by the man who has possession of money. It is not a high or low rate of interest in the absolute sense which must be regarded as influencing the demand for raw materials, labour, and land or other productive resources, and so indirectly as determining the movement of prices. The causative factor is the current rate of interest on loans as compared with what I shall be calling the natural rate of interest on capital. This natural rate is roughly the same thing as the real interest of actual business. A more accurate, though rather abstract, criterion is obtained by thinking of it as the rate which would be determined by supply and demand if real capital were lent in kind without the intervention of money.” (Wicksell 1936: xxiv–xxv).

Later in the book Wicksell elaborates on this:

“There is a certain rate of interest on loans which is neutral in respect to commodity prices, and tends neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods. It comes to much the same thing to describe it as the current value of the natural rate of interest on capital. (Wicksell 1936: 102).

In Wicksell’s later work Vorlesungen über Nationalökonomie. Band 2: Geld und Kredit (1922) there is another definition. In the English translation of this work called Lectures on Political Economy. Volume 2: Money (trans. E. Classen; 1935) we have this:

“But of what does this capital consist? In this connection it is usual to think of the stocks of goods in the warehouses of merchants and manufacturers’ stocks of articles ready for consumption, or of raw materials, or semi-manufactured goods. But this is not correct. The magnitude of stocks of goods is of little importance to the real phenomenon of capital, although in certain circumstances it may become so (cf. p. 251). On the contrary, on a first approximation we may completely ignore the existence of stocks and assume that all products, consumption goods, raw materials, and machinery find a market as soon as they are ready either for consumption or for further processes of production. Under such circumstances free capital will not really have any material form at all—quite naturally, as it only exists for the moment. The accumulation of capital consists in the resolve of those who save to abstain from the consumption of a part of their income in the immediate future. Owing to their diminished demand, or cessation of demand, for consumption goods, the labour and land which would otherwise have been required in their production is set free for the creation of fixed capital for future production and consumption and is employed by entrepreneurs for that purpose with the help of the money placed at their disposal by savings. Of course, this process presupposes an adaptability and a degree of foresight in the reorganization of production which is far from existing in reality, though this is as a rule of secondary importance in comparison with the main phenomenon.

The rate of interest at which the demand for loan capital and the supply of savings exactly agree, and which more or less corresponds to the expected yield on the newly created capital, will then be the normal or natural real rate. It is essentially variable. If the prospects of the employment of capital become more promising, demand will increase and will at first exceed supply; interest rates will then rise and stimulate further saving at the same time as the demand from entrepreneurs contracts until a new equilibrium is reached at a slightly higher rate of interest. And at the same time equilibrium must ipso facto obtain—broadly speaking, and if it is not disturbed by other causes—in the market for goods and services, so that wages and prices will remain unchanged. The sum of money incomes will then usually exceed the money value of the consumption goods annually produced, but the excess of income—i.e. what is annually saved and invested in production—will not produce any demand for present goods but only for labour and land for future production.” (Wicksell 1935: 192–193).

So what is the difference here? Erturk (2006: 454–455) defines the natural rate (apparently in the sense as given by Wicksell here) as the rate that is equal to the “return on new capital.” So Wicksell in Vorlesungen über Nationalökonomie. Band 2: Geld und Kredit (1922) seems to abandon the definition of the “natural rate” in terms of the barter rate on real capital goods that clears those real markets. By the “rate of interest at which the demand for loan capital and the supply of savings exactly agree, and which more or less corresponds to the expected yield on the newly created capital” does Wicksell mean the monetary rate on loanable funds (or the exogenous money supply “saved” and loaned out by banks)? But if this in turn causes clearing of real markets for capital goods, it seems to come to same thing as the earlier definition.

The early Austrians Mises and Hayek took over the natural rate and the Wicksellian loanable funds theory in their Austrian business cycle theory (ABCT).

We can see this in Mises’ statements in The Theory of Money and Credit (2009 [1953], original German edition 1912) and his “Monetary Stabilization and Cyclical Policy” (1928):

“Wicksell distinguishes between the natural rate of interest (natürliche Kapitalzins), or the rate of interest that would be determined by supply and demand if actual capital goods were lent without the mediation of money, and the money rate of interest (Geldzins), or the rate of interest that is demanded and paid for loans in money or money substitutes. The money rate of interest and the natural rate of interest need not necessarily coincide, since it is possible for the banks to extend the amount of their issues of fiduciary media as they wish and thus to exert a pressure on the money rate of interest that might bring it down to the minimum set by their costs. Nevertheless, it is certain that the money rate of interest must sooner or later come to the level of the natural rate of interest, and the problem is to say in what way this ultimate coincidence is brought about. Up to this point Wicksell commands assent; … .” (Mises 2009 [1953]: 355).

“In conformity with Wicksell’s terminology, we shall use ‘natural interest rate’ to describe that interest rate which would be established by supply and demand if real goods were loaned in natura [directly, as in barter] without the intermediary of money. ‘Money rate of interest’ will be used for that interest rate asked on loans made in money or money substitute. Through continued expansion of fiduciary media, it is possible for the banks to force the money rate down to the actual cost of the banking operations, practically speaking that is almost to zero. As a result, several authors have concluded that interest could be completely abolished in this way. Whole schools of reformers have wanted to use banking policy to make credit gratuitous and thus to solve the ‘social question.’ No reasoning person today, however, believes that interest can ever be abolished, nor doubts but what, if the ‘money interest rate’ is depressed by the expansion of fiduciary media, it must sooner or later revert once again to the ‘natural interest rate.’ The question is only how this inevitable adjustment takes place. The answer to this will explain at the same time the fluctuations of the business cycle.” (Mises 2006 [1978]: 107–108).

This is the “natural rate” as in Wicksell’s Geldzins und Güterpreise (Wicksell 1898).

We can see too that in Hayek’s Prices and Production (2nd edn.; 1935; the 1st edition was published in 1931), Hayek takes over the “natural rate” from Wicksell as defined in the latter’s Geldzins und Güterpreise (1898):

“Put concisely, Wicksell’s theory is as follows: If it were not for monetary disturbances, the rate of interest would be determined so as to equalize the demand for and the supply of savings. This equilibrium rate, as I prefer to call it, he christens the natural rate of interest. In a money economy, the actual or money rate of interest (“Geldzins”) may differ from the equilibrium or natural rate, because the demand for and the supply of capital do not meet in their natural form but in the form of money, the quantity of which available for capital purposes may be arbitrarily changed by the banks.

Now, so long as the money rate of interest coincides with the equilibrium rate, the rate of interest remains “neutral” in its effects on the prices of goods, tending neither to raise nor to lower them. When the banks, however, lower the money rate of interest below the equilibrium rate, which they can do by lending more than has been entrusted to them, i.e., by adding to the circulation, this must tend to raise prices; …” (Hayek 2008 [1935]: 215).

It very strange indeed, then, to see that in Hayek’s earlier work Geldtheorie und Konjunkturtheorie (1929) – translated into English in 1933 as Monetary Theory and the Trade Cycle – he endorses the alternative definition of the natural rate in Wicksell’s Vorlesungen über Nationalökonomie. Band 2: Geld und Kredit (1922), and as in the later English translation Lectures on Political Economy. Volume 2: Money (1935):

“As regards the relationship of the natural or equilibrium rate of interest to the actual rate, it should be noted, in the first place, that even the existence of this distinction is questioned. The objections, however, mainly arise from a misunderstanding which occurred because K. Wicksell, who originated the distinction, made use in his later works of the term ‘real rate’ (which to my mind is less suitable than ‘natural rate’) and this expression became more widespread than that which we have used. The expression ‘real rate of interest’ is also unsuitable, since it coincides with Professor Fisher’s ‘real interest’, which, as is well known, denotes the actual rate plus the rate of appreciation or minus the rate of depreciation of money, and is thus in accordance with common usage, which employs the term ‘real wages’ or ‘real income’ in the same sense. Unfortunately Wicksell’s change in terminology is also linked up with a certain ambiguity in his definition of the ‘natural rate’. Having correctly defined it once as ‘that rate at which the demand for loan capital just equals the supply of savings’ he redefines it, on another occasion, as that rate which would rule ‘if there were no money transactions and real capital were lent in natura’. If this last definition were correct, Dr. G. Halm would be right in raising, against the conception of a ‘natural rate’, the objection that a uniform rate of interest could develop only in a money economy, so that the whole analysis is irrelevant. If Dr. Halm, instead of clinging to this unfortunate formula, had based his reasoning on the correct definition which is also to be found in Wicksell, he would have reached the same conclusion as Professor Adolf Weber—the distinguished head of the school of which he is a member; that is, that the natural rate is a conception ‘which is evolved automatically from any clear study of economic interconnections’. In accordance with this view, Wicksell’s conception must be credited with fundamental significance in the study of monetary influences on the economic system; especially if one realizes the practical importance of a money rate of interest depressed below the natural rate by a constantly increasing volume of circulating media. Unfortunately, although Wicksell’s solution cannot be regarded as adequate at all points, the attention which it has received since he propounded it has borne no relation to its importance. Apart from the works of Professor Mises, mentioned above, the theory has made no progress at all, although many questions concerning it still await solution. This may be due to the fact (on which we have touched already) that the problem had become entangled with that of fluctuations in the general price level. We have already stated our views on this point, (p. 196) and indicated what is necessary for the further development of the theory. Here, we shall try to restate the problem in its correct form, freed from any reference to movements in the price level.” (Hayek 1933: 209–212).

Again, is Hayek trying to define the natural rate merely as a monetary rate that clears that market for loanable funds, and that is equal to the return on capital? But at the same time that rate must cause equilibrium in the markets for real capital goods, so it is unclear why Wicksell’s earlier definition is problematic.

Now we come to Keynes. I am unsure whether Keynes’ uses the natural rate in A Tract on Monetary Reform (1923), but in Keynes’ A Treatise on Money (1930), he also uses a concept called the natural rate, which he connects with Wicksell:

“It is now evident in what manner changes in the Bank-rate, or—more strictly—changes in the rate of interest, are capable of influencing the purchasing power of money.

The attractiveness of investment depends on the prospective income which the entrepreneur anticipates from current investment relatively to the rate of interest which he has to pay in order to be able to finance its production;—or, putting it the other way round, the value of capital-goods depends on the rate of interest at which the prospective income from them is capitalised. That is to say, the higher (e.g.) the rate of interest, the lower, other things being equal, will be the value of capital-goods. Therefore, if the rate of interest rises, P´ will tend to fall, which will lower the rate of profit on the production of capital-goods, which will be deterrent to new investment. Thus a high rate of interest will tend to diminish both P´ and C, which stand respectively for the price-level and the volume of output of capital-goods. The rate of saving, on the other hand, is stimulated by a high rate of interest and discouraged by a low rate. It follows that an increase in the rate of interest tends— other things being equal—to make the rate of investment (whether measured by its value or by its cost) to decline relatively to the rate of saving, i.e. to move the second term of both Fundamental Equations in the negative direction, so that the price-levels tend to fall.

Following Wicksell, it will be convenient to call the rate of interest which would cause the second term of our second Fundamental Equation to be zero the natural-rate of interest, and the rate which actually prevails the market-rate of interest. Thus the natural-rate of interest is the rate at which saving and the value of investment are exactly balanced, so that the price-level of output as a whole (Π) exactly corresponds to the money-rate of the efficiency-earnings of the Factors of Production. Every departure of the market-rate from the natural-rate tends, on the other hand, to set up a disturbance of the price-level by causing the second term of the second Fundamental Equation to depart from zero.” (Keynes 1930a: 154–155).

Later in A Treatise on Money Keynes has an extended discussion of the natural rate:

“Whilst Marshall, unless I have misunderstood him, regarded the influence of Bank-rate on investment as the means by which an increase of purchasing power got out into the world, and Mr. Hawtrey has limited its influence to one particular kind of investment, namely investment by dealers in stocks of liquid goods, Wicksell—though here also there are obscurities to overcome—was closer to the fundamental conception of Bank-rate as affecting the relationship between investment and saving. I say that there are obscurities to overcome, because Wicksell’s theory in the form in which it has been taken over from him by Professor Cassel seems to me to be reduced to practically the same thing as the first strand of thought mentioned above, namely that the level of Bank-rate determines the volume of bank-money and hence the price-level. But I think that there was more than this in Wicksell’s own thought, though obscurely presented in his book.

Wicksell conceives of the existence of a ‘natural rate of interest’ which he defines as being the rate which is ‘neutral’ in its effect on the prices of goods, tending neither to raise nor to lower them, and adds that this must be the same rate as would obtain if in a non-monetary economy all lending was in the form of actual materials. It follows that if the actual rate of interest is lower than this prices will have a rising tendency, and conversely if the actual rate is higher. It follows, further, that so long as the money-rate of interest is kept below the natural-rate of interest, prices will continue to rise—and without limit. It is not necessary for this result, namely the cumulative rise of prices, that the money-rate should fall short of the natural-rate by an ever-increasing difference; it is enough that it should be, and remain, below it.

Whilst Wicksell’s expressions cannot be justified as they stand and must seem unconvincing (as they have to Professor Cassel) without further development, they can be interpreted in close accordance with the Fundamental Equation of this Treatise. For if we define Wicksell’s natural-rate of interest as the rate at which Saving and the value of Investment are in equilibrium (measured in accordance with the definitions of Chapter 10 above), then it is true that, so long as the money-rate of interest is held at such a level that the value of Investment exceeds Saving, there will be a rise in the price-level of output as a whole above its cost of production, which in turn will stimulate entrepreneurs to bid up the rates of earnings above their previous level, and this upward tendency will continue indefinitely so long as the supply of money continues to be such as to enable the money-rate to be held below the natural-rate as thus defined. This means, in general, that the market-rate of interest cannot be continually held even a little below the natural-rate unless the volume of bank-money is being continually increased; but this does not affect the formal correctness of Wicksell’s argument. Professor Cassel’s belief, that Wicksell was making a very odd mistake in arguing in this way, may be justified by the incompleteness of Wicksell’s expression, but it probably indicates that, whilst Wicksell was thinking along the same lines as those followed in this Treatise, Cassel is not,—in spite of the fact that Cassel expresses himself elsewhere in practically the same terms as Wicksell, namely that the true rate of interest is that at which the value of money is unchanged.

At any rate, whether or not I have exaggerated the depth to which Wicksell’s thought penetrated, he was the first writer to make it clear that the influence of the rate of interest on the price-level operates by its effect on the rate of Investment, and that Investment in this context means Investment and not speculation. On this point Wicksell was very explicit, pointing out that the rate of investment is capable of being affected by small changes in the rate of interest, e.g. … [one and a quarter] per cent., which could not be supposed to affect the mind of the speculator; that this increased investment causes an increased demand for actual goods for use and not for ‘speculative’ purposes, and that it is this increased actual demand which sends up prices.

More recently a school of thought has been developing in Germany and Austria under the influence of these ideas, which one might call the neo-Wicksell school, whose theory of bank-rate in relation to the equilibrium of Savings and Investment, and the importance of the latter to the Credit Cycle, is fairly close to the theory of this Treatise. I would mention particularly Ludwig Mises’s Geldwertstabilisierung und Konjunkturpolitik (1928), Hans Neisser, Der Tauschwert des Geldes (1928), and Friedrich Hayek, Geldtheorie und Konjunkturtheorie (1929). (Keynes 1930a: 196–199).

So Keynes here defines the natural rate as:

(1) “… the rate at which saving and the value of investment are exactly balanced, so that the price-level of output as a whole (Π) exactly corresponds to the money-rate of the efficiency-earnings of the Factors of Production.”

(2) “… the rate at which Saving and the value of Investment are in equilibrium … .”

This seems to be developed from Wicksell’s definition in Vorlesungen über Nationalökonomie. Band 2: Geld und Kredit (1922).

The final point (astonishing as it may seem) is that Keynes’ period as a quasi- or proto-monetarist before his work on the General Theory saw him developing a theory of inflation, the natural rate and investment which he saw as “fairly close to” the Austrian theory of Mises and Hayek. Though Keynes did not accept Austrian capital theory or the notion of the unsustainable lengthening of the structure of production, there seems to be some truth in this. Later of course when Hayek came to England and published Prices and Production on the basis of the lectures he had given at the LSE and Keynes knew the theory in greater detail, Keynes was not supportive.

BIBLIOGRAPHY
Erturk, K.A. 2006. “Speculation, Liquidity Preference and Monetary Circulation,” in P. Arestis and M. Sawyer (eds), A Handbook of Alternative Monetary Economics. Edward Elgar, Cheltenham, UK and Northampton, MA. 454–470.

Hayek, F. A. von. 1929. Geldtheorie und Konjunkturtheorie. Hölder-Pichler-Tempsky, Vienna.

Hayek, F. A. von. 1933. Monetary Theory and the Trade Cycle (trans. N. Kaldor and H. M. Croome). J. Cape, London.

Hayek, F. A. von. 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard. Ludwig von Mises Institute, Auburn, Ala.

Hayek, F. A. von. 2008a [1933] “Monetary Theory and the Trade Cycle,” in F. A. von Hayek, Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard. Ludwig von Mises Institute, Auburn, Ala. 1–130.

Keynes, John Maynard. 1923. A Tract on Monetary Reform. Macmillan, London.

Keynes, John Maynard. 1930. A Treatise on Money. Volume 1. The Pure Theory of Money. Macmillan, London.

Keynes, John Maynard. 1930a. A Treatise on Money. Volume 2. The Applied Theory of Money. Macmillan, London.

Klausinger, Hansjoerg. 2003. “Hayek Translated: Some Words of Caution,” History of Economics Review 37: 71–83.

Mises, L. von. 1912. Theorie des Geldes und der Umlaufsmittel. Duncker & Humblot, Munich and Leipzig.

Mises, L. von. 2006 [1978]. The Causes of the Economic Crisis and Other Essays Before and After the Great Depression. Ludwig von Mises Institute, Auburn, Ala.

Mises, L. von. 2009 [1953]. The Theory of Money and Credit (enlarged, new edn). Ludwig von Mises Institute, Auburn, Ala.

Wicksell, K. 1898. Geldzins und Güterpreise. Fischer, Jena.

Wicksell, K. 1922. Vorlesungen über Nationalökonomie. Band 2: Geld und Kredit. Fischer, Jena.

Wicksell, K. 1935. Lectures on Political Economy. Volume 2: Money (trans. E. Classen). Routledge & Kegan Paul, London.

Wicksell, K. 1936. Interest and Prices (trans. R. F. Kahn). Macmillan, London.

Mises’ Early Austrian Business Cycle Theory

I am referring to the versions in Mises’ The Theory of Money and Credit (trans. J. E. Batson; Mises Institute, Auburn, Ala. 2009 [1953]), pp. 349–366 and his “Monetary Stabilization and Cyclical Policy” (1928). It is unclear to me if there is a similar version in the original German edition the Theorie des Geldes und der Umlaufsmittel (Munich and Leipzig, 1912) or the 2nd German edition published in 1924.

In fact, there are somewhat different early versions of the ABCT published by both Mises and Hayek, as follows:

(1) The version in Mises’ original, German first edition the Theorie des Geldes und der Umlaufsmittel (Munich and Leipzig, 1912), and the 2nd German edition published in 1924. Then in the English translation The Theory of Money and Credit (1934; trans. H. E. Batson from 2nd German edition of 1924), J. Cape, London.

And later in the 1953 version: The Theory of Money and Credit (trans. J. E. Batson; Mises Institute, Auburn, Ala. 2009 [1953]), pp. 349–366.

(2) Mises’ version in his essay “Monetary Stabilization and Cyclical Policy” (1928), available in Mises 2006 [1978], The Causes of the Economic Crisis and Other Essays Before and After the Great Depression (Ludwig von Mises Institute, Auburn, Ala.), p. 99ff.

(3) Mises’ version in Human Action: A Treatise on Economics (Yale University Press, New Haven, CT., 1949).

(4) Hayek’s first version of ABCT in the first edition of Prices and Production (London, 1931), which was revised somewhat in the second edition Prices and Production (2nd edn.; 1935), Routledge and Kegan Paul.

(5) Hayek’s second version of ABCT in Profits, Interest and Investment (London, 1939).

Though I will make some critical remarks here and there, I am not concerned so much with criticising the theory here, but merely reviewing it out of interest.

In brief, according to Mises, when banks issue new fiduciary media in the form of credit, this tends to lower the bank rate of interest (Mises 2009 [1953]: 352).

Mises’ monetary and interest rate theory is taken over from Wicksell, though Mises did not entirely agree with Wicksell on every point (Mises 2009 [1953]: 355).

As Mises says,

“Wicksell distinguishes between the natural rate of interest (natürliche Kapitalzins), or the rate of interest that would be determined by supply and demand if actual capital goods were lent without the mediation of money, and the money rate of interest (Geldzins), or the rate of interest that is demanded and paid for loans in money or money substitutes. The money rate of interest and the natural rate of interest need not necessarily coincide, since it is possible for the banks to extend the amount of their issues of fiduciary media as they wish and thus to exert a pressure on the money rate of interest that might bring it down to the minimum set by their costs. Nevertheless, it is certain that the money rate of interest must sooner or later come to the level of the natural rate of interest, and the problem is to say in what way this ultimate coincidence is brought about. Up to this point Wicksell commands assent; but his further argument provokes contradiction.

According to Wicksell, at every time and under all possible economic conditions there is a level of the average money rate of interest at which the general level of commodity prices no longer has any tendency to move either upwards or downwards. He calls it the normal rate of interest; its level is determined by the prevailing natural rate of interest, although, for certain reasons which do not concern our present problem, the two rates need not coincide exactly. When, he says, from any cause whatever, the average rate of interest is below this normal rate, by any amount, however small, and remains at this level, a progressive and eventually enormous rise of prices must occur ‘which would naturally cause the banks sooner or later to raise their rates of interest.’ Now, so far as the rise of prices is concerned, this may be provisionally conceded. But it still remains inconceivable why a general rise in commodity prices should induce the banks to raise their rates of interest.” (Mises 2009 [1953]: 355).

It is quite clear that Mises’ ABCT is founded on Wicksellian loanable funds theory and the unique natural rate of interest. The fact that the unique Wicksellian natural rate cannot be defined outside a one commodity world, and therefore the Wicksellian loanable funds theory underlying Mises’ ABCT is untenable, is sufficient to refute the theory (Rogers 1989: 22) on its own, but let us move on.

Mises, however, departs from Wicksell, and Mises thinks that the banks can extend their issues of fiduciary media to a very great degree:

“Assuming uniformity of procedure, the credit-issuing banks are able to extend their issues indefinitely. It is within their power to stimulate the demand for capital by reducing the rate of interest on loans, and, except for the limits mentioned above, to go so far in this as the cost of granting the loans permits. In doing this they force their competitors in the loan market, that is all those who do not lend fiduciary media which they have created themselves, to make a corresponding reduction in the rate of interest also. Thus the rate of interest on loans may at first be reduced by the credit issuing banks almost to zero. This, of course, is true only under the assumption that the fiduciary media enjoy the confidence of the public so that if any requests are made to the banks for liquidation of the promise of prompt cash redemption which constitutes the nature of fiduciary media, it is not because the holders have any doubts as to their soundness. Assuming this, the only possible reason for the withdrawal of deposits or the presentation of notes for redemption is the existence of a demand for money for making payments to persons who do not belong to the circle of customers of the individual banks. The banks need not necessarily meet such demands by paying out money; the fiduciary media of those banks among whose customers are those persons to whom the banks’ own customers wish to make payments are equally serviceable in this case. Thus there ceases to be any necessity for the banks to hold a redemption fund consisting of money; its place may be taken by a reserve fund consisting of the fiduciary media of other banks. If we imagine the whole credit system of the world concentrated in a single bank, it will follow that there is no longer any presentation of notes or withdrawal of deposits; in fact, the whole demand for money in the narrower sense may disappear. These suppositions are not at all arbitrary. It has already been shown that the circulation of fiduciary media is possible only on the assumption that the issuing bodies enjoy the full confidence of the public, since even the dawning of mistrust would immediately lead to a collapse of the house of cards that comprises the credit circulation. We know, furthermore, that all credit-issuing banks endeavour to extend their circulation of fiduciary media as much as possible, and that the only obstacles in their way nowadays are legal prescriptions and business customs concerning the covering of notes and deposits, not any resistance on the part of the public. If there were no artificial restriction of the credit system at all, and if the individual credit-issuing banks could agree to parallel procedure, then the complete cessation of the use of money would only be a question of time. It is, therefore, entirely justifiable to base our discussion on the above assumption.

Now, if this assumption holds good, and if we disregard the limit that has already been mentioned as applying to the case of metallic money, then there is no longer any limit, practically speaking, to the issue of fiduciary media; the rate of interest on loans and the level of the objective exchange-value of money is then limited only by the banks’ running costs – a minimum, incidentally, which is extraordinarily low. By making easier the conditions on which they will grant credit, the banks can extend their issue of fiduciary media almost indefinitely. Their doing so must be accompanied by a fall in the objective exchange-value of money.” (Mises 2009 [1953]: 357–359).

For Mises, then, the banks can “extend their issue of fiduciary media almost indefinitely” and induce a corresponding inflation.

Mises next turns to the question of what happens when the bank rate is pushed below Wicksell’s unique natural rate, and what forces the two rates to equilibrate again (Mises 2009 [1953]: 359–360).

The key for Mises is longer processes of production:

“Now if the rate of interest on loans is artificially reduced below the natural rate as established by the free play of the forces operating in the market, then entrepreneurs are enabled and obliged to enter upon longer processes of production. It is true that longer roundabout processes of production may yield an absolutely greater return than shorter processes; but the return from them is relatively smaller, since although continual lengthening of the capitalistic process of production does lead to continually increasing returns, after a certain point is reached the increments themselves are of decreasing amount. Thus it is possible to enter upon a longer roundabout process of production only if this smaller additional productivity will still pay the entrepreneur. So long as the rate of interest on loans coincides with the natural rate, it will not pay him; to enter upon a longer period of production would involve a loss. On the other hand, a reduction of the rate of interest on loans must necessarily lead to a lengthening of the average period of production. It is true that fresh capital can be employed in production only if new roundabout processes are started. But every new roundabout process of production that is started must be more roundabout than those already started; new roundabout processes that are shorter than those already started are not available, for capital is of course always invested in the shortest available roundabout' processes of production, because they yield the greatest returns. It is only when all the short roundabout processes of production have been appropriated that capital is employed in the longer ones.” (Mises 2009 [1953]: 360–361).

Mises further explains the process:

“The situation is as follows: despite the fact that there has been no increase of intermediate products and there is no possibility of lengthening the average period of production, a rate of interest is established in the loan market which corresponds to a longer period of production; and so, although it is in the last resort inadmissible and impracticable, a lengthening of the period of production promises for the time to be profitable. But there cannot be the slightest doubt as to where this will lead. A time must necessarily come when the means of subsistence available for consumption are all used up although the capital goods employed in production have not yet been transformed into consumption goods. This time must come all the more quickly inasmuch as the fall in the rate of interest weakens the motive for saving and so slows up the rate of accumulation of capital. The means of subsistence will prove insufficient to maintain the labourers during the whole period of the process of production that has been entered upon. Since production and consumption are continuous, so that every day new processes of production are started upon and others completed, this situation does not imperil human existence by suddenly manifesting itself as a complete lack of consumption goods; it is merely expressed in a reduction of the quantity of goods available for consumption and a consequent restriction of consumption. The market prices of consumption goods rise and those of production goods fall.

That is one of the ways in which the equilibrium of the loan market is re-established after it has been disturbed by the intervention of the banks. The increased productive activity that sets in when the banks start the policy of granting loans at less than the natural rate of interest at first causes the prices of production goods to rise while the prices of consumption goods, although they rise also, do so only in a moderate degree, viz., only in so far as they are raised by the rise in wages. Thus the tendency towards a fall in the rate of interest on loans that originates in the policy of the banks is at first strengthened. But soon a counter-movement sets in: the prices of consumption goods rise, those of production goods fall. That is, the rate of interest on loans rises again, it again approaches the natural rate.” (Mises 2009 [1953]: 362–363).

So the boom leads to accelerating inflation, and in fact the theory seems to predict serious or severe inflation that causes a panic that in turn leads to the bust, as Mises says in his essay “Monetary Stabilization and Cyclical Policy” (1928):

“If the banks could proceed in this manner, with businesses improving continually, could they then provide for lasting good times? Would they then be able to make the boom eternal?

They cannot do this. The reason they cannot is that inflationism carried on ad infinitum is not a workable policy. If the issue of fiduciary media is expanded continuously, prices rise ever higher and at the same time the positive price premium also rises. (We shall disregard the fact that consideration for (1) the continually declining monetary reserves relative to fiduciary media and (2) the banks’ operating costs must sooner or later compel them to discontinue the further expansion of circulation credit.) It is precisely because, and only because, no end to the prolonged ‘flood’ of expanding fiduciary media is foreseen, that it leads to still sharper price increases and, finally, to a panic in which prices and the loan rate move erratically upward.

Suppose the banks still did not want to give up the race? Suppose, in order to depress the loan rate, they wanted to satisfy the continuously expanding desire for credit by issuing still more circulation credit? Then they would only hasten the end, the collapse of the entire system of fiduciary media. The inflation can continue only so long as the conviction persists that it will one day cease. Once people are persuaded that the inflation will not stop, they turn from the use of this money. They flee then to ‘real values,’ foreign money, the precious metals, and barter.” (Mises 2006 [1978]: 114).

Yet most business cycles do not proceed in this manner: if we look at recessions in the post-1945 era, the breakdown of the boom is not characterised by crises in inflation that set off panic. While inflation rates might well rise in the boom, nevertheless they do not rise to the levels that Mises’ theory seems to predict.

According to Mises, the bust is driven by liquidation of capital projects that are unsustainable:

“Great losses are sustained as a result of misdirected capital investments. Many new structures remain unfinished. Others, already completed, close down operations. Still others are carried on because, after writing off losses which represent a waste of capital, operation of the existing structure pays at least something.” (Mises 2006 [1978]: 115).

However, as we have seen it is the inventory cycle that drives a good many recessions, which is to say, excessive accumulation of stock led to cuts in production and investment (basically, for many companies, changes in capacity utilisation) to liquidate inventories, and that in turn induces recessions. This process is a major cause of recessions, and is what drives the fall in investment, not liquidation of new, allegedly unsustainable projects.

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

“John Hicks on Hayek’s Business Cycle Theory,” July 18, 2014.

“A Candid Admission from Hayek?,” Sunday, July 20, 2014.

External Links
David Glasner, “Hayek on the Unsustainability of Inflation-Fed Booms,” Uneasy Money, August 30, 2012.

David Glasner, “Two Problems with Austrian Business-Cycle Theory,” Uneasy Money, October 3, 2012.

Robert Murphy, “David Glasner Needs to Re-Read Mises,” Free Advice, 9 October, 2012.

David Glasner, “On the Unsustainability of Austrian Business-Cycle Theory, Or How I Discovered that Ludwig von Mises Actually Rejected His Own Theory,” Uneasy Money, October 10, 2012.

Philip Pilkington, “Tyler Cowen and Daniel Kuehn Miss the Point of the Austrian Business Cycle Theory,” Fixing the Economists, December 6, 2013.

BIBLIOGRAPHY
Hayek, F. A. von, 1931. Prices and Production. G. Routledge & Sons, Ltd, London.

Hayek, F. A. von, 1935. Prices and Production (2nd edn). Routledge and Kegan Paul.

Hayek, F. A. von, 1939. Profits, Interest and Investment. Routledge and Kegan Paul, London

Mises, L. von. 1912. Theorie des Geldes und der Umlaufsmittel. Duncker & Humblot, Munich and Leipzig.

Mises, L. von. 1924. Theorie des Geldes und der Umlaufsmittel (2nd edn). Duncker & Humblot, Munich.

Mises, L. von. 1934. The Theory of Money and Credit (trans. H. E. Batson from 2nd German edition of 1924). J. Cape, London.

Mises, L. von. 1949. Human Action. A Treatise on Economics. Yale University Press, New Haven, CT.

Mises, L. von. 1953. The Theory of Money and Credit (enlarged, new edn). Yale University Press, New Haven.

Mises, L. von. 2009 [1953]. The Theory of Money and Credit (enlarged, new edn). Ludwig von Mises Institute, Auburn, Ala.

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

Mises, L. von. 2006 [1978]. The Causes of the Economic Crisis and Other Essays Before and After the Great Depression. Ludwig von Mises Institute, Auburn, Ala.

Mises, L. von, 2009 [1953]. The Theory of Money and Credit (trans. J. E. Batson). Mises Institute, Auburn, Ala.

Value and Price in Austrian Economics

This post is more an exercise in clarification than (for the moment anyway) criticism.

What is the Austrian view of the relation between subjective value and price?

As explained by Mises:

“In an exchange economy, the objective exchange value of commodities becomes the unit of calculation. This involves a threefold advantage. In the first place we are able to take as the basis of calculation the valuation of all individuals participating in trade. The subjective valuation of one individual is not directly comparable with the subjective valuation of others. It only becomes so as an exchange value arising from the interplay of the subjective valuations of all who take part in buying and selling. Secondly, calculations of this sort provide a control upon the appropriate use of the means of production. They enable those who desire to calculate the cost of complicated processes of production to see at once whether they are working as economically as others. If, under prevailing market prices, they cannot carry through the process at a profit, it is a clear proof that others are better able to turn to good account the instrumental goods in question. Finally, calculations based upon exchange values enable us to reduce values to a common unit. And since the higgling of the market establishes substitution relations between commodities, any commodity desired can be chosen for this purpose. In a money economy, money is the commodity chosen.

Money calculations have their limits. Money is neither a yardstick of value nor of prices. Money does not measure value. Nor are prices measured in money: they are amounts of money. And, although those who describe money as a ‘standard of deferred payments’ naively assume it to be so, as a commodity it is not stable in value. The relation between money and goods perpetually fluctuates not only on the ‘goods side,’ but on the ‘money side’ also. As a rule, indeed, these fluctuations are not too violent. They do not too much impair the economic calculus, because under a state of continuous change of all economic conditions, this calculus takes in view only comparatively short periods, in which ‘sound money’ at least does not change its purchasing power to any very great extent.” (Mises 2009: 115).

Two points here:

(1) according to Mises, and as he says elsewhere, what is needed for economic calculation is money prices for factors of production and consumer goods. As long as the general price level does not fluctuate too sharply, these two factors – (1) money prices and (2) mild or modest inflation or deflation rates – are sufficient for economic calculation.

(2) the second important point is here:

“Money calculations have their limits. Money is neither a yardstick of value nor of prices. Money does not measure value. Nor are prices measured in money: they are amounts of money.”

At first sight, point (2) seems a curious statement, but the crucial point that Mises seems to be making is that there is no objective unit of measure for value as defined as subjective utility:

“In the market, exchanges will occur until there are no more mutually beneficial trades. The underlying subjective valuations driving acts of exchange do not involve a ‘measurement’ of value. (For an analogy, someone can rank his friends in order of importance, without implying that there is an objective unit of friendship that the person measures in each person before constructing the ranking. Someone can report, ‘Jim is my best friend and Sally is my second-best friend’ without being able to say, ‘Jim is a 24 percent better friend than Sally.’) All that is necessary is that a person be able to look at any two possibilities, and decide which he prefers.

Even though market exchanges are driven by subjective valuations that are themselves nonquantifiable, nonetheless these exchanges in turn give rise to objective exchange ratios or prices.” (Murphy 2011: 14).

“If we are referring to subjective value, then there is no ‘unit’ of measurement at all. Suppose we take an old photograph of Jill’s grandmother, and ask Jill, ‘Do you value this object?’ Jill might say, ‘Yes, very much so.’ Then we hold up her calculator, and ask if Jill values it as well. Jill might say, ‘Yes, but not as much.’

Finally, we ask Jill, ‘By what percentage does your valuation of the photograph exceed your valuation of the calculator?’ Jill would be unable to answer such a nonsensical question. She can rank the two objects according to her subjective tastes; she can report that she values the photograph more than the calculator. But this doesn’t imply that there are cardinal units of psychic satisfaction, with the photograph bestowing more units than the calculator.”
Murphy, Robert P. 2011. “Subjective Value and Market Prices,” Mises Daily, February 7
http://mises.org/daily/4907/Subjective-Value-and-Market-Prices

The upshot is, according to Austrians, that subjective value cannot be measured with any objective unit at all, but market prices are objective as units of money that emerge in exchanges between buyers and sellers.

BIBLIOGRAPHY
Mises, Ludwig von. 2009. Socialism. An Economic And Sociological Analysis. Ludwig von Mises Institute, Auburn, Ala.

Murphy, Robert P. 2010. Lessons for the Young Economist. Ludwig von Mises Institute, Auburn, Ala.

Murphy, Robert P. 2011. Study Guide to The Theory of Money & Credit. Ludwig von Mises Institute, Auburn, Ala.

Murphy, Robert P. 2011. “Subjective Value and Market Prices,” Mises Daily, February 7
http://mises.org/daily/4907/Subjective-Value-and-Market-Prices

Hutchison on the History of Hayek’s Views on Economic Methodology

In “Hayek, Mises and the Methodological Contradictions of ‘Modern Austrian’ Economics,” T. W. Hutchison examines Hayek’s developing views on methodology in economics and the split on this issue within the Austrian school.

Hutchison (1994: 213) notes that Hayek’s original views on methodology were apparently derived from those of Friedrich Wieser and a kind of apriorism called “the psychological method.”

Hayek was then influenced by Mises and his circle and, according to Hutchison, held views close to Mises’ (Hutchison 1994: 215), although this does contradict Hayek’s later statements and his claims to have been a follower of Popper’s empiricism even from 1934 (Hutchison 1994: 216).

Hutchison (1994: 215), however, argues that no traces of this Popperian methodology can be found in Hayek’s writings before 1937, but Popper did recollect that Hayek read his book Logik der Forschung around September/October 1935 (Hutchison 1994: 217).

Hutchison (1994: 215–216) speculates that the economic controversies in the mid and late 1930s, especially about the role of expectations, stimulated Hayek to question his earlier views.

The public statement of his new views was in the talk “Economics and Knowledge” given in November 1936 and then published as an article in 1937 (see Hayek 1937; Hutchison 1994: 216).

But unfortunately Hayek’s break with Mises was so timid and weakly expressed that many, especially modern Austrians themselves, have missed the point of “Economics and Knowledge”:

“In the … letter to this writer of 15 May 1983, Hayek also stated that his ‘main intention’ in ‘Economics and Knowledge’ was ‘to explain gently to Mises why I could not accept his a priorism’. Unfortunately, the message to Mises, which it was Hayek’s ‘main intention’ to deliver in this celebrated article, was imparted so ‘gently’ that forty to fifty years later it had still not got through to most ‘Modern Austrians’, who, of course, found the fact of a vital, fundamental division of views between the two great patron saints of their movement difficult to accept.” (Hutchison 1994: 218).

The paper “Economics and Knowledge” also saw Hayek grappling with questions about how an economist could justify real world tendencies to general equilibrium, when this required perfect knowledge and foresight.

Hutchison (1994: 221–22) even contends that in later life Hayek questioned the characteristic Austrian idea of “methodological dualism.”

The break between (1) Hayek and some later Austrians who endorse some form of empiricist method in economics and (2) the Misesian apriorist praxeologists represents a serious division within, and incoherence in, the Austrian school (Hutchison 1994: 229–230).

Hutchison’s verdict on Misesian apriorism is difficult to fault:

“What Misesian, or ‘Modern Austrian’ praxeology succeeds in achieving is a quite unacceptable combination of dogmatic, ‘apodictic certainties’ with total empirical vacuity. Instead of being left with the traditional, full-knowledge ‘theory’, we are provided with the marvellously rich, enlightening and totally uninformative model—or Misesian ‘apodictic certainty’—that people act with whatever tastes, and whatever kind of knowledge and ignorance, which they happen to possess.” (Hutchison 1994: 228).

Addendum
Philip Pilkington has an interesting and critical post here on George A. Akerlof’s famous, but much overblown, paper “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism” (The Quarterly Journal of Economics 84.3: [1970]: 488–500), which can be related to the very issues that Hayek discussed in “Economics and Knowledge” – namely, the unrealistic nature of perfect information and general equilibrium models as related to the functioning of markets:

Philip Pilkington, “The ‘Information Asymmetry’ Paradigm is Vacuous,” Fixing the Economists, August 1, 2014.

BIBLIOGRAPHY
Hayek, F. A. 1937. “Economics and Knowledge,” Economica n.s. 4.13: 33–54.

Hutchison, Terence Wilmot. 1994. “Hayek, Mises and the Methodological Contradictions of ‘Modern Austrian’ Economics,” in T. W. Hutchison, The Uses and Abuses of Economics: Contentious Essays on History and Method. Routledge, London. 212–240.

Hutchison, Terence Wilmot. 1994. The Uses and Abuses of Economics: Contentious Essays on History and Method. Routledge, London.

John Quiggin on Apriorism in Austrian Economics

John Quiggin has an excellent post here on the apriorist method in Austrian economics:

John Quiggin, “Austrian Economics and Flat Earth Geography,” John Quiggin, July 28th, 2014.

Also posted here:
John Quiggin, “Austrian Economics and Flat Earth Geography,” Out of the Crooked Timber, July 27, 2014.

One minor point here is that John Quiggin says that apriorist praxeology was “also endorsed, in a more qualified fashion, by Hayek.”

Actually, Hayek rejected Mises’ apriorism and adopted a – more or less – Popperian method for economics.

We know this because Hayek said so explicitly in a letter to Terence W. Hutchison dated 15 May, 1983. In this, Hayek stated:

“I had never accepted Mises’ a priorism. .... Certainly 1936 was the time when I first saw my distinctive approach in full clarity – but at the time I felt it that I was merely at last able to say clearly what I had always believed – and to explain gently to Mises why I could not ACCEPT HIS A PRIORISM”. (quoted in Caldwell 2009: 323–324).

In fact, in 1937 Hayek had published an article called “Economics and Knowledge” where he criticised Mises’ apriorism; Hayek also appears to have moved closer to Popperian ideas on methodology in later years:

“I became one of the early readers [sc. of Karl Popper’s Logik der Forschung, 1934]. It had just come out a few weeks before …. And to me it was so satisfactory because it confirmed this certain view I had already formed due to an experience very similar to Karl Popper’s. Karl Popper is four or five years my junior; so we did not belong to the same academic generation. But our environment in which we formed our ideas was very much the same. It was very largely dominated by discussion, on the one hand, with Marxists and, on the other hand, with Freudians. Both these groups had one very irritating attribute: they insisted that their theories were, in principle, irrefutable. Their system was so built up that there was no possibility – I remember particularly one occasion when I suddenly began to see how ridiculous it all was when I was arguing with Freudians, and they explained, ‘Oh, well, this is due to the death instinct.’ And I said, ‘But this can’t be due to the [death instinct].’ ‘Oh, then this is due to the life instinct.’ … Well, if you have these two alternatives, of course there’s no way of checking whether the theory is true or not. And that led me, already, to the understanding of what became Popper’s main systematic point: that the test of empirical science was that it could be refuted, and that any system which claimed that it was irrefutable was by definition not scientific. I was not a trained philosopher; I didn’t elaborate this. It was sufficient for me to have recognized this, but when I found this thing explicitly argued and justified in Popper, I just accepted the Popperian philosophy for spelling out what I had always felt. Ever since, I have been moving with Popper.” (Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 18–19).

So Hayek lumped in apriorism in economics with Marxism and Freudianism!

It is also clear that Mises disliked Popper and Popper’s approach to epistemology in his seminal book Logik der Forschung (1934; later published in English as The Logic of Scientific Discovery, 1959):

“Popper was familiar with the early [sc. socialist] calculation debate – Polanyi’s seminar discussed it – but not much taken by it. He knew of Mises and his circle, but it is unlikely that he read Mises closely. He strongly disliked subjectivism and libertarianism. He ‘first met Mises early in 1935 in Vienna, owing to his interest in my first book. . . . Both he and I were aware of a strong opposition between our views in the field of the theory of knowledge and methodology. Mises saw me as a dangerous opponent.’” (Hacohen 2000: 478).

So it could not be more clear: Mises saw Popper “as a dangerous opponent”; but Hayek, rejecting apriorism, essentially endorsed Popper’s views on epistemology and method.

Nevertheless, Quiggin’s point that Misesian apriorist praxeology as a method for economics is untenable is right.

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.

BIBLIOGRAPHY
Caldwell, B. 2009. “A Skirmish in the Popper Wars: Hutchison versus Caldwell on Hayek, Popper, Mises, and methodology,” Journal of Economic Methodology 16.3: 315–324.

Hacohen, Malachi Haim. 2000. Karl Popper, The Formative Years, 1902–1945: Politics and Philosophy in Interwar Vienna. Cambridge University Press, Cambridge, UK and New York.

Hayek, F. A. 1937. “Economics and Knowledge,” Economica n.s. 4.13: 33–54.

Nobel Prize-Winning Economist: Friedrich A. von Hayek. Interviewed by Earlene Graver, Axel Leijonhufvud, Leo Rosten, Jack High, James Buchanan, Robert Bork, Thomas Hazlett, Armen A. Alchian, Robert Chitester, Regents of the University of California, 1983.
https://archive.org/details/nobelprizewinnin00haye