The Various Kinds of Collectivism, Communism, Fascism Differ in the Nature of THE GOAL Toward Which They Want to Direct the Efforts of Society

The common features of all collectivist systems may be described, in a phrase ever dear to socialists of all schools, as the deliberate organization of the labors of society for a definite social goal. That our present society lacks such “conscious” direction toward a single aim, that its activities are guided by the whims and fancies of irresponsible individuals, has always been one of the main complaints of its socialist critics.

In many ways this puts the basic issue very clearly. And it directs us at once to the point where the conflict arises between individual freedom and collectivism. The various kinds of collectivism, communism, fascism, etc., differ among themselves in the nature of the goal toward which they want to direct the efforts of society. But they all differ from liberalism and individualism in wanting to organize the whole of society and all its resources for this unitary end and in refusing to recognize autonomous spheres in which the ends of the individuals are supreme. In short, they are totalitarian in the true sense of this new word which we have adopted to describe the unexpected but nevertheless inseparable manifestations of what in theory we call collectivism. 

The “social goal,” or “common purpose,” for which society is to be organized is usually vaguely described as the “common good,” the “general welfare,” or the “general interest.”

—F. A. Hayek, The Collected Works of F. A. Hayek, vol. 2, The Road to Serfdom: Text and Documents, definitive ed., ed. Bruce Caldwell (Chicago: University of Chicago Press, 2007), 100.

Goods (and Services) Price Inflation and Asset Price Inflation Are the Two Forms of MONETARY DISEASE that PLAGUE the Modern Economy

The writers of the Maastricht Treaty had no knowledge about the disease of asset price inflation let alone any prophetic vision of its potential threat to the survival of their cherished monetary union. The monetary constitution in the Treaty was put together by a committee of central bankers who made low inflation (euphemistically described as ‘price stability’), as measured exclusively in the goods and services markets, the key objective. The famed monetarist Bundesbankers of the 1970s (subsequently described in this volume as ‘the Old Bundesbankers’) had departed the scene to be replaced by politicos and econometricians. 

The Old Bundesbankers, in fairness to their successors, also had no clear understanding of asset price inflation. But they did instinctively realize that strict monetary base control (MBC) in which interest rates were free of manipulation was essential to overall monetary stability in a wide sense (which transcended the near-term path of goods and services prices). Instinctively they applied a doctrine of pre-emption. According to this the pursuance of strict monetary control would mean less danger of various forms of hard-to-diagnose economic disease (possibly as yet unclassified), including those characterized by excessive financial speculation, with their origin in monetary disequilibrium. 

The intuition of the monetarist Bundesbankers took them one stage further than Milton Friedman’s famous pronouncement that ‘inflation [goods and services] is always and everywhere a monetary phenomenon’. Indeed, we should say the same about asset price inflation. Goods (and services) price inflation and asset price inflation are the two forms of monetary disease that plague the modern economy. They have their joint source in money ‘getting out of control’.

—Brendan Brown, Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations, 3rd ed. (Houndmills, UK: Palgrave Macmillan, 2014), Kobo e-book. 

The Gold Standard Is the Enemy of Big Government Because It Prohibits Inflation for the Purpose of Monetizing Debt

 During the time we were on a gold standard federal deficits were very small or nonexistent. Money that the government did not have, it could not spend nor could it create. Taxing the people the full amount for extravagant expenditures would prove too unpopular and a liability in the next election. 

Justifiably, the people would rebel against such an outrage. Under the gold standard, inflation for the purpose of monetizing debt is prohibited, thus holding government size and power in check and preventing significant deficits from occurring. The gold standard is the enemy of big government. In time of war, in particular those wars unpopular with the people, governments suspend the beneficial restraints placed on the politicians in order to inflate the currency to finance the deficit. Strict adherence to the gold standard would prompt a balanced budget, yet it would still allow for “legitimate” borrowing when the people were willing to loan to the government for popular struggles. This would be a good test of the wisdom of the government’s policy. 

Finally, the inflationary climate has encouraged huge deficits to be run up by governments at all levels, as well as by consumers and corporations. The unbelievably large federal contingent liabilities of over $11 trillion are a result of inflationary policies, pervasive government planning, and unwise tax policies.

—Ron Paul and Lewis Lehrman, The Case for Gold: A Minority Report of the U.S. Gold Commission (Auburn, AL: Ludwig von Mises Institute, 2007), 155.

For Rothbard, Reaganomics Is a Blend of Monetarism and Fiscal Keynesianism Swathed in Classical Liberal and Supply-Side Rhetoric

 It is, furthermore, too late for gradualism. The only solution was set forth by F. A. Hayek, the dean of the Austrian School, in his critique of the similarly disastrous gradualism of the Thatcher regime in Great Britain. The only way out of the current mess is to “slam on the brakes,” to stop the monetary inflation in its tracks. Then, the inevitable recession will be sharp but short and swift, and the free market, allowed its head, will return to a sound recovery in a remarkably brief time. Only a drastic and credible slamming of the brakes can truly reverse the inflationary expectations of the American public. But wisely the public no longer trusts the Fed or the federal government. For a slamming on of the brakes to be truly credible, there must be a radical surgery on American monetary institutions, a surgery similar in scope to the German creation of the rentenmark which finally ended the runaway inflation of 1923. One important move would be to denationalize the fiat dollar by returning it to be worth a unit of weight of gold. A corollary policy would prohibit the Federal Reserve from lowering reserve requirements or from purchasing any assets ever again; better yet, the Federal Reserve System should be abolished, and government at last totally separated from the supply of money. 

In any event, there is no sign of any such policy on the horizon. After a brief flirtation with gold, the Presidentially appointed U.S. Gold Commission, packed with pro-fiat money Friedmanites abetted by Keynesians, predictably rejected gold by an overwhelming margin. Reaganomics—a blend of monetarism and fiscal Keynesianism swathed in classical liberal and supply-side rhetoric—is in no way going to solve the problem of inflationary depression or of the business cycle. 

—Murray N. Rothbard, preface to the 4th edition of America's Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2008), xxi-xxii.

The Razzle-Dazzle of Reaganomics Was Supposed to Reverse Inflationary Expectations; the Gradualism Was to Eliminate Inflation without Recession

The Reagan administration knew, of course, that inflationary expectations had to be reversed, but where they miscalculated was relying on propaganda without substance. Indeed, the entire program of Reaganomics may be considered a razzle-dazzle of showmanship about taxes and spending, behind which the monetarists, in control of the Fed and the Treasury Department, were supposed to gradually reduce the rate of money growth. The razzle-dazzle was supposed to reverse inflationary expectations; the gradualism was to eliminate inflation without forcing the economy to suffer the pain of recession or depression. Friedmanites have never understood the Austrian insight of the necessity of a recession to liquidate the unsound investments of the inflationary boom. As a result, the attempt of Friedmanite gradualism to fine-tune the economy into disinflation-without-recession went the way of the similar Keynesian fine-tuning which the monetarists had criticized for decades. Friedmanite fine-tuning brought us temporary “disinflation” accompanied by another severe depression.

In this way, monetarism fell between two stools. The Fed’s cutback in the rate of money growth was sharp enough to precipitate the inevitable recession, but much too weak and gradual to bring inflation to an end once and for all. Instead of a sharp but short recession to liquidate the malinvestments of the preceding boom, we now have a lingering chronic recession coupled with a grinding, continuing stagnation of productivity and economic growth. A pusillanimous gradualism has brought us the worst of both worlds: continuing inflation plus severe recession, high unemployment, and chronic stagnation. 

—Murray N. Rothbard, preface to the 4th edition of America's Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2008), xx-xxi.

Social-Democratic Socialism, Russian-Type Socialism, and Pure Capitalism All Differ on the Question of the Politicalization of Society

The difference between both types of socialism lies (only) in the following: under Russian-type socialism society’s control over the means of production, and hence over the income produced with them, is complete, and so far there seems to be no more room to engage in political debate about the proper degree of politicalization of society. The issue is settled—just as it is settled at the other end of the spectrum, under pure capitalism, where there is no room for politics at all and all relations are exclusively contractual. Under social-democratic socialism, on the other hand, social control over income produced privately is actually only partial, and increased or full control exists only as society’s not yet actualized right, making only for a potential threat hanging over the heads of private producers. But living with the threat of being fully taxed rather than actually being so taxed explains an interesting feature of social-democratic socialism as regards the general development toward increasingly politicalized characters. It explains why under a system of social-democratic socialism the sort of politicalization is different from that under Russian-type socialism. Under the latter, time and effort is spent nonproductively, discussing how to distribute the socially owned income; under the former, to be sure, this is also done, but time and effort are also used for political quarrels over the issue of how large or small the socially administered income-shares should actually be. Under a system of socialized means of production where this issue is settled once and for all, there is then relatively more withdrawal from public life, resignation, and cynicism to be observed. Social-democratic socialism, on the other hand, where the question is still open, and where producers and nonproducers alike can still entertain some hope of improving their position by decreasing or increasing taxation, has less of such privatization and, instead, more often has people actively engaged in political agitation either in favor of increasing society’s control of privately produced incomes, or against it.

—Hans-Hermann Hoppe, A Theory of Socialism and Capitalism, 2nd ed. (Auburn, AL: Mises Institute, 2016), 68-69.

Money by Its Very Nature Constitutes a Kind of Loose Joint in the Self-Equilibrating Apparatus of the Price Mechanism

But even without further continuing the discussion of the rôle money plays in this connection, we are certainly entitled to conclude from what we have already shown that the extent to which we can hope to shape events at will by controlling money are much more limited, that the scope of monetary policy is much more restricted, than is today widely believed. We cannot, as some writers seem to think, do more or less what we please with the economic system by playing on the monetary instrument. In every situation there will in fact always be only one monetary policy which will not have a disequilibrating effect and therefore eventually reverse its short-term influence. That it will always be exceedingly difficult, if not impossible, to know exactly what this policy is does not alter the fact that we cannot hope even to approach this ideal policy unless we understand not only the monetary but also, what are even more important, the real factors that are at work. There is little ground for believing that a system with the modern complex credit structure will ever work smoothly without some deliberate control of the monetary mechanism, since money by its very nature constitutes a kind of loose joint in the self-equilibrating apparatus of the price mechanism which is bound to impede its working—the more so the greater is the play in the loose joint. But the existence of such a loose joint is no justification for concentrating attention on that loose joint and disregarding the rest of the mechanism, and still less for making the greatest possible use of the short-lived freedom from economic necessity which the existence of this loose joint permits. On the contrary, the aim of any successful monetary policy must be to reduce as far as possible this slack in the self-correcting forces of the price mechanism, and to make adaptation more prompt so as to reduce the necessity for a later, more violent, reaction.

—F. A. Hayek, The Collected Works of F. A. Hayek, vol. 12, The Pure Theory of Capital, ed. Lawrence H. White (Indianapolis: Liberty Fund, 2007), 367.

The Type of Economy Determines the “Propagation Mechanism,” How the Economy Reacts to Monetary or Real “Impulses”

The crucial property of a money economy is that, absent neutral money, a divergence of investment from voluntary saving becomes possible. In particular, Hayek considers an excess of investment over saving, financed by credit creation (inflation), as the root cause of maladjustments in the structure of production and thus ultimately of the crisis. These maladjustments will arise irrespective of whether the exogenous change that generates excessive investment originates from the monetary or the real side. Or put in terms of the interest rate criterion: It does not matter if a discrepancy comes about by a fall in the money rate or a rise in the natural rate—the former resulting from a policy of monetary expansion, the latter from an increase in the (expected) rate of profit, possibly due to technical progress. Indeed, Hayek in Monetary Theory and the Trade Cycle stressed fluctuations in the natural rate (relative to an unchanged money rate) as the typical impulse, while later on in Prices and Production he started the analysis of maladjustments from assuming a fall in the money rate. Framing the problem—anachronistically—in terms of Ragnar Frisch’s famous distinction, the type of economy—money or barter—determines the propagation mechanism, that is, how the economy reacts to impulses, be they monetary or real. According to Hayek it is the distinguishing property of a (non-neutral) money economy that it will not react to such impulses by an immediate tendency towards equilibrium.

—Hansjoerg Klausinger, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 7, Business Cycles, Part I, by F. A. Hayek (Carmel, IN: Liberty Fund, 2017), 19-20.

This Is the ONLY Sense in Which It is Proper to Speak of a MONETARY Explanation of the Business Cycle

Introducing Prices and Production in 1935, Hayek contrasted the two main pillars of his theory of the cycle,  “the monetary factors which cause the trade cycle” and “the real phenomena which constitute it.” In the following we will keep to this distinction and first concentrate on money as the prime cause of the cycle before turning to the changes in the structure of production as the crucial cyclical mechanism. 

As already noted, Hayek maintains that cycles and crises are possible only in a money economy. The analytical force of this argument draws on the distinction between neutral and non-neutral money, epitomised in the interest rate criterion, and in the identification of violations of this criterion as the ultimate cause of the business cycle. This is the only sense in which it is proper to speak, in Hayek’s view, of a monetary explanation of the business cycle. With the introduction of money the tendency towards equilibrium prevalent in the static economy is replaced by the more complicated adjustment patterns of dynamic theory. Yet, among the various peculiarities that make the money economy differ from its static counterpart, the most systematic, and that most pertinent to the existence of the business cycle, is the effect of credit creation (or destruction) in causing an incongruity between investment and voluntary saving.

—Hansjoerg Klausinger, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 7, Business Cycles, Part I, by F. A. Hayek (Carmel, IN: Liberty Fund, 2017), 19.

Alvin Hansen’s “Stagnation Thesis” Has Characteristics Similar to Joseph Schumpeter’s Business Cycle Theory

Schumpeter’s second explanation is that innovations cluster in only one or a few industries and that these innovation opportunities are therefore limited. After a while they become exhausted, and the cluster of innovations ceases. This is obviously related to the Hansen stagnation thesis, in the sense that there are alleged to be a certain limited number of “investment opportunities” — here innovation opportunities — at any time, and that once these are exhausted there is temporarily no further room for investments or innovations. The whole concept of “opportunity” in this connection, however, is meaningless. There is no limit on “opportunity” as long as wants remain unfulfilled. The only other limit on investment or innovation is saved capital available to embark on the projects. But this has nothing to do with vaguely available opportunities which become “exhausted”; the existence of saved capital is a continuing factor. As for innovations, there is no reason why innovations cannot be continuous or take place in many industries, or why the innovatory pace has to slacken. 

—Murray N. Rothbard, Man, Economy, and State with Power and Market, 2nd ed. of the Scholar’s ed. (Auburn, AL: Ludwig von Mises Institute, 2009), 856.

Keynesian Theory ‘Demoted’ the Interest Rate from the Rôle of Guiding Intertemporal Allocation to that of Rewarding the Sacrifice of Liquidity

Keynesian theory depicted current income as proximately determined by current expenditure (Y = C + I + G) rather than by prior production. The ‘circular flow’ supplanted capital theory in macroeconomics. Current-period analysis displaced intertemporal analysis. The interest rate no longer played an equilibrating rôle. Left to its own devices, the economy could readily get stuck at a level of expenditure too small to achieve full employment. Smithies found it remarkable (note his apparently sneering use of quotation marks) that “Professor Hayek’s point of view is that a ‘real’ economy, if left to itself, will automatically achieve ‘equilibrium’ and that the disturbances that occur in real life are due to the subversive influence of money.” Keynesian theory, as Uhr put it, ‘demoted’ the interest rate from the rôle of guiding intertemporal allocation to that of rewarding the sacrifice of liquidity. Though it never became mainstream doctrine, some Keynesians nearly overthrew the idea that capital is scarce, and needs to be carefully allocated, in favour of the ‘secular stagnation’ thesis that remunerative uses of capital are or soon will be hard to come by.

—Lawrence H. White, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 12, The Pure Theory of Capital, by F. A. Hayek (Indianapolis: Liberty Fund, 2007), xxxi.

On the Necessity of Organizing Production Around the Needs of Consumers, Not Around the Needs of Producers

 One of the great ideas of liberalism is that it lets the consumer interest alone count and disregards the producer interest. No production is worth maintaining if it is not suited to bring about the cheapest and best supply. No producer is recognized as having a right to oppose any change in the conditions of production because it runs counter to his interest as a producer. The highest goal of all economic activity is the achievement of the best and most abundant satisfaction of wants at the smallest cost. 

This position follows with compelling logic from the consideration that all production is carried on only for the sake of consumption, that it is never a goal but always only a means. The reproach made against liberalism that it thereby takes account only of the consumer viewpoint and disdains labor is so stupid that it scarcely needs refutation. Preferring the producer interest over the consumer interest, which is characteristic of antiliberalism, means nothing other than striving artificially to maintain conditions of production that have been rendered inefficient by continuing progress. Such a system may seem discussible when the special interests of small groups are protected against the great mass of others, since the privileged party then gains more from his privilege as a producer than he loses on the other hand as a consumer; it becomes absurd when it is raised to a general principle, since then every individual loses infinitely more as a consumer than he may be able to gain as a producer. The victory of the producer interest over the consumer interest means turning away from rational economic organization and impeding all economic progress. 

—Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time, trans. Leland B. Yeager, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2006), 164-165.

The “Correct” Length of the Roundabout Method of Production Is Determined by the Size of the Subsistence Fund or the Period of Time for which this Fund Suffices

Let us assume that in some country production must be completely rebuilt. The only factors of production available to the population besides laborers are those factors of production provided by nature. Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production, a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year. The population would in any case have an interest in stretching the roundabout method of production as long as possible, as every “cleverly chosen” lengthening of the roundabout method of production results in increased output. The extent to which the roundabout method of production can be lengthened is restricted, however, by the limited nature of the subsistence fund. The greater this fund, the longer is the roundabout factor of production that can be undertaken, and the greater the output will be. 

It is clear that under these conditions the “correct” length of the roundabout method of production is determined by the size of the subsistence fund or the period of time for which this fund suffices. If a shorter roundabout method of production were begun with a subsistence fund that suffices for one year, then the output would be smaller than it could have been. However, if the roundabout method of production is too long, then it could not be completed without interruption. 

—Richard von Strigl, Capital and Production, trans. Margaret Rudelich Hoppe and Hans-Hermann Hoppe, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2000), 6-7.

In the “Mengerian” Approach to Capital and Interest the ENTIRE Explanatory Burden Is Assigned to Consumer Valuations

In that controversy [Cambridge Capital Controversy] mainstream neoclassical theory was under relentless attack by economists seeking to reverse the marginalist revolution and to return to the classical perspective. The critics, especially insofar as they were following Sraffa (1960), argued for an economics in which the objective conditions of production determine economic events, with virtually no role assigned to consumer demand. We wish to emphasize that what was overlooked in that debate was the existence of a third theoretical approach (a “Mengerian” approach) to capital and interest issues, in which the entire explanatory burden is assigned to consumer valuations.

—Israel M. Kirzner, author's introduction to Essays on Capital and Interest: An Austrian Perspective, ed. Peter J. Boettke and Frédéric Sautet, The Collected Works of Israel M. Kirzner (Indianapolis: Liberty Fund, 2010), 5.

The Worst Outgrowth of the Use of the Mythical Notion of Real Capital Was the Spurious Problem of the Productivity of Real Capital

 Mises’s adoption of Menger’s concept of capital made it possible for him to avoid the pitfalls in interest theory that stem from the capital-income dichotomy. In everyday lay experience the ownership of capital provides assurance of a steady income. As soon as capital is identified as some aggregate of factors of production, it becomes tempting to ascribe the steady income that capital ownership makes possible as somehow expressing the productivity of these factors. This has always been the starting point for productivity theories of interest. Knight’s permanent-fund-of-capital view of physical capital is simply a variant of those theories that view interest as net income generated perpetually by the productivity of the abstract capital temporarily embodied in particular lumps of physical capital. The capital stock, in this view, is a permanent tree that spontaneously and continuously produces fruit (interest). Mises was explicit in concluding that this erroneous view of interest results from defining capital as an aggregate of produced factors of production. “The worst outgrowth of the use of the mythical notion of real capital was that economists began to speculate about a spurious problem called the productivity of (real) capital.” It was such speculation, Mises made clear, that is responsible for the “blunder” of explaining “interest as an income derived from the productivity of capital.”

—Israel M. Kirzner, “Ludwig von Mises and the Theory of Capital and Interest,” in Essays on Capital and Interest: An Austrian Perspective, ed. Peter J. Boettke and Frédéric Sautet, The Collected Works of Israel M. Kirzner (Indianapolis: Liberty Fund, 2010), 143-144.

In Theorizing on Capital, Hayek Uses the Wieserian Device of a COMMUNIST SOCIETY (!) Subject to an Omniscient Dictator

But the Mengerian tradition was developed in very different directions by his brilliant followers, Eugen von Böhm-Bawerk and Friedrich von Wieser, and by their own students and followers. Without tracing out this doctrinal development in any detail, suffice it to say that today the term “Austrian economics” is used to designate two very different paradigms. One derives from Wieser and may be termed the “Hayekian” paradigm, because it represents an elaboration and systematization of the views held by F. A. Hayek, a student of Wieser’s at the University of Vienna. Although it is yet to be generally recognized by Austrians, Wieser’s influence on Hayek was considerable and is especially revealed in the latter’s early work on imputation theory, which sought to vindicate the Wieserian (as against the Böhm-Bawerkian-Misesian) position that the imputation problem must be solved within the context of an exchangeless economy subject to the control of a single will yet somehow able to calculate using (subjective) value as the “arithmetic form of utility.”³

__________

³That there is no possibility of economic calculation and rational or purposeful allocation of resources within an economy based on division of labor where one will alone acts is, of course, the essence of Mises’s critique of socialism. Perceiving the unbridgeable gulf between his own and Wieser’s position on the possibility of directly imputing values to higher-order goods in the absence of monetary exchange, Mises, in his Notes and Recollections wrote that “[Wieser’s] imputation theory is untenable. His ideas on value calculation justify the conclusion that he could not be called a member of the Austrian School, but rather was a member of the Lausanne School.”

Also, Hayek, explicitly following Wieser, conceives the main problem of capital theory to be to explain how it is that the nonpermanent resources constituting the capital stock can yield a permanent net (physical) return. This Wieser-Hayek method of describing the quaesitum [something sought for, end or objective] of capital theory loads the dice in favor of explaining the interest return on capital in terms of productivity (rather than time-preference) considerations and, at the same time, diverts attention from what Böhm-Bawerk brilliantly perceived to be the fundamental question that must be satisfactorily answered by a correct theory of interest and was so answered by Mises’s pure time-preference theory: What is the cause of the difference in value between goods which differ only in their temporal availability? 

In theorizing on capital, moreover, Hayek makes significant use of the Wieserian device of a communist society subject to the control of an omniscient dictator, a device which reflects a paradigmatic lack of concern with problems of monetary appraisement and calculation. 

—Joseph T. Salerno, “Mises and Hayek Dehomogenized,” Review of Austrian Economics 6, no. 2 (1993): 114, 114n. 

De-Homogenizing Mises and Hayek: Hayek Favors the Productivity Explanation of Interest Instead of the Fetter-Mises Subjectivist Theory

A major reason for the neglect of this model is that in the United States, where the Austrian School experienced a renaissance in the second half of the twentieth century, the scholars adopted the Fetter-Mises subjectivist theory of interest instead of a productivity theory. The time preference theory of interest was endorsed by Rothbard ([1962] 2009), Garrison (1979), Kirzner (1993), and other authors (see Pellengahr 1996). Hayek (1941), on the other hand, very explicitly chose the productivity explanation of interest, even though he thought that time preference could also play a (minor) role in the determination of interest.³¹ As a result, his model—interpreted by Hayek as a validation of the productivity theory of interest—was largely overlooked.

__________

³¹ “Of the two branches of the Böhm-Bawerkian school, that which stressed the productivity element almost to the exclusion of time preference, the branch whose chief representative is K. Wicksell, was essentially right, as against the branch represented by Professors F. A. Fetter and I. Fisher, who stressed time preference as the exclusive factor and an at least equally important factor respectively.” (Hayek 1941, 420)

—Renaud Fillieule, “The Macroeconomic Models of the Austrian School: A History and Comparative Analysis,” Quarterly Journal of Austrian Economics 22, no. 4 (Winter 2019): 558-559.

Hayek Admitted That His Business Cycle Theory Stands Or Falls On Sraffa’s Challenge to Forced Savings

The next problem concerned Hayek’s analysis of forced savings. Recall that in the Austrian theory of the cycle the lengthening of the structure of production, begun under a regime of forced savings, never gets completed. It is always the case that rising consumer prices signal firms that their earlier decision to employ more roundabout methods was in error. Firms abandon their incomplete capital projects and thereby precipitate the crisis. But isn’t it possible that the transition to more capital-intensive production methods could be completed in time? Might not the consumer goods produced by using more roundabout methods come onto line just as consumer demand begins to rise? In short, why must the traverse to a new structure of production always be interrupted before completion? 

Hayek admitted in his reply that “it is upon the truth of this point that my theory stands or falls.” And, sadly for Hayek, his insistence that the traverse could never be completed strikes many current commentators as being the chief deficiency of his theory of the cycle. The general consensus is that, while the scenario painted by Hayek is a possible one, he neither demonstrated its necessity nor gave adequate attention to the lags implicit in the process of adjustment that he portrayed. Hayek’s theory fits some, but not all, trade cycles: It is not, as Hayek purported it to be, a general theory of the cycle.

—Bruce Caldwell, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 9, Contra Keynes and Cambridge: Essays, Correspondence, by F. A. Hayek (Indianapolis: Liberty Fund, 1995), 38-39.

De-Homogenizing Mises and Hayek: Hayek Believes that the Banks Are NOT “GUILTY” of Causing Business Cycles

There is another grave problem with Hayek’s 1933 analysis. He believes that the banks are not “guilty” of causing business cycles also because he thinks that in the early stages the “natural rate of interest” or profit on the market increases, and that the banks are not astute enough to realize it, so that they only pull the loan rate of interest below the natural rate, that is, by not raising their loan rates fast enough to match changes in the natural rate. The difficulty with this is that it misconceives the Misesian (1912) insight. The problem is not one of omission, rather it is one of commission; it is not that the banks are too passive and ignorant about finding the right loan rate to match the natural rate. Instead, it is that they actively expand credit beyond the cash in their vaults, thereby pushing the loan rate below the natural rate. In short, the Misesian view is that the banks don’t have to search for the natural rate in order to avoid generating the business cycle; all they have to do is not expand credit beyond their cash holdings. This is surely a much easier task. The banks’ insistence on expanding credit generates the business cycle, and makes them responsible and thus “guilty” as charged.

—Walter Block and Kenneth M. Garschina, “Hayek, Business Cycles and Fractional Reserve Banking: Continuing the De-Homogenization Process,” Review of Austrian Economics 9, no. 1 (1996): 83.

J. S. Mill Warns Us Against the Simplistic Incorporation of Derived Demands into Macroeconomic Theorizing

 John Stuart Mill’s cryptic aphorism, “Demand for commodities is not demand for labor,” warns us against the simplistic incorporation of derived demands into macroeconomic theorizing. Some such notion of derived demand, whereby the demand for final output and the demand for the factors of production always move in the same direction, characterizes virtually all modern macroeconomic theories. The recognition that the two demands can move in opposite directions characterizes the Austrian formulation and constitutes one of the most fundamental differences between the Austrian theory and its rivals. 

In accordance with Mill’s Fourth Proposition, a decrease in the current level of consumption does not necessarily mean a decrease in the demand for labor (and for other factors of production); a decrease in the current level of consumption may mean instead an increase in the level of saving, an increase in the level of future consumption, and a corresponding shift of resource demand away from the production for current-period consumption and toward the production for future-period consumption (Hayek 1941, pp. 433-39). There may even be a net increase in the current demand for capital and labor.

Hayek and other Austrian theorists have heeded Mill’s Fourth Proposition by recognizing that in a given period consumption spending and investment spending can—and, in conditions of full employment, must—move in opposite directions. In fact, it is the shifting of resources between consumption and investment activities—and between the different stages of the production process—in response to changing intertemporal consumption preferences that allows the economy to achieve intertemporal coordination. And it is the similar shifting of resources in response to monetary manipulations that constitutes intertemporal discoordination.

—Roger W. Garrison, “Hayekian Trade Cycle Theory: A Reappraisal,” Cato Journal 6, no. 2 (Fall 1986): 441-442.

Keynes Suggested that Hayek Was Trapped in an Old Framework in which Only Changes in Credit Could Cause Savings to Differ from Investment

For Keynes’s second claim was that Hayek had misunderstood in a fundamental way the thrust of the Treatise [on Money], and that many of Hayek’s criticisms were therefore misdirected. What Hayek had missed, according to Keynes, was the claim that savings and investment could “get out of gear” within the framework of the Treatise [on Money] for any of a number of reasons that were independent of changes in the amount of credit in the system. Keynes suggested that Hayek’s misreading was due to his being trapped within an old framework, one in which only changes in credit could cause savings to differ from investment. Exposing Hayek’s flawed framework was then Keynes’s excuse for reviewing Prices and Production. . . . 

But Keynes’s claims notwithstanding, many sources of disturbance were possible within Hayek’s model, too. One reason that Keynes may have missed this point is that he focused on Prices and Production, where the origins of the cycle take a back seat to the changes in the structure of production that constitute the cycle. In the fourth chapter of his earlier (and at that time available only in German) Geldtheorie und Konjunkturtheorie [Monetary Theory and the Trade Cycle], Hayek described things other than the actions of banks that could cause, in Keynes’s later terminology, the “marginal efficiency of capital” curve to shift. But Keynes was right to say that for Hayek, the effects of the shift will necessarily be transmitted through the credit system: It cannot be otherwise in a monetary economy.

—Bruce Caldwell, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 9, Contra Keynes and Cambridge: Essays, Correspondence, by F. A. Hayek (Indianapolis: Liberty Fund, 1995), 29-30.

On the Böhm-Bawerkian Distinction Between “Originating Forces” and “Determining Forces” of Interest

 “Some writers,” Fisher wrote, “have chosen, for purposes of exposition, to postulate two questions involved in the theory of the rate of interest, viz., (1) why any rate of interest exists and (2) how the rate of interest is determined.” Fisher dismisses this distinction as being unilluminating, “since to explain how the rate of interest is determined involves the question of whether the rate can or cannot be zero.” The purpose of the present section of this paper is (a) to present the case for the distinction criticized by Fisher—a distinction in fact made by Böhm-Bawerk, as we shall see—and (b) to show how failure to understand the rationale for the distinction has generated the widespread modern bewilderment with PTPT [Pure Time-Preference Theory of Interest] referred to earlier.

No better defense for Böhm-Bawerk’s distinction need to be found than the lucid discussion that he himself provided. Böhm-Bawerk was criticizing Fisher for not distinguishing between “originating forces” and “determining forces.” “All interest-originating causes undoubtedly are also determining factors for the actual rate. But not all rate-determining factors are also interest-creating causes. . . . When we inquire into the causes of a flood we certainly cannot cite the dams and reservoirs built to prevent or at least mitigate inundations. But they are a determining factor for the actual water-mark of the flood. . . . Similarly, there are other circumstances besides the actual interest-creating causes that bring about or enhance the value advantage of present goods over future goods.”

—Israel M. Kirzner, “The Pure Time-Preference Theory of Interest: An Attempt at Clarification,” in Essays on Capital and Interest: An Austrian Perspective, ed. Peter J. Boettke and Frédéric Sautet, The Collected Works of Israel M. Kirzner (Indianapolis: Liberty Fund, 2010), 161.

Kirzner’s Defense of the Pure Time-Preference Theory of Interest Amounts to an Affirmation of “Methodological Essentialism”

It will be observed that our defense of PTPT [Pure Time-Preference Theory of Interest] against the bewilderment evinced by its various critics, amounts to a partial affirmation of what has sometimes been termed “methodological essentialism.” Several historians of thought have noticed that for Menger, economic science is a search for the reality underlying economic phenomena— for their essence (das Wesen). In a letter to Walras, Menger asks, “How can we attain to a knowledge of this essence, for example, the essence of value, the essence of land rent, the essence of entrepreneur’s profit . . . by mathematics?” This search for essences, reflecting a philosophical approach attributed to Aristotelian influence, would focus, then, not on the land rent paid for a particular parcel of real-estate in a particular year, but upon those essential features of land rent that would be common to all examples of the phenomenon. Similarly an essentialist approach to the interest problem as posed by Böhm-Bawerk would focus not on the list of elements which together determine specific interest rates, but on those elements upon which the interest phenomenon essentially depends, elements without which the phenomenon could in fact not exist. PTPT finds these essential elements for the interest phenomenon in time preference.

—Israel M. Kirzner, “The Pure Time-Preference Theory of Interest: An Attempt at Clarification,” in Essays on Capital and Interest: An Austrian Perspective, ed. Peter J. Boettke and Frédéric Sautet, The Collected Works of Israel M. Kirzner (Indianapolis: Liberty Fund, 2010), 163-164.

Economists Fall into the Error of Defining Capital As REAL CAPITAL, As an Aggregate of PHYSICAL THINGS

Böhm-Bawerk defined capital as the aggregate of intermediate products (i.e., of produced means of production) and in so doing was criticized by Menger. Menger sought “to rehabilitate the abstract concept of capital as the money value of the property devoted to acquisitive purposes against the Smithian concept of the ‘produced means of production.’” As early as his work on Socialism (1923), Mises emphatically endorsed the Mengerian definition. In Human Action he pursued the question even more thoroughly, though without making it explicit that he was objecting to Böhm-Bawerk’s definition. Economists, Mises maintained, fall into the error of defining capital as real capital, as an aggregate of physical things. This is not only an empty concept but one that has been responsible for serious errors in the various uses to which the concept of capital has been applied. 

Mises’s refusal to accept the notion of capital as an aggregate of produced means of production expressed his consistent Austrian emphasis on forward-looking decision-making. Menger had already argued that “the historical origin of a commodity is irrelevant from an economic point of view.” Later Knight and Hayek were to claim that emphasis on the historical origins of produced means of production is a residual of the older cost-of-production perspectives and inconsistent with the valuable insight that bygones are bygones. Thus, Mises’s rejection of Böhm-Bawerk’s definition reflects a thoroughgoing subjective point of view.

—Israel M. Kirzner, “Ludwig von Mises and the Theory of Capital and Interest,” in Essays on Capital and Interest: An Austrian Perspective, ed. Peter J. Boettke and Frédéric Sautet, The Collected Works of Israel M. Kirzner (Indianapolis: Liberty Fund, 2010), 139-140.

Many of the Criticisms Leveled Against the Austrian Theory of Capital and Interest Are IRRELEVANT When It Is Cast in Terms of FORWARD-LOOKING Decisions

Mises took Böhm-Bawerk to task for not recognizing that time should enter analysis only in the ex ante sense. The role time “plays in action consists entirely in the choices acting man makes between periods of production of different length. The length of time expended in the past for the production of capital goods available today does not count at all. . . . The ‘average period of production’ is an empty concept.” It may be remarked that here Mises identified a source of perennial confusion concerning the role of time in the Austrian theory. Many of the criticisms leveled by Knight and others against the Austrian theory are irrelevant when the theory is cast explicitly in terms of the time-conscious, forward-looking decisions made by producers and consumers.

—Israel M. Kirzner, “Ludwig von Mises and the Theory of Capital and Interest,” in Essays on Capital and Interest: An Austrian Perspective, ed. Peter J. Boettke and Frédéric Sautet, The Collected Works of Israel M. Kirzner (Indianapolis: Liberty Fund, 2010), 138.

In Mises’s View, Böhm-Bawerk’s Theory Failed to Do Justice to the Universality and Inevitability of Time Preference

Mises, while paying tribute to the “imperishable merits” of Böhm-Bawerk’s seminal role in the development of the time-preference theory, sharply criticized the epistemological perspective from which Böhm-Bawerk viewed time as entering the analysis. For Böhm-Bawerk time preference is an empirical regularity observed through casual psychological observation. Instead, Mises saw time preference as a “definite categorial element . . . operative in every instance of action.” In Mises’s view, Böhm-Bawerk’s  theory failed to do justice to the universality and inevitability of the phenomenon of time preference. 

—Israel M. Kirzner, “Ludwig von Mises and the Theory of Capital and Interest,” in Essays on Capital and Interest: An Austrian Perspective, ed. Peter J. Boettke and Frédéric Sautet, The Collected Works of Israel M. Kirzner (Indianapolis: Liberty Fund, 2010), 138.

To Understand Hayek’s “The Pure Theory of Capital” Is to Question the Relevance of Mainstream Economics

The protracted and interwoven development of Hayek’s capital theory and business cycle theory was set against the background of an intense rivalry between Hayek and Keynes in the 1930s. Hayek had seen that ‘an elaboration of the still inadequately developed theory of capital was a prerequisite for a thorough disposal of Keynes’s argument’ (Hayek, 1983, p. 46); and, in retrospect, he considered it an error of judgement that he had given no time to an immediate and studious critique of Keynes’s General Theory. So, in addition to serving Hayek’s own exposition of a monetary theory of business cycles, The Pure Theory of Capital serves to expose the fallacy of the central tenet of Keynes’s General Theory — one that sits firmly in the mainstream of modern economics — for a ‘direct dependence of investment on final demand’ (Hayek, 1983, p. 48). Yet, Hayek’s exposé remains generally ignored, with the effect that Keynesian demand management (macroeconomics) together with marginal analysis (microeconomics) remain the dominant instruments of economic analysis. The issues could scarcely be more important. To understand The Pure Theory of Capital is to question the relevance of mainstream economics.

—Gerald R. Steele, “Hayek’s Pure Theory of Capital,” in Elgar Companion to Hayekian Economics, ed. Roger W. Garrison and Norman Barry (Cheltenham, UK: Edward Elgar Publishing, 2014), 71-72.

What Will Happen to the Pure Interest Rate If People Were Certain that the World Would End in the Near Future?

There are other elements that enter into the determination of the time-preference schedules. Suppose, for example, that people were certain that the world would end on a definite date in the near future. What would happen to time preferences and to the rate of interest? Men would then stop providing for future needs and stop investing in all processes of production longer than the shortest. Future goods would become almost valueless compared to present goods, time preferences for present goods would zoom, and the pure interest rate would rise almost to infinity. On the other hand, if people all became immortal and healthy as a result of the discovery of some new drug, time preferences would tend to be very much lower, there would be a great increase in investment, and the pure rate of interest would fall sharply.

—Murray N. Rothbard, Man, Economy, and State with Power and Market, 2nd ed. of the Scholar’s ed. (Auburn, AL: Ludwig von Mises Institute, 2009), 444.

The Final Market Rates of Interest Reflect the PURE Interest Rate PLUS OR MINUS Entrepreneurial Risk and Purchasing Power Components

In the purely free and unhampered market, there will be no cluster of errors, since trained entrepreneurs will not all make errors at the same time. The “boom-bust” cycle is generated by monetary intervention in the market, specifically bank credit expansion to business. Let us suppose an economy with a given supply of money. Some of the money is spent in consumption; the rest is saved and invested in a mighty structure of capital, in various orders of production. The proportion of consumption to saving or investment is determined by people’s time preferences—the degree to which they prefer present to future satisfactions. The less they prefer them in the present, the lower will their time preference rate be, and the lower therefore will be the pure interest rate, which is determined by the time preferences of the individuals in society. A lower time-preference rate will be reflected in greater proportions of investment to consumption, a lengthening of the structure of production, and a building-up of capital. Higher time preferences, on the other hand, will be reflected in higher pure interest rates and a lower proportion of investment to consumption. The final market rates of interest reflect the pure interest rate plus or minus entrepreneurial risk and purchasing power components. Varying degrees of entrepreneurial risk bring about a structure of interest rates instead of a single uniform one, and purchasing-power components reflect changes in the purchasing power of the dollar, as well as in the specific position of an entrepreneur in relation to price changes. The crucial factor, however, is the pure interest rate. This interest rate first manifests itself in the “natural rate” or what is generally called the going “rate of profit.” This going rate is reflected in the interest rate on the loan market, a rate which is determined by the going profit rate.

—Murray N. Rothbard, America's Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2000), 9-10.

Levying Income Taxes Causes a Shift to a Higher Proportion of Consumption and a Lower Proportion of Saving and Investment

There is another, unheralded reason why an income tax will particularly penalize saving and investment as against consumption. It might be thought that since the income tax confiscates a certain portion of a man’s income and leaves him free to allocate the rest between consumption and investment, and since time preference schedules remain given, the proportion of consumption to saving will remain unchanged. But this ignores the fact that the taxpayer’s real income and the real value of his monetary assets have been lowered by paying the tax. We have seen in chapter 6 that, given a man’s time-preference schedule, the lower the level of his real monetary assets, the higher his time-preference rate will be, and therefore the higher the proportion of his consumption to investment. The taxpayer’s position may be seen in Figure 86, which is essentially the reverse of the individual time-market diagrams in chapter 6. In the present case, money assets are increasing as we go rightward on the horizontal axis, while in chapter 6 money assets were declining. Let us say that the taxpayer’s initial position is a money stock of 0M; tt is his given time-preference curve. His effective time-preference rate, determining his consumption/investment proportion, is t₁. Now, suppose that the government levies an income tax, reducing his initial monetary assets at the start of his spending period to 0M′. His effective time-preference rate, the intersection of tt and the M′ line, is now higher at t₂. He shifts to a higher proportion of consumption and a lower proportion of saving and investment.

—Murray N. Rothbard, Man, Economy, and State with Power and Market, 2nd ed. of the Scholar’s ed. (Auburn, AL: Ludwig von Mises Institute, 2009), 916-917.

It Is Fallacious to Assume that the State Can Simply Add or Subtract Its Expenditures from that of the Private Economy

The breakdown of the economic system into a few aggregates assumes that these aggregates are independent of each other, that they are determined independently and can change independently. This overlooks the great amount of interdependence and interaction among the aggregates. Thus, saving is not independent of investment; most of it, particularly business saving, is made in anticipation of future investment. Therefore, a change in the prospects for profitable investment will have a great influence on the savings function, and hence on the consumption function. Similarly, investment is influenced by the level of income, by the expected course of future income, by anticipated consumption, and by the flow of savings. For example, a fall in savings will mean a cut in the funds available for investment, thus restricting investment.

A further illustration of the fallacy of aggregates is the Keynesian assumption that the State can simply add or subtract its expenditures from that of the private economy. This assumes that private investment decisions remain constant, unaffected by government deficits or surpluses. There is no basis whatsoever for this assumption. In addition, progressive income taxation, which is designed to encourage consumption, is assumed to have no effect on private investment. This cannot be true, since, as we have already noted, a restriction of savings will reduce investment.

Thus, aggregative economics is a drastic misrepresentation of reality. The aggregates are merely an arithmetic cloak over the real world, where multitudes of firms and individuals react and interact in a highly complex manner. The alleged “basic determinants” of the Keynesian system are themselves determined by complex interactions within and between these aggregates.

—Murray N. Rothbard, “Spotlight on Keynesian Economics,” in Strictly Confidential: The Private Volker Fund Memos of Murray N. Rothbard, ed. David Gordon (Auburn, AL: Ludwig von Mises Institute, 2010), 233-234.

The "Cyclically Balanced Budget" Was the First Keynesian Concept to be Poured Down the Orwellian Memory Hole

Originally, Keynesians vowed that they, too, were in favor of a “balanced budget,” just as much as the fuddy-duddy reactionaries who opposed them. It’s just that they were not, like the fuddy-duddies, tied to the year as an accounting period; they would balance the budget, too, but over the business cycle. Thus, if there are four years of recession followed by four years of boom, the federal deficits during the recession would be compensated for by the surpluses piled up during the boom; over the eight years of cycle, it would all balance out. 

Evidently, the “cyclically balanced budget” was the first Keynesian concept to be poured down the Orwellian memory hold, as it became clear that there weren’t going to be any surpluses, just smaller or larger deficits. A subtle but important corrective came into Keynesianism: larger deficits during recessions, smaller ones during booms. 

—Murray N. Rothbard, “Keynesianism Redux,” The Free Market 7, no. 1 (January 1989): 3.

Government Investment Is a Form of Socialism and Fascism Is Private Ownership Subject to Comprehensive Government Control and Planning

Yes, let the state control investment completely, its amount and rate of return in addition to the rate of interest; then Keynes would allow private individuals to retain formal ownership so that, within the overall matrix of state control and dominion, they could still retain “a wide field for the exercise of private initiative and responsibility.” As Hazlitt puts it,

Investment is a key decision in the operation of any economic system. And government investment is a form of socialism. Only confusion of thought, or deliberate duplicity, would deny this. For socialism, as any dictionary would tell the Keynesians, means the ownership and control of the means of production by government. Under the system proposed by Keynes, the government would control all investment in the means of production and would own the part it had itself directly invested. It is at best mere muddleheadedness, therefore, to present the Keynesian nostrums as a free enterprise or “individualistic” alternative to socialism.

There was a system that had become prominent and fashionable in Europe during the 1920s and 1930s that was precisely marked by this desired Keynesian feature: private ownership, subject to comprehensive government control and planning. This was, of course, fascism.

—Murray N. Rothbard, “Keynes’s Political Economy,” in The Rothbard Reader, ed. Joseph T. Salerno and Matthew McCaffrey (Auburn, AL: Mises Institute, 2016), 202-203.

The State Apparatus, the 4th Class of Society, Is a “Deus Ex Machina” External to the Market Guided by Scientific Philosopher Kings

To develop a way out, Keynes presented a fourth class of society. Unlike the robotic and ignorant consumers, this group is described as full of free will, activism, and knowledge of economic affairs. And unlike the hapless investors, they are not irrational folk, subject to mood swings and animal spirits; on the contrary, they are supremely rational as well as knowledgeable, able to plan best for society in the present as well as in the future. 

This class, this deus ex machina external to the market, is of course the state apparatus, as headed by its natural ruling elite and guided by the modern, scientific version of Platonic philosopher kings. In short, government leaders, guided firmly and wisely by Keynesian economists and social scientists (naturally headed by the great man himself), would save the day. In the politics and sociology of The General Theory, all the threads of Keynes’s life and thought are neatly tied up.

And so the state, led by its Keynesian mentors, is to run the economy, to control the consumers by adjusting taxes and lowering the rate of interest toward zero, and, in particular, to engage in “a somewhat comprehensive socialisation of investment.”

—Murray N. Rothbard, Keynes, the Man (Auburn, AL: Ludwig von Mises Institute, 2010), 50.

Only Continual Doses of New Money on the Credit Market Will Keep the Boom Going and the New Stages Profitable

We have seen that the reversion period is short and that factor incomes increase rather quickly and start restoring the free-market consumption/saving ratios. But why do booms, historically, continue for several years? What delays the reversion process? The answer is that as the boom begins to peter out from an injection of credit expansion, the banks inject a further dose. In short, the only way to avert the onset of the depression-adjustment process is to continue inflating money and credit. For only continual doses of new money on the credit market will keep the boom going and the new stages profitable. Furthermore, only ever increasing doses can step up the boom, can lower interest rates further, and expand the production structure, for as the prices rise, more and more money will be needed to perform the same amount of work. Once the credit expansion stops, the market ratios are reestablished, and the seemingly glorious new investments turn out to be malinvestments, built on a foundation of sand.

—Murray N. Rothbard, Man, Economy, and State with Power and Market, 2nd ed. of the Scholar’s ed. (Auburn, AL: Ludwig von Mises Institute, 2009), 1002.

Keynes Severed the Evident Link Between Savings and Investment, Claiming the Two Are Unrelated

There is a subset of consumers, an eternal problem for mankind: the insufferably bourgeois savers, those who practice the solid puritan virtues of thrift and farsightedness, those whom Keynes, the would-be aristocrat, despised all of his life. All previous economists, certainly including Keynes’s forbears Smith, Ricardo, and Marshall, had lauded thrifty savers as building up long-term capital and therefore as responsible for enormous long-term improvements in consumers’ standard of living. But Keynes, in a feat of prestidigitation, severed the evident link between savings and investment, claiming instead that the two are unrelated.

In fact, he wrote, savings are a drag on the system; they “leak out” of the spending stream, thereby causing recession and unemployment. Hence Keynes, like Mandeville in the early eighteenth century, was able to condemn thrift and savings; he had finally gotten his revenge on the bourgeoisie.

By also severing interest returns from the price of time or from the real economy and by making it only a monetary phenomenon, Keynes was able to advocate, as a linchpin of his basic political program, the “euthanasia of the rentier” class: that is, the state’s expanding the quantity of money enough so as to drive down the rate of interest to zero, thereby at last wiping out the hated creditors. It should be noted that Keynes did not want to wipe out investment: on the contrary, he maintained that savings and investment were separate phenomena. Thus, he could advocate driving down the rate of the interest to zero as a means of maximizing investment while minimizing (if not eradicating) savings.

—Murray N. Rothbard, “Keynes’s Political Economy,” in The Rothbard Reader, ed. Joseph T. Salerno and Matthew McCaffrey (Auburn, AL: Mises Institute, 2016), 199-200.

The Austrian Contribution Was to Posit the Deviation of the Market Rate from the Natural Rate as the CAUSE of the Trade Cycle

The price mechanism, then, coordinates economic activity. In a trade cycle, economic activity somehow becomes uncoordinated. In particular, in the crisis stage of the cycle an overproduction of capital goods exists. As such, any adequate theory of the cycle must explain how this situation of disequilibrium in this specific market arises. What keeps the interest rate from performing its coordinative function? 

Once again Wicksell’s framework proved helpful. Wicksell posited another interest rate, the ‘market rate of interest’. The market rate is influenced by banks’ lending activities and can differ from the natural rate: Specifically, it will fall below the natural rate whenever banks increase the amount of credit. Wicksell used the natural rate / market rate distinction to discuss movements in the general price level. The Austrian contribution was to posit the deviation of the market rate from the natural rate as the cause of the trade cycle. 

—Bruce Caldwell, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 9, Contra Keynes and Cambridge: Essays, Correspondence, by F. A. Hayek (Indianapolis: Liberty Fund, 1995), 15.

The Assumption that Consumption and Investment Move in the SAME Direction Over the Business Cycle Is Fundamental to Keynesian Macroeconomics

Hayek emphasized the trade-off between consumption today and consumption tomorrow (via saving and investment today): “The physical quantity of consumer goods per capita can only be increased by consistently devoting a larger part of productive resources to capitalistic investment rather than to immediate consumption.” One can illustrate the trade-off by drawing a production possibilities frontier between consumption and investment, as Roger Garrison has done in his important work developing Hayekian macroeconomics, particularly in the book Time and Money. Although the trade-off derives directly from the assumption of scarcity, and is today taken for granted by economists in the context of growth theory, Hayek noted that it is implicitly denied by all those economists who “assume that the demand for capital goods changes in proportion to the demand for consumer goods.” The most prominent such economists in 1932 were the “underconsumption” theorists of economic depressions, including John Maynard Keynes in his Treatise on Money  of 1930, which Hayek cited in this connection. Keynes amplified the underconsumption theme in his General Theory of 1936. The assumption that consumption and investment move in the same direction over the business cycle (by contrast to the trade- off acknowledged in the analysis of long-run growth) has been fundamental to Keynesian macroeconomics up to the present day.

—Lawrence H. White, ed., editor’s introduction to The Collected Works of F. A. Hayek, vol. 11, Capital and Interest, by F. A. Hayek (Chicago: University of Chicago Press, 2015), xxi.

In Rothbard’s Opinion, Lionel Robbins’s Book Is Unquestionably the BEST Work on the Great Depression

Lionel Robbins’s The Great Depression is one of the great economic works of our time. Its greatness lies not so much in originality of economic thought, as in the application of the best economic thought to the explanation of the cataclysmic phenomena of the Great Depression. This is unquestionably the best work published on the Great Depression.

At the time that Robbins wrote this work, he was perhaps the second most eminent follower of Ludwig von Mises (Hayek being the first). To his work, Robbins brought a clarity and polish of style that I believe to be unequalled among any economists, past or present. Robbins is the premier economic stylist.

In this brief, clear, but extremely meaty book, Robbins sets forth first the Misesian theory of business cycles and then applies it to the events of the 1920s and 1930s. We see how bank credit expansion in the United States, Great Britain, and other countries drove the civilized world into a great depression.⁶²

Then Robbins shows how the various nations took measures to counteract and cushion the depression that could only make it worse: propping up unsound, shaky business positions; inflating credit; expanding public works; keeping up wage rates (e.g., Hoover and his White House conferences)—all things that prolonged the necessary depression adjustments and profoundly aggravated the catastrophe. Robbins is particularly bitter about the wave of tariffs, exchange controls, quotas, etc. that prolonged crises, set nation against nation, and fragmented the international division of labor.

__________
⁶²In Britain the expansion was generated because of the rigid wage structure caused by unions and the unemployment insurance system, as well as a return to the gold standard at too high a par; and in the United States it was generated by a desire to inflate in order to help Britain, as well as an absurd devotion to the ideal of a stable price level.

—Murray N. Rothbard, Strictly Confidential: The Private Volker Fund Memos of Murray N. Rothbard, ed. David Gordon (Auburn, AL: Ludwig von Mises Institute, 2010), 289-290.

According to Rothbard, Sir Ralph George Hawtrey Was One of the Evil Geniuses of the 1920s

Executive director and operating head of the Association with such formidable backing was Norman Lombard, brought in by Fisher in 1926. The Association spread its gospel far and wide. It was helped by the publicity given to Thomas Edison and Henry Ford’s proposal for a “commodity dollar” in 1922 and 1923. Other prominent stabilizationists in this period were professors George F. Warren and Frank Pearson of Cornell, Royal Meeker, Hudson B. Hastings, Alvin Hansen, and Lionel D. Edie. In Europe, in addition to the above mentioned, advocates of stable money included: Professor Arthur C. Pigou, Ralph G. Hawtrey, J.R. Bellerby, R.A. Lehfeldt, G.M. Lewis, Sir Arthur Salter, Knut Wicksell, Gustav Cassel, Arthur Kitson, Sir Frederick Soddy, F.W. Pethick-Lawrence, Reginald McKenna, Sir Basil Blackett, and John Maynard Keynes. Keynes was particularly influential in his propaganda for a “managed currency” and a stabilized price level, as set forth in his A Tract on Monetary Reform, published in 1923.

Ralph Hawtrey proved to be one of the evil geniuses of the 1920s. An influential economist in a land where economists have shaped policy far more influentially than in the United States, Hawtrey, Director of Financial Studies at the British Treasury, advocated international credit control by Central Banks to achieve a stable price level as early as 1913. In 1919, Hawtrey was one of the first to call for the adoption of a gold-exchange standard by European countries, tying it in with international Central Bank cooperation. Hawtrey was one of the prime European trumpeters of the prowess of Governor Benjamin Strong. Writing in 1932, at a time when Robertson had come to realize the evils of stabilization, Hawtrey declared: “The American experiment in stabilization from 1922 to 1928 showed that an early treatment could check a tendency either to inflation or to depression. . . . The American experiment was a great advance upon the practice of the nineteenth century,” when the trade cycle was accepted passively. When Governor Strong died, Hawtrey called the event “a disaster for the world.” Finally, Hawtrey was the main inspiration for the stabilization resolutions of the Genoa Conference of 1922.

—Murray N. Rothbard, America's Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2000), 176-177.

Government CANNOT Act in the General Interest When It Controls the Supply of Money

Yet even if we assumed that government could know what should be done about the supply of money in the general interest, it is highly unlikely that it would be able to act in that manner. As Professor Eckstein, in the article quoted above, concludes from his experience in advising governments:

Governments are not able to live by the rules even if they were to adopt the philosophy [of providing a stable framework].

Once governments are given the power to benefit particular groups or sections of the population, the mechanism of majority government forces them to use it to gain the support of a sufficient number of them to command a majority. The constant temptation to meet local or sectional dissatisfaction by manipulating the quantity of money so that more can be spent on services for those clamouring for assistance will often be irresistible. Such expenditure is not an appropriate remedy but necessarily upsets the proper functioning of the market. 

—F. A. Hayek, “The Denationalization of Money: An Analysis of the Theory and Practice of Concurrent Currencies,” in The Collected Works of F. A. Hayek, vol. 6, Good Money, Part II: The Standard, ed. Stephen Kresge (Indianapolis: Liberty Fund, 1999), 203.