Irving Fisher Was the True Founder of Modern Macroeconomics with Its Aggregative Reasoning and Its Politically Managed Fiat Money

This new view culminated in the work of Irving Fisher, who in 1911 formalized the quantity theory in mathematical terms and proposed it as a formula for use by politicians and bureaucrats charged with the task of managing money in the interests of stability of the price level. Indeed, it was Fisher and not Keynes who was the true founder of modern macroeconomics with its aggregative reasoning and its central notion of politically managed fiat money. As the modern monetary theorist and historian of thought, Jürg Niehans wrote:

Fisher’s reformulation of the quantity theory of money … has successfully survived seventy-five years of monetary debate without a need for major revision; its analytical content is accepted today by economists of all persuasions, and in the present world of fiat money it is actually more relevant than it was in Fisher’s gold standard world.

Such was the state of monetary economics when Mises published his seminal work on The Theory of Money and Credit, in 1912. In writing this book, Mises achieved two aims. The first was to reconstruct monetary theory by integrating it with the subjective-value theory of price which had been developed by the early Austrian economists, most notably Carl Menger and Eugen Böhm-Bawerk. By doing this Mises was able to resolve the so-called “Austrian Circle,” according to which the value of money could not be explained in terms of marginal utility because any such explanation involved circular reasoning. It was this misconception that opened the door to Fisher’s analysis of money in terms of aggregative variables such as the national money supply, velocity of circulation of money, the average price level, and so on, eventually leading to the unquestioned predominance of the macroeconomic quantity theory of money.

—Joseph T. Salerno, introduction to Money: Sound and Unsound (Auburn, AL: Ludwig von Mises Institute, 2010), xv-xvi.

The Bimetallistic Refinement of the Quantity Theory after 1870 Contributed to the Destruction of the Gold Standard

The proponents of the bimetallic standard argued for remonetization of silver on the grounds that this measure would increase the money supply and thus arrest the decline in prices under the monometallic gold standard that had begun in the late 1870s. The quantity theory of money was the foundation of the arguments put forward by the bimetallists. The theoretical counter-arguments of the advocates of the monometallic gold standard were completely inadequate to meet the challenge posed by the quantity theorists. They were based on the view that the costs of production of mining gold directly determined the price level, a distortion of classical monetary theory developed by Ricardo and the currency school. Paradoxically, although the gold standard remained intact, at least for the short run, the seeds for its eventual abolition had been sown because the classical sound money doctrine had been discredited among economists.

As David Laidler, a modern proponent of the quantity theory, commented:

[T]he refinement of the quantity theory after 1870 did not strengthen the intellectual foundations of the Gold Standard. On the contrary, it was an important element in bringing about its eventual destruction. . . . [T]he notion of a managed money, available to be deployed in the cause of macroeconomic stability and capable of producing a better economic environment than one tied to gold, was not an intellectual response to the monetary instability of the post-war period. The idea appeared in a variety of guises in the pre-war literature as a corollary of the quantity theory there expounded.

Thus by the end of the nineteenth century the view that money should ideally be “stable” in value had fully displaced the classical ideal of “sound” money, meaning a commodity chosen by the market whose value was strictly governed by market forces and immune to manipulation by governments.

—Joseph T. Salerno, introduction to Money: Sound and Unsound (Auburn, AL: Ludwig von Mises Institute, 2010), xiv-xv.

Bimetallist Regimes Functioned As Alternating Monometallic Standards Due to Differences Between the Legal and Market Bimetallic Ratios

The bimetallist regimes that were legally in force in France, Belgium, Switzerland, Italy, and the U.S. actually ended up functioning as alternating monometallic standards. In the face of fixed legal bimetallic ratios (i.e., the official mint values at which silver could be exchanged for gold) in these nations, developments in the market for precious metals that caused the international market bimetallic ratio (i.e., the price at which silver bullion exchanged for gold bullion on the open market) to change also caused one of the metals to drive the other out of circulation.

In the U.S., for instance, the period before 1834 was a de facto silver standard owing to the fact that the market bimetallic ratio was consistently greater than the legal ratio (15-to-1) that prevailed in the U.S. Reacting to a shortage of circulating gold, Congress raised the legal ratio to 16-to-1 in 1834. This now placed the legal ratio above the market ratio, which meant that it would now be profitable for individuals to take silver out of circulation (which was now the undervalued rather than overvalued metal at the mint) and bring their gold (which was now the overvalued metal) to the mints. Quite expectedly, gold now displaced silver in circulation. In 1853, the revision of the coinage laws did not alter the legal ratio so as to bring silver back into circulation. Hence, the U.S. was actually practicing a gold standard de facto from the 1830s.

—Giulio M. Gallarotti, The Anatomy of an International Monetary Regime: The Classical Gold Standard, 1880-1914 (New York: Oxford University Press, 1995), 21.

Once You Admit the Existence of a State, then All Private Property Has Been Effectively Abolished; Therefore, State, Any State, MEANS Socialism

What Murray realized and I still had to learn was that the most vociferous and ferocious rejection and opposition to Austro-libertarianism would not come from the traditional socialist Left, but rather from these very self-proclaimed “anti-socialist,” “limited government,” “minimal state,” “pro-private enterprise,” and “pro-freedom” outfits and their intellectual mouthpieces, and above all from what has become known as the Beltway Libertarians. They simply could not stomach the fact that Murray had demonstrated with plain logic that their doctrines were nothing but inconsistent intellectual clap-trap, and that they were all, to use Mises’s verdict vis-a-vis Milton Friedman and his company, a “bunch of socialists,” too, notwithstanding their vehement protestations to the contrary. For, as Murray argued, once you admitted the existence of a State, any State, defined as a territorial monopolist of ultimate decision-making in every case of conflict, including conflicts involving the State itself, then all private property had been effectively abolished, even if it remained provisionally, qua State-grant, nominally private, and had been replaced instead by a system of “collective” or rather State-property. State, any State, means socialism, defined as “the collective ownership of factors of production.” The institution of a State is praxeologically incompatible with private property and private property based enterprise. It is the very anti-thesis of private property, and any proponent of private property and private enterprise then must, as a matter of logic, be an anarchist. In this regard (as in many others) Murray was unwilling to compromise, or “intransigent,” as his detractors would say. Because in theory, in thinking, compromise is impermissible. In everyday life, compromise is a permanent, and ubiquitous feature, of course. But in theory, compromise is the ultimate sin, a strict and absolute ‘no no.’ It is not permissible, for instance, to compromise between the two incompatible propositions that 1+1=2 or that 1+1=3 and accept that it is 2.5. Either some proposition is true or it is false. There can be no “meeting in the middle” of truth and falsehood.

—Hans-Hermann Hoppe, Getting Libertarianism Right (Auburn, AL: Mises Institute, 2018), 109-111.

Any Explanation of the Business Cycle Must Necessarily Be a Praxeological (As Opposed to a Psychological) One

Business cycles—so the central message of chapter 22 of Keynes’s General Theory, the “Notes on the Trade Cycle”—are psychologically determined phenomena. This is surely incorrect. A psychological explanation of the business cycle is strictly impossible, and to think of it as an explanation involves a category mistake: Business cycles are obviously real events, experienced by individuals, but experienced by them as occurring outside of them in the world of real goods and real wealth. Beliefs, sentiments, expectations, optimism, and pessimism on the other side are psychological phenomena. One can think of one psychological phenomenon as affecting or influencing another one, but it is impossible to conceive of a psychological phenomenon as having any direct impact on outcomes in the outside world of real things and goods. Only through actions can the course of real events be influenced; and any explanation of the business cycle then must necessarily be a praxeological (as opposed to a psychological) one.

—Hans-Hermann Hoppe, “Theory of Employment, Money, Interest, and the Capitalist Process: The Misesian Case Against Keynes,” in The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2006), 167-168.

The Socialist Society Will Always Decide for the Shorter Production Period, Preferring to Produce Consumer Goods Instead of Capital Goods

In the individualistic society the individual, not society, accumulates. Capital accumulation takes place by saving; the saver has the incentive of receiving income from the saved capital as the reward of saving. In the communist society, society as such will receive the income that today flows to the capitalists alone; it will then distribute this income equally to all members or otherwise use it for the good of the whole. Will that alone be a sufficient incentive for saving? To be able to answer this question, one must imagine that the society of the socialist state will be faced every day with the choice whether it should devote itself more to the production of consumer goods or more to that of capital goods, whether it should choose productive processes that do indeed take a shorter time but correspondingly yield less output or choose ones that take more time but then also bring greater output. The liberal thinks that the socialist society will always decide for the shorter production period, that it will prefer to produce consumer goods instead of capital goods, that it will consume the means of production it will have taken over as heir of the liberal society or at best maintain them but in no case increase them. That, however, would mean that socialism will bring stagnation, if not the decline of our whole economic civilization, and misery and need for all. That the state and the cities have already pursued investment policy on a large scale is no disproof of this assertion, since they pursued this activity entirely with the means of the liberal system. The means were raised by loans, that is, they were provided by private parties who expected from them an increase in their capital incomes. If in the future, however, the socialist society should face the question whether it will feed, clothe, and house its members better or whether it will save on all these things in order to build railroads and canals, to open mines, to undertake agricultural improvements for the coming generations, then it will decide for the former, even on psychological and political grounds alone.

—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), 157-158.