Mises’s Position on Socialist Calculation Emerged Out of His “The Theory of Money and Credit” (1912)

Finally, the unique root of Mises’s position, and one that distinguishes him and his “socialist impossibility” thesis from Hayek and the Hayekians, has been neglected until the present day. And this neglect has persisted despite Mises’s own explicit avowal in his memoirs of the root and groundwork of his calculation thesis. For Mises was not, like Hayek and his followers, concentrating on the flaws in the general equilibrium model when he arrived at his position; nor was he led to his discussion solely by the triumph of the socialist revolution in the Soviet Union. For Mises records that his position on socialist calculation emerged out of his first great work, The Theory of Money and Credit (1912). In the course of that notable integration of monetary theory and “micro” marginal utility theory, Mises was one of the very first to realize that subjective valuations of the consumers (and of laborers) on the market are purely ordinal, and are in no way measurable. But market prices are cardinal and measurable in terms of money, and market money prices bring goods into cardinal comparability and calculation (e.g., a $10 hat is “worth” five times as much as a $2 loaf of bread). But Mises realized that this insight meant it was absurd to say (as Schumpeter would) that the market “imputes” the values of consumer goods back to the factors of production. Values are not directly “imputed”; the imputation process works only indirectly, by means of money prices on the market. Therefore socialism, necessarily devoid of a market in land and capital goods, must lack the ability to calculate and compare goods and services, and therefore any rational allocation of productive resources under socialism is indeed impossible. 

—Murray N. Rothbard, “The End of Socialism and the Calculation Debate Revisited,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 843-844.

During the 1930s, Fisher and the Chicago School Were “pre-Keynes Keynesians” Wanting to “Reflate” the Price Level

And now, in his highly touted Monetary History of the United States, Friedman has demonstrated his Fisherine bias in interpreting American economic history. Benjamin Strong, undoubtedly the single most disastrous influence upon the economy of the 1920s, is lionized by Friedman for his inflation and price-level stabilization during that decade. In fact, Friedman attributes the 1929 depression not to the preceding inflation boom but to the failure of the post-Strong Federal Reserve to inflate the money supply enough before and during the depression.

In short, while Milton Friedman has performed a service in bringing back to the notice of the economics profession the overriding influence of money and the money supply on business cycles, we must recognize that this “purely monetarist” approach is almost the exact reverse of the sound—as well as truly free-market—Austrian view. For while the Austrians hold that Strong’s monetary expansion made a later 1929 crash inevitable, Fisher-Friedman believe that all the Fed needed to do was to pump more money in to offset any recession. Believing that there is no causal influence running from boom to bust, believing in the simplistic “Dance of the Dollar” theory, the Chicagoites simply want government to manipulate that dance, specifically to increase the money supply to offset recession.

During the 1930s, therefore, the Fisher-Chicago position was that, in order to cure the depression, the price level needed to be “reflated” back to the levels of the 1920s, and that reflation should be accomplished by:

1. the Fed expanding the money supply, and
2. the Federal government engaging in deficit spending and large-scale public works programs.

In short, during the 1930s, Fisher and the Chicago School were “pre-Keynes Keynesians,” and were, for that reason, considered quite radical and socialistic—and with good reason. Like the later Keynesians, the Chicagoans favored a “compensatory” monetary and fiscal policy, though always with greater stress on the monetary arm.

—Murray N. Rothbard, “Milton Friedman Unraveled,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 906-907.

The Chicagoite “Pure Monetary” Theory of the Business Cycle and the “Dance” of the “Price Level”

But the key problem with Friedman’s Fisherine approach is the same orthodox separation of the micro and macro spheres that played havoc with his views on taxation. For Fisher believed, again, that on the one hand there is a world of individual prices determined by supply and demand, but on the other hand there is an aggregate “price level” determined by the supply of money and its velocity of turnover, and never the twain do meet. The aggregate, macro, sphere is supposed to be the fit subject of government planning and manipulation, again supposedly without affecting or interfering with the micro area of individual prices.

In keeping with this outlook, Irving Fisher wrote a famous article in 1923, “The Business Cycle Largely a ‘Dance of the Dollar’”—recently cited favorably by Friedman—which set the model for the Chicagoite “purely monetary” theory of the business cycle. In this simplistic view, the business cycle is supposed to be merely a “dance,” in other words, an essentially random and causally unconnected series of ups and downs in the “price level.” The business cycle, in short, is random and needless variations in the aggregate level of prices. Therefore, since the free market gives rise to this random “dance,” the cure for the business cycle is for the government to take measures to stabilize the price level, to keep that level constant. This became the aim of the Chicago School of the 1930s, and remains Milton Friedman’s goal as well.

—Murray N. Rothbard, “Milton Friedman Unraveled,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 904.