The Alleged “Inevitable” Tendency Toward Monopoly Has Been Largely Confined to the Two “New Eras”

Every era of speculation brings forth a crop of theories designed to justify the speculation, and speculative slogans are easily seized upon. The term “new era” was the slogan for the 1927-1929 period. We were in a new era in which old economic laws were suspended. . . .

The new era of 1924-1929, like the earlier new era of 1896-1903, was characterized by a great consolidation movement. The alleged “inevitable tendency toward monopoly” in American business has been largely confined to these two “new eras.” It has not been due to technological or industrial reasons, but rather has been due to the ease with which new securities can be issued when money is excessive and stocks are rising — which makes it easy and profitable to organize holding companies and buy out competing concerns. There have been, in fact, only two great periods of consolidation in our history, the three-year period 1899-1902, and the five-year period 1924-1929. Both were periods of cheap money and excited stock markets. There were, in fact, a great many consolidations in the years 1924-1929. . . .

Bank consolidations, carefully considered, are often wholesome and beneficial, but the activities of promoters in throwing together a great many banks, as an incident to an excited stock market, were clearly unwholesome and dangerous. . . .

Another development of the period was the rapid multiplication and rapid growth of investment trusts. The investment trust idea is good in itself, and investment trusts in England and Scotland had had a long and honorable history. Investment trust management in the United States following 1932 has been, on the whole, highly creditable. But the mushroom growth of institutions of this kind in a financial atmosphere such as obtained in 1928-1929 was bound to bring a great deal of grief and humiliation.

—Benjamin M. Anderson, Economics and the Public Welfare: Financial and Economic History of the United States, 1914-1946 (1949; repr., Princeton, NJ: D. Van Nostrand Company, 1965), 202-204.

Credit Expansion Creates an Artificial Economic Inequality by Showing Up in the Stock Market and Driving Up Stock Prices

Capital in the form of credit is normally and, certainly, properly, extended out of previously accumulated savings. In sharpest contrast, credit expansion is the creation of new and additional money out of thin air, which money is then lent to business firms and individuals as though it were a supply of new and additional saved up capital funds. Its existence serves to reduce interest rates and to enable loans to be made and debts to be incurred which otherwise would not have been made or incurred. Always and everywhere, to the extent that private banks participate in the process of credit expansion, they do so with the sanction and generally with the active encouragement of the government.

Economists, above all Ludwig von Mises, have shown how credit expansion is responsible for the boom-bust business cycle and how its existence depends on deliberate government policy. Nevertheless, public opinion believes that the business cycle is an inherent feature of capitalism and that the role of government is not that of causing the phenomenon but of combating it. Indeed, as Mises observed, “Nothing harmed the cause of liberalism [capitalism] more than the almost regular return of feverish booms and of the dramatic breakdown of bull markets followed by lingering slumps. Public opinion has become convinced that such happenings are inevitable in the unhampered market economy.”

The truth is that credit expansion is responsible not only for the boom-bust cycle but also for another major negative phenomenon for which public opinion mistakenly blames capitalism. Namely, sharply increased economic inequality, in which the wealthier strata of the population appear to increase their wealth dramatically relative to the rest of the population and for no good reason.

It is not accidental that the two leading periods of credit expansion in history—the 1920s and the period since the mid 1990s—have been characterized by a major increase in economic inequality. Both in the 1920s and in the more recent period, a major cause of the increased economic inequality is that the new and additional funds created in credit expansion show up very soon in the financial markets, where they drive up the prices of securities, above all, common stocks. The owners of common stock are preponderantly wealthy individuals, who now find themselves the beneficiaries of substantial capital gains. These gains are the greater the larger and more prolonged the credit expansion is and the higher it drives the prices of shares. In the process of new and additional money pouring into the financial markets, investment bankers and stock speculators are in a position to reap especially great gains.

Since it’s so important, the main point just made needs to be repeated: credit expansion creates an artificial economic inequality by showing up in the stock market and driving up stock prices. Since  the stocks are owned mainly by wealthy people, they are the main beneficiaries of the process. The more substantial and the more prolonged the credit expansion is, the larger are the gains enjoyed by wealthy people more than anyone else.

—George Reisman, “Credit Expansion, Economic Inequality, and Stagnant Wages,” George Reisman's Blog on Economics, Politics, Society, and Culture, entry posted January 12, 2008, http://www.georgereismansblog.blogspot.com/2008/01 (accessed February 15, 2020).

Keynes, the Brilliant Generalizer of Half-Truths, Is Confused about Short-Term Speculation on the Stock Market

Once again Keynes, the brilliant generalizer of half-truths, has succumbed to the temptation of expressing a paradox at the cost of stating untrue facts and of giving dangerous advice.

Keynes’ reasoning confuses two different things: short-term investment or speculation in investments planned for the long run, and short-term investment or speculation in investments planned for the short run. It is simply not true that an investor, or even a speculator, is not interested in the long-term prospects of, say, a new plant to be installed. On the contrary, any calculation of earnings submitted to investors is based on very long-term estimates indeed. The fact that the more distant future cannot be assessed so clearly never leads to its being neglected. It only results in the attempt to reduce risks by providing for rapid amortization. However much anyone may invest for capital appreciation, he still invests with a view to the long-term earnings. Capital appreciation can ultimately be realized only by sale to an investor who, in his turn, buys the security for the sake of its long-term return.

—L. Albert Hahn, Common Sense Economics (New York: Abelard-Schumann, 1956), 208.

Keynes Thinks Investment Has Become a By-Product of a Gambling Casino So He Wants to Prevent Short-Term Speculation

In a widely known passage of his General Theory, Keynes has drawn from the undoubted dependence of stock market prices upon subjective factors, moods and errors the conclusion that the flow of savings into investments is no longer dictated by long-run expectations of yield, but rather by short-run expectations of stock market gains, particularly in the United States. Thus, he thinks, investment has become the by-product of a gambling casino! Foolish investments were made or reasonable ones omitted depending on whether speculators were pushing up or depressing prices. Keynes recommends as a remedy that the bonds between investor and investment be made as indissoluble as those of marriage, which can be separated only by death or for very important reasons. In other words, Keynes opposes negotiability of investments in securities so as to prevent short-term speculation.

—L. Albert Hahn, Common Sense Economics (New York: Abelard-Schumann, 1956), 207-208.

The Discrepancy (Disequilibrium) Between Ex Ante and Ex Post Price Information Motivates Economic Actions

It must be noted that Salerno has made a significant contribution to the development of a modern Austrian theory of the market process, despite my contrasting position with him on the dehomogenization of Mises and Hayek. That contribution is to refocus attention again on the issue of entrepreneurial appraisement and the forward-looking role of monetary calculation. But in Salerno’s presentation, the forward-looking role is, ironically, overemphasized. In Mises’ theory, monetary calculation is an indispensable aid to the human mind precisely because it is essential for both prospective and retrospective calculations. The price system, as an entire system, provides ex ante information which economic actors employ in deciding the future course of action; ex post information which informs economic actors of the appropriateness or inappropriateness of their past course of action; and the very discrepancy (i.e. disequilibrium) between the ex ante and ex post motivate economic actions (e.g. entrepreneurs) to discover better ways to arrange scarce means to satisfy ends. On the threefold advantage of the private property market price system see Mises (1922, p. 99).

—Peter J. Boettke, Calculation and Coordination: Essays on Socialism and Transitional Political Economy, Foundations of the Market Economy (London: Routledge, Taylor and Francis, 2001), 290n6.

Mises Has Four Basic Warnings against Socialism; All Are Derivative of an Argument for Private Property

As Mises pointed out in his original essay on the subject, there were socialists who never thought of the problems of economic organization, and there were those who examined in some depth the problems in economic history, but as regards a critical examination of the economic organization of socialism there were hardly any thoughtful excursions. Economics did not seem to figure prominently in the pictures painted of the future socialist world. “They invariably explain how, in the cloud-cuckoo lands of their fancy, roast pigeons will in some way fly into the mouths of the comrades, but they omit to show how this miracle is to take place” (Mises 1920, p. 88). The investigation into the properties of a society organized along socialist lines seemed to be called for. So Mises’ essay can be seen as an attempt to raise this challenge to socialist writers — to examine how the socialist commonwealth would in fact organize its economic affairs. As such, his argument was intended for a wide audience, and not a narrow subset of specialists within economics. Such a narrow subset did not yet exist to which one could aim an argument, but wide acceptance of the moral superiority and historical inevitability of socialism did exist.

In Mises’ writings there are four basic warnings against socialism — the most decisive, of course, was the problem of the impossibility of rational economic calculation. Nevertheless, it is essential to recognize that Mises does present four arguments which include:

1. private property and incentives;
2. monetary prices and the economizing role they play;
3. profit and loss accounting; and
4. political environment.

In a fundamental sense, all of these arguments are derivative of an argument for private property. Without private property, there can be no advanced economic process.

To the economically illiterate, Mises had to explain how private property engenders incentives which motivate individuals to husband resources efficiently. To the more informed, but still economically uninformed, he had to explain how the exchange ratios established in a market allow individuals to compare alternatives by summarizing in a common denominator the subjective assessment of trade-offs that individuals make in the exchange and production process. To the trained economist, Mises had to explain how the static conditions of equilibrium only solved the problem of economic calculation by hypothesis, and that the real problem was one of calculation within the dynamic world of change, in which the lure of pure profit and the penalty of loss would serve a vital error detection and correction role in the economic process. And, finally, to scholars, activists, and political leaders, Mises warned that the suppression of private property leads to political control over individual decisions and thus the eventual suppression of political liberties to the concerns of the collective. All four arguments are criticisms of socialist proposals. On the other hand, the private-property market economy is able to solve each of the three economic issues, and constitutional democracy does seek to guarantee individual rights, and protect against the tyranny of majority. Where socialism fails, in other words, liberalism succeeds.

—Peter J. Boettke, Calculation and Coordination: Essays on Socialism and Transitional Political Economy, Foundations of the Market Economy (London: Routledge, Taylor and Francis, 2001), 33-34.

The Uniqueness of Mises’s Calculation Challenge to Socialism Is that It Is Totally Unrelated to the Incentive Problem

But the uniqueness and the crucial importance of Mises’s challenge to socialism is that it was totally unrelated to the well-known incentive problem. Mises in effect said: All right, suppose that the socialists have been able to create a mighty army of citizens all eager to do the bidding of their masters, the socialist planners. What exactly would those planners tell this army to do? How would they know what products to order their eager slaves to produce, at what stage of production, how much of the product at each stage, what techniques or raw materials to use in that production and how much of each, and where specifically to locate all this production? How would they know their costs, or what process of production is or is not efficient?

Mises demonstrated that, in any economy more complex than the Crusoe or primitive family level, the socialist planning board would simply not know what to do, or how to answer any of these vital questions. Developing the momentous concept of calculation, Mises pointed out that the planning board could not answer these questions because socialism would lack the indispensable tool that private entrepreneurs use to appraise and calculate: the existence of a market in the means of production, a market that brings about money prices based on genuine profit-seeking exchanges by private owners of these means of production. Since the very essence of socialism is collective ownership of the means of production, the planning board would not be able to plan, or to make any sort of rational economic decisions. Its decisions would necessarily be completely arbitrary and chaotic, and therefore the existence of a socialist planned economy is literally “impossible” (to use a term long ridiculed by Mises’s critics).

—Murray N. Rothbard, “The End of Socialism and the Calculation Debate Revisited,” Review of Austrian Economics 5, no. 2 (1991): 52-53.

The Socialist Commonwealth Is Incapable of Measuring the Needs of Its Citizens and Is Unable to Give Directives to the Producing Units

He [Mises] next disposes of O. Neurath’s new proposal for calculation in physical terms, on account of its inability to add up different goods. There follows a discussion of a book by the exiled Russian economist Boris Brutzkus, who extensively treats the problem of economic calculation under Soviet socialism. Brutzkus concurs with von Mises that without economic calculation, rational economic action under whatever kind of economic system is impossible. He also is of the opinion that the fact that production requires the combination of three factors (land, labor, and capital) retains its validity and importance under socialism. Therefore, a calculation solely in terms of labor values is incapable of providing an indication of the greater or lesser profitability of enterprises. With that the drafting of a uniform plan, the essence of Marxism, becomes impossible. Von Mises quotes Brutzkus to the effect that:

With this the socialist commonwealth, even with the entire instrumentarium of scientific theory and a gigantic statistical apparatus, is incapable of measuring the needs of its citizens and of evaluating them and is therefore not in a position to give the necessary directives to the producing units (N.S., p. 189).

Von Mises finds Brutzkus’s book the first one that deals with the problem of the Soviet Union in a scientific way. All other works are of a descriptive nature and the presentation of the facts either suffers from an uncritical hatred of the Soviet Union (from which he therefore obviously wished to dissociate himself) or from its uncritical adulation.

—William Keizer, “Two Forgotten Articles by Ludwig von Mises on the Rationality of Socialist Economic Calculation,” Review of Austrian Economics 1, no. 1 (1987): 118-119.

LTV Is Useless for Economic Calculation Because of the “Reduction Problem” and Because It Ignores Natural Factors of Production

Von Mises finally discusses Leichter, who rigorously adheres to the labor theory of value. Von Mises repeats the arguments he made against this theory in his 1922 book Die Gemeinwirtschaft. The labor theory of value is useless for economic calculation because it is incapable of converting labor of different qualities to a single standard (the so-called “reduction problem”) and because it does not take into account the natural factors of production. Leichter believes that the importance of the various labor tasks can be compared with each other. Von Mises says that such comparisons can of course be made, but that they will lead to different results, depending on the subjective valuations of the person who made them. And what does “importance” mean in this context? Does it refer to the importance of being on the job, of producing better work, or the arduousness of the work, and so forth? Each of these comparisons yields a different result, but only one can be the basis of the reduction factor. Leichter’s contention that practice daily solves this problem by establishing wages (which was also Marx’s solution to this problem) is wholly erroneous. Wage rates are established in market exchange on the basis of subjective valuations, and the problem is precisely whether it is possible to reduce the various kinds of labor to a single standard in a society without market exchange. Leichter attempts his way out of this circular reasoning by stressing that modern wage negotiations have “nearly” nothing to do with “market haggling” in the normal sense of the word—supply and demand play “nearly” no role in determining the wage differentials. Von Mises notes that the double insertion of the word “nearly” robs these arguments of their basis.

The origin of Leichter’s (and Marx’s) error lies in an inadequate and unclear comprehension of the nature of the market mechanism and market price creation. To Leichter, the essence of the market seems to be “haggling” and reference to supply and demand. Von Mises states, however, that “haggling” may even be absent altogether. Even where “fixed” prices that “allow of no reduction” exist, the market mechanism acts in its usual way, except that the state of the market does not so much influence the price through the actual negotiations of the market parties, but through their behavior, such as the absence or queuing of buyers and the corresponding behavior of the sellers.

Von Mises’s other argument against the labor theory of value is that economic calculation should not only comprise labor, but also the material means of production, such as those provided by Nature. Leichter does not demonstrate how the problem of socialist economic calculation can be solved regarding these scarce goods, on which no labor has been spent. He does remark that “society” will set higher prices for these scarce goods. Von Mises argues that the problem is not whether society sets higher or lower prices, but whether it will be able to do so on the basis of the results of economic calculation. “It was never doubted that society can dispose: I maintain that it cannot do so rationally, i.e. on the basis of a calculation” (N.B., p. 500). Orthodox Marxists have been as incapable as others in finding a useful system of economic calculation for a socialist society.

—William Keizer, “Two Forgotten Articles by Ludwig von Mises on the Rationality of Socialist Economic Calculation,” Review of Austrian Economics 1, no. 1 (1987): 117-118.

Nikolaas G. Pierson Warned that a Communist Administration Will Have to Distinguish Gross Income from Net Income

Nikolaas G. Pierson was the most eminent Dutch economist of his day, and a sometime Prime Minister of Holland. His paper on ‘The Problem of Value in the Socialist Community’ was a direct reply to Kautsky’s celebrated speech at Delft in 1902, which Pierson had attended. Pierson’s paper, the first really clear exposition of the economic calculation problem, had very little influence until the 1920s, partly because it appeared in Dutch, and partly because its unassuming tone, its modest air of pointing out a few difficulties that would confront socialism, no doubt concealed from all the but the most attentive readers the possibility that these difficulties might be intractable. The true significance of the piece was probably further obscured by the fact that Pierson begins it (after a somewhat rambling introduction) by concentrating on the problem of how a socialist nation-state would conduct its foreign trade. There were still Marxists who denied that there could be such a thing as a socialist nation-state, or that there could be ‘foreign trade’ under socialism, but Pierson takes Kautsky’s recent concessions as his point of departure. A further contribution to the piece’s obscurity is that Pierson’s textbook on economics (1912) briefly discusses socialism but makes no mention of the economic calculation problem.

Pierson states that he will not pronounce on “whether socialism can be carried into practice”, but he challenges the socialist view that “value” will have no relevance in a socialist economy (Pierson 1935, 43). In order that trade between socialist nations will continue to be mutually beneficial, the national governments will have to find some way of valuing goods. Otherwise the movement of goods from one country to another will not be appropriately regulated according to the wants of the people in the various countries (55–67). Pierson suggests that under socialism trade between nations will have to be conducted on essentially the same principles as under capitalism: funds will still have to be borrowed, and interest paid on them; goods will be valued according to the services they render; and money and bills of exchange will still be employed.

He discusses national planning under socialism, assuming that “the division of income . . . is effected according to the most advanced method, that of communism” (70). A communist administration will have to distinguish gross income from net income. What Pierson means by this is that in order to ensure that there is net production—that more is yielded by the process of production than is destroyed therein, both in an individual project and in the totality of society’s production—the administration will have to be able to measure outputs and inputs in common units. For, “we cannot subtract cotton, coal, and the depreciation of machines from yarn and textiles, we cannot subtract fodder from beast” (70). Yet if people consume more than they produce, “society has been impoverished” (70–71). The communist administration must be able to arrange things so that the amount produced equals or exceeds the amount consumed.

—David Ramsay Steele, From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (La Salle, IL: Open Court Publishing, 1992), e-book.

The Theory of Capital Explains How the “Invisible Hand” Arranges Enterprises to Organize the Allocation of Resources According to Consumer Demand

The argument is linked to recent findings by Braun (2015a) and Braun et al. (2016) who show that Austrian School economists developed two different bodies of capital theory. The better known one defines capital as a factor of production and concentrates on the physical activities of roundabout production processes that are common to all economic systems. In this paper, the term ‘Austrian theory of capital’ only applies to this theory. Capital in this sense will be called ‘physical capital’ whenever the possibility of confusion arises. It consists of concrete and heterogeneous capital goods — which is nothing but an alternate expression for production goods.

The second and less well-known theory of capital by Austrian school economists, however, constitutes an appropriate starting point for a historically specific theory. It concerns itself with the organisation of the economic system called capitalism. Capital is not considered to be a production factor, but a sum of money invested in business enterprises. It is regarded as the central tool of the economic calculations by profit-oriented enterprises. This theory explains how the invisible hand arranges for profit-oriented enterprises to organise the allocation of resources in the market economy according to consumer demand. It will be called the ‘historically specific theory of capital’. Capital in this sense is simply money invested in business assets and will sometimes also be called ‘business capital’.

A deeper analysis will bring to light that the Austrian theory of (physical) capital can be subsumed under the theory of business capital and, in this capacity, helps to shed further light on specific characteristics of capitalism.

—Eduard Braun, “The Theory of Capital as a Theory of Capitalism,” Journal of Institutional Economics 13, no. 2 (June 2017): 306.

The Guiding Light of Economic Calculation—and Its Fundamental Notion of Capital—Makes Possible All of the Wonders of Capitalism

The guiding light of economic calculation—and its fundamental notion of capital—makes possible all of the wonders of capitalism. In the words of Mises:

The system of market economy has never been fully and purely tried. But there prevailed in the orbit of Western civilization since the Middle Ages by and large a general tendency toward the abolition of institutions hindering the operation of the market economy. With the successive progress of this tendency, population figures multiplied and the masses’ standard of living was raised to an unprecedented and hitherto undreamed of level. The average American worker enjoys amenities for which Croesus, Crassus, the Medici, and Louis XIV would have envied him.

As the last sentence in the above quotation indicates, Mises utterly rejects the Marxist claim that capitalism is a social system that exists to serve the capitalists. On the contrary, Mises conceived of the market economy as a system in which not the entrepreneurs or capitalists were in charge, but ultimately the consumers. . . .

One of the standard objections to the market economy is that it allegedly allows the wealthy elite to control everyone else. In the Marxist framework, the system is dubbed capitalism since the capitalists control the means of production; they are running the show. In contrast, the hapless workers are “wage slaves” who have the nominal freedom to quit their jobs, yes, but hardly enjoy true freedom since they will starve if they lose their paycheck. Just as the old aristocratic system had been swept aside by the movement for political democracy, the Marxists tried to sell the masses on the idea that socialism represented economic democracy that would complete the emancipation of man.

Mises sought to turn this typical view of the market on its head with his notion of consumer sovereignty. For Mises, the notion that the factory owner or landowner controlled the economy was absurd and reflected a naïve understanding of economics.

—Robert P. Murphy, Choice: Cooperation, Enterprise, and Human Action (Oakland, CA: Independent Institute, 2015), e-book.

Capital Makes sense Only in a Monetary Economy Since Capital Is Computed Only by Adding and Subtracting Money Prices of Assets and Liabilities

Remember that Mises thought it was important to integrate the crucial role of money in a market economy from the ground floor, as it were. Money is not neutral, and it is misleading to conceive of the market economy as if it were a giant network of barter exchanges. The crucial concept of capital makes sense only in a monetary economy since capital could be computed only by resort to adding and subtracting the money prices of various assets and liabilities. It’s true, the indispensable tool of economic calculation refers to physical things and how they are deployed; such considerations are necessary for Robinson Crusoe, as well as a socialist state. But the point is that a complex society requires a market and its attendant money prices for the various means of production and consumer goods, if there is to be any hope of efficient use of resources; the socialist dictator wouldn’t be able to objectively tell whether he were increasing or decreasing the amount of wealth at his disposal. In Mises’s succinct statement: “In a socialist economy there are capital goods, but no capital.”

—Robert P. Murphy, Choice: Cooperation, Enterprise, and Human Action (Oakland, CA: Independent Institute, 2015), e-book.

The Central Intellectual Concept in Economic Calculation Is Capital; Mises Defines Capital in the Way that an Accountant Would

The central intellectual concept in economic calculation is capital. In this respect, the Marxists were right to call the market economy capitalism, though of course they intended the label as derogatory rather than complimentary. The Marxists wanted to brand the market economy as one that served only the interests of a small group of exploiters, whereas Mises appreciates the term because it recognizes that only in a market economy can individuals resort to the indispensable mental tool of economic calculation.

It’s important to note that Mises defines capital in the way that an accountant or businessperson would: Capital is quoted in monetary units, and is equal to the total market value of all assets minus the total market value of all liabilities. Loosely speaking, to calculate how much capital is invested or tied up in a particular business entity, the accountant estimates how much money would be left over after first selling all of the business assets and then paying off all of the business debts.

—Robert P. Murphy, Choice: Cooperation, Enterprise, and Human Action (Oakland, CA: Independent Institute, 2015), e-book.

Only by Nationalizing the Banks into a Single Central Bank Does Society Obtain the Power to Regulate Its Labor According to a Plan

To Otto Bauer the nationalization of the banks appears the final and decisive step in the carrying through of the socialist nationalization program. If all banks are nationalized and amalgamated into a single central bank, then its administrative board becomes “the supreme economic authority, the chief administrative organ of the whole economy. Only by nationalization of the banks does society obtain the power to regulate its labor according to a plan, and to distribute its resources rationally among the various branches of production, so as to adapt them to the nation’s needs.” Bauer is not discussing the monetary arrangements which will prevail in the socialist commonwealth after the completion of the nationalization of the banks. Like other Marxists he is trying to show how simply and obviously the future socialist order of society will evolve from the conditions prevailing in a developed capitalist economy. “It suffices to transfer to the nation’s representatives the power now exercised by bank shareholders through the Administrative Boards they elect,” in order to socialize the banks and thus to lay the last brick on the edifice of socialism. Bauer leaves his readers completely ignorant of the fact that the nature of the banks is entirely changed in the process of nationalization and amalgamation into one central bank. Once the banks merge into a single bank, their essence is wholly transformed; they are then in a position to issue credit without any limitation.

—Ludwig von Mises, Economic Calculation in the Socialist Commonwealth, trans. S. Adler (1990; repr., Auburn, AL: Ludwig von Mises Institute, 2012), 39.

Under Socialism, A Moneyless (Or “Natural”) Economy Is Supposed to be a Prerequisite for “Just” Distribution

In examining the need and possibility of economic calculation in the different forms of socialist communities, it is natural to start with a study of a socialist society which uses no money, i.e. one with a natural economy as it is sometimes called. The moneyless society is the great ideal of many socialists, and even as late as in February, 1932, the Finance Commissar of the Soviet Union said that the policy of his Finance Department aimed at preparing the day when money “could be relegated to the museums.” . . .


In this connection it should be remembered that in an economy of private enterprise production and distribution take place uno acto, so that distribution automatically results from the individual’s contribution to the process of production, whether it takes the form of mental or physical labour, of special capability or knowledge, or of putting land or other forms of capital at the disposal of production.

In socialist communities production and distribution will be two separate operations, nor will there necessarily be any connection between contribution and remuneration, for the central authority will decide the distribution of income. Many economists maintain that distribution is the chief problem in any socialist society; at any rate it is obviously so in one with a moneyless economy. . . .


It may be mentioned here that this question of just distribution — with which we shall not occupy ourselves when discussing the possibilities of calculation in socialist communities with a monetary economy — is particularly à propos in connection with the moneyless economy, since that is supposed to be a prerequisite for just distribution.

—Trygve J. B. Hoff, Economic Calculation in the Socialist Society, trans. M. A. Michael (London: William Hodge and Company, 1949), 32-34.

Socialism Is Nothing But a Theory of “Just” Distribution; the Socialist Movement Is an Attempt to Achieve This Ideal

On logical grounds, treatment of the problem of income should properly come at the end of any investigation into the life of the socialist community. Production must take place before distribution is possible, therefore, logically the former should be discussed before the latter. But the problem of distribution is so prominent a feature of Socialism as to suggest the earliest possible discussion of the question. For fundamentally, Socialism is nothing but a theory of “just” distribution; the socialist movement is nothing but an attempt to achieve this ideal. All socialist schemes start from the problem of distribution and all come back to it. For Socialism the problem of distribution is the economic problem.

—Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 131.

Mises Built His Business Cycle Theory on the Currency School’s Doctrines Even Though He Had to Correct Its Many Defects

Throughout his writings, Mises recognized and lauded the lasting contributions of the Currency School to monetary and business cycle theory and policy. In his first complete presentation of the Austrian theory of the business cycle, published in 1928, Mises (2006, pp. 101, 128) stated:

Of all the theories of the trade cycle, only one has achieved and retained the rank of a fully-developed economic doctrine. That is the theory advanced by the Currency School, the theory which traces the cause of changes in business conditions to the phenomenon of circulation credit [that is, the issue of fiduciary media]. . . . Every advance toward explaining business fluctuations to date is due to the Currency School. We are also indebted to this School alone for the ideas responsible for policies aimed at eliminating business fluctuations.  

In his earlier treatise, The Theory of Money and Credit, Mises credited the Currency School as the main inspiration for the development of modern business cycle theory. There Mises (1981, pp. 282–83) commented that the Currency School “propounded a theory, complete in itself, of the value of money and the influence of the granting of credit on the prices of commodities and the rate of interest.” While noting that the school’s doctrines were based on the erroneous value theory of the classical school and a mechanical version of the quantity theory, Mises yet maintained, “Within its own sphere of investigation,” the Currency School “was extremely successful.” “This fact,” he observed, “deserves grateful recognition from those who, coming after it, build upon the foundations it laid.”

Mises, however, did not allow his admiration for the Currency School to blind him to the two key errors it committed. In fact he was eager to expose and correct these errors because they were the reason that the currency principle failed on the policy level when it was implemented in Great Britain by the Bank Act of 1844, more popularly known as Peel’s Act. The first error was an analytical one. Unlike the opposing and inflationist Banking School, the Currency School failed to recognize that bank deposits were perfectly interchangeable with bank notes in exchange and, as such, were part of the money supply. Consequently, the currency principle’s rigid restriction on the creation of fiduciary media was tragically weakened because Peel’s Act applied only to bank notes, while banks were left free to create new, unbacked demand deposits ad libitum.

The second, practical flaw in the program of the Currency School was its insistence that power to enforce the currency principle be centralized in a bank with monopolistic legal privileges—in this case the Bank of England. Th is quasi-central bank, in which most of the system’s gold reserves were held, would then have the means and the power to enforce the currency principle for the banking system as a whole. In effect, the authors of Peel’s Act unwittingly created the template for the modern inflationary and crisis-prone monetary and financial system. In the modern system, a central bank such as the Fed is legally empowered to issue its own fiat notes and deposits which serve as the reserves for the commercial banks. The commercial banks, in turn, are permitted to create fiduciary media by pyramiding their own bank deposits on these Fed liabilities.

—Joseph T. Salerno, “Ludwig von Mises as Currency School Free Banker,” in Theory of Money and Fiduciary Media: Essays in Celebration of the Centennial, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2012), 103-104.

The Link Between Central Banking and the Abandonment of Commodity Money Is Worth Stressing

The establishment of fiat money, in turn, means unlimited scope for a privileged bank to further abuse its powers in pursuit of narrow political and financial ends. Such was, broadly speaking, the history of the growth of central banks and fiat money throughout much of the world during the present century. This history has set the stage for price level, interest rate, and exchange rate movements such as were never seen under the gold standard. These fluctuations have spelled doom to thousands of private banks. The link between central banking and the abandonment of commodity money is particularly worth stressing, because so many past economists wrongly perceived central banks as devices for securing monetary stability. The evidence presented here suggests, on the contrary, that central banking is incompatible with monetary stability. Free banking grounded in strict rules of contract and bankruptcy law would have provided a much stronger bulwark against the flood of paper money.

—George Selgin, “Are Banking Crises Free-Market Phenomena?” Critical Review: A Journal of Politics and Society 8, no. 4 (Fall 1994): 603.

Under “Bagehotian” Free Banking, Numerous Competing Banks Issue Notes Redeemable in “Outside” Money Like Gold

The need for various kinds of legislative interference in banking, and for legislation establishing central banks in particular, has been taken for granted by most monetary writers at least since the passage of the English Bank Act of 1844. Peel’s Act eventually guaranteed the Bank of England a complete monopoly of paper currency in Great Britain, effectively ending the monetary controversies of preceding decades with a verdict in favor of a (rule-bound) central bank. Yet a few stalwarts continued to insist upon the theoretical superiority of free banking, where numerous banks of issue are “regulated” by competitive pressures only. One of them was Walter Bagehot who, while editor of The Economist in 1873, published his highly influential book on Lombard Street. Bagehot viewed free banking as an ideal that was both more stable and more “natural” than central banking. In contrast, he viewed the concentration of legal privileges in the Bank of England of his day as both unnatural and dangerous to economic stability. When it came to offering practical advice, however, Bagehot did not propose taking away the Bank’s special privileges: that, he said, would be like proposing a “revolution,” and just as fruitless. Instead, Bagehot hoped that the Bank could be persuaded to manage its affairs in a manner more conducive to the avoidance of financial crises (and, by implication, less conducive to maximizing the Bank’s profits).

In presenting his case for free banking, Goodhart draws heavily on Bagehot’s particular vision of a free-banking system. Although Goodhart also refers to works by Benjamin Klein and Friedrich Hayek, these have to do with hypothetical arrangements involving competing private issuers of irredeemable fiat money, which are a far cry from free banking in its conventional and traditional (Bagehotian) meaning. In a traditional free-banking system, rival banks issue notes redeemable in some “outside” money, like gold, that none of them can create.

—George Selgin, “The Rationalization of Central Banks,” Critical Review 7, nos. 2-3 (1993): 337.

An Increase in Supply IS (not ‘causes’) an Increase in Demand for Other Things and Vice Versa

Moving forward a century, the same concept is found in the following passage from one of the most widely used economic texts ever published, in which this principle is stated in very clear terms:

It is only because our exchanges are made through money that we have any difficulty in perceiving that an increase in supply is (not ‘causes’) an increase in demand . . . An increase in the supply of cloth is an increase in the demand for other things; and vice versa, an increase in the supply of anything else may constitute a demand for cloth. What is divided among the members of society is the goods and services produced to satisfy its wants; and the same goods and services are both Supply and Demand. (Clay, [1916] 1924: 242)

The notion of aggregate demand separate from aggregate supply was foreign to pre-Keynesian economic thought. Aggregate demand grows at the same rate and by the same amount as aggregate supply, and will not grow unless supply has grown. It is not, however, just any production that will lead to an increase in aggregate demand. What creates demand is the production of forms of output for which enough buyers can be found whose payments cover in aggregate the entire costs of production.

—Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

The Confused and Contradictory Notion of “Real Costs” Underlies Efforts to Determine Nonmarket Prices

Ludwig von Mises was one of the chief sources for the subjectivist economics expounded at LSE by Hayek, and his work was an influence as well on both Robbins and Thirlby. Mises’ earlier work on the possibility of socialist calculation has been mentioned; some reference must now be made to his treatise, Human Action, published in English in 1949, but based on a work in German published in 1940. In this book, Mises does discuss cost explicitly, even if briefly, and his basic conception is similar to that London conception that is best represented in Thirlby’s work. Generically, ‘‘costs are equal to the value attached to the satisfaction which one must forego in order to attain the end aimed at’’ (p. 97). ‘‘At the bottom of many efforts to determine nonmarket prices is the confused and contradictory notion of real costs. If costs were a real thing, i.e., a quantity independent of personal value judgments and objectively discernible and measureable, it would be possible for a disinterested arbiter to determine their height.... Costs are a phenomenon of valuation. Costs are the value attached to the most valuable want-satisfaction which remains unsatisfied’’ (p. 393).

Mises’ ideas on cost have been further developed by two of his American followers. In his two-volume treatise, Man, Economy, and the State, Murray Rothbard adopts a subjectivist conception of cost that is closely akin to that advanced by G. F. Thirlby. And perhaps the single most satisfactory incorporation of a choice-related notion of cost into a general price-theory context is found in Kirzner’s Market Theory and the Price System.

—James M. Buchanan, Cost and Choice: An Inquiry in Economic Theory, vol. 6 of The Collected Works of James M. Buchanan (Indianapolis: Liberty Fund, 1999), 33-34.

All-Around Price Controls Destroy the Connection between the Production Structure and the Structure of Demand

The imposition of all-around price controls means that the system of production has become completely independent of the preferences of consumers for whose satisfaction production is actually undertaken. The producers can produce anything and the consumers have no choice but to buy it, whatever it is. Accordingly, any change in the production structure that is made or ordered to be made without the help offered by freely floating prices is nothing but a groping in the dark, replacing one arbitrary array of goods offered by another equally arbitrary one. There is simply no connection anymore between the production structure and the structure of demand. On the level of consumer experience this means, as has been described by G. Reisman, “… flooding people with shirts, while making them go barefoot, or inundating them with shoes while making them go shirtless; of giving them enormous quantities of writing paper, but no pens or ink, or vice versa; … indeed of giving them any absurd combination of goods.” But, of course, “… merely giving consumers unbalanced combinations of goods is itself equivalent to a major decline in production, for it represents just as much of a loss in human well-being.” The standard of living does not simply depend on some total physical output of production; it depends much more on the proper distribution or proportioning of the various specific production factors in producing a well-balanced composition of a variety of consumer goods. Universal price controls, as the ‘ultima ratio’ of conservatism, prevent such a well-proportioned composition from being brought about. Order and stability are only seemingly created; in truth they are a means of creating allocational chaos and arbitrariness, and thereby drastically reduce the general standard of living.

—Hans-Hermann Hoppe, A Theory of Socialism and Capitalism (Auburn, AL: Ludwig von Mises Institute, 2010), 103-104.

History Is Largely a History of Inflation, Engineered by Governments for the Gain of Governments

When one studies the history of money one cannot help wondering why people should have put up for so long with governments exercising an exclusive power over 2,000 years that was regularly used to exploit and defraud them. This can be explained only by the myth (that the government prerogative was necessary) becoming so firmly established that it did not occur even to the professional students of these matters (for a long time including the present writer!) ever to question it. But once the validity of the established doctrine is doubted its foundation is rapidly seen to be fragile.

We cannot trace the details of the nefarious activities of rulers in monopolising money beyond the time of the Greek philosopher Diogenes who is reported, as early as the fourth century BC, to have called money the politicians’ game of dice. But from Roman times to the 17th century, when paper money in various forms begins to be significant, the history of coinage is an almost uninterrupted story of debasements or the continuous reduction of the metallic content of the coins and a corresponding increase in all commodity prices.

Nobody has yet written a full history of these developments. It would indeed be all too monotonous and depressing a story, but I do not think it an exaggeration to say that history is largely a history of inflation, and usually of inflations engineered by governments and for the gain of governments—though the gold and silver discoveries in the 16th century had a similar effect. Historians have again and again attempted to justify inflation by claiming that it made possible the great periods of rapid economic progress. They have even produced a series of inflationist theories of history which have, however, been clearly refuted by the evidence: prices in England and the United States were at the end of the period of their most rapid development almost exactly at the same level as two hundred years earlier. But their recurring rediscoverers are usually ignorant of the earlier discussions.

—F. A. Hayek, Denationalisation of Money: The Argument Refined; An Analysis of the Theory and Practice of Concurrent Currencies, 3rd ed., Hobart Paper (Special) 70 (London: Institute of Economic Affairs, 1990), 33-34.

The Anti-Bullionists Wanted an Elastic Money Supply Linked to the Discounting of Bills of Exchange

This elasticity of the money supply was channeled through the bank discount of bills of exchange issued against the increase in the supply of real goods (Torrens 1812, p. 127). Therefore, it was assumed that when discounting those bills, the banking industry was just providing new currency to those individuals who had increased their transactions demand for money to acquire newly produced goods.

This conception of the elasticity of the money supply linked to the discounting of bills of exchange was later known as the Real Bills Doctrine (Mints 1945, p. 25), but its origins can be traced back even before the Bullionist Controversy in the writings of Adam Smith ([1776] 1904, p. 287; Arnon 2011, pp. 40–45). However, Smith’s version of the Real Bills Doctrine presupposed a regime of monetary convertibility and free banking competition that was lacking in the version espoused by the antibullionists: whereas Smith tried to describe a mechanism of self-regulating bank liquidity within an institutional framework characterized by free banking and metallic money, the antibullionists tried to exculpate the monetary policy of the Bank of England of any responsibility for the inflation in England during the Restriction Period (Glasner 1992). The antibullionists’ version of the Real Bills Doctrine was specially problematic because money supply was ultimately not subject to the demand for money but to the demand for credit by those with sufficient collateral, and that demand for credit could endogenously be manipulated by the banking system itself through changes in its discount rate (something that, as we will see, moderate bullionists explicitly criticized).

—Juan Ramón Rallo, “The Issue of Free Banking During the Bullionist Controversy,” Journal of the History of Economic Thought 41, no. 1 (March 2019): 105-106.