If Only One Owner Establishes Prices, Then They Lose Their Basic Feature as a Denominator for the Competition Process

Socialism is a system organized by one owner, where there are no entrepreneurs competing for the most valuable use of resources. Even if one owner establishes some numerical system, this in no way differs from a straight ranking of all the possible ways of producing things. These centrally administered “prices” do not change anything since one owner establishes them, one owner acts upon them, and one owner changes them ex post. From the very beginning he employs the managers (there is no market for corporate control) and decides what in the accounting books is registered as profits and losses. In contrast, market economy prices are the result of different actions of competing owners and this is their nature: as a common denominator for different property assessments. If only one owner establishes prices, then they lose their basic feature as a denominator for the competition process and become only the expression of one owner’s preferences (hence they cannot be used as an independent economic indicator). Using prices in a socialist system is equivalent to a straight ordinal ranking of the processes by a central planner.

—Mateusz Machaj, “The Nature of Socialism,” in Property, Freedom, and Society: Essays in Honor of Hans-Herman Hoppe, ed. Jörg Guido Hülsmann and Stephan Kinsella (Auburn, AL: Ludwig von Mises Institute, 2009), 344-345.

Cost-Curve Theorists Erroneously Claim that a Firm Should Invest Up to the Point Were MR = MC (Marginal Revenue Equals Marginal Cost)

One fundamental such flaw is the artificial and even disastrous isolation of price theory from monetary and from time (and capital) phenomena. I know that questioning such isolation means bringing into question perhaps the very idea of a textbook devoted solely to price theory, but I’m afraid that this questioning must be done. The abstention from money is unfortunate but not fatal, but the abstention from time and capital analysis is, and this cannot be remedied by an appendix that Kirzner promises us on time. Problems of time, capital, interest must be infused into the price analysis. As a result of the failure to infuse, Kirzner ignores the vital “structure of production” analysis, which he claims makes little difference to one’s view of the economy. Further, the result of abstention from capital leads to all the crucial errors of the “cost-curve” analysis. For example, it is the claim of the “cost-curve” theorists (in the ranks of which Prof. Kirzner joins) that a firm will invest funds in production up to the point where “marginal revenue” equals “marginal cost.” Setting aside the equality fallacy which I will comment on below, this means, e.g. that if an output of 10 more units will bring in $100 of revenue and cost $99, the firm will produce the 10 more units. Now I submit that this is a critical fallacy. Why should the owner of the firm invest a $100 more for an expected return of (approximately) 1%, when he can invest the same $100 for, say, 8% elsewhere—or get 5% at a savings bank? Once we bring investment interest return, into the picture, we see that the whole elaborate cost-curve structure is totally faulty and should be tossed into the discard—but if that should occur, what in the world would happen to that dazzling display of quasi-mathematical pyrotechnics with which “modern” economics professors bedazzle their students?

—Joseph T. Salerno, “Varieties of Austrian Price Theory: Rothbard Reviews Kirzner,” Libertarian Papers 3 (2011): 7-8.

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.

The Values of the Factors of Production (FoP) DO NOT Depend Solely on the Valuation of the Consumers’ Goods But Also on the Conditions of Supply of the Various FoP

 A recent statement by Joseph Schumpeter in his Capitalism, Socialism, and Democracy provides a clear illustration of one of the methodological differences which I have in mind. Its author is pre-eminent among those economists who approach economic phenomena in the light of a certain branch of positivism. To him these phenomena accordingly appear as objectively given quantities of commodities impinging directly upon each other, almost, it would seem, without any intervention of human minds. Only against this background can I account for the following (to me startling) pronouncement. Professor Schumpeter argues that the possibility of a rational calculation in the absence of markets for the factors of production follows for the theorist “from the elementary proposition that consumers in evaluating (‘demanding’) consumers’ goods ipso facto also evaluate the means of production which enter into the production of these goods.”

Taken literally, this statement is simply untrue. The consumers do nothing of the kind. What Professor Schumpeter’s “ipso facto” presumably means is that the valuation of the factors of production is implied in, or follows necessarily from, the valuation of consumers’ goods. But this, too, is not correct. Implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind. It is evident, however, that the values of the factors of production do not depend solely on the valuation of the consumers’ goods but also on the conditions of supply of the various factors of production. Only to a mind to which all these facts were simultaneously known would the answer necessarily follow from the facts given to it. The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.

—Friedrich A. Hayek, “The Use of Knowledge in Society,” in Individualism and Economic Order (Chicago: University of Chicago Press, 1948), 89-91. 

Hayek Chides Schumpeter on the Assumption of “Imputation” Outside the Market

The breathtaking naivete of the Orthodox Line should have been evident even in the 1940s. As Hayek later chided Schumpeter on the assumption of “imputation” outside the market, this formulation “presumably means . . . that the valuation of the factors of production is implied in, or follows necessarily from the valuation of consumers’ goods. But . . . implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind.”

Economists were convinced of the Lange solution because they had already come under the sway of the Walrasian general equilibrium model; Schumpeter, for example, was an ardent Walrasian. In this model, the economy is always in static general equilibrium, a changeless world in which all “data” — tastes or value scales, alternative technologies, and lists of resources — are known to everyone, and where costs are known and always equal to price. The Walrasian world is also one of “perfect” competition, where prices are given to all managers. Indeed, both Taylor and Lange make the point that the Socialist Planning Board will be better able to calculate than capitalist markets, since the socialist planners can ensure “perfect competition,” whereas the real world of capitalism is shot through with various sorts of  “monopolies”! The socialist planners can act like the absurdly fictional Walrasian “auctioneer,” bringing about equilibrium rapidly by trial and error.

—Murray N. Rothbard, “The End of Socialism and the Calculation Debate Revisited,” Review of Austrian Economics 5, no. 2 (1991): 55-56.

Owing to Schumpeter’s Influence, Mises and Hayek Were Considered to Have “Lost” the Rational Economic Calculation Debate

Considering the extent to which Mises’ approach to economics ran completely counter to prevailing views during his lifetime, recent interest in his writings is nothing short of phenomenal. Two striking examples may suffice. For a long time, the most celebrated controversy in comparative economic systems theory — that is, the debate raging during the inter-war period over “rational economic calculation” in a socialist society, which was sparked off by a famous article by Mises — seemed to be a closed chapter in the history of economic thought. Not least owing to Schumpeter’s influence, Mises and Hayek were commonly considered to have “lost” the debate. Indeed, “victory” for the kind of market socialism espoused by Lange and Lerner was held to be so overwhelming that modern treatments of welfare economics do not even care to mention that there ever was such a controversy. (Layard and Walters (1978, p. 27) is illustrative of a general tendency.) Most recently, the standard account of the calculation debate has been seriously called into question, largely as a result of its iconoclastic reexamination by Don Lavoie (1985). 

—Stephan Boehm, “The Austrian Tradition: Schumpeter and Mises,” in Neoclassical Economic Theory, 1870-1930, ed. Klaus Hennings and Warren J. Samuels, Recent Economic Thought Series 20 (Boston: Kluwer Academic Publishers, 1990), 210. 

The Enthusiast for Macroeconomics and Co-Founder of the Econometric Movement, Joseph Schumpeter, Had Previously Supported ‘Methodological Individualism’

In 1908, when Joseph Schumpeter at the age of twenty-five published his Wesen und Hauptinhalt der theoretischen Nationalökonomie, it attracted much attention by the brilliance of its exposition. Moreover, though he had been trained at the University of Vienna and had been a leading member of the famous seminar of Eugen von Böhm-Bawerk, he had also absorbed the teaching of Léon Walras, who had received little notice by the Austrians and had adopted the positivist approach to science expounded by the Austrian physicist Ernst Mach. In the course of time he moved further away from the characteristic tenets of the Austrian school so that it became increasingly doubtful later whether he could still be counted as a member of that group.

Schumpeter was very much a ‘master of his subject’, in contrast to the ‘puzzlers’ or ‘muddlers’ who follow their own distinct ideas; he also showed a strong receptivity to the dominant opinions in his environment and the prevailing fashion of his generation. Nowhere does this show more clearly than in the still entirely Mengerian chapter of his early book, now translated into English for the first time and regarded as the classic exposition of a view which he later abandoned. Many of his students will be surprised to learn that the enthusiast for macroeconomics and co-founder of the econometrics movement had once given one of the most explicit expositions of the Austrian school’s ‘methodological individualism’. He even appears to have named the principle and condemned the use of statistical aggregates as not belonging to economic theory. 

That this first book of his was never translated is, I believe, due to his understandable reluctance to see a work distributed which, in part, expounded views in which he no longer believed. His reluctance to keep his brilliant first book in print, much less having it translated, can probably be explained by his awareness that his own distinct opinions emerged only in his second book on the Theorie der wirtschaftlichen Entwicklung, which came out four years after the first. Though the author may later no longer have been prepared to defend the ideas of his first work, they are certainly essential enough to the understanding of the development of economic theory. Indeed Schumpeter made a contribution to the tradition of the Austrian school which is sufficiently original to be made available to a wider public.

—F. A. Hayek, “Joseph Schumpeter (1883-1950),” in The Collected Works of F. A. Hayek, vol. 4, The Fortunes of Liberalism: Essays on Austrian Economics and the Ideal of Freedom, ed. Peter G. Klein (Chicago: University of Chicago Press, 1992), Kobo e-book.

The Problems of Process Analysis DEFY Any Mathematical Approach

Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease. But the logical economist knows much more than that. He shows how the activities of enterprising men, the promoters and speculators, eager to profit from discrepancies in the price structure, tend toward eradicating such discrepancies and thereby also toward blotting out the sources of entrepreneurial profit and loss. He shows how this process would finally result in the establishment of the evenly rotating economy. This is the task of economic theory. The mathematical description of various states of equilibrium is mere play. The problem is the analysis of the market process.

A comparison of both methods of economic analysis makes us understand the meaning of the often raised request to enlarge the scope of economic science by the construction of a dynamic theory instead of the mere occupation with static problems. With regard to logical economics this postulate is devoid of any sense. Logical economics is essentially a theory of processes and changes. It resorts to the imaginary constructions of changelessness merely for the elucidation of the phenomena of change. But it is different with mathematical economics. Its equations and formulas are limited to the description of states of equilibrium and nonacting. It cannot assert anything with regard to the formation of such states and their transformation into other states as long as it remains in the realm of mathematical procedures. As against mathematical economics the request for a dynamic theory is well substantiated. But there is no means for mathematical economics to comply with this request. The problems of process analysis, i.e., the only economic problems that matter, defy any mathematical approach. The introduction of time parameters into the equations is no solution. It does not even indicate the essential shortcomings of the mathematical method. The statements that every change involves time and that change is always in the temporal sequence are merely a way of expressing the fact that as far as there is rigidity and unchangeability there is no time. The main deficiency of mathematical economics is not the fact that it ignores the temporal sequence, but that it ignores the operation of the market process.

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 2:355-356.

Those Suggesting a Quasi-Market for the Socialist System Have NEVER Wanted to Preserve Stock and Commodity Exchanges, Futures Trading, and Moneylenders as Quasi-Institutions

Nobody has ever suggested that the socialist commonwealth could invite the promoters and speculators to continue their speculations and then deliver their profits to the common chest. Those suggesting a quasi-market for the socialist system have never wanted to preserve the stock and commodity exchanges, the trading in futures, and the bankers and moneylenders as quasi-institutions. One cannot play speculation and investment. The speculators and investors expose their own wealth, their own destiny. This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy. If one relieves them of this responsibility, one deprives them of their very character. They are no longer businessmen, but just a group of men to whom the director has handed over his main task, the supreme direction of the conduct of affairs. Then they—and not the nominal director—become the true directors and have to face the same problem the nominal director could not solve: the problem of calculation.

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:708-709.

The Capitalist System Is NOT a Managerial System; It Is an Entrepreneurial System

Our problem does not refer to the managerial activities; it concerns the allocation of capital to the various branches of industry. The question is: In which branches should production be increased or restricted, in which branches should the objective of production be altered, what new branches should be inaugurated? With regard to these issues it is vain to cite the honest corporation manager and his well-tried efficiency. Those who confuse entrepreneurship and management close their eyes to the economic problem. In labor disputes the parties are not management and labor, but entrepreneurship (or capital) and the salaried and wage-receiving employees. The capitalist system is not a managerial system; it is an entrepreneurial system. One does not detract from the merits of corporation managers if one establishes the fact that it is not their conduct that determines the allocation of the factors of production to the various lines of industry.

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:708.

On a Particularly Important Flaw in the Orthodox or Textbook Version of the Economic Calculation Debate

 But a particularly important flaw in the orthodox story is, as Hayek tried to make clear during the debate, the curious disjunction between the “theoretical” and the “practical.” It is not simply that Barone and his mentor Pareto scoffed at the workability of the theoretical equations under Socialist planning. More important is the point that Mises and Hayek were implicitly attacking the relevance of the entire concept of Walrasian general equilibrium from which these equations flowed. For Mises and Hayek there was no disjunction between the “theoretical” and the “practical”; following the Austrian tradition, a theory that necessarily violated practical reality was an unsound theory. The fact that in a changeless world of perfect knowledge and general equilibrium a Socialist Planning Board could “solve” equations of prices and production was for Mises a worse than useless demonstration. Clearly, as Hayek would later develop at length, if complete knowledge of economic reality is assumed to be “given” to all, including a Planning Board, there is no problem of calculation or, indeed, any economic problem at all, whatever the economic system. The Mises demonstration of the impossibility of economic calculation under socialism and of the superiority of private markets in the means of production applied only to the real world of uncertainty, continuing change, and scattered knowledge.

—Murray N. Rothbard, “Ludwig von Mises and Economic Calculation Under Socialism,” in The Economics of Ludwig von Mises: Toward a Critical Reappraisal, ed. Laurence S. Moss (Kansas City: Sheed and Ward, 1976), 68.

The Problem of Economic Calculation Is of Economic Dynamics; It Is NO Problem of Economic Statics

Now it is a complete fallacy to suppose that the problem of economic calculation in a socialist community relates solely to matters which fall into the sphere of the daily business routine of managers of joint stock companies. It is clear that such a belief can only arise from exclusive concentration on the idea of a stationary economic system — a conception which no doubt is useful for the solution of many theoretical problems but which has no counterpart in fact and which, if exclusively regarded, can even be positively misleading. It is clear that under stationary conditions the problem of economic calculation does not really arise. When we think of the stationary society, we think of an economy in which all the factors of production are already used in such a way as, under the given conditions, to provide the maximum of the things which are demanded by consumers. That is to say, under stationary conditions there no longer exists a problem for economic calculation to solve. The essential function of economic calculation has by hypothesis already been performed. There is no need for an apparatus of calculation. To use a popular but not altogether satisfactory terminology we can say that the problem of economic calculation is of economic dynamics: it is no problem of economic statics.

—Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 120-121.

The Ultimate Aim of Socialism Was the “End of History” When Perfect Social Harmony Is Established

The ultimate aim of socialism, inspired by Marx, was the “end of history,” in which perfect social harmony would be permanently established. Social harmony was to be achieved by the abolition of exploitation, by the transcendence of alienation, and above all, by the transformation of society from the “kingdom of necessity” into the “kingdom of freedom.”

Collective ownership was not an end in itself. By rationalizing material production and thus advancing it beyond the bounds reachable under capitalism, collective ownership was to usher mankind into a post-scarcity world.

The writings of Marx and his followers thus include critiques of capitalism on the grounds that its production is “irrational,” that it tends towards increasing monopolization and the immiseration of a growing proportion of the populace, and that it produces a business cycle that makes it inherently unstable. Marx and other socialists thus sought to demonstrate the productive inferiority of the capitalist system relative to what socialism could achieve.

The socialist project to which Mises responded therefore proceeded in two interrelated stages. First, by rationalizing production, socialism would eliminate the waste inherent in capitalism owing to its “anarchy of production,” eliminate capitalism’s tendency towards greater monopolization, and do away with capitalism’s inevitable crises; all of this would bring about unprecedented increases in material wealth. Second, these productivity gains would usher in a post-scarcity era, which in turn would provide the material preconditions for lasting social harmony.

—Peter J. Boettke and Peter T. Leeson, “Still Impossible after all these Years: Reply to Caplan,” Critical Review: A Journal of Politics and Society 17, nos. 1-2 (2005): 156. 

The Price Mechanism Solves the Allocation Problem WITHOUT Information about Individuals’ Preferences

The start of the debate about the feasibility of socialism was Mises’s early work (1920, 1922). Until then, a socialist commonwealth was described as an idealistic society where the question of how to allocate resources was neither asked nor answered. Socialism, at the time, was defined as a regime where there is no private property of the means of production (even if there was private property of final consumption goods). In a small society, where there is intimate knowledge among individuals (such as a family), there is no need to allocate resources with a price mechanism. Parents usually do not use a price mechanism to allocate the resources of the household. However, the situation of a large society is different, where there are numerous anonymous interactions, some of which may be repeated and many others of which may not. This anonymity means that individuals do not have knowledge of the preference sets of other individuals and also face limited opportunities to learn such preferences. The price mechanism solves the allocation problem without information about individuals’ preferences.

—Peter Lewin and Nicolás Cachanosky, Capital and Finance: Theory and History, Routledge International Studies in Money and Banking (London: Routledge Taylor and Francis, 2020), 112-113. 

Central Banks in Many Countries Have for Decades Published Deliberately Misleading Statistics

Central banks in many countries, the venerable Bank of England not excepted, have for decades published deliberately misleading statistics, as, for example, when part of the gold in their possession is put under “other assets” and only part is shown as “gold.” In democratic Great Britain before World War II, the Government’s “Exchange Equalization Account” suppressed for a considerable period all statistics about its gold holdings, although it became clear later that these exceeded the amount of gold shown to be held by the Bank of England at the time. This list could be greatly lengthened. If respectable governments falsify information for policy purposes, if the Bank of England lies and hides or falsifies data, then how can one expect minor operators in the financial world always to be truthful, especially when they know that the Bank of England and so many other central banks are not? 

—Oskar Morgenstern, On the Accuracy of Economic Observations, 2nd ed. (Princeton, NJ: Princeton University Press, 1973), 20-21. 

Oskar Morgenstern Questions the Accuracy of Economic Data, the Very Basis for Econometrics

A Morgensternian critique of econometrics is different from other critiques that focus on econometrics as practiced by prominent economists. Edward Leamer (1983), in an influential article, stated that econometric analysis is not taken seriously due to the amount of “data mining” and “number crunching.” Econometricians make implicit assumptions about the distribution of errors, the functional form, and the variables in the model. According to Leamer statistical interference is based on opinions and whims. In a similar way, Deirdre McCloskey and Steven Ziliak (2008) criticize the procedure of econometricians and the abuse of significance testing. Too often statistical significance is confused with real world significance. Morgenstern’s critique is, however, on a different level. The critique of econometric practices and techniques does not deal with the accuracy of the underlying data but takes it as given. Morgenstern more fundamentally questions the accuracy of economic data and, consequently, the very basis for econometrics.

It is indeed surprising to note how much the problem of accuracy in economic data has been neglected. This is not the case in the physical sciences (Preston and Dietz 1991). Within the physical sciences the error of observation is always explicitly mentioned, yet in economics there is simply no error estimate. This means that economists do not know the accuracy of the economic data presented to them. This is even more troubling when one considers that in social or economic data there are more possible sources of error than in the physical sciences. Economists, therefore, face the question of why the problem of accuracy of economic data is rarely mentioned or passed over in silence in economics, while in the physical sciences this problem is widely acknowledged.

—Philipp Bagus, “Morgenstern’s Forgotten Contribution: A Stab to the Heart of Modern Economics,” American Journal of Economics and Sociology 70, no. 2 (April 2011): 542. 

Under Democratic Government, the Problems of Capital Preservation and Accumulation Become the MAIN Issue of Political Antagonisms

If such a country is under a democratic government, the problems of capital preservation and accumulation of additional capital become the main issue of political antagonisms. There will be demagogues to contend that more could be dedicated to current consumption than those who happen to be in power or the other parties are disposed to allow. They will always be ready to declare that “in the present emergency” there cannot be any question of piling up capital for later days and that, on the contrary, consumption of a part of the capital already available is fully justified. The various parties will outbid one another in promising the voters more government spending and at the same time a reduction of all taxes which do not exclusively burden the rich. In the days of laissez faire people looked upon government as an institution whose operation required an expenditure of money which must be defrayed by taxes paid by the citizens. In the individual citizens’ budgets the state was an item of expenditure. Today the majority of the citizens look upon government as an agency dispensing benefits. The wage earners and the farmers expect to receive from the treasury more than they contribute to its revenues. The state is in their eyes a spender, not a taker. These popular tenets were rationalized and elevated to the rank of a quasi-economic doctrine by Lord Keynes and his disciples. Spending and unbalanced budgets are merely synonyms for capital consumption. 

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:849-850.

Failing to Understand the Problems of Capital, the Welfare School Pushes Santa Claus Fables

The Santa Claus fables of the welfare school are characterized by their complete failure to grasp the problems of capital. It is precisely this defect that makes it imperative to deny them the appellation welfare economics with which they describe their doctrines. He who does not take into consideration the scarcity of capital goods available is not an economist, but a fabulist. He does not deal with reality but with a fabulous world of plenty. All the effusions of the contemporary welfare school are, like those of the socialist authors, based on the implicit assumption that there is an abundant supply of capital goods. Then, of course, it seems easy to find a remedy for all ills, to give to everybody  “according to his needs” and to make everyone perfectly happy. 

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:848.

After the “Court Packing” Attempt of 1937, the Supreme Court Gave Up Its Mission of Protecting Property from Depredations

 When the Supreme Court, operating under the old principles, declared unconstitutional a number of New Deal laws, Roosevelt tried to alter its composition by adding new and more liberal justices. Although the infamous attempt to “pack the Court” in 1937 failed, the demoralized Court beat a retreat, and as old justices retired and appointees of Roosevelt replaced them, its philosophical complexion underwent substantial change:

The lacerating struggle over the validity of the New Deal Program engendered lasting hostility to the judicial protection of property rights. . . . Once the Supreme Court accepted the New Deal, the justices abruptly withdrew from the field of economic regulation. This reflected a monumental change in the Court’s attitude toward property rights and entrepreneurial liberty. From its inception, one scholar noted, “the Court deemed its mission to be the protection of property against depredations by the people and their legislatures. After 1937 it gave up this mission.” A sharply limited concept of property rights thus operated for the next generation. . . . Consequently, the Court gave great latitude to Congress and state legislatures to fashion economic policy, while expressing only perfunctory concern for the rights of individual property owners.

—Richard Pipes, Property and Freedom (New York: Alfred A. Knopf, 1999), Vintage e-book.

The Popular Doctrine of Modern Interventionism Exists in Defiance of Economic Science

 In defiance of economic science the very popular doctrine of modern interventionism asserts that there is a system of economic cooperation, feasible as a permanent form of economic organization, which is neither capitalism nor socialism. This third system is conceived as an order based on private ownership of the means of production in which, however, the government intervenes, by orders and prohibitions, in the exercise of ownership rights. It is claimed that this system of interventionism is as far from socialism as it is from capitalism; that it offers a third solution of the problem of social organization; that it stands midway between socialism and capitalism; and that while retaining the advantages of both it escapes the disadvantages inherent in each of them. Such are the pretensions of interventionism as advocated by the older German school of etatism, by the American Institutionalists, and by many groups in other countries. Interventionism is practiced—except for socialist countries like Russia and Nazi Germany—by every contemporary government. The outstanding examples of interventionist policies are the Sozialpolitik of imperial Germany and the New Deal policy of present-day America.

—Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2011), 69.

The Most Foolish Accusation Against the System of Free Trade and Private Property Is That It “Atomizes” the Body Social

Of all accusations against the system of Free Trade and Private Property, none is more foolish than the statement that it is anti-social and individualistic and that it atomizes the body social. Trade does not disintegrate, as romantic enthusiasts for the autarky of small portions of the earth’s surface assert; it unites. The division of labour is what first makes social ties: it is the social element pure and simple. Whoever advocates the economic self-sufficiency of nations and states, seeks to disintegrate the ecumenical society; whoever seeks to destroy the social division of labour within a nation by means of class war is anti-social. 

A decline of the ecumenical society, which has been slowly forming itself during the last two hundred years under the influence of the gradual germination of the liberal idea, would be a world catastrophe absolutely without parallel in history as we know it. No nation would be spared. Who then would rebuild the shattered world? 

—Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 276.

A Great Sociological Achievement of Classical Political Economy Was to Recognize the Social Function of Private Property

The division of individuals into owners and non-owners is an outcome of the division of labour.

The second great sociological achievement of Classical Political Economy and the  “individualistic” social theory of the eighteenth century was to recognize the social function of private property. From the older point of view property was always considered more or less a privilege of the Few, a raid upon the common stock, an institution regarded ethically as an evil, if sometimes as an inevitable one. Liberalism was the first to recognize that the social function of private ownership in the means of production is to put the goods into the hands of those who know best how to use them, into the hands, that is, of the most expert managers. Nothing therefore is more foreign to the essence of property than special privileges for special property and protection for special producers. Any kind of constraint such as exclusive rights and other privileges of producers, are apt to obstruct the working of the social function of property. Liberalism fights such institutions as vigorously as it opposes every attempt to limit the freedom of the worker. 

—Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 276-277.

In His 1903 Work Titled “Money” (“Das Geld”), Karl Helfferich Laid Down the “Austrian Circle” Challenge to the Austrian School of Economics

In 1903, the influential monetary economist Karl Helfferich, in his work on Money, laid down a challenge to the Austrian School. He pointed out correctly that the great Austrians, Menger, Böhm-Bawerk, and their followers, despite their prowess in analyzing the market and the value of goods and services (what we would now call “micro-economics”), had not managed to solve the problem of money. Marginal utility theory had not been extended to the value of money, which had continued, as under the English classical economists, to be kept in a “macro” box strictly separate from utility, value, and relative prices. Even the best monetary analysis, as in Ricardo, the Currency School, and Irving Fisher in the United States, had been developed in terms of “price levels,” “velocities,” and other aggregates completely ungrounded in any micro analysis of the actions of individuals.

In particular, the extension of Austrian analysis to money faced a seemingly insuperable obstacle, the “problem of the Austrian circle.”

—Murray N. Rothbard, The Essential von Mises (Auburn, AL: Ludwig von Mises Institute, 2009), 55.

The Austro-Hungarian Bank Saw Mises’s Gold Standard Proposal as a Threat to Its Secret and Illegal Slush Fund

In 1906, his doctorate out of the way, Mises determined to take up the Helfferich challenge, apply marginal utility theory to money, and solve the problem of the Austrian circle. He devoted a great deal of effort to both empirical and theoretical studies of monetary problems. The first fruits of this study were three scholarly articles, two in German journals and one in the English Economic Journal in 1908–09, on foreign exchange controls and the gold standard in Austria-Hungary. In the course of writing these articles, Mises became convinced that, contrary to prevailing opinion, monetary inflation was the cause of balance of payments deficits instead of the other way round, and that bank credit should not be “elastic” to fulfill the alleged needs of trade.

Mises’s article on the gold standard proved highly controversial. He called for a de jure return in Austria-Hungary to gold redemption as a logical conclusion of the existing de facto policy of redeemability. In addition to running up against advocates of inflation, lower interest rates, and lower exchange rates, Mises was surprised to face ferocious opposition by the central bank, the Austro-Hungarian Bank. In fact, the Bank’s vice-president hinted at a bribe to soften Mises’s position. A few years later, Mises was informed by Böhm-Bawerk, then Minister of Finance, of the reason for the vehemence of the Bank’s opposition to his proposal for a legal gold standard. Legal redemption in gold would probably deprive the Bank of the right to invest funds in foreign currencies. But the Bank had long used proceeds from these investments to amass a secret and illegal slush fund, from which to pay subventions to its own officials, as well as to influential journalists and politicians. The Bank was keen on retaining the slush fund, and so it was fitting that Mises’s most militant opponent was the publisher of an economic periodical who was himself a recipient of Bank subsidies.

—Murray N. Rothbard, The Essential von Mises (Auburn, AL: Ludwig von Mises Institute, 2009), 56-57.

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.