===== PAGE 1 ===== oo \ | To oo ) rn i | | Vol 12 #2 “i. Austrian Economics Newsletter by dettrey M. Herbener | \ A Te are ‘privileged to live in. fascinating and exciting times. Only socialists and bureau- 5 crats could not be breathless over the collapse of - communism. The economics profession too is: under-- going fundamental change, though, unfortunately, at RRR a much more leisurely pace. a Already showing chinks in their -armor, main-.. stream economists not only failed to predict the com= ‘| munist collapse of 1989 (the Friedmanite hallmark of economic science), but have been at a complete loss to explain it, let. alone to. provide a policy of desocialization when asked. When the godfather of neoclassical economists, Paul Samuelson, continued to state in the 1989 edition of his economics textbook, “The Soviet economy is proof that, contrary to what _ many skeptics had earlier believed, a socialist com- “mand economy can function and even thrive,” cheers. began turning to jeers. : = This. latest in a long line of failures of Keynesian ) and neoclassical economists has heightened the an- grey M: Herbener far. beyond his original thesis, attempting to demon- “trate that neoclassical economics is a misguided, perhap ‘even sinister, effort to adapt economics to the “= gugpect, if not fallacious, paradigm of Western sci- . ence: the metaphor of energy. He says, “The only way “to fully comprehend value theory in economics is to ‘situate it within the pyramid of Figure 3.1, the met- criticisms recently advanced, the economics profes. ~~ ‘aphorical simplex of energy, motion, body, and value, and to regard it as part and parcel of the same sion may soon be up for grabs, : hot wadergird Western ph The ctures that undergi estern physics. The pay- Enter Philip Mirowski, a Veblenian institutional- su ist, to the contest as a voracious critic of neoclassical off to. this reconceptualization of value theory is a economics. Following Veblen he has, in prior works, advanced the thesis that neoclassical economics isa = somewhat inaccurate adoption. of a mid-nineteenth : | century branch of physics he calls proto-energetics;. and since that branch of physics i is now discredited so However, forums to. voice: eriticisma of mainstream 3 Anyofa host of cranks, regardless of "past refutations, a k ~ ‘can now obtain a new hearing. As mainstreamers lose their nerve, seemingly impotent to stem. the tide of “In Memory of Ludwig) M. Lachmann. should neoclassical economics be: The first part ofhis. =~ | "by Roger Kopp -.. 8 thesis is an important insight that can help to clarify ~~ |= Y Sage r————_. all critiques of neoclassical economics. The second | The Collected Works o FA Hayek An A Update... ie 10 “part is much less convincing, And like Veblen; ‘he is. oo) “Eastern Europe: Mises Was Right” wii vee 10 less effective as a builder of a positive replacement. Cn Market Process Suspends! Publication es tuerivssssmssseenas 10, Br than as a critic. oT oo Cs Book Reviews .. RR — vorsresssnaarranessarbr ILLS errosesan 11 : | In his latest book, More Heat than Light (Cam- Cf Book Bites... enh i verreeranen veeservererens 15. bridge: Compiige University Press, 1990), be © goes ===== PAGE 2 ===== clarification of -the entire history of economic: ing metaphor. This stage sities with the rise of the thought” (pp. 141-42). ~~ = ~~. "world mercantile economy:a itutions of world industrial economy, because economic phenomena changed the perception of the: metaphor. of: value and therefore the metaphor of motion (p.. 18). This i is a grandiose glaim, simple and provocative . but one that is ultimately a failure. ‘Mirowski cer- _ tainly has ample evidence for his assertion that the founders of neoclassical economics cribbed their the- “ory from physicists of the’ mid-nineteenth century. And thus, neoclassical value theory and the perspec- tives of neoclassical economists on competing value | theories can be better understood by seeing the phys- The f ounders of neoclassical economics ics parallels. Mirowski provides more insight to what ~ cribbed their theory of economics from he has said before on this count. However, beyond this = mid-nineteenth century physicists. his thesis is unconvincing: as his framework. does J - oo nothing to advance the knowledge of value theory, per wT se. But first an overview. He borrows a stage of histoty analysis from the Polish historian Witold Kula who states that history moves through three. stages. of. metaphor: anthropo- metric (human body is a measuring device); ‘lineamentric (numbers are specific to each object), and syndetic (unified numbers based on nature) (p. Unfortunately, economics did not fully. atta § 5 a metamorphosis in the syndetic stage and. thus, has not yet emerged into the stage. of: modern gcience. ~ Some examples of the interplay of the social to the physics: the “vectors of trade” point to Holland in early 109). Each stage is identified by its unique treatment modern Europe and thus Descartes used accounting to of the metaphors of body, motion, and value. In the establish his physics (p. 121); Leibniz worked in mines anthropometric stage the three are seen as one, inthe and thus was able to apply conservation principles to lineamentric the three are separate and at war, and human action (p. 122); Bernoulli used economic met- in the syndetic there is unification of metaphors bya ~~ aphors and Carnot “derived the first law of thermo- fourth one, energy (p: 109). Thus, in the last stage the . dynamics from an economic metaphor” (pp. 124-25); consolidations hinge on «conservation principles and = the debasing of money ‘caused one of the founda- invariance. principles (p. 109). Co : tions of energy" to collapse and forced physicists to i. Physics was in the. lineamieritric stage from the change. the energy metaphor (p. 135); radiation is = sixteenth century through the mid-nineteenth giving based on central banking (p. 137). us rational mechanics and theories of fluids and © The breakdown of the energy concept is evi- ~ ethers in the discussions of heat, light, ‘magnetism, . dence of the latest stage, syndetic metro, Mirowski and electricity (p. 119). This period coincided withthe: says, where “metaphors are reconciled by realizing lineamentric stage in economics ushered in by Adam #0 that each is a fiction, but the same fiction, a fiction Smith and the classical economists (p. 143), who necessary for the organization of human discourse” advanced beyond the primitive anthropometric stage ~ (p. 137). Metaphor is a framework for “discourse.” begun by Aristotle (p. 144). ~~ ©. He seems to be arguing that all scientists have a The syndetic stage. begins with. the discovery of Marxian. “false consciousness,” feverishly pursuing energy conservation which led to'the unification of - metaphors inside their circle while posing cancern for the metaphors of different disciplines: in ‘biology via . truth to those on the outside, and that this activity the gene, in physics via energy, and in economics via blends across disciplines as they work on different fiat money (p. 115). Within the. metaphorical simplex, = “faces” of the metaphor. Each discipline appeals to the the social blends with science as individuals in differ- : metaphors established by the others when dealing ent disciplines work on different aspects 0 of the unify- with criticism (p. 118). As with all models of historical _. determinism, however; not all thinkers are under this spell. Not surprisingly, those that Mirowski favors. * seem able to transcend the metaphor, providing im-. portant, but until Mirowski, incomplete criticism, of E the framework. * Not until the last paragraph of the book “does: he | reveal the true purpose of his work: to convince ‘the Jeffrey Herbener is assistant professor of econom- "lcs at Washington and Jefferson College in Wash- § ~~ reader that culture must be central to “any: ogical . ington, Pennsylvania and is an adjunct s scholar of | » Cy . the Ludsg von Mises Institute. | economic theory.” He approvingly’ quotes Gunnar | | Myrdal on the subject of the, “countless errors...that | Roger Kopp! is’ assistant professor of economics at {| J Fairleigh Dickinson Uaiversity in Rutherford, New “no living man can yet detect, because of the fog within which our type of Western culture envelops. us. Cul- Jersey. tural influences have set up the assumptions about ===== PAGE 3 ===== the mind, the body and the universe with which we metaphoric, and it is much to the credit of Western begin; pose the questions we ask; influence the. facts ‘thinkers that their framework is grounded not on we seek; determine the interpretation we give these mythical metaphors, but on truths that can be inde- facts; and direct our reactions to these interpreta- pendently validated by others. . tions and conclusions” (p. 401). Just as all historicists => dll NIsLOrIicIsts Other types of knowledge, e.g., historical, cannot before him, Mirowski does not appreciate that; while ~ be obtained in these ways but must be, at least par- important in studies of history, culture’ does aii ~ tially, based on judgments and then systematized into trump science, either i in physics or economics. a coherent framework, This leads not to scientific His. fashionably disparaging view of Western knowledge but to what Ludwig von Mises called un- thought aside—is there really an Eastern physics to derstanding. juxtapose with the Western, when one drops an apple in China, does. it fall upward?—this raises another question, viz., why did science arise in Western'cul- ture? For a historicist, if culture determines. science | Co oo and science is the touchstone of modern civilization, oo Mirowski does not appreciate that then Western culture must be rated superior to the culture does not trump science, non-Western ones; yet, Mirowski concludes the oppo- ’ either in physics or economics. site. oo Contra Mirowski, methodology is important in the sciences, both natural and human. He ¢laims that to discover what is accepted as scientific knowledge one must apply a hermeneutic approach (his to be | No one is born with a world view but must con- precise) to the history of science; following a “rote” ~~ Struct one over time, putting the pieces together as method is useless. In the natural sciences, however, - best: he ¢ can, While an individual can live with incon- this is wrong because the knowledge therein i isdem- . - sistencies and thus, a defective world view, science onstrated in: repeated experimentation, ‘by ‘others; “cannot and must reconcile them in some fashion as before being accepted. It may be true that how a individuals within the discipline bring up these in- person decides to view that knowledge and integrate - consistencies and challenge the existing framework it with other knowledge is not susceptible to such a OF results. | a Procedure but that does not allow contradiction of Mirowski is quite right to claim that individuals HR what was learned. develop science within a culture that influences the questions they ask. That is why having a “rote” erroneous since a process of validation exists in this method is’ crucial to scientific endeavors, The xey realm too; viz., the repeatable mental experiments of question is, which is the correct framework? Clearly, praxeclogy conducted by indepenc dent minds. ~ Mirowski hag selected the ‘wrong one in the metaphor of energy. : LT In the sciences of human action. his diokm | is also Mirowski’ 5 thesis appears superficiaily plensible because one seeking to understand the world does fit knowledge gained from different: disciplines about - i different subjects into a coherent framework. Thig is | the hallmark of a sound: warld view, Consider what he. concludes from the history of Shysios: the energy concept is dead (p. 99); energy is equivalent to conservation laws (p. 13); conservation “laws are necessary for causal analysis (p. 160); all of Western thought is predicated on the energy concept A scientific endeavor i is ‘that part ¢ of a world view - (p.’8). Thus, not only is neoclassical economics dead | characterized by an accepted method for validating go is all of Western thought and especially economics * knowledge that can be employed by others’ who either (pp. 107, 116), corroborate ‘it or dispute it. The. ‘natural: sciences employ the inductive method of repeated experimen- 3 tation while the human sciences use the deductive I -{ method of praxeology. The latter is based on the irrefutable presuppositions. of human action while the former is based; in’ ‘addition: to. those, on the co | existence of an independent reality. - His. conclusion ‘about physics is, “late 20th cen- tury physics i is a frightening: and demoralizing place: a universe sprung full-blown from nothing; no real natural laws; chaos. wherever one turns; the physical world a ‘speculum serving us back our own gaze...It also corrodes and debases every little piety we may } happen to. cherish” (p. 140). In both cases Wb are Hesesury i in con- It is difficult to keep up ‘with the rapid changes in structing explanations; in the sciences of human ac- physics, and Mirowski is behind the times. Chaos is tion these are rationality and the : mental - not éverywhere one turns, Chaos theory applies only presuppositions of action, while. the natural sciences: go systems that are initial condition sensitive, such 4 depend upon not only rationality but, thy existence of ag global weather. This has no more to do with eco- a reality apart from ourselves. EE : SEE "nomic theory than the calculus does. Also, the sys- . However, this framework does not have to be tems described by ¢ chaos theory are not chaotic at all | ===== PAGE 4 ===== pr —— "but can be analyzed by the advanced mathematics of - verse came from nothing and that the universe had a the theory itself. Te ee “beginning but these facts do not undermine the first They are chaotic only in the sense that simple ~~ law in the least. They require .a. scenario for the mathematical techniques cannot describe them. The. creation “of the universe consistent. with. all three difficulty of predicting the outcome of a chaotic sys- * principles-—anything else 1s profoundly unscientific. tem has to do with the extreme accuracy of the mea- Science cannot even explain the initial conditions surements necessary and the precision of ‘the ~~ of the phenomena under study. While the new.infla- calculations required, not with the absence of conser-. tionary theory of the universe is a vast improvement: .. | vationlaws. ~~ SUE 7 overthe big bang theory, allowing us to go alltheway | 1 Randomness is precluded by the very existence of + ack foie beginning avoiding the “plank time” prob. "| 4 “human action, i.e., purposeful behavior, If the uni- lem, psither ii nor any other theory of physics can |. verse were actually cha otic, no-one could meaning- .. ~explain the initial conditions that created what we = fully strive toward the attainment of an end with the ~~ *°¢ from the big bang. Just as seeing the expanding application of means aceording to ideas. Action would . ° path of pell ets anid smoke from a shaigna blast Allows be impossible. . RITA us to trace backwards to their initial position, the new EE TE ET ‘inflationary theory allows us to trace back to the Even if one wishes to apply chaos theory outside . jniti I position of the stuff of the universe. In neither of its realm, it does not necessitate the eastern mys- case does physics explain, even if it discovers them, = ticism view of dancing wu. li masters advocated by the initial conditions that determine the path of ‘Mirowski. Several authors, e.g., Nick Herbert, have things once set in motion. Yet the motion and:asym- |. shown that many different views are consistent. with Co “metry of the universe ig predetermined by these ini- Ee chaos theory, some of them Western and rational. “.tial'conditions just as a person’s-body is determined : Contra Mirowski, twentieth-century- physics is’. “by the information contained in genes. neither frightening nor demoralizing. Far from the Mirowski also misunderstands, or ignores, infor. 3 demise of natural law and the disintegration of phys mation theory and the generalized second law of | 3 eg te eration and. Grand. Physics 1s thermodynamics. The latter states that natural pro ng toward mtegration. and franc tii cation: ~~ ‘cesses on average mix things over time. If so then. Theory. The overriding theme is unification, order, 7 ‘there is no reasonable ‘material explanation of the ed with the na >8. I'he dream.o "The patterns produced by nature are simple, i.e, t 2 ‘being able to understand the world around usisalive contain less P formation. When these Satterns od EF and well. IE ete ER ni SET made, e.g., crystals, information is always lost. Nat- Mirowski twists ‘this fact with the ‘claim that ural processes cannot produce the complex patterns ~ pre-twentieth century physicists ‘had a Laplacian. =~ We actually see in-the universe. dream, i.., one set of equations that determine the =" Mirows ot only skeptical of a Supreme Intel- motion of everything forever. ©" ne 0 : ) ligenee but of human intelligence as well, leading him But one awakens from this at the mere suggestion. “at one point to decry the productivity of man’s rear- o£ Godels theorem. viz., every non-trivial set of equa. ~~ rangement of physical matter He is quite right to tions must have conditions set. outside the system. < -Pointout that the first law prevents man from creat- ~ Furthermore, as with randomness, determinism is "ing matter and energy out of nothing; but he is quite | ‘precluded by the irrefutable fact that human action ‘wrong when he asserts that the second law plays y. exists. Only robotic activity could occur in a com: havoc with point-input point-output models and the . |: pletely deterministic world. There could be no choice, idea-that more roundabout processes. are more pro- i no striving, no evaluation, no learning—in short, no ductive (pp. 821, 827). (It is also hypocritical of him i action. Cee REE EE ‘to state that no natural laws exist and then use HJ Consider the following as an illustration of = natural laws to discredit the concepts of scarcity and Mirowski on physics: he is fond of telling us that = production.) Ce I modern physics has ‘shown that something can come ji ‘Physically, the productivity of man’s action is in from nothing, and in fact “the universe is a free the information added to the stuff when man acts. lunch.” (Presumably this is the basis of his belief that ~ Thisis seen most dramatically today in gene therapy. - scarcity is a “morality play.”) From this he concludes ~ butismo less evident when man builds a factory ora that the first law of thermodynamics, that paragonof machine. In fact, the major instrument. of man's ad-: natural law, isnot a law at all. But no such conclusion vancement is the expression of his intellect via-capi- follows. The first law of thermodynamics states that tal goods. ~ IE Fv SE § a natural process cannot bring something into exis- The creation of capital goods does not add matter {gy ~ witnessed a violation of this law. The “new inflation- or design that:is useful ‘man; Only natural pro- 1] ary theory of the universe” does. imply’ that theuni- cesees are subject ‘the sécond law, which raises the |] ===== PAGE 5 ===== question, if man’s activity, guided by intellect, cannot | were apologists: for the merchant class against the - add productivity, how can nature, without intellect, physiocrats who favored agriculture (p. 161); Turgot 3 add complexity via evolution? Just as there. is tos ‘was confused and advocated “the denial of value” | ‘much information evident in an electron: microscope “which led him into self contradiction (p. 163); Menger to attribute its existence to natural processes, there did not have the least idea of mathematical analysis is too much information in a protein: molecule to "and was “innocent” of physics and therefore unquali- attribute its existence to natural processes. The uni- + fied to attack the German historicists (p. 260); Eugen . verse contains approximately. 270 bits of information... von Bohm-Bawerk was a second-rate neoclassical hereasa simple bacterium contains over ¢ one million "economist who. was- not ‘qualified to criticize Marx's labor theory of value because he used a substance theory of value himself (p. 282); F.A. Hayek, “one of a cl Fu the fun Jamentally, productivity is a = subjective concept, ‘one that is meaningless outside - ~ very few remaining representatives of the Mengerian the context of an observing intellect. + tradition of Austrian economics {in 1942),” was a Don C Quixote, “tilting at scientific socialism in blissful ig- | Consider another sample of Mirowski on physics: - 'norance...”(p. 355), is “superficial” in his treatment of science is moving toward a world subject to change, physical theory, and “deficient” in his understanding diversity, indeterminacy, and at one with the observer of metaphors, and he “misrepresented” the history of "| (p. 275). Quantum theory is a set of laws about the thought and made “absurd” claims and “smeared” the ‘| relationship between observer and the objects of the ‘German historical school (p. 356); Ludwig von Mises ‘universe. It splits the universe into two types of ig gq insignificant that Mirowski does not even men- items, classical and quantum. The latter ate subject. tion Mises’s existence. » to quantum laws, the former are not. ‘Quantum theory precludes precisely what Mirowski asserts about the . observer. In fact, quantum theory implies that items. . 0. in the universe have no known objective characteris- wo wl tics unless an observer is present. - Cin a TL Mirowski says s that FE. A. Hayek was i © Since doing science is human action. the. same CLE a Den’ Quixote “tilting at- scientific "|" prerequisites apply to the natural scierices. Neither ~~ 50 ci cialis in blissfu [i iguarans ce. “| Newtonian physics nor Euclidian: geometry nor Car-.. ~~. tesian analysis has been refuted by modern physics. * - oN = {. The latter depends on them for construction of the . instruments that allow the observations that provide "their empirical foundation. Modern physics has” The reason Mirowski avoids the work of Ludwig © | shown them to be special cases of more general von Mises is Mises’s demonstration of the prerequi- . | principles encompassing a broader range of phe- sites for acquiring knowledge concerning human ac- : nomena, This ig progress in the natural sciences, tien, ‘Mises showed the proper separation and ; viz., moving. from - describing a limited number of relationship between the theory and history of | cases to @. larger number: of cases. Despite ~~ human action, viz. , theory is constructed praxeologic- | 3 Mirowski’s denigration of engineers—“In my expe-' ally from’ the universal presuppositions of action, 2 rience, they often look up certain calculations based without incorporating knowledge of specific histori- - = on crude empirical techniques rather than explicit cal events and then is used to understand the unique | physical laws; and then arbitrarily multiply the re- events of history. Mirowski notwithstanding, the spe- | _ quirements by ten for saféty’s sake”—the machines cific, unique episodes of history are insufficient build- still work, and rational mechanics | is s alive and well as. ing blocks of a theory of human action, is rational analysis. = EE Being: a. ‘historicist, Mirowski argues that one Outside the Pounday’ of his. ‘critique of major Co must ‘understand ‘history to-understand theory. Per- neoclassical economists; his “clarification” of the his- haps, then; this. sampling of his pronouncements con- tory of economic: thought. based: on the metaphor of = cerning economic theory will not be shocking: shares energy breaks down. Here are a few examples: - of stock are ownership ‘of nothing (p. 120); money is Thorstein Veblen and. Nicholas Georgescu-Roegen’ are. the abstraction of economic value (p. 123); it is “self the “most . profound ‘economic philosophers of the denying” to reduce value to a gingle index (p. 151); | twentieth century,” a fact i in honor of which he dedi- ~ * tradeis equivalence of value (p. 134); economic theory . | eates the book; Aristotle is the beginning of all eco- -- is’like a house of mirrors (p. 140); economic theory is | nomic thought. because others. have written a lot . neither true nor, false but metaphorically determined about what he said (p. 144); ‘Thomas Aquinas followed “by the particular stage it is in (p. 143); if value has no - Aristotle’s naive equal value iti trade-view (p, 148); ~~ quantitative. representation then: economics cannot . the schoolmen were equivalence-of-value theorists {p. . be:scientific (p. 151); “One of the great fallacies of '149); some of the Mercantilists were the best econo-.-." economic reasoning is to confuse requisite with pro- mists of their time (p- uo Adam Smith and: J.B. Say ; dugtive” p. 160);. “there is no such thing as causal ===== PAGE 6 ===== analysis without [conservation principles] "(p. 160); J.B. Say did not understand his own law which was the basis of a “mere polemical assertion of the market's efficacy based on little more than bravado” (p. 170); the law of one price is unjustified fiat (p. 236); the physics metaphor was the “inertial guidance sys- tem for research” and the major determinate of eco- nomic theory (p. 279); scarcity is not a permanent feature of human life but a “morality play” (p. 294); the second law of thermodynamics precludes more roundabout methods of production from being more productive (p. 321); production is the expression of the conviction that there is progress in material life (p. 322); the only progress in value theory in the twentieth century is Sraffian/Marxian (p. 351); we must use a substance theory of value, otherwise no coherent, transitive, connected system of prices exist (p. 352); “the nature of science is far too elusive for any adherence to some rote method to be an effective or plausible substitute. The only proof of this state- ment can be historical, irredeemably inductive” {p. 368): markets cannot undo things (p. 390). No wonder he states that this book risks his reputation in the community of economists (p. 1). ~~ What he has produced is the latest in a line of hermeneutical conversations designed not only toen-. tertain and amuse but to “deconstruct” neoclassical ~~ economics (p. 384). Once the readerunderstands this "he can simply go along for the ride, one that he will enjoy roughly in proportion to the extent he agrees with Mirowski. A word of caution in this age of sensi- tivity: For example, in his introduction to chapter two on the history of the energy concept he states that having learned about this subject, “I guarantee that after- - ward nothing will ever seem the same” (p. 12). Then in the introduction to chapter three he tells his read- ‘ers that chapter two has been a setup: “Let us say I have just subjected you to a similar sort of experi- ence” (p. 99) to involve us in. his hermeneutical plot. To avoid his literary battering, 1 suggest that the = ig energy: Unfortunately, energy cannot be a meta- reader start at the end of the book and read the chapters in reverse order. This ‘hermeneutic also. ‘makes his thesis more intelligible. Beyond cute, there is a harmful side to Mirowski: misquotes and misrepresentations.. One particularly disquieting example of misrepresentation is a quote of Pierre Dihem, viz., “The history of physics shows us that the search for analogies between two dis- tinct categories of phenomena has perhaps been the surest and most fruitful method of all the proce- dures put into play in the construction of physical theories” (pp. 277-78). Mirowski deconstructs this as «I propose that -we take Duhem’s words geriously...He did not merely say that metaphors were fruitful, he. said metaphor was a method of theory construction” (p. 278). Since his entire book is predicated on the thesis of metaphor this sets one. aback. To take ‘Duhem’s words seriously should imply, . ogy is a similarity, e.g., money in of speech in which a quality is given to something to the distinction during his conversation about meta- typographical errors and omissions, "those of nature (pp. 135-36). he does not treat the reader with much care. .. at least, that one not change them. What Duhem said concerned analogy not metaphor, the two are distinct. An anal- dicates the degree of ike a thermometer indicates the scarcity of a good 1 hile a metaphor is a figure temperature in a room, wW which it is not literally applicable, e.g, Ludwig von |. Mises had nerves of steel. Mirowski seems aware of “I phors in poetry {(p. 278). Yet his assertions about neoclassical economics seem to rely on analogy not metaphor. Duhem also spoke about physical theories, not economic ones. (The book is marred by several not the least of which is the absence of the source of Duhem’s quote.) But all is fair in hermeneutic deconstruction. Analogy seems an almost indispensable tool for explaining physics to the non-mathematical. When one attempts to explain the meaning of the knowledge in the natural sciences the task is different than that of discovering this knowledge. Mises put it succinctly by stating that we do not know what electricity is but we do know what utility is. The corollary is that we can understand the process of human action but not Physicists describe those processes but that does not make them meaningful. "It is this duality of things (a necessary implication of ~ quantum theory) that allows for the plethora of anal- ogies and/or metaphors in the attempts to explain physical activity. The physicist must use analogies to ~ convey the meaning of the equations that describe physical processes. Some of them will be more appro- ‘priate than others for the task and can differ from person to person depending on their range of experi- ence with the items used as an analogy. . The most famous common analogy to explain the Newtonian view of the universe was the clock. This works as an analogy only if the person understands - the working of a clock. Mirowski would have us be- lieve that the ruling metaphor of all western thought phor, because no one knows what energy is. It is energy that requires a metaphor to be explained or at least illustrated. Energy, as Mirowski admittedly uses it, isnot a metaphor but a framework of thinking about the world. a : Mirowski traces the history of science in general and the energy concept in particular from Aristotle to the present. The purpose of extending the purview to Aristotle is unclear (why not begin with Solomon? he was also a wise but “non-scientific” thinker) but the effect is to allow Mirowski to demonstrate that all previous scientists were wrong. This is hardly a tell- ing point; in fact it is a necessary (but not sufficient) “characteristic of a progressing discipline. It is also "true that today’s geniuses in physics will be ridiculed by future Mirowskis. This is a consequence not of ===== PAGE 7 ===== history but of man’s frailty and ignorance. = What we must do as a profession now is put economics More to the point for Mirowski’s thesis, econo- Pack on the correct path begun by Menger and blazed mists who crib their economics from the latest fad in by Bohm-Bawerk and Mises. We must avoid what physics, or mathematics, as the neoclassicals did, will Mirowski calls a clarion call, which is really a siren be ridiculed tomorrow. While this is surely a damag- song, to irrationality. = ing fact for the neoclassical school, it is no less so for Mirowski's apparent acceptance of game theory as a model for economic theory. He believes his applica- . . tion of more advanced mathematics will, presumably, Mises Institute to Move usher economics into the syndetic metro stage at last Operations to New Building since it is consistent with institutionalism. Being an - : institutionalist he argues that institutions are essen- : : tial to economic theory and adds that game theory is T he Mises Institute is building a new home on central to institutions, However, since von Neumann the Auburn University campus,” announced In- and Morganstern’s seminal work in this area, it has stitute president Llewellyn H. Rockwell. “It will be no been known that game theory requires its own set of ~~ palace, just spartan and shoestring, as usual for us. conservation laws and variation principles, the very “Since we will have, for the first time, space for concepts Mirowski claims have been destroyed. all our operations, we will be closing our small Law- Hig lack of a principled ¢ case against using math- rence Fertig Center near George Mason University, ematics to develop economic theory severely reduces but not our programs, including our scholar ships for the force of Mirowski's criticism, ‘since neoclassical GMU graduate students, our Austrian Economics ~ economists could respond by arguing that human Colloquium under the direction of adjunct scholar Dr. action is a special case for which proto-energetics is Roy Cordato of the Institute for Research into the an appropriate technique. Therefore, more advanced | Economics of Taxation, and our r Washington Lecture physics does not matter any more for economics than Series. for rational mechanics. It is up to Mirowski to dem- The student study center in the new Auburn onstrate the efficacy of game theory in the area based ~~ building will be dedicated to the memory of Lawrence on subjective utility and the inapplicability of field Fertig—entrepreneur, scholar of Austrian economics, theory to economic activity. (He has only argued that and friend of Ludwig von Mises and the Mises Insti-' field theory is no longer the cutting edge in physics. tute—who helped make possible Mises’s visiting pro- It is a non sequitur to conclude that therefore neoclas- fessorship at New York University. NYU refused to sical economics is refuted aswell) = ©. make Mises a regular member of the faculty during Again, Ludwig von Mises ‘provided the forceful | his many years there, or to pay him a salary. Free- refutation of neoclassical theory by demonstrating a market businessmen like Fertig did the job. principled case against using: mathematics i in build- ".- Rockwell added that the “Institute's center at the ing economic theory. Utility is subjective, having no University of Nevada, Las Vegas, consisting of Pro- extensive objective property subject to measurement; - fessors Murray N. Rothbard and Hans-Hermann therefore, no unit of utility can exist. All mathemati- Hoppe, as well as a team of top graduate students, is cal analysis is predicated on the (conceptual) exis- not affected.” w tence of a unit and thus cannot apply to human action. Neoclassical economics has staying power not solely from its alignment with physics but because of its claim to be grounded on the requisites of all eco- nomic theory, utility. It has taken a correct starting point, i.e., utility, and gone down the wrong path, i.e., the mathematical, not seeing or admitting that the two are incompatible. Both its theoretical and empir- ical components have become unintelligible and use- less in explaining and predicting real world events. Once this happens something must give, some part of the framework must be adjusted or the results must be rejected or a person must live with inconsistencies. . © Mirowski notwithstanding, the marginalist reve- ) lution did occur but was coopted. by mathematically inclined economists. | The architect's model of the new business school building Utility is real and essential for economic theory. =~ = on the campus at Auburn University. ===== PAGE 8 ===== | In Memory of Ludwig M. Lachmann by Roger Koppl \ A / ith the passing of Ludwig Lachmann, sub- ¥ jectivist economics has lost one of its great pillars. Lachmann was born in Berlin on Febru- ary 1, 1906. He died in Johannesburg, South Africa, on December 17,1990. In the interval the economics profession enjoyed the attentions of an extraordinary mind. He was the guiding light and inspiration to a generation of radical subjectivists inside and outside the Austrian school. He was one of the great old men of the profession and his passing is a painful loss. Those of us who had the fortune to meet and know him will also feel the ~ painful loss of a special personality. I remember being a graduate student at New York University during the years in which Lachmann was a member of the Austrian collo- quium. We were lucky to have Lachmann’s stim-. ulating presence. ‘He created an extraordinary intellectual atmosphere of scholarly seriousness and purpose. oo oo | Ludwig Lachmann and Israel Kirzner had been friends and allies for years. But they could not agree on certain fundamental points of social science. Every week at the seminar table we were confronted with the conflict between these two leading Austrians. Our thinking was shaped by this conflict. We were brought into serious discus- sion of fundamental issues. Even the students who rejected Lachmann’s position were shaped by his presence. They had to know why they rejected - * his position and they had to defend their own views against the doubts he raised. To be students in such an environment was incredible good luck. It is the lot of most graduate students in economics, how- ever serious, to be preoccupied with passing exams and learning mathematics. We were learning eco- nomics and participating in serious discussions with some of the best minds in the profession, Lachmann was always available for discus- sions with graduate students. He encouraged us to apply our minds to the issues of economic theory. We were thinking, challenging ideas, and being challenged. Lachmann taught us what the leading problems of economics theory are. He pursued them with undeviating attention. Lachmann’s career as an economist began in his native Berlin during the years of the Weimar Republic. In 1924 he enrolled in the University of Berlin where Werner Sombart would become his Ludwig M. Lachmann dissertation advisor. As a member of the ‘younger historical school,’ Sombart had a respect for the ideas of Max Weber and a distaste for the Aus- trian school. Luckily, while a student in Berlin, Lachmann hired Emil Kauder as his tutor. Study- ing both Pareto and the Austrians, they came to ‘view the subjective theory of value as essentially correct and the general equilibrium theory of Walras and Pareto as inadequate. Thus, Lachmann ended his studies in Germany an adherent of both the method of understanding (verstehen) practiced by German interpretive sociology and of the Aus- trian theory of marginal utility. "The intellectual position to which Lachmann was led by his studies with Kauder was hardly welcome or natural in German academic circles. The German historical school had always been hos- tile to the Austrians. Moreover, Lachmann was a liberal and, in his own words, “support for, and understanding of, the market economy, never very strong in these circles, had almost vanished” by the late twenties." Lachmann was to spend most of his professional life defending positions that were dis- missed out of hand by academic orthodoxy. Lachmann, twice damned as both Jew and liberal, left Hitler's Germany for England in 11933. There he studied under Hicks and Hayek at the London School of Economics. In London, he ===== PAGE 9 ===== met another student of Hayek, George Shackle. But were not the only students coming under his in- it was not Shackle who taught him the importance fluence. Post Keynesians and other opponents of of expectations in economics. It was through his neoclassical orthodoxy also discovered him. It is contacts with another refugee scholar, Paul a sure sign of the influence he exerted that his Rosenstein-Rodan, that Lachmann learned the im- students even spent time learning to imitate his portance of expectations. Rosenstein-Rodan had voice and gestures. been an assistant to Hans Mayer, who held It is widely recognized that Lachmann was a Menger’s chair in the University of Vienna. “It was radical subjectivist who believed that “expecta- Rosenstein-Rodan,” Lachmann once explained, tions are as subjective as preferences.” It is less “who in discussing Austrian trade cycle theory with widely recognized, I believe, how he was led to me said, ‘Ah yes, but whatever happens in the this conviction. In The Legacy of Max Weber, business cycle is in the first place determined by Lachmann proposed to replace Max Weber's expectations.” The subjectivism of expectations “ideal type” with the concept of “the plan” as the was to become a peculiarly Lachmannian theme. foundation for social science theorizing. Citing In the early thirties, Hayek’s thought domi- Alfred Schutz, Lachmann argued that the possi- nated discussion at the LSE. The Great Depres- bility of interpreting human action by “revealing sion put an end to that. Keynes had the right the plans which guide it” constituted both “the medicine. Or so it seemed. Hayek and the Austri- foundation of the method of interpretation” and ans were eclipsed. Hicks, Kaldor, Lerner, and “a vindication of the plea for the methodological Shackle were all swept away by the Keynesian autonomy of the social sciences.” If we graft to tide. Even Robbins quietly distanced himself from this branch of thought G.L.S. Shackle’s emphasis his early indiscretion, the Mises-Hayek theory of ~~ on the creativity and spontaneity of the human the trade cycle. As Walter Grinder has put it, by mind, we come close to Lachmann’s own position. the time the war was on, “the only consistent and Weber built on the ideal type. Mises built on thoroughgoing Hayekians left were Lachmann the categories of action. Hayek employed the con- and Hayek himself.” Lachmann found himself in cept of rule-guided action. Lachmann shifted the considerable intellectual isolation once again, focus from action to plan. This shift draws one’s | just as in Berlin before. attention to the fact that the plan is an emanation al After a fellowship which permitted Lachmann of the spontaneous activity of the mind and cannot, 3 to visit many schools in the United States includ- therefore, be predicted. It is, I believe, this shift ing the University of Chicago where he partici- from action to plan that led Lachmann from the pated in Frank Knight's seminar, Lachmann subjectivism of ends to the subjectivism of expecta- taught at the University of London and then the tions. The questions and difficulties raised by this University of Hull. In 1949, he was appointed to the shift formed the subject of his own research. They chair in Economics and Economic History at the play the same role in the work of many of his University of Witwatersrand in South Africa. Dur- students and admirers. We no longer have the ben- | ing these years he developed his radical subjectivist efit of his guidance, but we will continue to work on | position with a marked constancy of purpose. This the problems he taught us to recognize. | | steadfast cleavage to Austrian principles doomed Professor Lachmann leaves behind a worthy him to relative obscurity. | legacy. In addition to a substantial body of writ- The renaissance of the Austrian school began ings, he leaves behind a generation of economists with the South Royalton, Vermont Conference in who feel for him the deepest respect and grati- 1974 at which Lachmann was an attendee. A pro- tude. But no legacy will negate the loss. Professor gram in Austrian economics was begun under the Lachmann is gone and his extraordinary mind direction of Israel Kirzner and soon came to be with him. We will miss him. centered at New York University. At Professor Kirzner’s Invitation, Lachmann was brought to NYU l4Forward” to Ludwig von Mises, Epistemological Problems in 1975 as a visiting research professor. Until 1987 of Economics. New York: New York University Press, 1981. when his health prevented it, Professor Lachmann ~ 2«An Interview with Ludwig Lachmann,” in The Austrian travelled each Spring to NYU to participate in the Economics Newsletter (Fall, 1978). Austrian Economics Colloquium and give a seminar 3«In Pursuit of the Subjective Paradigm,” Introduction to on “Topics in Advanced Economic Theory.” Ludwig Lachmann, Capital, Expectations, and the Market , . ] Process. Kansas City: Sheed Andrew and McMeel, 1977. In these final years Lachmann’s patient exposi- ‘Ibid. p. 15 tion of the radical subjectivist views finally received 5The Legacy of Max Weber. Berkeley: Glendessary Press, the sort of attention it deserved. Young Austrians ~~ 1971,p.30.m = Kid ===== PAGE 10 ===== i | The Collected Works: of F. F. A. Hayek Kukathss. of ‘the ai author of ‘a’ book calle 1yek’s Libera i | An Update SU - . The Constitution’ of Liberty; Jeren ra aFmur of the CL EE Institute for Humane Studies will"e zollection | | he third volume of The Collected Works of F. A. titled Philosop hy, Politics and Economics. w yy 1 - Hayek will be published this spring by : | Le 3 Routiedge and the University of Chicago Press. Ed- ‘ited by the late W. W. Bartley, the founding editor of the project, and Stephen Kresge, the new general Eastern Europe: editor, this volume is titled The Trend of Economic ~~ Mises Was Right” Thinking: Essays on Political Economists and Eco- Co nomic History. 1t is a new collecti on of essays by Bb eland Yeager, the Ludwig von Mises Professor i Hayek, several previously unpublished and a few | of Economics at Auburn University, organized. | 1 translated for the first time. The core of the volume twin sessions at the Southern Economic Association ; b four pei No Engl ish and Continental ay and American Economic Association meetings on the i 1SLOTY and policy, Written in Lrerman-n the S88 economics of Ludwig von Mises and the. leseony’ of 3 part of a larger project when Hayek was director of . . ) To : NTRS Eastern Europe. : the Institut fir Konjunkturforschung (Austrian In- stitute for Business-Cycle Research). Hayek never ‘At the 60th Annual conference of the Southern oe Economic Association (November 18-20 in New Or- finished the larger project and the essays were never. , . « Ca published; he later turned the rest of his notes over leans) the session was titled “Eastern Europe: Mises Was Right.” Papers were presented by Murray to his research assistant Vera Smith (later Lutz), who EL | : used them in preparing her now-classic Rationale of Rothbard. ( Ludwig von Mises and the Collapse of So- i Central Banking (just reprinted by Liberty Press). | cialism”}, Gertrude Schroeder Greenslade of the Uni- y versity of Virginia (“The Dismal Fate of Soviet-Type r The Trend of Economic Thinking is the second Socialism”), and John Moore of George Mason Univer- j volume of the Collected Works to appear in print sity (“Yugoslav Socialism”). All three papers concluded ; hough it is labeled Rs volume 3), volume 1 being The that socialism was a dismal failure and that Ludwig von atal Conceut. Volume 2, The Uses and Abuses of Reason, Mises was on the mark with his critique of socialism. ; The Counter-Revolution of Science and Other Essays, has been delayed and will most likely come out in 1992. 3 In addition to the articles published in 1952 as | 2 The Counter-Revolution of Science this volume will j contain some related essays and may include selections discussants did their best to.draw further lessons, to from Hayek's long correspondence with the philoso . sogess the. agreement with Mises’s views in the world pher Sir Karl Popper, his longtime colleague and friend. “today, and to interject controversy. For example, Koppl, ~The fourth volume, The Fortunes of Liberalism. Essays ‘Rothbard; and others skirmished over the question of on Austrian Economics and the Ideal of Freedom, edited whether socialism were possible in a theoretical world by Peter Klein of the University of California, Berkeley, a (rather than the real world). and the Mises Institute, has been completed and is : presently under review by the publishers. This volume. gathers Hayek's writings on the Austrians (including seven essays on Mises) along with some material onthe rediscovery of liberalism in postwar Europe and the Mont Pelerin Society. As with volume 3, almost half the ~~ YOn V1Ses Ins contents have not been published before or are pre- ~The session, retitled “Eastern Europe: Perspectives sented for the first time in English. Co of Austrian Economics,” found presenters and discus- - The Collected Works, projected at around 19 vol- ~ sants alike searching for the implications of Mises’s umes in all, will continue with further collections of ideas and their impact on the future Course of events. ®. short essays and reviews, reprints of Hayek's existing books, and correspondence and interview volumes, drawing on the resources of the Hayek papers at the : rs | Hoover Institution archives at Stanford University. Market P rocess to Suspend The manuscripts for many of these volumes are Publication—Praxis to Continue 1 already in the hands of established scholars in the Co | various fields in which Hayek wrote. Lawrence White T he Center for the Study of Market Process has | of the University of Georgia will edit The Pure Theory ~~ A suspended publication of Market Process, In the | ‘|- of Capital; Antony Flew of Bowling Green State Univer- spring of 1990, volume 8 of the Market Process newsletter sity will edit Law, Legidiatinr, and ? Liberty, Chandran was issued in an expanded, journal-like format. No The three discussants were Roger Koppl of Fairleigh Dickinson University, Aubrey Drewry of Bir- mingham-Southern College, and James Dorn of Towson State University ‘and editor of the Cato Journal. The The gesgion at the American Economic meetings (December 28-30, Washington, D.C.) was also well attended and expanded with the presence of Yuri - ~~ Maltsev of the U.S. Institute of Peace and the Ludwig von Mises Institute as an additional panelist. B 10. ===== PAGE 11 ===== further issues have been produced to date and no cial bank stability in terms of the above indicators. further issues are planned. Chapter four examines, from the same perspec- The hurdle from newsletter to. journal status isa tive, the historical record. Chapter five introduces costly one, as editor Don Lavoie noted in the first ~ free banking theory and the likely effects of free issue. In that issue he requested that readers sub- banking on the banking system. And chapter six ex- - scribe to Market Process in order to defray the addi- amines the historical record in this regard. Two fol- tional costs of the journal. Academic journals are not = lowing chapters tie up loose ends. In the final chapter “only extremely costly, they are time consuming and. Salsman criticizes recent reform proposals and out- E -therei is tremendous competition for good articles and lines his own plan for the transition from central -- good reviewers. banking to free banking and the establishment of The Center plans to continue the publication of - sound money (he thinks monies would be largely Praxis which will provide information about the activi. ~~ based on gold under free banking). ties of the Center and developments in “market process A brief overview of Salsman’s analysis of the ef- economics.” In other developments, the Center marked ~~ fects of central banking on capital adequacy reveals its 10th anniversary with a celebration dinner on No- the type of issues Breaking the Banks is concerned vember 10th, 1990 and has announced that Professor with. The excess of assets over liabilities is the value Walter Williams of George Mason University willbethe = of the bank to its owners, the shareholders. This new chairman of the Center’s board of directors. a equity capital “serves as a cushion to absorb operat- ing losses and asset (primarily loan) defaults” (p. 9). Therefore, all else being the same (such as riskiness of assets) the lower the equity-capital the greater the possibility of insolvency. The amount of equity-capital tends to decline in a ~ central bank system. In banking as in all industries the tax deductibility of interest expenses, but not dividends, encourages the use of debt rather than equity. But the ~ banking industry is encouraged to debt finance in a number of additional ways. For example, one advan- ~ tage of equity over debt financing is that debt finanec- = Break ing the Banks: ~~ = ing carries the burden of possible bankruptcy (failure ) ir oo Central Bankingand = = - to pay bondholders their contractually agree upon Free Banking Solutions Co interest payments). But deposit.insurance and lender Richard Salsman ~~ of last resort privileges reduce the possibility of bank- ‘Great Barrington, Mass: American’ Institute for ruptcy even if insolvency occurs. Under the “too big to Economic Research, 1990 ~ fail” doctrine the central bank effectively guarantees that : = EE a big bank will never face bankruptcy. These factors B usiness cycles, chronic inflation, and now the subsidize debt financing, reduce the use of “cushion- S&L crisis; these dramatic failures of the cen- - ing” equity- capital and thereby i increase bank risk. ~ tral banking system have vaulted free banking intothe ~~ academic mainstream. The history and theory of free - banking is now regularly debated and discussed in the | top monetary journals. Richard Salsman, a New York | city banker and graduate of the NYU economics pro- - gram, has extended, reviewed and summarized the - most important historical and theoretical aspects of this literature for an audience who will be crucial play- : ers in the coming policy debates: the bankers. ~~ Most fundamentally, the very purpose of central "banking is to inflate the money supply at a rate "exceeding that of real growth, Because of the intimate connection between money and credit this means that deposits and loans are created faster than real capital is accumulated in the economy. A bank could raise more equity and refuse to increase its loans and deposits in order to maintain a high equity-capital to asset ratio but in a central bank system with guaran- Breaking the Banks, which contains a lengthy teed deposits the return from doing so is artificially annotated bibliography, is a good introduction to the low, making such actions uncompetitive. Capital ad- free banking literature. The main contributions, how- equacy invariably declines under these conditions. ever, flow from Salsman’s perspective as a banker. oo Some trenchant criticism of current reform pro- ~ After a short introduction, onthe importance of posals like private deposit insurance are made in the ‘sound banking for a healthy economic system, Sals- final chapter. Salsman argues that “government de- | man explains the standard measures of commercial posit insurance is inherent in a central banking sys- - & bank stability. These are: .(1) capital: adequacy, (2) tem because central banking creates systematic — asset quality, (3) liquidity, (4) profitability, and (5) ‘weakness and instability in the industry. No private management quality. Chapter three then looks atthe ~~ sector insurance industry would be willing or able to : theory of central ‘banking and its effects on commer- Co underwrite such risk” (p. 129). ===== PAGE 12 ===== Given the present mixed system, u unfortunately Ll Beonomic Policy and the Market Salsman is incorrect when he says that a ‘private en © Process: Austrian and ~ sector insurance industry would be unwilling to un- SICA oO Mainstream Economics. derwrite bank deposits. In my judgment the industry ‘would be more than happy to write such insurance . °° kK. poet 4.5 Fit oJ. am BN * even though they would be unable to dosointhelong. © = . msterdam: North-toflan SER run, as Salsman correctly points out, The problem is F71Y body likes te h Ch ny that regardless of whether or not there is private ~~ J. very ody likes to see rigorous. exchanges be- | : “insurance, the central bank (and ultimately the gov So tween scholars of different economic schools on™ | ernment) will continue to act as lenders and guaran-- publi policy. FR i do that, the result t fl t. Th ly diffe that ~- of Economic Policy and t arket Process is less than ors. of last resor e only difference is that under a fully satisfying. The. problems: 1) the editors are private insurance scheme they will have to guarantee the insurers. The insurers will kriow this in.advance . Jargely outsiders to the Austrian tradition and are not and will themselves face the same incentives the = © as conversant in’ ‘Austrian literature as one has come to banks face under the present system—risk is effec: - expect after 120 years of subjectivist- -marginaligt tively subsidized so insurers will extend insurance to thought, (2) the mainstreamers are not mainstreamers banks at une conomically low pri ces. “at all but unreconstructed social democrats remarkably unsympatheticto the language of market economics, (3) Private insurance in a- central’ ‘bank system is ~~ no discussion arises as to the political theories of the potentially 3 worse than the present. system. First, the." contributing social democrats, and (4) the organization private, free enterprise aspects of the system will be of the book: leans toward incoherence. 3 blamed for the crash when it eventually occurs. Sec- ond, under a private insurance system a single insur- . ance firm will insure many banks. If one or several of these banks becomes insolvent, insurance will be han- ‘dled in the private sector. But sooner or. latér many banks will become insolvent at one time, the private . The collection i isnot without its redeeming values, : - however. It contains some excellent individual contri- butions by. three Austrians (Israel Kirzner, Don *_ Bellante, Pascal’ Salin), one proto-Austrian (Roland Vaubel) and one Chicagoite (Yale Brozen). insurance system will go bankrupt and the government ". Ttalso contains a fair number of intellectual amuse- ‘will have to intervene. A large infrequent crash of this ‘ments along the way, for example, the utter naivete of sort may be worse than many smaller but more fre- ~~ social democrats who place as much faith in the voting quent shocks, The government could promise never to.. mechanism of democracy as. commiinists do in central ‘bail out a private insurance system but this gromiss planning, It-would be a shame if the book's real contri- | is not time consistent and therefore not credible. - SE “butions. are forgotten i in the thick. of such amusements, 2 Loosening" restrictions on “the. fields. ‘banks may Lo ~The: editors recognize. ‘that Austrians represent enter raises further problems, If banks become more. the most thorough refutation of social democracy. (Un: closely intertwined with commerce: ‘and industry, and ~: fortunately, they are incorrect in seeing it as the most ~~ prominent.) In this volume, ‘the Austrian wins the de- deposit insurance continues to exist, whether it be that of the FDIC or some sort of private/central-bank + bate in every case on merit only. What else can be said, “forex ample, about a radical and persuasive case for free * mix, then the possibility of cross subsidization occurs, | Through careful manipulation the insurance sys- banking (by Vaubel) coupled with a reply written by an tem—which is nominally intended to protect bank employee of a central bank who concludes that “coun- =] deposits—may end up protecting business ventures. tries are well-advised to stick to the practice of granting. I Monitoring and regulation may offset: this to.some a legal monopoly. to their central banks” since “modern | extent but excessive regulation is the problem pri at central banks are very aware of their public function” * | - izing insurance was supposed to solve." Tia (pp..290, 300)? If a real economist is to debate the = failures of public housing, he should prefer: to have a This’ analysis ‘accords with the general | febior of co “HUD bureaucrat as his opponent. Salsman’s own, as he puts it, “the FDIC supports. ‘regulation on the grounds that it must protect the © “The editors provide a sympathetic summary of BE Austrian ecoriomics in their introduction. They fairly - deposit fund. The Federal Reserve supports re las tion on the grounds that it must bw the pit LL represent the. dynamism of the Austrian model, the supply and control bank. access to its discount win . emphasis: on change and uncertainty, and the impor- _ dow. Central banking is a ‘package deal... To oppose tant role for price signals, the de-emphasis on aggre- regulation effectively, it is neceasary to oppos ¢ the . gate analysis, and the policy implications that follow B basic features of central banking: that make it neces- from these. positions. But they gloss over real internal sary... We will continue to have unsound banking as controversies, such as the role of equilibrium and. long as we have unsound money and we will continue. = entrepreneurship, and hardly mention important y to have unsound money ‘as long: as we’ have both B considerations of methodology as a‘unifying theme. government money and unlimited government” Pp: - In his contribution; Kirzner helps to correct for 129- 30). ATT ® J the failings of theeditors. In16 pages he summarizes ===== PAGE 13 ===== the essence of the Austrian paradigm and what he cial democrat P. Keizer (University of Limburg) who regards as his most important contributions to it. presents the most naive case for democracy seen in years. Thus he covers how markets work, questions of equil- For him, the proof that welfarism, unionism, and wage “ibration, discovery and entrepreneurship, prices and policies work is in that such institutions are “produced” profits, competition and monopoly, socialism and cal- by the democratic process and are therefore socially opti- culation, and the perils of regulation. His article is a mal. “Democracy should imply above all else a respect for model of economic coherency, a short and integrated decision taken by majorities” (p. 168), he says, because presentation of the Austrian position (although hetoo “democracy is the most progressive discovery process for neglects method). the production of collective goods” (p. 170). “In response to Kirzner, we witness an unsympa- Pascal Salin tackles the issue of business cycles 1 thetic Angus Maddison (University of Groningen) from an Austrian point of view (citing Hayek, Mises, complaining that Kirzner’s paper is so “abstract” that Rothbard and Garrison) and does an outstanding job it makes “no reference to contemporary economic of it. He is careful to distinguish his position from that problems of a kind you might find in an OECD report, of the monetarists who overlook intertemporal coor- a budget speech, or a central bank report.” Maddison dination problems associated with even marginal wonders where Kirzner’s discussion is of macroeco- _ central bank monetary expansion. The respondent, nomic considerations like “GDP Growth Potential” and J.C. Siebrand (Erasmus University) has a difficult “Transparent Redistributive Policies,” the absence of time with Salin since “I must confess I do not recog- which is supposed to make one wonder whether Kirz- nize the world in which we live in the picture he ner is doing economics at all. And the worst crime of sketches. His world is very abstract” (p. 227). | all: “There is no empirical evidence” (p. 40). If empirical evidence is what these “mainstreamers”- want, then Yale Brozen’s (University of Chicago) contri- bution offers an overwhelming, 41-page, purely em- E conromic Policy pirical case for the market with 79 footnotes Cade demonstrating the failure of interventionism. Alas, social democrat Arnold Heertje (University of Amster- dam) is not impressed. He is “struck by [Brozen’s] emphasis on empirical results,” but displays an | Austrian’s skepticism of such results: “it would not be 8 too difficult to produce evidence which just ‘proves’ the opposite of what Brozen likes to indicate” (p. 107). J. A. Kregel, a post-Keynesian, next argues that the most important goal of economic policy is to re- The final Austrian-oriented contribution is by Ro- strain “unbridled self-interest” through “market de- land Vaubel, who argues for competition in currency sign” and policiesto “assure the constricting forces of and against the theory that money is a public good. competition” (by which he means carving up market Most notable is his argument against all government lots. according to a government plan). Groenveld re- intervention in the supply of money. sponds by reminding Key nesians of the entrepreneur- - What is never explicitly dealt with in this volume, ial penchant for adjusting their behavior t0 but nonetheless constantly lies beneath the surface, is regulations and thus evading the law’s intent. the apparent political agenda of the “mainstream” econ- H. W. de Jong offers a contribution to the theory omists. While the Austrians struggle to maintain the of competition using the policy of the European Com- standards of value-free science, in objectively spelling munity as the backdrop. Entirely ignoring recent out the consequences of intervention, the social demo- work by Austrians and others against “competition crats advance views as if their economic theory and policy,” he proceeds to offer a very long litany of their political agenda were one in the same. alleged crimes against competition that the govern- When two world views clash, as Austrian economics ment ought to rigorously prosecute. As draconian as and social democracy do, it would have been in the EC's monopoly policy is, de Jong wants more. everyone's interest to have the Austrians directly take Brozen responds with a theoretical argument against on what lies at the root of their opponents views: the any restrictions that would end up “protecting com- idea of equality. It is their egalitarianism, which is petitors, not competition” (p. 142), and Stephen C. never argued for but only asserted, which supports Littlechild (University of Birmingham) offers a small their faith in democracy. The Austrians should have a piece showing the difficulties associated with distin- chance to ask whether the democratic regime invari- & guishing efficient mergers from inefficient ones. ably produces a mixed economy; if so, what type of The Austrian theory of labor markets is thor- political regime is necessary to support an Austrian oughly and persuasively presented by Don Bellante = economic program? Without such frank discussion, (University of South Florida). His respondent is so- there can be no meaningful exchange of views. There 13 ===== PAGE 14 ===== will only be bantering between one group presenting As the number of strikers mounted, the media a corpus of economic thought and another asserting closed ranks against ARET, with the Chicago Evening a political program. JAT m Post declaring that non-payers had “shirkf[ed] the responsibilities and duties of citizenship.” The radios and newspapers shut out pro-tax strike ads and mes- : : Ln sages; yet they ran ads promoting the government’s Taxpayers in Revolt: Tax Resistance “Pay-Your-Taxes” campaign. During the Great Depression Powerful local bankers now depended on tax David T. Beito money, like First National Bank of Chicago chairman Chapel Hill: University of Melvin Traylor who led the fight to smash the strik- oo North Carolina, 1989 ers. “The whole situation goes back to the fact,” } Traylor argued, “that you can’t run a government | Disc D. Roosevelt’s New Deal government is unless the people pay their taxes.” He might have usually thought of as a force for economic liber- added that neither can one run a municipal bond- ation. But there is another side to the story, as told in holding bank without taxes. this important revisionist work by David T. Beito. He shows an aspect of the government apparatus not usually noticed, that of the oppressor of the common man in his struggle to pay his bills. There’s not much economic theory here, but it helps support the case for the free economy. The Chicago strikers were ultimately undone. The government hit the high-profile leaders of the move- ment, turning off their government-supplied water, taking their business licenses, and revoking their per- mits for electric signs, driveways, and use of govern- ment property (sidewalks and streets). The government won the propaganda battle. And it had the force of law. But the Chicago strike was unusually successful in that it held off the revenuers for two years. The tax strike is a fierce weapon because all govern- ment ultimately relies on the consent of the governed; the public must pay the taxes and obey government dictates. The strikers of the early 1930s exhibited a distrust of maneuverings of politicians and bureau- Beito is alert to how Great Depression tax revolts crats. Their goal: to prevent a political power grab by illustrate libertarian class analysis. The tax strikers placing severe constraints on government spending. were, by and large, middle-class people trying to pay their bills. Those who propagandized against the strikers were the upper-class social elite, including public-school teachers, bureaucrats and politicians, entrenched corporate interests, the banking industry Taxpayer groups sprang up in every major city around the country, and Beito documents the major cases. Especially notable is the case of Chicago where r= a taxpayer group sent the local government looking and other bond holders. to Congress for a bailout. The Chicago strike, says Beito, was “the biggest concerted tax strike since the What motivated the strikers? Professor Beito of- aftermath of the Revolutionary War.” fers a theory. “It was not so much that taxpayers... cynically adopted an anti-big-government pose when the depression cut into their incomes,” he says. Rather, “the depression forced taxpayers to think for the first time about the burden and perforce the purpose of high taxes.” They became—in the popular term of the period—“tax conscious.” Tax problems and scandals were pervasive in Chicago during the twenties, and the citizens had become cynical about the nature of politics. By the time the depression hit, the public was ideologically primed to strike. Because of widespread complaints, in 1928, the city agreed to reassess property taxes, and taxpayers got a two-year tax holiday. Two years The tax revolt died after 1933. Why did the move- later, the government ordered the public to pay the ment fail to achieve its most radical ends? First, stalled taxes—three years of taxes due in a sixteen- many taxpayers got relief. Second, New Deal ideology month period. The Chicago tax strike hegan. ~~ overwhelmed its few opponents. Third, tax strike The flagship of the ensuing strike was the Associ- organizations were rife with internal disputes that ation of Real Estate Taxpayers (ARET), which had .a crippled them. And fourth, leaders developed a pro- paid membership of 30,000 at its height. ARET’s pensity toward ideological sellout. leaders, although newly wealthy, were not part of As powerful as these four factors were histori- Chicago’s business, governmental, or banking elite cally, there is also a more important institutional and they effectively represented the interests of the reason tax revolts fail. Strikers will always run up 30,000 pending appeals from taxpayers who had not against the familiar problem of the Prisoner’s Di- paid their property taxes. By 1931, though, only 55 lemma: to succeed, everyone must rely on everyone .| percent of the total levies had not been collected else’s cooperation, despite incentives pushing every- 3 before the penalty date. A year later, the city had one toward defection. If mutual trust slips even a | become helpless. Officials actually considered shut- little bit, the whole cooperative pact can unravel. This ting down the public schools. In 1932, they went to kind of Prisoner’s Dilemma is tough to overcome in ; Congress begging for financial help. absence of profound moral courage. ! 14 ===== PAGE 15 ===== Professor. Beito has assembled reams of Rothbard contributed 6. pathbreaking research into an extraordinary work Each volume has an identical preface and an that is also a joy to read. It invites a totally new . introduction which briefly discusses many of the in- understanding of those watershed years. Perhaps not dividual entries, their significance, and the related unwittingly, it also constitutes a radical case for pri- body of literature. Each introduction contains a list vate property against encroachments by the state and of references and further reading which enhances the its connected interests. jarw ~~ ‘research value of the collection. Volume 1 covers the history of Austrian thought and methodology. The first two parts are on “The Early Austrian School,” and “The Austrian School Founders.” A third section called the “Modern Aus- trian School,” contains Hayek’s Nobel Lecture, but is otherwise unfocused. This is then followed by two important and extensive sections on “Subjectivism” and “Methodology.” Of particular note in this volume . , ‘are three papers which discuss Mises’s seminar, and Austr wun Economics papers on the debates on subjectivism, empiricism, Edited by Stephen Littlechild oo and even hermeneutics. - Edward Elgar: 1990 Volume 2 covers macroeconomics. The sections } Co include “Capital and Interest Theory,” “Money and | his 3-volume set represents a valuable addition Banking: The Nature of Money,” “Money and Bank- for those doing serious research in Austrian ing: Public Policy,” and “Business Cycles and Macro- economics. Stephen Littlechild has collected 93 en- economics.” Together with the references for further tries divided into 14 sections and 3 volumes. This reading this volume provides a good overview of Aus- collection is yet another statement of the splendid trian “macroeconomics.” | history, strong resurgence, and bright future of the Austrian school of economics. Volume 3 opens with three parts on “The Compet- “itive Market Process,” dealing respectively with | : Littlechild’s selection of articles is not and was “Equilibrium, Market Process, and Competition.” not intended to be a “greatest hits” of Austrian eco- The 18 entries highlight the Austrian school’s empha- AT nomics. Articles which have been extensively re- sis of the role of competition and market processes. | printed or were readily available from other sources This is followed by a solid section of five articles on | were avoided in lieu of articles more difficult to obtain “Central Planning,” and an interesting although dis- or published in unusual places. Other entries could parate collection of seven articles on “Public Policy.” not be included because permission to reprint could not be obtained or they were to costly to obtain. The articles are reprinted directly from the orig- inal sources. While this does result in an awkward This is not to imply that all of the classics are absent. appearance, and in some cases light copy, it does avoid Hayek's “The Use of Knowledge in Society,” Menger’s problems referencing the articles. Given the mission “The Origin of Money,” Mises’s “Economic Calculation and constraints of this project, Littlechild has sup- in the Socialist Commonwealth,” Rothbard’s “Towards plied a valuable and well-balanced product. MT m a Reconstruction of Utility and Welfare Economics,” ‘and many other famous contributions are included. Many articles are from foreign sources, and newsletters such as the Austrian Economics Newsletter, excerpts from books, and reference works. One result of these limitations and guidelines is that the collection is weighted in the direction of the ultra subjectivists, Ludwig M. Lachmann and G.L.S. Shackle, as well as the contributions of Friedrich von Weiser, whose work American Austrians have shown a reluctance or aversion to. The set does contain a good sampling of the contributions of the latest gen- eration of Austrians—Don Lavoie, George Selgin, Larry White, Mario Rizzo, Hans Hoppe, Richard | Ebeling, Karen Vaughn, Jack High, Roger Garrison, = and philosopher/economist Barry Smith. ~~ The most entries (12) come from F.A. Hayek. Kirz- ner has 11, Mises and Lachmann have 7 each and 15 ===== PAGE 16 ===== Klarheit und Methode: Felix Kaufmanns Wissenschafts-theorie: ~ . Studien zur osterreichischen Philosophie . ~ 'H.G. Zilian Amsterdam: Rodopi, 1990 - CL T his i is the first extensive treatment of the philos- - ophy of the science of Felix Kaufmann (1895- CF 1949), a philosopher and: legal theorist close to Mises, .-Hayek and Alfred Schutz, arid author of Methodology of -the Social Sciences (Oxford: Oxford University. Press, 1944). Zilian deals extensively with the issue: of meth-- odological individualism, with the theory of action, and ER The opening section lays out the theory that | also with the question of the a priori nature of economic "money arose on the market out of barter and tends to laws, arid he sheds new light on the detailed discussions take on definite forms. according to its usefulness. All cof these matters in the Mises seminar in ‘Vienna. this is familiar to anyone: Wha has. had a first-year: His work includes also a detailed critical treatment money and banking course. But what is different is - of Husser!'s thinking insofar as this exerted an influence his integration of money's origins to the development Coon Kaufmann, and. the volume i 18 of interest for its treat- of banks as money warehouses. He sees no reason ment, of topics such as inner perception and synthetic a why free-market monetary institutions (including prior knowledge which served as point of contact be- private coinage) couldnt be stable and efficient had tween the Vienna circle and the phenomenological move- the government not intervened i in the market. | : ment. The Yohume shows also how pi on ~The government's motive for monopolizing currency I. extended into the sphere of the social sciences, Incluc- and cartelizing banking i ig purely self-interest. In its ing economics and Jurisprudence, and. thus in this res desire for revenue in addition to taxation, it derives spect, too, it throws light on Misesian methodology. ~ great benefit from expanding the money supply through The. author is. consistently contemptuous. in his a variety of means, including buying debt and lowering treatment of both Husserl and Mises, however, 80 . reserve requirements. The government must monopo- ~ that he rarely manages to give an adequate account. “lize the currency in order to make this possible. RES oo of the mr ib oft their ideas. Barty Smith . - . a oe Most useful is Ro thbar ds 6 sts Ce | swiof the West. Starting with the | CL tan f 1815, he takes us through 1 What Has Government I Done ete the: presen day: how how government has sys- “to Our Mone va Lo a tematically undermined. thie:gold standard to replace ye (it with a fiat money ‘standard. Most complete is his Auburn, se ST i te, 1990 oo analysis of the breakdown of J. M. Keynes's Bretton Woods System of international money. + othbard’ 5 NEWLY essay on Austrian monetary Clearly, a key attraction that Rothbard has toward AW and banking theory and policy i is back, but this = a free-market gold standard is his belief that as long as time in a beautiful new 120-page edition (with a spine "the monetary system is in private hands, and the unit so it won't slip to the back of the: bookshelf). Although ~~ of account is clearly: defined; ‘the government cannot first published in: 1963, and updated. periodically, ther use it to. enhance its, power over the economy. Thus. “content holds up-remarkably well as an‘introduction “the acceptance of Rothbard’s policy prescription (an | to free-market’ monetary. thought. Also added to this ~~ established: gold: standard with 100% demand deposit "| new edition are an introduction. by Mises. Institute” = reserves): relies on an acceptance. of limited govern- president Lew. Rockwell, and comments by Rothbard © = ‘ment and laissez-faire economics. For the free mar- | on the prospect: for the European Currency Unit and. keteer, What Has Government Done to Our Money? is | © the trend toward globally fixed exchange rates, both ~~ atestamentito. the sential radicalism and coherency = | © | - of which he sees as’ dangerous. Precursors to > global of Austrian: economic policy. td is good to have this- inflation. EE EE PE CI SR gem back i in print, RRH® TE