===== PAGE 1 =====

Vol 8 Ns 2

_ Austrian Economics Newsletter

Nicolaas G. Pierson and Socialism
by
Johannes Overbeek
University of the Virgin Islands

Pierson’s work ‘is the first important contribution to the modern
discussion of the economic aspects of Socialism.” —F.A. Hayek

Life and Work

Nicolaas Gerard Pierson, born in Amsterdam in 1839,
was the foremost Dutch economist of the 19th century.
During his primary and secondary school years he
attended both French and English speaking schools.
Pierson never attended any formal university or earned
any formal degrees, preferring rather the discipline of
self-study. Following this desire for self-study he visited
England and then the United States in order to learn
more first hand about the cotton trade and the banking
crisis that was taking place in Louisiana. His analysis

. of the 1857 banking crisis was later published (in Dutch)
Ain der the title of Trade and Banking in Louisiana. Pierson
was married in 1862 at the age of 23 and spent the
next several years working in the cotton industry, banking
and from 1864-1868 teaching economics to high school
students; all the while constantly writing and researching
areas of intense personal interest.

Dr. Johannes Overbeek

In 1868 the president of the Dutch Central Bank being the Minister of Finance. Pierson’s emphasis
wanted to appoint the young Pierson to a management widened and now included social legislation. New laws
position. This appointment met with objections from regarding elementary education, child labor, housing and
some members who thought that Pierson was too young health were adopted. Pierson’s principal aim was to
and too radical. In some of his earlier writings, Pierson alleviate some of the evils associated with industrialization
had been critical of the Dutch government’s “exploitation and urbanization. (Between 1905 and 1909 he was an
of the soil” policy in the Indonesian colony; emphasizing elected member of the Dutch House of Commons.)
instead of “exploitation” the economic and social merits In 1875 he was awarded an honorary doctoral degree
of private landownership and. the need for personal by the University of Leiden, and this made him a
initiative in colonial agriculture. Despite these objections recognized part of the academic establishment. Between

he was appointed by a large majority. This appointment the years 1877 and 1885 he taught economics at the

stood for 19 years, until 1885 when he was elected as University of Amsterdam. Both of these honors were

a president of the Dutch Central Bank (1885-1891). bestowed despite the fact he never attended any

Between 1891 and 1894 Pierson was the Minister of university. In 1889 he published his two-volume treatise,
Finance in the newly formed government. This office Principles of Economics.

gave him the opportunity to realize his ambition of

making the Dutch tax code fairer and simpler. Many

of the antiquated indirect taxes, such as the salt tax and

| the soap tax, were eliminated and replaced by a modest

= ax on the income from property and corporate tax. His

No? sain purpose was not to increase state revenues but to Hermeneutical Integrity................5
disperse the burden of taxation.
P | Review of The Gold Standard

Netherlands (1898-1901), this office was in addition to



===== PAGE 2 =====

In 1904 Cambridge University awarded him his second Pierson, throughout his active career, continuously

doctoral degree (honoris cause). During this same period confronted burning issues and this brought him
the prestigious American Economic Association also praiseworthy recognition from foreign economists. Carl .-1 |
made him an honorary member. Pierson died in 1909 Menger stated that Pierson’s work was important andy |
at the age of 70, that because of him, German speaking economists were
Pierson defined economics as the ‘‘science of interested in Dutch economic literature. fn 1909, when
exchange” and was one of the very first Dutch economists letter in which he oi d that the worl 4 would class him
to embrace marginalism. In his textbook Principles of with Adam Smith “the thinker, the patriot and the
Economics, Pierson tried to reconcile marginalism with cosmopolitan. and wi th Tureot the st an economist
the teachings of the classicals. Pierson’s five main areas mopotitan, & a ¢ ‘
of focus were: methodology, taxation, the international Socialism
monetary system, socialism and social issues. : oo ,
Y SY ’ In a short article written in 1904, Pierson explained
At the age 22, Pierson presented a paper on “The the basic difference between socialists and non-socialists.
Logic of Economics” to a group of economists in Socialists, he said, believe that poverty and hardship will
Amsterdam where he defended the deductive method. disappear if only people wish it; they see indigence as
Throughout his life he would remain faithful to this a consequence of the way society is organized. Change
approach although he recognized that factual evidence the social organization and destitution will go away. The
had to be systematically examined. In fact, as a prime non-socialists, however, believed that poverty is due to
minister he helped set up the Dutch “Central Bureau more fundamental causes, such as: rapid population 4
of Statistics” (1899) still the main fact-gathering agency. growth or slow capital formation. They do not believe :
. . in fo iali r bec such revisions
Pierson rejected the “exclusive” use (but not the use ew SE etorminants of a 1 ’
itself) of the inductive method as advocated by the y amply | ’
German Historical School. He criticized their fondness In his textbook Pierson notices with some surprise
for the omnipotent state, their protectionist preferences the apparent drift of opinion towards socialism in the
and their cloudy thinking. He believed that a mere jumble 1870s, the very moment that living standards are higher
of facts without theory was useless. Partially due to than ever before.? Socialist criticism, he observed, is
Pierson’s criticism, the German Historical School never usually not directed against some particular aspect of | |
quite made headway in Dutch economics. It was because the free enterprise order but against the very foundations w/ 3
of Pierson’s influence and his criticism of the German of the system itself. At the same time, very few if any, vo
Historical School that encouraged the adoption of the concrete and realistic counter proposals have come forth )
ideas of the Austrian School in the Netherlands. to replace the market economy. This is especially true h
: , ew . Lo 1€ f the *‘sociali * or “poetical
During his entire life-time Pierson defended the idea of the supporters of the S0¢1a ism of hope’ poet :
: Cs socialism.””? Adherents to this kind of socialism believe | -
of a simple and equitable tax code and as Minister of Hs :
. OF that the future moral standards will improve considerably
Finance he implemented some of his ideas. He was, in | . ) 1s .
: : ls and that a radically different-socialist-economic system
his treatise, one of the first economists to present a i therefore bound to emerge. Pierson replies that the
comprehensive treatment of the incidence of taxation. oe ge. mn rep
: > : two propositions were not necessarily related. It was
During these years he wrote many essays on the silver Eecause people link them without further thought that
and gold standards; first defending bimetallism only to s¢ peop: : os g
or the socialism of hope arises. Thus it is vaguely felt that
abandon it later. | A
| the present social order cannot endure and that somehow
In his treatise, written in the latter part of the 19th a “higher” level of social organization will take its place.
century, Pierson rejected the notion that the free market This new society must be socialist. If, however, one asks 4
economy promoted injustice and poverty. He observed how could the new order solve certain concrete problems 1
that no matter what test was applied, the average worker one is left without an answer. 1
in Europe enjoyed a higher standard of living than ever : . 1s i. : bi
pe choy : . g thal The more radical socialist writings often consist of
before. Although he sympathized with some of the condemnations and criticism. Frequently, feelings of
concerns of socialists, he took the view that their policy oy is ) quenty, 8 0
: hostility are obviously the true foundation of all this
proposals were usually confused and failed to address ord ie = . 1s
tes faultfinding. Moreover, says Pierson, there is little
the key problem: how best to use limited resources to evidence of genuine scientific thinking in the socialist
meet the endless wants of individuals and societies. idence OF genuine gn
: writings. Works by such authors as Ferdinand Lassalle,
Pierson was also preoccupied with social issues, such Henry George and Karl Marx are full of blunders and
as: rapid population growth, unemployment, distressing errors. “Let us not look for science among these men” i
housing conditions etc. As he saw it, both private notes Pierson, “but rather for expression of feeling of —%
initiative and government had a role to play in coping which the predominant tone varying with the speake F
with these problems. Yet government “‘involvement”, is either that of enthusiasm for a dimly conceived ideal |
which he did not oppose on principle, should not be or of compassion for the lower classes; or that of intense i
allowed to interfere with the production of goods and hatred of existing conditions.”*

services.

2


===== PAGE 3 =====

1 workers cooperatives operating their own means of

v

Socialist writers, such as Ferdinand Lassalle (1825-
1864), advocated the establishment of publicly financed

production. It is argued that this would eliminate the
exploitation inherent in the capitalist wage system once
and for all. Pierson retorts that this is simply not the
case. Competition among cooperatives would still prevail.
Some associations would do better than others, while
some would not prosper at all and would end up by
being dissolved. Moreover, a member of the cooperative
who has two sons would not permit a father with ten
male descendants to introduce all of them into the
association on terms of parity and equal profit sharing.
As a result, a growing body of non-members would be
formed and these individuals would consider themselves
lucky if they could simply be employed (by the
association) as wage earners. Thus we return to the wage
system so much despised by the socialists. Within the
cooperatives, a new class of leaders-~hardly distingui-
shable from the old employers—would probably emerge.

Another important socialist proposal consists in the
nationalization of the means of production. If the state
intends to nationalize the nation’s productive resources
it would have to choose between a quick seizure or a
gradual one. A rapid take-over seemed improbable to
Pierson because the state would not know how to operate
such firms and would first have to learn. But a gradual
nationalization, supposedly accompanied by some
measure of compensation, would lead to the following
undesirable results. Resource owners, seeing the day of

confiscation come nearer, would stop saving and start

neglecting their property. Thus, whatever the state finally
confiscated would probably be impaired if not in a state
of advanced dilapidation. The smaller the indemnity, the
greater the neglect of property would be. No matter what
promises state officials could make, some people would
have their doubts about the state's willingness and
ultimate capacity to fulfill its financial obligations.

Socialism also pretends to be capable of reducing
economic inequality substantially. Would it be possible,
asked Pierson? The Dutch economist stressed the point
that when the means of production was collectivized the
former owners would be compensated; there would still
be a propertied class but this time the wealth would
consist of government bonds. Second, bitter experience
would teach socialist governments that saving and capital
formation must be encouraged in all types of economic
systems, especially if population keeps growing. In order
to generate such savings, government banks would be
obliged to pay substantial interest rates on savings

deposits while the institution of inheritance, which is

known to enhance saving, would have to be maintained.
Therefore, Pierson concluded, economic inequality
would survive. Moreover, as interest rates would
probably vary over time, the market value of government
bonds would fluctuate as well and speculation, so much
loathed by socialists, would still prevail.

There are also some positive aspects of socialism
according to Pierson. By eliminating competition and
organizing production in fewer units, some resources
would be liberated and reallocated. Total production
would then increase. Moreover, entrepreneurial profits
would cease to exist because they were a reward for risks
which no longer exist in the socialist community. Profits
could be redistributed to the rest of the population. The
burden of misallocation of resources and overproduction,
in particular branches of industry, would be spread more
evenly as the government compensated the unemployed
with funds taken from those lucky enough to keep their
jobs. Finally, in a socialist society, the economically weak
and vulnerable would be better cared for than in a more
laissez-faire economy. *

These advantages, Pierson noted, would be outstripped
by some severe drawbacks. Economic progress—without
competition—would be much slower than in a free
enterprise society, The bureaucratic world of socialism
consists of the controllers and the controlled; an
environment where individual initiative would be stifled
as it always is in bureaucratic organizations.

In order to foster creativeness, a considerable amount
of freedom of action could be left to the managers of
government enterprises. Partaking in the firm’s profit
might also be permitted; however, to avoid abuse of
freedom, managers would have to share in the losses,
too. This situation would probably lead to a *‘safety first”
policy resulting in little or no inventiveness in the final
product. In addition, after a relatively short period of
socialism it would become increasingly more difficult
to find anyone from the old entrepreneurial class who
once had managed their own firm. Thus all entreprises
would be conducted by bureaucrats and government
officials and it is well known that government offices
are not fertile grounds for creative ideas.

Another problem socialism would have to face is that
of capital formation. In a free enterprise society large
profits and high rents are usually invested and thus
converted into productive equipment. This capital
formation makes large scale production, low prices and
rising wages possible. Even if a socialist state rewarded
savings, profits and rents as sources of capital formation
would disappear and it would, according to Pierson,
remain to be seen whether individual savings would
permit the steady increase in living standards witnessed
in market economies. In order to speed up capital
formation socialist governments might find themselves
obliged to set a wide margin between wages paid and
the prices of products posted in government stores. In

‘other words, socialist governments would pay workers

wages which are less than the value of their product,
which amounts to the very essence of “‘capitalist
exploitation” in socialist criticism. Finally, (here Pierson
is a predecessor of Lionel Robbins) patterns of
international trade and finance would degenerate into
international rivalry.5



===== PAGE 4 =====

Academic Socialism the ideas of earlier schools of thought. Others attempted

Before we enter into Pierson’s views on “academic” to discredit scientific economics in order to facilitate
or state socialism a few words of introduction are in vindication of prejudices and erroneous policies being
order. Between 1843 and 1883, the so-called “Historical advocated by representatives of the working class. Pierson
School” was the most influential circle of economic added, that such writings always end up glorifying the
thought in Germany. This school assigned overwhelming laboring class. Comprehensive criticism of State |
importance to historical studies in the examination of Socialism could, according to Pierson, be summarized |
economic processes while neglecting the deductive In 81x points:
method. Analytical economic theory was virtually 1) State Socialists return to an old-fashioned simple-minded
ignored in Germany between 1870 and the early 1920s, distinction which divides economists into two categories, those
so that most German economists were unable to who live in darkness—those who adhere to the teachings of
understand the great inflation of the 1920s and the the classical school—and economists who have been
depression of the 1930s. This influence was due to Gustav “enlightened” by prophets of the Historical School and
Schmoller (1838-1917) and other members of the later Academic Socialism. These socialists of the chair, says Pierson,
completely ignore the evolution of classical economic theory

period of the Historical School. Snort FY ng
as witnessed in the writings of such authors as john Stuart
The older “Historical School” had been influenced Mill, John E. Cairnes and Johann H. von s Joba They

by the so called “Romantic Movement” and characterized merely confront simplified versions of the ideas of classicals
by strong anti-individualistic intellectual tendencies. such as Adam Smith, David Ricardo ‘and Thomas Malthus
Thus, the Historical School had accustomed men’s minds which are supposedly “outdated” compared with those of the
to the idea that the analytical apparatus of classical “modern” writers like Schmoller and Wagner. They keep
economists was of minor importance. Theyalso prepared grouing that science should be on the move. Pierson retorts
people for state intervention in the economy. that this is a fine idea as long as science moves forwards.

Judging from the writings of the academic socialists, which
are full of the most elementary errors, economic science seems
to be moving backwards. Examples of basic mistakes quoted
by Pierson are: a) low wages only exist because collective
bargaining is lacking; b) when two countries exchange goods
and services one of them can increase its demand and/or supply
without causing a change in the terms of trade; ¢) David Ricardo
was the only source of Karl Marx’s ideas.

During the latter part of the nineteenth century there
arose in Germany a reformist movement known as
“Socialism of the Chair,” State Socialism” or
Academic Socialism?’ (Katheder-sozialismus) because of
the large number of university professors supporting its
views. One reason for this new interest was Gustav
Schmoller, a member of the Historical School. Schmoller
was an academic socialist and an all-powerful figure in

the social sciences in Germany, had become so influential 2) Pierson admits that the existing body of economic theory
that for decades hardly any chair of economics was filled has sometimes been used to rationalize and defend the existing
without his approval. His endorsement of a candidate status quo as some academic socialists claim. However, some
required commitment to his approach to economics; of these armchair socialists go to the other extreme and employ
German adherents of the Austrian marginalist school economic concepts to rationalize and to justify their own
were systematically excluded from university positions. prejudices; one being that trade union activity always benefits
Academic socialists supported the following agenda the factory workers, Another one consists of claiming that
which was characterized by a far reaching extension of - a 1h oe rate intervention Py sertions To
government action: (1) redistribution of income through chat amo » cademic socialists ind endent scientific research
a progressive income tax and inheritance taxes; (2) has censed fo exist. According to Pierson such writing merel
encouragement of trade unions and workers’ coopera- Co ne . Ung merely
. . (1 i demonstrates the misuse and even the “prostitution” of
tives; (3) extension of social insurance programs and science. These state socialists do not help the working class
minimum wage legislation; (4) extension of public ence. FRESE _ 1eip the 8 ’
ownership of industry; and (5) protective cariffs but merely raise unrealistic expectations which cannot be
’ ’ fulfilled and end in frustration and unhappiness. Pierson cites
In the last decades of the nineteenth century anumber other examples of wrong ideas; such as the claim that the
of university professorships in the United States were middle classes are disappearing, the notion that social mobility
filled by young scholars who had studied economics in is becoming increasingly difficult for factory workers. These
Germany and had come under the influence both of the are intentional distortions of fact.
Historical School and State Socialism. The Americ .
N Co Sh, Lhe an 3) The socialists of the chair equated the economic laws
version of the Historical School came to be known as : ,
ce Ls ay of the classicals with physical laws which cannot be altered
Institutional Economics.” Actually many of the . A ny a
\ : SA or influenced. But as the academic socialists say, “man” has
founders of the American Economic Association, such ) Py )
. . ys ) a free will and has the ability to modify his environment.
as historicist Richard T. Ely, were familiar with and ) : : Sp oo
svmpathetic to this historical approach.’ Therefore, he is not subject to economic laws.® Pierson insis
ymp PP ' that this distinction is misleading. Physical laws, he says,
Pierson emphasized that the scientific quality of the describe natural phenomena, “man” does not participate in
publications by the “socialists of the academic chair” the outcome. With economic laws one economic magnitude
left much to be desired. Some works merely justified (continued on page 8)



===== PAGE 5 =====

Hermeneutical Integrity

| by
7) Jonathan Barnes
Balliol College, Oxford University

Review of Gadamer’s Philosophical Apprenticeships and
The Idea of the Good in Platonic-Aristotelian Philosophy

Hans-Georg Gadamer ranks as one of Germany's
foremost philosophers. He occupied a chair at Heidelberg
for a quarter of a century, during which time his lecturing
skills and steady flow of publications brought him a
reputation and a following second to none. Since his
retirement he has divided his time between Germany
and North America. Many of his writings have been
translated, and the English version of his major work
on Truth and Method has helped to extend his fame. His
thought now enjoys a considerable vogue in the English-
speaking world.

Gadamer was born in Breslau at the turn of the century.
His father was a chemist and a philistine who despised
the more speculative disciplines. But it was his father’s
paperback copy of Kant's Critique which first introduced
the young Gadamer to philosophy, and in 1919 he went

to study the subject at Marburg, the centre of the:

dominant neo-Kantian school. He was taught by Paul

@ Natorp and Nicolai Hartmann. In addition, Stefan George
had a hidden importance, Max Scheler was a strong
influence, and Paul Friedlaender later supplied a training
in Classical scholarship. But the mystagogue of Gadamer’s
philosophical initiation was Martin Heidegger. He first
met Heidegger in 1923 and was captivated: Heidegger's
seal-—to change the metaphor-~was pressed deeply and
firmly into the soft wax of Gadamer’s mind.

Philosophical Apprenticeships, a book of memoirs
interspersed with brief biographical sketches, gives vivid
and amiable accounts of those early years and early
influences. There are humorous touches. Scheler “was
always a lover of beautiful women (but only three times
married).” Gerhard Krueger “could say the most amazing
things to your face while simultaneously and carefully
probing himself.” Rudolf Bultmann made scholarly
compilations of the jokes his pupils were required to
tell him. Heidegger himself was at least once involved
in a joke—a joke about herrings which remains, alas,
as incomprehensible as the rest of Heidegger's jovial
philosophy.

~~ Intellectually, life was intensely stimulating. It was also
exacting—the more so in that Heidegger would lecture

at seven in the morning, while Hartmann never rose
before midday and only flourished after midnight.
® Moreover, the circumstances of young Privatedozent were
severe: a meagre salary had to be eked out by tuition

money, and tuition money depended wholly on the skill .

of the tutor in attracting pupils. In any case, the Weimar
years in Germany were economically grim.

The Third Reich brought a turn for the better.
Although “our circle thinned and our situation became
difficult,” Gadamer and his friends were determined to
survive. “It remained difficult to keep the right balance,
not to compromise oneself so far that one would be
dismissed and yet still to remain recognisable to
colleagues and students. That we somehow found the
right balance was confirmed for us one day when it was
said of us that we had only ‘loose sympathy’ with the
new awakening.” This “loose sympathy” with the Nazi
regime amounted, in concrete terms, to this: Gadamer
declined to ‘spout Nazi nonsense from the podium,”
but he was prepared to give the Hitler salute.

A long-standing friend of Gadamer’s, Richard Kroner,
taught philosophy at Kiel. In 1934, Gadamer reports,
“fate intervened to throw Kroner off track’: that is to
say, Kroner was sacked because he was a Jew. Gadamer
took his job.

Despite this little success, further balancing acts were
still required, and in 1936 Gadamer voluntarily registered
at a Nazi “rehabilitation camp.” Doctrinally, life in the
camp was mild and undemanding, and Gadamer satisfied
his examiners without difficulty. He was also able to
join in the “gymnastics, competitive games, and marches
with nationalistic singing,” which enriched the emotional
life of the inmates. During his training, he was fortunate
enough to catch a glimpse of the Fuehrer himself, who
impressed him ‘‘as being simple, indeed awkward, like
a boy playing the soldier.”

The rehabilitation paid off. In 1937 Gadamer attained
the rank of professor. In 1938 he was called to a chair
in philosophy at the University of Leipzig. “The new
beginning in Leipzig” happily “pushed the gloominess
of the world situation into the background,” and
Gadamer could concentrate on his philosophy. The war
came. The gloom thickened. Leipzig was bombed to
rubble. Gadamer lectured on. He survived. And when
the Americans occupied Leipzig in 1945 they made
Gadamer what in another context would be called a
trusty. He was, after all, “uncompromised” (the
description is his own), and he came to play a major
role in the post-war reorganisation of the university.

But Leipzig was in the Eastern zone, and in the autumn
of the year the Russians took over from the Americans.
Plus ca change. Gadamer soon discovered that he
“belonged to the political ‘elite’ of the Soviet Zone.”
He was appointed Rector of the university. The position
was delicate. He had to be “constantly on his toes”’—
so much so that “it soon proved necessary to reserve
to myself the opening and distribution of incoming mail.”

- But by his deftness and sagacity he won ‘“‘the special

esteem of the Russian cultural authorities”: “the Russians
could at least be certain that I would carry through their
directives exactly, even against my own convictions.”
Nonetheless, Gadamer wanted to migrate to the West.
He received an offer from Frankfurt but feared that he
might not be let out: the issue of his departure “was
quite possibly a prestige operation for East German



===== PAGE 6 =====

cultural politics.” Eventually, in the winter of 1947, he ces and are bound by the “prejudices” of our age; as
and his books were freighted westward, a prudent supply philosophers, we must start from these prejudices (we
of alcohol and nicotine ensuring that he had no trouble could start nowhere else), and although we may examine '

with the railway authorities or the border guards. A year them, we should not suppose that we can step beyond

later he was called to Heidelberg, them and reach some timeless and objective truth. -
So much for the man, as he has portrayed himself. Fourthly, philosophy is linguistic: the ideas it advances |

What of the philosophy? “Hermeneutics” is its name. and the prejudices it examines are inseparable from their

It was not invented by Gadamer himself—on the linguistic form—thought and language are one, and all

contrary, Gadamer stands at the end of a long German understanding is linguistic understanding.

tradition which goes back at least as far as Schleiermacher The hermeneutic programme thus appears to demand

at the beginning of the 19th century. Gadamer’s own
version of hermeneutics is closely connected to the later
thought of Heidegger. But what, precisely, is the
hermeneutical tradition?

a scholarly approach to philosophical questions:
hermeneutics is interpretation, and, in particular,
interpretation of the philosophical texts of the past. All

Cs Ca this will remind English philosophers of the ideas of R.
The word “hermeneutic” is a posh term meaning “to G. Collingwood, who believed that philosophy was a |

. . : : + : [4 #4 4 $3
g ything 8. APP presuppositions of the human mind. It will remind

Philosophical Apprenticeships is an essay “On the Origins A ) arp
of Philosophical Hermeneutics,” which allegedly gives Classicists of Seneca’s sarcastic quip: quae p hilop hia fuit
a “succinct and comprehensive” account of Gadamer’s facta philologia est. And Gadamer’s own practice appears
thought. For example: to fit this picture: most of his early writings were, in
The hermeneutic task of integrating the monologic of | fact, of a scholarly and exegetical nature—they Were
the sciences into the communicative consoles mostly concerned with elucidating aspects of thought of
includes the task of exercising practical, social and Plato and Arisorle. And G adamer’s own conception of
political reasonability. practical philosophy derives from Aristotle, while of
More elaborately: Plato he says that “insofar as they are my constant
companions, 1 have been formed more by the Platonic
The model of practical philosophy must take the place dialogues than by the great thinkers of German Idealism.” 'y ¥

of a theoria whose ontological legitimation may be found
Bor y Many philosophers will be unhappy with this state

only in an intellectus infinitus that is unknown to an +
existential experience unsupported by revelation. This of affairs: can they, or should they, really do no more £4

model must also be held out as a contrast to all those than interpret the past and examine the standing k :
who bend human reasonableness to the methodical prejudices? Is there no room for pure thought or for 5
thinking of “anonymous” science. In opposition to the free speculation? Indeed, is there not a whiff of self- 3
perfecting of the logical selfunderstanding of science, this contradictoriness in the notion that philosophy is merely :
seems to me to be the authentic task of philosophy and the study of its own history? Students of the history i
is so precisely in the face of the practical meaning of of ancient philosophy may add a further complaint; for iF
science for our life and survival. | the scholarly studies of Gadamer and his disciples have

‘1 do not myself understand much of this, and so it received only sporadic acclaim outside the hermeneutical

may be appropriate to apply here what Gadamer calls school itself. Gadamer’s reflections on The Idea of the
“the hermeneutical principle that understanding must be Good in Platonic-Aristotelian Philosophy seem—to me at

a translation into one’s own language if it is to be real least—flat and unprofitable. As an essay in interpretation
understanding.” Here, then, is an English translation. The the book says little, and it says it at length.
hermeneutical philosophy, I guess, has four chief and Yet in a sense these doubts are misconceived: for

interconnected characteristics. It holds, first, that Gadamer does not in truth stand in the tradition of
philosophy is essentially practical: philosophy is, or philological philosophy. He is not an historian of thought,
should be, primarily and intimately concerned with and he is not an exegete. In what may be seen as a criticism
moral, social, and political issues; the idea of the Good of the Anglo-American approach to ancient philosophy,
is the highest object of philosophical contemplation, and he writes:

practical reason is the model for philosophical method.

Secondly, philosophy is essentially humanistic: it rejects - One can win a certain clarity by analysing the

"argumentation of a Platonic dialogue with logical means,

| the aspirations of the natural sciences, regarding their showing up incoherence, filling in jumps in logic, J
“search for objective, impersonal and anonymous truth unmasking false conclusions, and so forth. But is this
as the vain pursuit of an ignis fatuus; and it subscribes the way to read Plato, to make his questions’ one’s own?
instead to anthropocentric notions of value and truth. Can one learn from him in this way, or does one simply
Thirdly, philosophy is necessarily historicist: we are all confirm one’s own superiority?! What holds for Plato
determined, intellectually, by our historical circumstan- hold mutatis mutandis for all philosophy.



===== PAGE 7 =====

The answer to Gadamer’s two questions are plainly
these: “Yes, this is indeed (part of ) the way to read Plato—
. if your aim in reading him is understand what he meant,”
3 Wand “Yes, you can learn from him in this way—at any
rate, you can learn about him.” Gadamer will find these
answers unsatisfactory—because he himself has no wish

to learn about Plato.

And in fact, according to Gadamer, “philosophy has
no history.” Philosophy is in some fashion textually-
based and interpretative: but it is not, in any straight-
forward sense, exegesis or history. What, then, can it
be? In Gadamer’s view, the ‘peculiar character of
historical scholarship” is found in the fact that “the
cognition of its object entails and presupposes as an
ultimate hermeneutical principle a recognition of the
self.” The principle was learnt from Heidegger. “In
Heidegger’s lectures we were often so personally touched
that we no longer knew whether he was speaking of his
own concern or of that of Aristotle. It is a great
hermeneutic truth that we then began to experience
personally and that I was later to justify in theory and
to represent.” The hermeneutical approach to philoso-
phical texts is thus wholly egocentric: we read Plato in
order to “learn from him,” in order to ‘make his
questions our own;” when we talk nominally about
Aristotle we are really talking about ourselves. We do

_ di not particularly wish to learn about Plato. We are not
interested in the fact that Aristotle’s concerns were utterly
different from our own.

This “recognition of the self’ is not, pace Gadamer,
a feature of historical scholarship: it is a feature of
unhistorical anti-scholarship. Hermeneutics is not,
despite its claims, a historical science. Nor, despite its
name, is it an interpretative science. Interpreters look
at the sparkling surface of Plato’s text in the hope of
gauging the depth and the movement of the waters
beneath. The hermeneutical philosopher looks at the
surface in order to contemplate the reflection of his own
"more lovely features. Perhaps this explains why
Gadamer’s portraits of Plato and Aristotle sometimes
look a little Germanic.

There is nothing in the least wrong or disreputable
about his way of doing philosophy. Philosophers are at
liberty to hobble along on whatever crutches they can
find. Some sit and think by themselves, some read novels,
some read Scientific American—and many read the works
of their own dead predecessors. If a quick flick through
Aristotle inspires a thinker to new thoughts, that is
nothing but good: what matters is the content of the

3 inspiration, not its source. And if treating Aristotle in
this way be deemed a sort of exploitation, then let him
be exploited. But you may not call it scholarship, and
you may not call it history, and you may not call it
interpretation.

Nor is it peculiar to the hermeneutic men that they
seek inspiration in this way. What, then, are the
characteristic features of the hermeneutical philosophy?
Its enemies will wade in with adjectives like “empty,”
“vapid,” “dreamy,” “wooly,” “rhetorical.” Gadamer
himself tells an uncharacteristic story. At the end of a
seminar on Cajetan, Heidegger once startled his devoted
audience by posing the question: “What is being?’ “We
sat there staring and shaking our heads over the absurdity
of the question.” Quite right too, say the enemies of
hermeneutics: the question is perfectly absurd. But
Gadamer has only a frail sense of the absurd, and his
own reader ought to react as he once—but alas, only
once—reacted to Heidegger.

bE I 4 4

Gadamer is prepared to admit that his thought has
sometimes been less than pellucid: “Certainly I
sometimes spoke over [my pupils] heads and put too
many complications into my train of thought. Even earlier
my friends had invented a new scientific measure, the
‘Gad,’ which designated a settled measure of unnecessary
complications.” Some may prefer to this self-
congratulatory little story a remark which Gadamer
makes of his younger self: “Despite my title of doctor,
I was still a 22- year-old who thought rather murkily,
who reacted portentously to murky thinking, and who
still did not really know what was going on.” Did the
boy ever grow up? Or was he, too, always a little awkward,
like a boy playing the soldier?

The proponents of hermeneutics will accept none of
this waffly criticism. What to me is impenetrably dark
or pompously inflated is to them lucidly refulgent and
heavy with sense. And the particular illumination of
hermeneutics streams, they may perhaps aver, from a
determined opposition to any fixed and static dogma.
Hermeneutics stands above all for a staunch anti-
dogmatism, a “negative” dialectics’ which sails close to
scepticism. Gadamer puts it as follows:

Hermeneutic philosophy understands itself not as an
absolute position but as a way of experience. It insists
that there is no higher principle than holding oneself
open in a conversation. But this means: Always recognise
in advance the possible correctness, even the superiority
of the conversation partner’s position. Is this too little?
Indeed, this seems to me to be the kind of integrity one
can demand only of a professor of philosophy. And one
should demand as much.

The anti-dogmatism enjoined and espoused by the
hermeneutical tradition has, so far as I can see, no
connection with its claim to be a historicist and an
interpretative philosophy: but anti-dogmatism is directly
tied to the second characteristic of the tradition—its
rejection of the objective aspirations of science.

(continued on page 11)



===== PAGE 8 =====

(Overbeek continued from page 4) characterized by widespread government interference. From
changes as another varies, but this always occurs via a the paternal state we moved to the idea of government acting
psychological decision-making process. If the price of coffee merely as a policeman or watchman which involves the 1
rises in Amsterdam, it will, with a lag, also increase in Hamburg. establishment and enforcement of a legal framework. As ;
The second event results from the first. As merchants in Pierson puts it, the latter form of government existed longer
Hamburg observe the price increase in Amsterdam they realize in the literature than in the real world. However, if the state
that coffee in Hamburg is relatively cheap. Thus the demand socialists would have their way, the old evil would return to
for the latter kind of coffee would increase and the price rise. us in a new form. The socialists of the chair, says Pierson,
This simple event, says Pierson, is the result of a process which oppose “laissez-faire” and apparently want to replace it with
links one variable to another. If the interest rate rises, “ne laissez-rien faire” (allow nothing to happen). Pierson warns
entrepreneurs are less inclined to borrow and capital formation that big government inevitably kills private initiative, while

slows down. Man always stands between one economic event weakening feelings of individual responsibility.'°
and the next. Yet there will still be a decision making process Finally, Pierson inquires how the socialists of the chair
and economic regularities. } ,
can reconcile their enthusiasm for government interference

4) Socialists of the chair also misunderstand the economists’ with their rejection of economic laws. If one denies the
basic assumption about human behavior, that individuals existence of economic regularities and predictability one has
normally tend to follow the dictates of their own interests to admit that the implications of state intervention cannot
or desires. As Pierson states, each act of choice entails a benefit be foreseen either. Therefore, those who repudiate the existence
and a cost. Individuals will normally choose that course of of economic rules and generalizations should perhaps favor
action which yields the highest level of satisfaction given the laissez-faire. Logically speaking one cannot advocate something
cost. Academic socialists misrepresent this idea by arguing that if one believes that its consequences are unpredictable.
if the above basic postulate were valid all societies would consist ; . qe .

Economic Calculation in a Socialist Society

of petty tradesmen obsessed by a quest for pecuniary gain.
Then they assert that in reality people are not exclusively self- Pierson was the first economist to draw attention to

seeking so that classical economists and their followers work the so-called problem of economic calculation in a

with unrealistic premises leading to erroneous conclusions. socialist society;!! he did so in a paper written in 1902
entitled “The Problem of Value in the Socialist
Community.” In a socialist community, just like in other |
types of communities, consumer goods as well as factors fgg .
of production have to be priced if meaningful price and |

In reply Pierson argued that for an economist to be useful
he must concentrate on the essential. People differ in significant
ways but their economic behavior is sufficiently uniform to
permit some important generalizations. Imagine a man of

learning who prefers to be alone with his books and has little cost comparisons are to be made by consumers and
of strictly economic actions. Basic supplies will have to be abolishes markets, as it intends to, there is no mechanism
bought and on occasion he may want to invest a small sum to determine the value of consumer goods and resources.
of money. What will be his motivation if not self-interest? Comparisons cannot be ma de. Although Pierson was
This simply evidences a normal psychological process which ! . . ’
FE first, as is well-known, it was Ludwig von Mises who
the economist assumes to exist because he knows from i 4 .
| developed the argument in great detail, demonstrating

observation that it is a fairly good approximation of reality.
Experience shows that human behavior displays rather stable
and predictable responses to various economic stimuli which
contributes to the relative universality of economic laws. It is interesting to note that Pierson stressed the
international aspect of the problem. Developing his
earlier argument about the politization of international
trade, he emphasized the fact that international trade

that in the absence of market determined prices,
economic planning in a socialist society leads to chaos.

5) Academic socialists repeating the arguments of the
Historical School also maintain that economic events are not
predictable because institutions, preferences and knowledge

constantly change over time. In reply Pierson puts forward requires credit. In free market economies the price of |
the view that amidst all change many fundamentals remain. such credit, the interest rate, is determined by the demand
Agriculture, he says, has made great progress; yet there are and supply of loanable funds. Countries with abundant
still more and less fertile lands so that the Ricardian theory loanable funds (England in Pierson’s time) have the
of rent, which predicts relatively high rents on the more fertile lowest interest rates and almost automatically become
lands, is as valid as it used to be in the past. . :
the international financiers of world trade because they
6) The last charge levelled by Pierson against the proposition can provide credit on the best terms. But if in the future
of the academic socialists relates to their unmitigated two socialist countries trade, how and where asks Pierson,
enthusiasm for state intervention. Pierson notes that only will interest rates be set, especially if the practice of
. . . . bd
recently did we manage to free ourselves of the interventionist discounting bills of exchange is interrupte dr CY “3
A

(mercantilist) framework of policies. Now we are in danger
of returning right back to it again.’ Total laissez-faire may
not be ideal but does that mean we have to go to the other
extreme! For centuries we have lived in “paternal” states

The international movement of capital raises similar
questions. Saying that capital moves from low-priced
(continued on page 12) ;



===== PAGE 9 =====

Review of The Gold Standard: ignores the regression theorem in that the “Hayek” notes
An Austrian Pers pective would never have had any use value to base its exchange
1 value upon. If this were what Hayek meant the criticism

Bg by would be correct, but it is not so clear that this is the

Steven Horwitz case. Multiple note issuers might name their notes
“Hayeks” or ‘‘Rothbards’”, but such notes would still
need to be denominated in terms of the current monetary
unit. The “Hayek Bank’ might issue “Hayek” notes (like
“Federal Reserve” notes), but they would have dollar
(or whatever) denominations. If this interpretation is
correct, then the regression theorem has not been ignored.
In any case we should take to heart Rothbard’s reminder
of one of Mises’s greatest insights.

Of all the areas of economics in which Austrians can
make distinct contributions, monetary theory is perhaps
the most important. As Austrians and many non-
Austrians realize, a properly functioning monetary system
is vital to a sound economy because money pervades
all markets. As Roger Garrison put it in his excellent
survey of macroeconomics, ‘Time is the medium of
action; money is the medium of exchange.”! All action

takes place through time and all exchange takes place Hans Sennholz’s contribution sheds light on one of
through money. Anyone wishing to influence the pattern the most important insights in Austrian theory, Menger’s
of exchanges need only have control over the monetary story of the origin of money. A deep understanding of
system. With the recent problems in the United States this story is the fundamental Austrian criticism of
monetary system and the general economic malaise they constructivist attempts at monetary policy. Menger
have led to, the time seems ripe for some fresh ideas. describes money as a spontaneous order that by its very

nature cannot be effectively tampered with.
One source for new ideas is the recent collection of

essays entitled The Gold Standard: An Austrian Perspective.
The contents are a selection of papers presented at a
November 1983 conference in Washington sponsored
by the Ludwig von Mises Institute. It is an excellent
collection of articles covering money and banking and
the dynamics of monetary theory. As one reads through
“ie though, one realizes that perhaps it is mistitled; what
the book contains is Austrian perspectives. The essays
reflect the diversity of Austrian thought and approaches
to monetary theory. Through the comparisons and
contrasts within the framework of the book, we develop
a richer understanding of Austrian theory. Each of the
approaches illuminates features of the others.

The importance of Menger’s story is that the whole
process does not need any central direction. As Sennholz
paraphrases Menger, “Without any agreement, without
legislative compulsion, in fact, even without any
consideration of public interest and the public good,
individuals are persuaded to exchange their goods and
services for more marketable goods, even if they are not
needed for immediate use.” (p. 21) As in the Rothbard
article, Sennholz reminds us of the danger of attempting
to force a money on people. By its very nature money
cannot be “created” in this way. To be a medium of
exchange, a commodity needs to be accepted voluntarily
and be imbued with the trust that this brings. Any attempt
at monetary reform has to recognize the futility of

The first of the essays is Murray Rothbard’s “The constructivist changes imposed on an evolved choice in
Case for a Genuine Gold Dollar,” which is the standard money.
Rothbardian defense of a 100% reserve gold dollar. Perhaps the greatest benefit of Sennholz’s article is a
Rothbard reminds us that any monetary theorist must ~~ (ontinuing renewal of interest in Menger’s works. Over
consider Mises’s regression theorem when proposing any 100 years later, Menger’s Principles still stands as a true
reforms. The regression theorem states that any current pagterpiece and his methodological writings are crucial
medium of exchange must have once had a pure use to comprehending the truly radical challenge that
value in order to establish a trading ratio between it and Austrian economics poses to historicism and positivism.
other commodities. If it did not, we would have no way An understanding of where Austrian economics is today
of originally gauging prices in terms of that commodity. must include an investigation of where it came from.
‘This implies that one cannot simply impose a medium There is no better place to start than Menger.

of exchange on a populace, such a commodity, by

definition, has to be a historically evolved choice. This

of course does not mean that the given commodity will

continue to be the medium of exchange, but for the
v present we cannot ignore the past.

In his discussion of “Ludwig von Mises and the Gold
Standard,” Misesian scholar Richard Ebeling indicates
the implications of an improper monetary system, as he
discusses Austrian business cycle theory. The key to the
Mises-Hayek theory of the cycle is the non-neutrality

Rothbard makes this criticism in light of Hayek’s plan of money. The usual Friedmanite/Rational Expectations
for the denationalization of money. Hayek argues that story assumes that money is neutral in the long run,
anybody could issue notes in his scheme so Hayek himself in that increases in the money supply increase only the
might issue *“Hayeks”. Rothbard counters that this absolute level of prices and income without affecting the

9


===== PAGE 10 =====

relative values. Rothbard has called this the “Angel Roger Garrison has a number of insightful points in
Gabriel” model because it is as if the Angel Gabriel his article on the costs of a gold standard. Garrison begins
magically multiplied all prices and cash balances by the by saying that he is using the term gold standard “to -- .
same constant. denote the outcome of a market process.” (p. 62) He!
elaborates that, when left to themselves, people will -
develop a medium of exchange with certain character- :
istics, and the commodity best meeting those charac-
teristics has been gold. The important point here is, as i
Mises pointed out in 1912, that we, again, cannot impose
a monetary system on people, we must simple remove
all obstacles to them choosing the one they desire. The
quickest way to do this is to abolish all legal tender laws
and remove the FED’s privileged position as a monopolist
in money, by stopping open market operations, closing
the discount window, and making the dollar convertible
into a fixed amount of some commodity. By allowing

the market process to work we can discover the public's
As for how the new funds come in, the usual Austrian ~~ 14e preferences for a monetary system.

. story is that banks increase commercial credit and thereby
lower the interest rate in the credit market. This makes
previously untenable projects look profitable and
encourages investors to start longer térm projects. The
‘problem is that savers’ true time preferences have not
shifted and the new projects cannot be sustained by these
underlying true preferences. At some point the flow of
credit stops and the real preferences reassert themselves,
revealing the misallocations of the injection. Once this
malinvestment has been discovered it can be washed out
and profitable investments can again be undertaken.

The problem with this view of inflation is that it ignores
the importance of where and how the new funds are
actually injected into the system. Realizing that money
comes in at certain points implies that certain people
have it before others and can spend it before prices begin
to rise. Those who receive it later face prices that have
already risen and therefore these people are worse off
than they were before. Even more important, according
to Ebeling, is that all prices do not rise uniformly. These
relative price effects shift the allocation of resources away
from the previous pattern toward the new one induced
by the injection of new money.

In his critique of the Friedman analysis of the costs
of a gold standard, Garrison nicely integrates Austrian
price theory into his discussion. The neoclassical analysis
is a long-run one where all supply curves are perfectly
elastic. But, Garrison claims, this is a wrong assumption :
for the present analysis. The gold supply is inelastic in :
any run due to increasing costs of extraction and natural
scarcity. The Austrian concern with realistic assumptions
and the process of the market, not its results, leads to
a far better analysis, i.e. recognizing that the costs of
a gold standard are not as steep as Friedman concludes.

Of course the culprit in this story is the central bank.

As Ebeling notes, unwanted injections of credit only

i occur when central bankers inflate and get away with

| it. A gold standard and/or free banking system, on the

other hand, would self-regulate the supply of money and
credit so that they corresponded to the real demand for
money and loanable funds. Money, like any other good,
would be supplied to the extent it is demanded. This
idea, known as monetary equilibrium theory, has been
forgotten in the rush to stabilize purchasing power and
manipulate the money supply for macroeconomic goals.
The ability of the gold standard, or free market money
to equalize the supply and demand for money severely
limits macroeconomic distortions.

Lawrence White presents his case for free banking and
its relation to the gold standard in his essay in the
collection. White raises a number of interesting
questions, all of which are crucial to the issues at hand.
First and foremost, he reminds us that for money, as
for any other good, the task the market faces is to ensure
a correspondence between supply and demand, and to
provide the kinds of goods and services that people
demand. Again, as other contributors have said, a §
monetary system has to evolve out of the free choices
of market actors. White also notes that gold has
historically been the choice for the monetary base and
there are theoretical reasons to believe that it would 3

oo continue to be so under free banking.
As Leland Yeager points out in his introduction, gluts

| and shortages of money have more drastic implications
| than other goods because money is one side of all
exchanges. Chaos in the money market means chaos in

all markets. While most economists would count mone
¥ the monetary authority should adjust the supply of

as the first good that government should produce and I + “urchasi ble. But Whi
control, Ebeling and Yeager question why such a crucial =~ ™O2¢Y to keep its purchasing power stable. but ite, |.

good should be left to political manipulation when the in the tradition of the monetary equilibrium theorists, wy :
market can -effectively do the job. As many of the has shown a fallacy here. Should it any more be the

;] » 13 Kl al» .
contributions indicate, hundreds of years of destructive ~~ SOVErnments responsibility to stabilize the price of butter

- ) 3 - 7
business cycles attest to the inability of government to by manipulating its supply? The whole marvel of the
get the j ob done. market is that it allocates resources, matching supply

Many proponents of monetary reform, and many
defenders of current policy, think that monetary policy
should aim at the stabilization of the purchasing power
of the monetary unit. Regardless of all else, they claim,



===== PAGE 11 =====

and demand, through price adjustments. In fact, attempts ‘Roger Garrison, “Time and Money: The Universals of Macroeconomic
to fix prices (and controlling the money supply is a way Theorizing” (Journal of Macroeconomics v.6 no. 2, Spring 1984)
- of fixing all prices) frustrate this process and cause
@Ainnecessary harm. Should not the same reasoning apply
to money, especially given that money is one half of
all exchanges, and is that much more crucial to a properly
~ functioning economy?

]
i
i

Steven Horwitz is a Claude Lambe research assistant at the
Center for the Study of Market Processes at George Mason
University, He is currently working on his Ph.D. in economics

White also discusses two theoretical p oints pertaining and is specializing in Austrian economics. The views expressed
to the workings of a free banking system. On p.118 he here do not necessarily represent those of C.8.M.P or G.M.U.
argues that competition among multiple note issuers will
guarantee quality. Many opponents of free banking worry (Barnes continued from page 7)

about a bank issuing inferior notes in huge quantities
as a way of turning a quick profit. White argues that
~ no single bank has an incentive to expand note issue
beyond the demand of its noteholders. If the bank
attempts to do so, it will face adverse clearing at the
clearinghouse as noteholders dump the unwanted notes
at other banks. This will cause an unprofitable drain
on reserves, forcing the bank to scale back note issuance.

Now anti-dogmatism is no doubt a Good Thing, and
every wise man is something of a sceptic. You need not,
it is true, indulge in hermeneutics in order to be wise
in this way: even analytical philosophers can be—tend,
in fact, to be—modestly sceptical. But modest scepticism
is not quite the same as “openness,” and perhaps in
the end it is “openness’ which is the key to Gadamer’s
philosophy. |

In addition, since the defining characteristic of a money
is its acceptability in exchange, banks have a large
incentive to have their notes accepted by depositors and
local merchants. Banks would probably advertise how
widely their notes were accepted (as banks did with
substitute currency during the panic of 1907). Banks
would (and did) advertise their financial situation much

ymore freely in a system that did not have mandatory
insurance programs.

A sceptic recognizes that he himself may always be
wrong. Gadamer’s “open” philosopher allows that his
opponent may always be right. A modest sceptic may
have little hope that he has discovered the true answer
to any question: but he may for all that be sure that
he has uncovered several false answers. He may, indeed,
in his modest way regard the history of philosophy as
a ceaseless campaign, marked by frequent defeats and
occasional triumphs, against the ever powerful forces of

This whole discussion leads into the current debate fallacy and falsehood. He will not set up his own standard
among Austrian economists. Rothbard contends that with any great conviction. But with some opponents he
fractional reserve notes are fraudulent since they are a will not be “open”: he will be quite sure that they are
promise to pay a specific amount that the bank may wrong.

not be holding at the time. White counters that a typical
bank note only claims to pay a specified amount on
demand; it says nothing about the reserve behavior of
the bank. (p. 120) Of course the note is a contract,
in that a failure to redeem is a breach of contract and
the note holder still has a legal claim to that contract.
In a free banking system, depositors would be free to
negotiate any reserve arrangements (including 100% if
they so desire) that are voluntarily agreed to.

Hermeneutic openness is something more than a wary
scepticism. Is it also always virtuous? In particular, is
it virtuous in the practical sphere, where false beliefs
may ground foul actions? The question should be asked,
since Gadamer’s philosophy is, in intention at least,
practical. And it might even be conjectured that the idea
of openness is the point of contact between Gadamer’s
life and Gadamer’s thought. For the accommodations
of Gadamer’s life seem to illustrate nicely the openness

Banks, of course, would have every incentive to meet which his philosophy applauds. Then shall philosophers
consumer demands for reserve assets. One can imagine admire that openness which in hard reality conducted
banks catering to the risk preferences of depositors, with Gadamer safely from Marburg to Heidelberg? And shall
some banks advertising their 100% reserve policy as a we see here “the kind of integrity one can demand only

selling point. The crucial point of the debate, and the of a professor of philosophy?”

whole book, is that all Austrians do agree on the : |
elimination of the government's monopoly on money This article originally appeared in the London Review of Books

~,! via the Federal Reserve System. Regardless of what of November 6, 1986. The Austrian Economics Newsletter wishes

~ {gf happens m a deregulated monetary system, the book to express its appreciation to Professor Barnes and the LRB

makes clear that the abolition of that monopoly is the for their permission to reprint.

key to a sound monetary system. As a theoretical starting -

point to that end, this collection is both useful and

enjoyable reading. : :

11


===== PAGE 12 =====

(Overbeek continued from page 8)
locations to higher-priced ones amounts to stating that

it moves from areas where its value is relatively low to.

areas where its value is relatively high. In Pierson’s day
capital moved from Europe to “overseas” areas. Interest
rates served as guides and they tended to be low in the
capital abundant regions and relatively high in the capital
scarce nations. Pierson wondered how capital flows were
to take place in a socialist world without interest rates.

A final issue was that of the terms of trade. Let us

suppose, that prices are no longer allowed to be

determined in the usual way. And let us suppose further
that the value of goods were set by such socialist criteria
“as the amount of labor expended on them. In that case
a relatively inefficient country spending many hours of
labor on the production of an item would end up with
higher prices than a more efficient nation. This could
lead to the curious conclusion that the inept nation may
experience better terms of trade than the more skillful
country. If the inefficient community were somehow
allowed to impose its prices upon others, international
trade could degenerate into organized plunder. Ironically,
“exploitation” could become the leading principle of
international trade among socialist nations, 2

Conclusion

Nicolaas Pierson was undoubtedly a most versatile
economist blessed with a fertile mind. Few people can,
as he did, combine the career of an academic economist
with that of a central banker and statesman. Following
in the footsteps of Menger, Jevons and Bohm-Bawerk
he brought single-handedly the "marginal revolution”
to the Netherlands. Pierson fits into the Austrian tradition
in other ways as well,

(a) Throughout his life he defended the deductive method
as being the most appropriate to economic analysis. Yet he
recognized the importance of empirical work and historical

knowledge.

(b} Pierson always opposed state intervention in the
economy as a matter of principle. He knew that it could not
always be avoided but he kept believing that government is
best when it governs least.

(c) Like Bohm-Bawerk and von Mises, the Dutch economist
was very critical of revolutionary and Academic Socialism
which, as he saw it, would create far more problems. then
it would solve.

(d) Pierson strongly believed that real improvements in living
standards would not come from the redistribution of income
but from capital accumulation, increased output and a
slowdown of population growth.

(e) Pierson constantly defended free trade with all his might
and opposed protectionism whatever the motives. In 1896
when countries such as Germany and. France began to move -!

towards protectionism Pierson founded an association in they
Netherlands named ‘Free Trade.”

Bibliography

Aulnis de Bourquil, J.D. “Nicolaas Gerard Pierson,” Jaarboek van de
Koninklijke Akademie van Wetenschappen, Amsterdam, 1911.

Bordewijk, H.W.C. “Pierson, Nicolaas Gerard (1839-1909),” Encyclopedia
of the Social Sciences, New York: MacMillan, 1934.

“An Economic Critique of Socialism,” The Journal of Libertarian Studies, Vol.
V, Number 1, Winter 1981.

Hayek, F.A. (ed). Collectivist Economic Planning. Clifton: A.M. Kelley, 1975.

Holtrop, M.W. “Een Terugblik op Dr. N. G. Pierson,” De Economist 126,
Number 4, 1978.

Mises, L. von. Human Action. (3rd ed.) Chicago: Contemporary Books, 1963.

Nishiyama, C. & K.R. Leube (eds). The Essence of Hayek, Stanford University
Press, 1984.

Pierson, N.G, Principles of Economics, Vol. 2. London: MacMillan, 1912.

Robbins, L. Economic Planning and Intemational Order. London: MacMillan,
1937. :

Rothbard, M.N. “Ludwig von Mises and Economic Calculation under 3
Socialism,” in L.S. Moss (ed.) The Economics of Ludwig von Mises. Kansas
City: Sheed & Ward, 1976.

Spiegel, H.W. The Growth of Economic Thought. Englewood Cliffs: Prentice
Hall, 1971. 3

Verrijn Stuart, C.A. (ed.) Verspreide Economische Geschriften van N.G. Pierson, f
Vols. 1, 4. Haarlem: Bohn, 1910, 1911. :

Endnotes

IN.G. Pierson, “Socialisten en Niet-Socialisten,” De Economist 1904; 3
reprinted in C.A. Verrijn Stuart (ed.) Verspreide Geschriften van N. G,

Pierson, Vol. IV, Haarlem: F. Bohn, 1911.

IN.G. Pierson, Principles of Economics, Vol. 2, translation by A. A. Wotzel,
London: MacMillan, 1912, pp. 82-83. I
*N.G. Pierson, “The Value Problem in the Socialist Society,” in F.Ar yw gd |
Hayek, Collectivist Economic Planning. Clifton: A.M. Kelley, 1975.

Pierson, Principles of Economics, p. 85,
SL. Robbins, Economic Planning and International Order, London:
MacMillan, 1937.

Pierson expressed his views on academic socialism in a 36 page article
published in 1878 in a Dutch periodical entitle De Gids (The Guide).
In 1910, this article was published again in the above mentioned collection
of Pierson’s writings edited by C.A. Verryn Stuart. There exists no English
translation of this paper.

“Institutionalism greatly influenced the thinking that was at the foundation
of the New Deal in the 1930s.

When Gustav Schmoller and V. Pareto met in Bern (Switzerland)
Schmoller argued that there were no laws of economics. Pareto then
asked if Schmoller knew a free food restaurant. Schmoller said “no”
but added that he did know some really cheap ones. Pareto’s answer
was that there existed economic laws after all. In reality Schmoller did
not grasp the very nature of theory.

History has shown that after Pierson’s death we did exactly that.

10]f Pierson could watch the contemporary welfare state quagmire and
its consequences he would realize that his worst fears have been abundantly
verified.

UPjerson, “The Problem of Value in the Socialist Community,” pp. 41-
85.

12It is certainly interesting to note that the trade pattern between the
Soviet Union and Eastern European countries resembles Pierson’s
exploitation hypothesis.

*Editor’s note: Mises showed these concessions were wrong in theory.

Johannes Overbeek is Associate Professor of Economics at

the University of the Virgin Islands. i

AY