WEBVTT

NOTE Introduction to the Second Edition

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Man, Economy and State, A Treatise on Economic Principles with Power and Market, Government

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and the Economy, 2nd edition by Murray R. Rothbard.

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Introduction to the 2nd edition by Joseph T. Salerno.

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The introduction draws substantially on the information and resources found in the Murray

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Murray and Rothbard Papers. The Rothbard Papers are currently held at the Ludwig von Mises

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Institute, Auburn, Alabama, and include, among other materials, Murray Rothbard's letters

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and correspondence, 1940-1994, memos and unpublished essays, 1945-1994 and drafts of published works.

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Murray Rothbard began work on this magnum opus on January 1, 1952.

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On May 5, 1959, Rothbard wrote to his mentor, Ludwig von Mises, informing him, a finito.

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In English, it is finished.

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The more than seven years that it took Rothbard to complete Man Economy and State, elapsed

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during what was up to that time, one of the most sterile and retrogressive decades in

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and the History of Scientific Economics, dating back to the birth of the science in the systematic

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treatise of Richard Catillon published in 1755.

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In view of the progressive degeneration of economic thought throughout the 1950s, the

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eventual publication of Rothbard's treatise in 1962 was a milestone in the development

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of sound economic theory and an event that rescued the science from self-destruction.

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The era of modern economics emerged with the publication of Carl Menger's seminal work,

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Principles of Economics, in 1871.

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In this slim book, Menger set forth the correct approach to theoretical research in economics

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and elaborated some of its immediate implications.

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In particular, Menger sought to identify the causal laws determining the prices that he

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observed being paid daily in actual markets.

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Menger had worked as an economic journalist and market analyst for daily newspapers on

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and off for over a decade.

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His stated goal was to formulate a realistic price theory that would provide an integrated

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explanation of the formation of market phenomena valid for all times and places.

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Thus, in his preface to the book, Menger wrote, I have devoted special attention to the investigation

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One of the causal connections between economic phenomena involving products and the corresponding

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agents of production for the purpose of establishing a price theory based upon reality and placing

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all price phenomena including interest, wages, ground rent, etc. under one unified point

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of view.

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Menger's investigations led him to the discovery that all market prices, wage rates, rents, and interest rates could ultimately be traced back to the choices and actions of consumers striving to satisfy their most important wants by economizing scarce means or economic goods.

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Thus for Menger, all prices, rents, wage and interest rates were the outcome of the value judgments of individual consumers, who chose between concrete units of different goods according to their subjective values, or marginal utilities, to use the term coined by his student, Friedrich Wieser.

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With this insight was born modern economics.

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Menger's causal-realist approach to economic theorizing quickly began to attract outstanding followers both in Austria and later throughout continental Europe and the Anglophone countries.

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What came to be called the Austrian School grew rapidly in prestige and numbers, and by World War I, theoretical research based on the causal-realist approach was considered the cutting edge of economic science.

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For various reasons, the school suffered an amazingly rapid decline, especially in Great Britain and the United States, but also in Austria after the war.

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By the 1920s, the causal realist approach had been overshadowed by the partial equilibrium approach of Alfred Marshall in Great Britain, the United States, and even parts of continental Europe.

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Its star fell further with the importation of the mathematical general equilibrium approach of Leon Valra into the English-speaking world in the early 1930s.

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A little later, Menger's approach was nearly buried by the Keynesian Revolution.

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Hence, by the advent of World War II, there ceased to be a self-conscious institutionally embedded network of economists

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actively engaged in teaching and research in the Mangerian tradition.

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After World War II, a new and stifling orthodoxy known as the neoclassical synthesis had descended upon economics, especially in the United States.

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This so-called synthesis was actually a hodgepodge of the three disparate approaches

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The first two approaches focused narrowly on analysing the determination of unreal equilibrium prices, either in single markets, partial equilibrium, or in all markets simultaneously.

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The Neoclassical Synthesis, Thus Proclaimed,

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claimed that the price system worked efficiently to allocate scarce resources only if the government

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deftly employed fiscal and monetary policies to maintain a level of aggregate demand or

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total spending in the economy that was sufficient to absorb a full employment level of output.

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This new orthodoxy also promoted hyper-specialization and a corresponding disintegration of economic

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Economic Science into a clutter of compartmentalized sub-disciplines.

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Even the theoretical core of economics was now split into microeconomics and macroeconomics,

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which had seemingly very little connection to each other.

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Specialized journals proliferated and resulted in a radical change in the research culture,

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with a premium on the writing and reading of the latest journal articles.

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The few books that were published were technical monographs or dumbed-down textbooks.

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The era of the great systematic treatise on economic theory was at a close.

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Indeed, in the preface to this treatise, Rothbard laments the demise of the old-fashioned treatise

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on economic principles after World War I, and the ensuing progressive disintegration

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of Economics, including economic theory into compartmentalized sub-disciplines.

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Almost the sole holdout against this intellectual revolution was Ludwig von Mises.

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With the publication in 1940 of Nationale Economy, the German language forerunner of

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human action, Mises single-handedly recovered and greatly advanced the system of causal

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realistic economic theory.

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In particular, he integrated Mangerian value and price theory with his own earlier restatement

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of monetary theory.

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In addition, he provided a rigorous foundation for the entire system of economic theory in

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a broader science of human action that he himself had expounded in earlier works and

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now further elaborated.

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This science of human action he now dubbed praxeology.

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Unfortunately, Mises' great treatise was almost completely ignored by the post-war economics profession.

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However, while it failed to inspire an immediate renewal of the Mangerian scientific movement,

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Human Action did lay the foundations for its later revival.

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This revival was to be ignited by the publication of Man, Economy and State in 1962.

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When Rothbard initiated work on what would turn out to be a full-blown treatise, he conceived of the project as a book suitable both for lay readers and for college instruction, that would bring to the surface and clarify the step-by-step nature of the edifice which Mises had constructed, but more or less had taken for granted that his readers would understand.

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This was necessary because human action was addressed to a scholarly audience, and Mises had accordingly assumed a great deal of familiarity among his readers with many of the concepts and theorems of what he called modern subjectivist economics.

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Thus Rothbard intended to do for Mises what McCullough did for Ricardo, that is, to make his work comprehensible to an intelligent lay readership.

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But Rothbard quickly realized that his original plan was flawed and had to be abandoned for

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three reasons. First, the traditional textbook format was too disorganized in its arrangement

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and treatment of various topics to accommodate the development of economic theory in the logical

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step-by-step manner that Rothbard had envisioned. As such, it was inadequate to convey a sense

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of the Grand Sweep of the Coherent System Integrating and Pervading All Aspects of Sound

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Economic Doctrine.

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Second, Rothbard discovered that there existed a lot of gaps in Mises' economic organon

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that he had to fill in himself.

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In addition, Rothbard's step-by-step deductions led him to the conclusion that Mises' Theory

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The Theory of Monopoly, which was held by most economists in the Mangerian tradition, was irreparably flawed and had to be completely revised.

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The book was thus turning out to involve a good deal of original contribution on Rothbard's part.

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Third, as he proceeded in writing the book, Rothbard was concurrently researching the literature and reading widely,

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And he began to realize that human action had emerged from a very broad tradition that included many more economists than just Mises and his famous predecessors and direct proteges, for example, Friedrich A. Hayek, in the native Austrian school.

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Moreover, as Rothbard read and wrote, it became increasingly clear to him that the various strands of this theoretical tradition, which included many important American and British contributions, in addition to the great Austrian works, had not yet been completely integrated and their principles fully delineated in a systematic treatise.

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Accordingly, Rothbard concluded, many essential points must be deduced originally or with the help of other works, and therefore the book cannot simply be a paraphrase of human action.

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Rothbard's proposed book was thus transformed in the very process of its writing from a straightforward exposition of the principles of received doctrine of the Austrian School narrowly conceived,

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to a treatise elaborating a complete system of economic theory and featuring many original

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and even radically new deductions and theorems. Mises himself immediately recognized the profound

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originality and significance of Rothbard's contribution. In his review of Man Economy and

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State, Mises wrote that Rothbard joins the ranks of eminent economists by publishing a voluminous

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work, a systematic treatise on economics. In every chapter of his treatise, Rothbard adopts the best

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teachings of his predecessors and adds to them highly important observations. Mises went on to

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characterize Rothbard's work as an epical contribution to the general science of human action,

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praxeology, and its practically most important and up to now best elaborated part, economics.

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Henceforth, all essential studies in these branches of knowledge will have to take full

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account of the theories and criticisms expounded by Dr. Rothbard.

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Given Mises' exacting scholarly standards and his well-known parsimony in paying compliments

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for scientific contributions, this is high praise indeed for a book published by a 36-year-old

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economist.

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The following statement is indicative of Mises' attitude in this respect.

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There never lived at the same time more than a score of men whose work contributed anything

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essential to economics.

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More importantly, Mises evidently viewed Rothbard's work as opening a new epoch in modern economic

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science.

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Rothbard himself was not reluctant to indicate the respects in which he considered his treatise

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to have been a departure from or an advance upon Mises' work.

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Foremost among Rothbard's theoretical innovations was his formulation of a complete and integrated

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theory of production.

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Previously production theory in causal realist analysis was in disarray and had consisted

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of a number of independent and conflicting strands of thought that treated capital and

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interest, marginal productivity theory, rent theory, entrepreneurship and so on in isolation.

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Somewhat surprised by this yawning gap in production theory, Rothbard commented,

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Mises has very little detail on production theory, and as a consequence it took me many

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false starts and lots of what turned out to be wasted effort before I arrived at what

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satisfied me as a good production theory.

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It's involved emancipation from 90% of current textbook material.

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In Man Economy and State, Rothbard elaborates a unified and systematic treatment of the

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structure of production, the theory of capital and interest, factor pricing, rent theory,

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and the role of entrepreneurship in production.

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Furthermore, production theory is presented as part of the core of economic analysis and

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covers five of the book's twelve chapters and approximately 30% of its text.

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One of Rothbard's greatest accomplishments in production theory was the development of

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a capital and interest theory that integrated the temporal production structure analysis

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of Newt Wichsel and Hayek with the pure time preference theory expounded by Frank A. Fetter

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and Ludwig von Mises.

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Although the roots of both of these strands of thought can be traced back to Boehm-Bawerk's

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His exposition was confused and raised seemingly insoluble contradictions between the two.

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They were subsequently developed separately until Rothbard revealed their inherent logical connection.

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Despite Mises' lavish praise for the book as an epical leap forward in economic science,

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as well as general recognition among many adherents, observers and critics of the contemporary Austrian movement

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The first question relates to the precise sense in which Rothbard's treatise can be described as a work in Austrian economics, and how Rothbard himself conceived the connection between his treatise and the treatise.

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The first question relates to the precise sense in which Rothbard's treatise can be described as a work in Austrian economics,

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and how Rothbard himself conceived the connection between his treatise and this body of received doctrine.

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The second question concerns Rothbard's perception of the relationship of the theoretical system expounded in his treatise

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and the neoclassical synthesis of the 1950s.

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As we shall see, the answers to these questions are not only surprising

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Before addressing the question of the doctrinal affiliation between man economy and state

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and Austrian economics, it is instructive to examine Mises' attitude toward the Austrian

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school, because it is not as straightforward as is generally supposed, and it clearly influenced

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Based Rothbard's view, as early as 1932, Mises had argued that all the essential ideas

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of the Austrian School of Economics had been absorbed into the mainstream of what he called

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modern subjectivist economics.

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According to Mises, the Austrian and the Anglo-American schools and the School of Lausanne

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differ only in their mode of expressing the same fundamental idea and are divided more

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or by their terminology and by peculiarities of presentation than by the substance of their

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teachings.

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Now, admittedly, this opinion was delivered at an economics conference in Germany that

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was heavily attended by the still influential remnants of the German historical school,

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who were antagonistic to economic theory of all kinds.

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It certainly can be reasonably argued that, given this venue, Mises' remarks were intended

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as a Generic Defense of Theoretical Research in Economics.

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In fact, a year earlier, Mises had written,

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Within the field of modern economics, the Austrian school has shown its superiority

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to the school of Lausanne and the schools related to the latter, which favor mathematical

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formulations by clarifying the causal relationship between value and cost, while at the same

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In spite of the foregoing caveat, Mises continued to maintain that the label Austrian School

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was an anachronism, arguing in the last publication of his career in 1969 that the Austrian School

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constituted a closed chapter in the history of economic thought from about the time of

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Menger's death in 1921.

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By that time, according to Mises, all the essential ideas of the Austrian School were

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by and large accepted as an integral part of economic theory, and one no longer distinguished

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between an Austrian School and other economics.

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The Appalachian Austrian School became the name given to an important chapter of the

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history of economic thought.

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It was no longer the name of the specific sect, with doctrines different from those

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Mises held by other economists.

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As noted, Mises used the term modern subjectivist economics to describe the new synthesis of

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theoretical approaches that he believed had begun to emerge in the 1920s.

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There are two problems with this label, which may explain Mises' ambivalent attitude toward

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the inclusion of the Marshallian and Lausanne schools under its head.

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First, by World War I, most theoretical economists at least paid lip service to some version

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of subjective value theory, so that subjectivism was no longer a distinguishing characteristic

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of a unique approach to theoretical research.

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Second, as we have seen in our own time, the term subjectivism is a notoriously elastic

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term that can be stretched to denote even the nihilistic approach to economic theory,

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famously propounded by George Shackel, the later Ludwig Lachmann, and a number of postmodernist

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and hermeneutical economists.

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Rothbard evidently followed Mises in construing the term Austrian School as the designation

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for an important movement in the history of economic thought.

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In the text of Man, Economy and State, Rothbard uses the terms Austrian or Austrian School

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at least 10 times enclosed in quotation marks, as he naturally would if he were referring to a movement

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that had only historical significance to the contemporary reader. The few times he uses these

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terms without quotation marks, they clearly refer to historical doctrines or controversies,

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such as the Austrian wikstidian theory of price, or the Austrian school versus Alfred Marshall

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on the relationship between prices and costs.

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The single time that Rothbard mentions Austrian in his preface to the first edition, he does

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so in the phrase, the Austrian economists, placing the word in quotation marks and using

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it in a sentence featuring verbs in the past tense.

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This textual exegesis is not meant to imply that Rothbard did not consider his work as

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is continuing the great tradition originated by the early Austrian economists.

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Indeed, Rothbard wrote of the myth among economists that the Austrian school is effectively dead

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and has no more to contribute and that everything of lasting worth that it had to offer was

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effectively stated and integrated in Alfred Marshall's principles.

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Rather, the point is that Rothbard's goal was to recover and advance a much broader doctrinal tradition, for which Menger's and Boehm-Bawerk's works were indisputably the taproot.

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Thus, in his preface, Rothbard stated,

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This book, then, is an attempt to fill part of the enormous gap of forty years' time.

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The gap Rothbard is here referring to separates the publication of Man, Economy and State

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and that of the last three systematic economics treatises to appear in English, by Philip

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Wickstede, 1910, Frank Fetter, 1910, and Frank Taussig, 1911.

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Rothbard did not consider human action and old-style principles because it assumes considerable

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previous economic knowledge and includes within its spacious confines numerous philosophic

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and historical insights.

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The treatises of Wickstede and Fetter, in particular, were in what Rothbard called the

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praxeological tradition.

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Their procedure, like his own, was slowly and logically to build on the basic axioms

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and integrated and coherent edifice of economic truth.

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The main reason that his treatise contains numerous references to the historical Austrian

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school was because Rothbard judged the members of this school to have best perceived this

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method and used it most fully and cogently.

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They were the classic employers, in short, of the praxeologic method.

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In contrast to Mises's modern subjectivist economics, Rothbard's reference to the praxeologic

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method drew a bright line between those who employed Menger's procedure in logically

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deducing economic laws from a few basic facts of reality and those who did not.

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Praxeology was Mises' explicit and self-conscious elaboration of this venerable procedure for

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discovering the causal laws governing market phenomena.

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The early Austrian School and their followers, and even some of the better classical economists,

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had used this research method without being fully aware of it.

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The praxeological method begins with the self-evident reality of human action and its immediate

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implications.

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It then introduces other empirical postulates that reflect the concrete conditions of action

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from which emerge the historically specific market phenomena that the economist seeks

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to analyze.

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It is, therefore, necessarily about real things.

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It is for this reason that it has no use for fictions and figments like the representative

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The Highly Selective Use that the Praxeological Method makes of imaginary constructs has a single aim, the systematic elaboration of a unified body of theory comprising meaningful propositions about the causes of economic phenomena,

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The systematic elaboration of a unified body of theory comprising meaningful propositions about the causes of economic phenomena in the world as it is, has been, or is likely to be.

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As Mises put it, the praxeological method studies acting under unrealized and unrealizable conditions only from two points of view.

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It deals with states of affairs which, although not real in the present and past world, could possibly become real at some future date,

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and it examines unreal and unrealizable conditions if such an inquiry is needed for a satisfactory grasp of what is going on under the conditions present in reality.

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Mises concluded, the specific method of economics is the method of imaginary constructions, it is the only method of praxeological and economic inquiry.

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Rothbard took Mises' dictum seriously, and for seven years immersed himself in employing and perfecting this method in elaborating an integrated system of economic theory.

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This explains why Rothbard identified the use of the praxeological method rather than a loose subjectivist orientation as the hallmark and acid test of scientific economics.

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During the long period of sustained effort in writing the present volume, Rothbard thus became a master practitioner of the praxeological research method.

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Method.

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He not only skillfully used the various imaginary constructs whose nature and specific use Mises

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had explicitly formulated in human action, but also devised new ones as needed to assist

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in the deduction of new theorems to elucidate unexplained features of economic reality.

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Let us take a detailed example to illustrate Rothbard's procedure.

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In confronting the daunting task of untangling and systematizing causal realist production

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theory, Rothbard postulates an imaginary world of specific factors in which each and every

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individual laborer, parcel of land and capital good is irrevocably committed to the production

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of a single product and cannot be converted to use in any other production process.

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While this construct is highly unrealistic, it is not unrealizable, like the evenly rotating

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economy, E.R.E., which abstracts completely from change and uncertainty, and is used to

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analytically isolate interest income and the capitalist function which earns it from entrepreneurial

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profit.

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Thus, a world in which every factor is suited for one and only one task is not inconceivable or logically contradictory.

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In contrast, the E.R.E. is indeed an unrealizable and self-contradictory construct.

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It describes a world in which, for example, the future is known with perfect certainty,

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but action, which is always aimed at changing the future, occurs,

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and agents hold money balances despite the absence of uncertainty regarding the temporal pattern of their future receipts and expenditures.

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This is not to imply that proximity to reality makes one imaginary construct better or more useful than another.

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The sole test of a construct's usefulness is the aid it gives to thought in deducing the causal laws operating in real markets.

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Rothbard also imagines two variations of this world.

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In the first, the cooperating factors in each stage of a given production process jointly own the product,

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that is, the capital good of that stage.

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And since the services of all capital goods are embodied in the final product,

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therefore all factors jointly own the final good that is sold to consumers in exchange for money.

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The money receipts are then distributed according to the terms of a voluntary contract among all joint factor owners.

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In the second variation, a single capitalist or consortium of capitalists pay the various factors participating in the amalgamated process in advance of the sale of the final product on the market,

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and, in exchange, receive ownership of the capital goods from every stage, as well as the stock of final consumer goods and the money revenue obtained from its sale to consumers.

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In both variations of the construct, an evenly rotating economy is assumed in order to abstract from the problems of entrepreneurship.

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With the assistance of this construct, Rothbard deduces a number of important theorems and principles of production.

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First, in the case of joint ownership of the product by the collaborating land and labor factors,

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there are no independent primordial owners of capital goods, which are intermediate goods in the production process

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and therefore resolvable into the labor and land inputs that cooperated in producing them.

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Second, and consequently, all income in production consists of wages and land rents.

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Capital goods, which are merely waystations on the path to the final product, do not earn

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any net rents for their owners.

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Third, all cooperating laborers and landowners must wait for their income from the inception

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of the productive process to its termination and the subsequent sale of the final product

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to Consumers.

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Therefore, fourth, the size of the aggregate income of the cooperating factor owners depends

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solely and completely on the demand of consumers for their product.

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A relative shift in relative consumer demand between final goods will fall solely and completely

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on the specific factors that are involved in the production of the affected products.

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Once the capitalist is introduced into this fictitious world, a fifth principle becomes

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immediately evident.

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The function of the capitalist is to relieve the factor owners of the burden of waiting

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for income, as he advances them present money payments from his accumulated savings for

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the joint product of their labor and land services.

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In exchange for these present wages and rents, the capitalist receives an interest return

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and on his invested funds, which is based on time preference and reflects the value discount

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of the anticipated future monetary revenues he will be receiving relative to the present

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money payments he expends on the factor services.

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Conversely, the factor owners agree to this deduction from the full-sale proceeds of their

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A Sixth Principle is that, even in a world of capitalist ownership of the entire production process, capital goods still do not generate a net monetary income for their owners, because the net interest return obtained by the capitalist is not the same as the net income earned by the capitalist.

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Capital goods still do not generate a net monetary income for their owners because the net interest return obtained by the capitalist owners is fully derived from the discount incorporated into the present wages and rents paid to owners of labor and land factors, who are the only net recipients of incomes in a world without capitalists.

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Thus, wage, rent and interest incomes logically exhaust the entire proceeds from the sale

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of the final product, leaving no remainder for net payments to capital goods.

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This conclusion of the exhaustion of the income from production among wages, rents and interest

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receipts holds true only under the assumption that future market conditions are known with

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certainty.

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Once this assumption is dropped and the possibility is admitted of overvaluation or undervaluation

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of the complements of specific factors by capitalist investors, entrepreneurial profits

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and losses enter the picture.

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However, in a world of purely specific factors, such profits and losses would not have an

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and allocative function, because, by definition, factors cannot shift between production processes.

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More importantly, it becomes clear that such incomes accrue to the capitalists alone and

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that therefore, in the real world of uncertainty, the functions of capitalist and entrepreneur

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are integrated in the same agent.

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This analysis of Rothbard's hypothetical world of purely specific factors also is pregnant

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with implications for the role of subjective costs in production and pricing.

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Given that specific land factors and capital goods have no alternative uses in this imagined

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world, an immediate inference is that their use in production is costless, and their respective

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supply curves perfectly inelastic.

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Labor, specific to a particular production process, though it may be, in contrast, is

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costly to use, because it has an alternative use in the production of leisure, which is

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an instantaneously producible consumer's good.

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Thus, in a world without capitalists, labor involves the disutility of forgoing both leisure

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and present goods.

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The arrival of capitalists on the scene reduces but does not eradicate the disutility of labor.

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These inferences starkly demonstrate the principle that all production costs are ultimately and

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essentially subjective.

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Leisure preferences and time preferences thus determine the ultimate costs of production,

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and these costs are purely subjective and consist of the valuation of the foregone utilities

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of the Producers against the Anticipated Monetary Revenues from Consumers.

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Once these subjective producers' costs have all been incurred, the stocks of the various

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kinds of consumers' goods emerge from the production process ready for sale to consumers.

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Unless their producers have a direct use for the goods, their sale to consumers is completely

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and their relative prices are determined solely by the structure of value scale of consumers.

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Hence, barring speculation on future price variations, the supply curves for the various stocks of consumer goods are also perfectly inelastic.

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In sum, production costs, that is, the disutilities of labor and waiting that have already been incurred, or the utilities of leisure and immediate enjoyment that have already been foregone by producers, have no role whatever in determining the prices of the existing stocks of consumers' goods.

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Goods. Rothbard also wields the fictive construction

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he formulated to demolish Marshallian price theory, according to which prices were determined

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by two blades of a scissors, the subjective values of consumers composing one blade, while

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the objective or real costs of production compose the other blade. While Marshall and

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and his contemporary followers concede that, in the transient immediate run, the subjective

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value blade predominates in determining prices.

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They maintain that in the long run equilibrium, where the permanent tendencies of the economy

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reveal themselves, the cost of production blade governs, because the price of every

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product conforms to its average cost of production.

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This Marshallians superficially conclude that costs must therefore determine prices.

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However, Rothbard easily demonstrates that this conformity between price and average

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cost in long run equilibrium or the ERE, which itself is not real but a useful imaginary

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construction is the result of the same principles governing the determination of the actual

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In a world where all factors are purely specific to a single production process, Rothbard shows

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that in the long run, where entrepreneurial errors are absent and profits and losses have

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been totally eliminated, the aggregate payments to all factors cooperating in a given production

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and Process are rigidly governed by and must perfectly correspond to the aggregate revenues

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spent on the final product by consumers, minus the interest return to capitalists.

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Accepting this deduction and dividing both aggregate revenues and aggregate factor payments

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by the quantity of product implies that the direction of causation of the equality between

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Rothbard's formulation and deployment of this imaginary world of purely specific factors

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epitomizes the application of the praxeological method in theoretical research.

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As Mises pointed out, the main formula for designing of imaginary constructions is to

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To abstract from the operation of some conditions present in actual action, then we are in a

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position to grasp the hypothetical consequences of the absence of these conditions and to

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conceive the effects of their existence.

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Thus Rothbard first imagines that in this world all production processes are owned by

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the cooperating factors themselves, who must endure without income until the final product

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has emerged and is sold to consumers.

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By first analyzing the state of affairs in abstraction from the existence of the capitalist,

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we are able to grasp his function of advancing his accumulated savings to the factors before

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the sale of the final product, and to comprehend the nature of his income as a return to time

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preference, which has been previously established much earlier in the chain of praxeological

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In assuming away the capitalist, we have also assumed away monetary costs of production since the only money payments are directly from consumers to the joint factor owners of the final product.

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This enables us to see that total monetary costs are essentially determined by and equal to these total money expenditures by consumers, as mediated through capitalists who have previously advanced present wages and rents to the factor owners.

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In later chapters, Rothbard proceeds to drop the assumption of purely specific factors and admits varying degrees of specificity among factors into his analysis.

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The effects of relatively non-specific factors in the production process can now be identified by investigating how their presence modifies the outcomes of a hypothetical world of purely specific factors.

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Since non-specific factors can be converted to use in a wide range of production processes, a relative shift in consumer demand, Ceteris Paribus, will alter their allocation while only temporarily affecting their prices.

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But the principles already deduced regarding specific factors still hold sway in this more complex world.

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And so we are able to conclude that prices of the relatively specific factors in any process will bear the brunt of the change in aggregate consumer expenditures on a given final product.

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Thus, for instance, in the case of a relative decline of the demand for diamonds, all other things equal, the capital values of diamond mines and the wages of highly skilled jewelers will also decline,

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As a result, the capitalist will react to a change in his costs by adjusting his level of production, just as he would in the case of a change in the demand for his product.

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Hence, in the absence of a long chain of deductive reasoning utilizing imaginary constructs, a la Rothbard and earlier Austrians,

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A superficial view of the matter will render Marshall's metaphor of the two blades of the scissors as a plausible representation of reality.

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Without sedulous employment of the praxeological method, it would be impossible to conceive that it is the demands of consumers for the outputs of a wide range of production processes,

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as mediated through the bids of capitalist entrepreneurs as ultimately and exclusively

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determinative of the prices of all factors, relatively nonspecific as well as purely specific.

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This praxeological method so masterfully deployed by Rothbard had been used even if implicitly and

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crudely as the primary tool of theoretical research in economics up through the 1930s.

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However, as Rothbard points out, it was precisely Marshall's distrust of long chains of deduction,

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in addition to the whole Cambridge impetus toward making shortcut assumptions designed

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to make their theory more testable, that was one of the factors that led to the gradual

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breakdown of the praxeological method and its replacement by positivism.

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While Marshall utilized the method of imaginary constructions, his aversion to lengthy step-by-step

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deduction runs afoul of Mises' warning that it is a method very difficult to handle because

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it can easily result in fallacious syllogisms.

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It leads along a sharp edge.

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On both sides yawns the chasm of absurdity and nonsense.

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By the early 1950s, the praxeological method and verbal logic had been eclipsed by positivism

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and mathematical models.

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For example, the leading economist of the post-war era, Paul Samuelson, now maintained

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that the task of economic theory was to organize the facts into useful and meaningful patterns,

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and in so doing to provide economical descriptions of complex reality.

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Theoretic theorems, then, had to be framed in a manner that was operationally meaningful.

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According to Samuelson, a meaningful theorem was simply a hypothesis about empirical data

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that could conceivably be refuted if only under ideal conditions.

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Whether such a theorem was false or of trivial importance or even of indeterminate validity

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was not as important to Samuelson as it being framed as a proposition capable in principle

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of empirical refutation. For Samuelson, theorems would thus be embodied and expressed in highly

401
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simplified mathematical models that could be subjected to empirical tests if the data were

402
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available. Since admittedly the requisite data were rarely accessible, the most that could be

403
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One of the things we expected from such abstract models was that they often point the way to an element of truth present in a complex situation, and that they afford tolerably accurate extrapolations and interpolations.

404
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However, in a retrospective, Samuelson lamented the lack of success of the crude positive method in economics, writing,

405
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The Theory of Money and Credit

406
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Partial and Approximate

407
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If Samuelson downplayed the attainment of truth as a goal of theoretical research in favor

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of the formulation of operationally meaningful theorems, the other avatar of positivism in

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post-war economics, Milton Friedman, jettisoned all references to truth and realism in assessing

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the validity of economic theorems.

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Projecting Samuelson's crude logical positivism, Friedman reveled in the falsity or unrealism

412
00:49:41.600 --> 00:49:47.120
of a theorem's assumptions, and offered the seemingly more sophisticated alternative of

413
00:49:47.120 --> 00:49:53.760
falsificationism, which was allegedly based on Karl Popper's philosophy of science.

414
00:49:53.760 --> 00:49:59.340
Some methodologists have argued that Friedmanite positivist methodology shares little more

415
00:49:59.340 --> 00:50:03.880
than vocabulary with Popper's philosophy of science.

416
00:50:03.880 --> 00:50:08.280
Rothbard's position was concisely summed up in Mark Bloch's statement,

417
00:50:08.480 --> 00:50:13.240
No assumptions about economic behavior are absolutely true,

418
00:50:13.440 --> 00:50:18.800
and no theoretical conclusions are valid for all times and places.

419
00:50:19.000 --> 00:50:23.800
Despite the formal adherence by most of the profession to positivist methods

420
00:50:24.000 --> 00:50:28.720
during the 1950s, Rothbard's quest to recover and reconstruct

421
00:50:28.920 --> 00:50:32.840
the edifice of sound economic theory drove him to scour

422
00:50:32.840 --> 00:50:42.840
and the Contemporary Literature for new ideas and insights, as carefully as he had scrutinized the writings of his predecessors in the causal realist tradition.

423
00:50:42.840 --> 00:50:56.840
Rothbard's treatise contains citations from over 150 books, journal articles, conference proceedings, government documents, dissertations and Policy and Research Institute monographs

424
00:50:56.840 --> 00:51:03.640
Published Between the Appearance of Human Action in 1949 and Man, Economy and State

425
00:51:03.640 --> 00:51:10.400
in 1962, Rothbard's deep engagement with the contemporary literature paid off as he

426
00:51:10.400 --> 00:51:16.500
discovered that many of these works contained research that clarified, refined or advanced

427
00:51:16.500 --> 00:51:23.520
causal realist theory, and he eagerly integrated these contributions into his own work.

428
00:51:23.520 --> 00:51:29.720
For example, in his notable development of an explanation of the firm's costs and return

429
00:51:29.720 --> 00:51:36.000
on investment that sharply deviates from the Marshallian theory of the firm, Rothbard was

430
00:51:36.000 --> 00:51:43.400
heavily influenced by two neglected articles co-authored by André Gabor and I. F. Pierce

431
00:51:43.400 --> 00:51:47.740
on the Austro-Wixellian theory of the firm.

432
00:51:47.740 --> 00:51:53.480
Rothbard cites a discussion by the Cambridge economist Roy Herod in addition to a discussion

433
00:51:53.480 --> 00:52:00.520
by Boehm-Bawerk as a source for his own path-breaking identification of a fourth component in the

434
00:52:00.520 --> 00:52:04.940
gross business income of the capitalist entrepreneur.

435
00:52:04.940 --> 00:52:12.160
This ownership or decision-making rent is distinct from and in addition to implicit wages

436
00:52:12.160 --> 00:52:17.880
of management, interest return on invested capital and pure profit.

437
00:52:17.880 --> 00:52:23.920
In his thoroughgoing critique of the theories of perfect and monopolistic competition doctrines

438
00:52:23.920 --> 00:52:30.720
and his original formulation of a positive theory of competition as a dynamic process,

439
00:52:30.720 --> 00:52:36.600
Rothbard favorably cites the contributions of a number of his mainstream contemporaries,

440
00:52:36.600 --> 00:52:43.560
including G. Warren Nutter, Wayne Lehman, Marshall I. Goldman, and Ruben Kessel.

441
00:52:43.560 --> 00:52:50.760
Rothbard singles out a book by Lawrence Abbott, published in 1952, titled Quality and Competition

442
00:52:50.760 --> 00:52:56.680
for Special Praise, characterizing it as one of the outstanding theoretical works of recent

443
00:52:56.680 --> 00:52:57.680
years.

444
00:52:57.680 --> 00:53:03.920
Indeed, the theory of rivalrous competition that Rothbard expounds is clearly influenced

445
00:53:03.920 --> 00:53:10.500
by Abbott's arguments on the central importance of the qualitative dimensions of competition.

446
00:53:10.500 --> 00:53:16.540
The fact that theoretical research employing verbal logic and the praxeological method

447
00:53:16.540 --> 00:53:23.740
still remained relatively pervasive among academic economists even as late as the 1950s

448
00:53:23.740 --> 00:53:28.580
highlights the deep and hearty roots of the causal realist tradition.

449
00:53:28.580 --> 00:53:34.860
It also accounts for the reason why Rothbard did not yet perceive any advantage in appropriating

450
00:54:04.860 --> 00:54:12.580
in those areas not developed by Mises, its differences from Mises in such areas as monopoly,

451
00:54:12.580 --> 00:54:18.620
banking ethics and government, and its refutations of current economic theory.

452
00:54:18.620 --> 00:54:24.300
While in retrospect we may be tempted to dismiss Rothbard's bold prediction as a burst of

453
00:54:24.300 --> 00:54:30.840
youthful optimism, it hardly reflects the attitude of someone intent on completely breaking

454
00:54:30.840 --> 00:54:36.520
Following with the prevailing doctrine and founding a heterodox school of thought.

455
00:54:36.520 --> 00:54:43.360
By the advent of the 1970s, however, mainstream economic theory had sunk to almost unfathomable

456
00:54:43.360 --> 00:54:49.440
depths, degenerating into a series of loosely related mathematical models which had little

457
00:54:49.440 --> 00:54:52.160
contact with reality.

458
00:54:52.160 --> 00:54:57.960
Following the prevailing Friedmanite positivist methodology, the tentative validity, never

459
00:54:57.960 --> 00:55:04.240
over the truth of these models was putatively established by empirically testing their ability

460
00:55:04.240 --> 00:55:11.740
to predict, or more accurately, retrodict, using the methods of econometrics.

461
00:55:11.740 --> 00:55:17.580
The last vestiges of the Mangerian approach thus disappeared from the curricula of graduate

462
00:55:17.580 --> 00:55:24.380
economics programs and causal realist theoretical research was now completely banished from

463
00:55:24.380 --> 00:55:30.260
from academic journals, which had become the main, if not the only, research outlet for

464
00:55:30.260 --> 00:55:33.220
mainstream economics.

465
00:55:33.220 --> 00:55:38.800
Around the same time as this sea-change in economic theory and method, there began to

466
00:55:38.800 --> 00:55:45.540
coalesce outside the formal institution of academic economics a new intellectual movement

467
00:55:45.540 --> 00:55:51.700
that was directly inspired by Rothbard's reconstruction of the causal realist theoretical

468
00:55:51.700 --> 00:55:58.740
Organon in Man Economy and State. This movement comprised mainly graduate students and younger

469
00:55:58.740 --> 00:56:04.940
faculty members associated with U.S. academic institutions who were disaffected with the

470
00:56:04.940 --> 00:56:10.580
orthodox neoclassical synthesis, which had begun to break down with the failure of the

471
00:56:10.580 --> 00:56:17.900
Kennedy-Johnson New Economic Policies to rein in the Vietnam War inflation and the subsequent

472
00:56:17.900 --> 00:56:22.420
and Emergence of Stagflation in the early 1970s.

473
00:56:22.420 --> 00:56:28.300
By the mid-1970s, the new movement had grown to such an extent that the opportunity presented

474
00:56:28.300 --> 00:56:34.840
itself to institutionalize and promote its existence by means of a formal academic conference

475
00:56:34.840 --> 00:56:42.340
on Austrian economics, which was held at South Royalton, Vermont in June 1974.

476
00:56:42.340 --> 00:56:48.780
The Appalachian Austrian was chosen for this new intellectual tendency, mainly for strategic

477
00:56:48.780 --> 00:56:49.780
reasons.

478
00:56:49.780 --> 00:56:54.700
Since the Rothbardian movement embraced a method and body of doctrine that now shared

479
00:56:54.700 --> 00:57:01.020
very little common ground with the entrenched positivist orthodoxy, the label at least provided

480
00:57:01.020 --> 00:57:06.860
the movement with a recognizable affiliation with one of the great streams of early marginalist

481
00:57:06.860 --> 00:57:10.980
thought that had fed into this modern mainstream.

482
00:57:10.980 --> 00:57:16.380
The name also instantly endowed the movement with the great cachet associated with the

483
00:57:16.380 --> 00:57:22.380
well-known names of the founding members of the Austrian School, such as Carl Menger,

484
00:57:22.380 --> 00:57:29.180
Eugen von Boehm-Bawerk and Friedrich von Mises, and its later representatives Ludwig von Mises

485
00:57:29.180 --> 00:57:31.340
and Friedrich A. Hayek.

486
00:57:31.340 --> 00:57:37.600
The prestige of the Austrian brand name was further enhanced when Hayek became a co-recipient

487
00:57:37.600 --> 00:57:41.340
of the Nobel Prize in Economics later in the year.

488
00:57:41.340 --> 00:57:48.560
The term had the additional virtue of identifying the movement's general theoretical orientation.

489
00:57:48.560 --> 00:57:54.040
Rothbard and his followers eagerly embraced the new designation and began to refer to

490
00:57:54.040 --> 00:57:59.920
themselves as members or followers of the modern Austrian School, which was now positioned

491
00:57:59.920 --> 00:58:04.200
as a heterodox challenger to mainstream economics.

492
00:58:04.200 --> 00:58:09.760
Despite its significant short-run strategic virtues, however, branding the School of Thought

493
00:58:09.760 --> 00:58:15.840
that coalesced at the South Royalton Conference as Austrian has engendered a number of serious

494
00:58:15.840 --> 00:58:17.680
problems in the long run.

495
00:58:17.680 --> 00:58:23.480
First, it has come to obscure the extent to which the modern Austrian School was directly

496
00:58:23.480 --> 00:58:25.680
inspired by Rothbard.

497
00:58:25.680 --> 00:58:31.940
Indeed, it is no exaggeration to say that a large majority of the thirty or so participants

498
00:58:31.940 --> 00:58:38.420
in the South Royalton Conference, adhered to the body of causal realist theory elaborated

499
00:58:38.420 --> 00:58:40.900
in Man, Economy and State.

500
00:58:40.900 --> 00:58:47.060
Second, it conceals the fact, noted above, that in writing this treatise, Rothbard drew

501
00:58:47.060 --> 00:58:52.340
from a much broader range of literature than that emanating from the original Austrian

502
00:58:52.340 --> 00:58:55.860
School and its direct intellectual descendants.

503
00:58:55.860 --> 00:59:02.640
Third, the label diverts attention from Rothbard's primary mission in writing his treatise, which

504
00:59:02.640 --> 00:59:09.420
was to purge modern economic science of its alien, positivist and mathematical formalist

505
00:59:09.420 --> 00:59:15.880
elements and to reconstruct it along consistently causal realist lines.

506
00:59:15.880 --> 00:59:22.800
It cannot be stated too often or too emphatically that engineering a radical break from standard

507
00:59:22.800 --> 00:59:29.360
and economic theory and establishing a heterodox school of thought that rejected all forms

508
00:59:29.360 --> 00:59:36.120
of equilibrium analysis and the use of imaginary constructs was not Rothbard's purpose in

509
00:59:36.120 --> 00:59:38.880
writing Man Economy and State.

510
00:59:38.880 --> 00:59:45.360
Indeed, as we have seen, one of Rothbard's most important contributions in his treatise

511
00:59:45.360 --> 00:59:52.080
is his painstaking explication of the content and the proper use of fictitious constructs

512
00:59:52.080 --> 00:59:58.920
and Imaginary States of the World in deriving meaningful propositions about the causal determinants

513
00:59:58.920 --> 01:00:02.320
of observable economic phenomena.

514
01:00:02.320 --> 01:00:09.080
The last and perhaps most significant disadvantage of applying the unqualified term Austrian

515
01:00:09.080 --> 01:00:15.320
to the post-South Royalton economics movement is the fact that it fosters a conflation of

516
01:00:15.320 --> 01:00:21.180
the very different and conflicting research programs that have grown up under this opaque

517
01:00:21.180 --> 01:00:27.140
Like Semantic Veil, Rothbard recognized and lamented this state of affairs in the preface

518
01:00:27.140 --> 01:00:33.680
to the revised edition of Man Economy and State published in 1993.

519
01:00:33.680 --> 01:00:39.860
In fact, the number of Austrians has grown so large and the discussion so broad that

520
01:00:39.860 --> 01:00:45.900
differences of opinion and branches of thought have arisen, in some cases developing into

521
01:00:45.900 --> 01:00:48.540
to Genuine Clashes of Thought.

522
01:00:48.540 --> 01:00:52.180
Yet they have all been conflated and jammed together

523
01:00:52.180 --> 01:00:56.280
by non-Austrians and even by some within the school,

524
01:00:56.280 --> 01:00:59.900
giving rise to a great deal of intellectual confusion,

525
01:00:59.900 --> 01:01:02.980
lack of clarity and outright error.

526
01:01:02.980 --> 01:01:05.720
The good side of these developing disputes

527
01:01:05.720 --> 01:01:08.900
is that each side has clarified and sharpened

528
01:01:08.900 --> 01:01:11.860
its underlying premises and worldview.

529
01:01:11.860 --> 01:01:15.020
It has indeed become evident in recent years

530
01:01:15.020 --> 01:01:21.700
says that there are three clashing paradigms within Austrian economics, the original Misesian

531
01:01:21.700 --> 01:01:28.940
or praxeological paradigm to which the present author adheres, the Hayekian paradigm stressing

532
01:01:28.940 --> 01:01:35.660
knowledge and discovery rather than praxeological action and choice, and whose leading exponent

533
01:01:35.660 --> 01:01:43.260
now is Professor Israel Kirzner, and the nihilistic view of the late Ludwig Lachmann, an institutionalist

534
01:01:43.260 --> 01:01:51.220
anti-theory approach taken from the English subjectivist Keynesian G. L. S. Shackel.

535
01:01:51.220 --> 01:01:56.820
While this accurately describes the state of Austrian economics in the early 1990s,

536
01:01:56.820 --> 01:02:02.120
the situation has become even more contentious and muddled since then.

537
01:02:02.120 --> 01:02:08.820
While the Lachmanian branch has waned somewhat in influence, a new wildly eclectic tendency

538
01:02:08.820 --> 01:02:15.380
has developed, which proposes to agglomerate indiscriminately selected elements of Menger,

539
01:02:15.380 --> 01:02:23.380
Mises, Hayek, Lockman, Kirzner, and Rothbard, with random insights from Adam Smith's economics,

540
01:02:23.380 --> 01:02:30.940
public choice theory, new institutional economics, transaction costs economics, game theoretic

541
01:02:30.940 --> 01:02:38.060
modeling, hermeneutical economics, and ethnographic and historical case studies, all under the

542
01:02:38.060 --> 01:02:43.160
The Rubric of Austrian Economics, or Good Economics

543
01:02:43.160 --> 01:02:48.660
Needless to say, the situation is even less satisfactory now than it was when Rothbard

544
01:02:48.660 --> 01:02:50.940
penned the passage above.

545
01:02:50.940 --> 01:02:56.860
Those interested in pursuing theoretical research in the Mangerian causal realist tradition

546
01:02:56.860 --> 01:03:02.460
are now viewed by the profession, thanks to the Austrian label, as part of a splintered

547
01:03:02.460 --> 01:03:09.320
and Feuding Heterodox Movement, More Interested in Discoursing on Meta-Economic Esoterica

548
01:03:09.320 --> 01:03:16.660
or Devising Spontaneous Order Explanations for Obscure Historical Episodes than in Analyzing

549
01:03:16.660 --> 01:03:23.480
the Mundane Issues at the Heart of Mainstream Economics, Value Theory, Price Theory, Capital

550
01:03:23.480 --> 01:03:27.660
Theory, Monetary Theory, and Business Cycles.

551
01:03:27.660 --> 01:03:40.460
Fortunately, Man Economy and State points the way out of this morass of confusion, which threatens permanent and wholesale marginalization of all branches of Austrian economics.

552
01:03:40.460 --> 01:03:57.460
Every page of Rothbard's treatise is imbued with a profound awareness that the causal realist theoretical system that he was expounding was in the mainstream of an international economic tradition that originated in the Marginalist Revolution.

553
01:03:57.460 --> 01:04:05.460
His treatise thus was not intended as the program for a new heterodox movement or the revival of an old one.

554
01:04:05.460 --> 01:04:14.960
Rather, it represented an endeavor to reconstruct orthodox economics on the unshakable foundation of the praxeological method,

555
01:04:14.960 --> 01:04:19.460
and to use this method to substantively advance the theory.

556
01:04:19.460 --> 01:04:31.260
In a crucial sense, economic science had temporarily lost its bearings and was beginning to stray from its rich heritage, and Rothbard aimed at setting it back on course.

557
01:04:31.260 --> 01:04:40.160
Consequently, he never conceded the mainstream of economic science to the disciples of mathematical modeling and the positivist method,

558
01:04:40.160 --> 01:05:00.160
Rothbard has been proven correct. Mathematical modeling has revealed itself to be a vain and formalistic exercise incapable of explaining the international currency crises, stock market and real-estate bubbles, and the global financial crises that have wracked our world.

559
01:05:00.160 --> 01:05:12.160
is incapable of explaining the international currency crises, stock market and real estate bubbles and the global financial crises that have wracked our world in the past two decades.

560
01:05:12.160 --> 01:05:21.160
It is increasingly evident even to professional economists that the tortuous positivist detour has led to an intellectual dead end.

561
01:05:21.160 --> 01:05:34.160
Hence bizarre heterodox sects such as behavioral economics, experimental economics, the happiness literature, neuro-economics, etc. now abound.

562
01:05:34.160 --> 01:05:48.160
Some market-oriented economists have even abandoned modern economic theory altogether for the less rigorous rhetoric and metaphors of Adam Smith's invisible hand and Hayek's spontaneous order.

563
01:05:48.160 --> 01:05:55.160
Of course, the concept of the spontaneous order was only one of Hayek's many contributions.

564
01:05:55.160 --> 01:06:00.880
Most of these contributions were squarely in the Mungarian causal realist tradition and

565
01:06:00.880 --> 01:06:06.960
dealt with themes of mundane economics such as capital theory, business cycle theory,

566
01:06:06.960 --> 01:06:12.920
international monetary theory, and comparative monetary institutions.

567
01:06:12.920 --> 01:06:18.660
The death knell is now tolling for the mathematical and positivist pretenders to the mainstream

568
01:06:18.660 --> 01:06:20.260
of economics.

569
01:06:20.260 --> 01:06:26.560
The time is now ripe for Austrians to recover their rightful position as the true representatives

570
01:06:26.560 --> 01:06:32.840
of the central tendency of modern economic theory by affirming the praxeological method

571
01:06:32.840 --> 01:06:35.840
as the research method of economics.

572
01:06:35.840 --> 01:06:41.360
The prodigious fruits of this method stand before us in the integrated theoretical structure

573
01:06:41.360 --> 01:06:45.360
The Theory of Money and Credit