The History of Economic Thought: From Marx to Hayek

The Nobel award to F.A. Hayek in 1974 went directly against the tradition of that prize to go only to mathematical forecasters, left-liberals, and government central planners. Not only was Hayek’s work pioneering, but it is also the only correct analysis of business cycles past, present and future since they began in the mid-18th century.

Initially, various economists concluded that the boom-bust cycle must be deeply rooted within the free market industrial capitalist system. The blame must rest with free market capitalism, said Marx and Keynes. Government spending was to make up for some depression in the private sector. Too little spending created unemployment. Too much spending created inflation. However, this Keynesian concept has failed.

Another group said that it is the government-controlled fractional reserve banking system that is the cause. As far as this goes, it is accurate.

The problem was that when an inflationary credit expansion was pumped into the system, it not only tended to raise prices, it did something worse. It distorted the production system. It caused over-investment in construction and capital goods and under-investment in consumer goods. The recession becomes necessary medicine to the real evil – the boom.

In the normal course of events, prices don’t remain constant, they fall. The Austrian theory was the only one that predicted and could explain the Great Depression. But the fashion changed. Austrians were dropped. Keynesians thrived. Keynesians wanted government spending and deficit spending. In the 1920s there was no theory going on. There were simply institutions.

The only explanation Rothbard has for the number of Misesians who shifted over to Keynes was sellout. Looking at the money factor or the economic factor explains the shift. Keynesianism is filled with fallacies. Government has to use statistics to plan. Strip government of statistics, they can’t do anything.

Fischer and Mitchell viewed themselves as intellectuals who were above class struggles and divinely appointed to plan everything for society. It was a naked grab for power. The Invisible Hand of Planning is about these social scientists. So, Keynesianism is still around, but they have nothing to say.

The final lecture in a series of six on the History of Economic Thought.

The Whig Theory of History as developed in the 19th century still dominates textbooks today. The Whigs say that history is an inevitable march upward, always improving. The idea is that knowledge is never lost, instead knowledge continues building and adding. This has not been true for history, science, or economics. Contrary to the accepted history of economics, Adam Smith did not create all of modern economic thought in 1776. He was predated (and bettered) by the Spanish Scholastics. Murray Rothbard exposes the Whig Theory and its implications for us today.

The first in a series of six lectures on the History of Economic Thought.

Richard Cantillon was quite Misesian before Mises. He wrote of utility theory and the entrepreneur’s uncertainty in the 1970s. Cantillon was a great money practitioner. He became a bank and banker to the Jacobite Stuart line and to John Law who launched paper money inflation.

Turgot became finance minister in 1774, but laissez-faire ideas failed. Turgot was Rothbard’s favorite character in the history of thought. He wrote well under time pressure. He wrote of wealth and capital theory and even of Austrian time preference theory and the law of diminishing returns.

Cantillon and Turgot preceded Adam Smith, but were not mentioned by Smith. Smith made waste and rubbish of 2,000 years of economic thought. The French theorists were lost. Smith deviated from laissez-faire in practically everything. Malthus got his anti-population stuff from Smith.

Hume was a great writer while a confused pre-Friedmanite thinker. He thought fractional reserve banking was fraud.

John Stuart Mill originated much of the Ricardian system like the law of comparative advantage. Mill was one of the inventors of libertarian class analysis which proclaims that the only class conflict comes from the state. Mill and Marshall reestablish Ricardianism. That really ushers in the 20th century.

The third in a series of six lectures on the History of Economic Thought.

The essence of Austrian economics is based on the analysis of individual action. In other words, it is about individuals doing things, having purposes and goals and pursuing them. Other schools of economics deal with aggregates, groups, classes, wholes of one sort or another, without focusing on the individual first and building up from there.

Austrian economics builds on an earlier French and Italian tradition, really beginning with the Spanish scholastics in the 16th century, and then proceeding on in France with Cantillion and Turgot in the 18th century. Economics not only predated Smith by several centuries, but also was much better than Smith.

It seems not to be an accident that labor value came from Scotland because Scotland was the classical home of Calvinism, and Calvinist doctrine is that labor is a key thing. Everybody is doomed to work and consumer enjoyment is evil. Three fallacies are embedded in the British classical school: labor theory of value, aggregate class struggle of shares of income, and a focus on nonexistent, unreal, long-run equilibrium. Additionally, Ricardo totally divided macro from a micro sphere. There is no talk about entrepreneurs.

Subjective value theory, individuals making their valuations in marginal units, preferences are ordinal (by ranking), and economics is more a philosophic subject, not mathematical, are four Austrian issues.

Capital takes time. Interest is determined by a person’s time premium rate on present goods immediately available. The entrepreneur is the key figure in the profit and loss system.

Mises healed the micro-macro split, by applying the marginal utility theory to money. The only thing an increase in the money supply does is to dilute the purchasing power of the money unit. First receivers of new money benefit to greater degrees than final recipients. Money must originate out of the free market, not by government edict. Fractional reserve banking is fraud.

Mises created his Austrian theory of the business cycle. Increasing the central banking supply of money not only causes inflation, but also causes other disturbances. Mises singlehandedly stopped Austrian inflation in the 1920s, stopped it from becoming hyperinflation. He also warned about the Great Depression. Prices were being kept level, but they should fall in free markets due to increased productivity (as they do in computers).

Mises became the uncompromising, hardcore laissez-faire capitalist. Human Action is the great work of the 20th century.

The fifth in a series of six lectures on the History of Economic Thought.

Carl Menger, 1840-1921, founded Austrian economics. Eugen von Bohm-Bawerk was the most important student. Weiser was his brother-in-law, but was fairly pre-Keynesian. Mises was the great successor to Bohn-Bawerk.

With Adam Smith, and with especially Riccardo, we shift toward the theory which still plagues us to the present day – namely that the real determinant of value, of prices, is not consumer subjective utility, but objective labor pain – labor toil.

Menger in Austria, Jevons in England, and Walras in Switzerland created the Austrian discussion of marginalism. Menger brought back the scholastic tradition, the praxeological method of focus on individual action, entrepreneurship, time, structure of production, and the fact that the expected values of the consumers determine the value of the factors of production that entrepreneurs are willing to invest in.

Menger and Bohm-Bawerk were steeped in natural law and natural rights and Aristotelian epistemology in general. That’s a very different tradition than either the Germans or the British.

Marx essentially gave up the labor theory of value. He had to admit that profits tend to be equalized on the market. Marxists would shift the debate whenever faced with defeat. There is no one to tell us what Marx thought he meant by value. The entire Marxian canon is essentially a prophetic religious movement of a weird kind.

The fourth in a series of six lectures on the History of Economic Thought.