A Primer on Austrian Economics
[Based on the notes for a lecture given by the author to Young Americans for Liberty at the University of California, San Diego on May 4, 2010.]
The jurisdiction of economics extends far beyond the study of production and consumption of goods and services. The science of economics consists of the study of human action, interaction, and cooperation. Even if you accept the mainstream division of micro- and macroeconomics, at the most basic levels economics deals with how market agents make decisions and how these decisions affect interactions between individuals. Even the broadest of market trends, usually condemned to the realm of "macroeconomics," boils down to interactions between individual market agents.
How individuals interact in tandem, forming the economic system as studied in modern macroeconomics, is simply fascinating. Even the most complex economies, such as today's global market, are made up of individual human actors, each seemingly unaware of the others' intentions and goals. Economics is the science that studies these individual agents of the market and how they coordinate through the price mechanism to create, not just what the mainstream considers "the market," but society as a whole, all without the necessity of a central planner or authority. The fact that human civilization is the product of billions of individuals, each acting to accomplish certain self-serving ends, is truly mind blowing.
What economists call "political economy," or modern economics, did not come into being until the mid-18th century. Since then the study of economics has not been one of linear progress; neither has it been free of controversy. Even before the birth of political economy, the study of economics was done by competing schools of thought; for example, the French mercantilists and the French liberals. Following the Smithian movement and despite the development of Marxism in the mid-19th century, economics was largely unified by the marginal revolution. However, the marginal revolution was followed by the birth of several distinct schools of economic thought. Some of the most well-known include the Neoclassical, Austrian, and Keynesian Schools, which interestingly all enjoy the same foundations in the marginal revolution.
Of the three above-mentioned major intellectual movements, the Austrian School is probably the smallest and least known. Despite this, it has become one of the fastest growing schools of thought in the past decade. And its ranks have swollen since the financial crisis of 2007. This growth is impressive enough as to prompt responses to the Austrian School from intellectual opponents who are usually ambivalent. All of this should be evidence enough that the Austrian School merits a closer look.
There are some basic questions that most "beginners" ask when first delving into Austrian theory. What is Austrian economics? Who are these Austrian economists? Why is Austrian economics relevant in today's world? These are all questions worthy of a response, and this is what the present essay sets out to do. The present essay also serves as a bibliography of sorts, as one can further investigate into the topics proposed by following the sources suggested in the footnotes throughout.
What is Austrian Economics?
The Austrian School of thought has offered economic science a wide variety of unique insights. It is unrealistic to provide a detailed account of all Austrian theory within the limits of an introduction. Nevertheless, there are some key theories that the Austrians have become known for, providing a solid foundation for further investigation into Austrian economics.
The unique keystone to Austrian theory is the concept of praxeology. Praxeology is the science of human action, under which the broader subject of political economy is categorized. The employed methodology of praxeology is known as a priorism, which is based on the ideas
- that the fundamental axioms and premises of economics are absolutely true;
- that the theorems and conclusions deduced by the laws of logic from these postulates are therefore absolutely true.
Praxeology recognizes the fundamental axiom that is human action. Human action is purposeful and aims at completing ends through deliberately chosen means. Human action differentiates itself from instinctual reaction, such as a human's reaction to biological stimuli, in the sense that the latter is subconscious while human action is entirely conscious. Apart from the axiom of human action there are also several subsidiary axioms, including the facts that man values leisure over work and individuals vary — no one individual is the same as another.
From the axiom of human action, praxeology seeks to develop theory through logical deduction. Modeled, the axiom of human action is represented by A; if A implies B, and A is accepted as true, then B must also be true. That B must be true if implied by A is independent of experience (or a priori), proven through logic. As such, Mises denies the usefulness of historical experience in the study of economics, given that through praxeology any theories developed would be apodictic. It follows that praxeology makes empirical validation or falsification not only superfluous but, as Mises holds, almost useless.
Praxeology and a priori reasoning lead to the important concept of time preference. This is the notion that, ceteris paribus, individuals prefer present satisfaction to future satisfaction, under the condition that the utility of future satisfaction is the same or less, ordinally speaking. As such, humans choose certain time-consuming actions because they expect the end to have greater utility than any other end closer in time. In the broader sense, the idea of time preference becomes clearer once it is understood that capital accumulation, or savings, comes about as a result of changes in time preference. Individuals save as a means of garnering greater satisfaction at some point in the future.
While praxeology could be the subject of an entire book — and a complete understanding of praxeological science as developed to date would certainly be useful — for the purposes of a primer only the basic idea of what praxeology consists of is necessary. Praxeology is the science of rational human action, and its a priori methodology makes Austrian theory valid independent of experience. It follows that the following major Austrian insights are products of reason and not empiricism.
Non-neutrality of Money
One of the most important Austrian positions is the belief in the non-neutrality of money. The mainstream believes in the long-run neutrality, or superneutrality, of money. This belief maintains that changes in the money supply only cause proportional and permanent changes to prices, while leaving the "real economy" — investment, production, and employment — unchanged. While money may change the underlying economy in the short-run, it is believed that nevertheless these will adjust proportionally to changes in the money supply over the medium term or long run. It is exactly this belief in the superneutrality of money that led to the development of the mechanistic quantity theory of money, or MV=PT.
Austrians expressly reject the notion of the superneutrality of money. The Austrian rejection bases itself on the idea that the purchasing power of money is decided only upon the moment of an exchange. In other words, the price of a good relative to a medium of exchange is decided during individual exchanges, depending on the amount of money following that particular good during that particular period of time. Therefore, a change in the supply of money will not affect all prices proportionally; rather it influences only certain prices, depending on what the new money is spent on.
Austrian Business-Cycle Theory
Believing in the non-neutrality of money is an important step towards understanding the Austrian business-cycle theory. The Austrian theory of the trade cycle is perhaps their most well-known contribution to economics, at least for the mainstream. This is especially true when considering that the principal reason for the rise in popularity of Austrian economics after the recession of 2007 was their explanation of the causes of the recession — and their predictions of the recession prior to the crash.
Important to understanding the underlying premises behind the theory of the trade cycle is the recognition of the relationship between the supply of money and the rate of interest. This relationship is explicitly rejected by John Maynard Keynes. Keynes suggests that the main contributing factor behind the rate of interest is society's so-called liquidity preference, or the preference of the consumer to hold money in liquid form or surrender it to an investor by saving it in nonliquid forms (such as a time deposit).
Unlike Keynes, Mises recognized the demand for money as time neutral. Keynes conflated the concepts of money and capital, not realizing that to hold money (or to hold a medium of exchange) did not translate into a reduction in the supply of capital on the market. As opposed to Keynes, Mises believed that a decrease in the supply of money-chasing loanable capital would simply manifest itself in the structure of production as a change in the prices of capital goods.
The rate of interest on a good, or what Mises called the originary interest, is that established by the ratio of the value of future goods discounted against the value of present goods. As explained by Jesús Huerta de Soto, "the term 'interest rate' [denotes] the market price of present goods in relation to future goods."
Money relates to the rate of interest in the sense that as a medium of exchange money can be used to acquire a certain amount of goods. Instead of bartering actual capital on the market, money allows for a complex series of exchanges to take place, without one individual having to directly satisfy another by offering the other the exact good in demand. As such, the lending and borrowing of money follows the same praxeological laws as other goods. Like any other goods on the market, as price decreases demand increases. As the supply of money on the market increases the cost of borrowing, or the rate of interest, decreases and the quantity demanded of loanable funds increases. This tends to catalyze investment.
Austrians distinguish between a rise in the supply of loanable funds as a result of an increase in savings and the rise resulting from an increase in the supply of money. The latter is what leads to the business cycle. Providing a complete understanding of the Austrian business-cycle theory would require a deeper foray into Austrian capital theory, which unfortunately is something outside the scope of the present essay. Regardless, using what has been established thus far, the business-cycle theory can be explained as one that predicts discoordination in the market resulting from an artificial decrease in the cost to borrow money. This decrease in the rate of interest is artificial in the sense that it came as a result, not of an increase in loanable funds through an increase in savings, but an increase in loanable funds through an increase in the supply of money.
Given that a decrease in the market rate of interest will lead to an increase in the quantity demanded of loanable funds, this leads to an increase in investment. Investment leads to the lengthening of the structure of production in the hope of producing future goods.
Discoordination is caused by the fact that, given that the supply of money was increased artificially, consumers have not generally sacrificed present consumption for future consumption. Thus, existing capital is divided between continued production of consumer goods, for present consumption, and capital goods, which will be used to finance projects dedicated towards satisfying future consumption. This discoordination leads to widespread malinvestment, and when this discoordination is revealed it leads to an inevitable bust. Thus, Austrians hold that business cycles are caused by intertemporal discoordination, caused by artificial increases in the supply of loanable funds without an equal fall in present consumption.
Socialist Calculation Problem
While business-cycle theory is perhaps what the Austrians are currently most well known for, there is a myriad of other concepts the Austrians introduced or expanded upon. One such insight is that of the socialist calculation problem.
There is no objection amongst economists that given the existence of scarcity, the market is in need of a rationing device. Most economists, except those in extreme favor of centralized rationing, will also agree with the notion that price is the best rationing device of the market. While price hardly acts as a measure of value, due to the fact that no object has an objective value, it nevertheless serves as a useful tool to coordinate production by serving as a conveyor of information between different market agents and a method by which an individual can decide whether or not a particular action is economical.
In a socialistic economy, where prices are absent, this coordination would simply not exist. There would be no host of individual agents communicating through the price mechanism and allocating resources by means of subjective ratiocination. As a result, all meaningful economic activity would come to a halt. Complex programs would be impossible to complete economically, since without a price mechanism there would be no way for a central planner to distribute resources according to their most economical use. Thus, socialist economies are bound to fail.
These key Austrian positions have been explained in an effort to offer the reader an introduction. Understanding the basics of Austrian methodology, monetary and capital theory, and finally Mises's calculation problem, the reader can now fully plunge into a wider and deeper body of Austrian theory.
A Brief History of the Austrian School
Adam Smith is generally considered the father of political economy, and between Smith and the marginal revolution it is traditionally believed that there was a linear progression in the science of economics. Schumpeter's History of Economic Analysis suggested otherwise, and since then there has been a wealth of revisionism looking to correct economists' view on the Smithian movement. From an Austrian perspective, Smith did much to damage economic theory. Not only was much of Smithian theory erroneous — including his monetary and value theories — but also The Wealth of Nations effectively blotted out a rich tradition of economics prior to the Scottish enlightenment, including the School of Salamanca and the French liberals. It was left to the marginalists of the late 19th century to "rediscover" much of the pre-Smithian tradition.
The marginalist revolution was spearheaded by William Stanley Jevons, Léon Walras, and Carl Menger through the concept of marginal utility. It was Carl Menger who founded the Austrian School, expounding his ideas in two major economic works: Principles of Economics and Investigations into the Method of the Social Sciences with Special Reference to Economics. While Carl Menger laid the foundations for Austrian theory, his greatest influence was his support of an individualistic approach to economics, or what is called methodological individualism. This would ultimately lead to Mises's development of praxeology. In fact, Mises alludes to the importance of Menger's methodology by describing what was called the Methodenstreit (dispute on method) between Menger and Gustav Schmoller of the German Historical School (and others). While Menger's methodology did not recognize economic logic as all derived from the same axiom, one can certainly find the roots of the schism between a priori reasoning and empiricism in Menger.
Menger influenced two important economists. These were brothers-in-law Eugen von Böhm-Bawerk and Friedrich von Wieser. Böhm-Bawerk considerably developed Austrian capital theory, expounded over two important volumes — Capital and Interest and The Positive Theory of Capital. Perhaps his greatest contributions to capital theory were his concepts of time-preference and roundaboutness. Böhm-Bawerk also wrote a devastating criticism of Marxism and Marxian economics, Karl Marx and the Close of his System. Friedrich von Wieser made great strides in the socialist-calculation debate and would also become widely known for his development of the concept of opportunity cost.
Ludwig von Mises did not become immediately acquainted with Menger's economics. Mises read Menger's Principles only after Menger had retired from the University of Vienna. Jörg Guido Hülsmann believes that Mises became fully aware of Menger after being exposed to Friedrich Wieser, who gave a series of lectures at the university and attempted to expand on Menger's theories on money. Both Menger's book and Wieser's lectures impacted Mises's later writings on money, in many ways providing the basis of Mises's beliefs. While Menger did not immediately persuade Mises to embrace liberalism, it did cause a fundamental shift in the way Mises critically viewed the legitimacy of government intervention. It was this critical approach to theory that slowly converted Mises into the great liberal economist of Human Action, written over forty years after his first encounter with Menger and the Austrian School.
While Human Action can be considered the peak of Mises's intellectual career, it was not long after reading Menger that Mises published his first major theoretical work. This was The Theory of Money and Credit, published in 1912. It was this book that propelled Mises to forefront of the study of economics, although Mises's success was interrupted by the eruption of the Great War in 1914. Also rather unfortunate was the fact that The Theory of Money and Credit was not translated into English until the 1930s. Ultimately, Mises's views on money were drowned out by the views of figures such as Fisher and Marshall. Regardless, after the Great War Mises continued theorizing and developed Austrian methodology (what he would refer to as praxeology), he elucidated the socialist calculation problem, and prepared his great treatise, Human Action. The wide scope of Mises's contributions to Austrian theory, and the depths to which he pursued these topics, makes him the most important Austrian economist — and, to an Austrian, the most important economist of the 20th century.
Apart from directly contributing to the renaissance of Austrian thought, Mises also influenced many other economists, including Friedrich Hayek. Hayek contributed greatly by popularizing Austrian theory. During his stint at the London School of Economics, Hayek enjoyed widespread support of his beliefs, including from Lionel Robbins. Hayek was also awarded the Nobel Memorial Prize in Economic Sciences, a major stimulant in the resurgence of the Austrian School during the last two decades of the 20th century.
Hayek also contributed greatly to the Austrian theoretical corpus. This includes his work on the Austrian business-cycle theory, for which he would be awarded the Nobel Memorial Prize, and his writings that further developed capital theory. Hayek also revisited the calculation problem and was a renowned political scientist. Today, he is probably most well-known for Road to Serfdom, where he warned that all "middle of the road" policies would eventually lead to socialism and tyranny.
After Hayek came a host of new Austrians. Many of them were not Austrians of the same ilk as Mises, but were nevertheless greatly influenced by Austrian methodology and theory. The post-Hayek generation of economists includes Israel Kirzner and Murray Rothbard, the latter of which heavily influenced the Austrian School by merging the school's classical-liberal ethical foundations with anarchism. Although the Austrian School had already become much more than a school of economics, Rothbard fully broadened the scope to cover ethics and political science. The state of modern "Austrianism" owes much to Rothbard, even if many Austrians disagree with Rothbard's conclusions.
Today, the Austrian School has grown to include an even larger body of professional economists, and a previously inconceivable body of followers and students. There is no doubt that great strides will be made in theory, throughout the multitude of fields that now completely fall within the scope of the school.
Apart from the school's valuable insight in academics, how is the Austrian School relevant to current events? What makes Austrian theory important to the common man?
The answer to these questions can be deduced praxeologically, beginning with the axiom of human action. If we accept society as merely a web of purposeful interactions between individuals, then we begin to realize the potential distortions caused by exogenous factors — namely government through regulation. As a value-free science, praxeology cannot tell you whether or not government intervention is good or bad but it can tell you the consequences of exogenous distortion of human action. "Austrian" ethics, on the other hand, do serve the purpose of deciding between "good" and "bad," but in the purest sense the Austrian School can at least enlighten the layman by suggesting what effects certain economic policies will have.
This idea that government distorts, for better or for worse, is important. In a world where government is an irrefutable reality, and where intellectually the concept of anarchism has not been accepted by the mainstream, Austrian economics becomes very relevant in the sense of aiding individuals to judge the value of certain government programs. With an ongoing financial crisis and an impending greater crash, there is no better time to become aware of the consequences of interventionism.
It was the aim of the present essay to skim the surface of Austrian theory, in the hope that those interested will further explore Austrian thought. The message is not necessarily that one should uncompromisingly accept the views of the Austrian School, only that these insights are valuable and can add to whatever knowledge is already held by any given individual.
Nevertheless, the rigor of the Austrian method makes its methodology incomparable to that of any other school, which certainly makes the case for Austrian theory that much stronger.
 Viewing economics as the study of human action might seem distinctively Austrian, and certainly the change in methodology from one that focused on the "'economic' aspects of human action" to one that recognized all human action as the realm of economics coincides with the beginning of the marginal revolution and the Austrian School (Ludwig von Mises, Human Action. Auburn, Alabama: Ludwig von Mises Institute, 1998: pp. 2–3). While there are significant methodological differences between the Austrian School and other major schools of economics, it nevertheless stands that all economists must recognize that markets are no more than natural constructs of cooperating individuals.
 Adam Smith has traditionally been considered the father of modern economic science. Murray Rothbard believed otherwise and bestowed this honor on Richard Cantillon, writing that "[m]ost people, economists and laymen alike, think that economics sprang fullblown, so to speak, from the head of Adam Smith…. [t]he honour of being called the 'father of modern economics' belongs, then, not to its usual recipient, Adam Smith, but to a gallicized Irish merchant, banker, and adventurer who wrote the first treatise on economics more than four decades before the publication of Wealth of Nations" (Murray N. Rothbard, An Austrian Perspective on the History of Economic Thought, Volume I: Economic Thought Before Adam Smith. Auburn, Alabama: Ludwig von Mises Institute, 1995: p. 345).
Unfortunately, most of Richard Cantillon's insights were lost after the publication of Wealth of Nations. Cantillon was "rediscovered" in the late-19th century by William Stanley Jevons, one of the three "founders" of the marginal revolution. About Cantillon's treatise Essai, Jevons writes, "Cantillon's essay is, more emphatically than any other single work, 'the Cradle of Political Economy'" ("Richard Cantillon and the Nationality of Political Economy" [January 1881]: p. 342). Friedrich Hayek, basing his history of Cantillon on Jevon's work, also held this view (See The Trend of Economic Thinking. Indianapolis, Indiana: Liberty Fund, 1991: p. 246).
 One of the best treatises on pre-Smithian economics remains Murray Rothbard's An Austrian Perspective on the History of Economic Thought (1995). Joseph Schumpeter also treats a wide variety of historiographical subjects in History of Economic Analysis, where he includes a criticism of Adam Smith and suggests (like Rothbard) that Smith and his students (David Ricardo, et. al) set economic science on the wrong direction until the advent of the marginal revolution (I. M. D. Little, "History of Economic Analysis." The Economic History Review 8, no. 1 : pp. 95–96). Between Rothbard's and Schumpeter's treatises, the latter is probably the most well-known amongst mainstream academia. Nobel laureate George J. Stigler, himself interested in the history of economic thought, wrote, "[Schumpeter's] comments are, as ever, supremely sophisticated and, as usual, full of shrewd insight" ("Schumpeter's History of Economic Analysis." The Journal of Political Economy 62, no. 4 [August 1954]: p. 345).
 I.M.D. Little writes on Schumpeter's History of Economic Analysis that "[h]is main thesis is that there was a fundamental unity in the period's theory, at least in the later years. Jevons, Menger, Walras, and Marshall taught essentially the same doctrine" (Little , p. 97).
 John Maynard Keynes's economics marched in an almost complete opposite direction to that of the neoclassicistsand Austrians. While the two latter schools of thought generally agreed on the basic premises of economics as laid out by the classical economists, Keynes almost completely deviated away from these premises (Ralph Raico, "Was Keynes a Liberal?"). Nevertheless, Keynes's beliefs were greatly influenced by the marginal revolution, and especially by Knut Wicksell. Keynes's beliefs regarding subjectivity and the propensity to consume, marginal efficiency of capital, and his pure theory of interest, were all built on the foundations provided by the marginal economists (The General Theory of Employment, Interest and Money. BN Publishing, 2008).
 Austrian economics has become popular beyond the political boundaries of the United States. There are Mises Institutes in Brazil and Sweden, for example, while Austrian seminars have been held in countries such as Spain, where liberalism has historically been drowned out by syndicalist and socialist thought. For a view on the growth of the Austrian School, see Llewellyn H. Rockwell Jr., "More Powerful Than Armies."
 The Austrian School was not unknown during the 1920s and 1930s. John Keynes openly criticized Austrian theory in The General Theory. For example, he directly refers to Friedrich Hayek's and Lionel Robbin's criticism of his own theories put forth in his Treatise on Money. He also criticizes Hayek's business-cycle theory, by disputing the validity of Hayek's claim that a rise in the supply of credit will lead to discoordination in the market (Keynes 2008, pp. 79–85). Another notable criticism of Austrian theory was Piero Sraffa's critique "Dr. Hayek on Money and Capital," published in The Economic Journal. Sraffa was an "uncomprehending and rabid [disciple]" of Keynes, and his critique of Hayek's Prices and Production stems largely from the fact that at this time Keynes was chief editor of The Economic Journal (from Joseph Salerno's introduction to F.A. Hayek's Prices & Production and Other Works. Auburn, Alabama: Ludwig von Mises Institute, 2008: p. viii).
Following the 1930s and early 1940s criticism and acknowledgment of the Austrian School became far more sparse. Only more recently has there been a revival in opponent's interest in Austrian economics. This is probably because the Austrian "revival" threatens their own beliefs and the supremacy of their beliefs in modern academia and political policy. Some recent criticism includes that of Paul Krugman and Bradford DeLong.
 Mises wrote, "Out of the political economy of the classical school emerges the general theory of human action, praxeology. The economic or catallactic problems are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology" (Mises 1998, p. 3).
 Sometimes Austrian methodology is referred to as praxeology. For example, as Rothbard wrote, "Praxeology is the distinctive methodology of the Austrian school" ("Praxeology: The Methodology of Austrian Economics." Originally in The Logic of Action One: Method, Money, and the Austrian School, Cheltenham, United Kingdom: 1997, p. 58). But, most accurately praxeology is the science, not simply the methodology.
 Rothbard, Murray N., "In Defense of Extreme Apriorism." Southern Economic Journal (January 1957): p. 314.
 Mises believed the axiom of human action to be true a priori, or independent of experience. "The human mind," he wrote, "is not a tabula rasa on which the external events write their own history. It is equipped with a set of tools for grasping reality. Man acquired these tools, i.e., the logical structure of his mind, in the course of his evolution from an amoeba to his present state. But these tools are logically prior to any experience" (Mises 1998, p. 35). The belief that the axiom of human action is a priori is not universally shared amongst all Austrians. Rothbard, for example, believed the axiom of human action was found empirically. "My view is that the fundamental axiom and subsidiary axioms are derived from the experience of reality and are therefore in the broadest sense empirical" (Rothbard 1997, p. 64).
 Mises 1998, pp. 11–13. This is the implication Mises makes when he writes that "[m]en cooperate. That means that, in their activities, they anticipate that activities on the part of other people will accomplish certain things in order to bring about the results they are aiming at with their own work" ("Human Cooperation" in Ludwig von Mises on Money and Inflation).
 Rothbard 1997, p. 59. These subaxioms are not a priori, as Rothbard wrote, "[i]t should be noted that for Mises it is only the fundamental axiom of action that is a priori; he conceded that the subsidiary axioms of the diversity of mankind and nature, and of leisure as a consumers' good, are broadly empirical" (Rothbard 1997, p. 67).
 Rothbard 1997, pp. 58–60. Also relevant are the four first chapters of Human Action. Also see Israel M. Kirzner, The Economic Point of View (Indianapolis, Indiana: Liberty Fund, 1960): pp.151–89.
 According to Rothbard, "Mises indeed held not only that economic theory does not need to be "tested" by historical fact but also that it cannot be so tested." (Rothbard 1997, p. 72). It is common for Austrians to apply theory to history, but this is a form of illustration or elucidation, and not a method by which to deduce more theory (Selgin, George A., Praxeology and Understanding: An Analysis of the Controversy in Austrian Economics. Auburn, Alabama: Ludwig von Mises Institute, 1990: p. 25). Noteworthy is that Mises's view on empiricism is not universally accepted by all Austrian scholars. Friedrich Hayek, for example, believed that empiricism was a useful tool to falsify theory, even if empiricism could not validate theory (Hayek 2008, pp. 9–17). Nevertheless, Hayek agreed with Mises's a priori approach to logical deduction: "Even as a means of verification, the statistical examination of the cycles has only a very limited value for trade cycle theory … First, it must be deduced with unexceptionable logic from the fundamental notions of the theoretical system; and second, it must explain by purely deductive method those phenomena with all their peculiarities that we observe in actual cycles" (Hayek 2008, p. 12). For a general overview of differences in exact praxeologic methodology see Selgin 1990, pp. 27–37.
 Ordinal versus cardinal utility is an important concept in Austrian economics, and refers to nothing more than the belief that utility cannot be objectively measured (cardinal utility) and that nothing has measurable intrinsic value. The utility of something can only be measured relative to the utility of another thing (ordinal utility). Mises explains that "[m]arginal utility provides no unit of value. The worth of two units of a given commodity is not twice as great as one — although it is necessarily greater or smaller than one. Judgments of value do not measure: they arrange, they grade" (Socialism: An Economic and Sociological Analysis. New Haven, Connecticut: Yale University Press, 1951: p. 114). For an in-depth discussion on ordinal utility versus cardinal utility, see Murray N. Rothbard, "Towards a Reconstruction of Utility and Welfare Economics."
 Jesús Huerta de Soto explains that "actors undertake time-consuming actions because they expect to thus achieve more valuable ends; according to the latter, other things being equal, actors always prefer the goods closer to them in time" (Money, Bank Credit and Economic Cycles. Auburn, Alabama: Ludwig von Mises Institute, 2009: pp. 270–72).
 Thorsten Polleit, "The Fallacy of the (Super)Neutrality of Money." Polleit provides an important caveat: "The neutrality-of-money hypothesis does not rule out that changes in the money growth rate may have permanent effects on the level of economic activity. In fact, a rise in the growth rate of the money stock (from, say, 4% a year to 5% a year) may be thought of as having the potential of pushing production to a permanently higher level of output."
 Huerta de Soto writes that "[s]upposing the 'velocity of circulation' of money remains relatively constant over time, and the gross national product approximates that of 'full employment,' monetarists believe money is neutral in the long run, and that therefore an expansion of the money supply (M) tends to proportionally raise the corresponding general price level" (2009: pp. 522–35).
 There are a number of refutations of the mechanical-quantity theory of money, including: Mises 1998, pp. 395–98; Polleit 2009; Huerta de Soto 2009, pp. 522–35; Hayek 2008, pp. 253–76. Also: Ludwig von Mises, The Theory of Money and Credit. Indianapolis, Indiana: Liberty Fund, 1980: pp. 162–63.
 According to Keynes, "[t]he psychological time-preferences of an individual require two distinct sets of decisions to carry them out completely. The first is concerned with that aspect of time-preference that I called the propensity to consume, which, operating under the influence of the various motives set forth in Book III, determines for each individual how much of his income he will consume and how much he will reserve in some form of command over future consumption. But this decision having been made, there is a further decision that awaits him, namely, in what form he will hold the command over future consumption that he has reserved, whether out of his current income or from previous savings…. It should be obvious that the rate of interest cannot be a return to saving or waiting as such. For if a man hoards his savings in cash, he earns no interest, though he saves just as much as before." (Keynes 2008, pp. 166–67).
 On the subject, Mises wrote, "[a] drop in commodity prices, other things being equal, causes a drop in the money equivalent of the various individuals' capital. But this is not tantamount to a reduction in the supply of capital goods and does not require an adjustment of production activities to an alleged impoverishment. It merely alters the money items to be applied in monetary calculation" (Mises 1998, p. 519). Interestingly, Jörg Guido Hülsmann suggests that in an economy using a commodity currency the structure of production will be affected by an increase in demand for money, since an increase in demand for money would raise the return on investment for gold production. As capital flows from other industries into gold production, the rate of investment for gold lowers, while the rate of investment for other industries increases, thus causing a change in the rate of interest. Hülsmann notes that this relationship does not exist with fiat money, given that the marginal cost of production of fiat money is already near zero. See Jörg Guido Hülsmann, "The Demand For Money and the Time-Structure of Production."
 Mises 1998, pp. 521–34.
 Huerta de Soto 2009, p. 285.
 The clearest explanation of the Austrian business-cycle theory, and the necessary capital theory, is provided by Jesús Huerta de Soto and his book, Money, Bank Credit and Economic Cycles. Ludwig von Mises also gives an overview of the business-cycle theory in Human Action. Business-cycle theory reached its farthest intellectual extent, in the sense of development, under Hayek. Hayek's contributions to the theory of the trade cycle can be read in his Prices & Production and Other Works. For those interested in capital theory, one of the most complete books on the subject remains Hayek's Pure Theory of Capital. A more popularized explanation of Austrian capital theory is provided by Robert Murphy, "The Importance of Capital Theory."
 Similarly, popular accounts of the business cycle can be found in books such as Thomas Woods's Meltdown, or The Austrian Theory of the Trade Cycle and Other Essays, edited by Richard Ebeling.
 One mainstream macroeconomics textbook states that "[s]carcity implies the need for a rationing device … many other alternatives to dollar price could be used as a rationing device. However, each discriminates against someone, and none is clearly superior to dollar price" (Arnold, Roger A., Macroeconomics. Mason, Ohio: Thomson South-Western, 2008: p. 4).
 "Money calculations have their limits. Money is neither a yardstick of value nor of prices. Money does not measure value" (Mises 1951, p. 115).
 Ludwig von Mises's Socialism is perhaps the single greatest treatise covering the shortcomings of a socialist economy. Human Action also dedicates a chapter to the subject (pp. 694–711). Finally, Friedrich Hayek's Socialism and War offers the reader insight on the progress of the socialist calculation debate up to the 1970s.
 The belief that Adam Smith was a negative influence is unconventional and heterodox. As the present overview of the history of economic thought is purposefully brief, a much more complete analysis of the contributions of Adam Smith can be found here: Murray N. Rothbard, "The Adam Smith Myth."
 On the progress of economic science as nonlinear, see Rothbard 1995, p. 438. For an overview of Smith's theoretical mistakes see Rothbard 1995, pp. 441–71. Rothbard writes, "The most unfortunate aspect of the total Smithian takeover in economics was not so much his own considerable tissue of error, but even more the blotting out of knowledge of the rich tradition of economic thought that had developed before Smith" (Rothbard 1995, p. 502.)
 Ibid., p. 502. "As a result, the Austrians and their nineteenth century predecessors, largely deprived of knowledge of the pre-Smithian tradition, were in many ways forced to reinvent the wheel."
 Mises 1998, pp. 4–5. Also, see Mises's Historical Setting of the Austrian School of Economics. Jörg Guido Hülsmann provides a very clear exposition of Menger's methodology: "Menger did not use abstract models to posit falsifiable hypotheses that are then tested by experience. Instead, Menger's was an analytical method that began with the smallest empirical phenomena and proceeded logically from there. This put Menger in a position to consider market exchanges and prices as macro-phenomena and to explain how they are caused by atomistic, but empirically ascertainable 'elements of the human economy' situated in an economic microcosm of individual needs and the marginal quantities owned and acquired" (Mises: The Last Knight of Liberalism. Auburn, Alabama: Ludwig von Mises Institute, 2007: pp. 104–105).
 One of the best histories of the early years of Austrian thought is provided by Hülsmann 1997, pp. 101–74.
 Hülsmann writes, "Reading Carl Menger did not immediately produce the author of Human Action. Mises's own statism was too deeprooted: he had absorbed it from the earliest days of his childhood, and he unconsciously applied it in his research for the Grünberg and Philippovich seminars…. What Menger's Principles did was to change fundamentally Mises's outlook on the analysis of social problems…. All government intervention must therefore be considered carefully before it is allowed to disrupt the order of the market" (Hülsmann 1997, pp. 80–93).
 Hayek never completed his writings on capital theory, with Pure Theory of Capital being only the first part of an at least two-volume series on capital. Nevertheless, in many ways Hayek's theories represent the maximum extent of Austrian theory of capital.
 Disagreements with Rothbard range from political science, to ethics, to economics. Some main examples include the dichotomy between "free bankers" and "hundred-percent reservists," and anarchocapitalists and minarchists.