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The Mises Review

Edited and written by David Gordon, senior fellow of the Mises Institute and author of four books and thousands of essays.


An Austrian Perspective on the History of Economic Thought, Vols I & II

Murray Rothbard

2 1995
Volume 1, Number 2


Rothbard's Last Triumph

Summer 1995

AN AUSTRIAN PERSPECTIVE ON THE HISTORY OF ECONOMIC THOUGHT, VOLS I & II
Murray N. Rothbard
Edward Elgar, 1995, xvi + 556 pp.

Murray Rothbard tells us that this gigantic work was first envisioned as a "standard Adam Smith-to-the-present moderately sized book, a sort of contra-[Robert] Heilbroner" (p. xv). When we see what has emerged from that plan, a parallel at once springs to mind. Cervantes began Don Quixote as a short story, according to Ramón Menéndez-Pidal; but he gradually expanded it into one of the great books of the world. Likewise, the "moderately-sized book" has become one of the great intellectual enterprises of our age.

For Rothbard, the history of economics has an unusually broad scope. To him it include not only economic theory but virtually all of intellectual history as well. As he often did in conversation, Murray Rothbard here advances definite and well-thought out interpretations of major historical controversies.

As an example, Machiavelli was in his view a "preacher of evil"—not for him the fashionable portrayal of the Florentine as the founder of value-free political science (p. 189). With characteristic acuity, Rothbard asks: "Who in the history of the world, after all, and outside a Dr. Fu Manchu novel, has actually lauded evil per se and counselled evil and vice at every step of life's way? Preaching evil is to counsel precisely as Machiavelli has done: be good so long as goodness doesn't get in the way of something you want, in the case of the ruler that something being the maintenance and expansion of power" (p. 190).

And he concludes his discussion with a stinging rebuke to modern political scientists, who "eschew moral principle as being `unscientific' and therefore outside their sphere of interest" (p. 192).

Rothbard firmly rejects the Weber thesis, according to which the "inner-worldly asceticism" that Calvinism encouraged played a key role in the rise of modern capitalism. Capitalism began long before Calvinism; and the stress upon "God and profit" that Weber found distinctively Protestant was present in the Catholic Middle Ages.

For the Weber thesis, Rothbard substitutes another contrast between Catholics and Protestants, here following Emil Kauder. The Calvinist stress on the calling led to emphasis on work and saving and distrust of consumption: Catholic Europe, in the Aristotelian and scholastic tradition, found nothing wrong with consumption. This difference led to a crucial split in the growth of economics, between utility and cost-of-production theories of price.

I fear that readers will have become impatient because I have yet to treat economic theory. But one last topic before doing so, covered in what to my mind is the single most brilliant page in Rothbard's two volumes. With a few bold strokes, Rothbard demolishes oceans of misinterpretation about the quarrel between the ancients and moderns. "The pitting of `tradition' vs. `modernity' is largely an artificial antithesis. `Moderns' like Locke or perhaps even Hobbes may have been individualists and `right-thinkers,' but they were also steeped in scholasticism and natural law" (p. 314).

Further, on the same page our author strikes at another theory of vast but unmerited influence. "Neither are John Pocock and his followers convincing in trying to posit an artificial distinction and clash between the libertarian concerns of Locke or his later followers on the one hand, and devotion to `classical virtue' on the other . . . why can't libertarians and opposers of government intervention also oppose government `corruption' and extravagance? Indeed, the two generally go together" (p. 314). I wish that everyone interested in European history would study this marvelous page.

Rothbard firmly opposes the Whig view of the history of economics, in which "later" is inevitably "better," thus rendering the study of the past unnecessary. In his view, much of economics consists of wrong turnings; and the present volume ends with a tale of decline that will surprise many readers. Yet paradoxically, Rothbard's own method is in another way Whiggish itself. He has his own firmly held positions on correct economic theory, based on his surpassing command of Austrian economics. He accordingly is anxious to see how various figures anticipate key Austrian themes or, on the contrary, pursue blind alleys.

The dominant theme in Rothbard's appraisal of economics is the nature of value. Economic actors, endeavoring to better their own position, guide themselves by their subjective appraisals of goods and services. The pursuit of an "objective" measure of value is futile: what influence can such an alleged criterion have, unless it is reflected in the minds of economic agents?

Rothbard especially emphasizes, in this connection, the so-called paradox of value. How can it be that water costs little or nothing while gold is extraordinarily expensive? Life cannot exist without the former, while the latter is the merest luxury. The answer, fully developed by the Austrian school, depends on the fact that subjective appraisals of particular units of a good, not the supposed value of the whole stock of the good, determined price. Since water is abundant while gold is scarce, there is no anomaly at all in the greater price of the latter.

Our author never fails to praise those who reach or approach this insight. The scholastics fare especially well: Pierre de Jean Olivi, e.g., realized that the "important factor in determining price is complacibilitas, or subjective utility, the subjective desirability of a product to the individual consumers. . . . utility, in the determination of price, is relative to supply and not absolute" (p. 61). Again, he lauds Jean Buridan for extending the subjective utility analysis to money (p. 74).

A key corollary of the subjectivist position is that an exchange does not consist of an equality: each party values more highly what he obtains than what he surrenders. Those who miss the point arouse our author to protest. Even Aristotle, whom he much admires as a philosopher, does not escape censure: "Aristotle's famous discussion of reciprocity in exchange in Book V of his Nicomachean Ethics is a prime example of descent into gibberish. Aristotle talks of a builder exchanging a house for the shoes produced by a shoemaker. He then writes: `the number of shoes exchanged for a house must therefore correspond to the ratio of builder to shoemaker. . . .' How eh? can there possibly be a ratio of `builder' to `shoemaker'?" (p. 16). Those who knew Murray Rothbard can almost hear him asking this.

The subjectivist insight by no means died with the close of the Middle Ages. On the contrary, the School of Salamanca upheld it in the sixteenth century; and in the eighteenth, Cantillon and Turgot considerably extended it. But the path of economics was not one of continued progress. Theory suffered a major setback through the work of one of Rothbard's main villains, Adam Smith.

Far from being the founder of economics, Smith in the eyes of Rothbard was almost its gravedigger. Although Smith in his classroom lectures solved the paradox of value in standard subjectivist fashion, "in the Wealth of Nations, for some bizarre reason, all this drops out and falls away" (p. 449). Smith threw out subjective utility and instead sought to explain price through labor cost. Because of Smith's mistake, the "great tradition [of subjectivism] gets poured down the Orwellian memory hole" (p. 450).

Rothbard's discussion of utility constitutes only one strand in his powerfully argued case that Smith derailed economics from the analytical achievements of the scholastics and their French and Italian successors. And even in the discussion of utility, I have had to omit much. (The brilliant dissection of Daniel Bernoulli's mathematical approach to utility [pp. 380–81], e.g., should not be missed). But no review can do justice to the scores and scores of insights and scholarly discoveries in this volume.

An Austrian Perspective on the History of Economic Thought, Volume II: Classical Economics

Murray N. Rothbard
Edward Elgar, 1995, xvi + 556 pp.

The reader of this volume will at once face a puzzle: how was one person able to unify so vast a mass of material into a tightly organized narrative? I cannot pretend to provide a full answer, but one part of the solution lies in the fact that Rothbard follows a few main themes with iron consistency.

One of these central themes emerges in the book's initial chapter: "J.B. Say: the French Tradition in Smithian Clothing." Jean-Baptiste Say, far from being a mere popularizer of Adam Smith, "was the first economist to think deeply about the proper methodology of his discipline, and to base his work, as far as he could, upon that methodology" (p. 12).

And what is the procedure that Say advocated? One starts from certain "general facts" that are incontestably known to be true. From these, the economist reasons deductively. Since the beginning axioms are true, whatever is validly deduced from them also is true. Here, in brief compass, Say discovered the praxeological method that came to full fruition in the work of Mises and Rothbard himself.

To understand praxeology, a key point about the initial axioms must be kept in mind. The starting points are common sense, "obvious" truths, e.g., that people engage in exchange in order to benefit themselves. The economist should not begin from oversimplified hypotheses about the economy as a whole, chosen because convenient for mathematical manipulation. To adopt this wrong method was the besetting vice of the economics of David Ricardo, the main impediment, in Rothbard's view, to the development of economic science in the nineteenth century.

This conflict of method had a fundamental effect on the content of Say's and Ricardo's economics. Say began from the individual in action, the subject of the common sense propositions he took to be axiomatic. Thus, Say placed great emphasis on the entrepreneur. One cannot assume that the economy automatically adjusts itself: only by the foresight of those able and willing to take risks can production be allocated efficiently. "It seems to us that Say is foursquare in the Cantillon-Turgot tradition of the entrepreneur as forecaster and risk-bearer" (p. 26).

Again, Say's stress on the individual underlies his analysis of taxation, which Rothbard rates among his greatest contributions. Some, including notoriously Adam Smith, consider taxes a way to benefit the public; but Say would have nothing of this nonsense. Taxation, in essence, is theft: the government forcibly seizes property from its rightful owners. If the powers-that-be then condescend to spend some of their ill-gotten gains for the "public benefit," they are in reality purchasing people's goods with the people's own money. Taxation, accordingly, should be as low as possible: the search of Smith and his followers for "canons of justice" in taxation must be rejected. Rothbard characteristically adds: why have any taxes at all?

As any reader will discover after a few pages, Rothbard spurns the desiccated neutrality of much contemporary pseudo-science. He has his heroes and villains, chosen not by arbitrary preference but according to his carefully reasoned conception of economic principles. Yet he is no uncritical partisan of his heroes: he is a master of the fine discriminations that Dr. Leavis has taught us characterize the great critic.

When, we turn to Rothbard on Ricardo, the atmosphere is entirely different. Once again, our author reverses conventional opinion. Say was not a popularizer, but a great economist; likewise, Ricardo was not the first truly scientific economist. His much-praised logic is "verbal mathematics" that fundamentally misconceives economics. "Ricardo was stuck with a hopeless problem: he had four variables, but only one equation with which to solve them: Total output (or income) = rent + profits + wages. To solve, or rather pretend to solve, this equation, Ricardo had to `determine' one or more of these entities from outside his equation, and in such a way as to leave others as residu<als" (p. 82).

Rothbard explains with crystal clarity the path by which Ricardo sought to escape. He simply held fixed as many of his variables as he could: by oversimplified assumptions, he could "solve" his equations. In particular, he adopted a theory of rent based on differential productivity, which Rothbard neatly skewers; and he made price largely a function of the quantity of labor time embodied in a commodity's production.

Ricardo's labor theory of value had a consequence that would no doubt have shocked its author: it paved the way for Marxism. "Marx found a crucial key to this mechanism [by which the capitalist class would be expropriated] in Ricardo's labor theory of value, and in the Ricardian socialist thesis that labor is the sole determinant of value, with capital's share, or profits, being the `surplus value' extracted by the capitalist from labor's created product" (p. 409). And with his stress on the Ricardian roots of Marxism, Rothbard begins a devastating assault on "scientific socialism," the like of which has not been seen since Böhm-Bawerk.

As Rothbard notes, Marx's economics falls into error from the start. Marx assumed that in an exchange, the commodities traded have equal value. Moreover, he took this postulated equality in a very strong sense: both of the goods must be identical to some third thing. This, by spurious reasoning that Rothbard deftly exposes, he claimed could only be labor.

But the flaw in Marx's derivation does not lie in the details of his argument. A leitmotif of Rothbard's work is that an exchange consists not of an equality, but rather of a double inequality. Marx's whole edifice thus rests on a spurious assumption, and the three volumes of Das Kapital constitute an elaborate attempt to conjure a solution to a non-existent problem.

But the difficulties of Marxist economics are not confined to its starting point. Rothbard points out that Marx's theory of wage determination really applies not to capitalism but to slavery. "Oddly, neither Marx nor his critics ever realized that there is one place in the economy where the Marxist theory of exploitation and surplus value does apply: not to the capitalist-worker relation in the market, but to the relation of master and slave under slavery. Since the masters own the slaves, they indeed only pay them their subsistence wage: enough to live on and reproduce, while the masters pocket the surplus of the slaves' marginal product over their cost of subsistence" (p. 393).

Rothbard does not confine his assault on Marxism to an exposure of its economic fallacies. Behind the economics of Marxism, he finds a heretical religious myth, the goal of which is "the obliteration of the individual through `reunion' with God, the One, and the ending of cosmic `alienation', at least on the level of each individual" (p. 351).

One might at first think that abstruse theosophical speculations that date back to Plotinus have little to do with Marxism. But Rothbard convincingly shows that Marx, through the intermediary of Hegel, presented a secularized version of this witches' brew in the guise of "scientific socialism." In the course of doing so, Rothbard makes Hegel's philosophy seem amusing; his remarks on the "cosmic blob" are worthy of Mencken (p. 349). Rothbard's analysis of Marx's philosophy re-enforces the pioneering investigations of Eric Voegelin; this parallel between the conclusions of these two great scholars is all the more remarkable in that Rothbard, though familiar with Voegelin, was not deeply influenced by him

So filled with material is the book that one could easily write another detailed review stressing entirely different parts of it, such as the long and learned account of the bullionist controversy. I shall, with regret, confine myself to two final items. In his discussion of utilitarianism, Rothbard's philosophical turn of mind is evident. He notes that according to that system, reason "is only a hand-maiden, a slave to the passions. . . . But what, then, is to be done about the fact that most people decide on their ends by ethical principles, which cannot be considered reducible to an original personal emotion" (p. 57)?

Rothbard has here rediscovered an objection to utilitarianism raised by Archbishop Whately: how can utilitarianism accommodate preferences based on competing ethical systems? John Stuart Mill, though familiar with the objection, never answered it in a convincing way.

I cannot resist ending with Rothbard's assessment of Mill: "John Stuart was the quintessence of soft rather than hardcore, a woolly minded man of mush in striking contrast to his steel-edged father. . . . John Stuart Mill's enormous popularity and stature in the British intellectual world was partially due to his very mush-headedness" (p. 277).

You will not elsewhere encounter an intellectual historian who writes like that. Murray Rothbard's two volumes are a monument of twentieth-century scholarship.


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