'America’s Great Depression' 50th Anniversary

0:00Well, the title of my talk is Combating the Critics and Advancing the Theory. I actually have several hard copies of it that I'm going to leave up here for people to pick up. Just a handful of copies, but if you're interested, pick them up after the session. I'll also have it posted to the Mises site probably by the end of the day. Sure enough, I first read America's Great Depression when it was only six years old, and still in its first edition. We learned that from Bill Bustos already, and he pointed out that it was four years earlier that he bought the book.

0:45We don't know when he read it. But I've had numerous occasions to refer to Murray's book and read it in its entirety again in 2000 in preparations to review the fifth edition of the book, and still again I read much of it in preparation for this session. Now we all know that the primary contribution that Rothbard made was his insightful application of the Austrian Theory to America's Great Depression. But several of us, including myself, have chosen to focus on the theory chapters. And I'm focusing specifically on chapter one, which he calls a positive theory.

1:34And you could describe that theory as simply drawing from Mises and responding to critics. And as I've read this book different times, it's occurred to me of the strategic value of responding to critics, especially when it's Rothbard doing the responding. He has a knack for it and is just in his element when it comes to setting a critic straight. The approach is gleefully, let's say, sort of as a Rothbardian adjective. Responding to critics has a lot of payoffs. It gives you a better understanding of the theory that you're defending, helps you state it more clearly, causes you to see new directions in which the theory can be developed.

2:32Development. Well, sure, it does all those things, but who could object, who could deny that responding to critics is a worthwhile undertaking? And you don't have to look any further than one of our own Austrians, Louis Spadaro, who comes into play here as the chair of a conference in 1976, just two years after the South Royalton Conference, and he was chair of that session. It was a wonderful session. It was held at Windsor Castle, which is recommended as a place to have a conference. And Rothbard was there, as was Hayek and Kirzner and Lachmann, and then quite a few upstart Austrians, youngsters, I like to be able to refer to myself as a youngster every once in a while, and there I was in 1976 at Windsor Castle, soaking up some Austrian theory.

3:38Well, Spadaro, chair of the session, he did his PhD under Mises and undeniably an Austrian, But he spent about a quarter of his paper lamenting people responding to critics. I'm going to cut this short and I'm going to read one of his claims. He actually had a number of suggestions on how we might advance the theory, but when it came to responding, let me just paraphrase, that he says it's a shame that we spend so much time responding to critics, and we should use time more productively by developing our own theory.

4:36And so what we see is that he saw those as just strictly alternative ways of using your time. It's not, of course, it has a payoff in developing the theory as well. Now what I've chosen to do today is not to rehash some of the responses to critics that Rothbard portrayed. In fact, we've had some of that from Bill Butos and from John Cochran. But I want to respond in a Rothbardian style to critics that we've dealt with since 1963. And I have in mind here something called Cambridge Capital Theory, which calls into question the whole root of the Austrian theory.

5:28It's capital theory and therefore it's a business cycle theory. It's a kind of criticism that just lives a number of lives. It keeps coming back no matter what the criticism. It hadn't caught the wind in 1963, and so Rothbard would not have been inclined to deal with it, although it had its roots back in the 1920s. Now, I can tell just by looking at this audience that you're not already primed in Cambridge Capital Theory, so I'm going to have to tell you a little bit about what it is.

6:21And it strikes at the roots of the Austrian idea of roundabout production, of the production time in economics. And so I might start with just mentioning those contributions by a number of Austrians. Menger talked about orders of goods, Boehm-Bawerk talked about maturity classes, Hayek talked about a structure of production and drew a triangle. All of these were just efforts to put time into our theorizing, put time into the notion of roundaboutness. Boehm-Bawerk, unfortunately, attempted to quantify the roundaboutness, and it turns out that just won't work.

7:09There's no metric by which you can measure roundaboutness. One of the reasons is that capital has no natural unit of its own, unlike labor, which we talk about in terms of worker hours or land, acre years, each of those things, those are heterogeneous labor and land, but at least we have a unit that we can measure it in. With capital, there is no such unit, and that makes it impossible to quantify. Now, ironically enough, Cambridge Capital theorists create a unit in order to criticize Boehm-Bawerk and the Austrians.

7:54And this is true actually of neoclassical theory too, but I became attuned to this early on where the kinds of capital measure that people had in mind were what I call universal Universal Non-Units, they write about hunks of capital, or chunks of it, or doses, which are red flags that say that there's no more appropriate unit than that, they're universal non-units. Sometimes they just use the term unit of capital, not recognizing that unit is not a unit. And only by doing that can they make their case about the fallacy of, the so-called fallacy in Boehm-Bawerkian Capital Theory.

8:51Now the theory itself comes in the form of a re-switching model, capital re-switching. See if I can get through this in three minutes or whatever we've got here. They imagine that the whole economy is characterized by a sequence of input. They call it capital. But in these examples, capital takes the form of dated labor. Well, once again, they've gone to a unit, namely labor, to measure capital. Ludwig Lachmann referred to this kind of theorizing as capital theory without capital. And so, just on that basis, we could dismiss the criticism. So they imagine that we have these two different techniques, each of which could describe the entire economy, and they amount to dated labor being applied at different sequences to yield an output.

9:51And then they show using present value calculations, I don't know how you do present value of dated labor, you have to measure it in wage units like Keynes would, okay? But they demonstrate that if an economy is using technique A, they call it, it has one particular sequence, and could use technique B, which is another particular sequence, they might find that over a period of time when interest rates are descending, and their descending sort of waif-like, in other words, it's exogenous and they're floating down, say, from 9% down The Theory of Money and Credit

10:57is, and the other one is in violation of that relationship, and therefore so much for Austrian capital theory, so much for the business cycle theory, and we're all through with it, okay? I'm not quite through with it yet, but I say I got one minute. That's fine. Now, it turns out that they're theorizing, as they admit, and I've emphasized this in my articles and Leland Yeager has emphasized it in some of his, that what they're really talking about, especially to justify this waif-like descent of the interest rate, they're really not talking about a process through time, they're talking about maybe three separate islands where technique A is used here and technique B there and technique C over there, and of course if that's what they're talking about, then it has nothing whatever to do with the Austrian theory because as Austrian theory is about changing the structure over time in a given economy. However, ever since Sam Wilson wrote his summing up article claiming that re-switching gives a headache

12:15to the Austrians, then economists of all persuasions have been beating the Austrians over the head with Technique A and Technique B. And it's time to stop, okay? Because the theory doesn't work. It is a static theory. It's based on an exogenous interest rate. It uses a phony measure of capital and then inadmissibly takes present values of that phony measure. So it What needs to be rejected wholesale, as I'm sure Rothbard would agree, and I'll make one more point, and that is that even if, even if it could be restructured so as to cause things to happen over time and cause the economy to shift from technique A into technique B And then back to A, it would be no more damaging to Austrian capital theory and Austrian business cycle theory is than the Giffen good, if you know what that is, is to the law of demand.

13:25It's a quirky exception to the law of demand that has no force behind it at all, either empirically or otherwise. No one has ever pointed to an instance of re-switching that's going on out there. And so I think we can dismiss it once and for all, Rothbardian style.