Introduction to the Second Edition

0:00Man, Economy and State, A Treatise on Economic Principles with Power and Market, Government and the Economy, 2nd edition by Murray R. Rothbard. Introduction to the 2nd edition by Joseph T. Salerno. The introduction draws substantially on the information and resources found in the Murray Murray and Rothbard Papers. The Rothbard Papers are currently held at the Ludwig von Mises Institute, Auburn, Alabama, and include, among other materials, Murray Rothbard's letters and correspondence, 1940-1994, memos and unpublished essays, 1945-1994 and drafts of published works.

0:51Murray Rothbard began work on this magnum opus on January 1, 1952. On May 5, 1959, Rothbard wrote to his mentor, Ludwig von Mises, informing him, a finito. In English, it is finished. The more than seven years that it took Rothbard to complete Man Economy and State, elapsed during what was up to that time, one of the most sterile and retrogressive decades in and the History of Scientific Economics, dating back to the birth of the science in the systematic treatise of Richard Catillon published in 1755. In view of the progressive degeneration of economic thought throughout the 1950s, the eventual publication of Rothbard's treatise in 1962 was a milestone in the development of sound economic theory and an event that rescued the science from self-destruction.

1:49The era of modern economics emerged with the publication of Carl Menger's seminal work, Principles of Economics, in 1871. In this slim book, Menger set forth the correct approach to theoretical research in economics and elaborated some of its immediate implications. In particular, Menger sought to identify the causal laws determining the prices that he observed being paid daily in actual markets. Menger had worked as an economic journalist and market analyst for daily newspapers on and off for over a decade. His stated goal was to formulate a realistic price theory that would provide an integrated explanation of the formation of market phenomena valid for all times and places.

2:39Thus, in his preface to the book, Menger wrote, I have devoted special attention to the investigation One of the causal connections between economic phenomena involving products and the corresponding agents of production for the purpose of establishing a price theory based upon reality and placing all price phenomena including interest, wages, ground rent, etc. under one unified point of view. 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.

3:32Thus 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. With this insight was born modern economics. 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. 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.

4:27For various reasons, the school suffered an amazingly rapid decline, especially in Great Britain and the United States, but also in Austria after the war. 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. 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. A little later, Menger's approach was nearly buried by the Keynesian Revolution. Hence, by the advent of World War II, there ceased to be a self-conscious institutionally embedded network of economists actively engaged in teaching and research in the Mangerian tradition.

5:23After World War II, a new and stifling orthodoxy known as the neoclassical synthesis had descended upon economics, especially in the United States. This so-called synthesis was actually a hodgepodge of the three disparate approaches 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.

6:10The Neoclassical Synthesis, Thus Proclaimed,

6:40claimed that the price system worked efficiently to allocate scarce resources only if the government deftly employed fiscal and monetary policies to maintain a level of aggregate demand or total spending in the economy that was sufficient to absorb a full employment level of output. This new orthodoxy also promoted hyper-specialization and a corresponding disintegration of economic Economic Science into a clutter of compartmentalized sub-disciplines. Even the theoretical core of economics was now split into microeconomics and macroeconomics, which had seemingly very little connection to each other. Specialized journals proliferated and resulted in a radical change in the research culture, with a premium on the writing and reading of the latest journal articles.

7:35The few books that were published were technical monographs or dumbed-down textbooks. The era of the great systematic treatise on economic theory was at a close. Indeed, in the preface to this treatise, Rothbard laments the demise of the old-fashioned treatise on economic principles after World War I, and the ensuing progressive disintegration of Economics, including economic theory into compartmentalized sub-disciplines. Almost the sole holdout against this intellectual revolution was Ludwig von Mises. With the publication in 1940 of Nationale Economy, the German language forerunner of human action, Mises single-handedly recovered and greatly advanced the system of causal realistic economic theory.

8:28In particular, he integrated Mangerian value and price theory with his own earlier restatement of monetary theory. In addition, he provided a rigorous foundation for the entire system of economic theory in a broader science of human action that he himself had expounded in earlier works and now further elaborated. This science of human action he now dubbed praxeology. Unfortunately, Mises' great treatise was almost completely ignored by the post-war economics profession. However, while it failed to inspire an immediate renewal of the Mangerian scientific movement, Human Action did lay the foundations for its later revival.

9:14This revival was to be ignited by the publication of Man, Economy and State in 1962. 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. 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.

10:04Thus Rothbard intended to do for Mises what McCullough did for Ricardo, that is, to make his work comprehensible to an intelligent lay readership. But Rothbard quickly realized that his original plan was flawed and had to be abandoned for three reasons. First, the traditional textbook format was too disorganized in its arrangement and treatment of various topics to accommodate the development of economic theory in the logical step-by-step manner that Rothbard had envisioned. As such, it was inadequate to convey a sense of the Grand Sweep of the Coherent System Integrating and Pervading All Aspects of Sound Economic Doctrine.

10:50Second, Rothbard discovered that there existed a lot of gaps in Mises' economic organon that he had to fill in himself. In addition, Rothbard's step-by-step deductions led him to the conclusion that Mises' Theory The Theory of Monopoly, which was held by most economists in the Mangerian tradition, was irreparably flawed and had to be completely revised. The book was thus turning out to involve a good deal of original contribution on Rothbard's part. Third, as he proceeded in writing the book, Rothbard was concurrently researching the literature and reading widely, 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.

11:46Moreover, 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. 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. 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, to a treatise elaborating a complete system of economic theory and featuring many original and even radically new deductions and theorems. Mises himself immediately recognized the profound originality and significance of Rothbard's contribution. In his review of Man Economy and State, Mises wrote that Rothbard joins the ranks of eminent economists by publishing a voluminous work, a systematic treatise on economics. In every chapter of his treatise, Rothbard adopts the best

13:11teachings of his predecessors and adds to them highly important observations. Mises went on to characterize Rothbard's work as an epical contribution to the general science of human action, praxeology, and its practically most important and up to now best elaborated part, economics. Henceforth, all essential studies in these branches of knowledge will have to take full account of the theories and criticisms expounded by Dr. Rothbard. Given Mises' exacting scholarly standards and his well-known parsimony in paying compliments for scientific contributions, this is high praise indeed for a book published by a 36-year-old economist. The following statement is indicative of Mises' attitude in this respect.

14:00There never lived at the same time more than a score of men whose work contributed anything essential to economics. More importantly, Mises evidently viewed Rothbard's work as opening a new epoch in modern economic science. Rothbard himself was not reluctant to indicate the respects in which he considered his treatise to have been a departure from or an advance upon Mises' work. Foremost among Rothbard's theoretical innovations was his formulation of a complete and integrated theory of production. Previously production theory in causal realist analysis was in disarray and had consisted of a number of independent and conflicting strands of thought that treated capital and interest, marginal productivity theory, rent theory, entrepreneurship and so on in isolation.

14:56Somewhat surprised by this yawning gap in production theory, Rothbard commented, Mises has very little detail on production theory, and as a consequence it took me many false starts and lots of what turned out to be wasted effort before I arrived at what satisfied me as a good production theory. It's involved emancipation from 90% of current textbook material. In Man Economy and State, Rothbard elaborates a unified and systematic treatment of the structure of production, the theory of capital and interest, factor pricing, rent theory, and the role of entrepreneurship in production. Furthermore, production theory is presented as part of the core of economic analysis and covers five of the book's twelve chapters and approximately 30% of its text.

15:49One of Rothbard's greatest accomplishments in production theory was the development of a capital and interest theory that integrated the temporal production structure analysis of Newt Wichsel and Hayek with the pure time preference theory expounded by Frank A. Fetter and Ludwig von Mises. Although the roots of both of these strands of thought can be traced back to Boehm-Bawerk's His exposition was confused and raised seemingly insoluble contradictions between the two. They were subsequently developed separately until Rothbard revealed their inherent logical connection. Despite Mises' lavish praise for the book as an epical leap forward in economic science, as well as general recognition among many adherents, observers and critics of the contemporary Austrian movement 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.

16:58The 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 this body of received doctrine. The second question concerns Rothbard's perception of the relationship of the theoretical system expounded in his treatise and the neoclassical synthesis of the 1950s. As we shall see, the answers to these questions are not only surprising Before addressing the question of the doctrinal affiliation between man economy and state and Austrian economics, it is instructive to examine Mises' attitude toward the Austrian school, because it is not as straightforward as is generally supposed, and it clearly influenced Based Rothbard's view, as early as 1932, Mises had argued that all the essential ideas of the Austrian School of Economics had been absorbed into the mainstream of what he called modern subjectivist economics.

18:17According to Mises, the Austrian and the Anglo-American schools and the School of Lausanne differ only in their mode of expressing the same fundamental idea and are divided more or by their terminology and by peculiarities of presentation than by the substance of their teachings. Now, admittedly, this opinion was delivered at an economics conference in Germany that was heavily attended by the still influential remnants of the German historical school, who were antagonistic to economic theory of all kinds. It certainly can be reasonably argued that, given this venue, Mises' remarks were intended as a Generic Defense of Theoretical Research in Economics.

19:03In fact, a year earlier, Mises had written, Within the field of modern economics, the Austrian school has shown its superiority to the school of Lausanne and the schools related to the latter, which favor mathematical formulations by clarifying the causal relationship between value and cost, while at the same In spite of the foregoing caveat, Mises continued to maintain that the label Austrian School was an anachronism, arguing in the last publication of his career in 1969 that the Austrian School constituted a closed chapter in the history of economic thought from about the time of Menger's death in 1921.

19:54By that time, according to Mises, all the essential ideas of the Austrian School were by and large accepted as an integral part of economic theory, and one no longer distinguished between an Austrian School and other economics. The Appalachian Austrian School became the name given to an important chapter of the history of economic thought. It was no longer the name of the specific sect, with doctrines different from those Mises held by other economists. As noted, Mises used the term modern subjectivist economics to describe the new synthesis of theoretical approaches that he believed had begun to emerge in the 1920s. There are two problems with this label, which may explain Mises' ambivalent attitude toward the inclusion of the Marshallian and Lausanne schools under its head.

20:50First, by World War I, most theoretical economists at least paid lip service to some version of subjective value theory, so that subjectivism was no longer a distinguishing characteristic of a unique approach to theoretical research. Second, as we have seen in our own time, the term subjectivism is a notoriously elastic term that can be stretched to denote even the nihilistic approach to economic theory, famously propounded by George Shackel, the later Ludwig Lachmann, and a number of postmodernist and hermeneutical economists. Rothbard evidently followed Mises in construing the term Austrian School as the designation for an important movement in the history of economic thought.

21:39In the text of Man, Economy and State, Rothbard uses the terms Austrian or Austrian School at least 10 times enclosed in quotation marks, as he naturally would if he were referring to a movement that had only historical significance to the contemporary reader. The few times he uses these terms without quotation marks, they clearly refer to historical doctrines or controversies, such as the Austrian wikstidian theory of price, or the Austrian school versus Alfred Marshall on the relationship between prices and costs. The single time that Rothbard mentions Austrian in his preface to the first edition, he does so in the phrase, the Austrian economists, placing the word in quotation marks and using it in a sentence featuring verbs in the past tense.

22:33This textual exegesis is not meant to imply that Rothbard did not consider his work as is continuing the great tradition originated by the early Austrian economists. Indeed, Rothbard wrote of the myth among economists that the Austrian school is effectively dead and has no more to contribute and that everything of lasting worth that it had to offer was effectively stated and integrated in Alfred Marshall's principles. 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. Thus, in his preface, Rothbard stated, This book, then, is an attempt to fill part of the enormous gap of forty years' time.

23:25The gap Rothbard is here referring to separates the publication of Man, Economy and State and that of the last three systematic economics treatises to appear in English, by Philip Wickstede, 1910, Frank Fetter, 1910, and Frank Taussig, 1911. Rothbard did not consider human action and old-style principles because it assumes considerable previous economic knowledge and includes within its spacious confines numerous philosophic and historical insights. The treatises of Wickstede and Fetter, in particular, were in what Rothbard called the praxeological tradition. Their procedure, like his own, was slowly and logically to build on the basic axioms and integrated and coherent edifice of economic truth.

24:20The main reason that his treatise contains numerous references to the historical Austrian school was because Rothbard judged the members of this school to have best perceived this method and used it most fully and cogently. They were the classic employers, in short, of the praxeologic method. In contrast to Mises's modern subjectivist economics, Rothbard's reference to the praxeologic method drew a bright line between those who employed Menger's procedure in logically deducing economic laws from a few basic facts of reality and those who did not. Praxeology was Mises' explicit and self-conscious elaboration of this venerable procedure for discovering the causal laws governing market phenomena.

25:12The early Austrian School and their followers, and even some of the better classical economists, had used this research method without being fully aware of it. The praxeological method begins with the self-evident reality of human action and its immediate implications. It then introduces other empirical postulates that reflect the concrete conditions of action from which emerge the historically specific market phenomena that the economist seeks to analyze. It is, therefore, necessarily about real things. It is for this reason that it has no use for fictions and figments like the representative 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, 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.

26:29As Mises put it, the praxeological method studies acting under unrealized and unrealizable conditions only from two points of view. It deals with states of affairs which, although not real in the present and past world, could possibly become real at some future date, 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. Mises concluded, the specific method of economics is the method of imaginary constructions, it is the only method of praxeological and economic inquiry.

27:15Rothbard took Mises' dictum seriously, and for seven years immersed himself in employing and perfecting this method in elaborating an integrated system of economic theory. 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. During the long period of sustained effort in writing the present volume, Rothbard thus became a master practitioner of the praxeological research method. Method. He not only skillfully used the various imaginary constructs whose nature and specific use Mises had explicitly formulated in human action, but also devised new ones as needed to assist in the deduction of new theorems to elucidate unexplained features of economic reality.

28:13Let us take a detailed example to illustrate Rothbard's procedure. In confronting the daunting task of untangling and systematizing causal realist production theory, Rothbard postulates an imaginary world of specific factors in which each and every individual laborer, parcel of land and capital good is irrevocably committed to the production of a single product and cannot be converted to use in any other production process. While this construct is highly unrealistic, it is not unrealizable, like the evenly rotating economy, E.R.E., which abstracts completely from change and uncertainty, and is used to analytically isolate interest income and the capitalist function which earns it from entrepreneurial profit.

29:08Thus, a world in which every factor is suited for one and only one task is not inconceivable or logically contradictory. In contrast, the E.R.E. is indeed an unrealizable and self-contradictory construct. It describes a world in which, for example, the future is known with perfect certainty, but action, which is always aimed at changing the future, occurs, and agents hold money balances despite the absence of uncertainty regarding the temporal pattern of their future receipts and expenditures. This is not to imply that proximity to reality makes one imaginary construct better or more useful than another.

29:55The sole test of a construct's usefulness is the aid it gives to thought in deducing the causal laws operating in real markets. Rothbard also imagines two variations of this world. In the first, the cooperating factors in each stage of a given production process jointly own the product, that is, the capital good of that stage. And since the services of all capital goods are embodied in the final product, therefore all factors jointly own the final good that is sold to consumers in exchange for money. The money receipts are then distributed according to the terms of a voluntary contract among all joint factor owners.

30:43In 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, 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. In both variations of the construct, an evenly rotating economy is assumed in order to abstract from the problems of entrepreneurship. With the assistance of this construct, Rothbard deduces a number of important theorems and principles of production.

31:30First, in the case of joint ownership of the product by the collaborating land and labor factors, there are no independent primordial owners of capital goods, which are intermediate goods in the production process and therefore resolvable into the labor and land inputs that cooperated in producing them. Second, and consequently, all income in production consists of wages and land rents. Capital goods, which are merely waystations on the path to the final product, do not earn any net rents for their owners. Third, all cooperating laborers and landowners must wait for their income from the inception of the productive process to its termination and the subsequent sale of the final product to Consumers.

32:21Therefore, fourth, the size of the aggregate income of the cooperating factor owners depends solely and completely on the demand of consumers for their product. A relative shift in relative consumer demand between final goods will fall solely and completely on the specific factors that are involved in the production of the affected products. Once the capitalist is introduced into this fictitious world, a fifth principle becomes immediately evident. The function of the capitalist is to relieve the factor owners of the burden of waiting for income, as he advances them present money payments from his accumulated savings for the joint product of their labor and land services.

33:11In exchange for these present wages and rents, the capitalist receives an interest return and on his invested funds, which is based on time preference and reflects the value discount of the anticipated future monetary revenues he will be receiving relative to the present money payments he expends on the factor services. Conversely, the factor owners agree to this deduction from the full-sale proceeds of their 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.

34:01Capital 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. Thus, wage, rent and interest incomes logically exhaust the entire proceeds from the sale of the final product, leaving no remainder for net payments to capital goods. This conclusion of the exhaustion of the income from production among wages, rents and interest receipts holds true only under the assumption that future market conditions are known with certainty.

34:56Once this assumption is dropped and the possibility is admitted of overvaluation or undervaluation of the complements of specific factors by capitalist investors, entrepreneurial profits and losses enter the picture. However, in a world of purely specific factors, such profits and losses would not have an and allocative function, because, by definition, factors cannot shift between production processes. More importantly, it becomes clear that such incomes accrue to the capitalists alone and that therefore, in the real world of uncertainty, the functions of capitalist and entrepreneur are integrated in the same agent.

35:43This analysis of Rothbard's hypothetical world of purely specific factors also is pregnant with implications for the role of subjective costs in production and pricing. Given that specific land factors and capital goods have no alternative uses in this imagined world, an immediate inference is that their use in production is costless, and their respective supply curves perfectly inelastic. Labor, specific to a particular production process, though it may be, in contrast, is costly to use, because it has an alternative use in the production of leisure, which is an instantaneously producible consumer's good.

36:29Thus, in a world without capitalists, labor involves the disutility of forgoing both leisure and present goods. The arrival of capitalists on the scene reduces but does not eradicate the disutility of labor. These inferences starkly demonstrate the principle that all production costs are ultimately and essentially subjective. Leisure preferences and time preferences thus determine the ultimate costs of production, and these costs are purely subjective and consist of the valuation of the foregone utilities of the Producers against the Anticipated Monetary Revenues from Consumers. Once these subjective producers' costs have all been incurred, the stocks of the various kinds of consumers' goods emerge from the production process ready for sale to consumers.

37:26Unless their producers have a direct use for the goods, their sale to consumers is completely and their relative prices are determined solely by the structure of value scale of consumers. Hence, barring speculation on future price variations, the supply curves for the various stocks of consumer goods are also perfectly inelastic. 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.

38:13Goods. Rothbard also wields the fictive construction he formulated to demolish Marshallian price theory, according to which prices were determined by two blades of a scissors, the subjective values of consumers composing one blade, while the objective or real costs of production compose the other blade. While Marshall and and his contemporary followers concede that, in the transient immediate run, the subjective value blade predominates in determining prices. They maintain that in the long run equilibrium, where the permanent tendencies of the economy reveal themselves, the cost of production blade governs, because the price of every product conforms to its average cost of production.

39:05This Marshallians superficially conclude that costs must therefore determine prices. However, Rothbard easily demonstrates that this conformity between price and average cost in long run equilibrium or the ERE, which itself is not real but a useful imaginary construction is the result of the same principles governing the determination of the actual In a world where all factors are purely specific to a single production process, Rothbard shows that in the long run, where entrepreneurial errors are absent and profits and losses have been totally eliminated, the aggregate payments to all factors cooperating in a given production and Process are rigidly governed by and must perfectly correspond to the aggregate revenues spent on the final product by consumers, minus the interest return to capitalists.

40:16Accepting this deduction and dividing both aggregate revenues and aggregate factor payments by the quantity of product implies that the direction of causation of the equality between Rothbard's formulation and deployment of this imaginary world of purely specific factors epitomizes the application of the praxeological method in theoretical research. As Mises pointed out, the main formula for designing of imaginary constructions is to To abstract from the operation of some conditions present in actual action, then we are in a position to grasp the hypothetical consequences of the absence of these conditions and to conceive the effects of their existence.

41:11Thus Rothbard first imagines that in this world all production processes are owned by the cooperating factors themselves, who must endure without income until the final product has emerged and is sold to consumers. By first analyzing the state of affairs in abstraction from the existence of the capitalist, we are able to grasp his function of advancing his accumulated savings to the factors before the sale of the final product, and to comprehend the nature of his income as a return to time preference, which has been previously established much earlier in the chain of praxeological 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.

42:13This 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. In later chapters, Rothbard proceeds to drop the assumption of purely specific factors and admits varying degrees of specificity among factors into his analysis. 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.

43:01Since 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. But the principles already deduced regarding specific factors still hold sway in this more complex world. 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. 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,

44:25As 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. Hence, in the absence of a long chain of deductive reasoning utilizing imaginary constructs, a la Rothbard and earlier Austrians, A superficial view of the matter will render Marshall's metaphor of the two blades of the scissors as a plausible representation of reality. 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, as mediated through the bids of capitalist entrepreneurs as ultimately and exclusively determinative of the prices of all factors, relatively nonspecific as well as purely specific.

45:26This praxeological method so masterfully deployed by Rothbard had been used even if implicitly and crudely as the primary tool of theoretical research in economics up through the 1930s. However, as Rothbard points out, it was precisely Marshall's distrust of long chains of deduction, in addition to the whole Cambridge impetus toward making shortcut assumptions designed to make their theory more testable, that was one of the factors that led to the gradual breakdown of the praxeological method and its replacement by positivism. While Marshall utilized the method of imaginary constructions, his aversion to lengthy step-by-step deduction runs afoul of Mises' warning that it is a method very difficult to handle because it can easily result in fallacious syllogisms.

46:23It leads along a sharp edge. On both sides yawns the chasm of absurdity and nonsense. By the early 1950s, the praxeological method and verbal logic had been eclipsed by positivism and mathematical models. For example, the leading economist of the post-war era, Paul Samuelson, now maintained that the task of economic theory was to organize the facts into useful and meaningful patterns, and in so doing to provide economical descriptions of complex reality. Theoretic theorems, then, had to be framed in a manner that was operationally meaningful. According to Samuelson, a meaningful theorem was simply a hypothesis about empirical data that could conceivably be refuted if only under ideal conditions.

47:19Whether such a theorem was false or of trivial importance or even of indeterminate validity was not as important to Samuelson as it being framed as a proposition capable in principle of empirical refutation. For Samuelson, theorems would thus be embodied and expressed in highly simplified mathematical models that could be subjected to empirical tests if the data were available. Since admittedly the requisite data were rarely accessible, the most that could be 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.

48:09However, in a retrospective, Samuelson lamented the lack of success of the crude positive method in economics, writing,

48:39The Theory of Money and Credit Partial and Approximate If Samuelson downplayed the attainment of truth as a goal of theoretical research in favor of the formulation of operationally meaningful theorems, the other avatar of positivism in post-war economics, Milton Friedman, jettisoned all references to truth and realism in assessing the validity of economic theorems.

49:34Projecting Samuelson's crude logical positivism, Friedman reveled in the falsity or unrealism of a theorem's assumptions, and offered the seemingly more sophisticated alternative of falsificationism, which was allegedly based on Karl Popper's philosophy of science. Some methodologists have argued that Friedmanite positivist methodology shares little more than vocabulary with Popper's philosophy of science. Rothbard's position was concisely summed up in Mark Bloch's statement, No assumptions about economic behavior are absolutely true, and no theoretical conclusions are valid for all times and places. Despite the formal adherence by most of the profession to positivist methods during the 1950s, Rothbard's quest to recover and reconstruct the edifice of sound economic theory drove him to scour 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.

50:42Rothbard's treatise contains citations from over 150 books, journal articles, conference proceedings, government documents, dissertations and Policy and Research Institute monographs Published Between the Appearance of Human Action in 1949 and Man, Economy and State in 1962, Rothbard's deep engagement with the contemporary literature paid off as he discovered that many of these works contained research that clarified, refined or advanced causal realist theory, and he eagerly integrated these contributions into his own work. For example, in his notable development of an explanation of the firm's costs and return on investment that sharply deviates from the Marshallian theory of the firm, Rothbard was heavily influenced by two neglected articles co-authored by André Gabor and I. F. Pierce on the Austro-Wixellian theory of the firm.

51:47Rothbard cites a discussion by the Cambridge economist Roy Herod in addition to a discussion by Boehm-Bawerk as a source for his own path-breaking identification of a fourth component in the gross business income of the capitalist entrepreneur. This ownership or decision-making rent is distinct from and in addition to implicit wages of management, interest return on invested capital and pure profit. In his thoroughgoing critique of the theories of perfect and monopolistic competition doctrines and his original formulation of a positive theory of competition as a dynamic process, Rothbard favorably cites the contributions of a number of his mainstream contemporaries, including G. Warren Nutter, Wayne Lehman, Marshall I. Goldman, and Ruben Kessel.

52:43Rothbard singles out a book by Lawrence Abbott, published in 1952, titled Quality and Competition for Special Praise, characterizing it as one of the outstanding theoretical works of recent years. Indeed, the theory of rivalrous competition that Rothbard expounds is clearly influenced by Abbott's arguments on the central importance of the qualitative dimensions of competition. The fact that theoretical research employing verbal logic and the praxeological method still remained relatively pervasive among academic economists even as late as the 1950s highlights the deep and hearty roots of the causal realist tradition.

53:28It also accounts for the reason why Rothbard did not yet perceive any advantage in appropriating

54:04in those areas not developed by Mises, its differences from Mises in such areas as monopoly, banking ethics and government, and its refutations of current economic theory. While in retrospect we may be tempted to dismiss Rothbard's bold prediction as a burst of youthful optimism, it hardly reflects the attitude of someone intent on completely breaking Following with the prevailing doctrine and founding a heterodox school of thought. By the advent of the 1970s, however, mainstream economic theory had sunk to almost unfathomable depths, degenerating into a series of loosely related mathematical models which had little contact with reality.

54:52Following the prevailing Friedmanite positivist methodology, the tentative validity, never over the truth of these models was putatively established by empirically testing their ability to predict, or more accurately, retrodict, using the methods of econometrics. The last vestiges of the Mangerian approach thus disappeared from the curricula of graduate economics programs and causal realist theoretical research was now completely banished from from academic journals, which had become the main, if not the only, research outlet for mainstream economics. Around the same time as this sea-change in economic theory and method, there began to coalesce outside the formal institution of academic economics a new intellectual movement that was directly inspired by Rothbard's reconstruction of the causal realist theoretical Organon in Man Economy and State. This movement comprised mainly graduate students and younger faculty members associated with U.S. academic institutions who were disaffected with the orthodox neoclassical synthesis, which had begun to break down with the failure of the Kennedy-Johnson New Economic Policies to rein in the Vietnam War inflation and the subsequent

56:17and Emergence of Stagflation in the early 1970s. By the mid-1970s, the new movement had grown to such an extent that the opportunity presented itself to institutionalize and promote its existence by means of a formal academic conference on Austrian economics, which was held at South Royalton, Vermont in June 1974. The Appalachian Austrian was chosen for this new intellectual tendency, mainly for strategic reasons. Since the Rothbardian movement embraced a method and body of doctrine that now shared very little common ground with the entrenched positivist orthodoxy, the label at least provided the movement with a recognizable affiliation with one of the great streams of early marginalist thought that had fed into this modern mainstream.

57:10The name also instantly endowed the movement with the great cachet associated with the well-known names of the founding members of the Austrian School, such as Carl Menger, Eugen von Boehm-Bawerk and Friedrich von Mises, and its later representatives Ludwig von Mises and Friedrich A. Hayek. The prestige of the Austrian brand name was further enhanced when Hayek became a co-recipient of the Nobel Prize in Economics later in the year. The term had the additional virtue of identifying the movement's general theoretical orientation. Rothbard and his followers eagerly embraced the new designation and began to refer to themselves as members or followers of the modern Austrian School, which was now positioned as a heterodox challenger to mainstream economics.

58:04Despite its significant short-run strategic virtues, however, branding the School of Thought that coalesced at the South Royalton Conference as Austrian has engendered a number of serious problems in the long run. First, it has come to obscure the extent to which the modern Austrian School was directly inspired by Rothbard. Indeed, it is no exaggeration to say that a large majority of the thirty or so participants in the South Royalton Conference, adhered to the body of causal realist theory elaborated in Man, Economy and State. Second, it conceals the fact, noted above, that in writing this treatise, Rothbard drew from a much broader range of literature than that emanating from the original Austrian School and its direct intellectual descendants.

58:55Third, the label diverts attention from Rothbard's primary mission in writing his treatise, which was to purge modern economic science of its alien, positivist and mathematical formalist elements and to reconstruct it along consistently causal realist lines. It cannot be stated too often or too emphatically that engineering a radical break from standard and economic theory and establishing a heterodox school of thought that rejected all forms of equilibrium analysis and the use of imaginary constructs was not Rothbard's purpose in writing Man Economy and State. Indeed, as we have seen, one of Rothbard's most important contributions in his treatise is his painstaking explication of the content and the proper use of fictitious constructs and Imaginary States of the World in deriving meaningful propositions about the causal determinants of observable economic phenomena.

1:00:02The last and perhaps most significant disadvantage of applying the unqualified term Austrian to the post-South Royalton economics movement is the fact that it fosters a conflation of the very different and conflicting research programs that have grown up under this opaque Like Semantic Veil, Rothbard recognized and lamented this state of affairs in the preface to the revised edition of Man Economy and State published in 1993. In fact, the number of Austrians has grown so large and the discussion so broad that differences of opinion and branches of thought have arisen, in some cases developing into to Genuine Clashes of Thought.

1:00:48Yet they have all been conflated and jammed together by non-Austrians and even by some within the school, giving rise to a great deal of intellectual confusion, lack of clarity and outright error. The good side of these developing disputes is that each side has clarified and sharpened its underlying premises and worldview. It has indeed become evident in recent years says that there are three clashing paradigms within Austrian economics, the original Misesian or praxeological paradigm to which the present author adheres, the Hayekian paradigm stressing knowledge and discovery rather than praxeological action and choice, and whose leading exponent now is Professor Israel Kirzner, and the nihilistic view of the late Ludwig Lachmann, an institutionalist anti-theory approach taken from the English subjectivist Keynesian G. L. S. Shackel.

1:01:51While this accurately describes the state of Austrian economics in the early 1990s, the situation has become even more contentious and muddled since then. While the Lachmanian branch has waned somewhat in influence, a new wildly eclectic tendency has developed, which proposes to agglomerate indiscriminately selected elements of Menger, Mises, Hayek, Lockman, Kirzner, and Rothbard, with random insights from Adam Smith's economics, public choice theory, new institutional economics, transaction costs economics, game theoretic modeling, hermeneutical economics, and ethnographic and historical case studies, all under the The Rubric of Austrian Economics, or Good Economics Needless to say, the situation is even less satisfactory now than it was when Rothbard penned the passage above.

1:02:50Those interested in pursuing theoretical research in the Mangerian causal realist tradition are now viewed by the profession, thanks to the Austrian label, as part of a splintered and Feuding Heterodox Movement, More Interested in Discoursing on Meta-Economic Esoterica or Devising Spontaneous Order Explanations for Obscure Historical Episodes than in Analyzing the Mundane Issues at the Heart of Mainstream Economics, Value Theory, Price Theory, Capital Theory, Monetary Theory, and Business Cycles. 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.

1:03:40Every 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. His treatise thus was not intended as the program for a new heterodox movement or the revival of an old one. Rather, it represented an endeavor to reconstruct orthodox economics on the unshakable foundation of the praxeological method, and to use this method to substantively advance the theory. 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.

1:04:31Consequently, he never conceded the mainstream of economic science to the disciples of mathematical modeling and the positivist method, 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. 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. It is increasingly evident even to professional economists that the tortuous positivist detour has led to an intellectual dead end.

1:05:21Hence bizarre heterodox sects such as behavioral economics, experimental economics, the happiness literature, neuro-economics, etc. now abound. 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. Of course, the concept of the spontaneous order was only one of Hayek's many contributions. Most of these contributions were squarely in the Mungarian causal realist tradition and dealt with themes of mundane economics such as capital theory, business cycle theory, international monetary theory, and comparative monetary institutions.

1:06:12The death knell is now tolling for the mathematical and positivist pretenders to the mainstream of economics. The time is now ripe for Austrians to recover their rightful position as the true representatives of the central tendency of modern economic theory by affirming the praxeological method as the research method of economics. The prodigious fruits of this method stand before us in the integrated theoretical structure The Theory of Money and Credit