í' The Foundations of Modern Austrian Economics Studies in Economic Theory Laurence S. Moss, Editor America's Great Depression, Murray N. Rothbard (1975) The Economics of Ludwig ron Mises: Toward a Critical Reappraisal, ed. Laurence S. Moss (1976) The Foundations ofModern ,dustrian Economics, ed. Edwin G. Dolan (1,976) The Economic Point of View, Israel M. Kirzner (1976) -,,.' The Foundations of Modern Austrian Economlcs Edited with an Introduction by Edwin G. Dolan SHEED & WARD, INC. Subsidiary of Univer-_L!Press Syndicate KansasCity This edition is cosponsored by the Institute for Humane Studies, Inc., Menlo Park, California. The Foundation_ of Modern dustrian Economics Copyright © 1976 by the Institute for Humane Studies Al ñghts reserved. Printed in the United States of America. No part of this book may be used or repro- duced in any manner whatsoever without written permission except in the case of reprints in the context of reviews. For information write Sheed & Ward, Ira:., 6700 Squibb Road, Mission, Kansas 6620"2. Library of Congress Cataloging in Publi¢ation Data Main entry under title: The Foundations of modern Austrian economics. (Studies in economic theory) Proce.edings of a con ference sponsored by the Insti- tute for Humane Studies and held at Royalton College, South Royalton, Vt., in June 1974. Bibliography: p. lncludes index. 1. Austrian school of economists -- Congresses. I. Dolan, Edwin G. II. Instítute for Humane Studies. I11. Series. HB98.F68 330'.09436 76-5894 ISBN 0-8362-0653-3 ISBN 0-8362-.0654-1 pbk. -g CONTENTS PREFACE vii PART 1 INTRODUCTION Austrian Economics as Extraordinary Science 3 Edwin G. Dolan PART 2 THEORY AND METHOD Praxeology: The Methodology of Austrian Economics 19 Murray N. Rothbard On the Method of Austrian Economics 40 Israel M. Kirzner New Light on the Prehistory of the Austrian School 52 Murray N. Rothbard Philosophical and Ethical Implications of Austrian Economics 75 Israel M. Kirzner Praxeology, Value Judgments, and Public Polio/ 89 Murray N. Rothbard PART 3 APPLICATIONS Equilibrium versus Market Process 115 Israel M. Kirzner On the Central Concept of Austrian Economics: Market Process 126 Ludwig M. Lachmann The Theory of Capital 133 Israel M. Kirzner On Austrian Capital Theory _ 145 Ludwig M. Lachmann Toward a Critique of Macroeconomics 152 Ludwig M. Lachmann The Austrian Theory of Money 160 Murray N. Rothbard Inflation, Recession, and Stagflation 185 Gerald P. O'DriscoU,Jr., and sua_ R.s_u_ PART 4 CONCLUSION Austrian Economics in the Age of the Neo-Ricard_n Counterrevolution 215 Luduig M. I_dzmarm SELECTED BIBLIOGP_,PHY _4 CONTRIBUTORS _'28 INDF_ 231 PREFACE InJurie 1974 the Imfimte for Humane Smdies sponsored the first of a sedes of conferences on Austrian economics. This conference was held at Royalton College in South Royalton, Vermont, and attracted some f'tfty participants from all regions of the United States and three continents abroad. The conferees carne to hear lsrael M. Kirzner, Ludwig M. Lachmann, and Murray N. Rothbard survey the fundamentals of modero Aus- trian economics and thereby challenge the Keynesian- neoclassical orthodoxy, which has dominated economic science since World War II. Each lecturer addressed himself to two general questions: What is the distinctive Austrian contribution to economic theory? And what are the important problems and new direc- tions for Austrian economics today? By answering these ques- tions, the papers collected in this volume become more thanjust a set of ¢_nference proceedings--they take on the character of a manifesto and provisional textbook as well. The enthusiastic response to the South Royalton conference suggests that the century-old Austñan tradion is now entering a new era ofincreasing influence. Both the Austrian school and its orthodox competitor trace their origins to the restructuring ofec¢momic science that took place in the 1870s. The marginalist revolution of that period, which marked the breakdown of the _t_c_ economics es_ by Adam Smith, David Ricardo, John Smart Mili, was foltowed by the appearance of a number of new schools of economics in England and on the C_mtinent_ The greatest of the English economi_ of this period was Alfred MarshaiL The so.caLled neocl__cal school of Mar- shall m:.dhis foliowers soon became the new orthodoxy. In the procemit_ theconu2x,tiomoftwoothermajorschools dzaxbadm _d;,-: one a_,ociaze_d W'dUam vñi Preface Stanley Jevons in England and the other with Léon Walras in Switzerland. Meanwhile in Vienna the marginalist revolution was proceed- ing on another front. In 1871 Carl Menger published hiS Grundsfitzeder Volkswirtschaftslehreand, soon joined by Friedefich ron Wieser and Eugen von B/_hm-Bawerk, established the Aus- trian school. The Austrian school, although failing to achieve dominance in the international profession, retained its own identity and did not become wholly absorbed into neoclassicism. Throughout the remainder of the nineteenth century and into the twentieth, it continued to attract a small but vigorous stream ofadherents, among whom the most distinguished were Ludwig von Mises and Ffiedrich A. Hayek. During the Great Depression neoclassical economics was deeply shaken. The depth and duration of the economic crisis exceeded the expectations of orthodox theorists. Government policymakers were unable to fmd adequate guidance in the textbooks of the day, and members of the economics profession cast about for a new theoretical insight. The two major candi- dates for the leadership role were Hayek, the Austrian theoreti- dan, and John Maynard Keynes, the most prominent of Mar- shall's pupils. By the end of the decade of the thirties, the Keynesian system had attraaed the greatest number of adher- ents, and the Austrian school, aftera brief period of promi- nence, was left to pursue an independent course in relative obscurity. In the early postwar period neoclassicism proved its resitience and adaptability by gradua!ly coalescing with the Keynesian school. The work of Keynes, which at the time seemed so radical, was modified untit today economists like Paul Samuelson and Milton Friedman, once thought leaders of irreconcilable camps, share a common t.heoretical basis for their re-_arch. The Kennedy-Johnson years were the heyday of the Keynesian-neo,:!_ssical synthesis in the United States. Keynesian and leading neodassic_ economists were instaUed to head advis- ory posts in Washington, D.C., and were confident of their ability to _fine tune" the economy and tender it free of depres- Pref ace tx sion forevermore. Now, in the infladonary recession of the seventies, new doubts are raised, and new questions are being asked. The papers in this volume are addressed to these doubts and questions, and economists of aU academic persuasions will profit from their reading. A number of instimtions and individuals have contributed to the success of the conference and the publication of the proceed- ings. Fil,st, thanks must go to the Imdtute for Humane Studies for providing the necessary fimding for both the conference and the preparation of this volume. George Pearson and Kenneth Templeton of the Imtitute for Humane Studies were the prime movers of the conference from start to finish, and I am grateful to them for naming me conference director and editor of the proceedings. Much of the credit for the success of the week-long conference must go to Royalton College, which as conference host bore the burden ofall local arrangements. College president Anthony N. Doria together with Kilby Dewitt and Athena Jacobi of the col- lege staff worked tirelessly to put the facilities of the college at the disposal of the conferees. Neighboring Dartmouth College also merits thanks for ma_king auxiliary local arrangements. I would also like to acknowledge the gracious cooperation of the conference contributors for preparing their manuscripts according to schedule and granting me permission to include them in this volume. Gerald P. O'Drisfoll, Jr., and Sudha R. Shenoy attended the conference and partidpated in the discus- sions at the end of each session. I am grateful to them for agreeing to prepare a special paper for indusion in this volume on the Austrian theory of the business cycle and its application to the modernMay problem of stagflaon. Finally, I am indebted to Laurence S. Moss, editor of the series Studies in Economic Theory, of which this volume is a part, for his support and assistance in the preparation of the manuscript. Edwin G. Dolan SotahR03el_m, remoto June 1975 PART 1 INTRODUCTION Austrian Economics as Extraordinary Science Edwin G. Dolan Thomas Kuhn in The Structure of Scientific Revolutions (Chicago: University of Chicago Press, 1970) made a distinction between norma/and extraordinary science. Normal science is the day-to-day research activity oía community of scholars working and communicating with one another on the basis of certain shared principles and methods embodied in what Kuhn called a "paradigrn" for that science. From time to time such a science may undergo revolutionary change, in the course of which the prevailing paradigrn is replaced by a new one. Work involved in the search for and establishment ofa new paradigrn, as opposed to work proceeding within the framework of an accepted paradigrn, is called extraordinary science. We need not, on this occasion, enter the debate about the stñct applicability of Kuhn's analysis to the social sciences. It is enough for the moment to use his work as a source of useful analogy and metaphor. Taking this approach, we find that in contemporary economics, normal science is represented by work within the framework of the Keynesian-neoclassical synthesis. We can easily list many features characteristic of normal science. Communication among economists is primarily by means of journal artides pre'_nting incremental contñbutions to knowl- edge rather than by means of books concerned with first princi- pies. There is a well__tablished textbook tradition, and students are exposed to the original works of classical and contemporary economists only briefly and at a relatively advanced stage in their training.