MAN, ECONOMY, AND STATE

A TREATISE ON ECONOMIC PRINCIPLES

WITH

POWER AND MARKET

GOVERNMENT AND THE ECONOMY

MURRAY N. ROTHBARD

MAN, ECONOMY, AND STATE

A TREATISE ON ECONOMIC PRINCIPLES

WITH

POWER AND MARKET

GOVERNMENT AND THE ECONOMY

SECOND EDITION

MURRAY N. ROTHBARD

SCHOLAR’S EDITION

TO

Ludwig von Mises

(Man, Economy, and State)

AND TO

Libertarians of the Past,

who Blazed the Trail

and to

Libertarians of the Future,

who Shall Overcome

(Power and Market)

The Ludwig von Mises Institute dedicates this volume
to all of its generous donors
and wishes to thank these Patrons, in particular:

George W. Connell

Andreas Acavalos, Mr. and Mrs. David Baumgardner, Richard Bleiberg,
John Hamilton Bolstad, Louis Carabini (Monex International),
Christopher P. Condon, Anthony Deden (Sage Capital Zurich AG),
Mrs. Floy Johnson, Neil Kaethler, Mr. and Mrs. R. Nelson Nash

Mr. and Mrs. J.R. Bost, Dr. John Brätland, William H. Conn,
Carl Creager, Dr. and Mrs. George G. Eddy, Douglas E. French,
John R. Harper, Roland Manarin, Ronald Mandle,
Mr. and Mrs. William W. Massey, Jr., Hall McAdams,
E.H. Morse, Edward W. Rehak, Donald Mosby Rembert,
Thomas S. Ross, Dr. Tito Tettamanti, Jan Tucker,
Joe Vierra, Dr. Jim Walker

Anonymous, Toby Baxendale, Robert Blumen, Tobin Campbell,
Dr. John P. Cochran, John Cooke, Kerry E. Cutter,
D. Allen and Sandra Dalton, Rosemary D’Augusta (Perna Travel),
James V. De Santo (DTL Inc.), Capt. and Mrs. Maino des Granges,
Frank Van Dun, Eric Englund, Charles Ezell, Martin Garfinkel,
Mr. and Mrs. Thomas E. Gee, Frank W. Heemstra, Jule R. Herbert, Jr.,
L. Charles Hilton, Jr., Mr. and Mrs. Max Hocutt, Keith A. Homan,
Julia Irons, George D. Jacobs, M.D., Dr. Preston W. Keith,
Robert N. Kennedy, Richard J. Kossmann, M.D., David Kramer,
Steven R. Krause, John Leger, Arthur L. Loeb, Björn Lundahl,
Samuel Medrano, M.D., Frederick L. Maier, Dr. Douglas Mailly,
Steven R. McConnell, Joseph Edward Paul Melville, Roy G. Michell, Jr.,
Dr. Dorothy Donnelley Moller, Reed W. Mower, Ron N. Neff,
Christopher P. O’Hagan, Mr. and Mrs. Stanley E. Porter,
Thomas H. Reed, James A. Reichert, Michael Robb, Conrad Schneiker,
Alvin See, Mr. and Mrs. Thomas W. Singleton (Nehemiah Foundation),
Carlton M. Smith, Kent Snyder, Geb Sommer, William V. Stephens,
Charles Strong, Michael F. Thomas, Mr. and Mrs. James Tusty,
Mr. and Mrs. Quinten E. Ward, Thomas Winar,
Dr. Steven Lee Yamshon, Mr. and Mrs. Leland L. Young,
Robert S. Young

MAN, ECONOMY, AND STATE

A TREATISE ON ECONOMIC PRINCIPLES

CONTENTS

INTRODUCTION TO THE SECOND EDITION OF MAN, ECONOMY, AND STATE WITH POWER AND MARKET by Joseph T. Salerno ……… 19

PREFACE TO REVISED EDITION ……… 44

CHAPTER 1—FUNDAMENTALS OF HUMAN ACTION ……… 54

1.  The Concept of Action ……… 54

2.  First Implications of the Concept ……… 54

3.  Further Implications: The Means ……… 58

4.  Further Implications: Time ……… 61

5.  Further Implications ……… 63

A. Ends and Values ……… 63

B. The Law of Marginal Utility ……… 65

6.  Factors of Production: The Law of Returns ……… 73

7.  Factors of Production: Convertibility and Valuation ……… 76

8.  Factors of Production: Labor versus Leisure ……… 79

9.  The Formation of Capital ……… 82

10.  Action as an Exchange ……… 97

Appendix A: Praxeology and Economics ……… 98

Appendix B: On Means and Ends ……… 101

CHAPTER 2—DIRECT EXCHANGE ……… 105

1.  Types of Interpersonal Action: Violence ……… 105

2.  Types of Interpersonal Action: Voluntary Exchange and the Contractual Society ……… 108

3.  Exchange and the Division of Labor ……… 114

4.  Terms of Exchange ……… 119

5.  Determination of Price: Equilibrium Price ……… 122

6.  Elasticity of Demand ……… 132

7.  Speculation and Supply and Demand Schedules ……… 135

8.  Stock and the Total Demand to Hold ……… 139

9.  Continuing Markets and Changes in Price ……… 142

10.  Specialization and Production of Stock ……… 148

11.  Types of Exchangeable Goods ……… 153

12.  Property: The Appropriation of Raw Land ……… 158

13.  Enforcement Against Invasion of Property ……… 162

CHAPTER 3—THE PATTERN OF INDIRECT EXCHANGE ……… 174

1.  The Limitations of Direct Exchange ……… 174

2.  The Emergence of Indirect Exchange ……… 175

3.  Some Implications of the Emergence of Money ……… 177

4.  The Monetary Unit ……… 179

5.  Money Income and Money Expenditures ……… 180

6.  Producers’ Expenditures ……… 185

7.  Maximizing Income and Allocating Resources ……… 189

CHAPTER 4—PRICES AND CONSUMPTION ……… 205

1.  Money Prices ……… 205

2.  Determination of Money Prices ……… 208

3.  Determination of Supply and Demand Schedules ……… 212

4.  The Gains of Exchange ……… 217

5.  The Marginal Utility of Money ……… 219

A. The Consumer ……… 219

B. The Money Regression ……… 224

C. Utility and Costs ……… 228

D. Planning and the Range of Choice ……… 230

6.  Interrelations among the Prices of Consumers’ Goods ……… 231

7.  The Prices of Durable Goods and Their Services ……… 236

8.  Welfare Comparisons and the Ultimate Satisfactions of the Consumer ……… 242

9.  Some Fallacies Relating to Utility ……… 245

Appendix A: The Diminishing Marginal Utility of Money. ……… 251

Appendix B: On Value ……… 254

CHAPTER 5—PRODUCTION: THE STRUCTURE ……… 260

1.  Some Fundamental Principles of Action ……… 260

2.  The Evenly Rotating Economy ……… 261

3.  The Structure of Production: A World of Specific Factors ……… 265

4.  Joint Ownership of the Product by the Owners of the Factors ……… 268

5.  Cost ……… 273

6.  Ownership of the Product by Capitalists: Amalgamated Stages ……… 275

7.  Present and Future Goods: The Pure Rate of Interest ……… 278

8.  Money Costs, Prices, and Alfred Marshall ……… 281

9.  Pricing and the Theory of Bargaining ……… 287

CHAPTER 6—PRODUCTION: THE RATE OF INTEREST AND ITS DETERMINATION ……… 295

1.  Many Stages: The Pure Rate of Interest ……… 295

2.  The Determination of the Pure Rate of Interest: The Time Market ……… 299

3.  Time Preference and Individual Value Scales ……… 302

4.  The Time Market and the Production Structure ……… 308

5.  Time Preference, Capitalists, and Individual Money Stock ……… 320

6.  The Post-Income Demanders ……… 323

7.  The Myth of the Importance of the Producers’ Loan Market ……… 326

8.  The Joint-Stock Company ……… 329

9.  Joint-Stock Companies and the Producers’ Loan Market ……… 335

10.  Forces Affecting Time Preferences ……… 340

11.  The Time Structure of Interest Rates ……… 341

Appendix: Schumpeter and the Zero Rate of Interest ……… 344

CHAPTER 7—PRODUCTION: GENERAL PRICING OF THE FACTORS ……… 350

1.  Imputation of the Discounted Marginal Value Product ……… 350

2.  Determination of the Discounted Marginal Value Product ……… 358

A. Discounting ……… 358

B. The Marginal Physical Product ……… 358

(1)  The Law of Returns ……… 359

(2)  Marginal Physical Product and Average Physical Product ……… 359

C. Marginal Value Product ……… 363

3.  The Source of Factor Incomes ……… 365

4.  Land and Capital Goods ……… 366

5.  Capitalization and Rent ……… 372

6.  The Depletion of Natural Resources ……… 377

Appendix A: Marginal Physical and Marginal Value Product. ……… 380

Appendix B: Professor Rolph and the Discounted Marginal Productivity Theory ……… 382

CHAPTER 8—PRODUCTION: ENTREPRENEURSHIP AND CHANGE ……… 388

1.  Entrepreneurial Profit and Loss ……… 389

2.  The Effect of Net Investment ……… 393

3.  Capital Values and Aggregate Profits in a Changing Economy ……… 399

4.  Capital Accumulation and the Length of the Structure of Production ……… 405

5.  The Adoption of a New Technique ……… 410

The Entrepreneur and Innovation ……… 411

6.  The Beneficiaries of Saving-Investment ……… 411

7.  The Progressing Economy and the Pure Rate of Interest ……… 412

8.  The Entrepreneurial Component in the Market Interest Rate ……… 413

9.  Risk, Uncertainty, and Insurance ……… 414

CHAPTER 9—PRODUCTION: PARTICULAR FACTOR PRICES AND PRODUCTIVE INCOMES ……… 422

1.  Introduction ……… 422

2.  Land, Labor, and Rent ……… 422

A. Rent ……… 422

B. The Nature of Labor ……… 426

C. Supply of Land ……… 428

D. Supply of Labor ……… 431

E. Productivity and Marginal Productivity ……… 435

F. A Note on Overt and Total Wage Rates ……… 437

G. The “Problem” of Unemployment ……… 437

3.  Entrepreneurship and Income ……… 442

A. Costs to the Firm ……… 442

B. Business Income ……… 450

C. Personal Consumer Service ……… 452

D. Market Calculation and Implicit Earnings ……… 453

E. Vertical Integration and the Size of the Firm ……… 455

4.  The Economics of Location and Spatial Relations ……… 460

5.  A Note on the Fallacy of “Distribution” ……… 463

6.  A Summary of the Market ……… 465

CHAPTER 10—MONOPOLY AND COMPETITION ……… 476

1.  The Concept of Consumers’ Sovereignty ……… 476

A. Consumers’ Sovereignty versus Individual Sovereignty ……… 476

B. Professor Hutt and Consumers’ Sovereignty ……… 476

2.  Cartels and Their Consequences ……… 480

A. Cartels and “Monopoly Price” ……… 480

B. Cartels, Mergers, and Corporations ……… 485

C. Economics, Technology, and the Size of the Firm ……… 486

D. The Instability of the Cartel ……… 490

E. Free Competition and Cartels ……… 491

F. The Problem of One Big Cartel ……… 495

3.  The Illusion of Monopoly Price ……… 496

A. Definitions of Monopoly ……… 496

B. The Neoclassical Theory of Monopoly Price ……… 502

C. Consequences of Monopoly-Price Theory ……… 503

(1)  The Competitive Environment ……… 503

(2)  Monopoly Profit versus Monopoly Gain to a Factor ……… 504

(3)  A World of Monopoly Prices? ……… 506

(4)  “Cutthroat” Competition ……… 507

D. The Illusion of Monopoly Price on the Unhampered Market ……… 510

E. Some Problems in the Theory of the Illusion of Monopoly Price ……… 518

(1)  Location Monopoly ……… 518

(2)  Natural Monopoly ……… 521

4.  Labor Unions ……… 522

A. Restrictionist Pricing of Labor ……… 522

B. Some Arguments for Unions: A Critique ……… 529

(1)  Indeterminacy ……… 529

(2)  Monopsony and Oligopsony ……… 530

(3)  Greater Efficiency and the “Ricardo Effect” ……… 530

5.  The Theory of Monopolistic or Imperfect Competition ……… 531

A. Monopolistic Competitive Price ……… 531

B. The Paradox of Excess Capacity ……… 536

C. Chamberlin and Selling Cost ……… 541

6.  Multiform Prices and Monopoly ……… 542

7.  Patents and Copyrights ……… 547

CHAPTER 11—MONEY AND ITS PURCHASING POWER ……… 571

1.  Introduction ……… 571

2.  The Money Relation: The Demand for and the Supply of Money ……… 571

3.  Changes in the Money Relation ……… 575

4.  Utility of the Stock of Money ……… 576

5.  The Demand for Money ……… 578

A. Money in the ERE and in the Market ……… 578

B. Speculative Demand ……… 578

C. Secular Influences on the Demand for Money ……… 580

D. Demand for Money Unlimited? ……… 581

E. The PPM and the Rate of Interest ……… 582

F. Hoarding and the Keynesian System ……… 584

(1)  Social Income, Expenditures, and Unemployment ……… 584

(2)  “Liquidity Preference” ……… 589

G. The Purchasing-Power and Terms-of-Trade Components in the Rate of Interest ……… 593

6.  The Supply of Money ……… 598

A. The Stock of the Money Commodity ……… 598

B. Claims to Money: The Money Warehouse ……… 599

C. Money-Substitutes and the Supply of Money ……… 602

D. A Note on Some Criticisms of 100-Percent Reserve ……… 604

7.  Gains and Losses During a Change in the Money Relation ……… 605

8.  The Determination of Prices: The Goods Side and the Money Side ……… 608

9.  Interlocal Exchange ……… 610

A. Uniformity of the Geographic Purchasing Power of Money ……… 610

B. Clearing in Interlocal Exchange ……… 612

10.  Balances of Payments ……… 613

11.  Monetary Attributes of Goods ……… 615

A. Quasi Money ……… 615

B. Bills of Exchange ……… 616

12.  Exchange Rates of Coexisting Moneys ……… 616

13.  The Fallacy of the Equation of Exchange ……… 618

14.  The Fallacy of Measuring and Stabilizing the PPM ……… 626

A. Measurement ……… 626

B. Stabilization ……… 628

15.  Business Fluctuations ……… 632

16.  Schumpeter’s Theory of Business Cycles ……… 634

17.  Further Fallacies of the Keynesian System ……… 637

A. Interest and Investment ……… 637

B. The “Consumption Function” ……… 637

C. The Multiplier ……… 641

18.  The Fallacy of the Acceleration Principle ……… 642

CHAPTER 12—THE ECONOMICS OF VIOLENT INTERVENTION IN THE MARKET ……… 654

1.  Introduction ……… 654

2.  A Typology of Intervention ……… 654

3.  Direct Effects of Intervention on Utility ……… 656

4.  Utility Ex Post: Free Market and Government ……… 659

5.  Triangular Intervention: Price Control ……… 663

6.  Triangular Intervention: Product Control ……… 669

7.  Binary Intervention: The Government Budget ……… 673

8.  Binary Intervention: Taxation ……… 678

A. Income Taxation ……… 678

B. Attempts at Neutral Taxation ……… 681

C. Shifting and Incidence: A Tax on an Industry ……… 686

D. Shifting and Incidence: A General Sales Tax ……… 689

E. A Tax on Land Values ……… 691

F. Taxing “Excess Purchasing Power” ……… 692

9.  Binary Intervention: Government Expenditures ……… 693

A. The “Productive Contribution” of Government Spending ……… 693

B. Subsidies and Transfer Payments ……… 695

C. Resource-Using Activities ……… 696

D. The Fallacy of Government on a “Business Basis” ……… 698

E. Centers of Calculational Chaos ……… 701

F. Conflict and the Command Posts ……… 702

G. The Fallacies of “Public” Ownership ……… 704

H. Social Security ……… 704

I. Socialism and Central Planning ……… 705

10.  Growth, Affluence, and Government ……… 707

A. The Problem of Growth ……… 707

B. Professor Galbraith and the Sin of Affluence ……… 713

11.  Binary Intervention: Inflation and Business Cycles ……… 722

A. Inflation and Credit Expansion ……… 722

B. Credit Expansion and the Business Cycle ……… 726

C. Secondary Developments of the Business Cycle ……… 734

D. The Limits of Credit Expansion ……… 736

E. The Government as Promoter of Credit Expansion ……… 740

F. The Ultimate Limit: The Runaway Boom ……… 743

G. Inflation and Compensatory Fiscal Policy ……… 745

12.  Conclusion: The Free Market and Coercion ……… 747

Appendix A: Government Borrowing ……… 748

Appendix B: “Collective Goods” and “External Benefits”: Two Arguments for Government Activity ……… 750

POWER AND MARKET ……… 786

CHAPTER 1—DEFENSE SERVICES ON THE FREE MARKET ……… 787

CHAPTER 2—FUNDAMENTALS OF INTERVENTION ……… 796

1.  Types of Intervention ……… 796

2.  Direct Effects of Intervention on Utility ……… 798

A. Intervention and Conflict ……… 798

B. Democracy and the Voluntary ……… 801

C. Utility and Resistance to Invasion ……… 802

D. The Argument from Envy ……… 803

E. Utility Ex Post ……… 804

CHAPTER 3—TRIANGULAR INTERVENTION ……… 811

1.  Price Control ……… 811

2.  Product Control: Prohibition ……… 818

3.  Product Control: Grant of Monopolistic Privilege ……… 820

A. Compulsory Cartels ……… 824

B. Licenses ……… 824

C. Standards of Quality and Safety ……… 825

D. Tariffs ……… 828

E. Immigration Restrictions ……… 833

F. Child Labor Laws ……… 835

G. Conscription ……… 836

H. Minimum Wage Laws and Compulsory Unionism ……… 837

I.  Subsidies to Unemployment ……… 837

J.  Penalties on Market Forms ……… 838

K. Antitrust Laws ……… 839

L. Outlawing Basing-Point Pricing ……… 842

M. Conservation Laws ……… 842

N. Patents ……… 849

O. Franchises and “Public Utilities” ……… 853

P. The Right of Eminent Domain ……… 853

Q. Bribery of Government Officials ……… 854

R. Policy Toward Monopoly ……… 856

Appendix A: On Private Coinage ……… 856

Appendix B: Coercion and Lebensraum ……… 858

CHAPTER 4—BINARY INTERVENTION: TAXATION ……… 868

1.  Introduction: Government Revenues and Expenditures ……… 868

2.  The Burdens and Benefits of Taxation and Expenditures ……… 869

3.  The Incidence and Effects of Taxation ……… 871

Part I: Taxes on Incomes ……… 871

A. The General Sales Tax and the Laws of Incidence ……… 871

B. Partial Excise Taxes; Other Production Taxes ……… 875

C. General Effects of Income Taxation ……… 877

D. Particular Forms of Income Taxation ……… 881

(1) Taxes on Wages ……… 881

(2) Corporate Income Taxation ……… 881

(3) “Excess”Profit Taxation ……… 883

(4) The Capital Gains Problem ……… 883

(5) Is a Tax on Consumption Possible? ……… 888

4.  The Incidence and Effects of Taxation ……… 890

Part II: Taxation on Accumulated Capital ……… 890

A. Taxatuin on Gratuitous Transfers: Bequests and Gifts ……… 891

B. Property Taxation ……… 891

C. A Tax on Individual Wealth ……… 894

5.  The Incidence and Effects of Taxation ……… 895

Part III: The Progressive Tax ……… 895

6.  The Incidence and Effects of Taxation ……… 898

Part IV: The “Single Tax” on Ground Rent ……… 898

7.  Canons of “Justice” in Taxation ……… 909

A. The Just Tax and the Just Price ……… 909

B. Costs of Collection, Convenience, and Certainty ……… 910

C. Distribution of the Tax Burden ……… 912

(1) Uniformity of Treatment ……… 912

a. Equality Before the Law: Tax Exemption ……… 912

b. The Impossibility of Uniformity ……… 914

(2) The “Ability-to-Pay” Principle ……… 916

a. The Ambiguity of the Concept ……… 916

b. The Justice of the Standard ……… 918

(3) Sacrifice Theory ……… 920

(4) The Benefit Principle ……… 924

(5) The Equal Tax and the Cost Principle ……… 927

(6) Taxation “For Revenue Only” ……… 929

(7) The Neutral Tax: A Summary ……… 930

D. Voluntary Contributions to Government ……… 930

CHAPTER 5—BINARY INTERVENTION: GOVERNMENT EXPENDITURES ……… 946

1.  Government Subsidies: Transfer Payments ……… 946

2.  Resource-Using Activities: Government Ownership versus Private Ownership ……… 949

3.  Resource-Using Activities: Socialism ……… 959

4.  The Myth of “Public” Ownership ……… 962

5.  Democracy ……… 964

Appendix: The Role of Government Expenditures in National Product Statistics ……… 973

CHAPTER 6—ANTIMARKET ETHICS: A PRAXEOLOGICAL CRITIQUE ……… 980

1.  Introduction: Praxeological Criticism of Ethics ……… 980

2.  Knowledge of Self-Interest: An Alleged Critical Assumption ……… 982

3.  The Problem of Immoral Choices ……… 983

4.  The Morality of Human Nature ……… 986

5.  The Impossibility of Equality ……… 987

6.  The Problem of Security ……… 990

7.  Alleged Joys of the Society of Status ……… 992

8.  Charity and Poverty ……… 995

9.  The Charge of “Selfish Materialism” ……… 997

10.  Back to the Jungle? ……… 999

11.  Power and Coercion ……… 1000

A. “Other Forms of Coercion”: Economic Power ……… 1000

B. Power Over Nature and Power Over Man ……… 1003

12.  The Problem of Luck ……… 1006

13.  The Traffic-Manager Analogy ……… 1006

14.  Over- and Underdevelopment ……… 1007

15.  The State and the Nature of Man ……… 1007

16.  Human Rights and Property Rights ……… 1008

Appendix: Professor Oliver on Socioeconomic Goals ……… 1011

A. The Attack on Natural Liberty ……… 1011

B. The Attack on Freedom of Contract ……… 1014

C. The Attack on Income According to Earnings ……… 1016

CHAPTER 7—CONCLUSION: ECONOMICS AND PUBLIC POLICY ……… 1028

1.  Economics: Its Nature and Its Uses ……… 1028

2.  Implicit Moralizing: The Failures of Welfare Economics ……… 1030

3.  Economics and Social Ethics ……… 1032

4.  The Market Principle and the Hegemonic Principle ……… 1034

BIBLIOGRAPHY ……… 1039

INDEX OF NAMES ……… 1060

INDEX OF SUBJECTS ……… 1078

INTRODUCTION TO
THE SECOND EDITION OF
MAN, ECONOMY, AND STATE
WITH POWER AND MARKET

MURRAY ROTHBARD BEGAN WORK ON this magnum opus on January 1, 1952.¹ On May 5, 1959 Rothbard wrote to his mentor, Ludwig von Mises, informing him, “È finito!”² 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 the history of scientific economics, dating back to the birth of the science in the systematic treatise of Richard Cantillon published in 1755.³ 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.

The 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.⁴ 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.⁵ 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.” Thus, 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. For 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 U.S., and even parts of Continental Europe. Its star fell further with the importation of the mathematical general equilibrium approach of Léon Walras 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 Two there ceased to be a self-conscious, institutionally-embedded network of economists actively engaged in teaching and research in the Mengerian tradition.⁶

After 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 that had overwhelmed the Mengerian causal-realist approach in the interwar period. It jumbled together the Marshallian and Walrasian approaches to price determination with Keynesian macroeconomics. The first two approaches focused narrowly on analyzing the determination of unreal, equilibrium prices either in single markets (partial equilibrium) or in all markets simultaneously (general equilibrium). Keynesian macroeconomics denied the efficacy of the price system altogether in coordinating the various sectors of an economy confronted with the “failure of aggregate demand.” This latter condition was supposed to have caused the Great Depression and was further alleged by Keynes and his followers to be an endemic feature of the market economy. The neoclassical synthesis thus proclaimed 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 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 another. 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. The 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.⁷

Almost the sole holdout against this intellectual revolution was Ludwig von Mises. With the publication in 1940 of Nation-alökonomie, the German-language forerunner of Human Action, Mises single-handedly recovered and greatly advanced the system of causal-realistic economic theory.⁸ In particular, he integrated Mengerian 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’s great treatise was almost completely ignored by the postwar economics profession.⁹ However, while it failed to inspire an immediate renewal of the Mengerian scientific movement, Human Action did lay the foundations for its later revival. This revival was to be ignited by the publication of Man, Economy, and State in 1962.¹⁰

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.”¹¹ 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.” Thus Rothbard intended “to do for Mises, what McCulloch did for Ricardo,” that is, to make his work comprehensible to an intelligent lay readership.¹²

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.”¹³ Second, Rothbard discovered that there existed “a lot of gaps” in Mises’s “economic organon” that he had to “fill in” himself.¹⁴ In addition, Rothbard’s step-by-step deductions led him to the conclusion that Mises’s theory of monopoly, which was held by most economists in the Mengerian 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 protégés (e.g., Friedrich A. Hayek) in the native Austrian School. Moreover, 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.”¹⁵ 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

Mises went on to characterize Rothbard’s work as

Given Mises’s 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 thirty-six year old economist.¹⁸ 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’s work. Foremost, among Roth-bard’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. Somewhat surprised by this yawning gap in production theory, Rothbard commented:

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 percent of its text. One 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 Knut Wicksell 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 Böhm-Bawerk’s work, his exposition was confused and raised seemingly insoluble contradictions between the two.²⁰ They were subsequently developed separately until Rothbard revealed their inherent logical connection.

Despite Mises’s lavish praise for the book as an epochal leap forward in economic science as well as general recognition among many adherents, observers, and critics of the contemporary Austrian movement that Man, Economy, and State is indeed a foundational work in the renaissance of modern Austrian economics, there are two crucial questions regarding the book that, surprisingly, have never even been addressed, let alone resolved. 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 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 but are pregnant with implications for interpreting recent developments in Austrian economics and evaluating its future possibilities and prospects.

Before addressing the question of the doctrinal filiation between Man, Economy, and State and Austrian economics, it is instructive to examine Mises’s attitude toward the Austrian School because it is not as straightforward as is generally supposed and it clearly influenced 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.”²¹ According to Mises,

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’s remarks were intended as a generic defense of theoretical research in economics. In fact, a year earlier Mises had written,

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. By that time, according to Mises,

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’s ambivalent attitude toward the inclusion of the Marshallian and Lausanne Schools under its head. First, 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 Shackle, the later Ludwig Lachmann, and a number of post-modernist and hermeneutical economists.²⁵

Rothbard evidently followed Mises in construing the term “Austrian School” as the designation for an important movement in the history of economic thought. In the text of Man, Economy, and State, Rothbard uses the terms “Austrian” or “Austrian School” at least ten 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-Wicksteedian 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.²⁶

This textual exegesis is not meant to imply that Rothbard did not consider his work as continuing the great tradition originated by the early Austrian economists. Indeed Rothbard wrote of

Rather, the point is that Rothbard’s goal was to recover and advance a much broader doctrinal tradition, for which Menger’s and Böhm-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 40 year’s time.”²⁸ The “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 Wicksteed (1910), Frank Fetter (1910), and Frank Taussig (1911).²⁹ The treatises of Wicksteed 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 an integrated and coherent edifice of economic truth.”³⁰ The 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.”³¹

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’s explicit and self-conscious elaboration of this venerable procedure for discovering the causal laws governing market phenomena. The 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 firm,” “the perfectly competitive market,” or “the social welfare function”; nor does it concern itself with the existence, uniqueness, and stability of general equilibrium.

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 in the world as it is, has been, or is likely to be. As Mises put it, the praxeological method,

Mises concluded, “The specific method of economics is the method of imaginary constructions.… [I]t is the only method of praxeological and economic inquiry.”³³

Rothbard took Mises’s 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, Roth-bard thus became a master practitioner of the praxeological research 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. ³⁴

Let 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.³⁵ 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 (i.e., 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. In 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.³⁶ 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. First, 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 way stations on the path to the final product, do not earn any net rents for their owners. Third, all cooperating laborers and land owners 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. Therefore, 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. In exchange for these present wages and rents, the capitalist receives an interest return 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 product that is embodied in their discounted wage and rent payments from the capitalist, because these present payments unshackle them from the temporal dimension of the production process. 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-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.³⁷

This 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 consumers’ good. Thus, in a world without capitalists, labor involves the disutility of foregoing 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 forgone 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. Unless their producers have a direct use for the goods, their sale to consumers is completely costless 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 forgone, by producers—have no role whatever in determining the prices of the existing stocks of consumers goods.³⁷

especially