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« Very Well Said: Becker on the Milton Friedman Institute | Main | Comparative Advantage and "Diversity" »


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Davidson's review surprises me. As a layman who's read a few Austrian papers, Human Action, and bits of Hayek's books, I'd never, ever think of Austrians claiming that money is neutral! Shouldn't a professional economist (with orders of magnitude more experience than me) know better?

The non-neutrality of money is what led me to favor Austrian macroeconomics over other macroecon (having personally observed Cantillon effects in online worlds).

Right off the bat, I'll disagree with Pete's point 5. Also from Human Action: "The praxeological method traces all phenomena back to the actions of

The correct way to think about it, I submit, is this:

The scholastics (Aquinas) understood that one science's conclusions might be another science's principles. The classic example is physics and optics.

Praxeology is a science unto itself (albeit a limited one). It studies the formal nature of acting. Its conclusions form the principles of catallactics, which is acting within a given institutional environment. One man's conclusion is another man's method.

So we might say that something like philosophical anthropology (the ontology of man) or phenomenology is the method of praxeology, and that praxeology in turn is the method of catallactics. That is, catallactic phenomena are understood in terms of categories that are the conclusions of praxeological inquiries (scarcity, cost, uncertainty, etc.).

What constitutes methodology is relative. In critical realism, social ontology is an area of study unto itself, but it also "underlabors" for economics and other social sciences.

The big mistake, I think, is in conflating praxeology and apriorism. Praxeology can be defended from any number of epistemological positions. Which is why, when you catch me on a bold day, I'll tell you epistemology is irrelevant to methodology.

Okay, Pete, but how do you really feel? :-) I think you nailed it on each of the 8 points. Thanks for that. Davidson is a puzzler. I just don't get why his logic on ergodicity. Ergodicity and forecastability (neologism) are two different things. Give me a level of precision you require in forecasting a time series and I'll give you an ergodic process you can't predict within that threshold of precision and a nonergodic process you can predict within that threshold of precision.

Davidson uses the word "nonergodic" to mean "impossible to predict at all even in the short run" and "ergodic" to mean easily to predict in detail by simple extrapolation" he then criticizes everyone but himself for for implicitly assuming the "ergodicity axiom." As Bill Clinton would say, "What a fairy tail. Give me a break." Ergodicity has a precise meaning in probability and statistics. But Davidson basically makes it magic word.

By invoking the word ergodicity, Davidson also misconstrues deeply the nature of our knowledge of the future. The future is not a pre-determined time series, but a field of action. If it were predictable like a time series, we could not act upon it. But if it were utterly unpredictable, we could not act on it either. Botched statistical metaphors just don't help you through the logic of our knowledge of future events.

Taking up Adam's point that epistemology is irrelevant to methodology, perhaps the problem is that most epistemologies are irrelevant because they are concerned with the conclusive justification of theories. That is the common purpose of the two main schools of modern epistemology - empiricism in all its forms and rationalism or intellectualism (after Descartes). The more helpful approach is to focus on testing, as Pete quoted from Mises "All that man can do is to submit all his theories again and again to the most critical examination." (p. 68).

The vehicle for that process is the hypothetico-deductive method which is common to the natural sciences and the human sciences.

Unfortunately there is a serious tension in Mises between the critical approach and his depiction of a priorism as the source and/or the justification of the laws of praxeology. It seems that in some of his moods he fell into the trap of "justificationism", like the proponents of positivism and rationalism, as though testing was not enough and some foundation is required to justify belief in the laws.

People who read Mises to understand how the world works and also address problems outside the window will not be diverted into extended arguments about the foundations of the discipline. But there are some efforts along those lines, as though the future of Austrian economics depends on preserving the purity of a priorism. This tends to cut off Austrian economics from the non-foundationist, realist, non-justificationist strand of epistemology and metaphysics that flows through th work of Popper and others. This provides a combination of epistemology, methodology and metaphysicas which is synergistic with the Austrian approach, but both have to struggle with the overwhelming dominance of various forms of positivism in North American academic circles.

Just one comment about misconception 7 : I personally think that Mises' exposition in the calculation debate (though I'm not exactlysure to what extent Hayek ignored it) is more technical and precise that Hayek's. Simply put, it doesn't matter how inarticulate or dispersed the knowledge is in the world, without a market for capital which presupposes prices and therefore private ownership, there is no way to evaluate - or to impute, as Hayek would say - the efficiency of allocation of the different combinations of available factors of production.


Agree with your point, just not with the assertion that Hayek ignored this point! Nor did Lavoie in his excellent summary of the debate.

I would suggest my essay Economic Calculation: The Austrian Contribution to 20th Century Political Economy, and my introduction to the 9 volume reference work Socialism and the Market.


Great post!


You said:

"Nobody denies that in the real-world, entrepreneurs wear several hats --- owner, manager, etc. But that is different from strictly speaking the economic theory meaning of the entrepreneur which is what Kirzner is concerned about."

I would take this point one step further.

On at least two occasions, in Kirzenarian fashion, I used neither capital, served as owner or managed a situation, yet I have been able to still make substantial money by saying to one person little more than "you should talk to this person about this, I will arrange it and collect 10%."

I find it fascinating that academicians have so much problem with this point that Kirzner makes. In the real world pure Kirzenarian deals are going down every day.


Is there any part in Human Action where Mises says, "The Fed should cut interest rates to 1% and tell investors there is a Bernanke put. Then bubbles are impossible because of the Invisible Hand."

I'm hearing a lot on this point in recent days and some clarification might be helpful...


Nope, that isn't in Human Action.

You and I are on agreement on that.


While the followers of Minsky are working hard, writing papers etc. trying to understand the financial crisis, Austrians pursue their blablabla about the real or imagined differences between Mises and Hayek...

You're right Ludwig. No one on this blog has ever posted anything about the financial crisis here, nor have any of us written anything for professional or popular outlets about it... (sarcasm off)

Is it possible that we're doing BOTH?

On misconception #2 -- let me also add the following from HUMAN ACTION, p. 328: "The driving force of the market process is provided neither by the consumers nor by the owners of the means of production --- land, capital goods, and labor --- but by the promoting and speculating entrepreneurs."

I believe Israel Kirzner titled one his last books THE DRIVING FORCE OF THE MARKET.

Thanks, Pete. I've never understood the dehomoginization effort; it always seemed agenda-driven. Hayek was clearly building on Mises. He did not open up a new attack on socialist planning.

Sorry if I seemed too sarcastic. Yes, I am planning a paper, about Minsky versus the Austrians on the subprime crisis, or something...

Great Post!

I am a big fan of Peter Klein. I consider him to be an incredibly knowledgeable Austrian economist and an excellent communicator/scholar in the classical liberal/libertarian tradition. However, I have to highlight a recent paper, by Klein, where he overlooks a crucial component of the Austrian agenda.

Klein (2008: 4), in "Mundane Economics," argues that while Austrian economics is a distinct kind of economic analysis, he argues that "the essence of the Austrian approach is not subjectivism, the market process, or spontaneous order, but what I call mundane economics - price theory, capital theory, monetary theory, business cycle theory, and the theory of interventionism." What I think Klein overlooks is that the latter five areas he highlights are inspired by the Austrian focus on subjectivism, market processes, and spontaneous orders. In fact, the bulk of "Interventionism (1977)" is devoted to articulating how spontaneous market forces react to attempts at controlling prices that ultimately leads interventionists to expand their control until private property exists nominally, and ultimately subverts the knowledge-generating capacity of markets. This is what led me to believe that Mises, like Hayek (and Weber!), viewed the market as a discovery process, not simply as a tool for the allocation of scarce resources among competing uses. Thumbs-up to Klein, though; I really enjoyed the paper (especially given the recent misreadings seen on blogs). I just think he should give a more expansive reading of Mises.

Wow! No wonder why Pete hasn't posted anything recent over there on our blog.

This is Classic Pete, the Pete I know and love. This is the Pete who takes a 180 degree turn and says the enemy is over there! The Pete who says its time to change strategy. The Pete who says I'm sure we will get it right this time!

The "Just do it!" has been thrown aside (temporarily if you're an optimist) for "Now do this!"

Pete, I think this is your best post yet. Clear, sincere, explosive.

I look forward to the results.

To Brian Pitt: Thanks for the very kind words. Pete B., why didn't you delete everything after the second sentence?

To Pete and Robert Wenzel: Those of us who think Kirzner's separation of entrepreneur and capitalist is mistaken (and a misreading of Mises) certainly recognize that in practice, individuals can exercise several economic functions (capitalist, laborer, entrepreneur). That isn't the criticism. The argument is that Kirzner's "pure," non-resource-owning entrepreneur, is not a useful economic category, even in a purely theoretical sense, because in the absence of investment, "discovery" has no effect on the allocation of resources. Robert, without knowing the details, if you made money by suggesting an investment to someone else, who made the investment and reaped the entrepreneurial gain (profit), then what you were paid was a service fee. I would not classify your return as pure entrepreneurial profit. (It might contain an element of profit because you risked part of you reputation, a valuable asset), in giving the advice.) Anyway, this isn't the place for an extended debate, but I did want to point out for those who are interested that I think Pete's point #2 misrepresents the Kirzner critique he's referring to.

Mr. Boettke, regarding the leading theorists in the Mises-Hayek paradigm you cite in your post there is also the very important Spanish Professor Jesús Huerta.

Dear prof. Klein, I agree that without investment the "discovery" has no effect on the allocation of resources, but without "discovery" would there be any investment in the first place? And why, on the other hand, would judgement explain better than alertness entrepreneurial success and - something sometimes forgotten - error ?

Dear Rafa Garay,

I have nothing but the utmost respect for Professor Jesus Huerta de Soto. I know that Professor Kirzner is very impressed with his engergy and his scholarship. I agree with Prof. Kirzner on this.

Dear Peter Klein --

First, this is probably NOT the place for us to hash this out.

Second, there are at least two issues. (1) Does Kirzner's position represent a deviation from Mises? and (2) Does the position make sense?

I would argue contrary to the position that you hold in your recent paper that (a) Kirzner's position is the Misesian position, and (b) the Misesian position IN THE REALM OF THEORY is coherent and vital to our understanding of the market system.

I realize we can agree to disagree, but the follow up quote from Mises (p. 328) is pretty clear, as is his other quotes about the entrepeneurial function in economic theory.


Pete, I just wanted to clarify that the objection to Kirzner's concept of alertness is an objection "in the realm of theory," as you put it, not an objection to the practical application of the theory. My position is that understanding, or anticipation, or appraisal, not discovery, drives the market. I think this is what Mises meant, though of course ultimately what matters is what is correct, not what Mises thought. BTW, as Joe Salerno notes in his "Entrepreneur: Real and Imagined" paper, Mises is a little unclear on this point, offering at least two different concepts of the entrepreneur in Human Action, so I don't think a few quotations stripped of context can settle the matter.

Bogdan, I find the discovery metaphor unhelpful because it abstracts from uncertainty, in my mind the key to understanding market processes. I don't see discovery as a precursor to investment because, under uncertainty, there is nothing "there" to discover. I prefer the concept of judgment, which incorporates both successful and unsuccessful anticipations of the future.

Stephen King: entrepreneur or worker? He discovers novel combinations of words that bring joy to consumers, which other producers had previously overlooked.

On the other hand, it seems perfectly straightforward to say his earnings are a return to the productivity of his labor.


Professor Boettke has written a magisterial post. I agree with Prychitko: this is Professor Boettke's best post yet. Keep em comin! Let me briefly comment on some of the points made in this post:

1.) Now it is true that Davidson hasn't given Austrian economics a fair reading. He is committed to his idea of a monetary economy, and refuses to consult the Austrian literature on their own terms. But this does not mean that Davidson is wrong or not worth reading. I think the Post Keynesian literature is very good on money. And here is the main difference:

- For the Austrians, their monetary theory is premised on a real economy. Money is introduced only to illustrate its effects on the *real* economy. Their theory of the interest rate is an example. I took a course with Lawrence White, for example, and he said that "interest is not the price of money, but the price of credit!" By this he meant that interest can also be determined through the exchange of coconuts.

- But the Post Keynesians do not build their theory from a real economy. They are quite clear that their monetary theory is an *alternative* to the theory of the real economy. They reject all of the assumptions of a real economy, assumptions that Austrians accept; Austrians just take it a step further and show how money can cause disequilbria in the real economy. Here is a good way of thinking of it --- according to Minsky, neoclassical economics (Austrians included) is the theory of the "village fair paradigm" while Post Keynesian economics is the theory of the "wall street paradigm."

You cannot talk about financial and credit markets through the loanable funds model and Say's law, according to Post Keynesians. Austrians need to abandon the theory of the real economy if any progress is going to be made on this score with the Post Keynesians. Goods no longer trade for goods.

3.) On the point of equilibrium and ergodicity. Just because you reject mathematical economics does not mean you reject equilibrium theorizing. In fact, most Austrians eschew mathematics, yet they reason in equilibrium terms. The uniqueness of Austrian economics is this: they ignore the equilibrium state, and focus instead on market equlibrating properties (i.e. the market process). But this is still equilibrium, just a different kind of equilibrium. According to the Austrians, it does NOT makes sense to speak of an economy in equilibrium; we first have to understand the forces that allow the market to reach this state. This is still an equilibrium theory, and a cursory reading of Post Keynesian economics will show this clearly.

4.) On the point of the similarity between Hayek and Mises. I have recently written a blog post on this topic that can be found here:

In my view, the "organic Misesians" will have reason to argue that there is great similarity between these two thinkers. But the "fundamentalist Misesians" will not, largely because they focus almost exclusively on Mises' deductive logic and system of praxeology in iterpreting his larger economic framework. Now Boettke quoted Mises saying that Menger's theory of spontaneous order is similar to his theory of praxeology, but I am confident that many "fundamentalist Misesians" would disagree with this, and for many good reasons.

6. On business cycle theory, I think the Ausrtians have a lot to learn from Post Keynesians. And this does not require them to abandon their theory; but we should try to understand what Post Keynesians are getting at with their assertion of the "inherent" instability of capitalist markets. They are on to something. The Ausrtian defense of markets is so vague that it is almost tautological. Here it is:

Markets work because prices convey information. We observe disturbances in the economy because markets are not free, and thus prices become distorted as a result of government control. Until we see free markets, we will continue to observe economic fluctuations.

This is a very bad way of proceeding. It prevents us from ever analyzing the real functions of capitalist economies (which includes government) because they are still reasoning in terms of an ideal. Anything that goes wrong in the economy is blamed on government, and everything that goes right is attributed to these "islands" or "centers" of capitalism.

7.) On the dehomogenization debate. Austrians debate over the relative merits of property and knowledge while always presuming the efficacy of these two systems. But this is precisely what is at issue! Just because we can show that government planning does not work does not then mean that we have somehow vindicated capitalism. I think Austrians need to think more critically about the market's ability to transmit information through the price system and private property. We need to get away from the idea of scarcity and the *real* economy. Again, we are now living in a credit economy, where decisions no longer occur in real terms, but in monetary ones. There is no reason to believe that the prices that emerge in this environment will accurately reflect the relative scarcities of material resources.


I really enjoyed Professor Boettke's concluding thoughts. Now it should be no secret that I disagree with the recent direction Austrians economics has been moving in. I think that this emphasis on applied work that has been done at GMU is a step backwards. Accordingly, I am in full agreement with this sentence:

"unless you are completely knowledgeable of the Austrian tradition, you need to be fighting all the time to figure out the right interpretation of MIses and Hayek, rooting out wrong interpretation, and figuring out how you want to go forward with your research using the best of the ideas from Mises-Hayek). So now my advice to students is: go write that paper on apriorism; figure out pure time preference theory; give me a survey on entrepreneurship; contemplate the role of equilibrium within the Austrian theory of the market process; etc. We need an entire new generation of great economists, and the first step in that process is for them to study the great economics ideas of the master economic thinkers of the past -- namely Mises and Hayek."

Oh I wish this kind of work was being done by younger Austrian students!! Of course, for this to be done, we would have to read beyond "GMU-style" Austtrian economics and Public Choice theory, which makes me question if this "new" movement can be started at GMU. A radical change of course would be required.


And as to some current misconceptions of Austrian economics. Well, I have a few. For example, I think Austrians have miscontrued the central message of Mises. Mises rejected the desirability of the equilibrium model, while Austrians criticize it for merely being "inadequate." And, I also believe that the marginalist revolution is fundamentally opposed to the subjective theory of value. These are ideas I am still working out, and would love to see other younger students do this kind of work, namely, a radical re-interpretation of Austrian economics assisted by, among other things, Post Keynesian economics, NIE, Institutional Economics, economic methodology, etc. I have introduced these ideas on my blog:

Hence the name: Post-Austrian economics. People interested in following the passage I quoted from Boettke above should start calling themselves Post-Austrian economists in order to separate themselves from the Austrians who refuse to compromise and sacrifice some features of their nice little theory (and there are many!).

I appreciate the answer prof. Klein, but the emphasis you try to put on uncertainty via the concept of judgement, though important, doesn't have a direct implication for the resource investment-entrepreneurial "discovery" or creation" problem. There are in fact two different things at issue here: 1)the role of entrepreneurship in the - broadly speaking -equilibration process and 2) the distinctive role of the entrepreneur - to the extent there is one - in the production process and its exact relationship with the other market functions.

I haven't read the comments yet but I want to express my complete agreement with the post. I was thinking about something very similar a couple of days ago.

Talking recently about AE, I was told that there were 3 major differences among the various authors.

The 3 points were: Hayek vs Mises about calculation, Kirzner as a passive entrepreneurship theorist (alertness vs uncertainty), and Mises as a theorist of purposeful contructivism.

These points seemed misconstrued to me, this post has saved me a lot of time. :-)

I am really happy for Pete he enjoys that much success, has all those fans etc. really I am not envious of that, not at all, but I repeat I cannot understand why individuals get so excited about all this. OK, Mises and Hayek were really great but why not talk about how we can improve upon them? The were pioneers, precursors etc. so there is a lot to improve upon... Austrians seem to exhibit a tendency to rest on their laurels, don´t know why... Now with the financial crisis there is so much to do...

Now to say serious I should add to Steve that I agree there has been some really great stuff on this forum about the financial crisis, really relevant and interesting, for instance the comments by Mme Schwartz and others...

Now as regards your critique of Davidson, he is of course wrong in his assertion that money is neutral in Austrian theory; this is so obvious that it needn´t even be mentioned, and it certainly isn´t magisterial to point that out... But maybe Davidson´s point is more subtle. You won´t find for instance in Mises, nor in Hayek, a very clear theory of depression - I believe Roger Garrison would agree with me on that. When you read Mises and Hayek, it´s not obvious they ever heard about, say, the money multiplier, and how this is important to explain depression etc.; understandably from a Keynesian viewpoint this is essential. Monetarists too have stressed this point. As to Cantillon effects, this is really too well known to say a lot about it, except that it would be great to have some empirical studies illustrating Cantillon effects; also it would be great to be able to model them mathematically etc. That is what I meant when I said that there is a lot to improve upon. I won´t require Austrian to read, say, Patinkin-:)

"Even" Roger Koppl?

You hint that I might have changed my mind about issues I discuss in the article you linked to. I think I still go with all that I said there. The cite, BTW, is Koppl, R. “What is Alertness?” Journal des Economistes et des Etudes Humaines, 2002, 12(1): 3-13.

The tension I find between Mises and Kirzner has to do with the distinction between praxeology and thymology, not whether the entrepreneurial function can be separated from that of the capitalist. I give a quote showing Mises definitely had the pure and penniless entrepreneur in his system. I didn’t address whether Mises also had the opposite view in his system. Joe Salerno did, in the article Peter Klein cites above. (url: FWIW, I think Joe’s interpretation of Mises, given on pp. 8-10, is right.

Peter Klein:
I’ve written a few things for entrepreneurship scholars in which I defend a pure Kirznerian position. In that stuff I take a broad view of “discovery.” I think I’ve got good textual grounds for doing so in Kirzner’s 1982 paper, “‘Uncertainty, Discovery, and Human Action: A Study of the Entrepreneurial Profile in the Misesian System.’’ Israel cites his 1973 book, the 1982 paper, and his 1997 JEL paper as the three main statements of his position. I don’t see how you can read the 1982 paper and maintain that entrepreneurial opportunities are exogenous.

You say Shane and Venkataraman get Kirzner wrong in some degree. I think Shane gets Kirzner wrong in his 2000 Org. Sci. Shane actually says that Kirzner’s approach is somehow inconsistent with psychological notions such as locus of control. (Shane claims that in the Austrian theory, entrepreneurial action ‘‘depends on factors other than people’s ability and willingness to take action,” note 4, p. 450.) I don’t see how you could say that if you read the 1982 paper and took it seriously. So one of the issues here(and I think you may agree with this point) is that a leading defender of the opportunity-discover view doesn’t do justice to his supposed source, Israel Kirzner.

I think you can’t have a unified *theory* of entrepreneurship, it can’t be a coherent academic discipline, without a theoretically crisp definition of the entrepreneur and you can’t have that without making it a human universal. Who has defined entrepreneurship in such a way that it a human universal? Mises and Kirzner. I have argued for the view that entrepreneurship theory is the social science that views social processes from the perspective of the element of change and improvisation in all human action. Am I mistaken to see that as more general and universal than the view you recently put forward?


What you find in Mises is a vigorous defense of the use of the equilibrium construct as an indispensable methodological tool; read again what he wrote about the method of imaginary constructions etc.
Now as to Rothbard, he says it actually provides information about tendencies and directions of change, which is not too different from what a mainstream economist would say.

As to entrepreneurship, of course we can philosophize for hours and hours about the meaning of it, but I have always thought it´s really rather trivial; the essence of it can be summarized in a paragraph... Be assured this will NEVER receive a Nobel Prize...

Matt wrote:

"For the Austrians, their monetary theory is premised on a real economy. Money is introduced only to illustrate its effects on the *real* economy...
- But the Post Keynesians do not build their theory from a real economy. They are quite clear that their monetary theory is an *alternative* to the theory of the real economy."

This is an interesting dichotomy. But what if my position is to use the standard tools of price theory but apply them to money as a good? Does that allow us to achieve total consciousness, or does the universe blow up?

"And, I also believe that the marginalist revolution is fundamentally opposed to the subjective theory of value."

Can you point us to a blog post where you elaborate on this? At first blush, it sounds like someone saying, "I also believe E=mc^2 if fundamentally opposed to relativity."

I'm not a fan of your new advice:

"So now my advice to students is: go write that paper on apriorism; figure out pure time preference theory; give me a survey on entrepreneurship; contemplate the role of equilibrium within the Austrian theory of the market process; etc. We need an entire new generation of great economists, and the first step in that process is for them to study the great economics ideas of the master economic thinkers of the past -- namely Mises and Hayek."

I think the saying "Do the literature review, don't write a literature review" applies here. Sure, people who don't know or understand the austrian tradition should study and learn it. The end of your above quote is fine. If they're writing these papers merely as a set of their own cliff notes fine. But let's not mistake that for producing new knowledge of use to other scholars. I have serious doubts that somone writing yet another suvey on entrepreneurship (or any of your suggested topics) in order to learn austrian economics is going to write anything that changes my understanding of how to correctly understand entreprenuership that has any bearing on how I actually do economics.

Of course, the division of labor applies. Some people can work on these topics. But as general advice to grad students I think you're off the mark. My obviously biased opinion is that your "look out the window" advice is far more useful for grad students. Just make sure they have the correct "eye glasses" on first.



On the money multiplier:

You wrote:

"When you read Mises and Hayek, it´s not obvious they ever heard about, say, the money multiplier, and how this is important to explain depression etc.;"

Why the pronouncement, which is in fact completely wrong?

Hayek, in fact, clearly discusses how it works in his 1933 book, Monetary Theory and the Trade Cycle. See Ch. IV "The Fundamental Cause of Cyclical Fluctuations," esp. parts III-IX -- some forty pages of clear discussion of the way a fractional reserve banking systems creates multiple increases in the money supply. Very clear.

And then after this discussion, Hayek now states:

"The assertion which forms the starting point of the 'Additional Credit Theory of the Trade Cycle,' and whose proof has been attempted in the preceding pages, has never in fact been seriously questioned; but hardly any attempts have been made to follow up all the unpleasant consequences of the state of affairs it indicates."

Hayek does the follow up.

So Ludwig, what in the world are you talking about?

... and, Ludwig, while I'm uncomfortable being this blunt (but I think you can take it): please read before you make those kind of claims, as it makes the rest of us have to restate the obvious again and again, and waste our time in the process.


I know; actually I re-red _Monetary Theory and the Trade Cycle_ during the holidays, including the passage you cite. Actually I made the reflection how rudimentary this is according to present-day standards. It´s obvious Hayek knows about multipliers (I made an overstatement on that), which goes beyond Mises... But I think according to present-day standards it´s rudimentary, and I do not agree his discussion is extremely clear; it´s not integrated in a theory of depression either; Huerta de Soto has done some more work, and also gives a short mathematical derivation, which Hayek never does...

Hello Professor Murphy:

I talk about subjectivism and the marginalist revolution here:

and here:

and Ludwig,

I am familiar with the standard Austrian interpretation of the equilibrium concept as an " indispensable methodological tool." But this is not what Mises meant, in my opinion. Mises' basic idea is that human action is the central theme in economics. Therefore, economics must preserve the purposefulness of action. Equilibrium, for Mises, is used to *illustrate* the purposefulness of human action by showing that there is no action in equilibrium --- individuals are vegetables in equilibrium, as Mises said repeatedly in his 1949 book. I address all this in my paper that is currently under review. I have surveyed the literature on this and have shown that the Austrian interpretation is inconsistent with Mises' central message.

As to your second post: I repeat that I read this book again during the holidays, and I indeed made a mistake when I said that Hayek hadn´t heard about multipliers, which he obviously did. (I am a great fan of Hayek by the way...) Still Mises obviously hadn´t heard about multipliers...
But again, I have done quite some reading on multipliers and all that, and I do not believe Hayek´s discussion, even mentioning in footnote "convergent geometrical series" and all that, is very clear if you haven´t studied this independently in some detail. But Hayek can be forgiven on that. In fact the theory of money multipliers was only being developed about that time. I will look up the references for you; they are in my thesis.
I hold on to my point that Austrians still don´t have a satisfactory theory of depression. But fortunately, monetary disequilibrium theorists have done that for us.
And by the way: you can be as blunt as you want, I am totally unimpressed.
Sans rancune,
Ludwig van den Hauwe, Ph.D.

Ben Powell wrote:

"I have serious doubts that somone writing yet another suvey on entrepreneurship (or any of your suggested topics) in order to learn austrian economics is going to write anything that changes my understanding of how to correctly understand entreprenuership that has any bearing on how I actually do economics."

What is the point of learning? Sounds like you have it all down! The truth is that there is ALWAYS something new to learn. I can remember when I was 18 I read Ayn Rand's "The Virtue of Selfishness" and said to myself "I should just keep re-reading this book for the rest of my life because it is so right!" Just imagine how narrow-minded and arrogant I would be if I would have pursued that course. But is this attitude any different from the passage I quoted from your post??


I still add: Mises finished _Human Action_ in 1949. Help me, is that correct?; I am not a specialist in the history of economic thought.

So he should have discussed money multipliers, and he should have explained how depression arises through a contraction of the money supply.
I think this illustrates how an excessive aversion of - even simple - mathematics can lead someone into overlooking very important matters. I also believe the work of the Monetarists is in general superior on this particular issue.

Now Hayek can indeed be credited by having provided a rudimentary multiplier analysis in his _Monetary Theory and the Trade Cycle_ - at a time when this very theory had only begun to be developed - which was actually written before _Human Action_, which possibly illustrates that Hayek was perhaps (surely?) a more astute monetary theorist than Mises.

Whether Hayek´s development is fully satisfactory according to present-day standards is apparently a matter in dispute since David thinks it is, while I have some doubts. But I agree that Hayek was probably fully up-to-date with the literature at the time he wrote. I apologize for having insinuated the contrary.
But note that many other writers - including Friedman - have found Hayek´s economic writings rather obscure. I believe all things considered I am generous to Hayek on this. But of course the Keynesians would later become the champions of all kinds of multiplier analysis, in particular in depression scenarios.
Ludwig van den Hauwe

Oh, and on the recent Prychitko/Ludwig van den Hauwe exchange, let me just say that this is all too familiar to me.

Just some thoughts. It is important, as Prychitko notes, that students of Austrian economics do the reading in the literature before they make bold claims. I agree. But the problem is that most Austrians believe that certain things in Austrian economics are settled issues, and that they have a monopoly on the truth. This is difficult for well-read students because no matter how much research you do, it seems that you will not be able to make much progress because Austrians can be quite dogmatic on certain issues. And this is even worse because no one other than Austrians care much about what you have to say on Austrian questions! The audience is very limited. Now Austrians have managed to expand their reader base, but they have done this by extending their libertarian program, and not their economics one. I hope that this changes. We should re-interpret Austrian economics as being fluid and evolving, rather than settled and fixed. Now most will agree with this, but jook look at the recent work that is being done in Ausrtian economics. It is all applied work with A LOT of public choice!

A friend of mine just wrote to ask why I was so huffy with Bogdan Enache. Oops. I didn't *feel* that way! I truly apologize to Bogdan if I seemed unappreciative of his post. He was nice to cite my paper. And my question ("Even" Roger Koppl?) was meant in an entirely lighthearted way. I've got to work on the proper use of emoticons! :-) (Hey, there's a good example right there!)

Too many parallel threads going on here, but a quick note to my friend Roger Koppl:

"I think you can’t have a unified *theory* of entrepreneurship, it can’t be a coherent academic discipline, without a theoretically crisp definition of the entrepreneur and you can’t have that without making it a human universal."

Yes, definitely.

"Who has defined entrepreneurship in such a way that it a human universal? Mises and Kirzner."

Yes, but not exclusively. I think Schumpeter and Knight, and possibly even T. W. Schultz, have also done this.

"I have argued for the view that entrepreneurship theory is the social science that views social processes from the perspective of the element of change and improvisation in all human action. Am I mistaken to see that as more general and universal than the view you recently put forward?"

Yes. :-) Seriously, the version I'm putting forward is meant to be equally universal. Whether it's correct is for others to judge.

Roger, your definition strikes me as highly elastic. I would argue that Knight (and, in my reading, the non-Kirznerian part of Mises) is also about change and, if you like, improvisation. I don't see the unique connection to discovery.

And BTW my original reason for writing was to chide our good friend Pete for implying, in the original post, that the Austrian critics of Kirznerian entrepreneurship are somehow failing to grasp some basic point. "This is Kirzner's alertness to opportunities, driven by the insistent eagerness to earn profits. This is a point of economic theory of the market system, and Kirzner makes the Misesian point. Why this keeps getting missed I am not sure." Pete, we get it, we just just don't agree with it.


As to the equilibrium issue: When an author says "A" one should take her to _mean_ "A". If we always suppose that when an author says something, she actually means the contrary of what is actually said, rational discussion becomes totally impossible...

As to the other point, you say this is all very familiar, but I suspect many on this list will take my critique of Mises for not having explained depression through a multiplier analysis, as a grave insult...

I believe Hayek was probably the last Austrian economist who was considered _authoritative_ by the economics profession at large. Why is this?


You think your definition is just as universal. Okay, I'll reflect on that. I think there's a difference between us. I haven't yet absorbed your POV well enough, however, be sure we don't have a merely verbal disagreement. You know, how should we use the word "discover"? That sort of thing.

My definition, which I've put forward with M. Minniti, is elastic, I think, in just the same way Felix Kaufman's definition of economic was elastic. F.K. defined economics as, basically, the social science that uses marginal utility. Minniti and I offer a parallel definition of entrepreneurship studies, one that was inspired by Kaufman.

Taking up Roger's point on entrepreneurship as a human universal, it can be seen as an aspect of human creativity which Chomsky liked to say was manifest in our use of language. That is, all of us can both utter and understand strings of symbols that we have never said or heard before.

At the same time, of course, he was looking for universal rules or laws, in the same way that we might look for universal laws of economics.

On the Klein-Boettke discussion regarding Kirzner, it won't be resolved here and perhaps it won't be resolved anywhere. There is a serious rift in current Austrian economics regarding the entrepreneurial function, what it means and how we can use it to understand the market system.

Going back to Mises is not entirely helpful because in Mises not only one can find the entrepreneur as a function and as an ideal type, but also what the function is can be interpreted in many ways. It is my view that Mises at the end of the day, however, saw the function as that of novelty (at the ontological level). There is one reading of Mises that clearly points in that direction. Kirzner from that perspective is Misesian and stipulates that no judgement can be made unless there is something to be judged in the first place. From this perspective discovery of hitherto unknown information is the essence of the phenomenon of entrepreneurship (i.e. non-optimizing behavior).

It is also difficult to call upon Schumpeter because in his work the entrepreneur is not always the same either. Sometime a function sometime an ideal type. Again, a perfectly acceptable reading of Schumpeter is that he understood novelty/discovery as the fundamental issue, not judgement. My forthcoming paper in Pete B's new handbook makes all these points in detail.

We are now standing in a situation where Knight and Rothbard (and contemporaries such as Salerno and Klein) don't see entrepreneurship the same way as Kirzner and Boettke (and myself and, I suppose, Roger Kopple) do. I appreciate Peter Klein's attitude and perhpas we should just all agree to disagree.



Now my question is: what difference does it make?
Whatever your interpretation of entrepreneurship, the implications are libertarian, in the sense: the more liberty, the more entrepreneurship can have free play, and allow every individual to create, discover knowledge etc.
Is there any _deep_ philosophical sense to this debate beyond this type of conclusion?

Ludwig van den Hauwe

Ludwig, thanks for being a gentleman when I was a little rattled. The point you make about the recent discovery, so to speak, about the money multiplier was indeed true. The idea was just coming forward in the 20's and 30's. I almost said in my original response that, when you read Hayek (1933), it is so close to the discussion one would find in any macro principles textbook. So, on that basis, you are correct that Hayek's 1933 discussion is rather rudimentary.

I'd have to take another look at Human Action. Mises pays attention to the natural and artificial interest rate in his discussion of the cycle. He might -- this is what I'm not sure of -- have simply taken for granted that the MS expands in a fractional reserve system. Have to check that. At the very least, I don't think his approach would contradict the money multiplier notion. And if so, he might have believed that he could get on with focusing on the interest rate/time preference/stucture of production issue.


"We should re-interpret Austrian economics as being fluid and evolving, rather than settled and fixed."

You spoke broadly about some Austrians believing it's all settled. Just to clarify for our other readers: at least the two oldest guys on this blog (my friends Pete and Steve) would certainly shake their heads in agreement with you. In fact, there's that (in)famous paper by the three of us that argued just that twenty years ago. Pete recently quoted Mises to that effect (we are not infallible, the theory evolves, and so on). [Side point: It has become part of the great "verbal" tradition in our school that the three of us put together the ideas for our paper while in a rowboat fishing at Burke Lake. Steve even ran a tape recorder (for you youngsters, a taperecorder was an archaic piece of capital that evolved into digital recorders that we all enjoy today.] Now, we didn't catch any fish -- a great disappointment for me -- but we did catch the attention of many with that paper. We met the most criticism from precisely those who have taken Austrian theory to be settled -- Rothbardians, if you will.

One more thing on this point. Once again, the verbal tradition: I might be wrong, but I recall Pete saying in about 1986 that Rothbard was asked if there are any loose ends to tie up in Mises's theory. Rothbard said something like "Yea, maybe we need some more work in Industrial Organization." Now whether it was IO or whatever, the main point is that it has pretty much been settled. Rothbard had criticized Mises on only two points, if, again, I recall correctly:

(1) Mises's theory of monopoly

(2) Mises's argument about value-free theory.

I would love to do a post here on #2. I had always thought of writing a paper that accepts Rothbard's criticism of Mises, and then further it by out-Rothbardian Rothbard. But why write a paper when the main argument can be posted on this blog?

On calling ourselves "Post Austrians."

I recall Jack High saying around 1986 as well that Rothbard considered calling the new journal he launched "The Journal of Post-Misesian Economics" as a response to Davidson's Post Keynesian Economics journal. Instead, it became "The Review of Austrian Economics."

My guess is -- if this story is true -- that Rothbard was merely joking (poking) at the Post Keynesians. Why, from his perspective, would he need or really want to add "Post" to the nearly settled work of Mises?

One correction Dave: we didn't catch any *fish* but I did land a nice fresh-water Boettke, if you recall. (Casting is not part of my human capital.)

BTW, people should know that I am still in possession of that cassette, which I really should listen to sometime, for the historical and humor value combined.

I will pay +$60 for a copy of that tape. Email me.

Oh, and on the 1986 Boettke, Horwitz, and Prychitko paper, I thought I should mention that this paper had a great impact on me when I read it not too long ago. I actually used the arguments in this paper to radically re-interpret the message Mises advanced in his 1949 book. I think I have accomplished something apocalyptic, but Boettke disagrees, and will continue to until it appears in print.

I have also emailed the thesis to Prychitko. But if either of you (Professors Horwitz and Prychitko) are interested in seeing what a young "Post Austrian" has done with the message in your 1986 paper, then email Professor Boettke and ask that he send you a copy of my paper so that you guys can discuss its content. Or just email me for a copy of the paper. (Prychitko, I also address the Rothbardian critique of Mises' theory of monopoly. I conducted an exhaustive survey on Misesian scholarship --- RAE and QJAE and related references --- and have distilled, I believe, all the important standard interpretations of Mises and have shown them to be false!)

One thing Roger and I definitely agree on: anything written by Maria Minniti is worth reading! :-)

I am a huge fan of this post. And, I agree with Dave that “This is Classic Pete, the Pete I know and love.”

I want to think some about Pete’s advice to graduate students. To repeat , Pete writes:
“But I have rethought that position (unless you are completely knowledgeable of the Austrian tradition, you need to be fighting all the time to figure out the right interpretation of Mises and Hayek, rooting out wrong interpretation, and figuring out how you want to go forward with your research using the best of the ideas from Mises-Hayek). So now my advice to students is: go write that paper on apriorism; figure out pure time preference theory; give me a survey on entrepreneurship; contemplate the role of equilibrium within the Austrian theory of the market process; etc.”

Contrary to Matthew, I don’t read this as a rejection of doing applied work. The point of doing theory is to eventually apply it to understand history. Contrary to Ben, I don’t think that this is bad advice. There are only two ways to really really really know a set of ideas/arguments: to teach a class on them or to write a paper about them. Since many will not get a chance to teach a class in Austrian theory then trying to make contributions to Austrian theory is the way to become “completely knowledgeable of the Austrian tradition.”

I’d argue that Pete’s efforts to make original contributions to Austrian economics not only evidence but are also responsible for his deep understanding the ideas from Mises-Hayek. I’d also argue that his ability to make significant applied contributions in comparative political economy would have been less likely if he hadn’t spent a lot of time throughout his career not only thinking deeply but writing about methodological and history of thought issues. I think this true of others who have made significant contributions to our understanding of the real world through Austrian lenses. My friend Emily Chamlee-Wright, for instance, wrote an important book with Don Lavoie on culture and economics as well as doing excellent empirical qualitative work on the economic cultures of Ghana and Zimbabwe. My good friends (and bloggers here) Pete L. and Chris have done tremendous work in applied political economy (e.g. on the role of the media, pirates, post-war reconstruction) but have more than a few papers with Mises and Hayek in the title. I’ve done a lot of applied work on economic culture in the West Indies and community recovery in NOLA but I’ve also written on Weber’s relationship with the Austrian school.

My point is that theory work and applied work are complements not substitutes. And, that the best contributors to applied economics have also made serious contributions to theory, methodology and history of thought.

I have written several responses to this post and subsequently deleted them. I think Virgil sums up many of the points I wanted to make.

One more: not only are theory and applications compliments but one is often a direct input (higher order capital good) to the other. Each serves both roles at different times.

Just as Pete often points out Mueller's erroneous claims about a lack of Austrian attention to this topic or that, I get the impression that Mueller's interpretation of what goes on at GMU is totally off the mark. Pete's advice is what many a GMU student are doing day in and day out. Go to lunch with Adam Martin, Geoff Lea, Micheal Thomas, Diana Wienert, David Skarbek, Stewart Dompe, Emily Schaeffer, or any number of current students whose names escape me. You're going to discuss subtle differences between Kirzner and Schumpeter on entreprenuership, Mises and Rothabard on ERE, Lachman and Bohm Bawerk on capital theory, Buchanan and Tullock on demonstrated preferences, on and on.

These are the thought processes underlying the current applications and it is from the conclusions and insights of those applications which the next round of theorizing will begin.

I feel torn, on the one hand I feel like I need to apologize for being mis-interpreted that applied work is the only way to go. Such interpretation occurs at the detriment to theoretical work. But in making theory feel welcome we run a similar risk in downplaying the role of applied work.

Pete and Schaeffer's recent paper, "The Context of Context," argues that it was the contemporary setting of the socialist calculation debate which shaped Hayek's theory of knowledge. I think this is a convincing perspective and one that gets seen over and over again throughout the history of thought. Another example, the extreme unemployment rates of the great depression contributed to the paradigmatic change from Classicism to Keynesianism.

To deny that there is a mutual relationship between theory and application, is to misunderstand the value of both.

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