Horwitz Says: Let There Be Light. And There Is Light.

by Mario Rizzo  

In a series of persuasive posts, Steve Horwitz at The Austrian Economists blog (here, here, and here) shows that Ludwig von Mises’s views on monetary economics were more or less the same as the Selgin-White-Horwitz (and I would argue the Garrison) free-banking, monetary-equilibrium view, rather than the Rothbardian one. This is not surprising given Murray Rothbard’s deviation from Mises on questions of monopoly, the minimal state, utilitarianism and other matters. While these posts will no doubt be resisted by some, they should move the discussion out of what Mises meant and into the analytical merits of arguments – and, I hope, into empirical work. (After all, Mises didn’t spend a lot of time on what his forebears really meant!)


32 thoughts on “Horwitz Says: Let There Be Light. And There Is Light.

  1. Steve Horowitz’s postings are persuasive. Murray Rothbard was an original thinker, and disagreed with Mises on any number of issues. Rothbard’s 100% reserve plan has more in common with Henry Simons and the Chicago School than Mises and the Austrian School.

  2. Note well, however. Economics is hard. And complicated. And full of wide ranging and implicit assumptions about 1) the nature of the problems at hand; about 2) the causal elements of the explanans; about 3) the nature and use and character of the logically related elements involved.

    So, putting say Hayek or Mises’ work all together in one coherent piece turns out to play a MAJOR role in making the sense of the “analytic” merits of the arguments these individuals have given to the profession as “paradigm” problem solutions. (We could be talking of economists who’ve published in the last 10 year — or 30 years — as well as Mises or Hayek here.)

    And sometimes when were working to put together a coherent picture of the explanatory problems and explanatory strategies and explanatory solutions of economics, we’re going to have to make reference to all sorts of existing work and community shared understandings — and discussions of different understandings of things — often liked to particular innovators or authorities — is going to be a part of all this.

    It’s unavoidable.

    Which in part explains why it is so prevalent.

    Even folks in Darwinian biology are forced to do this sort of thing, in thinking about their own science, and the various innovators and authorities in that field.


    “While these posts will no doubt be resisted by some, they should move the discussion out of what Mises meant and into the analytical merits of arguments ..”

  3. While Steve makes strong arguments about how Mises defines inflation, it is important to remember that the consequences of increasing the money supply are a matter of economic law, fully known or not, and do not depend on just what the definition of inflation is, or even on the existence of the word itself.

    Regards, Don

  4. Robert, Rothbard spent a good deal of time trying to dismiss (fallaciously, I think) Mises’ idea of the existence of monopoly prices.

  5. No offense indented, but Mr. Callahan is either choosing to ignore Mises’s positive appraisal of Rothbard’s contribution on monopoly price theory or he lacks the analytic tools to understand the matter.

  6. Dr. Rizzo mentions “Murray Rothbard’s deviation from Mises on questions of monopoly, the minimal state, utilitarianism and other matters.”

    But one of his co-bloggers informs us: “Look, I am around professional political theorists frequently at Cardiff U. and at conferences. None of them ever talks about “deviations” from some “correct” political theory; if some did, they would (properly) be regarded as a nut.”

    I disagree. Dr. Rizzo is heroic and not a nut.

  7. Juan, c’mon. Rothbard explicitly set out to blow up Mises’ position on monopoly. He even referred to him by name in MES when he said he was doing so. Sure, he was very polite, saying that Mises’ position on monopoly was a lot more nuanced than the average mainstreamer’s, but clearly he was disagreeing strongly with Mises on the theory of monopoly price. That’s what Mario and Gene are talking about.

    But I think Robert Wenzel’s point–and Gene’s response–illustrate why Horwitz et al. are (possibly) wrong on this point about fractional reserve banking (FRB). Look what happened regarding monopoly: Wenzel found a quote where Mises says that monopoly is only a problem when fostered by government. So from that, Wenzel concluded that Mises basically agrees with Rothbard, who said that there is no problem at all, even in principle, with monopolies on a market.

    But Mario, Gene, and I (and also Kirnzer) disagree with Wenzel’s interpretation. We have seen other evidence that makes us quite sure that Mises thought monopoly price was a theoretical problem even on a free market, leading to a violation of consumer sovereignty. So for us to explain the quote Wenzel found, we say, “Well, Mises must have just meant in terms of the real problems facing society today, the monopoly threat comes from government. I.e. under a free market, monopoly would just be a minor inconvenience. Sure it would violate consumer sovereignty, but we wouldn’t lose sleep over some rich people paying slightly higher diamond prices to de Beers.”

    Does everyone see the irony here? If Mario (and Gene and Steve Horwitz) like how I just mapped out the various positions vis-a-vis monopoly price, then I point out that things are flipped (for them) when it comes to FRB. That is, Horwitz has found a bunch of quotes where Mises is saying, “FRB isn’t a problem on a free market.” Right, but that thorn in Steve’s side Nikolij (I’m not looking up the spelling, sorry…) has found a few quotes where Mises unequivocally says that any issue of fiduciary media will lead to the trade cycle.

    So, just like we would explain away the quote Wenzel found, so too can the 100% reservists say, “Well, in those quotes Steve found about FRB in a market, Mises must just be saying that the real FRB threat today comes from government. Sure, under competitive banking there would still be a small amount of fiduciary media being issued, and that would still cause inefficiencies and harm consumers, but I’m not going to lose sleep over Citibank holding 98% reserves instead of 100%.”

    Obviously, just by making the above comparison, I’m not proving Horwitz et al. are wrong. But that Nikolij (sp) found one or two really discussion-ending quotes, I think. In contrast, I didn’t see Horwitz come up with ones that were equally definitive–and which would then lead us to say, “Mises contradicted himself.”

  8. @Bob Murphy

    Can we apply the principle of Ockham’s Razor here and simply say that Mises was inconsistent on these points (monopoly and frb)? To me, the Mises quote I refer to and what he wrote in HA appear contradictory.

    And while what Mises really meant is fascinating (for me)in the sense that even he may have slipped and been inconsistent, for the advancement of economics Rizzo’s point holds:

    “While these posts will no doubt be resisted by some, they should move the discussion out of what Mises meant and into the analytical merits of arguments…”

  9. Robert:

    I think we all here work within the framework of subjective value. The direct implication of that position is that every seller is a monopoly of sorts. Sellers of a commodity still compete through price, location, etc. Sellers of non-commodities are even more clear cases: they each sell a different brand, a product with differentiated product attributes. Both commodity and non-commodity sellers face not only direct competitors but also compete with other possible uses of the potential buyer’s money. With this in mind we know they face their own demand curve, thus having to find their (subjectively defined) optimal balance between price and sales volume. An oasis owner in the middle of the desert is just more evident, and quantitatively different, not qualitatively so.

  10. “No offense indented, but Mr. Callahan is either choosing to ignore Mises’s positive appraisal of Rothbard’s contribution on monopoly price theory…”

    I’m glad you’re not indenting the offense you are giving, Mr. Caprio! In any case, Mises revised Human Action in 1966, well after MES was written, and did not remove his section on monopoly prices, so it is obvious he never came to agree with Rothbard on this matter.

  11. All right, I went and read the quote Wenzel cites, and I don’t see how this negates the (later) writing on monopoly prices in the least. Certainly Mises thought that, as a practical matter, it was government created monopolies that were the real danger. But, he noted the theoretical possibility of monopoly prices without government interference. And this is where Rothbard disagreed.

  12. Um, Stephan, Mario was not censoring Rothbard for deviating from Mises, but merely pointing out that he did deviate. Were you not able to understand the very plain meaning of what I wrote, or were you simply more interested in scoring cheap points than in being truthful?

  13. Mr. Callahan:

    You sure have a point there. But is there any recorded case of Mises altering his views or furthermore, stating so in print not to mention revising them on his own works? For all his greatness, he seems to be one of those men that never know when they lose an argument. One can find them everywhere.

  14. Has anyone written a direct response to Rothbard’s rebuttal of Mises on monopoly price?

  15. Sheldon asked, “Has anyone written a direct response to Rothbard’s rebuttal of Mises on monopoly price?”

    Not to my knowledge, but it sounds like an afternoon’s work for Gene.

  16. Rothbard’s argument always made sense to me. What would be the benchmark by which to judge a price a monopoly price, considering that all goods potentially compete against each other? Don’t diamonds compete against bowling balls?

    It’s highly possible (maybe even probable) that I’ve overlooked something.

  17. I don’t see where Kirzner replies to Rothbard. But he does clearly state Mises’s position.

  18. I prefer Alchian’s interpretation of the pricing issue in terms of information costs. Producers do not know demand curves, and are searching for the profit maximizing price. Price may be above marginal cost, but it is not due to monopoly power. Alchian’s approach is more subjectivist (Austrian?) than either Rothbard or Mises.

  19. Jerry,

    “…Producers do not know demand curves, and are searching for the profit maximizing price….”

    If we replace ‘demand curves’ by ‘their specific demand curves’, then this is also true for non-monopoly producers. For at least relatively weak competition, a producer in his search will have difficulty distinguishing between natural specific demand and competitively-modified specific demand (and there may be no need to distinguish).

    “…Alchian’s approach is more subjectivist (Austrian?) than either Rothbard or Mises…”

    Can you elaborate on this? I would have thought that profit maximization would normally only depend on exchange values. As long as a producer doesn’t have a subjective use value for part of his stock, where does the subjectivist content come from?

    Thanks, Don

    Don Lloyd
    MIT EE70
    Peabody, MA

  20. To Don Lloyd’s question: In a price searching model, there are no given prices (exchange values). Alchian’s analysis is subjectivist in the sense that individuals are all operating in a radically uncertain environment. They have specific knowledge of time and circumstances (to utilize Hayek’s phrasing) acquired through trial and error. They are searching for what price to charge, products to produce, what bundle of services to offer, etc. It is entrepreneurship before Kirzner.

  21. Bob Murphy,

    Regarding Mises views on money. As I said on “The Austrian Economists” I think that Nikolaj and D.G.Lesvic have got it wrong, at least about “The Theory of Money and Credit” >V.1.

    It’s difficult to show this by selecting quotations though, because so much context is involved.

    Mises talks approvingly of fiduciary media in several places. Why would he reverse his position in the last pages of the 1924/1934 book? I don’t think he really does this.

  22. Well, I tried to say something on the Austrian Economists blog. I think my post is in the moderation queue. I’ll restate it here, when I have a minute.

  23. Interpreting Mises by picking out quotes is very difficult. He often works by proposing a set of simplifications, then stating things within that context.

    I don’t know if Mises was a monetary equilibrium theorist in the first edition of TTOMAC, or if he was in Human Action. It’s quite clear though that he was in the later editions of TTOMAC. It seem to me that this is good evidence that this was his position.

    In the thread on “The Austrian Economists” Nikolaj quotes page 408-410 which in turn quote the first edition of TTOMAC. If you read the context though it’s quite clear Mises is showing the reader how prescient he had been in 1912. The details of the points being discussed he had already treated earlier in TTOMAC. I think it is unlikely that he quote that part of the first edition in order to retract comments he made earlier in the second edition (and further editions).

  24. Sheldon, I think be reiterating Mises view, Kirzner was trying to answer Rothbard. In any case, although I haven’t been through this material in a while, I’ll state what I recall to be my conclusions when it was fresh in my mind. (If I have misremembered something, please forgive and correct me.)

    1) Mises states that, as a theoretical matter, there exists cases where a producer can profit more by defying consumer sovereignty and destroying some of his goods then by selling them all. He calls this a “monopoly price.”

    2) Rothbard says Mises was wrong; as a practical matter we can never detect one of these monopoly prices.

    3) I concluded that this was a fallacious argument; theoretical constructs cannot be defeased by citing practical concerns; physicists’ infinite, frictionless planes are not rendered invalid because we can’t really build them.

  25. Gene, you have it right, as far as my understanding of it goes. Further, I agree. Mises/Kirzner acknowledges (111) that in a given real-world case we could not know if the resource monopolist was withholding supply to get higher price now or because he expected a higher price in the future or because he wanted to enjoy the resource as a consumer good — exactly Murray’s point. So they agree in practical terms. The difference, then, is that for Mises/Kirzner, we can identify a monopoly situation conceptually even if it would be rare and, further, impossible to identify in reality.

  26. Posts like this one remind me of how grateful I am to have discovered Austrian economics. The absence of intellectual worship is wonderful. Testing, proposing, critiquing, debating – and I’m able to put my two cents in (though I think I will refrain on this post, as the material’s quite a bit above my understanding…so far). Please keep doing what you’re doing everyone.

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