Pat Gunning’s Praxeological Economics Home Page


August 26, 2014


© J. Patrick Gunning




This page gives students of praxeological economics, or subjectivist economics, access to a set of papers on the meaning of the subject, to my working papers, to other unpublished works, and to quotations from neglected economists. It also summarizes and tells how to obtain published papers and books. Finally, it contains a set of links to other subjectivist-type writings, including web-published works of the early Austrian economists. Much of my work relates in some way to the concept of entrepreneurship, particularly as understood by “new subjectivist revolutionaries,” Ludwig von Mises, Frank Knight, and Herbert Davenport. Students of economic methodology and history of economic thought should also be interested in this work. Naturally, I would appreciate comments, criticism, or dialogue on any of the writings.


“What’s New”





Table of Contents


 


What is Praxeological Economics? (Several Essays)


Recent Publications: Personal Copies Available Through EMail


Working Papers in Subdirectory


Published Books


Selected Quotations and Interpretations of Neglected Subjectivists


Links to Subjectivist-Type Writings


Austrian Economics Homepage


Ludwig Von Mises Homepage





Recent Publications: Personal Copies Available Through EMail


“The Dynastic Impulse: A Speculative Hypothesis On Taiwan’s Rapid Post-War Growth” forthcoming in Yu, Fu-Lai Tony (ed.). Taiwan’s Economic Transformation in Evolutionary Perspective: Entrepreneurship, Innovation and Government, New York: Nova Science, forthcoming in 2007.


“Herbert J. Davenport.” In R.B. Emmett (ed.). Biographical Dictionary of American Economists. London: Thoemmes Press, 2006 (forthcoming).


“Wise Central Planning?: The Chinese on Taiwan.” Commentaries on Law and Economics.(forthcoming)


“Praxeological vs. Positive Time Preference.” History of Economic Ideas. 8 (1): 105-120, 2005.


“Interest: In Defense of Mises.” Quarterly Review of Austrian Economics” 8 (3): 81-91, 2005.


“How to Be a Value-Free Advocate of Laissez Faire: Ludwig von Mises’s Solution.” American Journal of Economics and Sociology. 65 (3), 2005.


“Did Mises Err? Was He a Utilitarian?: Reply to Block.” American Journal of Economics and Sociology. 65 (3), (2005).


“What Should We Do About Taiwan.” Commentaries on Law & Public Policy. (2): 411-426, 2004.


“Dynamics of Oil Prices.” in V. S. Sakalya (ed.). Oil - Politics & Economics. Hyderabad: ICFAI. University Press 2004.


“The Praxeological Concept of International Entrepreneurship” in Leo Dana (ed.) Edward Elgar Handbook on Research in International Entrepreneurship. Brookfield, Vermont: Edward Elgar 2003 .


“Ronald Coase’s Method of Building More Realistic Models of Choice.” Review of Political Economy. 14: 2, 2002 (with Bingyuang Hsiung ).


“New Subjectivist Economic Theory and Public Finance.” Public Finance and Management. 1:3, 2001.


“The Property System in Austrian Economics.” Review of Austrian Economics. 13 (2): 209-220, 2000.


“Roy Cordato’s ‘Austrian’ Critique of Coase on Social Cost.” Review of Austrian Economics. 13 (2): 175-192, 2000.


“H. J. Davenport’s Loan Fund Theory of Capital,” Journal of the History of Economic Thought. September, 1998.


“Herbert Davenport on the Single Tax,” American Journal of Economics and Sociology, volume 56, #4, 1997.


“Herbert J. Davenport’s Transformation of the Austrian Theory of Value and Cost,” Perspectives on the History of Economic Thought, Volume Fourteen, London: Routledge 1997.


“Ludwig von Mises’s Transformation of the Austrian Theory of Value and Cost,” History of Economics Review, No. 26 Winter-Summer, 1997.


“The Theory of Entrepreneurship in Austrian Economics,” in Keizer, W., Tieben B. and R. Van Zijp (eds.), Austrians in Debate, London, Routledge, 1997.


“Entrepreneurists and Firmists: Knight vs. the Modern Theory of the Firm,” Journal of the History of Economic Thought, March, 1993.


“The New Subjectivist Elucidation of Entrepreneurship,” Entrepreneurship, Innovation, and Economic Change, Vol. 1, No. 3, September, 1992.


“The Meaning of Entrepreneurship in Economic Theory: Historical Perspective,” Entrepreneurship, Innovation, and Economic Change, Vol. 1, No. 2, June, 1992.




Working Papers (most abstracts below)



Papers on Praxeological Economics
Papers on Ludwig von Mises and His Economics
Papers on Entrepreneurship and the Development of the Austrian Theory of Value and Cost
Papers on Equilibrium
Papers on Austrian Welfare Economics
Papers on Capital and Interest
Papers on Coase
Papers on the Trade Cycle, Credit, Money, and Banking
Miscellaneous Papers
Commentary



Papers on Praxeological Economics


The Procedure of Praxeological Economics and Its Relation to “Positive Economics”



Papers on Ludwig von Mises and His Economics


Consumer Sovereignty: the Key to Mises’s Economics


The Entrepreneur in Mises’s Economics


Kirzner on Mises’s Consumer Sovereignty In Light of the Market as a Process


Rothbard on Consumer Sovereignty and His Implicit Rejection of Mises’s Economics


Mises on Scope and Method in Light of His Purposes 


Mises’s Theory of Economic Growth


Mises vs. Rothbard on Time Preference and Interest: The Future Prospect of neo-Austrian Growth Theory


Ludwig von Mises’s Transformation of the Austrian Theory of Value and Cost



Papers on Entrepreneurship and the Development of the Austrian Theory of Value and Cost


Carl Menger: Founder of Neoclassical Individualist Economics


The Entrepreneur in Mises’s Economics


The Praxeological Foundations of the Employment Compact: Where the Firm Fits Into Austrian Economics


The Praxeological Concept of International Entrepreneurship


Profit, Entrepreneurship, Material Capital and Equality


The Theory of Entrepreneurship in Austrian Economics


Herbert J. Davenport’s Transformation of the Austrian Theory of Value and Cost


Israel Kirzner’s Entrepreneurship


Herbert J. Davenport



Papers on Equilibrium


Equilibrium in Ronald Coase’s Method


The Logical Concept of Equilibrium


The Pure Market Economy and the Evenly Rotating Economy:

Equilibrium in Austrian Economics (short)



Papers on Austrian Welfare Economics


Roy Cordato’s “Austrian” Critique of Coase on Social Cost


The Property System in Austrian Economics: Ronald Coase’s Contribution


Austrian Welfare Economics?: A Misesian Response


An Exchange of Views on Mises’s Advocacy of Laissez Faire, His Alleged Utilitarianism, and Rothbard’s Welfare Economics


Praxeology, Economics and Ethical Philosophy



Papers on Capital and Interest


Knight’s Theories of Socialism and Capital: A Critique of Boettke and Vaughn


Interest: In Defense of Mises


Time Preference and Entrepreneurship: Ludwig von Mises on the Components of Market Interest


Praxeological vs. Positive Time Preference: Ludwig von Mises’s Contribution to the Theory of Interest


Non-Material Austrian Capital Theory and Loan Markets


Entrepreneur’s Net Worth: Mises’s Praxeological Concept of Capital


H. J. Davenport’s Loan Fund Theory of Capital



Papers on Coase


The Praxeological Foundations of the Employment Compact: Where the Firm Fits Into Austrian Economics


Roy Cordato’s “Austrian” Critique of Coase on Social Cost


Equilibrium in Ronald Coase’s Method


Ronald Coase’s Method of Constructing More Realistic Models of Choice(With Bingyuang Hsiung)


The Property System in Austrian Economics: Ronald Coase’s Contribution



Papers on the Trade Cycle, Credit , Money, and Banking


Overinvestment and Malinvestment


Short and Long Period-of-Provision Goods During an Austrian Trade Cycle


Hayek, Free Banking, and the Commodity Money Syndrome: Toward A Praxeological Theory of Credit and Money (September 24, 1999)




Miscellaneous Papers


The Dynastic Impulse: A Speculative Hypothesis On Taiwan’s Rapid Post-War Growth


Herbert Davenport’s Work


Competition and Predatory Pricing


Ludwig Von Mises on Economics and Value Judgments


What it Means to Be an Historian of Economic Ideas


The New Subjectivist Economic Theory and Public Finance


The Irony of Individualism in a Market Economy (short)




Commentary


On Mises


Note to Readers about Links


The New Science of Economics 


Brief History of Pre-Mises Economics


Relationship between Praxeology and Economics


How to Build Economic Theory


Mises’s Method of Imaginary Constructions


The Determinants of Public Policy: The Ideology of the Common Man


Economics, Epistemology, and Popper


Mises on Freedom and the Praxeological Law



Rothbard vs. Mises


Note to Readers about Links


Rothbard’s Ethics of the Non-invasive Society


Competing Defense Agencies in Anarchy


Rothbard’s Distorted Image of the Free Market


Rothbard’s Critique of Mises’s Value Freedom 


The Methodology of Economics: Mises vs. Rothbard


Critique of Rothbard on Method


The Myth that Mises’s Employed Extreme Apriorism


Statism and Democracy: Mises vs. Rothbard


Rothbard’s Illusion that Mises was a Radical


How the Mises Institute Promotes Progressivism


Rothbard’s Ghost Haunting the Halls of the Mises Institute


Observations on the Anarcho-capitalism Movement



On Public Policy


Obamacare, Austrian Economics, and Progressivism


Can You Keep Your Healthcare Plan?







Working Paper Abstracts 



Carl Menger: Founder of Neoclassical Individualist Economics


          This essay interprets Carl Menger’s Principles of Economics as a deductive theory, or set of theorems, that he employs to explain economic growth under capitalism. The theory initiated what I call neoclassical individualist economics, which culminated with Ludwig Von Mises’s Human Action. This economics aims to deduce the consequences of distinctly human action under various conditions.

   The essay shows how Menger used the “composite step-by-step procedure” and the “state-of-rest method” to deduce various arrangements, institutions, and roles. Simultaneous with making these deductions, he produced a theory of growth based on the recognition of the classical economists that higher productivity of labor can be achieved by expanding the division of labor. This work was carried on by Eugen Böhm Bawerk, F. A. Hayek and Mises. Other prominent members of the neoclassical individualist economics class are J. B. Clark, Frank Fetter, Herbert Davenport, Philip Wicksteed, Frank Knight, Lionel Robbins, and W. H. Hutt.

   Many professional historians of economic thought use the term neoclassical economics to refer to mathematical representations or models of economic behavior. In an appendix I use Menger’s theory to assess the mathematical economics of W. S. Jevons, Leon Walras, and their successors.



Consumer Sovereignty: the Key to Mises’s Economics


   The praxeological and economic view of the isolated farmer’s action is that he identifies and employs factors of production. The result, in the absence of error, is that he satisfies his wants. Analogously, the economic view of economic interaction under the conditions of the pure market economy is that the entrepreneur role identifies and employs factors of production. The result, in the absence of error, is that the wants of individuals in the consumer role are satisfied, with the exception of monopoly. This statement implies consumer sovereignty and reflects a praxeological view of the role of the entrepreneur.

   If a pure market economy could exist without a huge tax burden to enforce private property rights, it would enable the members of a group to take the greatest advantage of the gains due to the “division of labor.” As a result, it would be the desired system from the utilitarian perspective. A utilitarian could not logically defend an argument favoring any kind of market intervention. This judgment about the utilitarian’s interventionist argument is value free.

   This, in a nutshell, is the core of Mises’s economics. It is built on the concept of consumer sovereignty. The burden of this argument is to defend this view of Mises’s economics by examining the structure of his treatise Human Action (1966) and the part of his book in which he presents the image of the pure market economy. The paper also discusses previous literature on Mises’s consumer sovereignty concept.



Kirzner on Mises’s Consumer Sovereignty In Light of the Market as a Process


   Consumer sovereignty and its counterpart – the entrepreneur function – played indispensable roles in Ludwig von Mises’s effort to achieve two goals: (1) to show how to make value free evaluations of arguments for and against market intervention and (2) to link economics to praxeology. Mises felt it necessary to achieve these goals in order to protect economics from attacks by “its enemies” and to bring sound reasoning to policy evaluation. By Israel Kirzner’s reckoning, Mises’s chief contribution was his treatment of the “market process.” Kirzner did not relate his interpretation of Mises in general or the market process in particular to Mises’s two goals. He thus neglected Mises’s achievement of protecting economics. Correspondingly, he adopted an approach to policy evaluation that is not only different from Mises but that also contradicts Mises’s strictures about what economics ought to do in the realm of policy evaluation. Accordingly, this essay concludes that he is an unreliable source for knowledge of Mises’s most important ideas.



The Entrepreneur in Mises’s Economics


   The aim of this essay is to elucidate Ludwig von Mises’s concept of the entrepreneur. The essay defends the claim that an understanding of this concept requires one to recognize three aspects of Mises’s economics. The first is consumer sovereignty, with which Mises codefined the entrepreneur role. The second is the link between praxeology and economics, which Mises used the entrepreneur role to maintain. The third is his notion of the entrepreneur as an agent of progress, distribution, competition, and selection in a market process. Since only the latter aspect has been embraced by neo-Austrian economist since Mises’s death in 1973, his entrepreneur is in danger of being relegated to obscurity, along with his economics. I defend my claim by means of a thorough exegesis of text in Mises’s Human Action.



Rothbard on Consumer Sovereignty and His Implicit Rejection of Mises’s Economics


   Ludwig von Mises made consumer sovereignty the foundation of his elucidation of market interaction. An exception to consumer sovereignty is the monopoly price, which can be wasteful. Murray Rothbard rejected consumer sovereignty in favor of the concept of individual sovereignty. Rothbard proceeded to build his own elucidation of market interaction on the basis of the latter concept. In this theory, monopoly prices are not wasteful. This seemingly minor difference between the two Austrian economists can be traced to a pivotal and crucial difference in fundamental assumptions about the nature and purpose of economics. Mises sought to create an value-free economics based on the assumption that readers accept the view that people benefit from the division of labor and from its further extension. Rothbard sought to create a ethics-based economics, founded on the assumption that the individual is sovereign.

    The difference in the goals of the two authors is reflected by a difference in their definitions of private property rights in a pure, unhampered market economy. Mises defined such an economy as containing sufficient private property rights that relevant external effects could not exist. He defined the benefits and harm associated with external effects in terms of the effect on the division of labor. In his pure market economy, every market action benefits others, except for monopoly. Once he had elucidated action under a system of complete private property, he provided the broad outlines of a framework for analyzing a system with incomplete private property rights, although he did not actually do an analysis. He opened the door for future Austrian economists to evaluate arguments that government intervention could correct a deficiency due to incomplete private property rights.

    Rothbard defined his unhampered market economy as containing sufficient private property rights so that individual sovereignty is not compromised. In such an economy, property is possessed exclusively by individuals are either first users of the property or who had acquired the things in question from first users through free exchange or gift. Because a person is free to use his property as he wishes, others cannot be harmed by his decision to not sell at a lower price, regardless of the reason. Rothbard’s approach left no room for the evaluation of government policies relating to external effects. An incomplete private property system, for Rothbard, meant that someone had taken away the property of a rightful owner without permission. She had violated the other’s individual sovereignty by invading his private property. The remedy for this was simple: return the property to the rightful owner.

    The importance of distinguishing between Mises’s and Rothbard’s economics derives from Rothbard’s (sometimes implicit) claims that he meant to clarify and extend Mises’s economics. Many students of Austrian economics believe that they can learn Mises’s economics by studying Rothbard. This paper shows that Rothbard’s claims are wrong and that students cannot learn about Mises’s economics by studying Rothbard’s theory of the unhampered market economy. It is true that both authors promoted private property rights and free enterprise. In light of these differences, the claim that a student can learn about one of these Austrian economists by studying the other is misguided.



Mises on Scope and Method in Light of His Purposes


   This essay is a sequel to my earlier essay on consumer sovereignty. The earlier essay defended the proposition that consumer sovereignty is the foundation of Ludwig von Mises’s single-purpose, value-free economics. This essay aims to interpret chapter 14 of Mises’s treatise Human Action (1966) on the basis of the assumption that this proposition is true. Chapter 14 was his chapter on “The Scope and Method of Catallactics.”

   My interpretation identifies three major, albeit unstated purposes of the chapter. The first is to describe what he regarded as the incontestable procedure of economics – to elucidate market interaction under the conditions of the pure market economy and then to examine the effects of intervention. The second is to set the stage for the elucidation of market economy interaction by defining what he regarded as the most important concept, insofar as this is possible. The concept is the entrepreneur. The third is to show the necessity yet danger of using imaginary constructions in economics. The essay tries to substantiate these purposes by meticulously examining the passages of the chapter in relation to the rest of the treatise.

   A consequence is that I identify several messages from Mises that are important to Austrian economists today. I believe that the most important are: (1) that there is a heretofore undiscovered continuity between his praxeology and economics, (2) that he maintains this continuity by his use of the correlative concepts of consumer sovereignty and the pure entrepreneur, and (3) that an understanding of these concepts is necessary if one wishes to understand his economics and, correspondingly, his elucidation of the market process.



Mises’s Theory of Economic Growth


   Recent interest among neoAustrian economists in economic growth prompts one to seek answers to the question of what the “masters” of Austrian economics regarded as the cause of economic growth. The purpose of this paper is to describe Mises’s theory and to defend it with text quotations. The theory begins with a definition of the standard of living that is based on historical consensus. Every reasonable historian knows about the massive increase in standard of living that has occurred under capitalism. Mises’s praxeological approach leads him to search for reasons in the actions of individuals. The question, then, is: what are the key characteristics of capitalism that lead individuals to take actions that increase the standard of living? Mises’s answer is: the characteristics of a market economy: private property rights, free enterprise, and the absence of manipulation of money.

   A complementary question is: which actions, given these characteristics, cause economic growth? Mises’s most fundamental answer is: specialization (division of labor) and trade, which raise the productivity of labor. The higher labor productivity causes higher saving, which makes it possible to adopt more physically productive but also more time consuming methods of production and it promotes further technological advance.

   Saving may also occur independently of the higher productivity of labor due to three factors: favorable changes in the natural environment, technological advance that is independent of increased saving, and a reduction of “institutional barriers.” Mises does not discuss independent technological advance to any significant degree.

   The actions that cause economic growth are contingent on the maintenance of the conditions of the market economy. An excess of intervention is possible and this would reduce the standard of living below what it otherwise would have been. To prevent this, people must be continually educated by economists about the economics of interventionism.



Mises vs. Rothbard on Time Preference and Interest:The Future Prospect of neo-Austrian Growth Theory


This essay compares Ludwig von Mises’s theory of time preference and interest with a comparable theory of Rothbard, who claimed to be following Mises. It shows that Mises held a praxeological theory, based on the assumption that individuals value goods according to the criterion of sooner or later. Murray Rothbard, on the other hand, held a theory that time preference is positive – that people prefer goods in the present to goods of like kind and quantity in the future. Rothbard’s implicit claim that his theory is based on Mises is incorrect.

   Rothbard’s applied his positive time preference to economic growth and his application was copied and modified by Joseph Salerno. The Rothbard-Salerno theory of growth attributes most if not all economic growth to a low or falling time preference. It is argued that this is a sharp departure from Mises, who proposed a more open-ended theory in which entrepreneurship plays an essential role in innovation. Some suggestions are made about further development of a growth theory along Misesian lines in order to give neo-Austrian growth theory a brighter future.


The Dynastic Impulse: A Speculative Hypothesis On Taiwan’s Rapid Post-War Growth


   This paper advances the hypothesis that Taiwan’s successful post-war economic development stems mainly from a combination of (1) a cultural trait that was more common among the Chinese during the era of high growth than among other cultures at other times (2) the special conditions that existed on Taiwan when Chiang Kai Shek and his Nationalist Party took command in 1949, and (3) the policies subsequently followed by the Taiwan government. We use the term “dynastic impulse” to refer the cultural trait.” It is argued that government policies in post-War Taiwan functioned as catalysts for this impulse, leading the heads of household to work hard, save, and apply their entrepreneurial talents. An important result was a large increase in human capital, which was especially important in light of Taiwan’s relative lack of natural resources. The relevant policies were the creation and maintenance of a private property system and free enterprise, monetary stability, infrastructure building, privatization, international trade liberalization, taxes, and human capital promotion.



Knight’s Theories of Socialism and Capital


                    This paper examines Frank Knight’s views on socialism and on capital and interest in light of some recent claims by Peter Boettke and Karen Vaughn. It makes several points that raise serious questions about the correctness of those claims. First, it argues that on the issue of socialism, the views of Knight and the Austrians was quite similar. Second, by more carefully examining Knight’s final contribution to the capital and interest controversy, it shows that the constructs he used – in particular the stationary economy and the Crusonia plant were quite appropriate for the goal he aimed to achieve. The Austrians did not understand this goal and there is no indication that they examined Knight’s final statement. Although Boettke and Vaughn refer to it, it is obvious that they also did not examine it carefully. Finally, the paper finds no justification for the claim that Knight differed from the Austrians on the definition or scope of economics. Knight was not interested in problems related to time preference, the period of production, or the time structure of production. But aside from that lack of interest, the definition and scope appear pretty much the same. The claim that Knight’s economics was, in general, only concerned with competitive equilibrium is false.



The Procedure of Praxeological Economics and Its Relation to “Positive Economics”


   This essay combines two ideas: (1) a praxeological view of the definition of the subject matter of economics (praxeological economics) and (2) the goal of evaluating arguments for and against market intervention on the basis of logic and relevance. Pursuing this goal and using the praxeological view has three important properties. First, it accounts at the most fundamental level for the fact that human actors are distinct from other animals and robots. Second, it satisfies the traditional goal in political economy to evaluate arguments for or against intervention in a market economy. Third, it is value free. Moreover, this combination implies a general procedure for evaluating interventionist arguments. The essay describes this procedure in four steps. Afterwards it uses the knowledge that is gained from deriving the procedure to assess some of the propositions that economists associate with the idea of positive economics. Five propositions are assessed.



Interest: In Defense of Mises


   This paper evaluates Guido Hulsmann’s attack on Mises’s theory of time preference and market interest. It argues that his article is a mix of misinterpretation, questionable reasoning, and omission. It shows that Mises’s theory of time preference does provide a solid basis for explaining market interest, that (consistent with Mises) market interest contains both a time preference and an entrepreneurial component, and that Mises provided a procedure for disengaging these two components.



The Praxeological Foundations of the Employment Compact: Where the Firm Fits Into Austrian Economics


   Ludwig von Mises, the 20th century champion of Austrian economics, asserted that the goal of economics is to evaluate arguments for and against government intervention in the market economy. He helped develop an economics that was especially suited for that purpose. Specifically he developed a price-quantity economics to deal effectively with several important arguments in favor of intervention: the socialist-Marxist exploitation hypothesis ( the theory of imputation), the possibility of centrally planning an economy (the theory of monetary calculation), the claim that interest is not deserved (the theory of profit and interest), macroeconomic intervention (the Austrian theory of the trade cycle), and price controls. The approach has also been used to show how the use of money prices economizes on the acquisition, communication and use of knowledge. However, many 20th century arguments supporting intervention cannot be handled with a price-quantity economics. A transactions approach is needed. This paper outlines such an approach – one that is based on the recognition of other transaction variables and pre-transaction actions. It goes on to show how the theory of the firm, as first described by Ronald Coase and then elaborated by those who followed, fits neatly into this approach. By this means it shows where the Coasean firm fits into Austrian economics.



The Praxeological Concept of International Entrepreneurship


   This paper applies the concept of praxeological entrepreneurship to international economics. Praxeological entrepreneurship is the personification of the distinctly human features of the interaction of human beings under the conditions specified in the definition of the hypothetical pure market economy. The paper begins by attributing the technological progress and the growth of potential wealth to (a) distinctly human action and (b) the institutions associated with the market economy. It proceeds to describe the praxeological concept of the entrepreneur and to show how it is used in ordinary economics. Then it applies this procedure to the study of several issues in international economics. First it presents an addendum to the principle of comparative advantage. Next it describes a procedure for analyzing a nation’s trade barriers. Then it shows how to use the concept of praxeological entrepreneurship to compare a two-nation global pure market economy with a two-nation global market economy in which the two nations have different policies toward liability for pollution.



Ronald Coase’s Method of Constructing More Realistic Models of Choice (With Bingyuang Hsiung)


   The goal of this paper is to present and defend the thesis that Ronald Coase’s major contributions to economic theory are best understood by recognizing the distinct method he used to construct more realistic models of choice. We call his method thebenchmark-comparison method. It consists of constructing models of choice and then using the models as benchmarks in the further investigation of economic interaction. The further investigation entails either (1) comparing the benchmark models with observed interaction or (2) constructing additional models of choice which may themselves function as benchmarks.


   The paper first describes the method. Then it demonstrates how Coase used the method in his two most famous papers. It goes on to show how an understanding of the method helps to confirm Coase’s own hypothesis about the continuity in his thought. Finally the paper discusses the literature. It assesses Coase’s critique of Milton Friedman’s positivist methodology and it discusses a recent paper on Coase’s methodology.



Roy Cordato’s “Austrian” Critique of Coase on Social Cost


   In his book on Austrian welfare economics, Roy Cordato uses what he describes as Austrian welfare economics as the basis for a scathing criticism of the Coasean approach to making judgments in tort cases. His criticism claims that the Coasean approach is both unrealistic and normative. Moreover, it would introduce uncertainty, thereby reducing individuals’ freedom in pursuing their goals through the exchange process. To avoid all of these problems or at least to better deal with them, the economist who is interested in giving advice to judges ought to advocate a rule of strict liability regarding invasions of real (i.e., material) property. He claims that this rule is derived from Austrian economics.


   This paper, which takes a “different” Austrian perspective, makes several arguments against Cordato. First, it argues that his recommended rule would not achieve the goal that he sets for it. It would increase the freedom of some people while reducing the freedom of others in pursuing their goals. Second, it argues that his criticism of Coase is misplaced. Contrary to Cordato’s claim, Coase has not advocated day-to-day interventions in the market system based on cost-benefit calculations that assume general competitive equilibrium. On the contrary, like the Austrians, he has emphasized the difficult knowledge and calculation problems associated with this. Also, he has pointed out the preponderance of empirical evidence against such interventions. Moreover, Coase’s recommendations do not concern day-to-day interventions at all. Rather, he has been concerned with the institutional structure, most especially with the initial delimitation of rights. This concern, which implicitly takes account of uncertainty, immunizes Coase’s analysis from Cordato’s uncertainty critique.



The Property System in Austrian Economics: Ronald Coase’s Contribution


   This paper argues that contrary to Roy Cordato’s claim, Ronald Coase’s work on the “problem of social cost” is an important contribution to Austrian economics. Coase identified a criterion that can be used to establish initial legal rights to control actions that have external effects. In other words, he discovered a criterion that, in some cases, can be directly applied to help establish a property system when there is none. The criterion also helps a government adapt, or maintain, a property system in light of continuing changes that are characteristic of the entrepreneur economy. Cordato’s anti-state ethical economics, which he used to criticize Coase, is a deviation from the century-old tradition of Austrian economics. Menger, Mises and Hayek saw economics as a body of logical knowledge that is value free. In addition they recognized a role for government in defining legal rights and in maintaining the property system in light of changing conditions. Accordingly, it is wrong to invoke “Austrian economics,” properly understood, to criticize this aspect of Coase’s work. In this paper, I argue that Cordato has followed a deviant and troubling path by trying to construct an Austrian economics based on ethics, that he has failed to understand that a changeable property system is a prerequisite for the market economy, and that he has correspondingly failed to recognize Coase’s contribution to the problem of how to maintain the property system in light of continuing change.



Equilibrium in Ronald Coase’s Method


   The aim of this paper is to describe the critical role that the concept of equilibrium played in Ronald Coase’s two revolutionary papers on the firm and on social cost. He introduced his paper on the firm with a concept of equilibrium in which individuals were assumed to adjust instantaneously to changes via the price mechanism. He attributed this concept to A. Salter but Salter’s concept can be traced further to J. B. Clark, who provided a methodological foundation for understanding its role in economic analysis. Later in history, the equilibrium was employed in rational expectations theory. Coase’s paper expanded the Salter model to include adjustments to changes by means of firms. His paper on social cost expanded it further to include direct government regulations, rights to control actions that have external effects, and legislation.



Time Preference and Entrepreneurship: Ludwig von Mises on the Components of Market Interest


   This paper shows how Ludwig von Mises distinguished the components of the market rate of interest and why such a distinction is important. His image of the evenly rotating economy (ERE) played an indispensable role. On the one hand, it enabled him to isolate entrepreneurship by means of a contrast with the robots of the ERE. On the other hand, it enabled him to identify a semblance of praxeological time preference by constructing an image of the ERE interest rate, which he called “originary interest.”


   The ERE and originary interest were essential elements in his procedure of bridging the gap between praxeological time preference and the loan interest rates in the market economy. Ultimately, he was able to distinguish three components of market interest rates: the social time preference component (originary interest), the entrepreneurial component, and the price premium (or inflationary-deflationary) component.


   These components were integral parts of Mises’s revised presentation of the trade cycle theory in Human Action. In other words, without an understanding of the method Mises used to derive the components -- i.e., without an understanding of the role of the ERE in Mises’s method -- one is unprepared to comprehend the latest version of the Austrian trade cycle theory. The paper demonstrates this with citations from Human Action. It also discusses a recent critique of Mises’s effort by Peter Lewin.


Praxeological vs. Positive Time Preference: Ludwig von Mises’s Contribution to the Theory of Interest


   Mises’s concept of praxeological time preference has been confused by neo-Austrians with the idea of positive time preference. Praxeological time preference refers to the idea that individuals acting in the consumer role distinguish between actions on the basis of whether they expect the effects to be felt sooner or later. Positive time preference goes beyond this to claim that some set of goods, money, or utility would always be preferred in the present to the same set in the future. Neo-Austrian economists have written as though the assumption of positive time preference is needed to explain a “positive rate of interest” in the market economy. This paper has three aims. The first is to show that Mises did not subscribe to the positive time preference view. The second is to discuss the claims to the contrary in order to show how this mistaken interpretation of Mises has evolved. The third is to present the basic assumptions that are necessary to deduce a positive rate of interest under the conditions of the pure market economy.



Austrian Welfare Economics?: A Misesian Response


   Several neo-Austrian economists have proposed various standards for a special welfare economics to rival the welfare economics of the economics profession. This paper shows that two of these (Tyler Cowen and Israel Kirzner) contain implicit and vague definitions of social welfare that violate methodological individualistic principles. In addition, it argues that neo-Austrians misconceive the new welfare economics largely because they misconceive the role of equilibrium. Next, it shows that these neo-Austrian efforts are fundamentally different from the recommendations of Ludwig von Mises. Mises advised that economists should evaluate the logic of the arguments presented by others and should determine whether the arguments are relevant to the goal that the others want to achieve. They should evaluate arguments, not policies. Finally, it shows that Murray Rothbard’s reconstruction of welfare economics is not based on Mises or subjectivism and that to follow it would render the fundamental task of economics, as Mises conceived it, impossible to carry out.



How to Be a Value Free Advocate of Laissez Faire: Ludwig von Mises’s Solution


   Ludwig von Mises is often regarded as a “champion” of laissez faire. This characterization seems to contradict Mises’s clear statements that economics is value-free. The aim of this paper is to resolve this apparent contradiction. We accomplish this by distinguishing, as Mises did, between the advocacy of specific laissez faire policies and the advocacy of a laissez faire ideology vis Á vis the alternative ideologies of socialism and interventionism. Mises argued that the logic of a value-free economics could be used to show that socialist and interventionist policies would not achieve a goal that the socialists and interventionists implicitly or explicitly aim to achieve, that of progress in terms of material wealth for the members of the society. Thus, Mises resolved the contradiction by shifting the debate from the welfare analysis of particular policies to a logical analysis of the ends of a particular ideology and the means available to achieve those ends.


   In a seminal paper in neo-Austrian economics, Murray Rothbard criticized Mises. This paper analyzes Rothbard’s argument partly as a means of elucidating Mises’s views. It argues that Rothbard misinterpreted Mises and quoted him out of context. Rothbard failed to adequately support his claim that Mises held the beliefs that Rothbard attributed to him. Moreover, Rothbard’s paper undermined the value-freedom that Mises regarded as a crucial characteristic of economics.



Non-Material Austrian Capital Theory and Loan Markets


   This paper explores the non-material definitions of capital that were used by Carl Menger and especially Ludwig von Mises. Menger introduced the idea that capital is a businessperson’s net worth devoted to earning income. Mises appears to have copied this definition, with added emphasis on the role of the entrepreneur. Mises also integrated this definition with a theory of loan interest. In the latter, he stressed time preference and the time structure of interest rates; entrepreneurship and economic calculation; how injections of money affect decision making; and the problem of aggregating the separate, private net worth of different individuals. It is argued that this notion of capital is superior to that of the material definitions used by other Austrian writers. It is superior because (1) it directs one’s attention to higher order goods and time, (2) it avoids all possibility of confusing Austrian capital theory with the classical notion that interest is the price of capital goods, (3) it neutralizes any concept of “social capital,” and (4) it places the focus on entrepreneurship, the entrepreneur point of view, and the entrepreneur process.



Entrepreneur’s Net Worth: Mises’s Praxeological Concept of Capital


   In Human Action, Ludwig von Mises employed two radically different notions of capital. The first was equivalent to what accountants call net worth. In calculating her profit and loss, the individual conceives of her income in terms of a change in net worth. If we shift the focus to the income stream, net worth (capital) can be said to refer to the capitalized value of that stream. Thus, the concept of capital as net worth implies capital accounting. This notion was truly subjectivist and fully consistent with the subjective theory of value and cost that was initiated by the early Austrian economists. The second notion was produced material factors of production.


   Mises recognized that the basis for distinguishing produced material factors from other non-produced and non-material factors was not consistent with the Austrian theory of value and cost. With some caution, he nevertheless employed the second notion, especially in his discussion of the relationship between economic action and time. One possible explanation for this was his desire to deal with the capital controversies of the period.


   This paper carefully analyzes the passages in Human Action in which the capital goods notion is used. It concludes Mises unwisely restricted what could have been a broader discussion that would account for all factors of production (i.e., roughly higher-order goods, in Carl Menger’s terminology). The significance of this lies in the fact that modern neo-Austrian economists have apparently neglected Mises’s first notion and accepted his second notion of capital goods. Or they have ignored Mises altogether and employed the capital goods notion in their work. By doing so, they risk neglecting the subjective theory of value and cost in their discussions of the relationship between time and economic action. The paper also shows that some of Mises’s capital goods’ discussions are trivial and out of place.



The Theory of Entrepreneurship in Austrian Economics


   This paper describes the writings of Austrian economists on entrepreneurship from the standpoint of the new subjectivism. The main focus is on Ludwig von Mises, who was the first economist to identify the distinct method used by economists to understand the distinct phenomenon of economic interaction under the conditions of the market economy. Mises showed that knowledge of the market economy is a special kind of knowledge that is different from logic, mathematics, and the sciences. He maintained that the knowledge acquired through economic reasoning is a branch of a broader category of knowledge -- praxeology. Mises regarded entrepreneurship as crucial to the understanding of economic interaction. The author has shown in previous work that Mises’s idea of the “functional entrepreneur” can be extended so that it embodies all action that is distinctly human and which occurs under the conditions of the market economy.

   The paper begins by outlining Mises’s position and the extension of that position carried out by the author in earlier works. It then discusses two other Austrians who have written about entrepreneurship: J. A. Schumpeter and Israel Kirzner. It argues that while Schumpeter was the first Austrian to explicitly be concerned with the subject, he contributed little. Kirzner, it is claimed, took a step backward. About a third of the paper is concerned specifically with Kirzner’s ideas, since they are today widely regarded as representing Austrian economics.




H. J. Davenport’s Loan Fund Theory of Capital


   American Herbert Davenport’s (1861-1931) theory about how market interest rates are determined in an environment of free banking has three characteristics: (1) the praxeological idea of the entrepreneur point of view, (2) the reservation demand approach to the supply of loanable funds, and (3) the assumption that the bulk of money under a free market banking regime would consist of monetized debt.


   Every actor begins his participation in the market economy with preferences, including time preference, knowledge of past prices, beliefs about the marketability of his current wealth, and beliefs about how he can gain by saving his wealth in different ways. We combine these characteristics by conceiving of a collection of reservation demands for funds, which we call private capital. Private capital is the source of funds that are ultimately used in business. Before they reach that stage, money must be lent, rights must be sold for loanable funds, and non-monetary wealth, and especially debt, must be monetized through banks. By providing guarantee and endorsement, individuals enable banks to monetize the debt and, by this process, to add to the loanable funds that are made directly available by savers. The resulting supply of loanable funds is partly borrowed by consumers and partly available for business. The loan fund is the amount that business borrows. Market interest rates are determined in the loanable funds market as a whole. Free market banks perform the combined functions of guaranteeing promises and creating credit money. The latter function can lead to a trade cycle by changing individuals’ time preference.

   Davenport was tagged with an undeserved reputation by Frank Fetter, in an apparently self-serving review of Davenport’s major work. Fetter was a well known capital and interest rate theorist of the era. The paper provides an extended refutation of the Fetter criticism. It also criticizes references to Davenport in the neo-Austrian literature.



Herbert J. Davenport and the American Transformation of the Austrian Theory of Value and Cost


   American Herbert Davenport (1861-1931) transformed the subjectivist theory of Carl Menger. The subjectivist theory sought to trace the cost of supply, or the separate prices of the factors of production, back to the preferences of the individuals acting in the role of final consumers of goods. Davenport transformed the theory by arguing that the tracing procedure must always pass through the minds of individuals acting in the role of the entrepreneur who takes account not only of preferences but also the means of satisfying those preferences. Davenport criticized the early Austrians for their marginalism and anticipated the later thought of Friedrich Hayek and especially Ludwig von Mises. In spite of his important contribution to subjectivist thought, his work is similar and has not yet been incorporated into subjectivist economics.



Ludwig von Mises’s Transformation of the Austrian Theory of Value and Cost


   In this paper, I argue that Mises transformed the Austrian theory of value (price) and cost by emphasizing subjective value, as expressed in the appraisals of qualitative entrepreneurship, instead of quantitative marginal utility. One might say that in so doing, he persuaded later Austrian economists who followed his lead to define cost as it is perceived by entrepreneurship.


   In adopting this perspective, one is led to recognize that the concept of cost must account for different appraisals by every unique entrepreneur who can be conceived to bid for the items that ultimately become factors of production. Cost refers to the calculations of entrepreneurs. To find the relationship between cost of a particular factor of production and consumer utility, given the assumptions described in the introduction, one must (1) identify all of the individuals whose entrepreneurship has an influence on the prices of factors, (2) recognize that the complementarity of factors does not enable an entrepreneur to precisely calculate the marginal revenue product of factors, (3) deal with the self-owned factors of the entrepreneur, (4) recognize the uniqueness of the entrepreneurship possessed by different individuals, and (5) recognize that entrepreneurship is limited. In dealing with the determinants of supply in the Marshallian demand supply models, one must take account not only the disutility of labor as Böhm Bawerk did but also the sacrifices of leisure made by individuals in their capacity as entrepreneurial appraisers. One might summarize Mises’s transformation by saying that he developed an entrepreneur theory of price and a theory of entrepreneur cost.



The Logical Concept of Equilibrium


   The logical equilibrium is an image of robots behaving in a uniform way again and again yet in a timeless state. It is a descendant of John B. Clark’s static equilibrium and its antithesis is the Walrasian general equilibrium, which is taken to be a simulation of a real market economy. Properly understood, it is part of what Ludwig von Mises called the method of imaginary constructions, a procedure that entails constructing counterfactuals to comprehend action. It helps one isolate appraisement and uncertainty bearing as fundamental properties of the entrepreneur role, the mandatory of the consumer role. One aim of this paper is to demonstrate this characteristic of the evenly rotating economy. A second aim is to show that Mises’s own application of the evenly rotating economy as an endpoint, or “final state of rest,” was unimaginative and misleading. It criticizes Mises for using the evenly rotating economy in conjunction with the promoting entrepreneur to refer to an equilibrium toward which the market process is tending. It also discusses Mises’s idea that the evenly rotating economy is useful in the study of change and his use of equilibrium in market process analysis to contrast logical economists with mathematical economists.



The New Subjectivist Economic Theory and Public Finance


   From the viewpoint of the new subjectivism, public finance is the study of how various forms of government action effect entrepreneurship. After briefly describing the development of the new subjectivism, this paper analyzes four branches of public finance: the theory of revenue exaction, the theory of externalities, the theory of public goods, and the theory of collective decision-making.



The Idea of the Entrepreneur Role as Distinctly Human Action: A History of Progress


    This paper concerns the concept of the economic entrepreneur as the personification of the distinctly human, as opposed to robotic or exclusively behavioral, features of the interaction under the conditions specified in the definition of the hypothetical pure market economy. It presents a history of the gradual development of this concept. Beginning with the mid 18th century, it traces the concept through the early Austrian economists, Clark, Hawley, Davenport, Schumpeter and Knight. It culminates with Ludwig von Mises’s treatise on Human Action (1966).

Since Mises was the first to actually define entrepreneurship in this way and to provide hints about how to elucidate it, the paper includes a more detailed description of his contribution. Of particular significance is his “method of imaginary constructions,” in which a contrast is made between an imaginary robot economy and an economy comprised of human actors, the characteristics of whom the economist knows on the basis of intuition and experience.



Predatory Pricing as an Outcome of Competition


   This is a brief subjectivist analysis of a story about predatory pricing written by Professor Randall Holcombe. Predatory pricing means pricing aimed at driving a competitor out of business in order to be able to charge a higher price than otherwise.



What it Means to Be an Historian of Economic Ideas


   My view of this subject. It discusses the meaning of cause and effect, distinguishes between history and (natural) science, defines an idea about distinctly human interaction, and selects a meaning for economics. Based partly on an interpretation of Jean Piaget’s theory of human development.



Ludwig Von Mises on Economics and Value Judgments


   This paper describes Ludwig von Mises’s views on the relationship between economics and value judgments. It tells how Mises distinguished the goal of economics from the goals of other fields of study, the role of ideologies in his choice of goal and his means of achieving it, and how this choice enabled him to successfully promote value freedom in economics.

   


Israel Kirzner’s Entrepreneurship


   Israel Kirzner defines the entrepreneurial element in human decision making as the behavior of following a spontaneous, subconscious hunch. The result is a greater satisfaction of wants, as viewed from the standpoint of superior insight. The entrepreneurial element also corresponds to what Kirzner calls alertness to hitherto unrecognized opportunities.



   In a market economy this entrepreneurial element becomes manifest in arbitrage. Arbitrage is the subconscious discovery of price differentials as viewed from the standpoint of a general equilibrium. Entrepreneurial actions, or arbitrage, are said to lead to a general equilibrium. Thus, the study of entrepreneurship is the study of how subconscious arbitrage in a disequilibrium situation lead to equilibrium. This essay is basically a description of Kirzner’s image of entrepreneurship without comment. It is not an assessment


   Ludwig von Mises used the term “praxeology” to mean “theory of human action.” A theory of human action consists of the logical conclusions that can be drawn on the basis of assumptions that “everybody knows to be true from their own actions.” In describing this branch, Mises assumed that everyone understands a priori the use of means to achieve ends. “Action” refers to precisely to the thinking and choosing that people associate with this use of means to achieve ends.



Praxeology, Economics and Ethical Philosophy


   In his book Human Action (1949), Mises argued that praxeology is value free since it is a set of logical deductions from universal ideas. He also argued that economics, correctly understood, is a branch of praxeology. Therefore, it is also value free. In other words, it contains no ethical premises or implications aside from those that one might base on the knowledge obtained by working through the logic.


   This paper describes Mises’s argument and extends it. It constructs a diagrammatic scheme for classifying a number of branches of praxeology. It shows the relationship betweentheory (logical deductions from assumptions) and history (the interpretation of historical events by referring to the means and ends of historical individuals). Finally, it identifies a new branch of praxeology called “the theory of interaction among consensual ethical philosopher.” The purpose of identifying this new branch is to evaluate an argument by Hans Herman Hoppe that praxeology can be the basis for an ethical philosophy. The paper also criticizes Hoppe’s claim that the seeds of this argument are contained in Mises’s work.



Hayek, Free Banking, and the Commodity Money Syndrome: Toward A Praxeological Theory of Credit and Money


   F. A. Hayek predicted that free banking would result in the emergence of a medium of exchange based on the right of a holder to exchange a unit of the medium for a fixed set of commodities. In this, he conforms to the norm among writers in Austrian macroeconomics of linking money tightly to commodities. A different approach was followed by some relatively obscure American writers, who claimed that macroeconomic thinking ought to be based on a theory of credit and fiduciary money. These writers developed a theory of the emergence of money that stood in opposition to Carl Menger’s theory based on goods with different degrees of marketability. This paper reviews the Austrian theory and the credit theory of free banking. It defends the argument that a realistic Austrian theory of free banking under modern conditions should be based on a theory of credit. In such a theory, entrepreneurship would have free reign to invent contractual arrangements to support a credit money that yields a return to holders and users in one form or another. In addition, there would be innovation in the property system to reflect the demand for changes in contract law that are more amenable to entrepreneur-initiated developments in the credit system.



Short and Long Period-of-Provision Goods During an Austrian Trade Cycle


   This essay presents a model of the effects of an increase in the quantity of money introduced through loan markets under rigid assumptions. It traces those effects through loan markets and resource markets. Its main contribution is its focus on two different consumer goods industries: a durable good industry with a long period of production and a perishable good industry with a short period of production. It is especially concerned with the theory’s deduction that there will be a shortage of the latter good during the contractionary phase of the cycle.



Overinvestment and Malinvestment


   This essay distinguishes between the concept of overinvestment and the distinctly Austrian concept of malinvestment. It first describes these phenomena in a strict gold standard environment. Then it describes them in a credit money environment.






Published Books:


Understanding Democracy: An Introduction to Public Choice. Taipei, Taiwan: Nomad Press, 2003. 

Contents, Sample Chapters, Comments by Readers, How to Order

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The Failure of the New Subjectivist Revolution: A Critical Essay on the Economic Theory of Ludwig von Mises’s Economics, Fort Myers, Fl. and Taipei, Taiwan: Nomad Press, 1994.


Abstract and Contents

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The New Subjectivist Revolution: An Elucidation and Extension of Ludwig von Mises’s Contribution to Economic Theory, Totowa, New Jersey: Rowman & Littlefield, 1990. Now at Fort Myers, Fl. and Taipei, Taiwan: Nomad Press, 1990.


Abstract and Contents

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Selected Quotations and Interpretations of Neglected Subjectivists


Davenport, Herbert J., Value and Distribution, Chicago: University of Chicago Press, 1908.


Davenport, Herbert J., Economics of Enterprise, New York: Macmillan, 1914.


Herbert Davenport’s Work


Taylor, W. G. Langworthy The Credit System, New York: Macmillan, 1913.




What’s New?***** 


Mises’s economic science; Mises vs. Rothbard; Rothbard and the Mises Institute; the Anarcho-capitalism movement; Comments on Obamacare; Karl Popper and positivism.







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Professor of Economics, Melbourne, Fl.


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