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Source link: http://archive.mises.org/7663/last-knight-live-blog-22-kraus/

Last Knight Live Blog 22 Kraus

January 17, 2008 by

One reviewer of the second edition of Socialism commented: “In some circles Mises is called the last representative of a liberal economic order. He is certainly not the last, but after many years the first who has dared to think through all the consequences of such an order [liberal economic order], and to erect and demonstrate a doctrine with unshakable logic.”

In chapter 15, Crisis, we learn about Mises at his best: fighting for economic freedom and succeeding in a number of ways. But the extraordinary complexity of the multifaceted fight, primarily intellectual, he faced was at times too much even for him. Nevertheless, one cannot help but marvel at the immense energy, courage, and intellectual curiosity that characterized all his efforts.As a result of a worldwide economic crisis coupled with extensive interventionist measures particularly in the spheres of labor relations and money and banking, problems in Austria’s economy intensified and became visible in stagnating profitability of Austrian firms. Despite overwhelming opposition from all sites, Mises did not hesitate a minute to identify the evil forces that caused the high and rising unemployment – labor unions and the welfare state ideology that stands behind them.

Attending various international conferences, Mises was attempting again and again to drive home his main argument that the Great Depression was caused by inflation and aggravated by interventions into business; particularly the persistency of large-scale unemployment was chiefly due to policies of labor unions that prevented the necessary fall of money wages.

The chapter is also jam-packed with significant discussions of a number of very important theoretical points. Austrian economists are very much advised to study it very closely.

While I agree with almost everything Prof. Hülsmann writes here, I must disagree with what to me appears a quite unwarranted conclusion that Hayek deserted Mises to become a “verbal-Walrasian” and that this was one of the primary reasons Mises’s ideas failed to displace neoclassicism and become a dominant theoretical paradigm.

The truth is that no strict differences in substance existed between Misesian economics and Wieserian/Walrasian general-equilibrium economics; at least this is how Mises himself saw matters. In chapter 7 of Epistemological Problems of Economics, Mises writing in 1933, says the following:

Within modern subjectivist economics it has become customary to distinguish several schools. We usually speak of the Austrian and the Anglo-American Schools and the School of Lausanne. Morgenstern’s work … has said almost all that is necessary about the fact that these three schools of thought differ only in their mode of expressing the same fundamental idea and that they are divided more by their terminology and by peculiarities of presentation than by the substance of their teachings. (p. 228)

I want to emphasize that I totally agree with the observation that “the logical structure of Mises’s arguments against socialism and interventionism was squarely outside the Walrasian paradigm”. Moreover, I would even venture to argue that the “logical structure of Mises’s arguments” has absolutely nothing to do with the Marginal Utility School in general. It stands squarely outside the main doctrines of that School and even contradicts them at several important junctures, as was clearly recognized by Hayek and others (see my previous blog entry).

The deeper-seated reason for the triumph of Keynesian Revolution is thus to be found first and foremost in the logical inadequacy of the theories inspired by the Marginalist Revolution of 1870s, and confusions they created. Neither Hayek, nor Mises, nor anyone else working within the Marginal Utility School paradigm, could withstand Keynes’s attack simply because neither of them possessed effective intellectual weapons to ward it off. I think Prof. George Reisman hits the nail on its head when he writes:

The reason was that in the two generations preceding the appearance of Keynes, much of the foundations of sound economics had quietly been lost, without anyone even being aware of the loss. The loss took place starting in the 1870s, in the abandonment of British classical economics in favor of the newer neoclassical economics. [T]he cause of this development was the fact that classical economics, with its labor theory of value, appeared to lay the groundwork for Marxism. Instead of eliminating the particular, localized errors of classical economics which did provide support for Marxism and then integrating the new doctrine of marginal utility propounded by neoclassical economics with the essential substance of classical economics that remained, virtually the whole theoretical body of knowledge constituted by classical economics was abandoned. What then remained were largely just out-of-context, memorized conclusions that in the absence of the necessary theoretical foundations could no longer be supported. Thus, when Keynes came along, it was only necessary for him to overturn such out-of-context, intellectually severed conclusions, not serious, living convictions. (Cf. Capitalism, p. 865)

Incidentally, let me point out that Prof. Reisman offers a refutation of Keynesianism which is entirely unprecedented in that it integrates Mises’s calculation argument with major doctrines of the Classical British economists such as the wages fund doctrine and his own revolutionary ideas in the theories of profit/interest and saving and capital accumulation. If you want to understand what Keynesianism, in all its variations, is, what are its central doctrines and precisely why Keynes’s system is contradictory in its inner logic as well as totally incompatible with how a capitalist economic system works in reality, look no further than Chapter 18 of Prof. Reisman’s Capitalism: A Treatise on Economics.

In this blog entry as well as in previous entries, I repeatedly emphasized the centrality of Mises’s calculation argument and that it actually has been leading a life of an orphan within prevailing Austrian/neoclassical paradigm at the time because it is incompatible with almost all of it. Now, as it turns out, Mises’s calculation argument finds its natural home and fullest development and integration in the system of Prof. Reisman. More on this in a later post.

{ 3 comments }

fundamentalist January 17, 2008 at 8:41 pm

While I understand the weaknesses of neo-classical econ as Kraus points them out, I don’t think that they were the main reason for Keynes’s triumph. Hayek and others did a good job of pointing out the errors of Keynes. I think the Keynes’s success had little to do with logic, reason or theory, and everything to do with emotion. People had been growing more socialistic with time. They were virtually demanding socialism. Keynes gave it to them in the guise of saving capitalism, not to mention Keynes’s excellent salemanship and charm. As Hayek often pointed out, you can’t fight emotion with reason. It’s a serious mistake to believe that the Keynes-Hayek debates were emotionless discussion about theory. Keynes used every fallacy and dirty trick at his disposal to discredit Hayek. As Schumpeter pointed out, sometimes the best offense is nothing but a snear.

Wladimir Kraus January 18, 2008 at 6:05 am

The weaknesses, or rather confusions, in connection with central problems of economic theory plagued both sides. And those weaknesses are related to the common pedigree that fundamentally unites Hayek’s and Keynes’s ideas.

True enough, emotions, i.e. relative readiness to accept interventionist ideas rather uncritically, as well as Keynes’s personality did play a role but how to explain the long-standing success of the core of Keynes’s ideas? It’s an established fact that everything in modern macroeconomics is very much inspired by General Theory’s framework. Even Milton Friedman, referring to Keynes’s concepts and ideas, argued that “We all are Keynesians now”.

The persistence of the essence of Keynes’s ideas must be traced back to the failure to offer a fundamental critique of its theories.

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