[Introduction to Economic Controversies (2011)]
It was nearly 40 years ago that Murray Rothbard changed my life. I was then a PhD candidate in economics at the New School for Social Research in downtown Manhattan, while also teaching principles courses at a local university. And I was rapidly losing interest in the whole subject.
Bored by the prattling of the left-wing crowd who dominated the New School, I could find nothing very satisfying in mainstream economics either. The New School's left-wingers certainly cared about achieving a free society. But their radical agenda mainly consisted of the "instrumentalist" ideas of the econ department's emeritus professor Adolph Lowe, which boiled down to coercing people into following the dictates of elitists like him.
My only real objection to conventional economics was that it also bored me. If a theory like "perfect competition" was remote from reality, it seemed like a judgment on the imperfections of capitalism. After all, to the degree that capitalism was not perfectly competitive, it fell prey to the evils of "imperfect competition," which might require intervention from antitrust. As a typically zonked-out product of conventional schooling, I vaguely believed that to the degree that any textbook theory failed to explain reality, so much the worse for reality. (Not long ago I spoke with an econ grad student who, when pressed, believed this quite explicitly.)
Always a compulsive book browser, I had more than once leafed through a two-volume work titled Man, Economy, and State in the New School library, whose author, Murray Rothbard, I had barely heard of. After the third or fourth look, I finally began reading the book — and experienced one eureka moment after another. Two especially memorable moments reflected the leftist tradition in which I was then mired.
First, I learned that, if leftists thought "capital" deserved no share of the economic bounty, they were in a sense more right than they knew. Rothbard explained that, in a free market, there were no financial returns to owners of capital goods as such. Since capital goods consisted of such items as factories, machinery, offices, and desks, these goods were entirely the product of labor and land (or resources). So the monetary value of newly created capital goods is entirely attributable to the purchase of land and labor, with nothing remaining for capital-goods owners.
How, then, did capital-goods owners make any money at all? The money they received came in two forms: interest payments for advancing resources in the present and profits for their entrepreneurial foresight — unless, of course, they were unsuccessful entrepreneurs and suffered losses.
Second was Rothbard's devastating refutation of the theory of imperfect or "monopolistic" competition — dear to leftists' hearts, since it highlighted the irrationality of capitalism. A cornerstone of this theory is that a monopolistic competitor like "Marioni Brothers' Barbershop" (monopolistic because there is only one set of Marioni Brothers; competitive, since there are many barbershops), always operate with excess capacity.
Economist Paul Samuelson had in fact targeted barber shops in his best-selling Principles text, observing, "The barbershop has excess capacity, with empty chairs much of the time," as he inveighed against the "wasteful social losses" resulting.1
Even before I read Rothbard, it occurred to me that, in this case at least, Professor Samuelson may have been missing something. Given his flexible work schedule, he may have had a habit of going for his haircut on a weekday, which would explain why he kept noticing empty chairs. Had he gone instead on Saturdays, he might have noticed that all the barber chairs were full, and that business was actually backed up. It then might have occurred to him that our hypothetical Marioni Brothers were not so dumb as to waste their money on excess capacity.
The problem they actually faced as businessmen was the classic tradeoff between peaks and troughs in demand. Had they not had empty chairs during the week, they wouldn't have been able to take advantage of the glut in demand on weekends.
Such were my tentative doubts. What Rothbard exposed was the preposterousness of the whole formulation. For why assume that all such monopolistic competitors necessarily invest in excess capacity? "To plan a plant for producing x units," he quotes economist Roy Harrod observing, "while knowing that it will only be possible to maintain an output of x−y units, is surely to suffer from schizophrenia."2 It made no more sense to believe that all such businessmen would waste funds on excess as it was to believe that they would all consistently underinvest and plan on inadequate capacity.
Then came what for me — robotically drawing all those cost and demand curves with the aid of differential calculus — was the coup de grâce. Rothbard demonstrated that the whole naïve error hinged on the technicalities of geometry. The theory was simply a prisoner of the way the demand curve was made tangent to the cost curve! He then adroitly showed two different ways of drawing the graph, without violating any of the assumptions. The miraculous result: The monopolistic competitor was now operating at the low point of his average cost curve, or at full capacity.3
I found such moments profoundly empowering, making me realize that, whenever I thought about economics outside formal straitjackets, I naturally fell back on modes of reasoning used by Rothbard and his mentor, Ludwig von Mises. That's why the very term "Austrian economics" is a kind of redundancy. Whenever people think sensibly about economics, they think like Austrians — one key reason why even the mainstream can have a few things to teach us, especially when they're writing mere journalism.
After finishing Man, Economy, and State, I discovered the Laissez-Faire bookshop, then a well-stocked store on Mercer Street, which regrettably shut down years ago. Browsing at that bookshop virtually every Saturday, I gradually bought up all the Rothbard I could find, plus all the Mises, F.A. Hayek, and Israel Kirzner.
"The very term 'Austrian economics' is a kind of redundancy. Whenever people think sensibly about economics, they think like Austrians."I formed a reading group in Austrian economics, attended late-afternoon seminars chaired by Kirzner at New York University — and even barged into one of Rothbard's classes at Brooklyn Polytechnic Institute, where he taught for many years.
I say "barged in" because somehow I forgot to ask him if I could sit in and audit. That might explain why he gave me a perplexed look when I raised my hand to ask a question, a reaction that discouraged me from chatting with him afterward. (The session must have been somewhere in the middle of the semester, since it was devoted entirely to the mundane task of reviewing the material to prepare students for the mid-term exam.)
When I became a senior economist at the New York Stock Exchange, the director I reported to once told me, "Gene, you're the only guy I ever met who reads economics for fun." I was honestly surprised, and might have remarked that if everyone read Rothbard and the Austrians, they might have just as much fun.
My only real, albeit brief, conversation with Rothbard occurred over the phone in October 1993, by which point he was teaching at the University of Nevada in Las Vegas, and I had just begun as a journalist at Barron's. University of Chicago economist Gary Becker had just won the economics Nobel, partly in recognition of his insight that a family was like a firm. (But how much more intriguing to theorize that a firm is like a family!)
Asking Rothbard what he thought of Becker's win, I expected him to tell me that he thought applying economics to noneconomic issues was foolish. Instead he began by saying that it was gratifying to see a free-market-oriented economist like Becker gain such recognition.
Then I asked, "But what do you think of the theory that a family is like a firm?"
Rothbard answered, "I think it's nuts!" And I was thus treated, firsthand, to that nasal voice going squeaky.
I had already become familiar with that nasal voice in the scores of audiotapes I'd heard of Rothbard's lectures, along with the salty insights tossed off with dazzling ease, punctuated by the signature giggle. To me, the joy in that giggle bespeaks an indefatigable spirit.
In Rothard's lectures on economic history, I caught him in a rare moment of hypocrisy. While he blasted the use of price indexes in his writings, he never hesitated to use a price index to prove a point about historical trends. He was of course quite right to criticize the pseudoscience of price indexes. But he might have acknowledged more explicitly that they sometimes come in handy as a rough approximation of price trends.
To get a sense of the fun it must have been to be Murray Rothbard or to merely know him, try listening to one of his best lectures, "The Meaning of Ludwig von Mises."
We all know there could be no Murray Rothbard the great writer and thinker without his great teacher, Ludwig von Mises. Those who read and love Rothbard would be cheating themselves if they did not also read Mises's many books. In my case, reading Mises's magnum opus, Human Action, for the first time, I found his discussion of wages finally cemented my understanding of why wages inevitably rise in a free market with rising productivity — an insight that helped seal my conversion to libertarianism.
It's remarkable that Mises's books read as well as they do, both in translation and in the English he began to write in at age 60. Rothbard had the advantage of being an extraordinary writer in the language he grew up in, as well as a devoted student of Mises. It was therefore left to him to render Mises's great theories in clear, accessible prose, while often bringing those theories to a new level.
So I think of Rothbard as having been Plato to Mises's Socrates — an analogy I might push further if Rothbard were not so critical of Plato. Try his discussion of Aristotle's refutation of Plato's communism in Economic Thought Before Adam Smith, the first of his two books on the history of economic thought. Among all of Rothbard's writings — the second volume is called Classical Economics — these two books are the ones I prefer to dip into again when I'm looking for something diverting to reread.
The whole informed guided tour of the way people thought about economics is vastly entertaining. My favorite part is probably the devastating dissection of the supposed "father" of economics, Adam Smith. It's tragic that Rothbard didn't live to complete the third and final volume, which would have dealt with economic thought in the modern era.
Which brings us to Economic Controversies. It contains all of Rothbard's best essays. If there is any single book worthy of being called a companion volume to Man, Economy, and State, this is it.
You should start, as the book does, with the magisterial essay "The Mantle of Science," in which Rothbard lays the groundwork on how to think about economics. After finishing this essay, you might reflect that all the writer has really done is make explicit a mode of thinking that comes naturally to us all. And just as I felt after I finished Man, Economy, and State, you might find it similarly empowering.
Mainstream economics suffers from two main handicaps:
the desire to sound like a branch of physics, which feeds the elitist fantasies of those who aspire to be professional economists, and
the desire to sit at the tables of power à la John Maynard Keynes and Alan Greenspan, which spawns such top-down monstrosities as "macroeconomics."
Given these handicaps, it's remarkable, as mentioned, that mainstream economists can still be insightful at times, especially in their journalism. I submit it's because even they are still capable of using the mode of thinking Rothbard sets forth in "The Mantle of Science."
You might then jump, for comic relief, to "The Hermeneutical Invasion of Philosophy and Economics." In that essay, Rothbard makes fun of the heavy thinkers who keep telling us, in effect, that words have no meaning. Of course, if they are right that words have no meaning, we can only respond that this key message of theirs is incomprehensible.
For me the greatest eureka moment of all is when I first read Rothbard's essay "The Austrian Theory of Money."
That was when I fully grasped Mises's most beautiful insight, called the "regression theorem," in which Mises was able to show that all money must have originated in some commodity (gold, seashells), that if you regress backward in time, you'll find this had to have been the case. What people think of as government-created money (dollars, euros) is nothing of the kind, but came from those same commodities. For me, the beauty of the regression theorem lies in its power to infer historical fact from simple logic about human action.
I did not read Rothbard's 1972 essay "Heilbroner's Economic Means and Social Ends" until years after it was first published. It's a devastating critique of a book edited by New School economics professor Robert Heilbroner about the ideas of the abovementioned Adolph Lowe.
Here, too, Plato comes up. "Professor Lowe's political economics," observes Rothbard, "is of a piece with an unfortunate penchant of intellectuals since the days of Plato: to impose their own arbitrary and static 'order' upon the rest of society, to freeze and annul change by their coercive fiat." Had I read this essay when it first came out, it probably would have gotten me to read more of Rothbard, even if I hadn't been lucky enough to find his economic treatise in the stacks.
There are many "first books" on libertarianism in general and Austrian economics in particular. Which one is most suitable depends on the individual. For me, the way in was Man, Economy, and State, which had a great deal to do with me and my circumstances at the time. If my counterpart today finds that book and this one in the stacks, I would say that Economic Controversies is probably the better way in. Man, Economy, and State can come a bit later.
This article is excerpted from the introduction to Economic Controversies (2011).
- 1Paul A. Samuelson, Economics, 9th ed. (New York: McGraw-Hill, 1973), p. 518.
- 2Murray Rothbard, Man, Economy, and State (Los Angeles: Nash, 1970), p. 642; combined with Power and Market to become the scholar's edition (Auburn, Ala.: Ludwig von Mises Institute, 2009), p. 732.
- 3Rothbard, Man, Economy, and State, pp. 642–45; scholar's edition, pp. 732–36.
