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Rothbard's Last Triumph, Part 1

Mises Daily: Monday, September 21, 2009 by

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[An Austrian Perspective on the History of Economic Thought, Volume 1, Economic Thought Before Adam Smith • By Murray N. Rothbard • Edward Elgar, 1995 • xvi + 556 pages]

Economic Thought Before Adam Smith

Murray Rothbard tells us that his gigantic, two-volume work was first envisioned as a "standard Smith-to-the-present moderately sized book, a sort of contra-[Robert] Heilbroner" (p. xv). When we see what has emerged from that plan, a parallel at once springs to mind: Cervantes began Don Quixote as a short story, but he gradually expanded it into one of the great books of the world. Likewise, this "moderately sized book" has become one of the great intellectual enterprises of our age. Indeed, the following review discusses only the first volume.

For Rothbard, the history of economics has an unusually broad scope. To him it includes not only economic theory, but virtually all of intellectual history as well. As he often did in conversation, Murray Rothbard here advances definite and well-thought-out interpretations of major historical controversies.

For example, Rothbard calls Machiavelli a "preacher of evil" — not for him the fashionable portrayal of that Florentine as the founder of value-free political science (p. 189). With characteristic acuity, Rothbard asks,

Who in the history of the world, after all, and outside a Dr. Fu Manchu novel, has actually lauded evil per se and counselled evil and vice at every step of life's way? Preaching evil is to counsel precisely as Machiavelli has done: be good so long as goodness doesn't get in the way of something you want, in the case of the ruler that something being the maintenance and expansion of power. (p. 190)

And he concludes his discussion with a stinging rebuke to modern political scientists, who "eschew moral principle as being 'unscientific' and therefore outside their sphere of interest" (p. 192).

Rothbard firmly rejects the Weber thesis, according to which the "inner-worldly asceticism" that Calvinism encouraged played a key role in the rise of modern capitalism. Capitalism began long before Calvinism; and the stress upon "God and profit" that Weber found distinctively Protestant was present in the Catholic Middle Ages.

For the Weber thesis, Rothbard substitutes another contrast between Catholics and Protestants. The Calvinist stress on the calling led to emphasis on work and saving, and distrust of consumption; Catholic Europe, in the Aristotelian and scholastic tradition, found nothing wrong with consumption. This difference led to a crucial split in the growth of economics, between utility and cost-of-production theories of price.

To my mind, the single most brilliant page in Rothbard's two volumes is page 314, which strikes at two theories of vast but unmerited influence. First, with a few bold strokes, Rothbard demolishes oceans of misinterpretation about the quarrel between the ancients and moderns.

The pitting of 'tradition' vs. 'modernity' is largely an artificial antithesis. 'Moderns' like Locke or perhaps even Hobbes may have been individualists and 'right-thinkers', but they were also steeped in scholasticism and natural law. (p. 314)

Second, he explains that

neither are John Pocock and his followers convincing in trying to posit an artificial distinction and clash between the libertarian concerns of Locke or his later followers on the one hand, and devotion to 'classical virtue' on the other.… Why can't libertarians and opposers of government intervention also oppose government 'corruption' and extravagance? Indeed, the two generally go together. (p. 314)

I wish that everyone interested in European history would study this marvelous page.

Rothbard firmly opposes the Whig view of the history of economics, in which "later" is inevitably "better," and thus the study of the past is unnecessary. In his view, much of economics consists of wrong turnings; and the present volume ends with a tale of decline that will surprise many readers.

Yet paradoxically, Rothbard's own method is, in another way, Whiggish itself. He has his own firmly held positions on correct economic theory, based on his surpassing command of Austrian economics. He is accordingly anxious to see how various figures anticipate key Austrian themes or, on the contrary, pursue blind alleys.

The dominant theme in Rothbard's appraisal of economics is the nature of value. Economic actors, endeavoring to better their own position, guide themselves by their subjective appraisals of goods and services. The pursuit of an "objective" measure of value is futile: what influence could such a criterion have, unless it is reflected in the minds of economic agents?

Rothbard especially emphasizes, in this connection, the so-called paradox of value: How can it be that water costs little or nothing while gold is extraordinarily expensive? Life cannot exist without water, while gold is mere luxury.

The answer, fully developed by the Austrian School, depends on the fact that subjective appraisals of particular units of a good, not the supposed value of the whole stock of the good, determine price. Since water is abundant while gold is scarce, there is no anomaly at all in the greater price of the latter.

Our author never fails to praise those who reach or approach this insight. The scholastics fare especially well: Pierre de Jean Olivi, for example, realized that the

important factor in determining price is complacibilitas, or subjective utility, the subjective desirability of a product to the individual consumers.… Utility, in the determination of price, is relative to supply and not absolute. (p. 61)

A key corollary of the subjectivist position is that an exchange does not consist of an equality. Each party actually values more highly what he obtains than what he surrenders. Those who miss the point arouse our author to protest. Even Aristotle, whom Rothbard much admires as a philosopher, does not escape censure.

Aristotle's famous discussion of reciprocity in exchange in Book V of his Nicomachean Ethics is a prime example of descent into gibberish. Aristotle talks of a builder exchanging a house for the shoes produced by a shoemaker. He then writes: 'the number of shoes exchanged for a house must therefore correspond to the ratio of builder to shoemaker.…' Eh? How can there possibly be a ratio of 'builder' to 'shoemaker'? (p. 16)

Those who knew Murray Rothbard can almost hear him asking this.

The subjectivist insight by no means died with the close of the Middle Ages. On the contrary, the School of Salamanca upheld it in the 16th century; and Cantillon and Turgot extended it considerably in the 18th. But the path of economics was not one of continued progress. Theory suffered a major setback through the work of one of Rothbard's main villains, Adam Smith.

Far from being the founder of economics, Smith, in the eyes of Rothbard, was almost its gravedigger. Although Smith in his classroom lectures solved the paradox of value in standard subjectivist fashion, "in the Wealth of Nations, for some bizarre reason, all this drops out and falls away" (p. 449). Smith threw out subjective utility and instead sought to explain price through labor cost. Because of Smith's mistake, the "great tradition [of subjectivism] gets poured down the Orwellian memory hole" (p. 450).

Rothbard's discussion of utility constitutes only one strand in his powerfully argued case that Smith derailed economics from the analytical achievements of the scholastics and their French and Italian successors. And even in the discussion of utility, I have had to omit much. (The brilliant dissection of Daniel Bernoulli's mathematical approach to utility [pp. 380–81], e.g., should not be missed). But no review can do justice to the scores and scores of insights and scholarly discoveries in this volume.