Murray N. Rothbard The Making of an Austrian Economist

PART III

A Böhm-Bawerkian Treatise, 1953–1955

MURRAY ROTHBARD’S PROJECT DRASTICALLY CHANGED in mid-1953. Unable to rely on Mises’s sparse treatment of production theory, Rothbard adopted his old Marshallian approach, focusing on an individual firm that faced fixed prices and restricted investment decisions. But he soon recognized the pitfalls of Marshallian partial equilibrium and discarded it for Austrian general equilibrium, emphasizing the Böhm-Bawerkian capitalist-entrepreneur’s ability to invest in multiple firms across the structure of production and influence market prices. In doing so, Rothbard finished the Böhm-Bawerkian system by integrating the pure time preference theory of interest of Frank A. Fetter and Ludwig von Mises into the production structure analysis of Knut Wicksell and F. A. Hayek. This interrelatedness approach led Rothbard to differentiate between factor incomes, apply Mises’s theory of the impossibility of socialist economic calculation to a vertically integrated firm, and expose the flaws of neoclassical monopoly and competition theory. With these theoretical breakthroughs, by 1955 Rothbard moved beyond his initial goal of “bringing to the surface and clarifying” his mentor’s “edifice” to deducing the architectonic edifice of praxeological economic theory along the lines of Mises’s “great book” suggestion.

A Marshallian Production Theory

Early on, Rothbard recognized that his textbook “cannot simply be a paraphrase of Human Action” because “many essential points must be deduced originally or with the help of other works.” Mises frequently assumed his readers possessed advanced knowledge of economic theory, such as Böhm-Bawerk’s theory of price. In some cases, he left a theory undeveloped, such as the explanation of individuals’ and firms’ production decisions. Although Mises analyzed “big-scale production,” his term for economies of scale, Rothbard noted that he “only tangentially” dealt with a firm’s cost schedules and output decisions. This resulted in large part from Mises writing Human Action without regard to Edwin H. Chamberlin and Joan Robinson’s monopolistic competition revolution in the 1930s and instead relying on the older neoclassical distinction between the competitive price and monopoly price. In his review of Mises’s Nationalökonomie, Hayek made this point: “He seems to have been little affected by the general evolution of our subject during the period over which his work extends. . . . This seems to be particularly true with regard to the more recent developments of the theory of competition.” Mises’s brief analysis of production forced Rothbard to initially rely on an eclectic blend of Mises and the Marshallian economists he read at Columbia, mainly his former teacher George J. Stigler, for his textbook’s production theory chapter.

In his first progress report on the book, in October 1952, Rothbard wrote that a future chapter would need to include “a discussion of revenue and costs, [and] assets and liabilities of the firm.” By his April 1953 progress report, in his chapter 4, “Money and Prices,” Rothbard titled the prospective section 5 “Producers’ Activity: Competitive Price and Monopoly Price,” planning to write future sections that dealt “with the monopoly question, . . . with costs of the firm, . . . with producers’ decisions and demand for factors, and finally with the prices of the various factors and resulting incomes.” Shortly thereafter, Rothbard decided to develop this section into chapter 5, “Producers’ Activity.” In doing so, he reached a breakthrough in his emerging theoretical edifice.

In chapter 5, Rothbard argues that “producer activity is vital” because it determines “the size of the stock thrown on the market” and “the money prices of factors of production.” Clearly, Rothbard planned to construct his production theory on the foundations of his theory of market pricing deduced from chapters 2 to 4. However, Rothbard also decided to restrict his analysis of “‘investment opportunities’” to a given firm’s “line of production” instead of focusing on investment in the overall structure of production. This fateful decision confines chapter 5 to Marshall’s partial-equilibrium analysis of a single firm, which must decide how much of a given good to produce and sell at an exogenously given price, and the amount and combination of inputs it must purchase at exogenously given prices to produce the good.

In section 1, “The Demand for a Firm’s Product,” Rothbard focuses on a firm’s output decision, which involves the selling price of the firm’s product, the prices of the inputs it purchases, and its production function or “the relationship between physical input and product.” Rothbard supposes that the firm requires factors X and Y to make good A. He assumes their prices are “fixed on the market” when he describes various hypothetical quantities of X and Y that cost the same amount of money to produce different amounts of good A. With these possibilities, and with the additional assumption that regardless of the firm’s choice “the market supply curve [of good A] will not be affected sufficiently to lower the price”—that is, the firm faces a horizontal demand curve—the very small firm will choose the combination of X and Y “that maximizes the physical product from a given amount of money invested.” Although he never allows changes in input prices, Rothbard occasionally drops the restrictive price-taking assumption for output and investigates firms that face downward-sloping demand curves. Here, if the firm faces an elastic demand curve “at and above the point of maximum output” for a given amount of invested money, the firm will “sell at [the] point of maximum output.”

In section 2, “Competitive Price and Monopoly Price,” Rothbard describes the maximum-output price as “the competitive price” regardless of whether it corresponds with a horizontal or downward-sloping demand curve. With a downward-sloping demand curve, however, if “the demand curve . . . is inelastic at the point of maximum output,” then to maximize revenue the firm will “supply less for the market than [it] could have done with the purchased factors” and reduce production of the stock. In this case, “the resulting price is termed the monopoly price” because of the “restrictive cut back from maximum productivity.” Therefore, depending on the individual firm’s production decisions, the equilibration process will lead to either competitive prices or to monopoly prices.

In section 3, “The Product and Outlay Schedules of the Firm,” Rothbard elaborates on “the activity of the firm and its production function,” particularly the “ratios between the quantities of factors.” Assuming “given factor prices,” he deduces the “the rate of outlay substitution, i.e., the rate at which one factor must be subtracted to compensate for the addition of another factor” to achieve a constant expenditure on inputs. He shows that it “is equal to the ratio of the money-prices of the two factors.” He then investigates “the alternative combinations of factors which can produce” a given amount of output. Due to the “imperfect substitutability of factors,” if the firm increases its purchases of X, it will need to use less of Y to “produce the same [amount of] product.”

Rothbard then deduces the “marginal rate of product substitution,” defining it as “the ratio of the amount of the second factor that can be diminished as a result of an increase in the first factor.” He demonstrates that “the maximum product combination for any given outlay of money is also the minimum outlay combination for that particular physical product,” which proves that if the rate of product substitution is different from the ratio of fixed factor prices, the firm will “shift to other alternatives until the two rates are approximately equal.” Thus, “the firm will always tend to produce so that the rate of product substitution between the factors equals the ratio of their money prices.”

Rothbard explained why this equalization was important. It “will fully emerge as essential to an analysis of the prices of factors of production, and, specifically, the demand schedules of the producers for these factors.” Rothbard planned to derive such a demand curve later in chapter 5 by exogenously lowering the factor’s price and showing how this would induce the firm to increase its quantity demanded.

With the exception of the competitive-monopoly price distinction that Rothbard explicitly borrowed from Carl Menger, Friedrich von Wieser, Frank Fetter, and Mises, the aforementioned sections largely derive from Stigler’s Marshallian textbook and the newer Marshallian-Walrasian textbook by E. T. Weiler. Rothbard references their writings throughout chapter 5, which is surprising because he previously criticized Stigler and Weiler in private letters. This tension runs throughout the chapter when Rothbard subtly criticizes many parts of his own production theory. For example, after discussing a firm so small it cannot affect the output price, Rothbard realizes that “strictly . . . [the firm’s] minute change will tend to affect the price,” which completely exposes the unrealism of the fixed-price assumption. Rothbard also grudgingly uses the terms monopoly price and competitive price, noting that “the terminology is the result of an old neoclassical preoccupation with single ‘industries,’” and every firm which “obtains a monopoly price is not beyond competition.” Furthermore, he signals a preference for the older definition of monopoly as “a grant of special privilege by the State” instead of the “highly misleading” competitive-monopoly price classification. Lastly, he partially recognizes the deep flaw in his analysis of a firm’s decisions, noting that “some writers discuss the activity of the firm as if this were the most appropriate manner of analysis. . . . However, it is clear that the beginning point is the decision to invest a certain amount of money.”

This tension becomes even more apparent in the final section when Rothbard “return[s]” to the theory of investment decision briefly mentioned at the beginning of chapter 5. In section 4, “The Output and Investment Decision of the Producer,” Rothbard moves away from analyzing the isolated firm by investigating how much an individual producer will invest, computing hypothetical “expected revenues,” “expected net income,” and “expected rate of net income.” He recognizes that this decision—not the activity of the firm after it receives invested funds—is the “central one in the analysis of productive activity on the market. For the question is applicable to all producers.” By means of “parceling out quotal parts of ownership of a firm’s assets to different investors in various shares,” individuals will invest in multiple firms and hire “managers to supervise the actual production.” Each investor will try to maximize “the rate of net income from each unit of money that he invests, therefore . . . maximizing his total net income.” Rothbard reaches a highly significant conclusion: “to pursue this approach will lead us to a theory of the savings and investment of the investor, rather than of the output of the firm, and thence to the theory of the savings and investment of all the investors, indeed all the individuals, in the economy.”

Continuing to elaborate on this insight, Rothbard deduces that an investor’s decision is “inextricably connected with the problem of time preference,” a corollary of the action axiom that refers to how individuals place a premium on present consumption over future consumption. This connection exists because any individual must always weigh “how much he will save and invest [for future consumption] compared to the amount he will consume [in the present].” Incorporating time preference into his marginal utility analysis, Rothbard deduces that the investor must “choose between the [marginal] utility of an expected future net money income, and between the [marginal] disutility of present consumer goods forgone.” He will invest in a given firm until the marginal rate of return is less than the marginal return from investing in alternative firms and will invest in general until the marginal rate of return is less than his “marginal rate of time preference.”

This “law of investment decision” demonstrates that “there is no precise theory of the determination of the investment in, and output of, the firm . . . because [a] firm cannot be considered in isolation from the other firms in the economy.” The amount that an individual invests in any firm depends on the alternative returns he could earn from investing in other firms as well as his time preference. In contrast, the Marshallian theory argues that the manager maximizes a firm’s net income by investing money raised on capital markets until its marginal income, or marginal revenue, is equal to its marginal cost, which includes the explicit interest cost of the invested funds. But the law of investment decision demonstrates that contrary to this mr = mc principle, an investor may maximize his net income by spending less in a given firm if he can make more money by investing in other businesses. In other words, the correct vantage point for marginal analysis and production theory is the investor, not the firm. Rothbard’s realization that most of the Marshallian theory was seriously flawed caused a seismic shift in his textbook project.

From Textbook to Treatise

In mid-1953, Rothbard began to realize that he needed to revise his production theory because its partial equilibrium framework narrowly focused on the isolated firm and ignored the important questions of investment and factor-price formation. He articulated his concerns in August when he criticized Fritz Machlup and Edith Penrose’s proposal to the Volker Fund on the “‘theory of growth of the firm.’” Rothbard approved their desire to remove the restrictive assumption that “‘the firm produced only one product.’” However, this did not go far enough because the important question is how much an investor should allocate among various firms. “If we wish to eliminate all restrictions,” contrary to Machlup and Penrose, “we wind up not with a ‘theory of the firm’ at all, but with a theory of the individual investor. . . . As a matter of fact, in the course of writing my textbook this summer, I have integrated the theory of the firm and the theory of the individual investor in a way which, as far as I know, has never been done—although the essence and foundation is in Mises.”

At the end of the year, Rothbard intensified his Misesian criticism of the Marshallian theory of the firm in a review of a Volker Fund proposal to sponsor an economics seminar in the following summer built around Stigler’s Theory of Price. Rothbard emphasized the differences between the Chicago School and the Austrian School, in response to Stigler’s “almost outrageous ridiculing of Böhm-Bawerk” in his dissertation, Production and Distribution Theories. Rothbard appeared to totally repudiate his chapter 5, now caustically criticizing Stigler’s price-taking and perfect knowledge assumptions as “unrealistic and simple-minded” and his “Theory of the Firm [as] . . . an abstract, erroneous analysis.” Stigler’s approach neglects “interrelations and diverts attention from the picture of the structure of the economy itself.” In contrast, “the great merit of ‘Austrian’ economics is that [it] analyzes the broad interrelations between individuals that form the economic system.” Rothbard concludes that teaching from Stigler’s Theory of Price—which he had received at Columbia directly from Stigler—“would not be the type of course conducive either to a sound knowledge of economics or to an understanding of the capitalist system.”

By early 1954, Rothbard decided to completely rewrite his production theory. This decision is noteworthy: while he had previously revised and rewritten parts of chapters, Rothbard never started over. He was now encountering the struggles that beset economists who try to develop new theories. Importantly, the development of a wholly new production theory required reorienting the project’s main purpose.

In February, Rothbard sent a letter titled “Textbook or Treatise” to Richard C. Cornuelle, the younger brother of Herbert C. Cornuelle, who was a student at nyu who took Mises’s seminar and now Rothbard’s main contact at the Volker Fund. In “the theory of production where the whole cost-curve situation has to be faced, Mises is not much of a guide.” This was an important setback because most “present-day textbooks” focus on “‘the theory of the firm.’” He declared chapter 5 a complete failure, now “being completely rewritten to omit the ‘theory of the firm’ and cost-curve approach.” Furthermore, Rothbard not only disagreed with prevailing Marshallian doctrine but also recognized that Mises “has not freed himself from the shackles of the old-neoclassical approach” because “there is no such thing as a ‘monopoly price’ versus ‘competitive price’ on the free market.” He believed the theory to be “outright nonsense.”

Given that Rothbard now wanted to devote a significant portion of his book to correcting the errors in Mises and modern-day production theory, he announced to Cornuelle that his work can no longer “be a textbook of general principles in the traditional sense. It is too revolutionary vis-à-vis received doctrine and even some areas of Misesian doctrine.” Instead, he proposed turning it into a “general treatise in the Austrian-libertarian tradition,” a great book similar to Böhm-Bawerk’s Capital and Interest, Philip Wicksteed’s Common Sense of Political Economy, Fetter’s Economic Principles, and Mises’s Human Action. He would also utilize contemporary neoclassical authors who still followed Lionel Robbins and applied the deductive method to production and whom he continually informed the Volker Fund about. The book’s main goal now was to “command the attention of the profession as a treatise because of its considerable elaborations in the areas not developed by Mises; its differences from Mises in such areas as monopoly, banking ethics, and government (although I do not intend to cite any specific differences with Mises in the book); and its refutations of current economic theory.” Only by improving the Misesian edifice could this emerging economic theorist convince the profession to reestablish economics on its proper foundations.

Since Rothbard envisioned his treatise to continue the Austrian-libertarian tradition, it constituted part of what Rothbard started to describe as a “comprehensive and integrated structure . . . a Science of Liberty” that explained the workings of the free market and voluntary choice in economics, history, ethics, political science, and other scholarly fields. Importantly, Rothbard later explained that this all-encompassing project in political economy paralleled the endeavors of “Ludwig von Mises, Frank H. Knight, and F.A. Hayek,” economists who realized that “it was vital to explore related and fundamental problems of philosophy, political theory, and history” so they could “construct a broader systematic theory . . . in which economics could take its place as a consistent but subsidiary part.” That Rothbard strongly disagreed with these thinkers on various aspects of free-market political economy, such as natural rights, utilitarianism, spontaneous order, and even the term libertarianism, does not change the fact that Rothbard envisioned his science of liberty as following in their footsteps and building upon their efforts.

Shortly after deciding to reorient his textbook project, Rothbard discussed his science of liberty and how to advance Austrian economics and libertarianism in a memo to Cornuelle titled “Suggestions for a General Research Program for the Volker Fund.” He was all too aware that the profession had dismissed Mises’s Human Action and a similar fate could befall his own treatise. The reason for the lack of “Austrian-libertarian economics” in “the top graduate schools in the country” was because there existed no “cohesive, high-powered group of libertarian-scientists” that communicated to students and other academics through “an active libertarian center.” Rothbard believed that the time was ripe to organize such an institute.

Initially, Rothbard hoped that the Foundation for Economic Education would become a “libertarian Institute for Advanced Study, [by] publishing books, pamphlets, and a scholarly journal.” But by the mid-1950s, Leonard Read “began to insist that fee publications refrain from any kind of intellectual critique of statist views or measures” and instead concentrate on “converting housewives, high school students, and, to some extent, blue-collar industrial employees.” Consequently, Rothbard urged the Volker Fund to create a full-blown research center with a “professional journal and professional society.” Only through such an organization could Austrian ideas and works, such as Rothbard’s treatise, overcome the profession’s denigration. “An active libertarian center,” Rothbard concluded, “would impress the fact of present day Austrian-libertarian economics on the academic world, and force them to take account of it.”

The implications of Rothbard’s letters are clear. By early 1954, Rothbard’s ambition had greatly expanded: not only would he write an Austrian treatise to rescue economics and demonstrate the efficacy of the free market, but his treatise would be but a component of an overarching political economy that a research center would promote. This multigoal project was a daunting task for even a group of scholars, but Rothbard was undaunted. His first step was to complete the economics treatise.

Austrian General Equilibrium

Rothbard spent the rest of 1954 and part of 1955 rewriting chapter 5 of his manuscript. He relied heavily on Böhm-Bawerk’s Capital and Interest, which Mises praised as “the most eminent contribution to modern economic theory.” The central drivers in Böhm-Bawerk’s system are the capitalist-entrepreneurs, or the “capitalist-undertaker[s]” who forecast the full range of consumer desires and accordingly allocate the “productive powers” in multiple firms along various time horizons. Although it appears as if factor prices are exogenously fixed, Böhm-Bawerk demonstrates that the “law of costs” shows how “the value of the means of production, and therefore the value of the costs, is regulated by the value of their products,” and each capitalist-entrepreneur influences input prices by allocating producers’ goods according to their estimations of consumer demand.

The centrality of Böhm-Bawerk’s treatise to Rothbard’s revised production theory cannot be overstated. Rothbard described Capital and Interest as “one of the all-time great masterpieces of economic thought [that] . . . is still sound today.” If only “one-tenth of the time and energy . . . lavished . . . [on] an enormously inferior work like Marshall’s Principles” had been directed to Capital and Interest, “the history of economic thought in our time would be enormously different.” This was because the “only translation” of Capital and Interest in English was the first edition. As a result, the Anglo-American community was not aware that Böhm-Bawerk had refuted the “deprecatory attacks of Alfred Marshall and his followers.” Consequently, “Austrian economics was written off in England and America as having been partly refuted, partly synthesized, by Alfred Marshall.” 

Rothbard subsequently described his Böhm-Bawerkian production theory as a “‘general equilibrium’ analysis in the dynamic Austrian sense,” a “complete break with the currently fashionable [Marshallian] theory of the firm . . . [and] the static, currently popular Walrasian” general equilibrium. Austrian general equilibrium theory analyzes interrelations in the economy by showing how a change in the economic data reverberates throughout capitalist-entrepreneurs’ pricing and production decisions. Rothbard previously utilized the basics of this framework in his preliminary money chapter when he demonstrated the economic consequences of a change in the money supply and in chapter 4 when he analyzed the interrelatedness of prices of consumers’ goods.

In what survives of the progress report for 1954, Rothbard described his new production theory as “one interconnected structure.” Central to this Austrian general equilibrium analysis was Mises’s “Evenly Rotating Economy.” In chapter 2, Rothbard briefly mentioned the Misesian long-run equilibrium, the “final state of rest” that a market price tends to if consumer preferences, resources, and technology remain constant. But “conditions, such as the demand curve, always change in the interim, thus setting a new final state as the goal of market prices. The final state is never reached.” Rothbard elaborated on this mental construction in his revised chapter 5.

The evenly rotating economy (ere) is indispensable for Austrian general equilibrium theory because in the real world “individual value scales, technological ideas, and the quantities of the means are always changing [and] continually impel the economy in various directions.” The economic theorist cannot fully investigate the effects of one change by simply observing marketplace activities because “before the effects of any one change are completely worked out, other changes intervene.” Therefore, the theorist must, “by the use of reasoning,” analyze what would happen if the data remained constant and the final states of rest in all markets resulted. If this unrealistic situation were to occur, the “state of final equilibrium” in all markets would be reached which would be “evenly rotating, i.e., in which the same activities tend to be repeated.” Only with this construct, “a world where there is no change and where given conditions are allowed to work themselves out to the full,” can the economic theorist understand the “complexity of the market system . . . in a world of continual change.” 

Rothbard stresses that unlike unrealistic assumptions such as “‘indifference classes’ and . . . infinitely small steps,” the “‘unrealistic’ concept [of] final equilibrium” comports with the praxeological method because the ere is only a preliminary tool used to understand the real world. Starting from this situation, the theorist introduces a change and mentally holds all other data constant, observing how the alteration works itself out to reach a new final equilibrium. Once the economist logically deduces the effects of the relevant change, the assumption of the ere, like other “restrictive” assumptions, can be “dropped.” What remains are the realistic laws that accurately explain economic phenomena. This reasoning contrasts with neoclassical economics’ logical chains of thought based on “false premises,” which are not dropped at the end of the analysis and therefore constitute “the basis of highly elaborate theoretical structures.” 

Equally important to note is that Austrians’ use of the ere contrasts with neoclassical approaches to long-run equilibrium. The mathematical theorems used to explain Walrasian general equilibrium cannot “describe the path by which the economy approaches” the final states of rest, the crucial equilibrating “analysis that is significant for human action.” The Marshallian “long run” of a single firm fails by not “taking account of all the interrelations in the economy.” Moreover, Marshall considered this “‘long run’ as actually existing . . . [and as] something that can be spotted and marked by an observer,” even though “the long run, by its very nature, never does and never can exist. . . . It is not observable, or real, as are actual market prices.”

Armed with the ere, Rothbard scrapped his earlier Marshallian production theory and erected a Böhm-Bawerkian one. As he explained in his progress report, his primary focus is the capitalist-entrepreneurs who “advance saved money to the factors.”  Rothbard first started with the ere where entrepreneurship was absent and only capitalists existed. He assumes that the factors of production (land, labor, and capital goods) differ in their specificity and are unequally “suited to the production of all possible products.” In such a world, capitalists invest their savings by paying labor and owners of land “to produce capital goods,” which are in turn bought by other capitalists and “transformed into lower and lower orders of capital goods, until consumers’ goods are reached.” Capitalists earn only “the rate of interest” determined by “the universal fact of time preference.” This natural or “‘pure rate of interest’ corresponds to Mises’ term ‘originary rate of interest.’” 

Rothbard then elaborates on the equilibrating processes that lead to the ere. In the world of uncertainty, the capitalist is also an entrepreneur who must forecast the future. In addition to earning interest, he also earns “entrepreneurial profits when [his] return is more than interest [and] suffers entrepreneurial losses when [his] return is less than interest.” Returns among production processes are equalized by capitalist-entrepreneurs moving from losing lines to profitable lines until there is “a uniform rate of interest in the” ere. This exercise shows that interest is conceptually different from profits because interest will still exist in the ere while profits will not. Thus, preliminary use of the ere had already enabled Rothbard to outline the capitalist function and the stages of production, which led him to explicate the differences between the profit and interest earned by capitalist-entrepreneurs.

Rothbard continued to explain the investment decisions of capitalist-entrepreneurs. They can invest in multiple firms “throughout the length and breadth of the production structure.” Although Rothbard no longer uses the term law of investment decision from his earlier chapter 5, he invokes its reasoning by stating that a capitalist-entrepreneur will compare different potential investments and choose the “line that earns him the greatest rate of return.” In a dynamic world, capitalist-entrepreneurs will maximize their return by weighing the potential return in one firm with alternative returns that could be earned in other firms. A capitalist-entrepreneur will invest in a single firm until the marginal rate of return is less than the marginal return from investing in other firms. He will invest in multiple firms until the marginal rate of return is no longer greater than his marginal rate of time preference.

This leads to a critical realization: because capitalist-entrepreneurs will invest in multiple firms, there is no theory determining investment in a single isolated firm. As Rothbard clarified in a letter to New York University graduate student Edward C. Facey, profit maximization will not occur by investing in a single firm until “total revenue [minus] total cost is greatest.” This error is based on the unrealistic assumption that the capitalist-entrepreneur “can only keep investing in that particular firm and nowhere else.” Consequently, because “only the Austrian theory” analyzes “each firm . . . in relation to other firms,” the Marshallian theory of the firm, related cost-curve analysis, and the mr = mc condition must be discarded. Rothbard made a critical point: a realistic production theory that incorporates the ability to invest in multiple lines of production can result only from an analysis of the capitalist-entrepreneur, not the hermetically isolated firm.

Equipped with this understanding of the interrelatedness of firms, Rothbard proceeded to explain the demand for factors without assuming fixed factor prices, either in the ere or in the dynamic world of uncertainty. The “chief error,” Rothbard emphasizes, “of basing a causal explanation of factor pricing on the assumption of given factor prices” is that it assumes as given the very problem to be solved—the prices for productive factors. Instead, Rothbard uses “marginal productivity analysis” to explain the pricing of specific and nonspecific factors. He demonstrated how capitalists’ estimations of future consumer valuations determine the “general schedule” of a factor’s marginal value product (mvp)—that is, the additional revenue that will be earned in the future from hiring an additional unit of the factor. The mvp schedule, in conjunction with its supply, results in the factor’s pricing and allocation according to consumer demand. Through capitalists bidding a factor away from its lower-valued uses to those valued more highly, the final equilibrium factor price is established. “Thus, by looking at a factor in all of its interrelations,” Rothbard is “able to explain the pricing of its unit service without previously assuming the existence of the price itself.” 

Achieving this feat allowed Rothbard to use Böhm-Bawerk’s law of costs against competing neoclassical theories. In the ere, if interest is assumed to be “an opportunity cost for an individual investor,” then “price will equal average money cost for every good.” However, the “curious conclusion . . . that costs determine price” does not follow because factor incomes are “the result of sales to consumers.” Although “factors are paid in advance of the sale of the product, . . . capitalist-entrepreneurs speculatively advance money” based on their expectation of future consumer demand. This leads to the law of costs: the prevailing prices of factors that a capitalist-entrepreneur confronts are simply reflections of all other capitalist-entrepreneurs’ estimations of consumer demand in other lines.

The law of costs exposes the flaws in the Marshallian and Walrasian theories. “The ‘cost curves’ so fashionable in current economics” assume fixed factor prices for the firm. When the economist considers only the single firm and abstracts from price formation, “it appears as if costs (at least in the sense of the prices of factors) are somehow given, and beyond [that firm’s] control.” This is erroneous because factor prices are “determined solely by consumers’ demand for all uses,” including those the individual firm caters to. On the other hand, when the economist “takes refuge in the irrelevant mathematics of the [Walrasian] ‘general equilibrium’ school,” he does appreciate interconnectedness more than when using partial equilibrium. The crippling flaw, though, is that the Walrasian economist cannot understand how capitalist-entrepreneurs’ estimations of consumer demand and costs of production bring the economy from one final equilibrium to another. Both approaches, Rothbard trenchantly concludes, are “equivalent to abandoning economics.”

By the end of this investigation, Rothbard had firmly established the importance of Austrian general equilibrium theory and its uniqueness in analyzing economic interrelations. But Rothbard was not content to rest there. Böhm-Bawerk’s production theory covered much more, especially the relationship between the interest rate and the process by which goods move through the stages of production. Both Mises and Hayek built upon Böhm-Bawerk’s capital theory in their own separate ways, and Rothbard now turned to improving upon and integrating their analyses.

Interest and the Structure of Production

When rewriting chapter 5, Rothbard accomplished an extremely significant breakthrough: “the Fetter–Mises pure time-preference theory of interest is synthesized with . . . the Austrian theory of the structure of production.” While Böhm-Bawerk pioneered both concepts, Mises recognized that his errors caused economists to develop capital and interest theory along different lines. According to him, Böhm-Bawerk showed the importance of time preference in determining the interest rate and “unmasked the fallacies of the naïve productivity explanations of interest, i.e., of the idea that interest is the expression of the physical productivity of factors.” Unfortunately, he later “based his own theory to some extent on the productivity approach,” referring “to the technological superiority of more time-consuming roundabout processes of production” as part of the reason why individuals prefer present consumption to future consumption. Similarly, while Böhm-Bawerk correctly emphasized the “roundabout ways of production requiring more time” and the “role played by the period of production,” he failed to recognize the irrelevance of “the length of time expended in the past for the production of capital goods [and that] . . . the ‘average period of production’ is an empty concept.”

As a result of Böhm-Bawerk’s mistakes, Mises’s follower Hayek concentrated on the structure of production in his Prices and Production, a work Rothbard considered “an excellent contribution to the analysis of the production structure.” However, while this work greatly refined and improved Böhm-Bawerk’s temporal stages framework, it de-emphasized time preference as a cause of interest. A similar procedure was followed by Knut Wicksell, who engaged in a “brilliant discussion of capital and the production structure and the role of time in production.” Partially in response to this, Mises’s Human Action focused on defending the pure time preference interest theory formulated by Fetter, who had criticized Böhm-Bawerk’s eclectic approach. Healing the disjunction between the capital and interest theories of Mises and Hayek was one of Rothbard’s major ambitions in his treatise.

Rothbard began by reorienting Böhm-Bawerk’s aggregate time market along pure time-preference lines. Böhm-Bawerk had demonstrated how the “demand for labour . . . from the Capitalist-Undertakers” codetermined, along with the supply of labor, the long-run return on investment. In particular, he showed how the interest “agio . . . is given in the form of a price for labour which remains under the amount of the future product of labour.” In other words, capitalists advance present money to factors in exchange for a greater amount of future money from selling the finished product. Interest, therefore, is the spread between the cumulative prices of the stages in the structure of production.

Working within the evenly rotating economy, Rothbard used “the schedule of time-preference valuations” to show how the capitalist’s supply of savings to factors of production is based on his marginal utility rankings of present and future money. The capitalist weighs the marginal utility of present money, which can be spent on present consumer goods, with the marginal utility of future money, which can be spent on consumer goods at a later date. If the capitalist ranks the marginal utility of a sum of present money lower than the marginal utility of a greater sum of future money, he will supply savings to workers and other inputs. Continuing the analysis, Rothbard shows that original factors’ (workers’ and landowners’) demand for savings is determined by their marginal utility rankings of present money against greater sums of money that could be earned from selling goods in the future. These time market schedules are then “aggregated on the market to form market-supply and market-demand schedules for present goods in terms of future goods.” The supply of and demand for savings then determines the interest rate.

This “pure rate of interest,” Rothbard emphasizes, “is determined solely by the time preferences of the individuals in society, and by no other factor.” He expands on this point by refuting “Böhm-Bawerk’s highly unfortunate lapse into a productivity theory of interest, coupled with a critique of Irving Fisher’s concessions to the productivity doctrine,” by utilizing the “brilliant dissections” of Fetter. Briefly, Fisher, who built on Böhm-Bawerk, argued for an eclectic theory of the interest rate. According to him, time preferences determine the supply of savings, while the ability to transform factors of production into consumers’ goods determines the demand for savings. Significantly, Rothbard stresses that this eclectic theory became standard “neoclassical doctrine,” which concentrated on financial markets and asserted that the “producers’ loan market determines the rate of interest.”

Rothbard exposes the flaws in this reasoning. The “cardinal error” is that investing in the transformation of producers’ goods into consumers’ goods enhances “physical productivity” but not “value-productivity or the monetary return on investment” per se. This rate of return is governed solely by individuals’ valuations of present and future money, or their “time-preference schedules.” Furthermore, firms’ demand for loanable funds is “determined by the rates of return that can be achieved in investments” in the production structure and not the other way around. Unlike “neoclassical analysis,” Austrian theory demonstrates that the “producers’ loan market has a purely subsidiary and dependent role.” The pure rate of interest originates in the production structure and not the loan market.

Rothbard finished his analysis of the time market by demonstrating the connection between the interest rate and the proportion of social income spent on consumer goods versus investment during a given time period. The individual’s time preference determines “the amount of his money income to be devoted to saving and the amount to be devoted to consumption.” The higher time preferences are, the higher the rankings of present consumption are to future consumption and “the greater will be the proportion of consumption to savings.” “Lower time-preference schedules,” in contrast, mean lower rankings of present consumption relative to future consumption and lead to a lower consumption-savings ratio. Therefore, time preferences determine “both the market equilibrium interest rate and the proportions between consumption and savings (individual and aggregate).” They are different “side[s] of the same coin.” The realization that lower time preferences lead to a lower interest rate and consumption-savings ratio while higher time preferences result in the opposite would play an important role in Rothbard’s explanation of how changes in time preferences affect the capital structure.

With the time market fleshed out, Rothbard shifted to Böhm-Bawerk’s structure of production theory. He defended the concept of a separate land factor (i.e., natural resources) against modern followers of Frank H. Knight, a member of the Chicago School who criticized Austrian capital theory. Economics books such as Stigler’s Theory of Price lumped land in with capital goods, making it “almost impossible to arrive at a satisfactory theory of production and its structure.” They failed to recognize Mises and Hayek’s insight that capitalists’ “permanent alterations” in the natural environment, such as a tunnel blasted through a mountain or “land that has been irrigated by canals or altered through the chopping down of forests,” are land. Capitalists do not worry about reproducing the physical change and treat it as given. Once “the permanent are separated from the nonpermanent alterations . . . the structure of production no longer stretches back infinitely in time” and “it would not take many years for the whole capital-goods structure to collapse, if no work were done on maintenance and replacement.”

Rothbard also modified Hayek’s definition of land by focusing on “the physical need and possibility of reproducing” capital goods. Hayek argued that permanence was the only criterion for the land factor, meaning that depletable natural resources that cannot be reproduced, such as a copper mine or crude oil, are capital goods. Rothbard believed “Hayek’s classification” to be in error. This is because capitalists view such resources as finite in supply and given for future production. They can conserve the resource and create substitutes but they cannot produce more of it. This means that land factors are those goods that are permanent or naturally depletable and irreproducible while capital goods are only nonpermanent and reproducible goods.

With the structure of production framework defended, Rothbard integrated it and his interest theory into the theory of factor pricing. Knightians such as Earl Rolph argue that in long-run equilibrium, firms pay factors their marginal value product, which is equal to the present value of their “immediate product,” such as a few “stakes in the ground” at the beginning of construction. To the contrary, Rothbard explains, capitalists only value the work those factors complete in the present because they can sell the finished building, which embodies their actual marginal product, in the future. Time preference and the consequent discounting of money earned in the future means that what capitalists really pay factors is the “discounted value of their marginal product” (dmvp). Rothbard’s defining of factor incomes as discounted marginal value products emphasizes the future-oriented nature of production and that interest is a spread between prices paid to factors and the revenue earned from selling the product.

Rothbard’s advances concerning the time market, the land factor, and a factor’s discounted marginal value product laid the groundwork for him to transition from the static analysis of the capitalist and the evenly rotating economy to the dynamic world of the capitalist-entrepreneur. In particular, Rothbard proceeded to demonstrate “the relationship between savings and production, and the rate of interest” and how changes in time preferences reconfigure the structure of production. In this deployment of Austrian general equilibrium theory, Rothbard finished the goal he set out to achieve: synthesizing Hayek’s important writings on the capital structure with the Fetter–Mises pure time-preference theory of interest.

Rothbard appropriately starts with the ere, where “net savings-investment is zero.” In such a world, “the production structure remains constant” and “price spreads conform to the aggregate of individual time-preference schedules.” He then introduces a change in individuals’ utilities that disrupts the ere: “a lowering of time-preference schedules” on the aggregate time market that decreases consumption and increases investment. Rothbard continues the analysis by explicating the equilibrating process that brings the economy to a new ere. The decline in “final consumers’ spending” leads to “declining money incomes and prices . . . along the production structure.” At the same time, “another force”—the increase in investment from capitalist-entrepreneurs’ directly plowing their savings into firms or lending them to firms on the loan market—exerts its influence in “higher-order production stages.” In the lower stages, “prices fall because of the lower consumer demand and the resulting shift of investment capital from the stages nearest consumption.” In the higher stages, “increased investment expenditures . . . raises the prices of the factors.”

After enough time has passed and the permanently lower consumption-savings proportion allows the “longer production processes” to be completed, their “increased productivity leads to a greater physical supply of capital goods.” This increases the supply of consumer goods and causes their prices to fall. Overall, the lower time preferences “lessens the spreads of cumulative prices” and hence the pure rate of interest. Once the change works itself out, the economy comes to rest in another final equilibrium and “the activities in the system continue endlessly in an ere.”

Rothbard elaborates on the change in cumulative price spreads. The change in relative demands leads to nonspecific factors leaving the lower stages for the higher stages “where the monetary demand for factors has increased,” while specific factors suffer permanently smaller incomes in the lower stages and receive permanently larger incomes in the higher stages. Rothbard further investigates the change in the prices of the original factors land and labor. Their increased productivity from “more productive and longer production processes, and a fall in the discount or interest rate concomitant with falling time preference . . . impel an increase in the real prices of factor services.” “The conclusion,” Rothbard recognizes, “is that in a progressing economy with increases in gross savings and investment . . . real wages and rents will rise.”

Ultimately, an increase in savings is far more important for economic growth than technological inventions because “while knowledge is a limit, capital is a narrower limit.” “Knowledge can and does exist without” the necessary savings needed to implement technologies. Building on Böhm-Bawerk and Mises, Rothbard explains that what is lacking in “‘backward’ or ‘underdeveloped’ countries . . . is not knowledge of Western technological methods . . . [but] the supply of saved capital needed to put the advanced methods into effect.” A capitalist-entrepreneur’s new technological innovation, such as oil-drilling or tractors, can “be put to use only by saving.” “That,” Rothbard emphasizes, “is the important limit on his investment.”

Thus, Rothbard used Austrian general equilibrium analysis supplemented by the ere to deduce the causal link between changes in time preferences and changes in the interest rate and the structure of production. Dropping the assumption of the ere, Rothbard’s analysis yielded an exact theorem applicable to the real world economy, an important implication of which is that falling time preferences tend to bring about a progressing economy featuring a lower interest rate, larger stock of capital goods, and increased labor productivity. In showing this, Rothbard synthesized the Fetter–Mises pure theory of time preference with Hayek’s structure-of-production analysis and joined the ranks of eminent production theorists.

Rents and Economic Calculation

With the completion of the Hayekian structure-of-production edifice, Rothbard could now use Austrian general equilibrium to further “develop the analysis” of production on the free market in a world of uncertainty. This included examining the various prices earned by particular factors, the incomes of capitalist-entrepreneurs, and the importance of calculating profits and losses. Notably, he would analyze these concepts in ways Mises had not done and refine his mentor’s work.

When Rothbard moved to factor pricing, he recognized that “the subject of ‘rent’ is one of the most confused in the entire economic literature.” The “classical writers” erroneously argued that “wages were the ‘reward’ of labor, rents the ‘reward’ of land, and interest the ‘reward’ of capital goods.” Land, which was supposedly fixed in supply, earned rent, and classical economists considered it an unnecessary earning because it was the “differential” between the price paid to a given land factor and the “zero” price needed to acquire the “most inferior working land.” Building on this, Marshall defined rent as a return that a firm pays to any factor fixed in supply which it cannot substitute in production. He reasoned that because the supply of “durable capital goods” may only be fixed “temporarily,” this rent is only earned for a period of time and can therefore be classified as a quasi rent—the difference between the price paid to the factor and its long-run cost. Modern disciples of Marshall, including Stigler, elaborated on quasi rents.

In Human Action, Mises stated that “the sophisticated distinction between ‘rents’ and ‘quasi-rents’ is spurious” but that “the differential-rent idea, by and large, can be adopted by the subjective-value theory.” For this reason, Rothbard considered Mises “under classical influence.” He confided to Ludwig Lachmann that “one thing which I try to do in my book . . . is a resurrection of Frank Fetter . . . [and] his superb theory of rent, which lies a mouldering-in-the grave—even Mises doesn’t see its contribution.”

True to his word, Rothbard used rent to signify “the sale and purchase of the unit services” of all factors. In the evenly rotating economy, “the rental price” of a factor equals its “discounted marginal value product [and] the capital value of a ‘whole factor’ will be equal to the sum of its future rents, or the sum of its dmvps.” Although capital goods earn “a gross rent, since all have unit services and prices for them,” they do not generate a separate interest income and thus their gross rent can be divided into interest paid for saving, rents paid to original factors, and rents paid for capital goods purchased from other capitalists (which can in turn be broken down in the same manner). This means that “on net, only labor and land factors—the ultimate factors—earn rents.” In the ere, the only net incomes that will be earned will be the net rents of the original factors and the interest earned from foregoing present consumption.

With Rothbard’s definition of rent as the hire price, “the marginal land will earn not zero, but only close to zero, rent” because it still has a positive discounted marginal value product. Moreover, the hire price of a factor “does not depend on the existence of a poorer factor of the same general category [like] the ‘differential’ basis of rent.” Furthermore, capital goods earn only a rent; they do not earn “‘quasirents’ temporarily. . . . Nowhere does this special type of income exist.” Thus, Rothbard had shown how rent was not a special exception to factor incomes but rather the unifying principle that could be used to describe the hire price of factor services, thereby encompassing all factor incomes.

After discussing factor prices, Rothbard turned to the incomes of the capitalist-entrepreneurs. Most importantly, capitalists “advance present funds to labor and land factors and earn interest” as well as profit from “uncertainty-bearing in an ever-changing world.” In the ere, capitalists earn an interest return and pay factors their dmvps. In the uncertain world, capitalist-entrepreneurs earn profits, an excess above their interest return, when they accurately judge the future and recognize that factors are “underpriced and undercapitalized” in relation to their true dmvps. In addition to profits and interest, capitalist-entrepreneurs can earn other incomes. To the extent they “may also be their own managers” of the firms they invest in, they earn “an implicit wage of management” equal to the wage that would be paid to an outside manager. While this is commonly recognized in economics, Rothbard proposed the novel concept of the “‘rent of decision-making ability,’” a return to capitalist-entrepreneurs for their “skills needed to hire proper managers and invest in the most efficient processes.” This innovation came from “one of those extremely fertile but neglected hints of . . . Böhm-Bawerk,” who understood the capitalist-entrepreneur’s unique “‘intellectual superintendence.’”

With the identification of factor prices and business incomes complete, Rothbard approached the difficult subject of “Market Calculation and Implicit Earnings” in chapter 5 of his treatise. In “Economic Calculation in the Socialist Commonwealth” and Socialism: An Economic and Sociological Analysis, Mises argued that a socialist society could not engage in economic calculation—that is, it could not allocate scarce factors of production to competing ends by computing their relative returns in terms of a cardinal unit. This is because socialism abolishes both the general medium of exchange and private property in the means of production, making it impossible for individuals to utilize monetary computations and figure out the returns of various production processes using monetary revenues, costs, profits, and losses. Mises’s insights sparked the famous socialist calculation debate in the 1930s. Neoclassical economists, under the influence of Walrasian general equilibrium theory, dismissed Mises’s theory and argued that a socialist government could theoretically calculate if it used a system of mathematical equations that describe general equilibrium.

During his graduate studies at Columbia, Rothbard learned the standard Walrasian perspective on the calculation debate in Professor Abram Bergson’s lectures, a notable expert on the Soviet economy who wrote the definitive mainstream survey article on socialist economics and the socialist calculation debate. He discovered that Bergson was mistaken after reading the new edition of Mises’s Socialism in mid-1951. Quickly grasping its insights, he recognized that Mises’s demonstration of “the impossibility of economic calculation under socialism” is a “very important one” that “most economists” fail to understand. By the end of the following year, he read the “very good” Collectivist Economic Planning that Hayek edited and Trygve J. B. Hoff’s “very fine” Economic Calculation in the Socialist Society.

By the time he had decided to write a treatise in 1954, Rothbard was pondering whether he would discuss “Socialism and Economic Calculation” in his analysis of government intervention or the free market. His rationale for the latter was that “the inability of a socialist government to calculate is a special case of the inability of any firm to calculate for departments internal to itself, if there is no external market to which to refer.” Rothbard arrived at this important refinement of Mises’s argument through his discussions with George Reisman, a young participant in Mises’s seminar “who raised the question of how extensive the number of firms in the economy must be in order to have calculation . . . an uncharted area for study.”

Rothbard arrived at this conclusion by once again utilizing Austrian general-equilibrium analysis, investigating how the interrelationships among factor markets in an economy affect capitalist-entrepreneurs’ calculational abilities. “The different sources of income” of the capitalist-entrepreneur “owners” of a particular firm can only be distinguished by referring to “prices on the market.” After a capitalist-entrepreneur pays out explicit costs to other owners of capital goods and original factors, he needs to determine his “implicit expenses,” particularly the interest and wages “foregone by engaging in the business.” To do so, he “looks around at the economy [and] estimates approximately what he would have received in wages of management if he had gone to work for a competing firm” as well as “what he can pretty well call the ruling rate of interest.” Without the ability to estimate these opportunity costs, he could not determine whether he reaps an entrepreneurial profit or suffers a loss. These imprecise estimates are ascertained through the indispensable “tool of ex post calculation” and require “an external market to which the entrepreneur can refer.” Without such markets to estimate implicit costs, “there would be no rational way for entrepreneurs . . . [to] know how to arrange factors in their most value-productive combinations to earn the greatest profit.”

Therefore, the abolition of a significant market for a product, whether through producers’ cooperatives or complete vertical integration, “introduce[s] little bits of chaos into the productive system.” This leads to an important economic law: to prevent such chaos, “for every capital good, there must be a definite market in which firms buy and sell that good.” Further elimination of capital goods markets causes the “islands of noncalculable chaos [to] swell” and “the degrees of irrationality, misallocation, loss, impoverishment, etc., [to] become greater.” In a world where “One Big Cartel” eliminates all factor markets, “complete economic chaos would prevail.” “The free market would never establish such a condition” precisely because it would cause “heavy losses.”

This analysis, Rothbard concludes, builds upon the “challenging article by R.H. Coase,” an economist of the Chicago School who had analyzed market determinants of the size of the firm. Adding on to Coase’s argument that the size of the firm will be limited by the increasing costs that result from making arrangements within a firm and not using the price system, Rothbard showed that the costs start to become increasingly prohibitive once the market for specific capital goods are eliminated. Furthermore, it “serves to expand the famous discussion of the possibility of economic calculation under socialism, launched by Professor Ludwig von Mises.” Socialism cannot calculate, not “because it is socialist,” but because one agent is trying to allocate scarce resources “without markets” to refer to.

The evidence suggests that Mises considered Rothbard’s analysis an important contribution. In 1966, Geoffrey Gilbert, an undergraduate at Dartmouth College, asked Mises if he had published “a reply to Mr. Bergson’s contention” that socialist economies could calculate. “Concerning the problem of socialist economic calculation,” Mises advised the student to consult the second edition of Human Action and Rothbard’s treatise. Regarding Rothbard’s work, Mises referenced the concluding pages where Rothbard summarized how the impossibility of economic calculation applied to either a socialist government or one private cartel and gave an overview of the socialist calculation debate.

After extending his mentor’s theorem regarding the impossibility of a socialist planner utilizing economic calculation, Rothbard completed chapter 5. He summarized the nature and importance of this achievement, recognizing that his “explanation of the free economic system constitutes a great architectural edifice.” Starting from “human action and its implications,” Rothbard used the praxeological “deductive apparatus” to explain the determination and interrelatedness of “the quantity of goods produced, the prices of consumers’ goods, the prices of productive factors, the interest rate, [and] profits and losses.” The central drivers in determining the “capital goods structure and total production” on the free market are the “profit-seeking” capitalist-entrepreneurs, who by “allocating resources to the most value-productive areas,” “drive toward ever more efficient servicing of the desires of consumers.”

Monopoly and Competition

After completing and summarizing his extensive chapter 5, Rothbard continued to use Austrian general equilibrium theory to analyze production in a dynamic setting. He saved his most radical innovations for chapter 6, titled “Monopoly and Competition.” Most importantly, Rothbard planned to show how a consistent analysis of the market led to a theory of competition that did not compare the free market to unrealistic standards. This led him to explicitly criticize the prevailing Marshallian orthodoxy as well as his mentor Mises.

One of the major reasons that convinced Rothbard to switch from writing a textbook to a treatise was his growing dissatisfaction with Mises’s theory of competitive and monopoly prices. To build up to his criticism of the theory, Rothbard began chapter 6 by discussing “the concept of consumers’ sovereignty” because it had “implications for the problems of competition and monopoly.” The concept, which Mises invoked, was best articulated by William H. Hutt, who “used it as an ideal with which to contrast the allegedly imperfect free-market system.” Hutt argued that even though on the free market “people will tend to produce those goods most demanded by consumers,” there are instances in which producers violate this standard by restricting production “to attain more monetary income than otherwise.” The problem with this view, Rothbard explains, is that every individual producer always attempts to “maximize his ‘psychic income’” by weighing the various marginal utilities of the monetary income, the nonpecuniary return from the type of work, and the leisure forgone. “It is impossible, not simply impracticable, to separate the leisure from monetary considerations” because if an individual can earn a higher income by working less, he also gains leisure, which is a consumer good. Therefore, “contrary to Hutt, each individual has self-sovereignty” over his private property and is free to pursue an expected monetary return and other nonmonetary factors. The free market is always tending to satisfy the desires of all individuals, not just consumers narrowly construed.

Rothbard then analyzed the “neoclassical theory of monopoly price,” held by Mises and other Austrian writers. Rothbard argued that Mises and others failed to realize “the illusion in the entire concept of monopoly price” on the free market. Economists cannot simply define a given price as competitive and any price above it that yields higher revenue as a monopoly price, because “the elasticity of the demand curve [does not] establish any criterion” for making such a judgment. In addition to the crucial Hayekian insight that “a demand curve is not simply ‘given’ . . . but must be estimated and discovered” by the capitalist-entrepreneur, the price will always be set “so that the range above [it] will be elastic.” Rothbard invokes the importance of economic interrelations and his criticism of consumers’ sovereignty when he stresses that the theorist “cannot use ‘restriction of production’ as the test” because “production in other lines” is expanded if the released nonspecific factors are used or, if not, leisure increases “for the owner of a labor factor.” In every case, the producer “will set his output at whatever point is expected to maximize his monetary earnings (other psychic factors being equal).” Therefore, the entire concept of a monopoly price “is meaningless. . . . There is only the ‘free market price.’”

Rothbard thought Mises’s distinction between a competitive and monopoly price was due to Mises’s straying from the praxeological method. Unlike the pure interest rate, there is “no prior rule available” to “define and distinguish a ‘monopoly price’ from a ‘competitive price.’” While the pure interest rate “in practice, is not strictly separable from profits,” the economist can deduce its existence “from the axioms of praxeology” and use it to understand market interest rates. But it is impossible for the economist to “separate conceptually an alleged ‘restrictive’ from a nonrestrictive act, and nowhere is it possible to define ‘competitive price’ in any way that would differ from the free-market price.” In other words, Mises failed to adhere to his own praxeological method when he used “a concept divorced from real action and employed as an actual reality and even an ideal.”

Once Rothbard had demonstrated that the economist could only analyze the free market price and not competitive and monopoly prices, he turned to the more recent literature from the 1930s and 1940s on “‘monopolistic’ or ‘imperfect’ competition,” whose “differences . . . are not important.” Unlike the earlier monopoly price theory, the monopolistic competition revolution’s newer framework did set up “identifiable criteria for their categories—such as a perfectly elastic demand curve for pure competition. Rothbard shows that this assumption, which forms the basis for the entire theory, turns “out to be completely fallacious.”

Rothbard first presented his criticisms in a report for Mises’s seminar in November 1954 “on monopolistic competition and on selling costs, which Mises had [him] do.” He wrote that it received a “good reception from Mises,” who even embarrassed him by repeatedly telling the seminar beforehand that “‘soon we will hear a very interesting, a very good report by that great old reporter, Mr. Rothbard.’” In his presentation, Rothbard attacked the root of the theory by going back to Marshall, whose “short-cuts and unreal assumptions” resulted in “‘partial equilibrium analysis’ [where] . . . an industry or firm is set aside and treated as if it were in isolation.” Using the “infinitely small step . . . Marshall classified as ‘competition’ all industries where actions of the individual firm could not affect its selling price,” while monopolies were “situations where the industry consisted of one firm, which determined its price by controlling the supply that it offered.” This was at least what Marshall implied, since he “never defined what he meant by competition [and monopoly].” Rothbard exploded this reasoning: even for the “industries based on the model of the wheat farm, consisting of many firms producing homogenous products . . . the smallest economic unit is not infinitely small . . . and therefore its actions do have an effect, however small, on the price of the product.”

Rothbard made this point even more trenchantly in his treatise. “It is clear from our construction of the demand curve” that there can never be any horizontal stretch. A “very small increase in supply,” all else constant, must always lead to a “very small lowering of price.” The error in assuming otherwise comes from the use of differential calculus where “infinite negligibility of steps” is used. Since the single firm exerts zero influence on the price, the Marshallians analyze it in complete isolation from other firms. In reality, although “the demand curve for each small wheat farm is likely to be very highly, almost perfectly, elastic . . . the fact that it is not ‘perfect’” renders the perfect competition model nugatory. The result is inescapable: because “praxeology cannot establish quantitative laws” and distinguish demand curves by “degrees of elasticity,” once the economist concedes “that all demand curves to firms must be falling . . . no further analytic distinctions” can be made.

Rothbard continued his critique by scrutinizing the standard comparison between “monopolistic or imperfect competition [and] . . . the ideal world of pure competition.” In “monopolistic competition (where the demand curve to each firm is necessarily falling),” the price is higher and production is lower compared to perfect competition. Thus, the “‘welfare’ case” for perfect competition is demonstrated.

When criticizing this comparison, Rothbard utilized Joseph A. Schumpeter’s point that larger firms “have lower costs” than smaller firms, Hayek’s insight that “competition is actually a dynamic process,” and even Chamberlin’s own admission that the comparison fails to consider “diversity as a good.” But he makes his own unique contributions as well. First, if all demand curves are falling, perfect competition cannot be upheld as the “ideal system for the general welfare [because it is] . . . never realizable in practice.” Second, as “Austrian general analysis” and the “classroom lectures of Professor Arthur F. Burns” demonstrate, the surplus factors are not trapped in an excess of inefficient, monopolistically competitive firms but must be utilized by firms outside the industry, meaning that they increase production and lower prices elsewhere in the economy. Rothbard’s innovations, in conjunction with earlier critiques, demolish the welfare comparison between monopolistically and perfectly competitive firms. The only viable standard for welfare analysis, then, is to recognize that all firms without exception face downward-sloping demand curves.

Thus, Rothbard dealt a devastating blow to the neoclassical paradigm, exposing the fatal flaws in the older competitive-monopoly price dichotomy and the newer perfect-imperfect competition distinction. He showed that both theories failed to properly consider economic interrelations among firms and presented an artificial and unrealistic depiction of isolated and hermetically sealed markets. In their place, Rothbard developed a theory of competition that recognized that capitalist-entrepreneurs move money capital and productive factors between firms and that firms always exert some influence on prices. It was a perfect capstone to his Böhm-Bawerkian production theory and convincingly demonstrated that Rothbard had advanced the Misesian paradigm.

A Böhm-Bawerkian Production Theory

With this critique, Rothbard completed his treatise’s revised production theory. Using Austrian general equilibrium theory, Rothbard demonstrated that the capitalist-entrepreneur as opposed to the individual firm must be the central focus of production theory. He showed how this radical change in focus refuted the standard theory of investment in a firm, led to a theory of factor pricing that did not assume input costs as given, and elucidated the key Austrian contention that the value of consumer goods determines the value of producer goods.

Rothbard’s refocusing of production theory naturally led to an improvement in Böhm-Bawerkian capital theory. Thus, starting with the ere, Rothbard reconstructed the aggregate time market along pure time preference grounds, linked the interest rate with aggregate consumption-investment proportions, presented the structure of production as a forward-looking concept, and infused the interest rate into factor pricing. He then used this framework to analyze uncertainty and demonstrate that lower time preferences lengthened the capital structure and constituted the key ingredient for economic growth.

Rothbard also resurrected Fetter’s theory of rent and applied Mises’s theory of economic calculation to explain limitations on firm size. He finished his production theory by advancing a radically new theory of competition that avoided the flaws of older Austrian-neoclassical competition theory as well as the newer variant incorporated in the neoclassical synthesis. Rothbard recognized the originality of his accomplishment: his architectonic structure “involved emancipation from 90% of current textbook material.”

In the April 1955 progress report, he stated that his manuscript’s chapter 5 “on production has grown to great length,” a total of 425 pages, and did not include chapter 6, “Monopoly and Competition.” By October 1955, Rothbard decided to divide chapter 5 into five different chapters. After the first four chapters on praxeology and price theory, the new, shorter chapter 5 introduces the structure of production. Chapter 6, on the rate of interest, concerns the derivation of the Böhm-Bawerkian time market. In chapter 7, on the general pricing of factors, Rothbard formulates his unique theory of factor pricing. Chapter 8, on entrepreneurship, concentrates on the capitalist-entrepreneur and the effect that changes in his savings exert on the capital structure. In chapter 9, on particular factor prices and incomes, Rothbard elaborates on the differences between factors as well as the rents they receive. The previous chapter 6 on competition became chapter 10 and laid out Rothbard’s criticisms of the competitive-monopoly price distinction and perfect competition. With the addition of the new chapters, the aforementioned chapter 7 on money turned into chapter 11, meaning that by late 1955, Rothbard had written eleven relatively complete chapters of the treatise.

The completion of the revised production theory from chapters 5 to 10 was one of the most important milestones in Rothbard’s development as an economist. It was clear to the Volker Fund that the bright graduate student, before even receiving his PhD from Columbia, was already shouldering his way into the front ranks of postwar economic theorists. Rothbard not only exposed the errors in Marshallian production theory and Walrasian general equilibrium theory; he constructed an entirely new theoretical edifice that greatly surpassed Mises’s limited writings on the topic. This was a monumental achievement made possible only with a thorough training in neoclassical economics and sedulous readings of Austrian texts, especially Böhm-Bawerk’s.

Though the end was in sight, Rothbard was not finished. He still had to incorporate the important subject of government intervention into his body of praxeological theorems. This task would extend into chapters 12 and beyond, constituting the final part of his work.

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Murray N. Rothbard to Herbert C. Cornuelle, June 28, 1952, p. 1, Rothbard Papers; Ludwig von Mises to Murray N. Rothbard, May 29, 1950, p. 1, Rothbard Papers.

Murray N. Rothbard, “Progress Report, January 1 to October 1, 1952,” n.d., p. 7, Rothbard Papers.

Ludwig von Mises, Human Action: A Treatise on Economics, scholar’s ed. (Mises Institute, 2008), p. 338; Murray N. Rothbard to Richard C. Cornuelle, “Textbook or Treatise?,” p. 1, Rothbard Papers. Mises, Human Action, pp. 336–47, 356–57.

Edward H. Chamberlin, The Theory of Monopolistic Competition: A Re-Orientation of the Theory of Value (Harvard University Press, 1933); Joan Robinson, The Economics of Imperfect Competition (Macmillan, 1933).

F. A. Hayek, review of Nationalökonomie: Theorie des Handelns und Wirtschaftens, by Ludwig von Mises, Economic Journal 51, no. 201 (1941): 125. Ludwig von Mises, Nationalökonomie: Theorie des Handelns und Wirtschaftens (Editions Union Genf, 1940).

Rothbard, “Progress Report, January 1 to October 1, 1952,” p. 9.

Murray N. Rothbard, “Progress Report, October 1, 1952 to April 1, 1953,” n.d., pp. 3–5, Rothbard Papers.

Murray N. Rothbard, “Chapter V: Producers’ Activity,” n.d., pp. 1–90, Rothbard Papers. Murray N. Rothbard, “Man, Economy and State, Original Chapter 5: Producers’ Activity,” ed. Patrick Newman, Quarterly Journal of Austrian Economics 18, no. 4 (2015): 487–561.

Rothbard, “Chapter V,” pp. 1–3, 5.

Rothbard, “Chapter V,” pp. 1, 6–7, 12.

Rothbard, “Chapter V,” pp. 12–14.

Rothbard, “Chapter V,” pp. 36–39.

Rothbard, “Chapter V,” pp. 40, 43, 46.

Rothbard, “Chapter V,” p. 47.

Frank A. Fetter, Economic Principles (Century, 1915), pp. 73–85; Carl Menger, Principles of Economics (Free Press, 1950), pp. 207–25; Mises, Human Action, pp. 278, 354–84; George J. Stigler, The Theory of Price (Macmillan, 1946); E. T. Weiler, The Economic System: An Analysis of the Flow of Economic Life (Macmillan, 1952); Friedrich von Wieser, Social Economics (George Allen & Unwin, 1927), pp. 204, 211–12.

Rothbard to Cornuelle, June 28, 1952, p. 1; Murray N. Rothbard to Ludwig von Mises, May 18, 1950, p. 1, Rothbard Papers.

Rothbard, “Chapter V,” pp. 8, 16, 26, 41. Rothbard, “Chapter V,” pp. 7, 14, 36.

Rothbard, “Chapter V,” pp. 36, 47, 61–62, 64–65, 68.

Rothbard, “Chapter V,” pp. 64–65, 69, 79, 83.

Rothbard, “Chapter V,” pp. 64, 79.

Murray N. Rothbard to Herbert C. Cornuelle, August 19, 1953, p. 2, Rothbard Papers. Edith Penrose, The Theory of the Growth of the Firm (John Wiley, 1959); Murray N. Rothbard to Kenneth S. Templeton, December 23, 1960, pp. 1–3, Rothbard Papers.

Lawrence C. Lockley to Richard C. Cornuelle, December 13, 1953, pp. 1–2, Rothbard Papers.

Murray N. Rothbard to Richard C. Cornuelle, December 25, 1953, p. 2, Rothbard Papers. George J. Stigler, Production and Distribution Theories (Macmillan, 1941), pp. 179–227.

Rothbard to Cornuelle, December 25, 1953, pp. 1–3.

Rothbard to Cornuelle, “Textbook or Treatise?,” pp. 1–2. Brian Doherty, Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement (PublicAffairs, 2007), pp. 184, 206.

Rothbard to Cornuelle, “Textbook or Treatise?,” pp. 2, 4. Eugen von Böhm-Bawerk, Kapital und Kapitalzins [Capital and interest], 4th ed. (Gustav Fischer, 1921); Fetter, Economic Principles; Philip H. Wicksteed, The Common Sense of Political Economy (Macmillan, 1910).

Lionel Robbins, An Essay on the Nature and Significance of Economic Science, 2nd ed. (Macmillan, 1935); Murray N. Rothbard, “Readings in Current Economics—1954,” n.d., pp. 1–11, Rothbard Papers; Murray N. Rothbard, “Readings in Economics and Political Economy—1955,” n.d., pp. 1–7, Rothbard Papers; Murray N. Rothbard, “The Best Journal Articles of 1956: Economics and Politics,” n.d., pp. 1–10, Rothbard Papers.

Rothbard to Cornuelle, “Textbook or Treatise?,” p. 4.

Murray N. Rothbard to Richard C. Cornuelle, “Suggestions for a General Research Program for the Volker Fund,” April 3, 1954, pp. 7–8, Rothbard Papers.

Murray N. Rothbard, introduction to the 1st ed., in “Egalitarianism as a Revolt Against Nature” and Other Essays, 2nd ed. (Mises Institute, 2000), p. xvi. Murray N. Rothbard, “Confidential Memo to the Volker Fund on F. A. Hayek’s Constitution of Liberty,” January 21, 1958, in Murray N. Rothbard vs. the Philosophers: Unpublished Writings on Hayek, Mises, Strauss, and Polanyi, ed. Roberta A. Modugno (Mises Institute, 2009), pp. 61–70; Murray N. Rothbard, “On Freedom and the Law,” New Individualist Review 1, no. 4 (1962): 37–40; Murray N. Rothbard, “The Symposium on Relativism: A Critique,” n.d., in Murray N. Rothbard vs. the Philosophers: Unpublished Writings on Hayek, Mises, Strauss, and Polanyi, ed. Roberta A. Modugno (Mises Institute, 2009), pp. 104–20.

Rothbard to Cornuelle, “Suggestions for a General Research Program for the Volker Fund,” pp. 1, 7–8.

Murray N. Rothbard, “Toward a Strategy for Libertarian Social Change,” April 1977, pp. 133, 135, Rothbard Papers.

Rothbard, “Suggestions for a General Research Program for the Volker Fund,” p. 8.

Ludwig von Mises, “Capital and Interest: Eugen von Böhm-Bawerk and the Discriminating Reader,” Freeman 9, no. 8 (1959): 52.

Eugen von Böhm-Bawerk, The Positive Theory of Capital, trans. William Smart (London, 1891), pp. 22, 82, 114, 183–84. The Positive Theory of Capital is the second volume of Capital and Interest.

Murray N. Rothbard to Ivan R. Bierly, November 6, 1959, p. 1, Rothbard Papers. Alfred Marshall, Principles of Economics, 8th ed. (Macmillan, 1920).

Murray N. Rothbard, Man, Economy, and State with Power and Market, 2nd scholar’s ed. (Mises Institute, 2009), pp. lvii.

Murray N. Rothbard, “Progress Report [fragment],” n.d., p. 2, Rothbard Papers. Although Rothbard later referenced his “discussion in the previous two Progress Reports,” complete copies of reports from April 1953 to December 1954 have unfortunately not survived. Furthermore, Rothbard did not save a copy of his revised chapter 5. Murray N. Rothbard, “Progress Report, December 1, 1954 to April 1, 1955,” n.d., p. 1, Rothbard Papers.

Murray N. Rothbard, “Chapter II: Economics of the Unhampered Market: Direct Exchange,” n.d., p. 80, Rothbard Papers.

Rothbard, Man, Economy, and State, pp. 321–22.

Rothbard, Man, Economy, and State, pp. 322, 348, 368.

Rothbard, Man, Economy, and State, pp. 325, 356, 358–59.

Rothbard, “Progress Report [fragment],” p. 2.

Rothbard, Man, Economy, and State, pp. 329, 331, 349, 351.

Rothbard, Man, Economy, and State, pp. 329, 331, 349, 351, 354, 371.

Rothbard, Man, Economy, and State, pp. 351, 354.

Rothbard, Man, Economy, and State, pp. 350–51.

Murray N. Rothbard to Edward C. Facey,” October 18, 1956, pp. 4–5, Rothbard Papers. Stevan Bennett, “Former Professor Edward Facey Shaped Hillsdale’s Economics Department,” Collegian, September 22, 2016, https://hillsdalecollegian.com/2016/09/former-professor-edward-facey-shaped-hillsdales-economics-department/.

Rothbard, Man, Economy, and State, pp. 454–55, 475–77.

Rothbard, Man, Economy, and State, pp. 354–56.

Rothbard, Man, Economy, and State, pp. 588–89.

Rothbard, Man, Economy, and State, p. lvii.

Mises, Human Action, pp. 478, 485–86, 524–25.

Rothbard, Man, Economy, and State, p. 402. F. A Hayek, Prices and Production, 2nd ed. (Routledge & Kegan Paul, 1935).

Rothbard, Man, Economy, and State, p. 506. Knut Wicksell, Lectures on Political Economy, vol. 1, General Theory (Routledge & Sons, 1934).

Joseph T. Salerno, introduction to Man, Economy, and State with Power and Market, 2nd scholar’s ed., by Murray N. Rothbard (Mises Institute, 2009), p. xxvii.

Böhm-Bawerk, Positive Theory of Capital, pp. 314–315, 336.

Rothbard, Man, Economy, and State, pp. 379, 388. Rothbard, Man, Economy, and State, pp. 379–89, 404–7.

Rothbard, Man, Economy, and State, pp. 389, 425. Frank A. Fetter, “Capitalization Versus Productivity: Rejoinder,” American Economic Review 4, no. 4 (1914): 856–59; Frank A. Fetter, “Davenport’s Competitive Economics,” Journal of Political Economy 22, no. 6 (1914): 550–65; Frank A. Fetter, “Interest Theories Old and New,” American Economic Review 4, no. 1 (1914): 68–92; Frank A. Fetter, “The ‘Roundabout Process’ in the Interest Theory,” Quarterly Journal of Economics 17, no. 1 (1902): 163–80; Irving Fisher, The Theory of Interest: As Determined by Impatience to Spend Income and Opportunity to Invest It (Macmillan, 1930), pp. 61–98, 150–77.

Rothbard, Man, Economy, and State, p. 421.

Rothbard, Man, Economy, and State, pp. 423–25.

Rothbard, Man, Economy, and State, pp. 400–401.

Frank H. Knight, “Professor Hayek and the Theory of Investment,” Economic Journal 45, no. 177 (1935): 77–94.

Murray N. Rothbard, “Appendix C: The Neglect of Urban Land in Economic Analysis,” n.d., p. 2, Rothbard Papers. Stigler, Theory of Price, pp. 321–22.

Rothbard, Man, Economy, and State, p. 484. F. A. Hayek, The Pure Theory of Capital (University of Chicago Press, 1941), pp. 54–58; Mises, Human Action, p. 634.

Rothbard, Man, Economy, and State, p. 484. Rothbard, Man, Economy, and State, pp. 483–85.

Rothbard, Man, Economy, and State, p. 497.

Rothbard, “Progress Report, December 1, 1954 to April 1, 1955,” p. 2.

Rothbard, Man, Economy, and State, pp. 496–99.

Earl Rolph, “The Discounted Marginal Productivity Doctrine,” Journal of Political Economy 47, no. 4 (1939): 544.

Rothbard, Man, Economy, and State, p. 505.

Murray N. Rothbard, “Savings, Interest, and Production,” n.d., p. 180, Rothbard Papers. Hayek, Prices and Production; F. A Hayek, “The ‘Paradox’ of Saving,” Economica, no. 32 (1931): 125–69.

Rothbard, Man, Economy, and State, pp. 517–19, 521–22.

Rothbard, Man, Economy, and State, pp. 522, 525.

Rothbard, “Savings, Interest, and Production,” p. 200.

Rothbard, Man, Economy, and State, pp. 522, 525–26.

Rothbard, Man, Economy, and State, p. 542.

Rothbard, Man, Economy, and State, p. 500.

Rothbard, Man, Economy, and State, pp. 351–52, 488, 603.

Rothbard, Man, Economy, and State, pp. 558. Marshall, Principles of Economics, pp. 413–24.

Stigler, Theory of Price, pp. 179–81.

Mises, Human Action, pp. 631–32.

Murray N. Rothbard to Richard C. Cornuelle, August 31, 1955, p. 2, Rothbard Papers.

Murray N. Rothbard to Ludwig M. Lachmann, February 14, 1957, p. 7, Rothbard Papers.

Rothbard, Man, Economy, and State, pp. 488, 490, 558.

Rothbard, Man, Economy, and State, pp. 558, 560, 563.

Rothbard, Man, Economy, and State, pp. 510, 601–3. Eugen von Böhm-Bawerk, Capital and Interest: A Critical History of Economical Theory (London, 1890), 8.

Rothbard, Man, Economy, and State, p. 606.

Ludwig von Mises, “Die Wirtschaftsrechnung im sozialistischen Gemeinwesen” [Economic calculation in the socialist commonwealth], Archiv für Sozialwissenschaften 47 (1920): 86–121; Ludwig von Mises, Die Gemeinwirtschaft: Untersuchungen über den Sozialismus (Gustav Fischer, 1922).

Abram Bergson, “Socialist Economics,” in vol. 1 of A Survey of Contemporary Economics, ed. H. S. Ellis (Richard D. Irwin, 1948), pp. 412–48. Murray N. Rothbard, “The End of Socialism and the Calculation Debate Revisited,” in Economic Controversies (Mises Institute, 2011), p. 830.

Ludwig von Mises, Socialism: An Economic and Sociological Analysis, new ed. (Yale University Press, 1951). Murray N. Rothbard to Richard C. Cornuelle, June 14, 1951, p. 1, Rothbard Papers.

Murray N. Rothbard to Richard C. Cornuelle, November 12, 1952, p. 1, Rothbard Papers. F. A. Hayek, ed., Collectivist Economic Planning (George Routledge & Sons, 1935); Trygve J. B. Hoff, Economic Calculation in the Socialist Society (William Hodge, 1949); Murray N. Rothbard to George C. Resch, November 1, 1961, pp. 1–2, Rothbard Papers; Murray N. Rothbard to Kenneth S. Templeton, September 8, 1959, p. 1, Rothbard Papers.

Murray N. Rothbard to Richard C. Cornuelle, August 9, 1954, p. 2, Rothbard Papers.

Rothbard, Man, Economy, and State, pp. 606–8.

Rothbard, Man, Economy, and State, pp. 609, 613–14.

Rothbard, Man, Economy, and State, p. 613. R. H. Coase, “The Nature of the Firm,” Economica 4, no. 16 (1937): 386–405.

Rothbard, Man, Economy, and State, pp. 614–15.

Geoffrey Gilbert to Ludwig von Mises, September 24, 1966, p. 1, Ludwig von Mises Collection, Grove City College.

Ludwig von Mises to Geoffrey Gilbert, September 29, 1966, p. 1, Ludwig von Mises Collection, Grove City College. Ludwig von Mises, Human Action: A Treatise on Economics, 2nd ed. (Yale University Press, 1963), pp. 698–715; Rothbard, Man, Economy, and State, pp. 614–16.

Rothbard, Man, Economy, and State, pp. 624–27.

Rothbard, “Progress Report, December 1, 1954 to April 1, 1955,” p. 1.

Rothbard, Man, Economy, and State, pp. 629, 631. William H. Hutt, “The Concept of Consumers’ Sovereignty,” Economic Journal 50, no. 197 (1940): 66–77; Mises, Human Action, scholar’s ed., pp. 270–73.

Rothbard, Man, Economy, and State, pp. 629–34.

Rothbard, Man, Economy, and State, p. 672. Fetter, Economic Principles, pp. 73–85; Menger, Principles of Economics, pp. 207–25; Mises, Human Action, pp. 278, 354–84; Wieser, Social Economics, pp. 204, 211–12.

Rothbard, Man, Economy, and State, pp. 687–90. F. A. Hayek, “The Meaning of Competition,” in Individualism and Economic Order (University of Chicago Press, 1948).

Rothbard, Man, Economy, and State, pp. 688, 690, 698.

Rothbard, Man, Economy, and State, pp. 696–98.

Rothbard to Cornuelle, “Textbook or Treatise?,” p. 2.

Rothbard, Man, Economy, and State, p. 720. Edward H. Chamberlin, The Theory of Monopolistic Competition (Harvard University Press, 1933); Joan Robinson, The Economics of Imperfect Competition (Macmillan, 1933); Robert Triffin, Monopolistic Competition and General Equilibrium Theory (Harvard University Press, 1940).

Rothbard to Cornuelle, November 5, 1954, p. 1.

Murray N. Rothbard, “The Theory of Monopolistic or Imperfect Competition,” November 28, 1954, pp. 1, 3–4, Rothbard Papers.

Rothbard, Man, Economy, and State, pp. 721–22.

Rothbard, Man, Economy, and State, pp. 726–28.

Rothbard, Man, Economy, and State, pp. 726, 728–29. Edward H. Chamberlin, “Product Heterogeneity and Public Policy,” American Economic Review 40, no. 2 (1950): 85–92; Hayek, “The Meaning of Competition,” pp. 92–106; Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (Harper & Bros., 1942).

Rothbard, Man, Economy, and State, pp. 720–21, 731–32.

Rothbard to Cornuelle, August 9, 1954, p. 1.

Rothbard, “Progress Report, December 1, 1954 to April 1, 1955,” p. 1.

Murray N. Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” n.d., p. 2, Rothbard Papers.