Murray N. Rothbard The Making of an Austrian Economist

PART IV

The Rothbardian Theory of Interventionism, 1955–1956

MURRAY ROTHBARD USED HIS GENERAL-EQUILIBRIUM APPROACH with its emphasis on economic interrelations to erect a systematic framework of interventionism. He started by elaborating further on the concept of the purely free market and developing a comprehensive welfare theory. He then proceeded to create a typology of government policy, formulate a novel theory of monopoly that distinguishes between a monopoly price and a free-market price, develop an original theory of backward tax imputation, and analyze the calculational chaos caused by government expenditure. The capstone of Rothbard’s analysis of interventionism was his integration of the Mises–Hayek theory of the business cycle into general economic theory. Rothbard was thus able to demonstrate how the boom could result only from credit expansion and not from an increase in the supply of commodity money such as gold. He also demonstrated how credit contraction during the bust promotes recovery. With these advances in the Austrian theory of the business cycle, Rothbard finally completed the monumental task of deducing the entire corpus of economic theory using the praxeological method.

The Purely Free Market

In 1955, Rothbard finished the “analytic bulk of the book” with chapter 12, on “the role that government would play in a purely free market.” Before exploring the effects of government policies, Rothbard realized that he needed to elaborate on the features of the free market he had only briefly sketched in chapter 2. He clarified his concept of the free market as an economic system with “self-ownership, no invasion of the person or property of others, no implicit or explicit theft, [and] first ownership of unused factors by the first user.” This meant that the free market is a “society in which there is no violent invasion of anyone’s person or property.” The government, in striking contrast, “is the only organization in society legally equipped to use violence, and . . . the only agency that legally derives its revenues by compulsory levy.” It is the primary institution that initiates violence, which means “in practice it will be the State to which analysis of violent intervention” applies.

At this point, Rothbard reached a momentous stage in his treatise. So far, chapters 2 to 11 assumed that there was no invasion of private property, which, according to definitions in chapter 12, meant that there was no government at all. Chapter 12 justified this approach: “it is most convenient to begin with a pure system,” either capitalist or socialist, “to analyze it at length, and then . . . analyze the consequences of . . . various ‘mixed systems’” that incorporate violent intervention. But a socialist economy lacks a price system and thus the means of economic calculation. A socialist system would, therefore, not be able to economize resources and “must result not in order or ‘planning,’ but in chaos. . . . And it is obviously absurd to ground economics on an analysis of chaos.” This means that the economist cannot begin with socialism and must start with “indirect exchange on the purely free market, and [then] analyze various types of violent intervention in the free market.” For deducing the workings of a free market provides “the explanation of the seemingly mysterious processes of price formation, income, money, calculation, production, profits and losses, etc.” Without familiarity with these processes and their intricate interrelations, it would be impossible to systematically trace out the effects of various government interferences or to conceive of what the wholesale abolition of the market logically entails. The pure market, therefore, is indispensable in economic reasoning.

Rothbard’s analysis of a pure market economy had implicitly challenged his mentor’s definition, for Human Action assumed that the free market operated under the night watchman government. Mises emphasized that “government interference always means either violent action or the threat of such action,” but argued that such behavior was essential for the economy’s smooth operation because “peaceful social cooperation is impossible if no provision is made for violent prevention and suppression of antisocial action.” 

Rothbard boldly set out to challenge this assumption by sketching out how a pure free market with marketable defense and private “police forces, courts, etc.” could actually work. In such a system, coercion would only be “defensive” and protect against invasions of private property. This contrasted with modern neoclassical economists such as William J. Baumol, who, in Rothbard’s words, argued that “a purely free-market, Stateless, society either cannot exist, or would be so obviously helpless in certain areas that nobody (or hardly anybody) would wish it to exist.” Rothbard countered: “Police and judicial services could be sold to those individuals who purchase them.” These “freely competitive defense agencies” would exist alongside a system of law developed in “private courts [and] voluntarily adopted by all of the people concerned.” Police and arbitration agencies that provided reliable and prompt service would earn profits and drive less efficient firms out of business.

Rothbard’s application of the profit and loss mechanism to law and order was extremely controversial, even among libertarians. Mises had insisted that some form of government was absolutely necessary to the operation of the market economy, and now Rothbard was challenging that position and arguing for private protection agencies. Though Rothbard realized his position would have far-reaching consequences for the reception of his Austrian-libertarian treatise, he determined that it was essential to developing a comprehensive framework of interventionism: government itself was an intervention into the market economy.

Reconstructing Welfare Theory

Rothbard finally introduced interference by the state, “the agency engaged in regularized violence on a large scale,” in chapter 13, “Fundamentals of Intervention.” To fully explain the economics of government intervention though, Rothbard needed a welfare economics that compared the consequences of political actions with marketplace activities.

Rothbard’s development of such a welfare economics evolved while he was writing his production theory. In 1954, he planned to accomplish this goal in an academic paper while “thinking about the Volker Fund program [and] the relation of economics to [the] ethics” of libertarianism. Despite this reference to libertarianism, Rothbard wrote his paper strictly as a scientific economist, with the result that “there is precious little ethics in it—just the statement of the problem at the end.” His main goal was to “pillory the very fashionable ‘welfare economics’” in the ruling neoclassical synthesis that economists “use to make pronouncements about government policy while still claiming to be strictly ‘scientific.’”  Although Earl J. Hamilton, the editor of the Journal of Political Economy, “found it interesting” and “well done,” he rejected the manuscript because of “the large mass of material on hand” that needed to be published.

Undeterred by the setback, the following September Rothbard refined his thoughts on welfare economics in a report to the Mises seminar. He devoted extensive space to its history to show where the discipline had gone wrong. In doing so, he displayed a deep and extensive knowledge of the history of utility theory. In the late eighteenth and early nineteenth centuries, British classical economics grew out of “an atmosphere of utilitarianism” and “‘the greatest happiness of the greatest number.’” These utilitarians assumed utility was cardinal and interpersonally comparable so it could construct “a single lump of ‘social utility’ or ‘social welfare.’” This approach led to a weak defense of laissez-faire that contained “tortuously introduced qualifications” because certain interventions could purportedly increase social utility. British utilitarianism contrasted with the “French optimist school in the nineteenth century,” who understood that the economists’ “discovery of regularities, of harmonies, in the market economy is a powerful argument for laissez-faire.”

The position of the leading British classical economists was refined during the marginalist revolution of the 1870s with the discovery of incremental utility. Neoclassical economists now believed that marginalism would “permit interpersonal comparisons and additions of utility in economics.” By the early twentieth century, they developed what came to be known as “Old Welfare Economics,” best described in the Marshallian Arthur C. Pigou’s Wealth and Welfare and The Economics of Welfare. The old welfare economics, with its use of cardinal and interpersonally comparable utility, “attempted to invest economics with the scientific power to recommend government policies” such as subsidies, taxes, and regulations. For example, Pigou and others justified the progressive income tax on the grounds that because “the marginal utility of money . . . diminish[es] as its stock increases . . . a dollar is worth more to a poor man than to a rich man.”

However, the old welfare economics crumbled in the 1930s under the criticism that utility is ordinal and not subject to interpersonal comparisons or measurement. Lionel Robbins, who was still a Misesian at the time, introduced this criticism. He established as the benchmark for welfare economics the unanimity rule: “the only time an economist can say that ‘social utility’ has increased is when everyone has gained in utility.” Unfortunately, the “New Welfare Economics” perpetuated the old paradigm’s fallacies, as neoclassical economists adopted various rules to “get around this restriction.” In particular, according to Rothbard, John R. Hicks and Nicholas Kaldor devised a compensation principle whereby social utility increases from an intervention if the “winners (in utility) . . . are able to compensate the losers,” a compensation that only has to theoretically “take place.” But this theoretical compensation was an impossible task because it relied on measuring and comparing ordinal utilities and “no one knows how each person’s utility has been affected.”

In conclusion, economics by the time of the neoclassical synthesis that was developing in the mid-1940s had not yet figured out how to make welfare pronouncements without relying on cardinal utility. This meant that “welfare economics is currently in a deplorable state.” Rothbard recognized the task that lay before him: he would have to construct an alternative welfare economics that built upon the Austrian conception of ordinal utility.

Rothbard established the foundations of this welfare economics in his 1956 Mises Festschrift paper, “Toward a Reconstruction of Utility and Welfare Economics.” Rothbard recognized that he could salvage welfare economics by incorporating Mises’s theory of “demonstrated preference . . . that actual choice reveals, or demonstrates, a man’s” ordinal utility rankings. Rothbard now defined an increase in social utility as a situation where everyone demonstrably gained in utility, a broader conception than he used in his Misesian monetary analysis where he linked an increase in social welfare to the overall supply of consumer products and services. Moreover, Rothbard’s broadened social utility excludes “opinions about exchanges made by others” because these “opinions are not demonstrated through action.”

He then delivered his striking conclusions. On the free market, “the very fact that an exchange takes place demonstrates that both parties benefit (or more strictly, expect to benefit) from the exchange.” Therefore, “the free market benefits all its participants . . . [and] increases social utility.” In contrast, when the state violently prohibits “A and B from making an exchange they are willing to make . . . some individuals have demonstrably gained, and some demonstrably lost in utility.” Because utility is ordinal, the economist cannot say whether one individual’s gain is greater than another’s loss, and therefore “no government interference with exchanges can ever increase social utility.”

Significantly, this paper had only analyzed ex ante utility, or the utility an individual expects to gain. In his treatise’s chapter 13, Rothbard improves on his paper by discussing the vital concept of “utilities ex post,” the ordinal ranking of a choice after an individual makes his decision. Although ex post utility cannot be demonstrated in action, it is still important because individuals want to know if “they actually benefit from the results of their decisions.” For example, by choosing a turkey sandwich over a ham sandwich, an individual increases his utility ex ante, but only after consuming the sandwich and evaluating his decision does the person know whether he benefited or erred. Here, Rothbard stresses the importance of market tendencies and mechanisms that coordinate economic activity, an approach emphasized by the French economists who reasoned that voluntary exchanges “harmoniously conduced to the benefit of all.”

On the free market, “error is reduced to a minimum” because of the market mechanism. Specifically, businessmen on the market have a “fast-working, easily understandable test”: profits or losses. Profits indicate that capitalist-entrepreneurs are allocating resources to the most urgent demands of consumers while losses signal that they are wasting resources. “Profits and losses,” Rothbard stresses, “spur rapid adjustments to consumer demands.” The smooth and accurate working of this profit-and-loss mechanism stems from the fact that consumers “have direct tests by which to acquire their knowledge” about whether products satisfy them. They buy a certain item and if it does not suit them, “they don’t buy it again”; if the performance of another product pleases them, “they buy another one.” In both cases they inform friends and acquaintances of their experience. Consumers can also consult “research organizations, which can warn or advise them in advance.” Consumers’ decisions to buy or abstain from buying any particular product is thus based on their own or others’ direct experience. These decisions not only determine the distribution of profits and losses among capitalist-entrepreneurs but, in the long run, effect the allocation of resources that best promotes a convergence between ex ante and ex post utility.

While the free market “contains a smooth, efficient mechanism for bringing anticipated, ex ante utility into the realization of ex post . . . in political action . . . there is no such mechanism.” Unlike capitalist-entrepreneurs, government officials do not abide by the profit and loss mechanism. Instead, politicians and bureaucrats earn income “from a compulsory levy on the populace.” They do not have to produce goods that the public consensually decides to purchase and “wholly lack the pecuniary incentive to care about serving the public properly and competently.” Voting in democratic elections does not solve the problem, for the most successful politicians are those that are the “most adroit at making demagogic appeals to the voting public.”

Overall, “the free market . . . maximizes social utility ex ante; it also tends to do so ex post, since it works for the rapid conversion of anticipations into realizations.” On the other hand, under government intervention, “one group gains directly at the expense of another,” and therefore the intervention cannot increase ex ante social utility. In fact, the lack of mechanisms to ensure efficiency will cause the majority of the public, and even many interveners, to “lose utility ex post.”

This welfare theory was a significant accomplishment and a marked improvement over the new welfare economics. Adhering to a strictly ordinal theory of utility that eschews interpersonal comparisons, Rothbard demonstrated that government policy always prevents the coerced from choosing their preferred action and individuals tend to regret the outcome because the government lacks the means to identify and minimize error. It was a crucial defense of the free market and a necessary component of “a general treatise in the Austrian-libertarian tradition.” Rothbard could now proceed to investigate the “consequences of various types of governmental intervention,” which would take up the “remainder of” his work.

The Economics of Government Policy

In addition to outlining welfare economics, Rothbard wrote chapter 13 “to present the whole government intervention part in one logical organon.” He wanted to “evolve it step by step on the basis of analysis of the effect of different types of violent or fraudulent interference with the market.” He envisioned his task as “one of weaving the whole part, for the first time, into a logical structure, one which would give a comprehensive view of all possibilities of intervention.” This was a daunting task because most neoclassical studies of intervention “have been confined to disconnected chapters on taxation, or inflation, or price controls, with no linking between them.” “Even Mises’ discussion of this material is sketchy and fragmented,” in part because Mises never explicitly developed a welfare theory that could compare the effects on social utility of the market and the government. However, Rothbard had done so and could now fill the gap in his mentor’s edifice.

Rothbard’s integrative theory distinguished between three types of interventions. Autistic intervention “occurs when the invader coerces a subject without receiving any good or service in return.” Examples include murder, forced salutes, and religious prohibitions. This type of intervention is not very relevant for analyzing the effects of government policy on prices and production because “exchange is not involved.”

The other two kinds of intervention do affect market activity and occupy the bulk of Rothbard’s analysis. Binary intervention occurs when “the invader forces the subject to make an exchange or a unilateral ‘gift’ to the invader of some good or service.” Examples are highway robbery, slavery, and taxation. Comparing taxation to forced labor and theft, let alone considering it an intervention, was extremely controversial because many economists did not consider it an “interference with the free market.” But taxation does interfere with exchanges, for “taxes . . . are paid in money” and taking money away from someone changes their spending patterns.

Triangular intervention occurs when the invader prohibits “an exchange between a pair of subjects.” Price controls are the typical example. Significantly, Rothbard did not limit himself to investigating price controls but also included many other interventions in this category, such as grants of monopolistic privilege.

Rothbard recognized that, when “tracing the effects” of the three types of intervention, the economist must analyze “all of the consequences, direct and indirect.” In other words, the economist must investigate how a given intervention affects the utilities of the actors directly involved as well as its indirect consequences in altering prices, production, and income and wealth distribution. This was an important point because, without a comprehensive welfare theory, Mises had “dealt only with the indirect effects.”

Therefore, it was left to Rothbard to investigate both. In all three types, the intervention causes the coerced “subjects to lose in utility” ex ante. For example, in the case of taxation, a binary intervention, the taxed individuals lose in utility ex ante because they cannot allocate money to their most preferred choice. At the same time, the intervener gains in “utility ex ante” because he “gains in exchangeable goods at the expense of his subject.” However, indirect effects are more complex because they depend on how a given intervention affects relative prices, incomes and production. “The remainder of this volume,” Rothbard writes, “will largely consist of analysis of what we may call the ‘indirect’ consequences.”

Rothbard would now analyze binary and triangular interventions with his Austrian general equilibrium theory. In particular, he would show how: (1) certain triangular interventions lead to monopoly prices conceptually distinct from free market prices; (2) the burden of a tax gets imputed back to the original factors of production; and (3) government spending introduces islands of calculational chaos into the economy.

Chapter 14, “Triangular Intervention,” concerned price and product controls. Rothbard devoted the bulk of the chapter to product controls, especially “grants of monopolistic privilege.” He applied this term to interventions such as licenses and quality standards because they eliminated some firms from the market by raising their costs or explicitly preventing them from competing. By recognizing that certain triangular interventions had this effect, Rothbard rehabilitated the original definition of monopoly as a grant of government privilege. In analyzing this coercive restriction, Rothbard concluded that “the theory of monopoly price . . . applies fully to the case of monopoly and quasi-monopoly grants.”

Previously, Rothbard had demolished the “spurious distinction between the ‘competitive’ and ‘monopoly’ or ‘monopolistic price’” by demonstrating that all demand curves slope downward. But now there was “an identifiable distinction”—the price that may result from coercion and the voluntary free-market price. The monopoly privilege “renders the consumer demand curve less elastic, for the consumer is deprived of substitute products from other would-be competitors.” If substitutes decrease so much that the demand curve becomes inelastic, the capitalist-entrepreneur can restrict production and institute “a monopoly price so as to maximize his revenue,” thereby reaping a “monopoly gain.” The higher, monopolistic price causes the ex ante utility of consumers and excluded competitors to decrease while benefiting the monopolizing firm. Consumers’ utility is still lowered even if the monopolist is unsuccessful in charging a higher price, because consumers are forcibly “barred from buying from the most efficient and value-productive producers.”

Rothbard then applied Austrian general equilibrium theory to elucidate the indirect effects of a monopoly grant. “It is true,” Rothbard conceded, that just as in the case of a firm restricting production on the free market, “nonspecific factors are again released for production elsewhere.” However, the cutback is not due to voluntarily altered consumer spending patterns but government edict. Therefore, the monopoly grant distorts the overall economy through a “misallocation of production” by artificially keeping factors out of one sector while encouraging their less valuable uses in others, which “will satisfy consumers less than under free-market conditions.” The effects of the monopoly grant thus radiate beyond the monopolized market.

Rothbard finished his analysis by investigating how the monopoly gain is imputed throughout the overall structure of production. Unlike profits, which arbitrage among the capitalist-entrepreneurs “reduce to a uniform interest return,” the monopoly gain “does not disappear in the long run.” Instead, it is imputed to the factor of “the right to enter the industry” and exists “as long as the privilege remains and consumer valuations continue as they are.” Another way of putting it is that the monopoly privilege leads to a type of income for the capitalist-entrepreneur that is conceptually different from profits or interest.

Rothbard continued his investigations of indirect effects in chapter 15, on “Binary Intervention: Taxation,” where he introduced his unique theory of backward incidence. This was a wholly original contribution because “none of the Austrian economists applied their theory to the problem of shifting and incidence of taxation.” Even “Mises doesn’t deal with it.”

Rothbard admitted to Richard C. Cornuelle that he “never took a course on the incidence of taxation, and [found] on surveying the literature that the situation is an unholy mess. Everyone disagrees with everyone else.” Previously, “the ‘old-fashioned’ discussion of shifting and incidence was based on Marshallian assumptions.” He referred to the “old classical ‘cost of production’ theories of price” that involved a forward-sloping supply curve that shifted as costs of production changed. This supply curve implies that “certain taxes on business can be shifted to consumers through raising cost of production and therefore price.” More modern “‘general equilibrium analysis’” correctly argued that the effect of a tax could not be investigated separately from government expenditures but downplayed analyzing individual taxes in isolation. Both starkly contrast with the Böhm-Bawerkian vision of sequential adjustment through a reconfiguration of resources across the production structure. “Therefore it has been necessary,” Rothbard explained, “for me to carve out a new theory of incidence.” He used “Austrian subjective value theory” to demonstrate “that no tax can be shifted forward, but can only be shifted backward” onto the incomes of land and labor. He was influenced by “some of the very latest stuff,” such as an article by Harry Gunnison Brown, “which denies even that sales taxes can be shifted forward to the consumer.” 

Rothbard proved this “law of incidence” by investigating a general sales tax on retail goods, concentrating on economic interrelations in the structure of production. Contrary to the thinking of “most people,” given a constant supply of money, demand for money, and stocks of goods, “there is no possible way that a general price increase can be obtained.” Consequently, capitalist-entrepreneurs pay the tax out of existing retail prices, which “lowers the gross revenue of firms by the amount of the tax.” Their losses are reflected in “a decreased demand for the products of all the higher order firms.” However, because all capitalist-entrepreneurs earn a uniform interest return in the long run, the incidence ripples backward throughout the production structure and falls entirely on land and labor. Original factors now “earn less than their dmvp’s” by the amount of the sales tax paid to the government. These lower earnings “may push some workers into idleness,” decreasing the stock of goods produced. Although “to this tenuous extent, prices will rise,” it will not occur through the Marshallian framework where a sales tax raises prices by instantly shifting forward-sloping supply curves leftward.

Rothbard completed his analysis by utilizing Austrian general equilibrium theory to spell out the indirect effects of the government’s spending the “proceeds of taxation.” First, the general sales tax reduces production through the increased idleness of workers and decreases the demand for and production of goods that the now poorer laborers and landowners have “been spending heavily on,” such as clothing. Second, the government’s expenditures stimulate output in various sectors—say, “armaments.” This leads to lower demands for factors in clothing and higher demands in weapons manufacturing, increasing the “tendency for non-specific factors” to shift from the former to the latter. After profits and losses are wiped out through arbitrage, the sales tax and the government expenditures cause permanent changes in the constellation of factor prices. The prices of specific factors in clothing decline the most. In contrast, specific factors in armaments “may gain absolutely” if the government’s increased demand for weapons offsets the decreased demand from the sales tax on weapons sales. As a result, there will not be a “proportional . . . fall in all original factor incomes.” 

Overall, Rothbard showed how a government’s sales tax and related expenditures affect production, prices, and incomes throughout the economy. After the government levies a sales tax on retail goods, retailers respond by decreasing demands for factors, lowering their prices and incomes. This decreases the relative demands and production of goods that original factors purchase. Total production also may decline if lower real wage rates induce laborers to choose more leisure. Concurrently, government disbursement of the tax revenues increases the demands for some goods, partially offsetting the decline in incomes of some specific factors and even increasing the incomes of others. In sum, the tax does not directly increase consumer prices; instead, it first affects exchanges in earlier stages, increasing overall prices only later if, in the face of declining wages, some laborers shift into idleness. Rothbard recognized the significance of adopting “a consistent ‘Austrian’ approach,” which the “Austrian economists themselves never got around to.” “This discussion,” Rothbard concluded, “breaks new ground.” 

In chapter 17, on “Binary Intervention: Government Expenditures,” Rothbard further elaborated the lack of market mechanisms inherent in government spending, particularly regarding the “difference between government and private ownership [and] the Mises distinction between bureaucratic management and profit-and-loss management.” This was an especially crucial task given the rise of Keynesian macroeconomic thinking that advocated managing aggregate spending through fiscal policy. According to contemporary Keynesians, under certain conditions the government’s job was to incur budget deficits via increased government spending, which, they claimed, was just as efficient as private sector spending.

In refuting Keynesianism and likeminded thinking, Rothbard moved beyond Mises by applying the theory of the impossibility of economic calculation in a socialist society to situations his mentor had not fully analyzed. Rothbard demonstrated that a mixed economy and socialism actually exist along a spectrum, with every increase of government ownership and spending in a mixed economy “spreading calculational chaos” and pushing the economy closer to socialism. This contrasted with Mises, who admitted that “publicly owned and operated enterprises are subject to the sovereignty of the market” and “must strive for profits, or, at least, to avoid losses.” “Nothing,” Mises reasons, that relates to a publicly owned enterprise in the market economy “is in the praxeological or economic sense to be called socialism.” 

Subtly lumping his mentor in with orthodox theorists, Rothbard argued that “it is often stated that a single government enterprise, operating within the sphere of a private market . . . can price its services and allocate its resources efficiently.” But this view is wrong due to “a fatal flaw that permeates every conceivable scheme of government enterprise” that prevents it from ever operating on “a ‘business’ basis, no matter [its] intentions.” Capitalist-entrepreneurs “can only get funds from consumers and investors” and direct “resources to their most value-productive uses” according to the free market’s profit-and-loss mechanism. But the government, aside from the different incentive structure that its “bureaucratic managers and politicians” face, cannot function as a business. This results from the fact that a “coercive levy”—taxpayer funds—is an “arbitrary element . . . ‘built in’ to the very vitals of the enterprise,” which distorts its operations. It cannot even appropriately pay factors, for taxpayer revenue causes them to have “no discernable value-product.” In other words, a government enterprise’s profit-and-loss accounting is qualitatively inferior to capitalist-entrepreneurs’ estimations because part of the money it receives is exogenous to the marketplace.

Rothbard extends his theory to other cases of government activity. Like the total vertical integration of “two or more stages [that] . . . would eliminate a whole segment of the market, . . . each governmental firm introduces its own island of chaos into the economy.” This island “disrupts and distorts pricing, the allocation of factors, consumption/investment ratios, etc.” These indirect effects are more pervasive in market economies than commonly realized, for government lending leads to the same effect. Rothbard recognizes that a government lender “is also an entrepreneur and part owner, regardless of his legal status,” and therefore loans “create many centers of government ownership.” His argument, then, applies to wholly state-owned and partially owned firms as well as those who receive subsidies. No form of government spending, Rothbard concludes, “can ever determine prices or costs or allocate factors or funds in a rational, welfare-maximizing manner.” Instead, it introduces calculational chaos, pushing the economy farther along the spectrum to full-blown socialism.

Rothbard’s pioneering analysis leads to two important results that challenge the economic orthodoxy. First, in contrast to the “essential part of the Keynesian doctrine” that treats government spending as investment, expenditures by the state “must be considered consumption . . . whatever their intention or physical result.” The inability to engage in economic calculation means that state officials can only be “playing at enterprise—no profit and loss test can or will apply, and therefore the whole activity becomes a consumption activity by government officialdom.” This means that increases in spending must always increase the societal consumption-investment ratio.

Second, “the Department of Commerce method” of estimating government’s contribution to “National product statistics” according to what it spends must be revised. Rothbard argues that government activities actually “sap the national product” because they misallocate resources due to the lack of profit-and-loss accounting. Instead, the statistician must subtract various expenditures by the state to arrive at “gross private product,” a concept originated by Rothbard that estimates production by the private sector. Rothbard’s revision moves national income accounting closer to its originator, Simon Kuznets, who at least “evaluated government services as equal to the taxes paid” and excluded spending financed by deficits.

Rothbard’s exhaustive investigation of intervention did not focus only on regulations, taxes, and spending activities. He also analyzed monetary policy. In doing so, he would return full circle to the field of study with which he started when asked to write a Misesian textbook.

Austrian Business Cycle Theory

Rothbard’s most important contribution to the praxeological analysis of government policy occurred in chapter 16, on “Binary Intervention: Inflation.” As he stated in his progress report, he planned to improve the Mises–Hayek theory of the trade cycle, also known as Austrian business cycle theory (ABCT). He would do so by putting ABCT “squarely under the effects of intervention” by showing how only the government could cause the cycle and how “deflationary credit contraction” is the natural reaction to a previous credit expansion and “speeds recovery” during the depression.

In an unpublished manuscript written around the time he penned chapter 16, Rothbard classified business cycle theories in a way “which is almost completely neglected in the economic literature.” “The issue,” Rothbard emphasized, “is this: do business cycles emerge from the market economy itself, or are they imposed upon that economy by outside intervention?” In more technical terms, “Are they ‘endogenous’ (coming from within the market economy), or are they ‘exogenous’ (coming from without)?” Most theories assert that business cycles “come from within the ‘capitalist system.’” In contrast, Rothbard planned to show that business cycles result solely from government intervention.

In the 1950s, two major endogenous theories existed. The first was the institutionalist approach of Wesley Clair Mitchell and the National Bureau of Economic Research with which Rothbard became well acquainted during his Columbia education. This view of the business cycle asserted that it “is caused by processes deep within the capitalist system.” The institutionalist “rarely tries to explain the causes of the cycle” but simply assumes that “business cycles are caused by the capitalist system itself, in some vague, unknown protean way.” His method is a “naïve statistical-behaviorist view that the cycle must be traced, must be summarized, etc. in infinite and intricate detail, and perhaps then, some sort of theory might emerge.” Although the cause of each phase of the cycle, such as an abundant crop harvest or banking crisis, depended on the unique historical data, the ultimate cause was always “processes deep within the capitalist system.” For these institutionalists, the solution was monetary and fiscal intervention, especially micro-oriented “aid to particular depressed areas.”

The second and more dominant endogenous theory was the various branches of Keynesian theory, whose theoretical differences did not concern Rothbard. For many Keynesians “do not necessarily accept the theoretical structure of [John Maynard] Keynes but do accept his main conclusions. . . . [The] economy is fundamentally and totally unstable in the aggregate” and is “perpetually in danger of falling into the abyss of depression and unemployment on the one hand, or of inflation on the other.” According to the Keynesians, “the irrationality of the economy as a whole” pushes it into prolonged periods of unemployment or price increases, with the emphasis almost always on the former. Their solution was aggregative “compensatory spending: of government deficits during depressions, and of government surpluses during booms.” Modern Keynesians scorn monetary policy “as being ‘classical’ and old-fashioned.”

Rothbard then discussed the third strand of endogenous theories that was gaining prominence in the 1950s. It was associated with the emerging Chicago School, which built on Irving Fisher’s equation of exchange and business cycle theory. “Henry C. Simons, Frank Knight, Lloyd Mints, Milton Friedman, etc.” were its main expositors. Essentially, the Chicago School argued that the business cycle is a “monetary-price level phenomenon,” although the ultimate “causes of the cycle” are unknown. They advocated expansionary monetary policy during a depression, thereby “raising the price level and stimulating economic activity.” During a boom, Chicagoans recommend restricting “the money supply . . . thereby checking the rise of the price level.” The ultimate goal, therefore, is for monetary intervention to keep the “aggregate price level stable.”

Crucially, Rothbard did not see “very much” of a difference between the “Chicago, and the moderate Keynesian, approach.” Although Keynesians push for fiscal policy while the Chicagoans advocate “automatic formulas, formula rates of increase of the money supply, etc., which at least limit the discretion of the monetary authorities,” they both agree fundamentally on the central point that the free market tends to generate business cycles and the government should adjust spending “fiscally and/or monetarily.” Overall, the typical neoclassical economist will be “a blend of Mitchellianism and Keynesianism with perhaps a little Chicagoism thrown in for good measure.” During a depression, he will counsel the government to support various interventions: to “increase bank reserves, lower interest rates, increase its spending and deficits, embark on public works programs, [and] raise unemployment insurance.” 

In stark contrast to the above endogenous theories, Rothbard explained that the second type of explanation of the business cycle was the exogenous theory, “almost unknown among economists today.” This tradition began with the “Bullionists and the Currency School in early nineteenth-century England and America.” Notably, these economists integrated their business cycle theory “with [the] ‘equilibrium’ theory of prices and of price levels.” They argued that in the absence of a disruption caused by government intervention, the “economy tends smoothly toward equilibrium and there is no reason for a cycle.”

The Currency School’s “classical monetary theory of the business cycle” explained how the central bank’s expansion of “bank money and credit” beyond the supply of specie (gold and silver) increased domestic prices. This encouraged imports and discouraged exports, “leading to drains of specie abroad” and a cessation of monetary expansion. The subsequent credit contraction “precipitated the crisis” and led to “bankruptcies and scrambles for credit.” Once prices declined, the “drain was reversed.” This price-specie flow mechanism encompassed all the features of the exogenous theory of business cycles: the boom resulted from “governmental disruptions,” the depression was “the market’s adjusting from the disruptions of the boom,” and the solution was for the government to not expand the money supply “in the first place” or to “do nothing” during the crisis.

Breaking new ground, Mises integrated the Currency School’s insights “with the new science of ‘Austrian’ economics, and on the insights of Knut Wicksell into the relation of bank credit to free-market interest rates.” In doing so Mises “created another and magnificent ‘exogenous’ theory of business cycles.”

Rothbard then briefly described Mises’s theory. The boom is ignited when the banking system, enabled by the central bank, expands money and credit and “distorts the market’s interest rate structure,” driving the loan rate below the natural rate. This interest-rate gap encourages “too many projects with a ‘lengthy period of production’ and not enough ‘shorter period’ projects”—that is, a disproportionately large and unprofitable investment of resources in capital goods compared to investment in consumer goods. The increased demand in the higher orders artificially lowers the price spread between the stages of production. As they are not based on the public’s consumption-savings ratio, “these unprofitable investments . . . remain undetected, covered up by false, distorted values of the boom” and continued credit expansion. It is “only once the credit expansion stops [that] the free market begins to reassert” the true consumption-investment ratio and “liquidate[s] the wasteful investments.” This raises the price spread and “readjust[s] the interest rate structure to what it would” have been on the free market.

Contrary to policy recommendations of the endogenous cycle theorists, the actual way to end the depression is laissez-faire and allowing the market to shift resources out of the malinvestments. This includes allowing prices and wages to fall to their new market clearing levels. Otherwise, “it is the institution of rigid wage rates downwards that causes chronic mass unemployment during depressions.” 

Rothbard hailed Mises’s theory as “a true integration of general economic theory with business cycle theory” and “a magnificent performance, one of the great achievements in the history of economic thought.” The ABCT, as it came to be known, was elaborated upon in the 1930s by F. A. Hayek, whose structure-of-production analysis of the cycle “inaugurated a wave of Misesian influence among business-cycle students in England and America,” including Lionel Robbins, Fritz Machlup, and Gottfried Haberler. Unfortunately, the “advent of the Keynesian Revolution . . . completely swamped and drowned out the Mises–Hayek theory.” The Misesians were “equipped to explode the Keynesian doctrines as soon as they appeared” but inexplicably chose not to. Hayek even “backtracked on many of his views, so that his business cycle writing in the later 1930s is inferior to his earlier product.” Only “Ludwig von Mises himself remained true to his insight, and continued to develop a more elaborated version of his theory.” 

“One problem,” Rothbard explained, was that “the Misesians were not as ‘exogenous’ in their theory as Mises,” and “even Mises himself is not 100% exogenous.” In particular, Mises’s followers believed that the theory’s exogeneity was a weakness and “fell into the fallacy that bank credit expansion was not needed to initiate the boom, that it could be initiated by improving prospects for profit in the general economy.” Instead of banks initiating the boom by expanding the supply of credit, they may merely accommodate increased credit demands of businesses seeking to profit from technological innovation. This made Hayek and the other Misesians “more prone to blame the market economy” for the business cycle, increasing their susceptibility to the Keynesian revolution. While Mises did not share this perspective, he did fall victim to another error: he “concede[d] that even a free market” could “experience a (very mild) business cycle” from an inflow of gold that initially affects the loan rate of interest. Rothbard set out to correct both mistakes and thereby advance the Mises–Hayek theory.

In a chapter 16 subsection titled “The Responsibility for the Cycle,” Rothbard analyzed “the controversy between Mises and Hayek” on this question. To Hayek and his students who argued that the boom could be caused if “banks refrain from altering the interest [rate]” when the demand for loans increased, Mises tersely responded, “These assertions are unwarranted.” Rothbard recognized that his remarks were only “brief comments” and wanted to strengthen Mises’s position. The loan rate of interest does not increase “because of vague improvements in ‘investment opportunities,’” Rothbard explained, but because “time preferences increase.” Technological innovation per se does not increase the demand for loans because that demand is based on the “natural interest rate,” which is the rate of price spread between the stages of production and is determined by the overall consumption-investment ratio. The error of Mises’s followers stems from “their failure to adopt the pure time-preference theory of interest of Fetter and Mises, and their clinging to eclectic ‘productivity’ elements.”

Rothbard thus showed that a rise in interest rates can result only from an increase in the consumption-investment proportion and that credit expansion always drives interest rates below their free-market levels. This affirms the Misesian position: banks can “force market interest rates below free-market rates [only] by expanding their credit.” Turning to Hayek, who “believes Mises’s theory is somehow deficient because it is exogenous,” Rothbard responded by defending the praxeological method: “the only test of any analysis is its truth, not whether it is exogenous or endogenous. If the process is really exogenous, then the analysis should reveal this fact.”

Rothbard further advanced ABCT in a separate subsection of chapter 16 titled “Can a 100% Specie Economy Experience a Business Cycle?” On this issue, he was “reluctantly forced to part company with Mises.” In Human Action, Mises included his trade cycle theory “not in the theory of interventionism but in that of the pure market economy.” This was because a boom could theoretically be initiated by “any increase in the supply of money proper as far as this additional supply reaches the loan market” before prices increase, thereby lowering the loan rate below the natural rate. While the quantitative impact would be relatively minor, Rothbard still considered it an important theoretical issue.

In his critique, Rothbard argued that the expansion of credit by fractional-reserve banks and government-issued money “are acts of fraudulent intervention in the market, distorting voluntary preferences and the voluntarily determined pattern of income and wealth.” An increase in the supply of gold on the loan market, on the other hand, “embodies changes in the structure of voluntary time preferences” and decreases the public’s consumption to investment ratio. “In the case noted by Mises,” the increase in savings “will disappear once the effects of the new money on prices are completed.” But this is like any other situation “in which time preferences will change suddenly on the free market, first falling, then increasing.” Such “irregular fluctuations,” while they “undoubtedly cause a ‘crisis’ and temporary readjustments to malinvestments,” cannot be confused with “regular processes of the business cycle.” Furthermore, entrepreneurs, “trained to estimate changes and avoid error . . . can handle irregular fluctuations.” While “the normal forecasting ability of entrepreneurs is allowed full sway” in the case of gold flows, credit expansion “tamper[s] with all their moorings, distort[s] interest rates and calculations of capital.” Credit expansion “hobble[s] the objective ‘signals’ of the market and mislead[s] the great bulk of entrepreneurs.”

In defending the exogenous nature of the business cycle, Rothbard presented a new definition of inflation. Before inflation meant an increase in prices, it denoted an increase in the money supply that caused higher prices. Mises had adopted various monetary definitions of inflation in his early writings but in Human Action argued that “the notions of inflation and deflation are not praxeological concepts” because they commonly referred to an arbitrarily defined change in the money supply and its purchasing power.

In chapter 16, Rothbard defined inflation as “the process of issuing money beyond any increase in the stock of specie” and deflation “a contraction in the money supply outstanding over any period (aside from a possible net decrease in specie).” Rothbard “explicitly defined [inflation] to exclude increases in the stock of specie” because they “do not constitute an intervention in the free market . . . and do not lead to the processes of the business cycle.” In other words, Rothbard defined inflation to directly link it with interventionism and the business cycle: a coerced expansion of the money supply that caused a boom and bust. Responding to Mises’s statement, Rothbard concluded, “As here defined,” inflation and deflation “are praxeological categories.”

Rothbard’s definition caused controversy. Most notably, when asked to provide critical comments on his manuscript “Money, Free and Unfree,” Mises considered Rothbard’s definition “very unexpedient” because “it does not take into account the inflationary effect of considerable additions to the available supply of the money metal.” However, he did believe that “for a popular description of contemporary monetary troubles such a definition may be less objectionable.” Unfortunately, Mises’s remarks do not touch on whether the definition is appropriate for business cycle analysis because Rothbard’s pamphlet did not discuss Austrian business cycle theory or the problem of gold inflows. Despite Mises’s strictures, Rothbard’s definition fitted with his efforts to improve upon his mentor’s theory by demonstrating its exogenous aspect.

After explaining the exogenous nature of the boom, Rothbard shifted his scrutiny to the bust. One reason the Keynesian revolution was so successful during the Great Depression was because central banks had been unable to stymie the collapse in the money supply. Although Misesians had generally advocated a policy of noninterference, they split over the question of so-called secondary deflation, which referred to a market contraction of bank credit caused by, for example, the public’s redemption of deposits for currency and eventually gold. In 1932 and 1934, respectively, Hayek and Mises argued that central banks should not expand credit or try to prevent credit contraction. But by 1935, Hayek began advocating an interventionist policy that stabilized nominal spending (i.e., increasing the money supply when money demand rises), giving credence to his opponents’ calls for countercyclical intervention. And in Human Action, Mises considered “deflation and credit contraction no less than inflation and credit expansion [as] elements disarranging the smooth course of economic activities, and sources of disturbance.” Consequently, Rothbard believed that Mises “regard[ed] deflation as just as much of an evil as inflation.” In contrast, Rothbard argued that it could be “shown that deflation has a great deal of merit,” at last providing the Austrian response to interventionists’ calls for monetary stimulus in the early 1930s.

Rothbard exaggerated somewhat Mises’s position regarding deflation and, in fact, built directly on his mentor’s arguments. Mises actually considered deflation and credit contraction “less disastrous on account of their inherent effects” than inflation and credit expansion. For Mises, credit contraction could only raise the loan rate above the price spread. This causes long-term projects “which would have appeared profitable before appear so no longer, [which] . . . produces a temporary stagnation of business.” The loan rate only adjusts back down after the decreased spending percolates throughout the economy, lowering prices in a step-by-step fashion. Importantly, Mises insists that, unlike inflation, the “contraction produces neither malinvestment nor overconsumption” because of the “drop in consumption” by individuals in the distressed industries.

Rothbard used Mises’s analysis and built upon it in two respects. First, he incorporated and elaborated on the reverse of Mises’s inflation-induced capital consumption that he had briefly mentioned in his preliminary money chapter. Mises argued that a decrease in the purchasing power of money during the boom will lead to “apparent profits” because assets are traditionally recorded at historical cost. Using his bookkeeping entries as the benchmark, a capitalist-entrepreneur will only save enough to replace nonpermanent factors at their original prices and not at the unexpected higher levels. He will therefore unwittingly engage in capital consumption and increase his consumption-investment ratio, exacerbating the bust’s necessary readjustment process. Mises never discussed the opposite scenario of deflation in detail. He only briefly stated that “the same is valid with the necessary changes with regard to the analogous consequences and effects of a deflationist or restrictionist movement.”

Recognizing the gap, Rothbard fleshed out his mentor’s analysis. He utilized “an excellent article” by W. T. Baxter that demonstrated how use of “historic cost” by “orthodox accounting” “aggravates the business cycle. . . . Mises was one of the first to point out this factor.” Baxter argued that rising prices encouraged capital consumption while falling prices promoted the opposite. If a plant is bought “at a peak price . . . the accounting profit will in consequence always be less than corrected profit. . . . The firm sets aside more depreciation funds than will be needed for replacing the plant,” thereby expanding “its real capital unwittingly.” Rothbard reasoned similarly to Baxter’s “interesting discussion,” emphasizing that under credit contraction “the accounting error of inflation” is reversed and businesses “will save more than they would have with correct accounting.” This “increased saving will speed adjustment” by expanding the pool of voluntary savings available and thereby obviating the need to liquidate a part of the investments initiated by credit expansion.

Second, Rothbard used Mises’s analysis of credit contraction to show that it does not always raise the loan rate above the price spread but can cause the two to converge. Unlike credit expansion that “distorts the free market by lowering price differentials,” credit contraction acts in the reverse direction. The decrease in loans “reduces the demand for factors in the higher stages, lowers factor prices and incomes, and increases price differentials and the interest rate.” This “spurs the shift of factors, . . . speeds the market’s adjustment process, [and] . . . returns the economy to free-market proportions much sooner” than what would have occurred in absence of the deflation.

Rothbard then addresses Mises’s position that credit contraction may “overshoot the free-market equilibrium point and raise price differentials and the interest rate above it.” Invoking Austrian capital theory, Rothbard points out that any “increased investment must be made in the higher-order goods.” Since all investment therefore lengthens the production structure, credit contraction does not cause excess investment in lower orders but “simply a shorter structure than would otherwise be the case.” Furthermore, the market “will correct the error rapidly” because “owners of original factors, receiving lower incomes” in longer-term production projects, decrease their consumption spending and thereby restore “the free-market consumption-investment ratios.” He then reaches his mentor’s conclusion: “contraction, unlike expansion, does not create positive malinvestments.” 

Thus, contrary to Keynesian and Chicago School analysis, Rothbard’s Austrian analysis of accounting errors induced by deflation and of credit contraction’s positive impact on the recession-adjustment process leads to the realization that “the government should encourage, rather than interfere with, a credit contraction” during the bust. Deflation actually speeds up the depression-adjustment process.

Rothbard’s systematic analysis of violent intervention into the market thus culminated in notable advances in Austrian business cycle theory. He demonstrated that the business cycle is the inevitable outcome of and can only be caused by intervention into the banking system via credit expansion initiated by the central bank or other government policies. He also established—in direct opposition to Keynesians and Chicagoans—that credit contraction actually hastens economic recovery. Rothbard had written the definitive and long-overdue response to endogenous business-cycle theorists and proponents of “reflationist” monetary policy. In doing so, Rothbard fully integrated the theory of the business cycle into the structure of general economic theory that he had built up previously in his treatise.

To summarize: Rothbard’s overall contribution to the analysis of government action was to demonstrate for each type of intervention into the market economy the full set of consequences, “deducing everything step by step.” His comprehensive framework from chapters 12 to 17 contrasted with Mises’s “isolated chapters, [which had] . . . no systematic integration between them or logical deductions of one from the other.” “It had always been my hope,” Rothbard divulged, “to find the logical integration for the praxeology of intervention.” “Now,” he triumphantly concluded, “I believe I have found it.”

Ending the Treatise

By the beginning of 1956, Rothbard had wrapped up the rough draft of his treatise. He settled on the title “Man, the Economy, and the State: A Treatise on Economic Principles.” This soon became “Man, Economy, and State: A Treatise on Economic Principles.” He began “proofreading the previously-typed chapters” and writing chapter 18 on “Anti-Market Ethics: A Praxeological Critique.” This chapter had little to do with economics per se and instead served as “an expansion of value-free praxeology into the ethical field.” Rothbard’s goal was to use his body of deduced economic theorems to “show the logical inconsistencies and conceptual meaninglessness of all left-wing ethics, and of all ethical criticisms of the market economy.” For example, he criticized the possibility of “equality as an ethical goal” because of the self-evident fact that humans differ in terms of their knowledge, skills, aptitude, location, and so on.

Rothbard followed this discussion with chapter 19, titled “Conclusion: The Economist and Public Policy,” which dealt with the role of the economist as advisor to governments and businesses. Despite its brevity, Rothbard considered chapter 19 essential because it clarified the distinction between positive and normative economics. Though he did not say it explicitly, Rothbard strongly disagreed with Mises on this issue. Mises “believes that it is legitimate for an economist to say that price controls are ‘bad’, simply because, as a utilitarian, he thinks that the advocates of price controls would have to agree that price controls are bad, and therefore he too can say so.” While Rothbard certainly agreed with Mises’s positive analysis of price controls, he argued that a bureaucrat “can be for controls for their own sake . . . and therefore could still say that price controls are good, even after learning of their economic consequences,” because they want to maintain their power. Therefore, to advocate public policy, economists must engage in normative reasoning by articulating “a coherent ethical system, a coherent political philosophy,” such as one grounded in natural rights.

But expounding this libertarian political economy would have to wait for another time. Instead, Rothbard finished Man, Economy, and State by summarizing “our economic knowledge of the market and of government intervention.” He reemphasized that praxeology proves markets result in “maximized social utility, . . . economic calculation, . . . and [an] advance in living standards” while government creates “exploitation, . . . calculational chaos, . . . and [a] regression of living standards.”

In July, Rothbard informed Harold Luhnow, the president of the Volker Fund, that he had completed his treatise. His work totaled “1900 typewritten pages” and was being “finally typed, proofread, and [having the] charts drawn.” When he had previously corresponded with Luhnow, Rothbard defended the time it took to write the book and its length because it “broke new ground and required a difficult search for answers to the many theoretical problems that arose.” Now, he “expressed [his] really deep gratitude” to the Volker Fund for its institutional “support and encouragement over the years” because it allowed him to learn “an enormous amount of economics.”

His major treatise completed, at thirty years old, Rothbard was hardly finished. In the next phase of his career, he would obtain his long-delayed academic credentials and begin to apply his hard-earned knowledge and praxeological perspective to evaluating the current state of mainstream economic theory. In this endeavor, he clearly showed that he deserved a place among the front rank of contemporary economic theorists.

____________________

Murray N. Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” n.d., pp. 1, 4, Rothbard Papers.

Murray N. Rothbard, “Chapter XII: Government and the Free Market,” n.d., pp. 1, 5–6, Rothbard Papers.

Rothbard, “Chapter XII,” pp. 1, 3–4.

Ludwig von Mises, Human Action: A Treatise on Economics, scholar’s ed. (Mises Institute, 2008), p. 715. Mises, Human Action, pp. 238–39.

Rothbard, “Chapter XII,” pp. 6, 13. William J. Baumol, Welfare Economics and the Theory of the State (Harvard University Press, 1952); William J. Baumol, “Economic Theory and the Political Scientist,” review of Politics, Economics, and Welfare, by Robert A. Dahl and Charles E. Lindblom, World Politics 6, no. 2 (1954): 266–77.

Rothbard, “Chapter XII,” pp. 8, 11.

Murray N. Rothbard, “Chapter XIII: Fundamentals of Intervention,” n.d., p. 13, Rothbard Papers.

Murray N. Rothbard to Richard C. Cornuelle, February 10, 1954, p. 6, Rothbard Papers.

Earl J. Hamilton to Murray N. Rothbard, June 10, 1954, p. 1, Rothbard Papers. Murray N. Rothbard to Earl J. Hamilton, May 24, 1954, p. 1, Rothbard Papers.

Murray N. Rothbard, “Welfare Economics,” September 1955, pp. 1–4, Rothbard Papers. Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” p. 16.

Rothbard, “Welfare Economics,” p. 2. Arthur C. Pigou, Wealth and Welfare (Macmillan, 1912); Arthur C. Pigou, The Economics of Welfare (Macmillan, 1920).

Rothbard, “Welfare Economics,” pp. 4–5.

Rothbard, “Welfare Economics,” p. 6. Lionel Robbins, An Essay on the Nature and Significance of Economic Science, 1st ed. (Macmillan, 1932), pp. 120–26.

Rothbard, “Welfare Economics,” pp. 6, 8. John R. Hicks, “The Foundations of Welfare Economics,” Economic Journal 49, no. 196 (1939): 696–712; Nicholas Kaldor, “Welfare Propositions of Economics and Interpersonal Comparisons of Utility,” Economic Journal 49, no. 5 (1939): 549–52.

Rothbard, “Welfare Economics,” p. 9.

Murray N. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” in On Freedom and Free Enterprise, ed. Mary Sennholz (D. Van Nostrand, 1956), pp. 225, 250.

Rothbard, “Toward a Reconstruction,” pp. 250, 252.

Rothbard, “Chapter XIII,” pp. 24, 31.

Rothbard, “Chapter XIII,” pp. 31–33.

Rothbard, “Chapter XIII,” pp. 37–38.

Murray N. Rothbard to Richard C. Cornuelle, “Textbook or Treatise?,” p. 4, Rothbard Papers.

Rothbard, “Chapter XIII,” p. 38.

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

Murray N. Rothbard, “Progress Report, December 1, 1954 to April 1, 1955,” p. 8, Rothbard Papers.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” pp. 4–5.

Rothbard, “Chapter XIII,” pp. 15–17.

Rothbard, “Chapter XIII,” p. 18.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” p. 5.

Rothbard, “Chapter XIII,” pp. 20, 31.

Murray N. Rothbard, “Chapter XIV: Triangular Intervention,” n.d., pp. 39, 63–64, Rothbard Papers.

Rothbard, “Chapter XIV,” pp. 64–65, 68.

Rothbard, “Chapter XIV,” pp. 66, 68.

Rothbard, “Chapter XIV,” p. 67.

Murray N. Rothbard, “Chapter XV: Binary Intervention: Taxation,” n.d., p. 1, Rothbard Papers.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” pp. 6–7.

Murray N. Rothbard to Richard C. Cornuelle, July 19, 1955, p. 6, Rothbard Papers.

Rothbard to Cornuelle, July 19, 1955, p. 6.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” p. 7. Alfred Marshall, Principles of Economics, 8th ed. (Macmillan, 1920), pp. 413–39, 794–804; E. R. A. Seligman, The Shifting and Incidence of Taxation, 2nd ed. (New York, 1899), pp. 122–33.

Rothbard to Cornuelle, July 19, 1955, p. 6. Antonio De Viti De Marco, First Principles of Public Finance (Jonathan Cape, 1936), pp. 141–65.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” p. 7.

Rothbard to Cornuelle, July 19, 1955, p. 6. Harry Gunnison Brown, “The Incidence of a General Output or a General Sales Tax,” Journal of Political Economy 47, no. 2 (1939): 254–62.

Rothbard, “Chapter XV,” pp. 162, 164, 166–67.

Rothbard, “Chapter XV,” pp. 167–68.

Rothbard, “Chapter XV,” p. 169.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” p. 14. Ludwig von Mises, Bureaucracy (Yale University Press, 1944), pp. 20–56; Murray N. Rothbard to Richard C. Cornuelle, March 17, 1956, p. 1, Rothbard Papers. For more on chapter 16, see pp. 117–29.

Alvin H. Hansen, Fiscal Policy and Business Cycles (George Allen & Unwin, 1941), pp. 261–88; Paul A. Samuelson, Economics: An Introductory Analysis (McGraw-Hill, 1948), pp. 409–23.

Murray N. Rothbard, “Chapter XVII: Binary Intervention: Government Expenditures,” n.d., p. 337, Rothbard Papers.

Mises, Human Action, pp. 259–60.

Rothbard, “Chapter XVII,” pp. 328–31, 334.

Rothbard, “Chapter XVII,” pp. 336–37, 346.

Rothbard, “Chapter XVII,” p. 325.

Rothbard, “Chapter XVII,” pp. 371–73. Milton Gilbert et al., “Objective of National Income Measurement: A Reply to Professor Kuznets,” Review of Economics and Statistics 30, no. 3 (1948): 179–85; Simon Kuznets, “National Income: A New Version,” Review of Economics and Statistics 30, no. 3 (1948): 151–79; Simon Kuznets, National Income and Its Composition, vol. 1, 1919–1938 (National Bureau of Economic Research, 1941); Murray N. Rothbard to Ivan R. Bierly, February 27, 1959, pp. 1–2, Rothbard Papers.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” p. 11. A copy of chapter 16 could not be found in the Rothbard Archives. Rothbard’s outline of its subsections in his progress report is similar to his outlines in America’s Great Depression, 5th ed. (Mises Institute, 2008), pp. vii, and Man, Economy, and State with Power and Market, 2nd scholar’s ed. (Mises Institute, 2009), p. xv. Murray N. Rothbard to F. A. Harper, January 4, 1964, p. 1, F. A. Harper Papers, Hoover Institution.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” p. 12.

Murray N. Rothbard, “The Problem of Cyclical Instability,” n.d., p. 1, Rothbard Papers.

Arthur F. Burns and Wesley Clair Mitchell, Measuring Business Cycles (National Bureau of Economic Research, 1946); Wesley Clair Mitchell, Business Cycles (University of California Press, 1913); Wesley Clair Mitchell, Business Cycles: The Problem and Its Setting (National Bureau of Economic Research, 1927).

Rothbard, “Problem of Cyclical Instability,” pp. 3–4, 7.

Hansen, Fiscal Policy and Business Cycles; John Maynard Keynes, The General Theory of Employment, Interest, and Money (Cambridge University Press, 1936); Samuelson, Economics.

Rothbard, “Problem of Cyclical Instability,” pp. 5–7.

Rothbard, “Problem of Cyclical Instability,” p. 7. Irving Fisher, “The Business Cycle Largely a ‘Dance of the Dollar,’” Journal of the American Statistical Association 18, no. 144 (1923): 1024–28; Milton Friedman, “Price, Income, and Monetary Changes in Three Wartime Periods,” American Economic Review 42, no. 2 (1952): 612–25; Milton Friedman, “The Quantity Theory of Money,” in Studies in the Quantity Theory of Money, ed. Milton Friedman (University of Chicago Press, 1956), pp. 3–24; Frank H. Knight, “The Business Cycle, Interest, and Money: A Methodological Approach,” Review of Economics and Statistics 23, no. 2 (1941): 53–67; Lloyd W. Mints, Monetary Policy for a Competitive Society (McGraw-Hill, 1950); Henry C. Simons, A Positive Program for Laissez Faire: Some Proposals for a Liberal Economic Policy (University of Chicago Press, 1934).

Rothbard, “Problem of Cyclical Instability,” pp. 7–9.

Rothbard, “Problem of Cyclical Instability,” pp. 12–14. Ludwig von Mises, Theorie des Geldes und der Umlaufsmittel [The theory of money and credit] (Duncker & Humblot, 1912); Knut Wicksell, Geldzins and Güterpreise [Interest and prices] (Jena, 1898).

Rothbard, “Problem of Cyclical Instability,” pp. 13–14, 19–20.

Rothbard, “Problem of Cyclical Instability,” pp. 14–15. Gottfried Haberler, “Money and the Business Cycle,” in Gold and Monetary Stabilization, ed. Quincy Wright (University of Chicago Press, 1932), pp. 43–74; F. A. Hayek, Prices and Production, 1st ed. (Routledge, 1931); F. A. Hayek, Prices and Production, 2nd ed. (Routledge & Kegan Paul, 1935); F. A. Hayek, Profits, Interest, and Investment (Routledge & Kegan Paul, 1939); Fritz Machlup, The Stock Market, Credit, and Capital Formation (William Hodge, 1940); Lionel Robbins, The Great Depression (Macmillan, 1934).

Rothbard, “Problem of Cyclical Instability,” pp. 16–17.

Rothbard, “Problem of Cyclical Instability,” p. 17.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” p. 12.

Mises, Human Action, p. 570. Gottfried Haberler, Prosperity and Depression: A Theoretical Analysis of Cyclical Movements, 3rd ed. (United Nations, 1941), pp. 64–67; F. A. Hayek, Monetary Theory and the Trade Cycle (Harcourt, Brace, 1933), pp. 144–48; Machlup, Stock Market, pp. 247–48; Mises, Human Action, p. 789.

Rothbard, America’s Great Depression, p. 32.

Rothbard, America’s Great Depression, pp. 32–33.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” p. 12.

Rothbard, America’s Great Depression, p. 34.

Mises, Human Action, p. 571.

Rothbard, Man, Economy, and State, p. 1022.

Rothbard, America’s Great Depression, pp. 35, 80.

Mises, Human Action, p. 419.

Rothbard, Man, Economy, and State, pp. 990, 1022.

Ludwig von Mises to Miss Brown, October 21, 1957, p. 2, Rothbard Papers. Murray N. Rothbard, “Money, Free and Unfree,” June 1957, pp. 1–85, Rothbard Papers.

Hayek, Monetary Theory, pp. 19–22; Ludwig von Mises, The Theory of Money and Credit, English ed. (Jonathan Cape, 1934), p. 15.

Hayek, Prices and Production, pp. xii–xiii, 122–24.

Mises, Human Action, p. 564.

Murray N. Rothbard, “Confidential Memorandum to William Volker Fund on Hans Sennholz’ A History of the Federal Reserve System,” April 3, 1960, p. 2, Rothbard Papers.

Mises, Human Action, pp. 564–65.

Mises, Human Action, pp. 546–47.

Murray N. Rothbard, “Readings in Economics and Political Economy—1955,” n.d., p. 4, Rothbard Papers.

W. T. Baxter, “The Accountant’s Contribution to the Trade Cycle,” Economica 22, no. 86 (1955): 102.

Rothbard, Man, Economy, and State, pp. 994, 1006. Murray N. Rothbard, “Money and Banking on the Unhampered Market,” 1950, pp. 64–65, Rothbard Papers.

Rothbard, America’s Great Depression, p. 18.

Rothbard, Man, Economy, and State, p. 1006.

Rothbard, America’s Great Depression, p. 21.

Rothbard to Cornuelle, July 19, 1955, p. 4.

Murray N. Rothbard to Richard C. Cornuelle, November 25, 1955, p. 1, Rothbard Papers.

Murray N. Rothbard to Rae C. Heiple III, June 2, 1957, p. 1, Rothbard Papers.

Rothbard to Cornuelle, March 17, 1956, p. 1.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955,” p. 15.

Murray N. Rothbard to Ivan R. Bierly, January 17, 1960, pp. 1–2, Rothbard Papers.

Rothbard, “Progress Report, April 1, 1955 to October 1, 1955, p. 15.

Rothbard, Man, Economy, and State, p. 1365.

Murray N. Rothbard to Harold W. Luhnow, July 29, 1956, p. 1, Rothbard Papers.

Murray N. Rothbard to Harold W. Luhnow, December 6, 1955, p. 1, quoted in Joseph Stromberg, introduction to Man, Economy, and State with Power and Market, scholar’s ed., by Murray N. Rothbard (Mises Institute, 2004), p. lx.

Rothbard to Luhnow, July 29, 1956, p. 1.