Review of Austrian Economics

Arthur Marget in the Austrian Tradition of the Theory of Money

John B. Egger

Arthur William Marget (1899–1962) was a respected American monetary theorist and scholar who received his doctorate from Harvard in 1926 and taught for the next fifteen years at the University of Minnesota. His best known work, The Theory of Prices (2 vols.: 1938, 1942), had three goals. Marget sought to demonstrate that Keynes misrepresented the history of monetary theory, to reveal the shortcomings of Keynes’s own approach, and to show that progress required an escape from the Keynesian “blind alley” and a return to the “high road” of earlier tradition.

The book was either behind its time, ahead of it, or (as I suspect) both. The doctrinal revolution that Marget opposed swept The Theory of Prices aside. Perhaps it was imprudent of him to pursue three ambitious goals at once, for even the book’s supporters found it long and arduous.1 Nicholas Kaldor, a non-supporter whose review managed to misstate the book’s subtitle, called Prices I “mid-Victorian,” with its “leisurely repetitiousness, elaborate style, pompous exactitude, and . . . exhaustive scholarship,” reminding him “of the bourgeois solidity and spaciousness of that bygone age” (1939, pp. 495–6).2

For two reasons, this may be an appropriate time for a reconsideration of Marget’s work. The first, which provides a backdrop, is that the interpretation and evaluation of Keynes’s theory continues unabated. The second, on which this paper focuses, is the recent decades’ renewal of interest in the Austrian School.

My principal argument is that most of the respects in which Marget asserted the superiority of pre-Keynesian orthodoxy over the revolution of Keynes are now primarily identified with the Austrian tradition in monetary theory.

This position calls for some explanation, because Marget had no special interest in the Austrians. He held an evolutionary theory of the growth of knowledge that he called “the Principle of Continuity,” and identified Menger, Böhm-Bawerk, Mises, and Hayek as contributors (along with many others, especially Walras and Fisher) to the monetary edifice that more than two centuries of scholarship had established by the time of the Treatise. To Marget they were not a unique School that posed a challenge and offered an alternative to orthodoxy: they were a well integrated part of it.

At the time, though, that is how they viewed themselves. Kirzner (1989, p. 232) notes that: “About a half-century ago, Austrians such as Mises, Hayek, and Machlup all maintained that important Austrian insights had been successfully absorbed into the mainstream by the early 1930s.” By 1969, however, Mises apparently believed “that the fundamental Austrian ideas, absorbed into general economics by the 1920s came, somehow, to be lost from general economics by about 1940” (the words are Kirzner’s; ibid., n. 1).

The best single word that describes what intervened is Keynes. “[I]t is he,” Marget wrote, “who is largely responsible for the feeling that the Principle of Continuity does not apply as a maxim of scientific procedure at the present stage in the development of monetary theory” (1938, p. 3). But Marget (and Hayek and a few others) lost the fight, so the orthodoxy after Keynes was not the orthodoxy that Marget defended. The characteristics of established pre-Keynesian thought that Keynes and the subsequent development of macroeconomics cast out, committing the grave error of which Marget warned, were reluctantly accepted back by the Austrians, like a glorious gift returned by an unappreciating recipient.

That is why I believe that Marget’s staunch defense of “orthodoxy”—and his evolutionary belief that no valid advance remains for long the province of any unorthodox School—is in large measure a case for ideas that are now identified with the Austrians.3

My paper argues this position, but its scope is limited. It is far from a comprehensive study of either Marget’s system, or Austrian economics, or pre-Keynesian monetary orthodoxy. Its case that Marget’s work should be embraced by Austrians and identified as a contribution to their theory of money will rest on some observations about method, focusing on the methodologically individualistic analysis of temporal monetary processes and the role of aggregation.

“The ultimate goal of any Theory of Prices”—a phrase that Marget used interchangeably with “Theory of Money and Prices” to identify monetary theory—“is to explain why realized prices are what they are” (1942, p. 222).4 The focus on explanation rather than prediction, and on “prices” rather than “price” (level) or rate of interest or other aggregate, establishes common ground with the Austrians at the most fundamental level.

Marget’s “realized prices” refers to the money or nominal prices of all goods that are exchanged for money. Like many other economists, he found it analytically convenient to separate this pattern into a structure of relative prices and level. His “Theory of Prices” included the influence of money on both, however, since he understood that no market process could determine structure and level independently. A strict methodological individualist, he insisted that “explanation” link observable events to the choices of individuals.

The Individualistic Analysis of Process

Most economists would probably agree that the ideal analysis of monetary change is to trace its sequential effects on particular individuals. This ideal method was introduced by Cantillon in 1755; one of its virtues is the absence of any “dichotomy” between monetary and value theory, since the latter provides the analytical link between each individual’s new alternatives and his new behavior. But our inability to identify particular individuals and to be certain of their actions prevents us from attaining this ideal. To some extent “schools” can be identified according to how they accommodate these problems of incomplete information.

One accommodation is to argue that consideration of the details of the process can be dismissed because they are unpredictable, random, and “average out,” with no measurable effect on empirical relationships among aggregates. Since the analysis of those individual choices is the province of value theory, this avenue is risky: It makes possible a dichotomy in which value and monetary theory are at best isolated and at worst contradictory. Dichotomization is the most serious criticism of a monetary theorist, so it must be levelled with caution.5

Neither Keynes nor the Austrians took this route. They analyzed the process differently, but neither undervalued its significance. Indeed, Marget recognized this virtue in Keynes. Citing two writers who are praised by Austrians—e.g., by Hayek ([1935] 1967, pp. 8, 10) and Mises ([1952] 1971, p. 139)—for this very reason, Marget identified “the emphasis in the Treatise” as “a tribute. . . . to those writers, from Cantillon through Cairnes to writers of our own day, who . . . provided contributions to an understanding of the mechanism of price-change” (1938, p. 172). The fault that Marget found with Keynes’s application of the method was chiefly his imprudent aggregation (different, but equally imprudent, in the Treatise and the General Theory). When Keynes attempted to differentiate his products6 by charging that his predecessors failed to recognize the importance of process, Marget sprang to their defense.

Marget’s use of the method of the individualistic analysis of process is most clear in his extended rebuttal, in Prices II, of Keynes’s charge that his predecessors dichotomized. In three chapters Marget (1942, pp. 221–403) examined the effects of money on ordinary Marshallian demand curves (“Particular Demand Curves and the Determination of Money Prices”), their role in mutually determining flows of money and flows of goods (“Stream Equations and the Price System”), and the significance of these flows in modern monetary dynamics (“Stream Equations and Process Analysis”). Later (ibid., pp. 521–624), he paralleled them with chapters on supply: “Elasticity of Supply and the Structure of Money Prices” and “Particular Supply Curves, Stream Equations, and the Determination of Money Prices.” He endeavored to show not only that the “value theory” of dynamic monetary processes had dominated pre-Keynesian theory but that its application of the method was superior to those offered by Keynes himself.

It is impossible to discuss sequential processes without introducing time. Ever since Menger ([1871] 1981, pp. 67–71 et passim) an emphasis on the significance of time has been considered one attribute of the Austrian School, but few if any of their works equal the treatment of time in Marget’s analysis of the monetary process. For a hint of the power and richness of Marget’s method of sequences, consider his classification of different types of period. They can be (1) clock-time or analytical-time, (2) ex ante or ex post, or (3) ceteris paribus or non-ceteris-paribus. There are eight possible combinations; Marget listed them all (1942, pp. 402–3 n. 122), complete with page references to preceding discussions. He noted that because the goal of monetary theory is the explanation of realized money prices, “the ‘periods’ . . . to which all the other types of ‘period’ must be related, are . . . ex post non-ceteris-paribus clock-time periods” (ibid., p. 403 n. 122).

Expectations inevitably affect currently realized money prices, but these—in turn—“help to determine expectations with respect to the future course of prices” (ibid., p. 230 emphasis Marget’s). Expectations must themselves be explained, Marget insisted:

we must proceed upon the assumption that expectations are what they are largely as the result of experience of economic processes as they have been actually realized in the past and as they are being currently realized in the present. (1942, pp. 228–9)

The phrase “are what they are largely as the result of” accommodates a subjective perspective. It does not mean “are identical to,” which would indicate a deterministic adaptive interpretation that some might find mathematically tempting. Marget’s view is identical to that of Austrian writers who both preceded and succeeded him.7

Now that macrotheorists have discovered the electromagnetic property of hysteresis, it is interesting to note Marget’s observation about the dependence of expectation upon knowledge acquired in the actual market process, and the resulting effects of those expectations on subsequent processes:

When, therefore, it is said that “equilibrium” is “indeterminate” whenever “the final position is dependent upon the route followed,” all that this can mean is that no account of the actual functioning of the economic process can be regarded as complete until it undertakes, upon the basis of a study of the successive, actually realized steps in any economic process actually unfolding itself in time, to establish the nature of the considerations likely to determine the nature of entrepreneurial responses to changes in the market situation, including the possible changing nature of the goals whose attainment these responses are designed to aid.8

Marget’s analysis of the monetary process, with its sequential cause-and-effect relationship to expectations and—through them—to subsequent demands and supplies and, finally, to money prices and (if one wishes) to conventional monetary aggregates, is as sophisticated as any Austrian discussion of monetary processes of which I am aware. Combining this analysis with his rich scheme for classifying periods produces a presentation that has yet to be equalled.

Underlying many analyses of process is the notion of a goal or target toward which the various actors are gradually moving the economic system. Modern Austrians continue to debate the usefulness of the concept of general equilibrium, and of Mises’s evenly rotating economy in particular (see Fink and Cowen 1985). Their common ground, though, is sufficiently well known that Paque (1985) used it to differentiate an Austrian from a Chicago School approach. Marget’s position on those interpretations of general equilibrium with which Austrians tend to agree, and the side that he would take in the debate, support my characterization of his theory of monetary processes.

Early in his career, Marget published two articles (1931, 1935) on the monetary economics of Leon Walras that are occasionally cited in today’s literature, and he considered the mathematical formulation of general economic equilibrium immensely important among Walras’s contributions. The concept of general equilibrium, Marget stated, “provides a description of one conceivable (‘ideal’) type of functioning economic system with which other types of functioning economic systems can be compared” (1942, p. 424), and in his analysis “full place is given to the possibility of using the concept of an equilibrium of the system as a standard of comparison” (ibid., p. 450). Mises accorded this role to his evenly rotating economy: “in order to analyze the problems of change in the data and of unevenly and irregularly varying movement, we must confront them with a fictitious state in which both are hypothetically eliminated” (1966, p. 247).

Although Mises identified “the tendency, prevailing in every action, toward the establishment of an evenly rotating economy” (ibid., p. 250), these actions take time during which knowledge and tastes must be presumed to change. He thus emphasized that the evenly rotating economy could never actually be approached. Marget shared this position:

When, on the other hand, it is claimed that the concept of a state of general equilibrium is useful not only as a standard of comparison, but also as the specification of a goal which the economic system as a whole actually tends to approach, the cogency of the argument for the use of such a concept is very greatly diminished. (1942, p. 446)

But Marget shared with Lachmann a more fundamental objection to general equilibrium. He acknowledged and accepted the tendency for adjustment to bring about partial equilibria in particular markets, while noting that the specific entrepreneurial actions chosen to effect them do not necessarily succeed (1942, p. 448). Even when they do, though, he claimed that these very actions “might have the effect of driving the system still further away from ‘equilibrium’” (ibid., p. 447). Lachmann expressed the same point like this: “we can never be sure that the spill-over effects which an equilibrating adjustment in one market has on other markets will always be in an equilibrating direction . . . Equilibrium in one market may be upset when the repercussions of the equilibrating adjustments in other markets reach it” ([1952] 1971, pp. 190–1).

The essential difference that Marget perceived, between the probable partial-equilibrating tendencies in particular markets, and an improbable approach to a general equilibrium, is that which Hayek (1976, pp. 107–32) drew between economy and catallaxy.

It is of the utmost importance to observe, however, that in the case of the concept of an “equilibrium of the system,” there is no agency, under institutions such as ours, which can be assumed to be engaged in a type of calculation, or to cherish a type of intention, involving the conditions for “general” economic equilibrium in a sense comparable to that in which the calculations and intentions of individual entrepreneurs can be said to involve a consideration of the conditions for “equilibrium” within their own firms. (Marget 1942, pp. 448–9, emphasis Hayek’s)

These problems of process “strengthen the case for refusing to regard as identical the concept of ‘general economic interdependence,’ on the one hand, and ‘general economic equilibrium,’ on the other” (1942, p. 423). In a manner wholly consistent with modern Austrian technique, Marget recognized the linkages among actions and prices but insisted that the vagaries of subjective interpretation demand the “loose joint” of general interdependence rather than the hyper-refined precision of general equilibrium.9 Indeed, despite Marget’s nod to its usefulness as some kind of standard, the concept of general equilibrium seems to play no role in his system.10

Action in disequilibrium (general and partial) was important to Marget, so it seems unlikely that he would have accepted the “equilibrium always” interpretation of the new-Classicals. He objected, for example, to the “over-simplified propositions” that consumers’ valuations are “reflected immediately and with unerring accuracy in the prices of producers’ goods” (1938, p. 494). A few years later, Hayek (1945, p. 90) used the same example to demonstrate the profession’s (specifically Schumpeter’s) tendency to take for granted the market’s solution of knowledge problems by unwarranted analogy to the actions of the individual, for whom a consistent set of knowledge and goals may be assumed. It was—as Hayek called it later—another failure to distinguish catallaxy from economy.

Although a thorough analysis of Marget’s microeconomics must take place elsewhere, a part of it that is significant to our interpretation is his remarkable discussion of the role of “particular demand curves” in the determination of money prices (1942, pp. 241–63). His consideration of knowledge, time, and the microeconomic marketing process again illustrates an affinity with a method that is now associated with the Austrians.

In the third of his forty “Propositions” specifying the relationship of Value to Monetary Theory, he accepted that “any given realized price is what it is as the result of the conformation and position of the market demand curve and the market supply curve prevailing at the moment the price is realized” (ibid., p. 240). But he explained that these market demand and supply curves need not be the standard ex ante curves that we imagine to be formulated in the minds of the buyers and sellers prior to the start of the marketing process. If the knowledge of others’ valuations that is acquired in the marketing process provokes a change in one’s own valuations, these discoveries may change the supply and demand curves themselves, and a realized price and quantity (though necessarily characterizing the intersection of the curves that obtain at the moment of the exchange) need not lie on either the demand curve or the supply curve as these were conceived prior to the marketing process (1942, p. 222). “[R]ealized prices are not necessarily ‘equilibrium’ prices,” he noted (ibid., p. 231; emphasis his), “if the concept of ‘equilibrium’ is to be given most of the connotations which it carries in the ‘general’ Theory of Value.” Conventional ex ante curves play an indispensable explanatory role, he quickly assured us, but that role is not as simple as elementary presentations of the Theory of Value make it appear (ibid., pp. 236–38).

Aggregation

It is easy to understand the appeal of macroeconomics, with its promise of simplicity and empirical manageability at the small cost of irrelevant detail. The Austrian criticism was never exclusively that the detail was interesting or important to a full understanding of economic processes: it was that the composition of the aggregates was important to the goals of the macroeconomists themselves. The effect of investment on current and future unemployment, for example, depends on both its amount (the aggregate of concern to macroeconomics) and composition—specifically, the likelihood that it conforms to the composition of future consumer demands.

What is the appropriate role for aggregates, one might wonder, to a writer as committed to the individualistic and temporal tracing of patterns of money flow as Marget obviously was? He issued many warnings against their incautious use. He insisted, for example, that “the composition of [the Fisherian] T . . . is particularly relevant for the role of prices in determining the absolute demand for cash balances” (1938, p. 210; emphases his). He understood, as do students of the Austrian theory of the business cycle, that “a process that deserves to be called ‘inflationary’ may take place under the cover of a ‘stable’ price level” (1937, p. 28; see also 1942, pp. 248–49 n. 43). And he warned that the use of Keynes’s aggregate production function

may prevent an adequate recognition of the importance of studying changes in the structure of output and employment which may be of the greatest importance for the explanation of movements in output “as a whole” or employment “as a whole” themselves. (1942, p. 537 n. 33)

In this advice Marget did not quarrel with the goal of explaining changes in aggregates, but argued that even for that goal it is not safe to rely on an analysis that largely restricts itself to aggregates.

It would be wrong to infer that Marget had no interest in aggregates. He himself cautioned against this misinterpretation:

This does not mean, however, that a system such as that outlined in the present work implies a lack of interest in, or is incapable of dealing with, movements in aggregates. The possibility, stressed in earlier parts of this work, of summing the terms of the various “partial” stream equations into significant aggregates or sub-aggregates, proves the direct contrary. (1942, p. 437)

These are the two sides to Marget’s view of aggregates, so it would clearly be too simplistic to identify him as either “for them or against them.” To explore the relationship between his view and that of the Austrians, we must examine both judgments of aggregation in more detail.

One of the best-known warnings about the use of aggregates, and my own favorite, is Hayek’s forceful statement in 1930:

in the near future, monetary theory will not only reject the explanation in terms of a direct relation between money and the price level, but will even throw overboard the concept of a general price level and substitute for it investigations into the causes of the changes of relative prices and their effects on production. ([1935] 1967, p. 29)

By now it is apparent that Marget’s evolutionary theory of the growth of knowledge produced an inherent conservatism in his theory of money. This alone would incline him against Hayek’s revolutionary forecast; more importantly, though, he found that Hayek himself was unable to get along completely without the concept of the price level:

[T]he most pertinacious critics of the concept of a “general” price level have been impelled to re-introduce, in one way or another, some analytical equivalent of the concept of a movement in the “general” level of prices. (1942, p. 332)

[D]espite Professor Hayek’s sharp attacks upon the usefulness of concepts, such as that of a “general” price level, which are alleged to imply an attempt “to establish causal relations between aggregates or general averages,” he has found it necessary to speak, for example, of both the fact and the consequences of a “general fall of prices.” (ibid., pp. 332–33)

Marget’s point is likely to be admitted, reluctantly and with much sympathy for Hayek, by any Austrian who has attempted to discuss monetary matters without some concept of a “general” level of prices. Actually, though, an examination of the reasons that one might feel this reluctance finds Marget in substantial agreement with them.

The concept of a change in “the general level of prices” certainly encourages one to conceive, at least as an immediate impression, of equiproportionate changes in every individual money price. The Austrians are well known for insisting that such an impression is vacuous, and that even hypothetical means of monetary expansion that are designed to be uniform among individuals (whether Hume’s, Mill’s, or Friedman’s) can never produce identical proportionate changes in each good’s money price.

But an impression is not a logical implication, and a change in a “general level” does not preclude changes in the pattern. Marget had a couple of suggestions to guard against the unnecessary absurdity. First, he proposed the use of the term “scale of prices” or “the scale of magnitude of money values” (1942, p. 333; emphasis his) instead of a general price level (which, after all, suggests that individual prices are “level” or the same relative to each other). Second, Marget conceived of the general level of prices as a “swarm” of individual money prices. If one wished to gain an impression of general trends,

[t]here is no logical reason why a picture of changes in the height of a given “swarm” could not be obtained by simply plotting the individual prices in such a “swarm,” and then generalizing concerning the movements of the “swarm” on the basis of the picture of the movement of individual prices thus obtained. (1942, p. 333)

This “generalizing” is exactly the kind of casual, rough impression—something like looking at a scatter diagram from a distance or while squinting to deliberately blur the details—that is acceptable to Austrians.11 It involves none of the methodological errors of which they warn, and the “precision” that it sacrifices is spurious and misleading anyway. “[I]t is possible to speak of a ‘general’ movement of prices,” Marget assured us, “simply upon the basis of inspection of arrays of individual prices that remain uncombined into a single index figure” (ibid., p. 335).

Actually, the calculating of a precise numerical index through the assignment of specific weights was fully acceptable to Marget. Throughout his writings, he seemed unwilling to throw any analytical tool overboard. Time and time again, just when his sharp criticism had convinced the reader that an analytical device that had been misused and misconceived by predecessors was headed for the trash can, Marget backed off and suggested instead that the concept was acceptable if sufficiently “supplemented” by other analysis.12

He imposed two conditions on the use of a price index. First, most or many individual prices must in fact have changed by the average amount; he specifically rejected the use of a mean to measure price changes when the distribution was bimodal (with many prices changing more, many changing less, and perhaps not a single one changing by the average). The index must not, in other words, convey an inaccurate picture of the “swarm.” Second, and more important, was his warning that “we carefully refrain from reading more into this single figure than is justified by an ‘operational’ view of the processes employed” (1942, p. 334). To explain the process by which an average changes, one must study the principles that determine its individual prices. “We are not warranted,” Marget cautioned, “in assigning any ‘reality’ to the movements in this figure over and above the ‘reality’ which is represented by the individual price movements thus combined in the average” (ibid., p. 335).

This was Marget’s advice against exactly the error that Hayek identified as establishing “causal relations between aggregates and averages” ([1935] 1967, p. 4). Even in those instances in which a precisely calculated numerical index accurately conveys the “general” movement of prices, an explanation of that move requires the explanation—according to the methodologically individualistic process described earlier in this paper—of the changes of the individual prices from which the average is computed. To Marget, and—in his judgment—to scores of preceding monetary theorists who recognized the significance of changes in relative prices, the disaggregated analysis of prices and production of which Hayek spoke constituted not (as Hayek implied) a substitute for an aggregate price level, but a complement to it.

Marget was sensitive to an important limitation to the use of aggregates that was significant, also, in the Austrian theory of monetary processes. This analytical restriction is that only realized, ex post, quantities can be summed.

If the purpose of economic theory is to explain realized and observed events in terms of the choices of the individuals whose actions bring them about, the relation of the ex ante to the ex post is the essence of economics itself. Quantifiable, observed magnitudes—like the amount of money spent on certain goods in a time period—can clearly be aggregated. But what about the plans, the intentions, the ex ante demands or supplies? If the conception of “planned” aggregates is illegitimate, macroeconomics becomes, at best, an ex post exercise of quantitative economic history, filling certain economic categories (such as “the price level” or “national income”) with numerical specifics.

The reason for Marget’s unwillingness to aggregate everything that can be found in microeconomics is grounded in the point, raised earlier by Hayek (1937; also, see below) and later by Lachmann (1958, p. 222), that except in general equilibrium ex ante quantities are based on inconsistent plans, expectations of others’ behavior that are logically incapable of realization. He noted:

It should be observed that since the “summation” involved applies to the summation of realized magnitudes, it is not open to the objections that have been raised to a mechanical summation of “expected” magnitudes (Marget 1942, p. 437 n. 69),

and later that

realized results do represent a net, quantitatively measurable social resultant of “expectations,” after all allowance has been made for the loose quantitative aspects of the expectations themselves, their essentially contingent nature, and their possible mutual inconsistency. (ibid., p. 503)

Because he perceived this problem, two popular aggregates held little appeal for him. He referred sarcastically to “that blessed dichotomy, ‘Savings and Investment’ . . . , which some of us will continue to avoid as if it were the plague” (Marget 1936, p. 566). Marget’s skepticism about the significance of general equilibrium may explain part of this position. But it is also consistent with Hayek’s (1933, 1934, 1935) discussions of the subjective and future-oriented nature of capital, saving, and investment.13

Marget knew that this criticism runs the risk of going too far, so it must be examined more closely. After all, in a sense every concept is an aggregate, in that it sweeps together individual elements with a particular common property and ignores their differences. He noted that “This is not to say, of course, that there are no circumstances under which it would be perfectly permissible to sum up ex ante values. The case of the ‘total’ demand schedule for a particular commodity proves an example to the contrary” (1942, pp. 503–4 n. 101). One wonders what principle differentiates this acceptable microeconomic ex ante aggregate from the dubious macroeconomic ones.

Even with the use of partial-equilibrium “particular demand curves” of microeconomics, he urged caution:

Even here, however, the realistic validity of such a “total” demand schedule depends upon its being related in all cases to realized results; and since these results are in all cases “realized” through the actions of individuals, it would always be safer to approach the problem from the standpoint of the calculations and the probable reactions of these individuals, leaving for a next step an evaluation of the share contributed by the actions of individuals to the “total” realized result. (1942, p. 504 n. 101)

The only methodologically safe analysis, Marget advised, is that of the choices of individuals. With a wholly Austrian adherence to the principles of subjectivism and individualism, he warned that one forms even such aggregates as “the demand for widgets” only at some risk.

He was not very explicit about the relationship of his reluctance to accept macroeconomic ex ante aggregates with his acceptance of more modest microeconomic ones like the “market demand” for a particular good. I suspect that he may have accepted the latter as useful and coherent because the more narrowly a good is defined, the more likely it is that individual demanders can effect their demands for it without their very action exposing any contradictory expectations on which their individual demands may have been based. If we were to conceive of an aggregate good consisting of widgets and a gradually increasing number of other goods, however, it becomes increasingly likely that individuals’ demands for one component of the aggregate are inconsistent with their demands for other components of the same aggregate. The more narrowly a particular commodity is defined, or—perhaps more accurately—the fewer individuals who are included, the less likely it is that the problems of logical inconsistency lie interior to the concepts of its demand and supply.

This problem with multi-individual ex ante aggregates is that they constitute another application to the catallaxy of analytical devices truly appropriate only to economy. Although it surely may be identified with the works of Hayek (from the ’30s to the ’70s), it is perhaps again Lachmann who—among the Austrians—has expressed a position most like that of Marget. “We must not forget,” Lachmann wrote in 1973,

that whenever we pass from the sphere of action controlled by one mind, in household or firm, to the sphere of action in which diverse minds have to take their orientation from one another while each is pursuing its own interests, as in a market, we face a formidable array of problems of the existence of which all too many economists seem blissfully unaware, (Lachmann 1973, pp. 15–16),

and in 1977:

Equilibrium of the individual, household, or firm, as an expression of consistent action, is indeed an indispensable tool of analysis. Equilibrium involving action planned by different minds involves altogether new problems. Equilibrium on a simple market, such as a Marshallian corn market, still has its uses. “Equilibrium of an industry” is already harder to handle. (Lachmann 1977, p. 37)

Lachmann’s general perspective on aggregates, expressed over a span of many years, is also fully in keeping with Marget’s. Referring in 1978 to “macroeconomic aggregates,” he noted that “Austrian aversion does not pertain to these aggregates as such. . . . It pertains to the construction of an economic model in which these aggregates move, undergo change, and influence each other in accordance with laws which are devoid of any visible reference to individual choice” (1978, pp. 8–9). While the quest for “micro foundations” has not been, for at least several decades, the exclusive property of Austrians, Lachmann insisted that such a micro foundation be properly subjectivist.14

Although Marget defended the use of aggregates in monetary analysis, and gently rapped Hayek’s knuckles for suggesting that we could get along just fine without them, a careful examination of Marget’s position uncovers a virtual identity with the Austrian viewpoint. “In fact, neither aggregates nor averages do act upon one another, and it will never be possible to establish necessary connections of cause and effect between them . . .,” said Hayek ([1935] 1967, pp. 4–5) in 1930. Marget’s insistence that aggregates be composed only of ex post data, changes in which must be explained according to methodologically individualistic analyses of effects on particular markets in temporal sequence, thoroughly precludes the simple kind of direct causal connection of which Hayek warned.

On the issue of doctrinal history, Marget might have challenged the Austrians. For he was convinced that, whatever shortcomings characterized the early stages of an evolving theory, there never had been a significant period (in the pre-Keynesian, pre-monetarist era, of course) in which monetary theorists had not sought individualistic, process, explanations of relationships between measurable aggregates.15

Conclusions

Exactly how Marget might have reacted to this interpretation of his work is a matter of some concern to me. Around 1940, he considered himself simply an expositor of (pre-Keynesian) orthodoxy, reminding those who had lost their way of its sophistication and urging that they return to its “highroad,” and he would hardly have accepted a specific Austrian affiliation.16 He probably would not have accepted it now, so I have tried not to thrust it upon him. But perhaps he would have agreed that—because of the very changes that he feared—some of the most important characteristics of the “orthodoxy” that he supported have come to be identified particularly with the Austrian School.

This paper has examined only two related characteristics of Marget’s work: his advocacy of the method of the individualistic analysis of monetary processes, and his position on aggregation. Precisely because they are broad issues of method, however, the specific topics that I have chosen provide clues to Marget’s position on a wide array of subjects not discussed here. As one might expect, an examination of his work on the theories of interest, capital, the business cycle, and economic policy usually—perhaps not always—illustrates the consistent application of a subjectivist methodological individualism.

Although some Austrians have taken notice of Marget (Hayek (1978, p. 75), Hutt (1963, p. 89)), others may have been misled by the same “defender of orthodoxy” label that caused the Keynesian anti-orthodoxy to ignore The Theory of Prices. In particular, Marget identified pre-Keynesian theory with the “Quantity Equation” (the transactions form of the ex post identity). One consequence is that he is known today primarily as a “historian of the Quantity Theory,”17 a label that—as my paper suggests—hardly does justice to his work.18 But his association with the “Quantity Equation” may also explain the rather lukewarm welcome of his work by the Austrians. Despite Mises’s comment that “one may call the modern theory of money an improved variety of the quantity theory” (1966, p. 405), there remains suspicion that the very adjective “quantity” denotes a belief in direct causal connections among averages and aggregates that is inconsistent with methodological individualism and subjectivism (Hayek ([1935] 1967, p. 3), Rothbard (1970, pp. 727–37)).

Whether or not such a characterization is fair even to Fisher (to whom it was specifically directed), it clearly has nothing to do with Marget. After all, Marget’s deep conviction in, and spirited argument for, the Quantity Equation’s system of conceptual organization arose precisely because it was capable of the disaggregated, individualistic, and subjective analysis of temporal process that has always identified the Austrian method.

Labels aside, Marget’s work offers scholarship in the history of monetary doctrine that is unmatched, and an analysis of processes that is in some respects unmatched, in explicitly Austrian works. “Prolixity” or not, it deserves to be recognized as an exciting and significant contribution to the tradition of the methodologically individualistic analysis of monetary processes.

References

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John B. Egger is associate professor of economics at Towson State University, Towson, Maryland. He is grateful to three anonymous referees for perceptive and detailed comments.

The Review of Austrian Economics Vol. 8, No. 2 (1995): 3–23

ISSN: 0889–3047

• 1Historical Statistics of the United States, part 1 (Washington, D.C.: 1975), series D-86 for unemployment rates and series F-32 for gross national product. Throughout this article, the standard data series for unemployment rates are used, with recognition that there has been a challenge to the validity of those data during the Great Depression years. See Michael R. Darby, “Three-and-a-Half Million U.S. Employees Have been Mislaid: Or An Explanation of Unemployment, 1934–1941,” Journal of Political Economy 84, 1976.
• 2A.C. Pigou, Industrial Fluctuations, 1st ed. (London: Macmillan, 1927), p. 176.
• 3A.C. Pigou, Theory of Unemployment (London: Macmillan, 1933), p. 252. Pigou makes his arguments in a variety of other places. For example, see his “Real and Money Wage Rates in Relation to Unemployment,” Economic Journal 47, 1937, and “Money Wages in Relation to Unemployment,” Economic Journal 48, 1938.
• 4It is perhaps something of an exaggeration to ascribe this position entirely to Pigou. A number of other economists espoused similar views. Recognizing that the list is incomplete, we cite a few, beginning with Jacob Viner, Balanced Deflation, Inflation, or more Depression (Minneapolis, Minn.: University of Minnesota Press, 1933), especially pp. 12–13. See also W.H. Beveridge, Causes and Cures of Unemployment (London: Longmans, Green and Co., 1931), p. 25, and Unemployment, A Problem of Industry (London: Longmans, Green and Co., 1930), chapter 16; Wilford I. King, The Causes of Economic Fluctuations (New York: Ronald Press Co., 1938), chapter 8; and Lionel Robbins, The Great Depression (New York: Macmillan, 1934).
• 5John A. Hobson, The Economics of Unemployment (New York: Macmillan, 1923), p. 84.
• 6W.T. Foster and W. Catchings, Profits (Boston: Houghton Mifflin, 1925) and Business Without a Buyer (Boston: Houghton Mifflin, 1927); and C.H. Douglas, Credit-Power and Democracy (London: C. Palmer, 1920) and Warning Democracy (London: C.M. Grieve, 1931). A more recent interpretation of the Great Depression with underconsumptionist overtones in John Kenneth Galbraith, The Great Crash, 1929 (Boston: Houghton Mifflin, 1976).
• 7Murray N. Rothbard, America’s Great Depression (Princeton, N.J.: Van Nostrand, 1963), p. 45.
• 8Henry Ford, The New York Times, November 22, 1929, p. 2.
• 9The New York Times, November 22, 1929, p. 1. It is interesting to note that Hoover’s inclinations toward underconsumptionism were recognized and, of course, approved, by trade unionists. Witness a statement by the AFL’s John P. Frey in 1929 relating to a public works scheme of Hoover’s. In effect, Frey argued that the president was in agreement with the AFL’s position that depressions were the result of underconsumption and low wages. See Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1959), vol. 4, pp. 349–50. See also Ronald Radosh, “The Development of the Corporate Ideology of American Labor Leaders, 1914–1933” (doctoral dissertation in history, University of Wisconsin, 1967).
• 10Rothbard, America’s Great Depression, chapter 8. Not to be ignored is the fact that ideas such as those that enamored Hoover were not as unorthodox among professional economists as sometimes claimed. See J. Ronnie Davis, The New Economists and the Old Economists (Ames, Iowa: Iowa State University Press, 1971). Davis presents an interesting array of statements by economists and other academics relating to the issue of the impact of wage reductions on the economy (pp. 94–99).
• 11John M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936).
• 12Abba P. Lerner, “Mr. Keynes’ ‘General Theory of Employment, Interest and Money,’” International Labor Review 34, 1936. See also W.B. Reddaway, “The General Theory of Employment, Interest and Money,” Economic Record 12, 1936. A systematic description of the thought of this time is contained in Lawrence R. Klein, The Keynesian Revolution (New York: Macmillan, 1947). For a taxonomic description of the various views of the aggregate demand schedule for labor, see Sidney Weintraub, “A Macroeconomic Approach to the Theory of Wages,” American Economic Review 46, 1956.
• 13Paul M. Sweezy, personal letter to John B. Shelley, dated February 11, 1977, cited in Dana C. Hewins and John B. Shelley, “Sweezy’s Kink: Macro Foundations of a Micro Theory,” Economic Inquiry 17, 1979.
• 14For a description of the various dimensions of the Keynesian critique of classical economics, see Alvin H. Hansen, A Guide to Keynes (New York: McGraw-Hill, 1953). More recent appraisals and restatements of the total thrust of Keynesianism are Abba P. Lerner, “From ‘The Treatise on Money’ to ‘The General Theory,’” Journal of Economic Literature 12, 1974; and Hyman P. Minsky, John Maynard Keynes (New York: Columbia University Press, 1975).
• 15Peter Temin, Did Monetary Forces Cause the Great Depression? (New York: Norton, 1976), p. 140. Temin also attempts to demonstrate that the Great Depression was brought on by an autonomous shift in the consumption function. That view has been challenged (successfully, we think) by Thomas Mayer, “Consumption in the Great Depression,” Journal of Political Economy 86, 1978.
• 16Keynes, The General Theory. In chapter 2, Keynes is very explicit. In reference to the principle that real wages and employment are systematically related, he says, “I am not disputing this vital fact which the classical economists have (rightly) asserted as indefeasible.”
• 17Ludwig von Mises, The Theory of Money and Credit (New Haven, Conn.: Yale University Press, 1953). Permission granted by Mrs. Margit von Mises. Quotes from 1981 Liberty Classics, Indianapolis, edition.
• 18Milton Friedman, “The Role of Monetary Policy,” American Economic Review 58, 1968.