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Classical Economics Murray N. Rothbard To mymentors, LudwigvonMises andJosephDorfman Classical Economics An Austrian Perspective on the History of Economic Thought Volume II Murray N. Rothbard LU~lVig von Mises Institute AUBURN, ALABAMA TheLudwigvonMisesInstitutededicatesthisvolumetoallofits generousdonorsandwishestothankthesePatrons,inparticular: Anonymous '§>o ReedW.Mower '§>o RamalloPallastWakefield& Partner; DouglasFrenchandDeannaForbush;HughE. Ledbetter; Mr. andMrs. R. NelsonNash;JuleR. Herbert,Jr.;RichardMoss '§>o AndreasAcavalos;WilliamH.Anderson; Mr. andMrs.WilliamM. Benton;RichardB.Bleiberg; JohnHamiltonBolstad;RomanJ. Bowser; Mr. andMrs. RogerH. Box;MaryE. Braum;CarlCreager; D.AllenandSandraDalton;Mr. andMrs.JeremyS. Davis; Mr. andMrs. LewFetterman;Mr. andMrs.WillardFischer; FranciscoGarciaParames;KevinGriffin; Dr.andMrs. RobertHarner;AdamHogan; RichardJ.Kossmann,M.D.;S.GiovanniLewis;JonathanLiem; BjornLundahl;Mr. andMrs.WilliamW. Massey,Jr.; WilliamandZintaMcDonnell;JosephEdwardPaulMelville; Dr. DorothyDonnelleyMoller;topdog™ ;MichaelRobb; DagnyRoss;LeeSchneider;ConradSchneiker; Mr. andMrs. EdwardSchoppe,Jr.;Mr. andMrs. CharlesR. Sebrell; NormanK. Singleton;JohnSkar;GloriaandRobertStewart; JoanThompson;WilliUrbach;JamesS.VanPelt;WilliamP.Weidner; Mr. andMrs.WalterWoodulIII;Dr.StevenLeeYamshon Copyright©EdwardElgarPublishingLtd., 1995 This2006editionofClassicalEconomics:AnAustrianPerspectiveon the HistoryofEconomicThought, VolumeII,ispublishedbyarrangementwith EdwardElgarPublishing,Ltd. Allrightsreserved. Nopartofthisbookmaybereproducedinanyman nerwhatsoeverwithoutwrittenpermissionexceptinthecaseofreprints inthecontextofreviews. ForinformationwritetheLudwigvonMises Institute,518WestMagnoliaAvenue,Auburn,Alabama36832. ISBN:0-945466-48-X Contents Introduction vii Acknowledgements xv 1. J.B. Say: theFrenchtraditioninSmithianclothing 1 2. JeremyBentham: theutilitarianasbigbrother 47 3. JamesMill, Ricardo, andtheRicardiansystem 69 4. ThedeclineoftheRicardian system, 1820-48 101 5. Monetary andbankingthought,I: theearly bullionist controversy 157 6. Monetary andbankingthought,II: thebullionReportandthe return togold 191 7. Monetary andbankingthought,III: thestruggleoverthe currency school 225 8. JohnStuartMill andthereimpositionofRicardianeconomics 275 9. RootsofMarxism: messianiccommunism 297 10. Marx's vision ofcommunism 315 11. Alienation, unity, andthedialectic 347 12. TheMarxian system,I: historicalmaterialismandtheclass struggle 369 13. TheMarxian system,II: theeconomicsofcapitalismandits inevitabledemise 407 14. AfterMill: BastiatandtheFrenchlaissez-faire tradition 439 Bibliographicalessay 477 Index 507 v j' j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j Introduction As the subtitle declares, this work is an overall history ofeconomic thought from a frankly 'Austrian' standpoint: that is, from the point of view of an adherent ofthe 'Austrian School' ofeconomics. This is the only such work byamodernAustrian; indeed,onlyafew monographsinspecializedareasof the history ofthought have been published by Austrians in recent decades.1 [ Not only that: this perspective is grounded in what is currently the least fashionablethoughnottheleastnumerous variantoftheAustrian School: the 'Misesian' or 'praxeologic'.2 ButtheAustrian nature ofthis workis scarcelyits only singularity. When the presentauthorfirst began studyingeconomics in the 1940s, there was an overwhelmingly dominant paradigm in the approach to the history of eco nomic thought - one that is still paramount, though not as baldly as in that era. Essentially, thisparadigmfeatures afew GreatMenastheessenceofthe history of economic thought, with Adam Smith as the almost superhuman founder. But ifSmith was the creator ofboth economic analysis and ofthe free trade, free market tradition in political economy, it would be petty and niggling to question seriously any aspect of his alleged achievement. Any sharp criticism ofSmith as either economist or free market advocate would seemonlyanachronistic: lookingdownuponthepioneeringfounderfrom the pointofview ofthe superiorknowledge oftoday, punydescendants unfairly bashingthegiantson whoseshoulders westand. IfAdam Smithcreatedeconomics, much asAthenasprangfull-grown and fully armed from the browofZeus, thenhis predecessors mustbefoils, little men ofno account. And so short shrift was given, in these classic portrayals ofeconomicthought, to anyoneunlucky enoughtoprecedeSmith. Generally theyweregroupedintotwocategoriesandbrusquelydismissed. Immediately preceding Smith were the mercantilists, whom he strongly criticized. Mer cantilistswereapparentlyboobswhokepturgingpeopletoaccumulatemoney but notto spend it, orinsisting thatthe balance oftrade must 'balance' with each country. Scholastics were dismissed even more rudely, as moralistic medieval ignoramuses who kept warning that the 'just' price must cover a merchant'scostofproductionplusareasonableprofit. The classic works in the history of thought of the 1930s and 1940s then proceeded to expound and largely to celebrate afew peakfigures afterSmith. Ricardo systematized Smith, and dominated economics until the 1870s; then the 'marginalists', Jevons, Menger and Walras, marginally corrected Smith- vii viii Classicaleconomics Ricardo 'classicaleconomics' by stressingtheimportanceofthemarginalunit ascomparedtowholeclassesofgoods.ThenitwasontoAlfredMarshall,who sagely integrated Ricardian cost theory with the supposedly one-sided Aus trian-Jevonian emphasison demand and utility, to createmodem neoclassical economics. Karl Marx could scarcely be ignored, and so he was treated in a chapterasanaberrantRicardian.Andsothehistoriancouldpolishoffhisstory bydealingwithfourorfiveGreatFigures,eachofwhom,withtheexceptionof Marx, contributedmore building blockstowardthe unbroken progress ofeco nomicscience,essentiallyastoryofeveronwardandupwardintothelight.3 In the post-World War II years, Keynes ofcourse was added to the Pan theon, providing anew culminatingchapterintheprogress anddevelopment of the science. Keynes, beloved student ofthe great Marshall, realized that the old man had leftoutwhat would laterbecalled 'macroeconomics' inhis exclusiveemphasisonthemicro.AndsoKeynes addedmacro, concentrating on the study andexplanationofunemployment, aphenomenon whichevery onebeforeKeyneshadunaccountablyleftoutoftheeconomicpicture,orhad conveniently sweptundertherugbyblithely 'assumingfull employment'. Since then, the dominant paradigm has been largely sustained, although matters haverecently becomerathercloudy. Foronething, thiskindofGreat Man ever-upward history requires occasional new final chapters. Keynes's General Theory, published in 1936, is now almost sixty years old; surely there must be a Great Man for a final chapter? But who? For a while, Schumpeter, with his modern and seemingly realistic stress on 'innovation', had a run, but this trend came a cropper, perhaps on the realization that Schumpeter's fundamental work (or 'vision', as he himselfperceptively put it) was written more than two decades beforethe General Theory. The years since the 1950s have been murky; and it is difficult to force a return to the once-forgottenWalras intotheProcrusteanbedofcontinualprogress. My own view ofthe gravedeficiency ofthe Few GreatMen approach has been greatly influenced by the work of two splendid historians of thought. One is my own dissertation mentor Joseph Dorfman, whose unparalleled multi-volume work on the history of American economic thought demon stratedconclusivelyhowimportantallegedly 'lesser'figures areinanymove ment ofideas. In the first place, the stuff of history is left out by omitting thesefigures, andhistoryisthereforefalsifiedbyselectingandworryingover a few scattered texts to constitute The History ofThought. Second, a large number of the supposedly secondary figures contributed a great deal to the development of thought, in some ways more than the few peak thinkers. Hence, important features of economic thought get omitted, and the devel opedtheory ismadepaltry and barrenas well as lifeless. Furthermore, the cut-and-thrust of history itself, the context of the ideas and movements, how people influenced each other, and how they reacted to Introduction ix and against one another, is necessarily left out of the Few Great Men ap proach. This aspectofthe historian's work wasparticularly broughthome to mebyQuentinSkinner'snotabletwo-volumeFoundationsofModem Politi calThought, thesignificanceofwhichcouldbeappreciatedwithoutadopting Skinner'sownbehaviouristmethodology.4 Thecontinualprogress, onward-and-upwardapproach was demolishedfor me, and should havebeen for everyone, byThomas Kuhn's famed Structure ofScientific Revolutions.5Kuhn paid no attention to economics, butinstead, in the standard mannerofphilosophers andhistorians ofscience, focused on suchineluctably 'hard'sciencesasphysics,chemistry,andastronomy. Bring ing the word 'paradigm' intointellectualdiscourse, Kuhn demolished whatI like to call the 'Whig theory of the history of science'. The Whig theory, subscribedtobyalmostallhistoriansofscience,includingeconomics,is that scientific thought progresses patiently, one year after another developing, sifting, and testing theories, so that science marches onward and upward, each year, decade or generation learning more and possessing ever more correctscientifictheories. OnanalogywiththeWhigtheoryofhistory,coined in mid-nineteenthcentury England, which maintained that things are always getting (and therefore must get) better and better, the Whig historian of science, seemingly on firmer grounds than the regular Whig historian, im plicitly or explicitly asserts that 'later is always better' in any particular scientific discipline. The Whig historian (whether of science or of history proper)really maintains that, for any pointofhistorical time, 'whateverwas, wasright',oratleastbetterthan 'whateverwasearlier'.Theinevitableresult is a complacent and infuriating Panglossian optimism. In the historiography of economic thought, the consequence is the firm if implicit position that every individual economist, or at least every school ofeconomists, contrib utedtheirimportantmitetotheinexorableupwardmarch.Therecan, then,be no suchthing as grosssystemicerrorthatdeeply flawed, oreveninvalidated, an entireschoolofeconomic thought, muchlesssenttheworldofeconomics permanentlyastray. Kuhn, however, shocked the philosophic world by demonstrating thatthis is simply notthe waythatsciencehas developed. Onceacentralparadigmis selected, there is no testing or sifting, and tests of basic assumptions only take place after aseries offailures and anomalies in theruling paradigm has plunged the science into a 'crisis situation'. One need not adopt Kuhn's nihilisticphilosophic outlook, his implicationthatno oneparadigmisorcan be better than any other, to realize that his less than starry-eyed view of sciencerings true bothashistory andas sociology. ButifthestandardromanticorPanglossianviewdoesnotworkeveninthe hardsciences,afortioriitmustbetotallyoffthemarkinsucha 'softscience' as economics, in a discipline where there can be no laboratory testing, and