Economics

50th anniversary of Man, Economy, and State

As 2012 draws to a close, we should note that it is the 50th anniversary of the 1962 publication of Murray Rothbard’s grand treatise, Man, Economy, and State. This was the book that inspired many of today’s “Austrian” economists to devote their careers to this unorthodox but remarkable school of thought. In this essay I’ll first explain who Rothbard was, and then summarize some of the major elements of his treatise.

Murray Rothbard

Murray Rothbard (1926-1995) became interested in laissez-faire economics at a relatively young age. While working on his economics Ph.D. at Columbia University, Rothbard attended Ludwig von Mises’ famous seminar at nearby New York University. According to this biographical essay, Rothbard

made major contributions to economics, history, political philosophy, and legal theory. He developed and extended the Austrian economics of Ludwig von Mises…He…applied Austrian analysis to historical topics such as the Great Depression of 1929 and the history of American banking.

Rothbard was no ivory-tower scholar, interested only in academic controversies. Quite the contrary, he combined Austrian economics with a fervent commitment to individual liberty. He developed a unique synthesis that combined themes from nineteenth-century American individualists such as Lysander Spooner and Benjamin Tucker with Austrian economics. A new political philosophy was the result, and Rothbard devoted his remarkable intellectual energy, over a period of some forty-five years, to developing and promoting his style of libertarianism. In doing so, he became a major American public intellectual.

Although Rothbard would eventually write several books—any one of which would have secured his legacy to economic theory and the political philosophy of liberty—his magnum opus was Man, Economy, and State, to which I now turn.

Style and Scope

Rothbard originally intended his work to be a textbook treatment of Ludwig von Mises’ own magnum opus, Human Action, which had come out in 1949. Indeed, Herbert C. Cornuelle, president of the Volker Fund, was the one to pitch this idea to Rothbard that very year. Rothbard prepared an outline and a sample chapter on money, then received the blessing of Mises himself to go forward with it.

However, as Joseph Stromberg chronicles in exquisite detail in his Introduction to the Mises Institute’s (2004) Scholar’s Edition of MES, upon embarking on the project Rothbard eventually realized that a mere textbook would not be adequate. Cornuelle had visited Rothbard and asked if he thought the work should become a treatise in its own right. Rothbard pondered the question and eventually wrote in response (in February 1954):

The original concept of this project was as a step-by-step, spelled out version of Mises’ Human Action. However, as I have been proceeding, the necessary elaborations on the sometimes sparse framework of Mises has led inevitably to new and original presentations. Now that I have been proceeding to the theory of production where the whole cost-curve situation has to be faced, Mises is not much of a guide in this area. It is an area which encompasses a large part of present-day textbooks, and therefore must be met, in one way or another….A further complication has arisen. A textbook, traditionally, is supposed to simply present already-received doctrine in a clear, step-by-step manner. But not only would my textbook fly in the face of the doctrine as received by 99 percent of present-day economists, but there is one particularly vital point on which Mises, and all other economists, will have to be revised: monopoly theory.

Thus we see that Rothbard eventually realized that he was writing a brand new treatise, resting on the Misesian edifice to be sure, but one that was Rothbard’s own. Not only did Rothbard differ from Mises on certain key points (some of which will be discussed below), but even where their treatments were compatible, Rothbard’s was the clearer and more systematic.

The fundamental difference between Human Action and Man, Economy, and State is that the latter, though intimidating because of its size, is completely self-contained. The intelligent layperson with no prior exposure to any economics can read just Rothbard’s treatise, and walk away understanding the core of orthodox Austrian theory. In contrast, Mises’ classic work assumes a great deal of background knowledge on the part of the reader, including Kantian philosophy, the classical theory of value, and Böhm-Bawerkian capital and interest theory (!). None of this is meant to belittle Mises’ work, but merely to underscore that I personally always point the dedicated newcomer to MES first, and only then to Human Action.

A “Misesian” Work Grounded in Praxeology

Rothbard begins the book closely following in Mises’ footsteps, by categorizing economics as a subset of praxeology, which is the science of human action. According to Rothbard, starting from the basic axiom that human beings act—in other words, that they consciously use means to (attempt to) achieve desired goals—one can logically deduce the entire body of economic principles or laws.

It is interesting to read Rothbard’s description (in a March 1951 letter to Cornuelle) of his method of attack:

What I have in mind for a textbook would be a pioneering project….At each step, the reader would be enlightened through simple, hypothetical examples, until, slowly but relentlessly, he would find himself equipped to tackle the economic problems of the day….[T]hrough this method, even the most confirmed socialist, would step-by-step, beginning with simple praxeological axioms, at the end, suddenly find himself realizing the absurdity of his socialist and interventionist beliefs. He would become a libertarian in spite of himself.

Following Mises, Rothbard and his modern disciples argue that sound economic theory is logically antecedent to empirical investigation. If trying to understand the causes of the Great Depression, for example, one can’t simply “let the facts speak for themselves,” because there are an infinity of possible facts one could assemble for the purpose. (What was the mass of the moon on February 16, 1923, at exactly noon GMT, and might it have something to do with the 1929 stock market crash?) Indeed, the very concepts of money, interest rates, and so forth are themselves theory-laden; one needs to have a praxeological foundation in order to even perceive such categories, because they don’t exist “out there” in “the real world” the way a naïve positivist might suggest.

The Structure of Production

Joe Salerno once told Rothbard that he (Rothbard) had incorporated the capital theory of Böhm-Bawerk into his exposition far more than Mises had done in his own works. For those of us who read MES in our youth, we take this for granted, but Salerno’s observation is perfectly correct: Rothbard takes the crucial yet at times mind-numbingly dry treatments of Austrian capital theory from the masters (mainly Menger, Böhm-Bawerk, and Hayek) and distills them into a very readable discussion. He caps it all off with a beautiful diagram (appearing in the beginning of Chapter 6, “Production: The Rate of Interest and Its Determination”) that I have described as the superior Austrian version of the mainstream’s “Circular Flow Diagram.”

Rothbard’s diagram takes the famous Hayekian triangle and rotates it 90 degrees to the right, so that what is considered the earliest or “highest” stage of production, actually is the highest bar on the diagram. At each step moving downward, the goods-in-process have moved through another period of work, where further inputs of land, labor, and capital goods have been applied, transforming the capital goods to become ever closer to the ultimate consumer goods.

Rothbard’s ingenious construction allows for an “economy-wide” accounting, where the capitalists earn the correct rate of return on their investments each period, and where the net incomes earned by the capitalists, land owners, and laborers each period sum to the total spent on the finished consumer goods emerging from the bottom of the production “pipeline” that period.

Monopoly Theory

Throughout the book, Rothbard makes original contributions, but they are often in the form of making a received point a little more crisply, or by filling in a gap in the standard case for a familiar conclusion. When it comes to monopoly theory, however, Rothbard overturns the tables and starts from scratch.

Rothbard begins his treatment by challenging the very notion of “consumers’ sovereignty” as developed by William Hutt. Hutt (and later Mises) used the term to convey the notion that the “customer is always right,” and that through their spending decisions the consumers in a market economy ultimately allocated resources to competing ends.

Rothbard rejected the term on the grounds of both accuracy and strategy. Strictly speaking, it was simply not true to say that consumers were somehow “sovereign” over producers. Yes, consumers were free to withhold their money, but by the same token business owners were free to withhold their products, and workers were free to withhold their labor. Instead of exhibiting consumers’ sovereignty, Rothbard felt the free market demonstrated individual self-sovereignty.

Rothbard also disliked the term for strategic reasons, because the notion of “consumers’ sovereignty” could be used as an ideal benchmark with which to criticize the performance of the real-world market. Indeed, that is precisely what happened (with the related notion of “perfect competition”) in mainstream welfare economics.

During his preliminary discussion of monopoly, Rothbard makes some brilliant observations. For example, he points out that most economists and the general public are horrified by the formation of a cartel, while they look with favor upon the creation of a corporation. Yet the processes are quite similar, involving individuals pooling their resources into a unified enterprise. Rothbard also generalizes Mises’ calculation argument as originally applied to a socialist State, to show that no single firm could ever encompass the entire economy.

In another tour de force, Rothbard shows the dangers of the mainstream fascination with graphical expositions. It is standard in textbooks to this day to show the inefficiencies of “monopolistic competition” using a diagram where the downward sloping demand curve is tangent to the U-shaped average cost curve on its left side, which is not at the lowest point on the curve. Mainstream economists attribute to this purely geometric result economic significance, claiming that “monopolistically competitive” industries will have “excess capacity” and operate at higher unit costs than a perfectly competitive industry. Yet Rothbard points out that this result follows purely from the convenient assumption of a smooth U-shaped average cost curve. If instead we used a jagged average cost curve (with straight lines connecting discrete points), then a downward sloping demand curve could cross the AC “curve” at its lowest point. In other words, Rothbard showed, the standard textbook critique of industries such as sneakers and breakfast cereals, was based on a graphing decision and had little to do with economic analysis.

After these warm-up sections, Rothbard goes for the throat: He denies the very existence of a so-called “competitive price,” with which to contrast the allegedly inefficient “monopoly price.” Instead Rothbard offers the free-market price, which is the only benchmark that can be discussed coherently.

Critique of Keynesianism

In addition to his positive exposition of sound Austrian economics, Rothbard fills MES with critiques of rival doctrines. I am particularly fond of his discussion of Keynesian economics. The critiques have lost some of their force over the decades, because a typical Keynesian textbook no longer motivates its policy conclusions with the arguments that were common when Rothbard was writing. Even so, Rothbard’s demonstrations are a joy to behold.

My personal favorite is his reductio ad absurdum of the multiplier (based on a similar argument by Hazlitt). After reviewing (what was at that time) the standard Keynesian case that new investment spending will have a “multiplier” impact on total income, Rothbard uses the same approach to “prove” that the reader of his book has a much higher multiplier still.

Specifically, Rothbard sets out a few equations, showing that “Social Income” is equal to the “Income of the Reader” plus the “Income of everyone else.” Then he uses some empirical observation to discover that the “Income of everyone else” is 0.99999 times “Social Income.” After some algebra, Rothbard concludes that “Social Income” is 100,000 times the “Income of the Reader.” The consistent Keynesian, Rothbard notes, should then advocate that the government print up dollars and hand them to the reader of Rothbard’s book, because the “reader’s spending will prime the pump of a 100,000-fold increase in the national income.”

Conclusion

Fifty years after its initial publication, Murray Rothbard’s grand treatise still holds up. I have written a Study Guide for it, and still receive emails monthly from people thanking me for helping them work through this classic book, because they recognize its importance and the knowledge it contains. If anyone considers him or herself a fan of Austrian economics and has yet to try Man, Economy, and State, I promise you are in for a treat.

This essay is based on an article originally published by in The Freeman.

 

7 comments to 50th anniversary of Man, Economy, and State

  • Paul Marks

    Man, Economy and State is a great work – not a perfect work (there are signs in it of political thinking influencing the study of economics), but no work is perfect. Perfection is not given to us humans – we do the best we can, and I venture to say, that none of us has produced a work half as good as “Man, Economy and State”.

    It is tragic (tragic) that after finishing this work, Rothbard basically wasted the rest of teh 1960s (and much of the early 1970s) in weird political activity.

    And “weird” is not too strong a word (nor should what he did have a cover put over it). Murray Rothbard actively cooperated with Marxists (he never became one – but he cooperated with them) at the very time the Marxists were mudering tens of millions of people in China (see “Mao: The Untold Story”) and were working to murder millions more in IndoChina (Vietnam, Laos and Cambodia – with the mass murder by the pro Soviet Marxists only be outdone by the mass murder by the pro Mao Marxists).

    Rothbard (I repeat) never became a socialist (he remained opposed to the evil doctrine of “social justice” all his life), but he allied with them – at a terrible time. This should no more be forgotten (or forgiven) than the antics of Richard Nixon and Edward Heath with Mao should be forgotten or forgiven. Nor should any illusion be maintained that the American Marxists only wished the victory of the Communists in IndoChina – on the contrary they wished for it the United States also, and actively discussed how many tens of millions of Americans would “have to be” sent to death camps (to have cooperated with such people is an act of astonishingly bad judgement – to put the matter mildly). Such was the “freedom” of the “new” left.

    As for the reasoning that Rothbard presented to justify his actions – it is astonishingly different from the clear reasoning presented in “Man, Economy and State”.

    The “reasoning” Rothbard presented in the later 1960s and early 1970s (to justify his cooperation with the Marxists) is so twisted and convoluted that it resembles the behaviour of the bird the comic characters seek in the film “Carry On Up The Jungle”

    Had Rothbard continued to concentrate his energies on academic work (works such as “Man, Economy and State”) I believe he would have achieved astonishing things. For example, he woud (at least) have completed his history of economic thought (still, although alas uncompleted, the best work on the subject).

    It was, I repeat, tragic that the insanity of the 1960s (at least for a period of time) so disrupted Rothbard.

    It may be protested that I should not bring up such a painful subject – and that we should only consider Rothbard’s academic work.

    But such protests would be mistaken. We must face (and face squarely) the terrible mistakes of the past – if we are to avoid making them in the present and the future.

    And to ally with the left (no matter how good we tell ourselves our motives are) is the most tragic error we could make.

    They have not gone away (in some ways they are more powerful than ever) and they are not a “new” left, any more than the left of the 1960s were really a “new” left.

    They were just the old totalitiarians – with longer hair.

    The central totalitarian belief that all income and wealth is rightfully owned by the collective (“the people” or whatever) and should be “distributed”, remains.

  • Richard

    “Nor should any illusion be maintained that the American Marxists only wished the victory of the Communists in IndoChina – on the contrary they wished for it the United States also, and actively discussed how many tens of millions of Americans would “have to be” sent to death camps ”

    Is there a source for this? I thought the American Marxists at least pretended to be opposed to Stalinism.

  • Yohan

    Paul Marks comment is typical of those who have not read any of Rothbards academic output during this era, but have picked up this meme of ‘Rothbard allied with Marxists’ that mainly appears in Objectivist blogs.

    Rothbard was a multi-disciplinary polymath, and his writing output was often dozens of pages per day. Throughout the 60’s and 70’s he wrote 100’s of very thorough articles on economics, law and philosophy that could appear in any peer reviewed journal today.

    To say he focused his energies on political activity is taken out of context once you realise his economic output during this period was more than most economists write during their entire lifetime.

    At the same time, he wrote 1000’s of short ‘popular’ articles for the various newsletters and publications of the day.

    Again at the same time, there was the fun Rothbard, involved in libertarian political strategizing and university campus politics. The goal was to promote the political theory and ethics of libertarianism. So many outreach attempts were made to ‘convert’ socialists and Marxists to his anarcho-capitalist philosophy. Similar attempts were made in the 90’s with disaffected conservatives hence the paleo-conservative outreach.

    But to imply that this activity meant Rothbard ‘co-operated’ with Marxists and then bring up ranting examples of Mao and death camps is just absurd and dishonest. This entire slur of Rothbard mainly comes from the Randian movement, who cannot accept that Rothbard held the most consistent and rational teachings regarding self-ownership and individualism, and have always tried to take out of context his political activities as a way of demeaning him.

  • Paul Marks

    I never mentioned “Stalinism” – because it is not relevant (if it even exists).

    If anything the left regarded “Uncle Joe” as too moderate – too willing to mimic “capitalism” (by having money prices, paying more for extra work and so on).

    Also Stalin pretended that the people in his camps were “criminals” (actually real criminals in the camps were treated better than the 58s).

    As for internal policy in the United States once “liberation” had been achieved……

    On economic policy the enemy were somewhat vague (as they tend to be).

    However, the Weathermen (and so on) were quite clear (in their internal discussions) what shoudl be done with the millions of reactionaries.

    Sources?

    The normal “abuse of state power” I am afraid.

    FBI wire tapping (often illegal – and thus not admissible in court), and infiltrators.

    As Bill Ayers laughed as he walked free from his terroism trial.

    “Guilt as Hell, and free as a bird – you have got to love America”.

    Of course these days the FBI would not do such dreadful things.

    At least not to their side.

    After all the FBI is responible to the Justice Department – and that means (in the end) to Mr Holder and Mr Obama.

    Somewhat ironic really….

    The security systems built up since the wave of terrorism after World War One (the history books attack the “Palmer Raids” but gloss over the people who had their faces blown off by the Radicals) still exists – indeed it is bigger than ever.

    But it is now under the control of the sort of people it was meant to fight.

    The character (although not perhaps the real man) in the film of Thomas Moore “A Man For All Seasons” would have seen the problem.

    If one knocks down the legal limits – to “hunt the Devil”.

    When the Devil turns round and starts hunting you the legal defences that you could have used in defence are destroyed.

    Because one has destroyed the defences.

    After all even Palmer (in spite of being denounced for the best part of a century by the left) was actually a Progressive in his politics.

    He never really understood (at a gut level) the principles of the rule of law – and neither did those Cong hunters who came after him.

    And that is costing us now.

    The structures the Cong will use to achieve their objectives were created (at least in part) by their foes.

  • Paul Marks

    Short reply.

    The followers of Trotsky, and the followers of Mao, and the followers of Saul Alinksy are all different in STYLE.

    In their basic objective (collectivism) they are the same as “Stalin” (just perhaps a bit “pure” – there was a allways a bit of peasant common sense in Stalin that even the Marxist ideolgy could not quite destroy).

    And none of the factions have anything but amused contempt for such reactionary notions as the value of human life.

    This David H. found out when he sent an middle aged women to help the Black Panthers with their accounts – back in the 1960s.

    The women uncoverd some fraud – so, natually enough, the Panthers murdered her.

    Young David H. was shocked (which suprises me – as, even at six years of age, I would have expected the Cong to behave in this manner).

    He was even more shocked when none of his “liberal” friends cared about the murder.

    And the still do not – they do not care about this murder or all the other murders.

    And if they had the power they would murder tens of millions.

    “Social Justice” must be achieved.

    The one thing they presently do not have total control of is the military.

    I expect they are working on this difficulty.

  • Paul Marks

    Yohan.

    I am not a Randian Objectivist – although, yes, I respect them.

    But I do not need any “Objectivist blog” to tell me what Murray N. Rothbard was doing in the late 1960s.

    “Left and Right join hands”. Encouraging young libertarians to cooperate with the “new” left (which was not “new” at all – it was even dominated by Marxist families, people whose parents and grandparents had been in the same “family business” of subversion).

    The result should have come as no surprise to anyone….

    The young libertarians were taught (by professional Marxists) that the war was being faught for the benefit of “corporate profits” (for the benefit of “the capitalists”) and, little by little, the young libertarians (who had been led to the Marxists – like lambs to the slaughter) were turned into Marxists themselves.

    The struggle in IndoChina as a struggle for “freedom” against “Western Imperialism”. That was the Rothbard line – and openly used “Leinist” language.

    Rothbard’s writings in the period often read like transcripts from Radio Moscow (which I am old enough to remember).

    “But Rothbard remained a supporter of large scale private ownership of the means of production, distribution and exchange”.

    I know he did – Rothbard never became a leftist.

    That is what makes his alliance with them (and he did ally with them) all the more insane.

    Nor was it “just” a matter of IndoChina.

    I remember well the support for the Marxist IRA (at the height of its murder campaign) and the utter nonsense that the IRA was fighting for freedom.

    Murray Rothbard was a great economist and a great historian of economic thought.

    However, he could have achieved vastly more had he not wasted his time “writing thousands of popular articles” – specifically the Red propaganda ones on IndoChina, Ulster and other topics (even though he seems to have cribbed the language and the “facts” from leftist publications – perhaps to save time).

    Nor is “popular” activity just a matter of time wasting – what he did was EVIL (wicked). And efforts to rewrite history will not work.

    If it was wrong for Richard Nixon and Edward Heath to play footsie with the Marxists (and it was wrong – it was vile, utterly vile) it was ALSO wrong for Rothbard to do it.

    And HE DID DO IT.

  • Paul Marks

    “But Rothbard had good motives”.

    Most likely he did.

    I do not care.

    Richard Nixon and Edward Heath most likley had good motives also.

    I respect the anarchocapitalist economic position – I am NOT a foe of Rothbard’s academic work.

    But I see no reason to give anarchocapitalists a pass when they do terrible things. Any more than anyone else should be given a pass.

    The ideology someone has is not relevant.

    To cooperate with the Cong (indeed even going so far as the parrot their anti Western propaganda) is a terrible thing to do.

    It is not acceptable behaviour.

    And this is not over.

    Such errors (moral errors) may be made again – by libertarians seeking to “win over” the left.

    They might as well try and “win over” Hell itself.

    By the way – it is perfectly acceptable to oppose a war.

    I thought the Iraq war would turn out badly – and said so.

    And I think the Afghan war will turn out badly – and still say all Western troops should pull out of Afghanistan (at once – today).

    But there is a vast difference between opposing a war and whitewashing the enemy.

    And if Rothbard was unable to understand that difference then he was a child.

    Or an “intellectual” which, as Cicero pointed out, is much the same thing – “there is nothing so absurd that a philosopher has not taught it”.