I have heard it claimed that the recently deceased Nobel laureate economist Paul Samuelson called fellow economist Murray Rothbard a “quack.” At first I scoffed at the idea. How could someone like M. Rothbard, so versed in logic and deductive reasoning, be a “quack”? I love how Rothbard, in his economic treatise “Man, Economy, and State”, uses logical deduction to build up his economic theories and axioms step by step. I was happy to see an answer to the question of “where does price come from?” that is exactly the opposite to what I had been taught in my microeconomic courses at Oregon State University. I had been taught that the price of consumer goods is determined by the costs of land, labor, capital, etc. Rothbard explains logically how those costs are actually determined by what consumers will pay for the product. In other words, the consumers ultimately determine the price of goods! I believe Rothbard’s logic to be accurate. So, what about the “quack” comment? I tried to understand what would cause Samuelson to say such a thing. As I continued deeper into the treatise, my disregard of the comment began to weaken as I read more of Rothbard’s refutations of his own critics. I found that his arguments in his own defense were sounding strikingly similar.
First, a clarification: Paul Samuelson is a “Keynesian” economist, one who believes in implementing fiscal policies at a national level in order to keep the economy humming. These policies are supposed to smooth out the business cycles of boom and bust. Murray Rothbard is an “Austrian” economist, staunch believers in a free market and minimal government intervention into economic decisions.
When detractors like Samuelson attack the Austrian economic pillars of a free market system, Murray Rothbard can only point to the underlying logical principles of the free market to prove that it works. There is a dearth of case studies or real world examples for him to draw from. For example, when critics claim that a free market system is disruptive to society because it necessarily advances too many product innovations that threaten the peace of society, Rothbard cries out that, logically, in a free market, entrepreneurial foresight will be utilized and taken advantage of as much as is possible and desired by consumers. When critics claim that a free market system slows down innovation due to capitalist resistance stemming from a desire of a return on their previously invested capital, Rothbard declares that by logical reasoning, in a free market system, producers of goods will allocate the various factors of production in the most efficient manner possible. In other words, the free market naturally and logically has forces working that are always moving toward efficiency and customer satisfaction. I agree with these logical deductions and, like Von Mises and Bastiat before him, I am a proponent of a laissez-faire economic system with as little government intervention as possible.
But this logically constructed world of Rothbard’s does not exist, and that’s the rub.
There was no major economic system during Rothbard’s time that adhered to the principles he was advocating. There still is not today. There is no proving ground for his theories other than the written word and the adept use of logical arguments. As long as Rothbard can condemn Alfred Marshall’s use of mathematical equations as nonsensical and devoid of meaning due to Marshall’s assumptions being overly simplified and based on the concept of a “long run” economy that never actually exists in the real market, critics will be able to point to Rothbard’s theories and axioms that are based on a world that is not actually in existence, and claim he is a “quack.” My sympathies are growing for the accuser, although I am not in his camp. He seems to be saying that there is something missing from Rothbard’s analysis, and I am beginning to agree. I understand that Murray Rothbard’s free market world is loaded with idealisms that he doesn’t explicitly state; he doesn’t take his discussion of requirements for the ideal market into the political realm. Yet I also understand that by making a treatise of this magnitude, with its very foundation based on political and free market ideals, he is tacitly proposing them. Hear, hear! I applaud the effort and the proposition.
However, until and unless a society will adopt the principles he proposes and becomes more like Rothbard’s ideal free market system, there will be something patently missing from his treatise. I don’t believe he needs to go so far as to develop his own eschatology or raison d’être for mankind. I agree with Rothbard that that work should be left for religion and philosophy. But a greater emphasis needs to be put on how to implement his ideas in the real world: how and what needs to be done to correct our current economic crises? If interest rates are really supposed to be dependent upon how much people save and invest – as Rothbard explains logically – what are specific steps he would take to remediate our reliance on a central bank that artificially adjusts the market interest rates to low levels even when saving is non-existent? How would he purport to demonstrate to Americans that an elevated demand to consume leads to lower wages because it causes capitalists to discount to a greater degree the marginal value of the products that the workers are producing? And since the marginal value of a product is directly linked to the payment of labor (wages), high demand to consume is detrimental to their pay?
Rothbard’s treatise is great. I especially love it for its clear and methodical explanation of how an economy would work on a desert island and inside an evenly rotating economy where all uncertainty is removed. Once we see how an economy would work in these imaginary examples, he adds uncertainty and constant change in order to demonstrate how a modern economy will work within a truly free market. But it needs to be followed up with practicalities that can make a difference in the world in which we live, not only in imaginary ones – because the truly free market Rothbard posits is just as imaginary as his desert island or his evenly rotating economy.