New Perspectives on
Political Economy
A bilingual interdisciplinary journal
Vol. 7, No. 1, 2011
New Perspectives on Political Economy
A bilingual interdisciplinary journal / Vol. 7, No. 1, 2011
New Perspectives on Political Economy is a peer-reviewed semi-annual bilingual interdisciplinary
journal, published since 2005 in Prague. The journal aims at contributing to scholarship
at the intersection of political science, political philosophy, political economy and law.
The main objective of the journal is to enhance our understanding of private property-,
market- and individual liberty-based perspectives in the respected sciences. We also belive
that only via exchange among social scientists from different fields and cross-disciplinary research
can we critically analyze and fully understand forces that drive policy-making and be
able to spell out policy implications and consequences. The journal welcomes submissions
of unpublished research papers, book reviews, and educational notes.
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New Perspectives on Political Economy
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Editor-in-Chief:
Josef Šíma, President, CEVRO Institute, Prague
Advisory Editor:
Ladislav Mrklas, CEVRO Institute, Prague
Associate Editors:
Pavel Pšeja (political science), Masaryk University, Brno
Michal Kořán (international relations), Institute of International Relations, Prague
Alena Zemplinerová (political economy),
Institute of Economics, Academy of Science, Prague
Roman Cardal (political philosophy), CEVRO Institute, Prague
Petr Koblovský (law), University of Economics, Prague
Book Review Editor:
Jan Jireš CEVRO Institute, Prague
Managing Editor:
Veronika D’Evereux, CEVRO Institute, Prague
Language Editor:
Shelly Gussis
Editorial Board:
Terry Anderson, Hoover Institution, Stanford University
Peter Boettke, George Mason University
Hardy Bouillon, Trier University
Enrico Colombatto, University of Turin
Christie Davies, University of Reading
Frank van Dun, Ghent University, Faculty of Law
Richard Ebeling, Trinity College
Richard Epstein, New York University School of Law
Robert Higgs, The Independet Review
Jesus Huerta de Soto, Universidad Rey Juan Carlos
Jorg Guido, Hulsmann Université Anger
Zdeněk Kühn, Charles University, Faculty of Law
Miroslav Novák, CEVRO Institute
Svetozar Pejovich, Texas A&M University
Gerald Steele, Lancaster University
František Zoulík, CEVRO Institute
A bilingual interdisciplinary journal 105
Economic Calculation,
Maturity Mismatching
and the Credit Cycle
IVAN JANKOVIC†
aBSTRACT
This paper is an attempt to synthesize the classical Misesian argument for the impossibility
of economic calculation in socialism with the Mises-Hayek credit cycle theory. The key
concepts of the ABCT such as “interest rate” and “natural interest rate” have been traditionally
defined for a barter economy, which made it very difficult to integrate them with
the monetary theory of economic calculation. The focal point of the synthesis proposed
here is Mises’s regression theorem in which he showed that money can be understood only
as a commodity that has to be independently demanded for industrial and consumption
purposes prior to establishing itself as a medium of exchange. It is shown that abandoning
of the pure gold standard is just a special and limited case of the general problem Mises
originally explored in the context of the debate on socialism – abolishing of the private
property rights that leads to “incalculability” in the economic system. The main finding
of the paper is that maturity mismatching and fractional reserve banking in a similar way
bring about the inconsistent time structure of private property rights in money, and distort
the economic calculation that way. Hence, the necessary condition for both the rational
economic calculation and the avoidance of business cycle is the presence of a 100% reserve
commodity money that is privately owned, the full-banking reserve as well as the private
property in the means of production and the absence of maturity mismatching.
KEY WORDS: business cycle, gold standard, economic calculation
†	 Simon Fraser University, E-mail: jankoivan@gmail.com
New Perspectives on Political Economy106
I. Introduction
When an economist of the Austrian school is asked what causes the business cycle, the
usual answer is “the artificially low interest rates”. On the follow-up question: “how do you
know that any particular interest rate was artificially low”, the predictable answer is: “because
it was lower than the natural interest rate that would have otherwise prevailed on the
free market”. When the next question comes “what is the natural interest rate and by how
much should it be higher than the actual interest rate”, the real problem begins to loom; an
Austrian looks into the main texts of Mises and Hayek and comes up with approximately
the following definition: “the natural interest rate is the one that would prevail in a barter
economy”.1
Obviously, this is a problem, since it is not immediately clear how can one claim
any precise relationship between the magnitude A (an actual interest rate) and the magnitude
B (a natural interest rate) when the magnitude B is not only unobservable, but conceptually
of a very different kind. It is really problematic to claim that the monetary policy
of the Fed under Alan Greenspan was too easy, because in a primitive barter economy the
interest rate would have been higher than it was under his chairmanship!2
How can anyone
know that? And what kind of change should be made in the existing monetary arrangements
in order to make the interest rate as closely as possible approximate the natural rate?
Of course, this does not mean that the general concept of an artificially lowered interest
rate is wrong, but only that this concept is not sufficiently developed or clarified, because it
is typically not analyzed in the context of private property rights in money.
The purpose of this paper is to try to deal with this problem – to show that all disagreements
about whether fractional reserve banking and maturity mismatching were consistent
with the ABCT stem from the failure to put the discussion in the context of private property
rights and economic calculation. Once this is done, it becomes clear why so much confusion
exists in this area. Inconsistency between the monetary explanation of the business
cycle and a non-monetary definition of the key analytical terms of that theory is much
more peculiar and ironic as we bear in mind that the same intellectual tradition provided
a theory of impossibility of socialism based on its incapability to calculate the monetary
prices of the factors of production, and hence to provide a basis for the cost-accounting and
hence rational economic planning (Mises, 1990). Now, it turns out that the Crown Jewel
of the same tradition, a purportedly “monetary” theory of the credit cycle is based on the
non-monetary categories of a barter economy. Ironically, maybe the two most important
paradigms in the economic theory of the Austrian School, Mises’s theorem of impossibility
1	 See Hayek, 2009, Mises, 1949.
2	 A reviewer objected to this statement of mine by arguing that every change in the money supply always artificially
pushes the interest rate downward, so there was no problem with the Austrian definition. However,
although this is quite correct as far as qualitative law goes, it still does not provide us with a systematic and rigorous
explanation as to how much the interest rate was depressed under the Greenspan’s chairmanship, and
what has to be done in order to avoid the same thing in the future.
A bilingual interdisciplinary journal 107
of the economic calculation in socialism, and the Mises-Hayek theory of the credit cycle
remained disintegrated. The basic arguments that underlie both of these paradigms seem
to be well understood, and it could be even said that in some sense there is a “consensus”
among the majority of “Austrian” economists about the meaning of those two theoretical
paradigms, and yet none has come up with an idea how to unify them in a comprehensive
theoretical whole.
However, this is less surprising when we take into account that Mises and Hayek themselves
in their classic texts were vague and often inconsistent in explaining what they meant
by the “sound money” or a free market monetary regime. Mises was generally close to the
100 % gold standard, but considered free banking as a second best, and even occasionally
accepted the legitimacy of the fiduciary media (Mises, 1978), contrary to his general theoretical
assumptions. Hayek was even less consistent, for he accepted at various points of
his career everything: 100 % gold standard, fractional reserve free banking, competition in
issuing the private currency all the way to the central banking which he considered a given
framework in his best works from 1930s (Hayek, 2009).
It is then even less of a surprise that among the followers there is an even bigger confusion
on this issue. Today, at least two distinct Austrian traditions or schools of thought
exist, which tend to offer fundamentally different accounts of the basic categories of monetary
economics, and therefore completely different analysis and policy prescriptions for
business cycle, due to the different understandings of this critical issue. What distinguishes
those two traditions is exactly how they understand money – its origins, its place in economic
life, and the ways how it affects production. The one tradition that follows Menger
and the classical economists sees money as a scarce commodity which is used as a medium
of exchange (such as gold or silver).3
The economic calculation only makes sense in terms
of units of that commodity. Banks and other financial institutions cannot create additional
money out of “thin air” that is not backed by 100% commodity reserves, without hampering
and distorting the very process of economic calculation. The second “Austrian” tradition,
on the contrary, considers the Misesian economic analysis (praxeology) to be compatible
with the emission of fiduciary media, i.e. credit money in the fractional reserve banking
system which does not have a 100 % backing in money proper, or specie, such as gold (Selgin
1988, White 1990, Garrison, 2002). It is widely believed within this tradition that the
Austrian theories of monetary calculation and credit cycle (with all their indispensable ana-
3	 But even this tradition, the main representative of which is Murray Rothbard, and contemporary heirs Hoppe,
Block, Huerta de Soto, Huelsman, Salerno etc, does not offer an unified theory of monetary calculation which
would put Mises’s impossibility hypothesis together with the credit cycle theory, as analogous consequences
of the interference in private property rights, which distorted and took into question the very possibility of
rational economic planning. De Soto (1998) came closest to that perspective by insisting that central banking
management of the money must fail for the same reason as attempts to centrally plan a whole economy, but
even he did not offer a complete theory of the demand-side incalculability stemming from hampering private
property rights in the money commodity. Others, such as Hoppe (1994) and Huelsman (1996) emphasized
the ethical and economic consequences of abandoning 100% gold standard, but did not offer an integrative
theory of calculational effects of commodity money either.
New Perspectives on Political Economy108
lytical tools) hold true even when we abandon the commodity standard and accept some
form of fiat or fiduciary money; the Austrian theory is “institutionally elastic”, i.e. equally
applicable both in the pure gold standard and in the various forms of mixed-systems, including
the fiat money and central bank regimes.
Moreover, the things are even worse than that: not only is there not an agreement about
what the proper monetary framework is, but the very disagreements are based on personal
opinions or philosophical and ethical differences rather than on rigorous economic theorizing.
The economists who argue for 100 % standard do that irrespective of the theory of monetary
calculation: as we shall see, all the praxeological deductions concerning the natural
interest rate, malinvestment, voluntary saving etc. apply only to the barter economy. None
has any idea what these categories would mean in a monetary economy (i.e. in different
types of monetary regimes). The “Rothbardian wing” of the Austrian school has a praxeological
theory which explains the properties of Crusoe economy or barter, including the
pure time preference theory, definitions of interest rate, profit and loss and so on, on the
one hand, and a theory of 100% gold reserve system, on the other hand, based largely on the
ethical and philosophical interpretations of what the libertarian or “free market” monetary
system would require. No attempt at their synthesis or unification by economic analysis has
been undertaken. The members of the “Kirznerian” wing, from their part, accept a general
Mises-Hayek framework in explaining the credit cycle, but when it comes to money they
adopt the mainstream Keyensian-monetarist doctrines (macroeconomic equations, monetary
policy, anti-deflationist measures etc). Unlike the Rothbardians who at least emphasize
the regression theorem (although they do not incorporate it into their pure theory and the
credit cycle theory), Kirznerians reject it completely and explicitly.
The main thesis I would like to defend and elaborate more in detail in the remainder
of the paper is that the Austrian concepts related to the credit cycle, such as voluntary
and “forced” saving, time preference, natural rate of interest, monetary calculation, creditinduced
production cycle etc., make sense only in the pure 100 % commodity money system.
And consequently, that all forms of interference with the 100 % commodity money system
hamper economic calculation and distort the price system and production structure. Furthermore,
I will argue that even in the 100 % reserve system, miscalculation is possible, with
the same consequences as in the FRB, if so called maturity mismatching is allowed. Both
the fractional reserve banking and maturity mismatching create the inconsistent structure
of property rights in money and inflict the distortions in the price mechanism, making rational
economic planning impossible. Both of these “special impossibility theorems” (FRB
and MT) are derived directly from the Mises’s general impossibility theorem of socialism:
private property rights = market prices = rational economic calculation. In this case, this
algorithm is applied not only to the consumers’ or producers’ goods (as it was usually the
case from Mises onwards), but to money as well.
A bilingual interdisciplinary journal 109
II. The Regression Theorem and Economic Calculation
The Austrian credit cycle theory originally proposed by Mises (1978, 1998), and developed
in its state-of-the-art form in Hayek (2009), was adopted and reinforced by their subsequent
students and followers. It is a theory of monetary-induced over-investment in the capital
intensive production processes that causes the inter-temporal misallocation of resources
and distortions in the pattern of production that leads to the economic crises. By artificial
lowering of the interest rate below the free market rate (the “natural” interest rate), banks
create ‘forced savings’ and induce the entrepreneurs to invest in the capital-intensive production
processes that are unsustainable in the long run and will be liquidated in the future
(Rothbard, 2004, Huerta de Soto, 1998). As it was mentioned, none of the economists writing
in the Mises/Hayek tradition would question this basic framework for the explanation
of the business cycle. However, the problem shows up when we try to define more precisely
and stringently the key analytical categories of the theory, money being the most important
among them. Depending on how we define money the theory itself could be interpreted in
completely different ways.
What this practically means is that unless the relationship between Mises’s “impossibility
theorem” and the credit cycle theory is explained, the latter remains in a vacuum. What
does it mean to say, for example, that some interest rate is “natural” and some other is not,
and what is the “genuine free market” on which a natural rate would manifest itself? Mises
follows Wicksell in understanding the natural rate of interest as one that would prevail if
no money would exist and the exchange of productive factors would have been carried out
through a series of barter arrangements (Mises, 1978). However, since in the market economy
we never face that situation of barter, of what analytical use is the concept of natural
rate which cannot be approximated by anything observable in a real market economy? We
have the two interest rates, “a” and “b” (say, prior to, and after the central bank’s intervention)
on the real market. Which one of them is closer to the “natural” rate and why?
As we have already shown, in the pure Austrian theory there is only a metaphorical
theory of interest, pertaining to the artificial constructs of the moneyless Crusoe economy.
However, our main task here is exactly to look at how the interest rate is forming in a real
monetary economy.4
Of little help in that endeavour would be either to say, again in Wicksell’s
footsteps, as all Austrians have been doing for a century, that the natural rate is the
one that “equates the demand for and supply of capital” (Hayek, 1967:23). For, immediately
the question arises – what is the legitimate “supply of capital” and what is the legitimate
“demand” for capital in this context? As the Austrians warn us, money is not and cannot be
“neutral” to prices and production, and hence nor to the volume of available capital. So, the
Wicksellian definition accepted by Hayek again begs the question. It is a petitio principii:
4	 An additional irony of the situation is that the branch of the Austrian school insisting the most on the credit
cycle theory is called a causal-realistic school, meaning a school concerned not with the artificial equilibrium
prices, but with the mechanisms of the formation of the real, everyday, market prices.
New Perspectives on Political Economy110
the natural interest rate equates the demand for and supply of capital, and demand and
supply are equal when there is a natural interest rate.
Let us look at an example: the rate lowered by a central bank using its “discount window”
appears to provide a higher level of the “supply” of capital than otherwise would have been
the case. But, the entire point of the ABCT is that this “inflated” supply of capital is not real,
ie. that it provides for an artificial increase of long-term investment which is not justified
by the change in the underlying rate of time preference of the public. In other words – it is
not clear what all this supply-demand rhetoric means (if anything) in the fractional reserve
system (with or without the central bank) where the “supply of capital” can be increased
by emitting fiduciary credit, without any changes in the underlying gold base, and without
any change in the social rate of time preference.5
How would we recognize the “natural”
rate when we see one? Further, what is “voluntary saving” as opposed to “forced saving”
in each of these different systems, and how can we distinguish praxeologically between the
two? And does it make any sense to talk about such analytical differences in the context of
the central banking regime at all?
The problem we face here is not just a matter of some theoretical splitting of hairs. If we
cannot establish the mentioned distinctions in a praxeologically relevant way, by explaining
the central concepts of monetary theory within the sensible theory of individual human
action, the explanatory power of both the ABCT and impossibility theorem would have
been greatly diminished. If we have no sensible way of defining the natural rate of interest,
the theory of the credit cycle as stemming from the “artificial lowering of the interest rate”
becomes a little more than game playing, just as the impossibility of monetary calculation
becomes a murky speculation, once we are not able to define the “sound money” clause
(Mises, 1990) upon which the very calculation is supposed to be based.6
In his seminal
paper “Economic Calculation in the Socialist Commonwealth” Mises lists the three conditions
for a successful economic calculation and rational planning: consumer goods must
be privately owned, producer goods also have to be privately owned and there must be
a “universally accepted medium of exchange”, ie. money. That is pretty much everything
Mises has to say about the role of money in economic calculation. He does not specify
anything further, neither about the nature of this medium of exchange nor about the “right”
monetary regime. He merely emphasizes that the fluctuation in purchasing power of money
should not be too sudden in order for the system to retain the ability to calculate (ibid.).
But, he never addresses the problem of the monetary system consistent with “genuine”
monetary calculation.
Mises in “Human Action” clearly concedes that the problems of artificial lowering of the
interest rate and malinvestment boil down to the distortions in the mechanism of economic
5	 For the explanation of how it is possible for this to happen, see de Soto (1998; 688–700).
6	 In “The Economic Calculation in the Socialist Commonwealth” (1990, p.8) Mises lists money as one of three
preconditions for rational economic planning, but does not define it stringently. Mises’s “sound money” is
indifferent toward the distinction commodity money-fiat money.
A bilingual interdisciplinary journal 111
calculation. At least at the surface, those two paradigms, the credit cycle and the economic
(mis)calculus appear to be interrelated: “But now the drop in interest rates falsifies the businessman’s
calculation. Although the amount of capital goods available did not increase, the
calculation employs figures which would be utilizable only if such an increase had taken
place. The result of such calculation is therefore misleading. They make some projects appear
profitable and realizable which correct calculation, based on an interest rate not manipulated
by credit expansion, would have shown unrealizable. Entrepreneurs embark upon
the execution of such projects. Business activities are stimulated. A boom begins.” (Mises,
1998: 550). Mises’s works are full of similar rhetorical snapshots linking the credit cycle
with economic (mis)calculation. What is, however, missing in these eloquent descriptions
of the “calculational failure” as a cause of the boom is an institutional structure that gives
rise to the artificial lowering of the interest rates; or to be more precise, the description of
a type of monetary regime that brings about that kind of effect, as well as the description of
the type of a regime that could prevent the same process from happening. The cluster of
unanswered questions we asked recently reappears: is it possible to avoid this kind of wrong
calculation in the central banking regime? If not, is that possible in fractional reserve free
banking? If not, why? What is a “sound money” which provides a reliable informational
basis for the economic calculation? Can it include fiduciary credit and why? Obviously,
we cannot rely upon any sort of end-state criterion to answer these questions, but can only
define a genuine interest rate as a result of a legitimate process. Which kind of process, and
in which type of institutional framework and property rights regime? How could the “free
market rate of interest” be brought about?
Mises seems to provide a preliminary hint as to the resolution of these problems in his
discussion of the fiduciary media and its influence on artificial stimulation of the credit
expansion in “Human Action”, where he says: “The notion of “normal” credit expansion is
absurd. Issuance of additional fiduciary media, no matter what its quantity may be, always
sets in motion those changes in the price structure the description of which is the task of
the theory of the trade cycle. Of course, if the additional amount issued is not large, neither
are the inevitable effects of the expansion.” (Mises, 1998; 442). What the quoted passage
clearly enunciates is that the fractional reserve system per se is a cause of the credit cycle;
that any amount of fiduciary media emitted sets in motion the forces that lead to the famous
“artificial lowering of interest rate”, that is to say, to the unwarranted credit expansion and
unjustified lengthening of the production structure. From there, it would further follow that
only the 100% reserve ratio banking model is consistent with reliable economic calculation,
and with the preservation of the genuine time preference of the public.
Curiously enough, although this proposition might have been precious for synthesizing
the credit cycle with the monetary calculation argument, Mises has never followed up on
this crucial and fundamental insight to develop a more detailed theory of the calculational
failure of fractional reserve banking. He was satisfied to point out that the creation of
New Perspectives on Political Economy112
fiduciary media leads to the insolvency and instability of the banking system, leaving the
monetary miscalculation problem in a very rudimentary state (Mises, 1978).7
However, although Mises has never elaborated this in depth, I believe that he gave us
both the general theoretical framework for understanding the problem, as well as some
specific guidelines where to look for the elements that can be utilized for the synthesis of
these two paradigms (the calculation argument and the credit cycle theory). In my opinion,
the key is the concept of private property rights. What Mises failed to do in his paper on
economic calculation in the socialist commonwealth was to emphasize that for a successful
calculation to take place it is not enough to have private property in the producers’ and
consumers’ goods; we need private property in money as well. As we shall demonstrate
later on, the very existence of fractional reserve banking represents an infringement on the
private property rights in money. Mises should have applied his “impossibility theorem”,
with its famous sequence private property-prices-calculation on money as well, and he would
have reached the same conclusion.
The absence of this deduction is even more surprising as we take into account that Mises
had done all the necessary preparatory steps for it. He gave a complete praxeological deduction
of money! In “Theory of Money and Credit” Mises, following Carl Menger, explains
the origins of money as a commodity spontaneously emerging from the market transactions
as a universal medium of exchange. After the economy surpasses the stage of a primitive
barter, and when division of labour allows for a much wider extent of trade than was possible
within the isolated group or tribe, the need emerges for an indirect exchange of goods
and services. For that purpose, some commodity is needed that everybody will want to own,
but not for its potential to directly satisfy certain human needs, but because of its usefulness
as a universal medium of exchange. The qualities of that good that functions as a universal
medium of exchange should be its relative scarcity, marketability and possibility to be easily
divided into smaller homogenous pieces. During history, the free market gradually selected
some commodities as more appropriate than others for this purpose: “Whenever a direct
exchange seemed out of the question, each of the parties to a transaction would naturally
endeavour to exchange his superfluous commodities, not merely for more marketable commodities
in general, but for the most marketable commodities; and among these again he
would naturally prefer whichever particular commodity was the most marketable of all. The
greater the marketability of the goods first acquired in indirect exchange, the greater would
be the prospect of being able to reach the ultimate objective without further manoeuvring.
Thus there would be an inevitable tendency for the less marketable of the series of goods
used as media of exchange to be one by one rejected until at last only a single commodity
remained, which was universally employed as a medium of exchange: in a word – money”
(bold ours) (Mises, 1978, 32–33).
7	 Moreover, especially in his earlier work, he sowed the seed of confusion by attributing some positive features
to the fiduciary media that gave some room to the advocates of fractional reserve banking to claim the
“Misesian” mantle (see, Selgin and White, 1994).
A bilingual interdisciplinary journal 113
So, Mises here explicitly claims that money cannot be established but as a physical commodity
that has been demanded for industrial and consumption purposes initially, and only
gradually transformed into money by emerging demand for it as a medium of exchange.
Therefore, in his famous “regression theorem” Mises was quite explicit that money was just
another commodity which survived the competition with other goods for the status of the
universal medium of exchange.8
Therefore, the monetary calculation in a praxeologically
relevant sense means expression of the relative value of various goods for the participants in the
exchange in terms of one common denominator which is also a scarce physical good, which is
privately owned. For, how otherwise would have the purchasing power of money – the price
of money in terms of consumer and producer goods – reflected the real scarcity and opportunity
cost of money, had it not been privately owned itself? Money emerges as a private good
on the market, with separate demand for industrial purposes, and only after its acceptance as
a medium of exchange does it gain an additional element of purely “monetary demand”.
However, there is no basis whatsoever to believe that money can cease to be a privately
owned commodity and still be used as a medium of exchange and the basis for a reliable
economic calculation; nothing more than the producers’ good which is not privately owned
can be used in the economic calculation. Of course, an economy with a large part of capital
goods in government ownership can still survive, but the calculation mechanism would be
significantly damaged and tampered with. As Murray Rothbard has pointed out, insofar as
the extent of the economy which is not privately owned increases, the “island of incalculability”
in the economy increases as well (Rothbard, 2004). The nationalized money, fiat
money, or a fractional reserve banking money (fiduciary media) all broaden this island of
incalculability in the same way the partial nationalization of various industries broaden it
on the side of the “real economy”, making the economic calculation less efficient and less
precise than it would have been otherwise. There is no qualitative difference at all between
money and capital goods in terms of their influence on economic calculation. The only
significant difference is that tampering with private property rights in money distorts not
only a particular set of prices, but the structure of relative prices of the entire economy. The
theory of the trade cycle describes just a special case of calculation failure of the socialist
economy. The ABCT is just a special case of Mises’s “impossibility theorem”.
The prices of goods and services depend upon the conditions of supply of and demand
for those goods and services, and upon supply of and demand for the money commodity
on the other hand. All prices are thus the consequences of the millions of individual valuations
demonstrated by the millions of acts of buying and selling on the market, expressed
in some common commodity denominator – money. We should bear in mind that money,
being a scarce good itself, also has its own costs of production, and that since money tends
8	 This is quite obvious even from the very title of the German original of the book that came to be known in
its (very imprecise) English translation “Theory of money and credit”, and that is Theorie des Geldes und der
Umlaufsmittel, which means literally “Theory of Money and Fiduciary Media”. We see that Mises draws a sharp
distinction between money and fiduciary media, and that he does not seem to consider paper credit money to
be a money in praxeological sense.
New Perspectives on Political Economy114
to be a very scarce commodity in the same time, the costs of money production are usually
very high. Thus, Mises’s regression theorem offers a synthesis of the monetary and real economics
in a praxeological whole (Salerno, 1994) as well as an implicit explanation how the
abandonment of commodity standard distorts the economic calculation. The problem was,
and remained, that the Austrian theorists often, especially in the context of the credit cycle
theory, tended to forget this critical implication of the regression theorem – the extremely
institutionally rigid character of money as a tangible commodity selected by the individual
choices of the people on the free market. Economic calculation without the regression
theorem is a theoretical impossibility.
Having this in mind, we can now define more stringently many other important categories
of “monetary economics” we mentioned earlier, such as voluntary saving, natural interest
rate, a genuine free market production structure and so on. For example, “voluntary saving”
is a quantity of income of individuals that is withheld from the current consumption and assigned
for investing in future consumption either via direct personal investment or through
lending to other investors with interest. The quantity of the available saving is expressed as
a sum of individual savings of all members of a community. In a free market society, quantity
of saving would equal the aggregate quantity of goods as expressed in gold that all individuals
together are willing at any given point of time to sacrifice (withhold from consumption), and
confine to production/investment. This is the only possible praxeological, Misesian meaning
of the term “voluntary saving”; no credit money beyond the gold base.
What is then the “natural interest rate”? If we go further from the circular definition
according to which it is a “rate which equates supply and demand of capital” (what is demand?
what is supply?), we can define it as an interest rate paid on capital in a society in
which all investment is carried out on the basis of voluntary saving (as previously defined),
which is to say the natural interest rate is a rate paid on capital in the market with 100 %
commodity money. This is the real praxeological definition of the famous rate of interest
that “would prevail on the free market”, the rate that Austrian economists are always talking
about, but very rarely, if ever, define. The production structure on the free market is
therefore the one determined by the social rate of time preference expressed in a given ratio
consumption/investment, as measured by commodity money prices.
III. Beyond praxeology, or the fractional-reserve banking
The obvious implication of our analysis would be that fractional reserve banking is irreconcilable
with rational economic calculation, since it eliminates the assumption of private property
in money, i.e. of money as a physical commodity with a rigidly fixed quantity, the price
of which is determined by the cost of production and the demand of the public. By fitting
together a deposit contract with a loan contract banks are able to “duplicate” in some sense
parts of the money supply – by creating the loanable funds beyond their available commodity
money reserves (Rothbard, 1991 De Soto, 2006). What in this process happens in terms of
A bilingual interdisciplinary journal 115
private property rights is the creation of the inconsistent structure of property titles. Let us
suppose that there are 1.000 ounces of gold in a country. That means that all producer and
consumer goods are priced according to their relative values as calculated numerically using
this monetary base. The factors of production are distributed among the various branches
of industry in accordance with their relative prices as revealed in the millions of actions of
buying and selling with gold used as a medium of exchange. The distribution of gold among
the people in that country corresponds to the proportions of the real goods and services their
incomes can command at the given point of time. The investment and consumption patterns
are defined in accordance with the aggregate social rate of time preference which determines
the gross market interest rate and thus the distribution or the factors of productions among
the various branches and among the different stages of production.
Let us suppose further that 100 ounces of gold are deposited with the commercial banks
as demand deposits. Suppose also that the banks are the fractional reserve banks, and
that they emit, for every ounce of gold received, an additional claim to an ounce of gold
that does not really exist (fiduciary media) which is then channelled into the economy via
the credit market. In the meantime, the time preference of the public did not change; the
consumption-saving ratio remained the same as before. Hence, what does emerge from this
is that for every ounce of deposited gold-cash, we have an equivalent of an additional ounce
of credit lent out to the entrepreneurs; that way the same amount of money (100 ounces)
was effectively doubled by a stroke of the pen, or out of “thin air”, by creating the claims to
an additional 100 ounces that did not exist anywhere in the bank’s vaults.9
Suddenly, we have two sets of people – the depositors with the commercial banks, and
the corporate borrowers who have been given the new loans by the same banks – who claim
the property rights over the same 100 ounces of gold in the same time! No new saving is
accumulated, no change in the time preference has occurred; banks just by an administrative
stroke of pen transformed the deposits into the loans and 100 ounces of money into
200 ounces of money!10
And all of these people are starting to compete for the limited real
resources the quantity and quality of which had not changed at all. As the ABCT explains,
the people do not cut their consumer spending, while the investors increase their investment
spending, which is the original sin that leads inexorably towards the crash. This is
the most critical element in the credit cycle theory; that what we perceive as a distortion
in the investment-spending patterns in the fractional reserve system is essentially caused
9	 This analysis has nothing to do with the question whether the fractional reserve bank is “solvent” or not,
whether it is “inherently bankrupt” or not. The only thing I am interested in here is what happens to the private
property rights and the economic calculation in the fractional reserve banking.
10	 See Murray Rothbard (2004, pp.115–16): “…a claim – and bank notes or deposits are claims to money – does
not involve the creditor’s relinquishing any of the present good. On the contrary, the noteholder or depositholder
still retains his money (the present good) because he has a claim to it, a warehouse receipt, which he
can redeemed at any time he desires. This is the nub of problem, and this is why fractional-reserve banking
creates new money while other credit agencies do not – for warehouse receipts or claims to money function
on the market as equivalent to standard money itself”.
New Perspectives on Political Economy116
by the inconsistent structure of property rights in money, and the consequential misinformation
about the real quantity of goods people think their money income can command.
The duplication of property titles over money units means eventually a duplication of the
claims to the real, physical resources. And that means over-investment in the more roundabout
productive processes more sensitive to interest rate variations. The phenomenon of
the business cycle described in the Austrian theory is just a form of the failure of government
to enforce private property rights. One of the authors who probably most forcefully
emphasized this was Jorg Guido Hulsman: “The customer receiving interest payments for
his money deposited in a demand balance believes he receives a free lunch. In fact, they
do not do so for their deposit with a bank makes fiduciary issues possible and thus leads
to a decrease of the purchasing power of their money. Additionally, they are erring about
the quantity of money they can dispose of. Thus, it is precisely under a regime of fractional
reserves that the market participants are systematically misinformed about the quantities of
goods they can dispose of.” (Huelsman, 1996; p.33)
Of course, entrepreneurs and other market participants do not know about this “misinformation”
ahead of time. Since they have no real practical way of differentiating between
the genuine increase of savings and an artificial credit creation by the banks (the praxeological
properties of money and the fiduciary media are the same in this context),11
they
behave as if the increase in real savings has taken place, i.e. as if the social rate of time
preference has decreased. Led by an illusion of a command over the greater amount of real
goods, they increase accordingly the investment in the long-term and more capitalistic ways
of production.12
This situation is usually described as an “artificial lowering of interest rate”,
but we can now more precisely define when some particular interest rate is “artificially”
lowered; it is in the case when the banking system emits any amount of fiduciary media,
which is to say, any amount of credit money that is not covered 100% by gold money proper
(“specie”). In that case, the whole process of dis-coordination of economic activity is set
in motion, leading to the malinvestment of capital by oversupplying it to the remote parts
of the production processes – to the “higher order” goods – and under-supplying it to the
stages of production nearer to the consumption.13
That process must eventually lead to the
11	 “Fiduciary media are scarcely different in nature from money: a supply of them affects the market in the same
way as a supply of money proper: variations in their quantity influence the objective exchange value of money
in just the same way as do variations in the quantity of money proper” (Mises, 1978; 446).
12	 For the explanation why it is unavoidable that entrepreneurs treat an artificially lowered interest rate as genuine
increase in saving, see Mises (1978), Garrison (1986), Huelsman (1998) or Carilli and Dempster (2001).
13	 This does not mean, as some popular misunderstandings of the ABCT claim, that one should expect a depression
in the consumer goods industries during the boom. It only means that the higher-order goods expansion
would be disproportionately larger than in the consumer goods industries, and that the squeeze in the real
resources nearer to the consumption will eventually lead to the under-supply of capital to the higher stages of
production, and the entire structure must collapse. But, the entire point of ABCT is that because of an artificially
low interest rate the consumer goods industries experience a too high and not too low growth during the
boom.
A bilingual interdisciplinary journal 117
liquidation of the wrong investments and to shrinkage of artificially lengthened production
structure. As Ludwig von Mises emphasized time and again, there is no other way to eliminate
those cyclical economic miscalculations and misdirections of production on a large
scale, except to abolish all fiduciary media altogether: “Fiduciary media are scarcely different
in nature from money; a supply of them affects the market in the same way as a supply
of money proper; variations in their quantity influence the objective exchange value of
money in just the same way as do variations in the quantity of money proper. Hence, they
should logically be subjected to the same principles that have been established with regard
to money proper; the same attempts should be made in their case as well to eliminate as
far as possible human influence on the exchange ratio between money and other economic
good. The possibility of causing temporary fluctuations in the exchange ratios between
goods of higher and of lower orders by the issue of fiduciary media, and the pernicious
consequences connected with a divergence between the natural and money rates of interest,
are circumstances leading to the same conclusion. Now it is obvious that the only way of
eliminating human influence on the credit system is to suppress all further issue of fiduciary
media.” (Mises, 1978, pp. 407–408).
This is in complete agreement with Mises’s original argument of the impossibility of
calculation in socialism and with Hayek’s reformulation of that argument. Those arguments
rest on a proposition that without private property in the means of production there are no
genuine market prices. All attempts of so called market socialists to “play the market”, i.e.
to devise the various mechanisms for substituting prices with the trial-and-error way of determining
value of goods in a centrally planned society, are futile. If this is so, and if money
is, on the other hand, a fungible commodity as every other such commodity (as Mises,
among others, had established), then the very possibility of economic calculation rests critically
on the money being a privately owned good, and also on its having a certain physical
quantity, determined by the supply, demand and the production costs. Just as there is no
genuine market price for ordinary goods and services in terms of money, if those goods are
not privately owned, also there is no a genuine market price for money in terms of other
goods without money being a privately owned physical commodity.
The price system with less than 100 % gold backing for all demand deposits continually
sends wrong or distorted information to the economic actors about the structure of the
relative prices of producer and consumer goods which is optimal from the point of view of
a genuine time preference of the public, inducing those actors to invest in the wrong kind
of projects.
The problem cannot be resolved by somehow managing the money supply better, either
by government fiat, or by “competition” of the private banks in multiplying the money
“substitutes”; if there is an increased scarcity of bread, bare issuing of the million fake
“certificates” for bread, that cannot be redeemed for bread in the stores, will do nothing to
alleviate the scarcity of it. The solution can be only found in increased production and/or
increased price of bread. By the same token, the quantity of money commodity cannot be
increased simply by issuing paper stickers that have no real backing in the certain quantity
of money proper; nothing more than the mere coupons for bread can increase the quantity
New Perspectives on Political Economy118
of bread, without previous increase in its production. The price of money in terms of other
goods must fall, and/or production of that money should increase if both money and other
goods have to have a genuine market price, and money to become less scarce at the same
time. From the praxeological point of view, the issuance of the fiduciary media is not a production
of money, but counterfeiting, because paper is not money, and banks do not engage
in mining and refining gold or silver that are monies.
IV. Maturity mismatching and economic calculation
Until now, we have explored the relationship between fractional reserve banking and economic
calculation in the Misesian sense, concluding that the very institution of fractional
reserve banking is irreconcilable with rational economic planning and calculation, because
it leads to an inconsistent structure of property rights in money. The only monetary and
banking system that can provide the smooth functioning of the free market, a viable economic
calculation and avoid the credit cycle is the 100 % reserve gold standard.
However, an additional complication in this connection is contained in the fact that
even the 100 % reserve system is not per se a reliable safeguard against the credit cycle and
economic mis-coordination and miscalculation. It could be deemed just a conditio sine qua
non of the successful market system. The usual and widespread practice of modern banks
to “borrow short and lend long” would have the same detrimental consequences, as the
ones the ordinary fractional reserve banking inflicts upon society, even if carried out in the
system of 100 % reserves. The maturity mismatching, in other words – a divorce between
the time structure of bank’s assets and its liabilities – brings about the situation in which the
same quantity of money proper again can create more credit, depending upon the bank’s
policies, just like in the case of a “normal” fractional reserve system. The reason for the
attractiveness and hence for the danger of maturity mismatching is simple: the long-term
interest rates tend to be higher than the short term interest rates. The value of utility forgone
is higher when one abstains from the consumption for a longer period of time than for
a shorter period of time. Technically speaking, the yield curve tends to be steeper overtime,
which means that the interest rate grows as the maturity of a loan increases. That further
means that the basic reason for the popularity of maturity mismatching is that a bank can
increase their profits by practising it. The banking business most often takes a form of
the interest rate arbitrage. The final consequence is the same as in the ordinary fractional
reserve banking: an oversupply, or inflation of long-term commercial loans that causes the
productive processes to become more roundabout by introducing the new intermediate
stages of production that would have never come into being otherwise.
The danger of maturity mismatching has not gone unnoticed by the Austrian economists.
As early as 1912 in the “Theory of money and credit”, Ludwig von Mises warned:
“For the activity of the banks as negotiators of credit the golden rule holds, that an organic
connection must be created between the credit transactions and the debit transactions. The
A bilingual interdisciplinary journal 119
credit that the bank grants must correspond quantitatively and qualitatively to the credit
that it takes up. More exactly expressed, ‘The date on which the bank’s obligations fall due
must not precede the date on which its corresponding claims can be realized.’ Only thus
can the danger of insolvency be avoided” (Mises, 1978; 263). Murray Rothbard also stumbled
upon a similar problem, and he noted that: “Another way of looking at the essential
and inherent unsoundness of fractional reserve banking is to note a crucial rule of sound
financial management – one that is observed everywhere except in the banking business.
Namely, that the time structure of the firm’s assets should be no longer than the time structure
of its liabilities”. (Rothbard, 2008).
However, neither Mises nor Rothbard went further than noticing the harmful effects of
maturity mismatching on the bank’s solvency and soundness, and on the integrity of the
banking system overall. They did not analyze the systematic effects of the maturity mismatching
on economic calculation and cyclical movements of the economy. The problem
of detrimental effects of maturity mismatching as such remained by and large ignored in
Austrian economics. None moved beyond Mises’s and Rothbard’s sporadic and isolated
objections against this process to systematically analyze them in the context of economic
calculation and how they affect the structure of property rights in money. This problem fell
into an almost complete oblivion until quite recently.
The main problem that remained unaddressed is which way maturity mismatching interferes
with private property rights in money commodity, and distorts the price of money in
terms of producer and consumer goods? If we are not able to demonstrate how the process
of maturity mismatching inflates property titles, then the objection against this process
becomes irrelevant, because we are unable to demonstrate how it creates the miscalculation
of economic data. Why would one care at all about the unsoundness or insolvency of the
banking system if that “unsound” system does not create any systematic distortion in the
price structure of the economy? The “stability” and “solvency” of the banks is not a good
thing per se, nor is it the task of an economist to deal with these problems. Let the banks
take care of themselves in the market process in which the sound ones would out-compete
the unsound ones. Maturity mismatching is an economic problem only insofar as it has
some systematic ramifications for economic calculation and the credit cycle. The fractional
reserve system is a problem not because it creates a “systemic risk” or “liquidity crises”
but because it multiples (inflates) the property titles in money by using the portions of the
demand deposits to create the loanable funds out of thin air, distorting the relative price of
higher and lower order goods that way. Can we found a similar mechanism by which maturity
mismatching interferes with genuine private property rights in money and brings about
distortion in the mechanism of economic calculation?
The great step forward in closing this theoretical gap in understanding the link between
maturity mismatching and private property rights infringement was made by Walter Block
and William Barnett II in their article “Time Deposits, Dimensions and Fraud” (Barnett and
Block, 2008). In that article they brought forward the private property rights approach and
applied it to this problem of maturity mismatching. Barnett and Block, however, limited their
conclusions to the legal and ethical aspects of the issue, avoiding completely its ramifications
New Perspectives on Political Economy120
for economic calculation; in their interpretation, just as fractional reserve banking was fraudulent
and illicit, maturity mismatching is fraudulent and illicit as well (Barnett and Block,
2008). Just like Mises and Rothbard and all others, they did not discuss the issue of how
this process affects the rationality of economic planning and calculation. Nevertheless, their
ethical-logical analysis allows us to make a step forward in understanding how the maturity
mismatching affects not only the legal status of property rights in money, but also influences
the economic problem. The question Barnett and Block ask is – when person A borrows
a $100 from the person B for 1 year, and then lends the same $100 to a person C for 2 years,
is there a logical incompatibility between these two operations? Are the property titles multiplied
this way in a similar fashion they are multiplied and compromised when the loans are
created out of demand deposits? Obviously, during the first year, both person A and person
C believed they had the same $100 in their ownership, and they adjusted their consumption
and spending patterns according to this erroneous knowledge. Block and Barnett emphasize
the ethical side of the issue: that all credit transactions based on maturity mismatching are
illicit and fraudulent because they create the inconsistent structure of property rights. However,
for our purposes it is much more significant to note that maturity mismatching creates
misallocation of the real resources in the same way the ordinary fractional reserve credit
creation does, by inducing people to believe that there is more of the real factors of production
suitable for long-term investment than there really is.
Barnett and Block established that if fractional reserve banking is fraudulent, then maturity
mismatching must be fraudulent as well; we can reformulate that and say that if the
FRB creates the credit cycle, maturity mismatching does the same as well. Moreover, we
can treat fractional reserve banking as an enterprise in which the zero maturity “loans” given
by the depositors are transformed by the banks into long terms loans. Fractional reserve
banking would be just the most extreme and detrimental form of maturity mismatching.
Bagus and Howden (2010) analyze the neglected problem of the term-structure of savings;
although on the real markets there are several different loan markets for loans of different
duration, the Austrian models assume just one market for loanable funds (Rothbard,
2004, Garrison, 2002). Although this is justified for purely analytical purposes when one
studies the artificial states like ERE, it leads to unwarranted conclusions if applied to real
market situations. All real savings have two distinct dimensions: monetary dimension and
duration, or term-structure. All loans made by the lenders are always for specified quantity
of money, and for a specified duration. The gross market interest rate is determined by the
confluence of those two factors: “The same nominal amount of monetary savings offers
a different yield depending on its maturity” (Bagus and Howden, 2010: 70).
The authors say that maturity mismatching would not be a great problem in the absence
of the fractional reserve system administered by central banks, because the incentives for
excessive mismatching would have been much lower in that situation and entrepreneurial
arbitrage would diminish the returns on maturity mismatching overall (ibid). However, we
can say the same thing for fractional reserve banking in general; without the central bank tutelage,
the problem of cycle would certainly have been much less pronounced. For theoretical
purposes, it does not matter how large a distortion of relative prices is brought about by
A bilingual interdisciplinary journal 121
falsified interest rate; the only thing that counts is that such an effect does exist. We do not
have to claim that maturity mismatching in a 100% reserve system would be sufficiently
strong to trigger a major financial and economic crisis in order to establish a qualitative
law that maturity mismatching creates malinvestment. Because, for that matter, neither the
ordinary, free banking fractional reserve system without the central bank or government
help and amplification could possibly create large scale financial panics and crises. When
talking about the cause and effect, the source of disturbances and so on, we are referring to
the qualitative rather than quantitative phenomena. Just as Mises, in our opinion correctly,
had emphasized that “issuance of additional fiduciary media, no matter what its quantity
may be, always sets in motion those changes in the price structure the description of which
is the task of the theory of the trade cycle”, it is equally justified to say that any amount of
maturity mismatching always sets in motion exactly the same type of changes in the structure
of production Mises is talking about in the context of fractional reserve banking.
To see the dramatic consequences this has, we can go back to the issue of voluntary
vs “forced saving”. Our initial “monetary” definition was that voluntary saving was that
amount of deferred consumption which is possible in the system of 100 % gold standard
money. Now, we see that even that is not the entire story. As savings has both its quantitative
and time dimensions, true voluntary savings on an unhampered free market would be
the one emerging from the monetary system of 100 % gold reserves on bank deposits, with
no banks practising maturity mismatching. As Mises had said in the “Theory of Money and
Credit”: “The date on which the bank’s obligations fall due must not precede the date on
which its corresponding claims can be realized.’ “. Anything less than that would create (at
least some amount of) credit cycle disturbance.
V. Towards conclusion
The real reason why there was so much confusion about what the key analytical categories
of the ABCT had meant has to do with the non-monetary aspects of the theory, with the
fact that all these key categories (natural interest rate, time preference, voluntary savings)
were defined by and large for the conditions of a barter economy. Robert Murphy rather
convincingly demonstrated that the main weakness in the conventional Austrian exposition
of the credit cycle was a non-monetary character of the pure time-preference theory; the interest
rate was determined irrespective of monetary factors in the state of an evenly rotating
economy. We could see in this paper that this has a tremendous implication for the entire
structure of the theory; other categories, such as voluntary savings, malinvestment, supply
of capital and so on were also affected.
The problem with the conventional exposition of the credit cycle is that it explains real
market phenomena using the categories of a pure theory detached from the real institutional
process of the market economy. That approach is maybe equally unrealistic as mainstream
macroeconomic theorizing; an abstract model is constructed which is a pure theoretical
New Perspectives on Political Economy122
exercise (nothing wrong with that per se, since it still can be used for explanatory purposes
in some cases) which explains only a phenomenological structure of trade interactions, the
praxeological fundamentals necessary to understand the basic structure of the Austrian
theoretical claims (ERE, Crusoe economy etc). However, that is a rather ironic outcome:
an allegedly “monetary” theory of the trade cycle ends up accepting the explanation of interest
and savings that applies only to the barter, Crusoe economy.
Our proposal in this paper was to supplement this conventional Austrian analysis by developing
a truly monetary theory of the business cycle, and linking together the credit cycle
theory with the theory of economic calculation. This is possible only by shifting the focus
away from the abstract constructs of pure theory towards the empirical-institutional processes
that create the economic outcomes in the real world of monetary exchange. Instead
of defining the “natural” interest rate and voluntary savings as the ones that would exist
without money, as if the entire economy was in a barter, we proposed to define all these categories
as pertaining to a specific free market monetary regime, a 100% gold reserve system
without maturity mismatching.
This modification of the conventional credit cycle theory allows us to show how and why
Mises’s impossibility theorem and Mises-Hayek credit cycle theory are one and the same
theory, just seen from different angles; a consistent and non-contradictory structure of property
rights in producers, consumers and exchange goods (including the absence of fractional
reserves and maturity mismatching) is equally a precondition for the avoidance of the business
cycle as it is for the avoidance of socialist calculational failure. Actually, those two phenomena
are one and the same: the failure of the economic system to correctly calculate the
prices, caused by the lack of consistent and well defined private property rights.
This renders a reinterpretation of the general Mises/Hayek argument about the impossibility
of socialism. Both of them emphasize that the problem is by and large simple: capitalism
has private property in capital goods, so it can calculate the cost and prices and
hence can coordinate economic life. Socialism, having no private property, has no real
market prices and hence cannot rationally plan. Money is understood in this context just as
an outside appendix, as a precondition and facilitator of the exchange, not as a participant
in exchange and a good to which the same requirement of being privately owned and produced
must be applied as well.
However, when we add our amendment of 100 % commodity money (directly based
on the Mises’s regression theorem!) to this basic theoretical framework, as a condition
of a genuine calculability, the picture becomes much fuzzier. It seems now that we do not
have capitalism and socialism as antipodes anymore, but capitalism with 100 % gold standard
and without maturity mismatching on the one pole, and the entire continuum of different
systems with various degrees of informational and allocational irrationality and distortions
on the other side, ranging from free banking, fractional reserve gold standard, then
central banking with the partial gold standard, fiat money central banking, socialism with
some private property, and full-scale socialism without any kind of private property at the
end of the continuum. The difference between all those types of economic and social orders
is not in kind anymore, but just in the degree or the type of interference with the price sys-
A bilingual interdisciplinary journal 123
tem. Credit inflation under the free banking regime is one and the same type of economic
irrationality as the impossibility to have the market prices for consumer goods in full central
planning socialism; only the degree of distortion of the price system is different.
My proposal for a theoretical unification of Mises’s impossibility theorem and Mises/
/Hayek theory of trade cycle would be that rational economic planning requires the universal
presence of private property rights both in the means of production and consumption, as well
as in the means of exchange. If on either side of the equation we have government or at least
government-sponsored interference with private property rights (as in the case of the fractional
reserve system), we will incur necessarily a crisis of economic miscoordination. This
paper covered primarily what happens when banks, by issuing the fiduciary media, violate the
private property rights axiom on the demand side – the side of the money.
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6, no. 2, pp. 113–46.
Salerno Joseph (2003), “An Austrian Taxonomy of Deflation: With Application to US”,
The Quarterly Journal of Austrian Economics vol. 6, no. 4 (Winter 2003): 81–109
Selgin George (2009), “100 Percent Reserve Money: The Small Change Challenge”, The
Quarterly Journal of Austrian Economics 12, no. 1, pp. 3–16.
Selgin George, Lawrence H. White (1996) „In Defence of Fiduciary Media: We are not
Devo(lutionists), We Are Misesians“, The Review of Austrian Economics, Vol 9, No 2.
Selgin George (1988), The Theory of Free Banking: Money Supply under Competitive Note
Issue (Totowa, N.J.: Rowman and Littlefield).
Selgin George (1994), “Free Banking and Monetary Control,” Economic Journal 104, no.
427: 1449–59.
White Lawrence H. (2008), “Did Hayek and Robbins Deepen the Great Depression?” Journal
of Money, Credit and Banking, Volume 40 Issue 4, pp. 751–768.
White Lawrence H. (1984), Free Banking in Britain: Theory, Experience, and Debate,
1800–1845, 2nd ed. Cambridge University Press.
A bilingual interdisciplinary journal 125
Anarchism and Austrian Economics
Peter Boettke†
aBSTRACT
In the 2011 Franz Cuhel Memorial Lecture, I argue that the study of endogenous rule formation
in economic life (what I term the positive political economy of anarchism) should
be studied in-depth and that the economic analysis of the Austrian school of economics
provides many of the key analytical insights necessary for such study.
KEY WORDS: austrian economics, anarchy, rule formation
†	 George Mason University,E-mail: pboettke@gmu.edu.I would like to thank Chris Coyne, Pete Leeson, Josef
Sima, and Ed Stringham for useful comments on an earlier draft, and David Hebert and Nick Snow for
research assistance in preparing the paper.
New Perspectives on Political Economy126
I. Introduction
It is a great honor for me to give the Cuhel Memorial Lecture at the Prague Conference on Political
Economy for 2011. Franz Cuhel rightly holds an honored place in the development of
the pure theory of the Austrian school of economics.1
Ludwig von Mises credits Cuhel (1907)
with providing the first presentation of a strict ordinal marginal utility analysis. The confusion
in choice theory that eventually lead to the purging of the human element in the economic
analysis of decision making would have been avoided had Cuhel’s ordinal presentation of
marginal utility analysis been more widely accepted. Instead, it was for Mises (1949) and later
Rothbard (1962b) to develop that presentation and offer it as an alternative to the neoclassical
theory of microeconomics that developed after John Hicks’ (1939) Value and Capital.
The implications, I would argue, are far greater than the technical issues of ordinal versus
cardinal utility and the subsequent debate among ordinal utility theorists of marginal utility
analysis and demonstrated preference versus marginal rates of substitution and indifference
curve analysis, etc. The implications of the debate in choice theory go to core of how we
view the individual that we study in economics.2
The optimizing agent who must maximize
against given constraints belongs to the world of Hicks, but the human actor who is fallible
yet capable, who must balance between alluring hopes and haunting fears, belongs to the
world of Cuhel and Mises. “Choice” theory in the Hicksian presentation is close-ended,
I would argue, while choice in the Misesian framework is open-ended. The implications
of this go not only to the way we conceive of the individual in economic analysis, but ultimately
determines our analysis of the impact that the diversity of institutions within which
men act will have on their acts of choice, their exchange relationships, and their ability to
realize the gains from trade, and the gains from innovation.
Adam Smith long ago taught us that man has a natural propensity to truck, barter and exchange,
and Thomas Hobbes also warned us of man’s propensity to rape, pillage and plunder.
Which human propensity dominates any social environment is a function of the institutions
in place that provide the rewards and penalties in social intercourse. But this institutional analysis
requires that our model of the act of individual choice in economics is logical (predictably
rational), yet indeterminate in manifestation. In other words, what is “rational” is contextual
in nature and not acontextual, or to use the language of Vernon Smith (2007), rationality in
economics should be conceived of as ecological and not constructivist.
The open-endedness of human action can be captured in the ordinal analysis laid out
by Cuhel (1907) and developed by Mises (1949), whereas the closed and robotic agent fits
1	 See Hudik (2007) for an overview of Cuhel’s life and work.
2	 Focus should be on the substantive economics of the human chooser in Mises’s first part of Human Action
(1949) rather than his philosophical defense of methodological dualism and the apriori nature of economic
theory. More recently, Richard Wagner (2010, 1–26) discusses the differences between ‘closed maximization’
versus ‘open action’ for economic analysis and social sciences more generally more cogently to my mind than
any other contemporary example.
A bilingual interdisciplinary journal 127
with the analysis of decision-making provided by Hicks and the subsequent developments
of neo-classical price theory. And, as the German sociologist Hans Albert (1979; 2010)
acutely argued long ago, the institutional deficiency that was evident in 1950–1970 neoclassical
economics would never be completely repaired until the behavioral foundations of
neoclassical economics are changed.3
The maximizing actor model cannot accommodate
institutional analysis without diluting it to the point of non-existence.4
Instead, we need to
engage in rational choice analysis as if the choosers were human actors, and this enables
us to do institutional analysis as if history and culture mattered. In short, only by moving
away from the economics of automatons and the twin obsessions of optimizing and equilibrium,
and instead focus on the economics of human actors with a focus on perception
of opportunity and processes of adjustment to change can we see how the institutional
context of choice not only structures incentives, but shapes the choice context faced by the
individual.
While Cuhel’s work was a contribution to positive economic theory, I want to argue that
this approach to the logic of human action provides the foundation for subsequent developments
in comparative political economy that addressed questions in institutional analysis.
Thus, my title – “Austrian Economics and Anarchism.”
This title is meant to be startling at first sight. Adherents of the Austrian school of
economics claim their work to be a scientific body of thought, and not a normative political
doctrine. Correctly so, I agree. And clearly anarchism is an extreme and evenromantic
political doctrine as far removed from science in the public imagination as is possible. How
can the two be put in the same title?5
3	 It is important to stress that a goal of neoclassical economists in this period was to develop an ‘institutionally
antiseptic’ theory, and this lead to the counter-reaction of what later was termed “New Institutionalism” in
economics – e.g., property rights, law and economics, public choice, ‘new’ economic history, etc. See the discussion
of this counter-reaction in economics and also his discussion of ‘new’ versus ‘neo’ institutionalism in
Eggertsson’s Economic Behavior and Institutions (1990).
4	 An important illustration of this point is the development of the theory of market socialism by Oskar Lange
(1936) and Abba Lerner (1944); though also see Lavoie (1985). They both argued that in the realm of pure
theory what they had demonstrated was that the model of market socialism could mimic the efficiency results
of the model of capitalism, but that in practice the model of market socialism would outperform the model
of capitalism because they could eliminate the real-world problems of capitalism associated with monopoly,
externalities, and business cycles. The point I want to emphasize is the pure theory point – in the model the
institutional differences between socialism and capitalism were completely neutralized. Lange went as far in
his essay as to accuse Mises of “institutionalism” because he thought economic calculation depended on private
property. And, in Milton Friedman’s (1947) review essay on Lerner’s The Economics of Control he stressed
that it was a mistake for economists to engage in public policy analysis as if administration were done inside
of an institutional vacuum.
5	 One easy way to square this is to emphasize the Schumpeterian point about the necessity of pre-analytic cognitive
acts (what he called ‘vision’ and what others might call ‘ideology’) for the analytic cognitive acts that are
the domain of positive science (what he called ‘analysis’). So an anarchist vision would lead one to engage in
analysis differently than an alternative vision, but the positive science concerning the analysis can be judged
independently from one’s assessment of the vision. I appreciate this point, but that is not the way I am going
to pursue my argument.
New Perspectives on Political Economy128
But it is also true that for the audience to which I  am addressing, perhaps my title
is not startling at all, but in fact commonplace. The sophisticated audience here at the
Prague Conference in Political Economy is no doubt familiar with the radical libertarian
writings of Murray Rothbard (1970, 1973, 1982) and those who follow Rothbard such as
Walter Block (1976) or Hans Herman Hoppe (2001). Rothbard, Block and Hoppe are
foremost representatives of the individualistic and anarcho-capitalist camp of normative
political economy, and they also are self-styled Austrian economists. Whatever my criticisms
or sympathies are with the Rothbardian approach, that is decidedly not what I intend to discuss
here. My intent to startle remains. Rather than discuss the normative political theory
doctrine of anarcho-capitalism, my focus is on the positive political economy of anarchism
and its relationship to the positive economic theory of the Austrian school of economics.
In the end I hope to persuade my intended audience that the study of anarchism is part of
a progressive research program in contemporary Austrian economics.6
The right way to view this paper is as an invitation to inquiry into situations where
“alternative institutions that support economic activity when a government is unable or
unwilling to provide adequate protection of property rights and enforcement of contracts
through the machinery of state laws” (Dixit 2004, vii). It is an effort to persuade students of
Austrian economics that embracing an empirically oriented research program focusing on
the institutional analysis of situations of self-governance is not only an exciting intellectual
endeavor, but perhaps the best way to advance the theoretical and methodological tradition
of the Austrian school of economics in the context of modern scientific economics.
By the positive political economy of anarchism, I mean simply the study of historical and
contemporary situations where the rules (and their enforcement) that govern social intercourse
are not provided, for whatever reason, by a geographic monopoly supplier of law and
order. And I am particularly interested in those social relations that concern the recognition
of property rights, the keeping of promises, and the transference of goods and service
through consent. In standard economic analysis the institutions within which economic
activity takes places are treated as given. The rules of the game and their enforcement are
exogenously provided and constitute the social framework within which individuals engage
in economic activity. The positive political economy of anarchism does not accept this
assumption of exogenously provided institutions. Instead, the research program we are describing
focuses on endogenous rule formation.7
6	 See my essay “Anarchism as a Progressive Research Program in Political Economy” (Boettke 2005). Also see
the comprehensive survey of the literature by Powell and Stringham (2009).
7	 James Buchanan (2011) has recently argued again that endogenous rule formation cannot be trusted precisely
because there is no analogous profit-loss mechanism in operation in the selection of the framework of rules.
This position of Buchanan’s is not new, and Israel Kirzner (2000) also shares Buchanan’s skepticism. Though
more controversial of an interpretation, I would argue that Rothbard also would argue that a spontaneous
order analysis of the framework was intellectually flawed and that a more exogenous analysis of the framework
would be required. (see, e.g., Rothbard 1962a) For Buchanan, the framework results from a pre-constitution-
A bilingual interdisciplinary journal 129
II. The Soviet
and Post-Soviet Context of Trading Outside of the Law
As a matter of empirical reality, there are plenty of exchange relationships that take place
in an environment where the rules of the game are in fact still up for question, and certainly
not enforced by any legitimated geographic monopoly of coercion. The current market for
illegal drugs in the US is one such environment, just as the market for alcohol during the
era of Prohibition, but one could also describe the anonymous dealings on the internet
involving perfectly legal commodities as transacted on sites from E-Bay to Craigslist in this
manner as well.8
My interest in endogenous rule formation environments actually began with my studies
of the Soviet economy. My Austrian school perspective had alerted me to the fact that
Soviet central planning could not have been the operating principle for the economy due to
the Mises-Hayek critique of socialism.9
The disjoint between how the system was supposed
to work, and how it really worked became a major theme of my work (e.g., Boettke 1993,
chapters 3–4) – and I wasn’t alone as this assessment was shared by many economists,
political scientists, and historians who studied the Soviet system up close and personal. But
those who approached the system from afar tended to obscure the operating principles of
Soviet political economy both inside the official planning system and outside that system
in the different “colored markets” that ranged from the extra-planning system that enabled
state enterprises to meet planned production targets to the underground market in consumer
goods that provided some answer to consumer frustrations.
In the late 1950s and early 1960s, as Sovietologistswho gained access to the system that
they had been denied since the ascendancy of Stalin observed, the Soviet planning system
didn’t work according to known models of optimal planning, but instead through a hodgepodge
of exchange relations and makeshift alternative supply chains in production.10
The
social glue that held the system together was not the rational plans of Soviet managers,
but the system of privileges and side-payments that emerged to coordinate the economic
behavior of bureaucrats, managers, and ordinary citizens. “‘Blat’ is higher than Stalin,” was
a common phrase used to explain how the informal economic system held together. These
al process of rational discourse that results in agreement on the rules, whereas to Kirzner and Rothbard the
framework is provided by moral discourse over individual rights and commonly accepted social mores.
8	 One recent estimate put the magnitude of organized criminal activity at 15% of world output.
9	 See my essay on “Coase, Communism, and the ‘Black Box’ of the Soviet-Type Firm,” in Steven Medema, ed.
(1998).
10	 The consequences of the Soviet system being effectively closed off after this period of “thaw” were dire for economic
analysis and steered economic research from the mid-1960s away from this “on the ground” approach
to either escape theoretically into mathematical modeling of planning, or empirically into efforts to reassess
the economic growth figures Soviet statistical agencies reported. Only during the 1980s did economists start
to get back to the economic analysis of the organizational logic of the Soviet system. See Boettke (1990, 1993,
2001).
New Perspectives on Political Economy130
informal arrangements were neither defined nor enforced by any central authority of law
and order, but through a variety of private mechanisms of social cooperation.
Identifying these private mechanisms and the de facto property rights and the stream
of rents they produced was vital for the analysis of the post-communist transition. And,
obviously the standard assumptions of given clearly defined and strictly enforced property
rights by the state does not apply. The state capacity to define and enforce property rights
and freedom of contract was what was being developed. But economic life couldn’t wait
until that state capacity was in place. There is, in short, an endogenous rules formation process
that we have to recognize and study. There is ordered anarchy both in terms of market
theory and the price system and the framework within which the market process guided
through relative prices is played out.
The political economy of this ordered anarchy is not just evident in the Soviet and postSoviet
example. In fact, the ordered anarchy of everyday life exists throughout history and
across cultures. The way I have put the issue so far given the exclusive Soviet context, is, in
fact, overly pessimistic.11
If you read carefully, it will appear as if I am arguing that the informal
arrangements are what exists in the Soviet and post-Soviet environment, but everyone
would be better off if we could get the state capacity to define and enforce property rights.
We only rely on the informal because we cannot yet rely on the formal.12
But the day we get
formal mechanisms in place, the better off everyone will be. This reading of my argument
would be wrong. Informal institutions not only serve as the basis of social order, and ultimately
constrain the legitimacy of the formal institutions that the state attempts to impose
on the population in question, but they can in many circumstances simply outperform any
conceivable set of formal institutions that will emerge in the future given the realities of the
situation and the range of possible types of government that would be introduced.
Chinese entrepreneurs, for example, have found the informal institutions to be more secure
and thus have made long term investments. The situation is different in Russia even though
they apparently have formal laws that should provide such security, but there remains a lack
of trust (see Rodrik, et. al., 2004). Claudia Williamson (2009) has found that the informal
11	 In my analysis of Soviet and post-Soviet life, I have emphasized the mechanisms that result due to the “black
market” nature of the economy and have emphasized the dark side of the “connection based” economy as
opposed to the “contract based” economy. As I have often stressed, if the market economy can be characterized
as the “strength of weak ties,” the Soviet type economy can be characterized as the “weakness of strong
ties” – to flip a result from economic sociology. Thus, the mechanism that I focused on in dealing with the
Soviet black market dealings were repeat dealings among actors who relied on family ties and with recourse
to extra-legal enforcement. And the work tended to focus on how the post-communist extra-legal enforcement
agents emerged from the communist era extra-legal enforcement agents who had ties to the party.
12	 Though I would argue that a challenge for researchers in the positive political economy of anarchism must
confront is the difference between “emergence” and “development,” There are plenty of examples of how institutions
have emerged historically to enable complex contractual relationships to be realized (see, e.g., the work
by Stringham (2003) on the rise of stock exchanges), but the historical reality is that the formal apparatus of
state law and order did follow and lead to the greater development of these institutions. So is there an objective
limit to “anarchy” or do we see “anarchy unbound”?
A bilingual interdisciplinary journal 131
institutions that are in operation in any society are a greater determinant of economic performance
than the formal institutions of governance. “Good” informal institutions will work
to minimize the negative influence of “bad” formal institutions, and will work to reinforce the
positive influence of “good” formal institutions. She concludes that yes, institutions rule, but
it is informal institutions that really rule. And Leeson and Williamson (2009) argue that in
the situations of transition economies (post-communism), less developed economies (e.g.,
Africa and Latin America), and failed and weak states (e.g., Middle East and Africa) realism
is needed, not romance. Governments equipped with power to protect private property have
to be constrained in order to prevent government members from abusing their power to predate
on citizens. In countries where governments are not effectively constrained, government
activity tends to favor members of the ruling elite, making increases in government involvement
undesirable from the perspective of economic development. The informal sector in such
instances is not only more attractive to individuals in that situation but from the perspective
of a realistic political economy would be more productive.
That observation demonstrates the contemporary relevance of recognizing the possibility
that escaping from government might be more desirable than living under government
(see, e.g., Scott 2009). But we have to move the analysis from “what happened” and “why
it happens” ultimately to “how it happens.” How does this system of informal institutions
work so that individuals can coordinate their plans, realize the gains from trade, and realize
the gains from innovation? And can it?
My example of the samizdat economy during the Soviet Union enabled individuals to alleviate
consumer frustrations in the black-market for commodities, and it allowed managers
of Soviet firms to meet the targets of planning authorities by relying on the extra-plan process
of bartering and swapping of resources among state firms through intermediaries. But what it
didn’t do was allow the Soviet economy to realize the gains from social cooperation under the
division of labor. As a result, while life muddled through in a way that it could not have had
they not had recourse to the informal sector, the sort of economic growth that characterizes
a vibrant society eluded the population. Just as the samizdat intellectual culture gave some
relief from oppressive tyranny while not overcoming it, the samizdat economic life did not
permit individuals to escape the economic deprivation of the Soviet system.
The real question in the post-communist situation was whether or not the samizdat political
and economic life of the communist era could serve as the basis for the rise of a working
democracy and vibrant market economy.13
It turned out that the idea that all that was
needed was the development of the formal institutional capacity of the state to define and
enforce property rights proved to be naïve for the very reasons identified by Leeson and Williamson
(2009). But the movement from a low income country to a middle income country
and from a middle income country to a high income country does require the endogenous
evolution of rules of property and contract that takes time.14
We learn this not only from
13	 See Boettke (1993, chapter 7).
14	 On the process of economic development see Bauer’s From Subsistence to Exchange (2004).
New Perspectives on Political Economy132
close study of the transitioning and developing economies, but also from a study of the
development of Western civilization. There is a process of two-tiered entrepreneurship that
is in operation during the development process. Development does follow from individuals
realizing the gains from trade, and realizing the gains from innovation through entrepreneurial
action, but there is also the entrepreneurial act of rule-creation and enforcement
that individuals within social settings must engage in if those gains from social cooperation
under the division of labor are to be realized (see Leeson and Boettke 2009)
III. Rules, Strangers and Living Better Together
What must those rules do if they are to accomplish the goal of realizing the gains from social
cooperation under the division of labor, and since access to a central enforcer is denied
in these situations how do these rules operate as self-enforcing? That is the fundamental
question all researchers on endogenous rules must address. Rules that are not respected
aren’t effective rules; they remain only notional rules. On the other hand, rules that require
extremely costly methods of enforcement will not on net be beneficial as they will give by
necessity increasing scope for predatory behavior.15
In order to realize the gains from social
cooperation, rules must simultaneously limit predation and maximize the opportunities for
mutually beneficial exchange.
Such rules govern the use of resources and our social interactions with one another.
Hume recognized that the fundamental institutions of social order were property, contract
and consent. We must delineate “mine and thine,” we must keep promises, and we must respect
transference of property by consensual trade. So at the most basic level, the rules that
govern property, contract and consent must become established. At the next level, we must
recognize that in an endogenous rule formation process, we can distinguish between form
and function in rules. The vast diversity of human institutions we find across cultures and
through time does not mean that the gains from social cooperation under the division of labor
can be realized under any conceivable set of rules. The rules might take on the form that
is culturally specific, but the function they serve is more universally recognizable: they must
limit access to scarce resources; they must make individual decision makers accountable for
their use of that resource; and they must introduce graduated penalties for those that violate
the first two. In Elinor Ostrom’s various studies of common-pool resources, this is what
she has discovered.16
And we see the universal character of these functions when we study
15	 As Spinoza wrote, “He who tries to determine everything by law, will foment crime rather than lessen it.”
The work of Chris Coyne on the post-war efforts of reconstruction addresses this issue in detail, see Coyne
(2007).
16	 For an overview of the research program of Elinor and Vincent Ostrom and what is called the Bloomington
School of Institutional Analysis see Aligica and Boettke (2009).
A bilingual interdisciplinary journal 133
covenants with and without swords in the field as well as in the lab (see Ostrom, Walker
and Gardner 1992). Ostrom’s work challenges the Hobbesian presumption that covenants
without the sword are but mere words and thus cannot serve as the basis of a secure social
order. She finds in a variety of circumstances instead what I have called a Smithian solution
to a Hobbesian problem (see Boettke 2009, also see Boettke 2010). We can observe that
human beings have a tremendous capacity for self-governance even in situations where we
might least expect it to be viable.
But observation is not analysis; it demands analysis. In short, institutional analysis must
move to a third stage of analysis, I would argue, which focuses on mechanisms of inclusion
and exclusion. Standard theory suggests that self-governance is capable in the limited environment
of small groups of homogenous agents who possess low discount rates. But such
an environment cannot realize the great gains of social cooperation under the division of
labor. The cooperation in anonymity that is exhibited in the vast division of labor is among
such a large group that the number of exchanges, Adam Smith argued, far exceeds our computation.
In fact, the puzzle as Smith put it in The Wealth of Nations (1776, 18) is that while
we stand in need of the cooperation of a great multitude of individuals in order to survive,
we have the ability to make but a few close friends in our lifetime. Thus, we cannot rely on
benevolence alone for our survival. We must, and do, rely on the elicitation of cooperation
through appealing to self-interest. It is not from the benevolence of the butcher, the baker or
the brewer that we get our dinner, but from their self-interest. But again it is not self-interest
alone; it is instead the marshaling of self-interest via the institutions of property, contract
and consent that coordinates the production plans of some with the consumption demands
of others. And this cooperation and coordination takes places among anonymous strangers
who are often geographically and socially distant from the market transaction and the people
who are striking the deal. Adam Smith gave us the puzzle that as economists we must
solve. We often forgot it was a puzzle because we take it for granted since we come to it
not as an unknown but amazingly familiar with the situation. Too familiar, I would argue.17
Smith invites us to be amazed at what we immediately observe everyday. We need to permit
ourselves to see the mystery in the mundane. Smith (1776, 15–16) asked us to contemplate
the complexity of the exchange relationships required to produce a simple woolen coat, and
Milton Friedman (borrowing from Leonard Read) held up a pencil and asked his audience
to contemplate the same thing as the cover to his Free to Choose(1980). I ask you today to
engage in that same thought experiment on your shoes, your backpack, or your computer.
How many exchange relationships are required for you to enjoy the products that you take
for granted? And how is it that the people involved in this set of complex relationships come
to trust one another even though they have never met, never spoken, and most likely will
17	 This, I would argue, is one of the reasons economists were complacent in dealing with the “pretense of knowledge”
and the “fatal conceit” that Hayek identified throughout his career. As Hayek said “The curious task of
economics is to demonstrate to men how little they know about what they imagine they can design.” (1988)
New Perspectives on Political Economy134
never meet. The institutions of property, prices and profit/loss work to facilitate trust where
personal relationships are non-existent.
This “ordered anarchy” of the market is recognized by almost all practicing economists,
at least at some level. Still the 18th
and 19th
century doctrine of laissez faire has sometimes
been described by critics as “anarchy with a constable” and the focus of much of 20th
century
economics was intended to demonstrate the shortcomings of the “ordered anarchy” of
the market. Instead of self-regulation, state regulation was required for economic arrangements
to be efficiently organized. Complicated contractual relationships required law and
order, and could not develop based on profit and loss alone. I cannot adequately address
this argument here, but in the narrative of economic theory and applied political economy
that I am constructing the mainstream of 20th
century economics is overly pessimistic about
“ordered anarchy” and overly optimistic about “reasonable regulation.”
IV. A Plea for Mechanism in the Study of Anarchy
As mentioned above mankind has exhibited throughout history two overwhelming propensities:
(a) a propensity to truck, barter and exchange; and (b) a propensity to rape, pillage
and plunder. Which propensity is manifested in history is a function of the institutions that
men find themselves interacting with one another within. And at their core these institutions
are about property, contract and consent. The social games based on realizing the
mutual gains from trade are radically different from the social games based on predation.
When property is not respected, when there is no expectation of promises being kept, and
consent is not required, then predatory relationships will dominate the social game. On
the other hand, if property is respected, promises are kept, and consent is required, then
mutual beneficial exchange relationships will dominate the social game. Predatory societies
are poor and sick; exchange-based societies are healthy and wealthy.
But the critical question is the mechanism of self-enforcement that permits this exchangebased
order to develop. And as mentioned above, to realize the great gains from social
cooperation under the division of labor these mechanisms must work among anonymous
actors characterized by great geographic and social distance. But the working capacity for
standard mechanisms of self-governance, such as reputation, are pushed to the limit as
geographic and social distance rises. Think of the puzzle this way:we have the most to gain
in exchange from those that are most distant from us, yet precisely because of that distance,
we have the least reason to trust them. Strangers are both potentially our greatest teachers
and our worst fear.
To ensure our relationships with strangers are mutually beneficial, the mechanisms of
self-governance must be transformed to take into account the changing social situation. Or
to put it another way, either we must find mechanisms that transform the situation with
strangers into a situation of in-group social intercourse, or we must have in operation mechanisms
that build trust in institutions that permit cooperation among strangers. In short,
A bilingual interdisciplinary journal 135
we have to identify historically the mechanisms that excludedactors who could threaten the
social order, and the mechanisms that include those actors who could improve the social
order through mutual beneficial exchange.
Among modern Austrian economists, the two economists who have done more on the
examination of the mechanisms that make ordered anarchy possible are Edward Stringham
and Peter Leeson. Both take seriously the standard game-theoretic result that social cooperation
without a geographic monopolist in law and order can only occur in small group
settings with homogeneous agents who have low discount rates. Their work, however, respectively
demonstrates that this standard theoretical result is defied repeatedly throughout
history and in fact in everyday life in the contemporary world. Social cooperation within
large group settings of heterogeneous agents happens all the time.18
When history appears
to defy what logic dictates, the economists must show why it appears that way, and how the
logic is actually played out in that situation. The “how it works,” question is answered by
explicating the mechanism in operation.
Stringham’s (1999, 2002, 2003) work has tended to focus on how, through the use of
“club-like” arrangements, mechanisms of excluding potential bad traders takes place. Stringham
emphasizes that most of the literature focuses on the potential effectiveness of ex
post punishment. But historically, those engaged in the complicated exchange relationship
would rather avoid any of the costs associated with ex post punishment; they would prefer to
have ex ante sorting mechanisms that weed out potential bad-faith traders. We do not come
into trading relationships with a tattoo on our heads that says “trustworthy” or “cheater,”
but various institutions have evolved throughout time and across historical circumstances
that attempt to approximate that. And the “club-like” arrangements Stringham has studied
reveal amazing creativity in efforts at ex ante sorting while minimizing the cost of excluding.
Stringham mechanisms tend to transform large-group settings into more manageable
small group settings, and to pre-sort the group so that even though the population pool is
heterogeneous those who are accepted into the club are more or less homogeneous on the
character trait that matters for the group. Self-enforcement is thus obtained through these
ex ante methods of sorting.
Leeson’s (2007, 2008, 2009a, 2009b) work, on the other hand, has tended to focus on
Mises’s argument concerning social cooperation under the division of labor, and show how
strangers find mechanisms to become included in the trading community.19
But Leeson
18	 And often even with actors that have high discount rates, see Leeson’s work on pirate communities (2009a)
and another example is Skarbek’s (2010) work on prison gangs.
19	 In his chapter on “Human Society,” Mises (1949) explains how sympathy, friendship and a sense of belonging
follow from realizing the great gains from social cooperation under the division of labor. And he stresses
the arrow of causation. It is because specialization and trade increases productivity and wealth that humanity
can enjoy the fruits of sympathy, friendship and community. If specialization and exchange did not yield great
productivity and wealth creation, then mankind would have forever been destined to be trapped in a relentless
struggle for survival and would view each other as deadly foes competing by whatever means to secure a portion
of the scarce resources necessary for sustenance provided by nature. He would be in constant conflict
New Perspectives on Political Economy136
hasn’t limited his creative energies to situations of how strangers signal their trustworthiness
to potential trading partners, but his work has spanned over a variety of historical
circumstances where it would be least likely for the theoretical mechanisms he has explicated
to work. In other words, while he started out trying to explain how actors overcome
geographic and social distance to realize the gains from social cooperation under the division
of labor, his subsequent studies have touched upon not only the ex antesignaling
mechanisms (e.g., Leeson 2008) but the role that ex postenforcement mechanisms play in
producing social order (e.g., 2007 and 2009b).
So we have in the recent work of Stringham and Leeson an exploration far beyond the
original discussions of the Soviet and post-Soviet situation. They have demonstrated that
complicated exchange relationships have emerged and developed in the absence of any
geographic monopoly of formal law and order. Sometimes the rules of the game in the
historical examples they examine are implicit and enforced by the social sanction of ostracism
exclusively, but in many instances they have identified explicit rules and elaborate
enforcements as a penalty for violating the rules. In all the cases, the endogenous rules they
have identified serve to allow individuals in those situations to realize the gains from social
cooperation under the division of labor.
There remains much work to be done.
V. Conclusion
The Austrian school of economics from its founding has emphasized the logic of human
action and the spontaneous order of the market. Contributors to that tradition, such as
Menger and Hayek, have also explained how the framework institutions of morals, money
and law are examples of institutions that arise not from the brow of a genius, but as the byproduct
of individuals striving to better their condition in the world and in so doing seeking
out the gains from social cooperation. Morals, money, and law, as well as the market economy
itself, are prime examples of institutions that are “the result of human action, but not of
human design.” But note something of importance – morals, money, and law are framework
institutions; the market economy operates within that framework. In short, from Menger as
well as Hayek, we learn that the most important questions in the sciences of man concern
the mechanisms by which the spontaneous evolution of the framework is established, as
well as the spontaneous order of the market that exists inside of that framework.
The positive political economy of anarchism follows as a research program naturally from
this emphasis on spontaneous order one finds in the Austrian school. We cannot treat institutions
as given, and we cannot treat state governmental capacity as either easily established
with any other creature he encountered. It is this caricature of the human condition (more than the absence
of a sovereign as Hobbes postulated) that would produce a life for man that was “nasty, brutish and short.”
A bilingual interdisciplinary journal 137
or benign in operation. As a result, the research program of positive political economy of
anarchism is empirical and possesses contemporary relevance.
That contemporary relevance is not limited to the post-communist, developing countries
or after-war reconstruction situations. Instead, the contemporary relevance can be seen in
the contemporary efforts to escape the state provision of public goods in schooling and
health, in the rise of private communities, and in the persistence of various private dispute
resolution mechanisms and even the growing market share of private security forces. And,
perhaps most relevant for the young scholars in attendance – the relevance of research on
anarchism is not tied to the normative anarchist theory that has had some connection to the
Austrian school (whatever your judgment is on that work) but can address what the Economist
recently referred to as “the great political issue of our times.”20
And that ‘issue of our
times’ is the fiscal crisis that has spread through the western world and the need to rein in
the growth of the state and tame Leviathan. Such exercises require a rethinking of the scale
and scope of government. In the process of such rethinking, we can explore the old classical
liberal wisdom that we must limit the scope of government to those things, and only those
things, that is does well, and leave to the market and to civil society those things the government
cannot do well. The answer to that question is up for the next generation to answer.
The answer provided by your ancestors was wrong, and the answer provided by my generation
has proven wrong; it is time for your generation to get it right. As the Economist reports,
the Chinese policy maker Ma Hong recently argued that “We are in a transition from a big
state to a small state, and from a small society to a big society.” As we turn more and more
to civil society and the market economy to substitute for the state, the mechanisms in operation
that permit individuals to realize the gains from social cooperation under the division
of labor will need to be continually explicated in our research and communicated in your
writing and lecturing. Austrian economics is a progressive research program in economic
science, and the positive political economy of anarchism is perhaps its best testing ground to
prove its worth against the competitive research paradigms in modern economics and the
social sciences.
20	 See the March 19th
2011 edition of The Economist and the special issue on “Taming Leviathan”.
New Perspectives on Political Economy138
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A bilingual interdisciplinary journal 141
The Vampire Economy and the Market:
An Assessment of Economic
and Political Dynamics
Ben O’Neill†
aBSTRACT
The competing political-economic systems of free-market capitalism and fascism are vastly
different systems, rather than variants of the same genus, as they are sometimes presented.
Though these systems are connected by a continuum of possible levels of government intervention,
fascism is a form of hyper-interventionism amounting to socialism. The system
of fascism is examined here by reference to the business and economic climate prevailing
in Nazi Germany. This shows that the political and economic dynamics of fascism are very
different to those of free-market capitalism. In particular, government actions in the fascist
political system lead to a business environment where economic entrepreneurialism is
gradually replaced by political entrepreneurialism, leading to an entrenched and privileged
ruling elite. The productive business class is replaced by an unproductive class of political
entrepreneurs. The result of this process is economic decline and ultimately economic collapse,
precipitating a drive to war.
KEY WORDS: economic fascism, inverventionism, war
†	 University of New South Wales, E-mail:ben.oneill@hotmail.com
New Perspectives on Political Economy142
I. Authoritarian capitalism (fascism) and liberal capitalism
(the free market)
What is sometimes referred to as “authoritarian capitalism,” or fascism, is in fact a variety
of statism, specifically socialism, the system of political-economy in which the prerogatives
of ownership over the means of production and distribution are vested in the State. Under
the fascist economic system, private capitalists are nominally regarded as the owners of the
means of production, meaning that they hold property titles to these assets and are referred
to as “owners” of these assets. However, this so-called “ownership” is merely illusory. The
actual prerogatives of ownership are vested, not in the private capitalist, but in the State
and its bureaucracy.1
It is the State which tells the private capitalist how he must use “his”
property, under the threat of confiscation or even imprisonment. In the words of economist
Ludwig von Mises, it is “socialism in the outward guise of capitalism.”2
This is a very different political-economic system to “liberal capitalism,” also known as
“free market capitalism.” Free market capitalism is an authentically capitalist system, in
which the prerogatives of ownership over the means of production are vested in private
citizens, not in the State. Under this system, the means of production are genuinely privately
owned, and the private property owner holds, not just a property title, but, more
importantly, the actual prerogatives of ownership and ultimate control. In the system of free
market capitalism, the private property owner is regarded as having property rights (i.e., an
enforceable moral claim to the prerogatives of ownership) which must be respected by all
others, including the State and its functionaries.
In their purest forms, these two systems of political-economy are fundamentally different in
kind; in fact, they are polar opposites. However, this opposing nature stems from the degree to
which the prerogatives of ownership of ostensibly private property are arrogated to the State –
i.e., the degree of State intervention. On the one extreme we have the free market, in which
there is no – or at least little – State interference with private property ownership (which is
therefore genuine); on the other extreme we have fascism, in which there is plentiful or total
State interference with private property ownership (which is therefore illusory).
Since fascism and the free market are distinguished by State intervention we can therefore
see that the two systems are separated by a  connecting bridge of interventionism
through the system of the “mixed economy.” The fascist system can be viewed as a system
of hyper-interventionism, accruing when State interference with private property rights is
so extensive that the alleged private ownership of property becomes a mere farce, and the
State may properly be regarded as the de facto owner of the means of production and distri-
1	 Shaffer (2009) notes that “[u]nder the system of fascism, the title to property remains in private hands, but
the state exercises actual decision-making authority (i.e., control) over the use of such property” (p. 127). He
further explains why genuine ownership must entail the ultimate prerogative to control one’s own property,
and thus, any claim to ownership, absent ultimate control, is illusory (Ibid, pp. 161–177).
2	 Mises (1985), p. 56.
A bilingual interdisciplinary journal 143
bution – i.e., there is de facto socialism. For this reason, the analysis of fascism and its long
term viability is very similar to the analysis of interventionism in the mixed economy, and
the same kinds of economic and political insights apply.
II. Fascism and the fusion of business and State
Fascism is unlike other forms of socialism. Its expropriation of the means of production is
done without overt nationalization, and is not directed towards an egalitarian goal. It is far
more subtle than this, and far more insidious. Fascism can arise by revolution, but it can
also arise by gradual measures towards State control in the mixed economy. While noting
the similarities between fascism and communism, philosopher Roderick Long observes
that “…there is a difference in emphasis and in strategy between fascism and Communism…
When faced with existing institutions that threaten the power of the state – be they corporations,
churches, the family, tradition – the Communist impulse is by and large to abolish
them, while the fascist impulse is by and large to absorb them.”3
The fascist economic strategy is also one of absorption: the regime attempts to secure
economic growth and prosperity by fusing a “partnership” between business and the State,
absorbing business into the State in this process. Such a strategy appeals to those who correctly
judge that private business is the locus of production and economic growth, but who
incorrectly believe that this productivity is enhanced by partnership with government and
central-planning of production. The fascists, like interventionists more generally, seek to get
the “best of both worlds” from the productive powers of private business under capitalism
and the central-planning of the State under socialism.
Of course, the “partnership” between business and State which occurs under fascism is
of a coercive nature: the State determines its requirements from business and orders private
entrepreneurs to meet these requirements, lest they be expropriated of their remaining
property (nominally held), or even imprisoned. In describing the fusion of business and
State in Nazi Germany, economist Günter Reimann explains the process as follows:
The State orders private capital to produce and does not itself function as a producer.
Insofar as the State owns enterprises which participate in production, this can be regarded
as an exception rather than a general rule. The fascist State does not merely
grant the private entrepreneur the right to produce for the market, but insists on production
as a duty which must be fulfilled even though there be no profit. The businessman
cannot close down his factory or shop because he finds it unprofitable. To do this
requires a special permit issues by the authorities.4
3	 Long (2005), para 5 of Internet article.
4	 Reimann (2007), pp. 296-297.
New Perspectives on Political Economy144
This basic conception of the role of the private entrepreneur puts him at the service of
the State, and destroys any notion of self-ownership, including any genuine property rights.
He exists, not to pursue his own happiness and satisfy his own personal desires, as is the
case under liberal capitalism, but rather, to produce for the fascist State. From here, the
remaining regulations on his business affairs under this “partnership” are similarly directed
towards the ends determined by the State: the State regulates the prices he can charge for
his goods; the amount he can buy and sell; who he can employ or dismiss from employment;
the wages he must pay; how much of his profit he may keep (if there is any profit
produced); and whether or not he will continue his business or shut it down.5
In tandem with the enormous body of arbitrary State regulations is the ever-present
threat of expropriation. Without any overt nationalization of property the State may send
its auditors to scrutinize a business for breaches of regulations, using minor infractions as
a pretext for massive fines, amounting essentially to a confiscation of assets.6
III. Breakdown of the rule of law
Even the fact that every aspect of his business is regulated by the State does not give full appreciation
for the perilous situation of the titular ownersof property under fascism. In fact,
it is not the specific content of regulations, but rather the inevitable breakdown of the rule
of law that poses the greatest danger under a system of central-planning.7
The rule of law under the fascist system is replaced with the arbitrary and unconstrained
power of the political elite in the State apparatus.
The capitalist under fascism has to be not merely a law-abiding citizen, he must be
servile to the representatives of the State. He must not insist on “rights” and must not
behave as if his private property rights were still sacred. He should be grateful to the
Fuehrer that he still has private property.8
It is the arbitrary power of the fascist regime that is the most important determinant of the
relationship between the titular private property owners and the State. However, it affects
not only this relationship, but also the relationship between private citizens themselves.
5	 For an overview of interventions under the Nazi regime, see Reimann Ibid.
6	 For an account of this practice in Nazi Germany, see Ibid Reimann, pp. 11–12.
7	 On central-planning and the breakdown of the rule of law, see Hayek (1994).
8	 Reimann Ibid, p. 20.
A bilingual interdisciplinary journal 145
As a rule, the relations between businessmen are still regulated by laws and customs.
But customs have changed and modified law, and law has, in turn, been largely replaced
by a vague conception of “honor.” It is easier for a businessman to win a case
in the German courts by appealing to “National-Socialist honor” than by referring to
the exact text of the law.9
Like other citizens, the businessman cannot find justice or challenge the predations of the
State, even on sound legal grounds under the prescribed regulations. This is because the
courts are themselves a mere cog in the workings of the ruling regime, which claims total
power over the economy. Any private property owner who is foolish enough to seek judicial
relief from the impositions of the State quickly arouses the ire of State functionaries who
have unlimited means to retaliate to any fleeting victories he might obtain.
IV. Fascism and the motivation problem
Although enforceable property rights are non-existent, and titular “ownership” is insecure,
the fascist system still avoids the crude problems of motivation experienced under egalitarian
variants of socialism (e.g. communism). By allowing inequalities in the nominal ownership
of property and the consumption that is contingent on this nominal ownership, the
State allows incentives for the acquisition of private property to remain, even though this
ownership is subordinate to the whims of the State rulers.
This observation may seem to contradict the previous assertion that the private capitalist
is only the illusory owner of the property to which he holds title. However, no contradiction
exists: although the prerogatives of ownership ultimately accrue to the State under fascism,
this does not prevent the private capitalist from enjoying additional consumption if he is
the nominal owner of property. Consumption is consumption, and once a resource is consumed
by its nominal owner, or otherwise used for his immediate benefit, the State cannot
exercise its de facto ownership to prevent this, no matter how authoritarian it may be.
In fact, the acquisition of private property under fascism, even while subordinated to the
State, offers more than just consumption benefits. Although all private capitalists are subject
to the political power of the State rulers, large capitalists can use the residual economic
power they maintain to capture smaller units of political power, particularly in the lower
echelons of the bureaucratic apparatus. Reimann explains the interaction between political
and economic power in Nazi Germany as follows:
The authoritarian position of the provincial and local bureaucrats – and the degree to
which the local Party bureaucracy is independent of industrialists and businessmen –
9	 Ibid, p. 18.
New Perspectives on Political Economy146
varies with the social structure in different sections of the country. In districts where
big industrial magnates have direct relations with the top flight of Party leaders, the
local bureaucracy is largely dependent on – in some cases, a tool of – the big concern
or trust. In districts where only small and medium-sized firms exist, however, the Party
bureaucracy is much more authoritarian and independent. A dual power exists under
fascism: the indirect power of money and the direct power of the Party leader.10
Thus, under fascism, there remains a large incentive for the acquisition of private property.
Although the private capitalist has no enforceable property rights against the State, he can
protect his titular ownership and subsidiary control of property by acquiring political power.
His control over property, even though it is at the mercy of the State, can allow him to capture
some of the political power of the State, which can in turn protect his control. If he is
a small private capitalist, the local bureaucrats will be his masters, and he will be forced to
pay endless tribute to them merely to survive. However, if his business concern is large and
profitable, he may be able to form relationships with more powerful political figures, thereby
acquiring political influence, and bringing himself within the ambit of the State apparatus.
The motivation problem in fascism is therefore of a different and more subtle form to the
motivation problem in egalitarian socialist systems. Under fascism, the private citizen is at
the mercy of the State, which can take his nominally held property from him at any time.
He is therefore motivated to consume more of his property than he otherwise would, and to
use his savings to buy political influence, rather than engaging in productive endeavours. He
is motivated, in short, to engage in political rather than economic entrepreneurialism.
V. The rise of political entrepreneurialism
Under fascism, businessmen may continue to work within the regulatory regime, eking out
whatever living they can maintain under the arbitrary decrees of the State bureaucracies.
But in order to do so they must seek to obtain influence over the State functionaries in order
to survive unmolested. Under fascist regimes that have historically existed, this has given
rise to large investments in maintaining good relations with the State, employing “contact
men” with connections to politically powerful members of the fascist regime. For example,
under the fascist economic system of Nazi Germany such “contact men” became a crucial
part of any business concern:
The business organization of private enterprise has had to be reorganized in accordance
with the new state of things. Departments which previously were the heart of
a firm have become of minor importance. Other departments which either did not exist
10	 Ibid, p. 34.
A bilingual interdisciplinary journal 147
or which had only auxiliary functions have become dominant and have usurped the
real functions of management.
Formerly the purchasing agent and the salesmanager were among the most important
members of a business organization. Today the emphasis has shifted and a curious
new business aide, a sort of combination “go between” and public relations counsel, is
now all-important. His job – not the least interesting outgrowth of the Nazi economic
system – is to maintain good personal relations with officials in the Economic Ministry,
where he is an almost daily caller…11
As with political lobbying in the mixed economy, this heavy investment in influence over
the State bureaucracies is used by businesses both for protection from the State itself, but
also to obtain special privilege. Having invested successfully in political influence, a successful
business enterprise will seek to use the State as a buyer of its products or services,
and will seek to use State power to destroy its competitors. Economic and political powers
jostle for control in this system, and large business entities can come to dominate smaller
political units, with businessmen becoming powerful political entrepreneurs in the regime.
This interaction between political and economic power under fascism is very similar to
that which exists in highly interventionist industries in the mixed economy. In the latter
case, problems of regulatory capture are well known, and it is common for large firms to use
their connections with the State to obtain special privileges. This leads to a concentration
of economic power in a few large firms, who are able to rely on government contracts to
boost their income, while at the same time using captured regulatory bodies as a means to
block smaller competitors from their market.12
If the level of State intervention in such a system increases, government contracts and
captured regulatory bodies become more and more valuable, and more effort is shifted
away from productive activities and towards the capture of political power. In short, as interventionism
grows, and the economic system moves towards fascism, firms will shift their
efforts away from economic entrepreneurialism and towards political entrepreneurialism.
Under the pure fascist system, State intervention is ubiquitous, and connections and influence
in the State apparatus become all important for business. Instead of productive success
and economic entrepreneurialism, political entrepreneurialism becomes the means to
acquiring wealth, and protecting it from State predation. Any firm which fails to forge State
connections or find an adequate contact man will be forced out of business, while a few big
firms with strong political connections will come to dominate the market.13
At the same time, political figures in the regime take advantage of their political power to
become wealthy private capitalists themselves. High ranking members of the ruling regime
11	 Ibid, p. 44.
12	 See Stigler (1971) and Laffont and Tirole (1991). For an example of this process during the United States
“Progressive Era” see Kolko (1963).
13	 Riemann Ibid, pp. 46-47.
New Perspectives on Political Economy148
are able to exercise their political power to favour their own business interests and expand
their economic power as private capitalists.14
Over a period of time, this process means that productive firms and economic entrepreneurs
are destroyed, while unproductive (parasitic) enterprises run by political entrepreneurs
take their place. Reimann explains the outcome in Nazi Germany:
[The genuinely independent businessman] is disappearing but another type is prospering.
He enriches himself through his Party ties; he is himself a Party member devoted
to the Fuehrer, favoured by the bureaucracy, entrenched because of family connections
and political affiliations. In a number of cases, the wealth of these Party capitalists has
been created through the Party’s exercise of naked power. It is to the advantage of these
capitalists to strengthen the Party which has strengthened them.15
The fascist economic systemcauses a convergence of economic and political power, both
through the politicization of existing private capitalists, and the enrichment of political
figures. The attempt to form a partnership between business and State eventually leads to
a situation where business is the State, and the State is business. The resulting system is
fittingly described by what philosopher Ayn Rand called the “aristocracy of pull.”16
Under
this system, business enterprises are run by an entrenched class of politically privileged
capitalists, with little prospect of outside competition.17
VI. Why corruption is not the problem
It is worth noting that the breakdown of the rule of law under the fascist system means that
corruption of the legal and bureaucratic system is likely to be rampant. However, it is not
law-breaking that is the problem – the problem is the law itself.
The fascist system empowers the State to intervene in all aspects of business, violating
property rights at will. Its repudiation of free market capitalism means that central-planners
are expected to take an active part in running the economy and cannot merely stand back
and leave business alone (at least not without implicitly repudiating the fascist system). This
interventionism means that considerations of property rights must necessarily be replaced
by the amorphous notion of the “public good” (however this happens to be expressed), cre-
14	 For some historical examples during the Nazi regime, see Ibid Reimann, pp. 35–39).
15	 Ibid, p. 35.
16	 See Rand (1964), pp. 167–172.
17	 Ibid Reimann, p. 39.
A bilingual interdisciplinary journal 149
ating conditions where business success is determined primarily by influencing the judgement
of bureaucrats and powerful political figures.
Because property rights have been discarded, political entrepreneurialism becomes crucial
to success, regardless of whether bureaucrats are “corrupt.” It occurs whether bureaucrats
exercise their judgement in a transparent and impartial manner, or sell their power
directly to wealthy business entities. It is not the corruption of bureaucrats which is the
problem; it is the fact that there is no honest way to dole out special favours to business
under a system in which the State has total control.18
VII. Information and calculation problems in the fascist
commonwealth
The rise of political entrepreneurialism is not the only problem with the fascist economy. It
is augmented by the standard information and calculation problems of socialism, stemming
from the lack of any genuine private ownership and the extensive price and wage controls
imposed by the State.19
(Even if price and wage controls are absent, prices and wages will
be heavily distorted by State interventions in the economy, so that these prices are not commensurate
to the true costs of resources.)
As with other variants of socialism, the economic exchanges in the fascist economy are
not driven by the preferences of consumers or the requirements of productive entrepreneurs.
Instead, the exchange of goods proceeds, mimicking the market economy in some respects,
but the price system reflects the extensive price and wage controls of the fascist State, or,
in the absence of price controls, the distorting effects of its other interventions. This means
that the central-planning bureaucrats in the fascist State are unable to determine the true
value of resources. They distort the prices of goods to such an extent that rational allocation
of resources becomes impossible. Misallocations of resources occur as prices of good are
artificially suppressed or inflated.
At best, the central-planners can increase output for favoured businesses or areas of the
economy at the expense of other businesses and areas of the economy, while at the same
time destroying the very price system that allows entrepreneurs to calculate rationally under
the free market. Since they have no method to objectively value competing projects, their
interventions will involve a misallocation of resources compared with the free market case,
and will frequently involve an aggregated loss of resources even ignoring opportunity costs.
Thus, despite any pretensions to the contrary, the State is unable to increase total economic
18	 See Ibid Rand, pp. 167-172 (especially p. 170).
19	 On knowledge and information problems under socialism see Mises (2008) and Hayek (2009a), (2009b); on
decision making mechanisms, see also Sowell (1996).
New Perspectives on Political Economy150
output through its central planning; instead, it destroys the price system and causes loss.20
This gradually leads to economic decline.
VIII. Economic decline and the incentives of the ruling elite
The forgoing analysis of the motivations of businessmen and the economic ineptitude of
the central-planning apparatus is pregnant with obvious economic conclusions. The more
authoritarian the economic system becomes, the more valuable is the capture of political
power and the less valuable is the expansion of productive capacity. All other things being
equal, the authoritarian system will lead businessmen (and others) to shift their efforts
away from production and towards the acquisition of political power.21
The result is obvious:under an authoritarian system, political entrepreneurialism increases
and production decreases. This further politicises the economy and leads to ever greater
distortions of prices, making rational calculation impossible. As authority over the means
of production grows, more and more people compete more and more ferociously through
the political process for a smaller total economic output. With no genuine conception of
property rights to guide them, there is no moral impediment to the coveting of property that
is “owned” by others, and there is no legal impediment to its capture.
It is again worth noting that this is merely the most extreme manifestation of the economic
effects of interventionism in the mixed economy. Since fascism is, in essence, a system
of hyper-interventionism, the economic effects of the fascist system are merely the logical
extremes of smaller “pragmatic” interventionist programs. Each intervention in a mixed
economy distorts prices, misallocates resources to unproductive endeavours, and results
in a net loss of production.22
At the same time intervention increases the value of political
influence and thereby shifts effort from production to political lobbying.
With enough political intervention in the economy, this culminates in economic stagnation,
then net capital consumption, and finally, economic collapse, occurring when capital
supplies become insufficient to sustain basic services. As this process occurs, parasitic
groups in the system suck as much as possible from the dying economy, with their parasitic
activities becoming increasingly frantic as the economy collapses and the resources available
for capture become scarcer.
20	 Temkin (1996) argues that information and calculation problems were the primary cause of the failure of communism.
It is likely that similar problems affected the fascist regimes of the early twentieth century and were
responsible for their poor economic performance.
21	 The economic incentives for political entrepreneurialism due to political intervention are studied in the economic
literature on “public choice theory,” notably in Riker (1962), Buchanan (1972), Stigler (1988), Tullock
(1989) and Tullock (2002).
22	 On the dead-weight costs of intervention driven by pressure groups see Becker (1985).
A bilingual interdisciplinary journal 151
The problems with the fascist economic system become more and more clear, but there
is no incentive for those in control of the State apparatus to avoid the approaching disaster.
Since the only antidote to the problem is liberalisation of the economy from State control,
the cure for the economic decline threatens the personal livelihoods of the State bureaucrats
and the ideological program of the higher level members of the ruling regime.
Of course, it is true that sustained economic decline will eventually threaten the position of
the ruling elite, particularly since they must make some appeals to the “public good” in their
efforts to maintain their own power. However, their situation is threatened far more directly
and far more immediately by the cure for economic decline than from the decline itself.
The authoritarian State breeds irresponsibility on the part of this ever-growing and
legally privileged group. Their position is secure – unless they are purged by their own
friends, often as a result of rivalries – whereas the general economy is insecure. They
do no work which adds goods or social services to the market. Their job is: to hold their
job. The rest of the community finds itself serving as the hardworking host upon which
the bureaucratic clique is feeding and fattening.23
We therefore see the most terrifying aspect of the fascist system. The problem is not merely
that its authoritarian controls destroy the economy in the long-term. The greater problem
is that as this process occurs, the authoritarian system undermines the human capital of
the society it operates on. In particular, it creates a privileged ruling elite, who have wrested
all economic and political power from the productive capitalists they have expropriated, at
the expense of impossible promises to the masses. Their sole incentive is to maintain the
parasitic system that gives them power, prestige and money, and they will do anything to
keep it, even as they watch the general economy collapse into ruin.
IX. The drive to war
The economic decline ensuing from state intervention, misallocation of resources and rising
political entrepreneurialism must eventually lead to a crisis of confidence in the State, if
not deflected by some nationalistic endeavour to rouse the support of the public, and instil
them with some alternative fear. Even the most authoritarian regime must rely on compliance
from the public to maintain its power, and so it is natural that the fascist State will turn
to war and conquest as its economic problems become a threat to its rule.
War and conquest serve three main purposes for the fascist State. Firstly, notwithstanding
its risks, war promises the possibility of conquered territories to serve as resource cash-cows
for the declining economy. Secondly, the presence of an external military threat allows the
23	 Ibid, Riemann, p. 301; emphasis added.
New Perspectives on Political Economy152
ruling elite to rationalise their authoritarian rule and expand their domestic power over the
public, while imbuing them with nationalist fervour. Finally, the threat of death and ruin from
real or alleged foreign enemies makes the predations of the State look to many of its citizens
like the lesser of two evils, and so the discontent of the public is directed to an alternative
source.
This drive to war is a logical consequence of the ideology and economic program of fascism
and interventionism more generally. It is no accident that fascist ideology promotes
war as an energizing and righteous endeavour. Since the domestic policies of the authoritarian
State revolve around appeals to nationalistic ideals (e.g., the “public good”) militarism
is a natural corollary, and it is easy for the State to rouse the public to war.24
Of course, war is economically destructive, and more rapidly so than domestic intervention.
It involves a massive reallocation of resources to military projects, a full or partial withdrawal
from the international division of labour,25
and the direct destruction of resources by
enemy forces. Moreover, war involves the risk of military defeat, a prospect which usually
ends the rule of the existing political elite. Nevertheless, it is the only option for a ruling class
that has repudiated liberalism and hitched its reputation to the fascist system of authoritarian
control. In describing the motivation of the Nazis in World War II, Reimann explains that:
…Nazi leaders in Germany do not fear possible national economic ruin in wartime.
They feel that, whatever happens, they will remain on top, that the worse matters become,
the more dependent on them will be the propertied classes. And if the worst comes
to the worst, they are prepared to sacrifice all other interests to maintain their hold on
the State. If they themselves go, they are ready to pull the temple down with them.26
Or, as Nazi Propaganda Minister Joseph Göebbels expressed it in his diary:
The war made possible for us the solution of a whole series of problems that could
never have been solved in normal times.27
For those outside the ruling elite there is a sense of inevitability to the whole process, from
economic decline to war. They are stripped of any genuine property rights and exist at the
mercy of the State and its functionaries. They are devoid of economic or political power,
and are mere pawns in the machinations of the fascist State and its leaders.
24	 For an overview of this topic, see Mises (1985).
25	 Mises (1985), p. 281.
26	 Ibid Reimann, pp. xiii-xiv.
27	 Lochner (1948).
A bilingual interdisciplinary journal 153
The fatalism which was typical of the spirit of the German businessman before Europe
was plunged into [World War II] was not due to economic difficulties alone, but far more
to a feeling that he had become part of a machine inexorably leading him to disaster.28
X. Concluding remarks
The economic system of fascism is economically unviable in the long-run, and what is true
of this most extreme manifestation of hyper-interventionism is true, to a lesser extent, of
any interventionist system of government. The central-planning of the State and the concomitant
destruction of private property rights destroy the independent businessman and
replace him with a parasitic impostor, the political entrepreneur, who succeeds by special
privilege, rather than by economic production.
The vast power of the State leads to a convergence of all economic and political power
into a small elite of political entrepreneurs, who will hold on to their power and privilege
at the expense of the general economy. Combined with all-pervading regulations, price and
wage controls and other distortions of prices under State central-planning, this leads to
economic stagnation, then economic decline and collapse.
The long-run result of the fascist or interventionist economic systems is the drive towards
war and conquest, with the ruling class desperately seeking to maintain its power at
all costs, even if the cost is the complete destruction of the nation. The endpoint is tyranny,
death and destruction.
28	 Ibid Reimann, p. vii.
New Perspectives on Political Economy154
References
Becker, G.S. (1985) Public policy, pressure groups.and dead-weight costs. Journal of Public
Economics 28(3), pp. 329–347. Reprinted in Stigler (1988), pp. 85–105.
Buchanan, J.M. (1972) Theory of Public Choice: Political Applications of Economics. University
of Michigan Press: Ann-Arbor.
Hayek, F. (ed.) (2009a) Collectivist Economic Planning. Ludwig von Mises Institute: Au-
burn.
Hayek, F. (2009b) Individualism and Economic Order. Ludwig von Mises Institute: Auburn.
Hayek, F. (1994) The Road to Serfdom. University of Chicago Press: Chicago.
Kolko, G. (1963) The Triumph of Conservatism. Free Press: New York.
Laffont, J.J. and Tirole, J. (1991) The politics of government decision making: a theory of
regulatory capture. Quarterly Journal of Economics 106(4), pp. 1 089–1 127.
Lochner, L. (ed.) (1948) The Goebbels Diaries, 1942–1943. Doubleday and Company: New
York.
Long, R. (2005) Liberalism vs. Fascism.Mises Daily, 25 November 2005. Available at
http://mises.org/daily/1957. Audio version available at http://mises.org/media/1555.
Mises, L. (1981) Socialism: An Economic and Sociological Analysis. Liberty Fund: Indiana-
polis.
Mises, L. (1985) Omnipotent Government: The Rise of the Total State and Total War. Libertarian
Press Inc: Grove City.
Mises, L. (2008) Economic Calculation in the Socialist Commonwealth. Ludwig von Mises
Institute: Auburn.
Moyra, G. (2003) Key Ideas in Politics. Nelson Thornes Ltd: Cheltenham.
Rand, A. (1967) Capitalism: The Unknown Ideal. Signet: New York.
Reimann, G. (2007) The Vampire Economy: Doing Business under Fascism. Ludwig von
Mises Institute: Auburn.
Riker, W.H. (1962) The Theory of Political Coalitions. Yale University Press: New Haven.
Salvemini, G. (1936) Under the Axe of Fascism. Victor Gollancz: London.
Shaffer, B. (2009) Boundaries of Order: Private Property as a Social System. Ludwig von
Mises Institute: Auburn.
Sowell, T. (1996) Knowledge and Decisions. Basic Books: New York.
Stigler, G. (1971) The theory of economic regulation. Bell Journal of Economics and Management
Science 2 (Spring Issue), pp. 3–21.
Stigler, G.J. (ed.) (1988) Chicago Studies in Political Economy. University of Chicago Press:
Chicago.
Temkin, G. (1996) Information and motivation: reflections on the failure of the socialist
economic system. Communist and Post Communist Studies 29(1), pp. 25–41.
Tullock, G. (1989) The Economics of Special Privilege and Rent Seeking. Boston and Dordrecht:
Netherlands.
Tullock, G. (2002) Government Failure: A Primer in Public Choice. Cato Institute: Washington
D.C.
A bilingual interdisciplinary journal 155
BOOK Review
Bourgeois Dignity:
Why ECONOMICS CAN´T EXPLAIN THE MODERN
WORLD
by Deirdre N. McCloskey, 2010.
CHICAGO, tHE UNIVERSITY OF CHICAGO, 571 p.
Following 2006’s Bourgeois Virtues, Bourgeois Dignity: Why Economics Can’t Explain the
Modern World is an intellectual journey perhaps no one besides Deirdre McCloskey is
qualified to take us on. The grand mystery McCloskey challenges us with is what she calls
the “factor of sixteen,” the startling magnitude of per capita income growth since 1800 after
millennia of stagnation. No “traditional” explanation of growth both stands up to historical
examination and contains the power to explain the factor of sixteen.
I tell the story of modern economic growth, summarizing what we have thought we knew
from 1776 to the present about the nature and causes of the wealth of nations – how we
got the refrigerators and college degrees and secret ballots. The book tests the traditional
stories against the actually-happened, setting aside the stories that in light of the recent findings
in scientific history don’t seem to work very well. A surprisingly large number of the
stories don’t. Not Marx and his classes. Not Max Weber and his Protestants. Not Fernand
Braudel and his Mafia-style capitalists. Not Douglass North and his institutions. Not the
mathematical theories of endogenous growth and capital accumulation. Not the left-wing’s
theory of working-class struggle, or the right-wing’s theory of spiritual decline. (xii)
McCloskey then turns to changes in sociology, ideology, and words to explain the origin
of growth. One historical event that did occur in the 18th
and early 19th
century was a change
in the way in which the public looked upon business, entrepreneurship, and profit. Rather
than seeing them as valueless reshufflings, theft, or upsetting the natural order, the public
began according the actions of what came to be known as the bourgeoisie a certain dignity
in Holland and Britain. Societies in the past, which occasionally secured property rights,
never accorded dignity to the bourgeoisie. For instance, even though it secured property,
“Ancient Greek society despised physical work as slavish and womanly […] and above all
looked down on the bourgeoisie” (363). McCloskey’s theory is a theory of the potentially
enormous economic consequences of what economists typically think of as being mere
tastes and preferences –attitudes toward entrepreneurship and innovation, the very gustibus
of De gustibus non est disputandum– are what must be disputed. Certain gustibi are the key
to understanding the greatest economic question of all.
New Perspectives on Political Economy156
The book follows an untraditional structure, and the book often “feels” like it is something
different than what one would expect after reading a summary of its ideas. More
than one hundred pages are spent on what could be described as “introductory” topics.
McCloskey lays out her general thesis with several examples of developing liberal ideology
around 1800. But above all, she takes time to demonstrate that growth happened and
it was enormous, unprecedented, and good for everyone. She provides some mainstream
economic arguments, for example that countries are able to rapidly catch up to Western
Europe under the correct conditions. McCloskey also spells out here her methodology,
lifted from J.S. Mill, which we will discuss in depth later on. This methodology demands
that she examine the alternative explanations of growth in detail, which she then spends
most of the book doing.
Besides dignity for the bourgeoisie, few of the competing explanations of growth hold
up because they are either empirically untrue or were present historically in other societies
which did not experience growth. The presence of coal in Britain, for instance, cannot conceivably
cause income to increase by a factor of sixteen, and in any case, was already used
by the Chinese without any similar explosive gross (186–196); “the Chinese did it already”
is a theme that comes up many times in the book. Others, such as Marxist concerns about
the “original accumulation” (153–160), supernormal profits (256–265), and exploiting European
colonies (239-248) are simply a-historical. The same can be said of commercialization
(249–255), eugenics (266-295), and the Protestant Ethic (140–145). The development
of science is also not a plausible historical explanation, as there is little linking the pure
science of the eighteenth and nineteenth centuries with the commercial products brought
to market during that period (355–365). Of economists’ other favored explanations, human
capital is only recently important since education was simply not very useful for people like
“coal miners and cotton mill workers” (162). Since literacy often has historically led to
hostility towards the bourgeoisie, education may have often had net negative effects: “education
without the new bourgeois rhetoric is merely a desirable human ornament, not the
way to human riches” (163). McCloskey also rejects capital accumulation out of hand due
to diminishing returns to capital; what is important is using innovation to figure out what to
do with the capital, not the accumulation of capital itself (133–139).
Many other factors perhaps existed, but were far too small to be meaningful, like efficient
domestic allocations (168–177), trade (197–216) and the dynamic effects thereof
(217–228). None of these can approach the factor of sixteen we find in worldwide growth.
McCloskey also rejects the plausibility of the economic growth equivalent of death by
a thousand paper cuts; the magnitude of any of these incremental gains in efficiency, such
as “trade, coal, education, canals, peace, investment, reallocation” are just too tiny to have
sufficient explanatory power, even taken together (192).
Perhaps the most jarring claim McCloskey makes is that Douglass North is entirely
wrong about the importance of institutional development. While she sees the protection
of private property as a necessary precondition of economic growth, it had already been
adequately protected in England for centuries before The Glorious Revolution in 1688, the
event North believes was the precursor for explosive growth around 1800. But the primary
A bilingual interdisciplinary journal 157
economic effect of The Glorious Revolution was to make it easier for government to borrow,
which is not particularly important for growth.
Prefacing McCloskey’s claims of the historical facts of 1688 is something a bit more
unsettling: that “[i]nstitutions cannot be viewed merely as incentive-providing constraints”
(296). Institutions do more than give information about relative costs. They have sociological
effects that are quite relevant for economics.
Behavior is sometimes best described scientifically as being about incentives given to
social actors. But sometimes it is best described as Second City improvisational comedy,
with or without the audience. The joke is on the economist. Rakesh Khurma, for instance,
gives a typically sociological definition of institutions as “complex and interacting system
of norms, structures, and cultural understandings that shape individual and organizational
behavior.” That’s not a budget line facing someone who can tell at once and easily what it
is that pleases him. (300)
Economics which looks only at incentives and constraints, or in the words of McCloskey,
“prudence-only” economics, misses much of what is important. And while she sarcastically
refers to this as Mr. Max U (297), she is not criticizing excessive formalization in
economics. She is criticizing rational choice theory, namely New Institutional Economics,
North, Gary Becker, Deepak Lal, Avner Greif, Steve Levitt (302), Public Choice Theory,
the UCLA property rights approach, the Law and Economics movement, the economic
theory of regulation, new economic history, quantitative finance, and rational expectations
(306). This is coming from someone who self-identifies as a libertarian economist. In
a book with many sidebars, this is the one most important for economists. If McCloskey is
right –and it is hard to argue with the points she raises– then there are fundamental problems
in economics that are well outside the scope of the book.
In such a sweeping world history, it would be impossible to find a single person expert
enough to verify each and every one of her claims. However, on the few margins I would
call myself knowledgeable, I have significant objections to her arguments. For instance,
after reviewing the primary thesis of Guns, Germs, and Steel, she concludes that Diamond
“doesn’t answer the question he poses” (181). The thesis she evaluates is the famous one,
that endowments of food sources and the east-west axis of Eurasia caused extensive civilization
to first appear there. She criticizes Diamond for saying this is what allowed Europe
to grow. Diamond does no such thing. In the epilogue of the book, Diamond argues that
the reason why civilization appeared in Europe rather than China was that the geography
of Europe encouraged polycentricism and institutional evolution. McCloskey is certainly
aware of this type of argument; she discusses it elsewhere (109). Why she mischaracterized
Diamond is befuddling. In addition, while attacking what she calls the “eugenic materialism”
of Gregory Clark’s A Farewell to Alms, she insists bringing up Steven Pinker as the
reviver of eugenicism. She cites nothing from the evolutionary psychology literature and for
New Perspectives on Political Economy158
those familiar with it, the charge is unfortunately common but nonetheless bizarre.1
It is for
these reasons that, while her many arguments seem strong, I treat the rest of her empirical
and historical claims with a certain degree of skepticism. This skepticism is important when
we later consider the success of the thesis of Bourgeois Dignity.
Use of “Scientific” History
McCloskey treats historical evidence in ways economists are unaccustomed to and does
little to justify herself. She cites various historians as bases for dismissing many theories of
growth, but does not always tell the reader why her references are the credible ones. She
claims several times that these references are “scientific history,” but it is unclear what
exactly she means by that, except that she agrees with it and that the reference is not Marxist.
Making matters worse is her brash dismissal of the concept of statistical significance.
Although she should not be expected to restate her entire argument when it has already
appeared as a book (Zillack and McCloskey 2008), one wonders which economist would
possibly be convinced of the general veracity of her arguments when she snaps that historical
t-tests suffer from the logical fallacy of post hoc ergo propter hoc and that “no serious
economic issue since the Second World War has been settled by econometricians” (198).
Economists use statistical tests because they at least have the potential to differentiate between
randomness and causal relations. In Bourgeois Dignity, a book written at least in part
to change the minds of the profession, she gives no reason to believe her alternative methods
of historical analysis are able to do such a thing, even if she calls them “scientific.”
Mill’s Method of Residuals
McCloskey claims J.S. Mill as her methodological precursor (33), specifically his method
of remainders found in System of Logic. Once one has accounted for all other possible causes
to a phenomenon, whatever remains, even if immeasurable, is the cause. She examines
and dismisses all competing explanations and finds them wanting, so that she may argue
that granting dignity to the actions of the bourgeoisie was the cause of growth. One way of
interpreting this follows.
1	 Consider: “[A]ny biological differences [between races and ethnicities] are minor at most and scientifically
uninteresting” (Pinker 2002: 340).
A bilingual interdisciplinary journal 159
A “typical” economist ascribes a non-zero probability to each of the explanations of
growth prior to reading Bourgeois Dignity. The probability would be large for explanations
economists are amenable to, such as Northian Institutions or Human Capital. It would be
small for ones such as expropriation. Upon hearing of the intuition of dignity for the Bourgeoisie
as another explanation, the economist would ascribe a small (but non-zero) probability
to it. What McCloskey implicitly argues is that she shows that all other explanations
are wrong, and therefore of zero probability, so dignity for the bourgeoisie is correct.
But this is not the way economists normally reason. As I suggested, there may be reasons
to be skeptical of her empirical claims in areas one does not know inside-and-out. And even
if one dismisses my call for caution as nitpicking, the point stands; no matter how strong
her arguments are, it is still incorrect to ascribe a zero probability to anything that is not
known a priori. Whether one accepts her arguments depends on how one Bayesian update
against the evidence she provides, and it’s far from clear that dignity for the bourgeoisie is
the most probable.
Moreover, dignity for the bourgeoisie is just one of many theories that economists had
not dreamt up yet. One imagines that before hearing any evidence, “something else we have
not thought of” would have a much greater prior probability than dignity for the bourgeoisie.
To the extent that McCloskey is convincing, she is more successful in demonstrating
that we still have a poor understanding of how economies actually function than she is in
showing that dignity is important.
Testability
In the future, as more nations graduate to the status of first world nations, McClosky’s thesis
will ultimately become more testable. While no clear pattern exists at the moment, the nations
that protect private property without substantial growth should be the same that do not respect
the bourgeoisie. If this pattern emerges, it will become a significant empirical confirmation
of her hypothesis. Presently, it is difficult to locate nations that adequately protect private
property in the modern world without significant economic gains to show for it.
Conclusion
McCloskey’s book is essential reading. The breadth of topics covered all but guarantees
the reader will learn a great deal about economic history, the growth literature, sociology,
and general political economy no matter what one’s background is. The challenges she
poses are real ones, and regardless of whether you believe she actually defeated each and
New Perspectives on Political Economy160
every alternative explanation of growth successfully, the brute force of her attack should
at the least make the reader more skeptical of modern growth literature and mainstream
economic history.
It is up to the reader how much her attacks on traditional explanations of the origins of
growth actually demonstrate the importance of dignity for the bourgeoisie. Besides Mill’s
method of remainders, her direct evidence of the relationship between dignity and growth
is rather light. Of course, this is only the second volume of a six volume series; presumably
evidence will be presented more systematically in her future books. Still, it is difficult to
endorse the thesis of the book without having seen this.
Frankly, I eagerly await modern experts in each aspect of growth theory to respond to
each and every one of her charges. This would require a dedicated volume from a professional
journal. No single book review could do it justice in that respect. I hope I have
encouraged economists to make it through this imposing volume, as whatever one may feel
about her conclusions, Bourgeois Dignity contains many important ideas deserving to be
discussed.
Ryan H. Murphy
Suffolk University
darsox64@gmail.com
A bilingual interdisciplinary journal 161
Refferences
Diamond, Jared. 1997. Guns, Germs, and Steel. New York: Norton.
McCloskey, Deirdre N. 2006. Bourgeois Virtues: Ethics for an Age of Commerce. Chicago:
University of Chicago Press.
–. 2010. Bourgeois Dignity: Why Modern Economics Cannot Explain the Modern World. Chicago:
University of Chicago Press.
Pinker, Steven. 2002. The Blank Slate: The Modern Denial of Human Nature. New York:
Penguin Books.
Zillack, Stephen T. and McCloskey, Deirdre N. 2008. The Cult of Statistical Significance:
How the Standard Error Costs Us Jobs, Justice, and Lives. Ann Arbor: University of Michigan
Press.
list of articles
Ivan Jankovic: Economic Calculation, Maturity Mismatching
and the Credit Cycle ........................................................................................105
Peter Boettke: Anarchism and Austrian Economics.....................................125
Ben O’Neill: The Vampire Economy and the Market:
An Assessment of Economic and Political Dynamics..................................141
Book Review
Bourgeois Dignity: Why Economics Can´T Explain
The Modern World By Deirdre N. Mccloskey, 2010 ....................................155
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