Chapter 18: In Memoriam of Murray N. Rothbard

This excerpt celebrates the work of Murray N. Rothbard, a leading Austrian economist. It highlights:

• Rothbard's prolific contributions: At 36, Rothbard completed the nearly 1,000-page treatise Man, Economy, and State. His clear, deep, and original analysis significantly influenced Austrian economics.

• Key areas of focus: Rothbard's work addressed monopoly theory, political philosophy, and the subjective theory of value, building on the work of Ludwig von Mises.

• Rothbard's link to Spanish Scholastics: He identified the School of Salamanca (16th-17th centuries) as foundational to Austrian economics, crediting them with developing the subjective theory of value and applying it to money and institutions. He saw the Anglo-Saxon classical school's focus on the labor theory of value as a "deviationism" from this tradition.

Chapter 19: Hayek’s Best Test of a Good Economist

This excerpt focuses on Friedrich Hayek's perspective on the core tenets of Austrian economics, arguing that:

• Understanding capital theory is crucial: Hayek believed grasping the complexity of the productive structure and the detrimental effect of increased consumer demand on employment in early production stages is a "best test" for an economist.

• Rejection of macroeconomics and Keynesianism: Hayek criticized macroeconomic aggregates, arguing they lead to socialism and misunderstandings of the market process. He criticized even Milton Friedman, stating, "Even Milton Friedman is reported to have once said 'we are all Keynesians now'."

• Emphasis on microeconomic foundations: Hayek believed understanding the market process requires a microeconomic approach, focusing on individual actions and the role of prices in conveying information.

• Importance of economic calculation: Hayek stressed the importance of market prices in enabling economic calculation and estimating opportunity costs, something he believed socialist economies lacked.

Chapter 20: The Ricardo Effect

This excerpt explains the "Ricardo effect," a microeconomic phenomenon explaining how savings lead to more capital-intensive production:

• Increased savings lead to higher real wages: When savings increase, demand for consumer goods falls, leading to lower prices for these goods. This results in higher real wages for workers, even with constant nominal wages.

• Incentive to substitute capital for labor: Higher real wages encourage entrepreneurs to replace labor with capital goods, making production more capital-intensive. This effect, first analyzed by David Ricardo, is cited by Hayek in his work on business cycles.

• Countering the "paradox of thrift": The Ricardo effect demonstrates how increased saving, even if leading to a short-term decrease in consumer goods production, ultimately leads to economic growth through investment in longer, more productive processes.

Key Takeaways:

These excerpts highlight the importance of capital theory in Austrian economics, emphasizing the role of savings and investment in driving economic growth. They showcase a strong critique of macroeconomic approaches, arguing for the superiority of microeconomic analysis grounded in individual action and market processes. The Ricardo effect provides a specific example of how microeconomic forces translate changes in savings into shifts in the structure of production.