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.

Chapter 15: Juan de Mariana and the Spanish Scholastics

• Subjectivist Tradition: Spanish Scholastics, particularly those associated with the University of Salamanca, developed key economic concepts that would later form the foundation of the Austrian School. This included the subjective theory of value, recognizing that value is determined by individual preferences rather than inherent qualities.

• Diego de Covarrubias y Leyva: "The value of an article does not depend on its essential nature but on the subjective estimation of men, even if that estimation is foolish."

• Dynamic Market Processes: These scholars recognized the dynamic and ever-changing nature of the market and refuted the idea of a static equilibrium.

• Libertarian Leanings: Figures like Juan de Mariana advocated for limited government and individual liberty, arguing against taxation without consent and highlighting the dangers of inflation caused by currency debasement.

• Precursors to Austrian Theory: Chapter 15 establishes a direct intellectual lineage between the Spanish Scholastics and the Austrian School, emphasizing the continuity of their ideas.

Chapter 16: New Light on the Prehistory of the Theory of Banking and the School of Salamanca

• Early Criticisms of Fractional-Reserve Banking: This chapter explores the early debates surrounding banking practices, focusing on the School of Salamanca's analysis of fractional-reserve banking.

• Doctor Saravia de la Calle: "Under no circumstance should the Christian give his monies to these lenders because, if he sins in giving them, as he always sins, he should cease it because it is his own sin."

• Emergence of Currency and Banking School Ideas: The chapter identifies two distinct schools of thought within the School of Salamanca, mirroring the later Currency and Banking School debate:

• Currency School: Advocated for 100% reserve banking, viewing fractional-reserve practices as illegitimate and harmful.

• Banking School: More tolerant of fractional-reserve banking, arguing for its economic benefits as long as prudence was exercised.

• Early Recognition of Bank Money: Luis de Molina, while advocating for fractional-reserve banking, was the first to recognize that bank deposits constitute a significant part of the money supply.

Chapter 17: Human Action as a Textbook of Economics

• A Treatise on Human Action: The chapter focuses on Human Action as a comprehensive treatise on economics, emphasizing its foundation in human action and its rejection of static models and mathematical formalism.

• The Importance of Entrepreneurship: Mises' theory of entrepreneurship is highlighted, stressing the role of entrepreneurs in driving market processes and coordinating economic activity.

• Aprioristic-Deductive Methodology: The chapter delves into Mises' methodological approach, advocating for an aprioristic-deductive methodology based on the self-evident axioms of human action rather than empirical verification.

• Critique of Socialism and Interventionism: Mises' critiques of socialism and interventionism are explored, arguing that they hinder economic calculation and disrupt market coordination.

• Lasting Influence and Contemporary Relevance: The chapter concludes by stressing the enduring influence of Human Action on economic thought and its continued relevance for understanding complex economic phenomena.

Chapter 12: The Ethics of Capitalism

• Failure of Consequentialism: De Soto argues that consequentialist approaches to economics, focused solely on cost-benefit analysis and maximizing positive outcomes, have demonstrably failed.

• “The consequentialist ideal, consisting of believing that it is possible to act by taking decisions to maximize the forecast positive consequences on the basis of given means and costs which are also known, has ostensibly failed.”

• Dynamic Efficiency and Justice: De Soto proposes a dynamic view of the market, emphasizing human entrepreneurial capacity and the continuous creation of new ends and means.

• "According to this conception, the considerations of ‘efficiency’ and ‘justice’, far from being a trade-off which would allow different combinations in varying proportions, would appear to be two sides of the same coin."

• Kirzner's Contribution: De Soto highlights Israel Kirzner's work on entrepreneurship and its ethical implications. Kirzner's theory, which emphasizes the individual's right to the fruits of their entrepreneurial creativity, provides a powerful ethical foundation for free markets.

• "the most just society will be the society that most forcefully promotes the entrepreneurial creativity of all the human beings who compose it."

Chapter 13: A Hayekian Strategy to Implement Free Market Reforms

• Overcoming Political Impossibility: While acknowledging the theoretical arguments presented by the Public Choice School regarding the inherent difficulties in implementing free market reforms, de Soto argues that historical examples, such as the liberalizations in post-war Germany and the Thatcherite revolution in the UK, demonstrate the feasibility of overcoming these challenges.

• Dual Strategy for Libertarians: De Soto advocates for a dual strategy for libertarian theorists:

• Unwavering pursuit and dissemination of free market principles.

• Development of transitional policies that move society towards the ultimate goal of a free market while remaining consistent with those principles.

• Avoidance of compromises that betray libertarian ideals or confuse the public regarding the ultimate objectives.

• Three Levels of Action: De Soto proposes three levels of action required for successful free market reforms:

• Theoretical: Rigorous development and dissemination of sound economic theory emphasizing the dynamic efficiency and ethical superiority of free markets.

• Ethical: Articulating the moral foundation of capitalism and exposing the immorality of interventionism and the privileged pressure groups that benefit from it.

• Historical: Engaging with intellectuals, journalists, and policymakers to shape public opinion and influence political processes in favor of libertarian ideals.

Chapter 14: The Future of Liberalism: The Deconstruction of the State through Direct Democracy

• Direct Democracy and Secession: De Soto agrees with Bruno Frey's advocacy for direct democracy through referenda, arguing that it offers a potential avenue for limiting government power.

• "for a libertarian it is of the utmost importance to combine the political procedures of direct democracy with the effective existence of the right of secession"

• Towards a World of Smaller States: De Soto envisions a future where technological advancements and globalization empower individuals to participate in direct democracy and exercise their right to secession.

• Private Property Anarchism as the Ultimate Ideal: De Soto ultimately views a free market encompassing all spheres of human activity, including those currently under government control, as the ultimate ideal.

• "the most perfect direct democracy only will be reached once the free market is also extended to the areas currently covered by governments through a constellation of overlapping voluntary and competing private agencies, associations and corporations."