Objectivism and “Austrian” Economics – compatible or not?

My Answer to Richard Salsman’s Vile Attacks on “Austrian” Economics in General and on George Reisman in Particular

The following is a series of postings I made on Facebook in April 2010 in a group called “Advocates for Capitalism” (now extinct) with some added comments. The administrator started the discussion by quoting a critique of “Austrianism” by Richard Salsman (originally posted in Betsy Speicher’s Forum for Ayn Rand Fans, where Salsman appeared as an “expert” on economics). After some preamble, Salsman lists twelve objections he has to the “Austrian” school.

As you may know, I have criticized Richard Salsman before, in my article Reisman Insights without George Reisman. But I thought this was a good opportunity to answer his other objections to the “Austrian” school and at the same time provide some proper information about the relation between Objectivism and “Austrianism” and about the contributions of George Reisman.

First, there was a good answer from Wladimir Kraus, from which I take the liberty of quoting the best part:

Then there are, of course, the revolutionary contributions of George Reisman. In my opinion, no economist either before or after him was able to bring the science of economics closer in line with the teachings of Objectivism. It is the writings of George Reisman that belong on the reading list of a devoted Objectivist, not some oversimplified and silly models of rational expectations sophists that do not go beyond the most general commonplaces. George Reisman offers a fully integrated system of thought which spans important contributions of the classical and Austrian schools into one grand synthesis. He retained what is true and discarded what is false in the doctrines of both schools and augmented the end-product by a number of his own extremely powerful ideas. If you want to learn more about the nature and extent of Reisman’s contributions to positive economics, please see my review of his magnum-opus Capitalism: A Treatise on Economics.

Now to my own comments, which I will mainly present in the order I made them.


I think it important to note that the so-called “subjective theory of value” espoused by Mises and other “Austrians” is not subjectivism in the philosophical sense of the term. It has nothing to do with “It’s true because I feel it’s true” or “It may be true for you, but it’s not true for me” (and all that kind of jazz). It refers to the simple and elementary fact that economic phenomena can always be traced back to individual choices and individual valuations.

That they call this theory “subjective” raises unnecessary havoc – especially to us who have learned and digested the principle that values are as objective as any other fact of reality. The best advice I can give when you read Mises is to, in your own mind, substitute “individual” every time Mises writes “subjective”. (There will still be points where an Objectivist will have to disagree with Mises, but they will be much fewer.)

I once made up a simple but drastic example to illustrate the point: suppose two persons meet in the middle of a desert. One of them is starving to death, but has only a bottle of water left; the other one is thirsting to death, but has only a loaf of bread left. Obviously, the stage is set for an exchange.

“Austrians” would call this “subjective”, merely because it illustrates that values can differ from person to person and are dependent on the specifics of the situation. But what is really subjective about this?

It’s an objective fact that a man cannot survive without food; and it’s equally objective that he cannot survive without water.

More on this subject in my article Objectivism versus “Austrian” Economics on Value.

Nathaniel Branden’s review of Human Action

I should mention that Nathaniel Branden (in the “good old days” pre-1968) wrote a laudatory review of Human Action, which was published in the September 1963 issue of The Objectivist Newsletter. Toward the end he writes the following, which is a good summary of the actual differences between Objectivism and “Austrianism”:

In justice to Professor Mises’ position and our own, it must be mentioned that there are many sections of Human Action with which Objectivists cannot agree. These sections pertain, not to the sphere of economics as such, but to the philosophical framework in which his economic theories are presented. We must take the gravest exception, for example, to the general doctrine of praxeology; to the assertion that all value-judgments are outside the province of reason, that a scientific ethics is impossible; to the disavowal of the concept of inalienable rights; and to many of the psychological views expressed.

Notwithstanding these reservations, the book is of the first rank of importance, eminently deserving of careful study. It is a major economic classic. As a reference work, it belongs in the library of every advocate of capitalism.

“Value-free” Economics

A first installment of my critique of Salsman. He writes:

Austrian economics offers the best economic (though not philosophic) case for free markets … in modern times.

This is virtually the only thing I can agree with Salsman on. There are flaws in the philosophical framework of the “Austrians”, which serve to undercut their case.

I think the most egregious flaw in Mises is his insistence that ultimate ends are outside the province of reason – that we can judge only the means to an end, not the end itself.

Of course, the ultimate end is preserving and furthering one’s own life – and Ayn Rand has demonstrated this point. (I won’t go into this in detail, because I presume that the people who read this already know Objectivism.) But if someone has a different end, which entails destruction of life, then, on Mises view, there would be no way of choosing which end is the right one – one could only judge the means taken to whatever end, and if the destructive man chooses means that do lead to destruction, one would have to grant him that he is “rational” in his choice of means and leave the question of the rationality of his end aside.

And a corollary of this is Mises insistence that economics should be “werthfrei” (“value-free”), and that value judgments should not enter economics. (There is an odd contradiction here: if Mises held the view that capitalism is neither good nor bad, as this view implies, then why did he spend almost his entire life passionately defending capitalism? But this merely goes to show that he was a better man than his view implies.)

But this is also an instance of George Reisman having purged “Austrianism” of errors and contradictions. I quote from his book (p.  36):

[O]ne philosophical question that must be briefly addressed here is the assertion that science and value should be kept separate and distinct—an assertion that is often made by advocates of socialism and interventionism when they are confronted with the advocacy of capitalism. This book obviously flies in the face of that demand, for it consistently seeks to forge a union between the science of economics and the value of capitalism.

Despite the prevailing view, this procedure is perfectly sound. The notion that science and value should be divorced is utterly contradictory. It itself expresses a value judgment in its very utterance. [Emphasis added.] And it is not only self-contradictory, but contradictory of the most cherished principles of science as well. Science itself is built on a foundation of values that all scientists are logically obliged to defend: values such as reason, observation, truth, honesty, integrity, and the freedom of inquiry. In the absence of such values, there could be no science.

Salsman’s objections in numerical order

1) their “radical subjectivism”.

I already covered this earlier. I think it is unfortunate that the “Austrians” call their value theory “subjective”, when they actually do not mean “subjectivism” in the philosophical sense. But I guess we are stuck with the terminology.

Typical pattern: an Objectivist hears about this “subjective” value theory and dismisses it out of hand, since subjectivism is obviously anathema. An “Austrian” hears about the objective value theory of Ayn Rand, and dismisses it out of hand – because to him, it represents a regression to the theories of economic value that were rampant before Menger and the “marginal revolution”. He doesn’t know the trichotomy “intrinsic-subjective-objective” and has no clue that those older theories are intrinsic value theories and not objective at all.

Of course this is an over-simplified pattern: some people are able to “look beneath the words” here. But it is a pattern one sees too often.

And there is only one cure for this: that many more Objectivists study “Austrian” economics in depth, and that many more “Austrians” study Objectivism in depth!


2) their resort to inane praxeology.

I wouldn’t call it “inane”. But this is a tricky issue. I have been thinking for a long time of writing an essay called “Praxeology refuted”, but I haven’t gotten very far with it, because this is an issue where it is hard to separate “the wheat from the chaff”. So all I can offer at the moment is some stray remarks.

First I think the term should be explained: it means “theory of (human) action” (“λογος” about “πραξις”, to use the Greek words).

There are some good things to be said about praxeology. It stresses that man is an acting being (not merely reacting), who uses reason to relate means to ends, who makes choices and has preferences – all of which is of course eminently true.

The bad thing is that Mises clothes those insights in Kantian garb. He says that those principles are “a priori”, i.e. not derived from experience but prior to experience. He says that they depend, not on facts of reality, but on the “innate structure of the human mind”. And he says that human action is necessarily rational – which I think flies in the face of facts, since is it easily observable that people often do act irrationally.

As a corollary of this apriorism, Mises rejects induction and claims that economics is a purely deductive science. Now, I agree that there is a great amount of deductive reasoning in economics, even that it is a predominantly deductive science. But basic concepts are always formed inductively (see ITOE), and how would anyone form a concept like “price” or “money”, if not by inducing from observations?[1]

(Some “Austrians” – notably Murray Rothbard – have tried to overcome this Kantianism of Mises. But I go here by what Mises himself says.)

I want to note that George Reisman rejects praxeology; but he does so in a footnote in his book (p. 61, footnote 12) and doesn’t go into it in any great detail.[2]

Jerry Kirkpatrick, in his book In Defense of Advertising, has this comment:

Menger and Böhm-Bawerk are explicit about their Aristotelianism. […] Mises, on the other hand, on the surface seems to be a Kantian or a Neo-Kantian. A thorough reading of his corpus, however, reveals a solid underlying Aristotelianism masked, as it were, by a thin overlay of Kantian terminology.

I am not sure whether it is just a “thin overlay”, but if it is, it is an overlay that needs to be removed!

(Jerry Kirkpatrick wrote to me in a private message:

I agree now that Mises’ Kantianism is not as thin an overlay as I had thought, but there is nothing in his writing that is dishonest or corrupt. He was a genuinely sincere scholar.)

Ayn Rand herself made a short comment quoted in Ayn Rand’s Marginalia (ed. by Robert Mayhew), p.  133, which may shed some light. In answer to a sentence from Human Action (p.  231)

…the economists were bound to widen step by step the field of their studies until they finally developed a system dealing with all human choices, a general theory of action [i.e. praxeology].

she writes:

That is the definition of the province of morality. Isn’t it clear by now that “praxeology” is intended as a substitute for morality? What is morality, if it is not the science of “all human choices”?

(Mises had a certain disdain for morality, but I think the reason for this is that he had only been exposed to the Christian-Kantian version of morality, which only consists of “dos and don’ts” and never gives any kind of positive advice, the way Ayn Rand’s ethics does.)

As I said, those are just stray observations. Maybe someday I will be able to integrate them into something better.

(If you want to know more about praxeology, the best sources are the beginning chapters of Human Action and the book The Ultimate Foundation of Economic Science.)[3]

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There followed a short exchange on “praxeology” with another commentator:

Apparently [praxeology is] not based on observation. I find this a little absurd. Surely, as a system of axioms, you’d have to test them and see if your praxeology truly applies? How do you test an axiom? Well, observation.

You have a point here. As I said, there is much truth (and some errors) in misesian praxeology, but the problem is that Mises “kantianizes” even the true points by making them a matter of the innate “structure of the human mind”, rather than facts of reality.

A minor objection, however: axioms are not actually “tested” against reality. A true axiom – like “existence exists”, “consciousness is conscious, “A is A” – does not need to be tested; they themselves are the foundation of any “testing”. I got a comment from George Reisman, which I think captures the point:

I don’t think axioms are “testable” or can be overthrown by any test. They represent knowledge so certain, that any test which seemed to refute them would stand as flawed. The proposition 2+2=4 is not an axiom, but it is as certain as any axiom, and any test that appeared to show that 2+2 equaled any number other than 4 would merely provide grounds for searching for the error that produced that result. We would not abandon the proposition that 2+2 does in fact equal 4 but rather rely on its absolute certainty as a foundation of the discovery of where the error lay.

The idea that axioms should be “tested” sounds a bit like Karl Popper. But I did not want to delve into this issue, because it would have distracted from the main subject.

I have seen discussions by “Austrians” who claim there is no big difference between Objectivism and praxeology, because both rely on basic axioms. A minor point here is that Mises himself does not talk about “axioms”, but about “a priori categories”. But the major difference is that the axioms of Objectivism are by no means “innate” or “only in our minds”. They are implicit in all knowledge – but the explicit formulation of them is something that has to be learned.

There is a funny example from Mises (at least I consider it funny) regarding the proof that there is an external world. If you are an Objectivist (or just follow common sense), how would you prove this? Well, you just open your eyes (or pull the plugs out of your ears); then you see and hear that there is an external world.

But Mises presents a different proof. He says that if there were no external world, all our wishes and desires would automatically come true. But they do not automatically come true; ergo, there is an external world that puts hindrances in our way.

Well, this is true. My objection to this proof is that it is unnecessary.

I don’t think that there is a logical structure to human action in general.

Neither do I. We certainly have the capacity to reason logically. But then, we also have the capacity to reason illogically. (The proof of this is all the logical fallacies that have been committed throughout the ages – and there are quite a few!) The use of logic is something we have to learn – sometimes painstakingly.

Profit Theory

3) their (virtually non-existent) profit theory.

This charge is simply bizarre. Or should I say “inane”?

To begin at the end (remember that Salsman claims that the “Austrian” school has deteriorated “in nearly chronological order”), George Reisman certainly has a profit theory. It is called the “net consumption/net investment theory” and is presented in great detail in his treatise (Chapter 16, p. 719–808). I will just make a short summary to indicate the main points of it.

Adam Smith claimed in The Wealth of Nations that in the “rude and early state” (i.e. before there were capitalists in the world, and before there was any significant division of labor), all income was wages (probably on the basis that all labor in those times was menial labor). But then early “capitalists” appear on the scene, there is a division between employers and employees, the employers make a profit, and thus profits are a deduction from wages. (This is called the “primacy of wages” theory.)

You can see that this view lays the ground for Karl Marx’ “exploitation theory”, the idea that employers (capitalists) take away from the employees (the laborers) what is actually rightfully theirs.

What Reisman shows is that it is exactly the other way round. In this “rude and early state”, there are no wages. There is no one to pay the wages and no one to pay wages to! There are no employers and no employees. And therefore, all income in this early stage is profit. (This is called the “primacy of profits” theory.)

But then early “capitalists” appear, and people are employed. (A farmer, for example, might employ farm-hands to help him out.) Then wages are paid, and those wages then become deductions from profit.

Observe what might at a first glance seem paradoxical: in the beginning, profits were 100%; as division of labor develops and farm-hands are employed, profits get lower than 100%. Doesn’t this make the farmer poorer? By no means! Because of the increase in production, it makes him richer! (It incidentally also makes the farm-hands richer.)

The outcome of this is that, as the economy advances and there is more and more division of labor, more capitalists and more employees, the rate of profit, in percentage terms, gets lower and lower. But profits in absolute terms, in terms of an increase in actual wealth, get higher and higher. Today, when we do have an advanced division-of-labor economy (although by no means an ideal laissez-faire economy), the rate of profit is only a few percent; yet capitalists are infinitely richer than the stone-age farmer whose profit was 100%. (And so, of course, are the non-capitalists.)

There is, however, a limit to this development. In an advanced capitalist economy, the rate of profit would never fall to zero but would stay at a few percent – there will always be enough capital accumulation to ensure this, and should the rate of profit ever fall unduly low, there will be what Reisman calls “springs to profitability” to make the rate of profit rise again. As Reisman himself explains in his mail to me:

You refer to the rate of profit falling as the economy advances. This is true only up to a point, in reflecting the achievement of a sufficiently low degree of time preference and a sufficiently high degree of capital intensiveness and provision for the future. One of my major contributions is to show how, once those conditions are achieved, capital accumulation is possible without any further fall in the rate of profit.

(This is explained at greater length in Capitalism, p.  778ff.)

The next step in Reisman’s profit theory is the insight that the rate of profit is determined, predominantly, by the capitalists’ own consumption. I won’t go into the proof of this – it is in his book. And the capitalists’ consumption, in its turn, is determined by their time preference: as long as capitalists are able to think and act long-range, most of their earnings will not be consumed but reinvested. Should the capitalists be short-range, they will instead consume more and reinvest less, the rate of profit will rise (and the economy will actually suffer).

If this seems paradoxical, let me point out one thing: this refers to the average, economy-wide rate of profit. If a single businessman makes huge profits, this is of course a good thing: it proves that he is successful. But his profits are offset by correspondingly lower profits (or outright losses) by other businessmen. (To take a simple example: when Microsoft and Apple entered the scene, they made huge profits. But this was outweighed by less profits or outright losses by older firms such as IBM.)

To avoid a possible misunderstanding: it would never be possible for a capitalist or a group of capitalists to somehow increase the average rate of profit by going on a “consumption spree”. Those capitalists would simply lose their money, and the money would go to better capitalists, the kind who actually save and invest. Again, I give the word to Reisman:

In your discussion of my theory of profit, you cite the capitalists’ own consumption as determining the rate of profit. I think it’s essential to point out that this does not imply that the individual capitalist can increase his profits by increasing his consumption. Any individual capitalist who increases his consumption at the expense of his capital helps to raise the overall average rate of profit in the economic system very modestly while reducing his own capital and thus his share of the profits of the economic system very dramatically.

(Again, this is explained at greater length in Capitalism, p. 37ff.)

Now, let’s take a step back, chronologically. This insight by Reisman was foreshadowed by Mises, who made a distinction between “entrepreneurial profit” and “originary interest”. “Entrepreneurial profit” is that part of profit that depends on the businessman’s own skill; and “originary interest” is the part of profit that depends on the average degree of time preference. (That Reisman builds on Mises is probably what Salsman must refer to, when he talks about “chronological deterioration”.)

Now, a further chronological step back: the principle that “time preference” (the fact that a good today, other things equal, has more value than a good tomorrow, or a year from now, or a decade from now) determines the rate of interest and of profit, was discovered by Böhm-Bawerk. Although there is an important difference between Reisman’s theory of time preference and Böhm-Bawerk’s, it is clear that Reisman also builds on Böhm-Bawerk.

And if you are familiar with Böhm-Bawerk’s work, he made an excruciating feat of first going through each and every theory of profit and interest presented before his day, and then presenting his own positive theory.

It is this development, from Böhm-Bawerk to Mises to Reisman, that Salsman labels “virtually non-existent”. Some expletive is in place here!

The Role of the Entrepreneur and the Investor

4) their (absurd) theory of the essentially-passive, arbitrage-chiseling entrepreneur (and “the consumer is king”).

I’m not sure that this is a fair criticism of any “Austrian”, although I may concede that Mises puts too much stress on the “sovereignty of the consumer”. But this is another point where Reisman “comes to the rescue”.

Reisman’s answer to the “consumer is king” idea is that this makes sense on the “microeconomic” level: it’s consumers’ choices that determine the relative size of business companies. But on the “macroeconomic” level, it is business that is the source of all the spending that takes place in the economy.

As an illustrative example, take buying a PC versus buying a Mac. If a lot of people switch from PC to Mac (or vice versa), this determines the relative size of Microsoft and Apple. And in this context, it makes sense to say “the consumer is king”. Microsoft and Apple have to serve the consumers as best they can!

But on a “macro” level, it certainly is not consumer demand that created those companies (or the whole computer industry) in the first place. Before there were computers, there was no consumer demand for any computers at all! The demand was created by those who invented and then produced the computers!

(The example is mine, not Reisman’s. But I think it is in line with his reasoning. There is more to it in his book.)

To be fair, I should mention that I once heard Harry Binswanger make the same point in a Q&A session. His example was different, but the main point was the same: “consumer demand” doesn’t create great inventions – there is no such demand until some invention is actually made.

There will be no consumer demand for vacation trips to Alpha Centauri until someone invents a way to get there swiftly and safely! But once it is invented, there will be sharp competition between different space ferries – and in this competition, the consumer will be king.

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5) their non-view of the role of the capitalist (financier-investor).

Similar answer. To which “Austrian” is this applicable? Certainly not to Reisman, but in this case I cannot see that it pertains to any “Austrian” economist that I know of.

One small point: I just took a look at Human Action, and I ran across this quote:

In eliminating the entrepreneur one eliminates the driving force of the whole market economy. (P.  249)

So much for the idea that “Austrian” economics downplays the role of the businessman or entrepreneur!


6) their disdain for math…

Now, wait a minute. What kind of math is Salsman talking about here? “Austrians” stress that higher math, such as calculus, has virtually nothing to do with economics, and that the kind of equations one finds in Keynes and his followers is worthless and merely serves to obscure. Mises is reputed to have said that “the more one knows about mathematics, the more one understands how little it has to do with economics”.

Reisman, by the way, uses math quite a lot in his book, but you will notice that all of it is elementary algebra. Besides, he always uses it to sum up what he has already explained verbally, in plain English.

… and of General Equilibrium Theory (including their claim that markets are in perpetual DIS-equilibrium and that equilibrium is incompatible with economic motion or dynamism).

What am I to say about this objection? The point is very well explained in Human Action. How one can read this book and still believe in such a thing as “general equilibrium” is simply beyond me.

The Austrian Business Cycle Theory

7) their business cycle theory (to the extent it embodies the superstition of market “bubbles” or the alleged idiocy of easily-duped businessmen).

Here, I will simply refer you to my earlier article under the sub-heading “More Salsman Nonsense”. Salsman simply does not understand the theory he is criticizing.

And I haven’t the faintest idea what Salsman can possibly mean, when he says that “bubble” is an “anti-concept”. An “anti-concept”, in Ayn Rand’s definition, is

an unnecessary and rationally unusable term designed to obliterate some legitimate concept.

What legitimate concept is “bubble” designed to obliterate? And what exactly, then, were the “IT bubble” and the “housing bubble”. (Well, in fact they were concrete instances of the “boom-bust” phenomenon, properly analyzed in the “Austrian” business cycle theory rejected by Salsman.)

Fractional Reserve Banking

8) their insistence that fractional-reserve free banking and anything short of a 100%-reserve gold warehouse is “fraudulent” (the view of Rothbard-Reisman-Skousen – but rejected by White, Selgin and me).[4]

It is fraudulent.

“Fractional reserve banking” is simply the practice of lending out more money than you actually have.

Simple example (assuming free banking operating on a gold standard): a bank has a certain amount of gold in its vaults. It then issues bank notes backed by this gold. As long as those notes are fully backed by the gold in its vaults, all is good and well. But then the bank issues more notes than are actually backed by its gold. It does so on the premise that not all depositors will want to withdraw their gold at the same time (which would cause a “bank run” and the bank will turn out to be insolvent and go into bankruptcy).

This system is sometimes defended (sometimes even by Objectivists) on the grounds that it is a voluntary transaction: if only the people who borrow the money are aware of its “fractional” status and willing to take the risk involved, there is no fraud involved.

The error in this reasoning is that it overlooks the fact that third parties are defrauded – other people than those who take out the loans.

To see this clearly, remember Ludwig von Mises’ point about inflation in general: Those who receive the newly created paper money first are in a position to buy before prices have risen; those who receive it later can buy only after prices have risen. This means that those who receive the inflationary money first get an unfair advantage over those who receive it later.

Of course, today, when almost all money is inflationary fiat money with no backing (except empty promises and a gun – the threat of being imprisoned if you don’t accept the fiat money), this phenomenon is running rampart.

But the situation is actually the same in the situation I described earlier. The “fractional” money has an inflationary effect. Because it is accepted as money in ordinary transactions, it enlarges the money supply and will have the inevitable effect of rising prices. And Mises’ point holds true also in this case: those who take out “fractional loans” are in a position to use their money before prices have risen; those who do not take such loans will suffer from the higher prices. They are defrauded.

I think that if we had free banking under a gold standard, and this kind of “fractional banking” were practiced, the problems would be much smaller than in today’s “age of inflation” – competition between the banks would lead them to follow a “conservative” policy and reign in their issuance of “fractional” money. But that doesn’t really change the point – certainly not the moral point that the practice is fraudulent.

As to the question how Objectivists ought to reason in this issue: I grant you that Ayn Rand, to my knowledge, never addressed it. But one thing she certainly did address is that honesty is a virtue. It is

the recognition that the unreal is unreal and can have no value, that neither love nor fame nor cash is a value if obtained by fraud.

The cash one gains through “fractional banking” surely is obtained by fraud!

George Reisman’s statement of this point is so eloquent that I will quote it:

Shysterism in any form is always slippery. Thus if it occurs to anyone to argue that the banks’ customers are not victims of fraud because they clearly know and understand that their funds are being lent out, then the answer is that in that case they would be parties to fraud. Their fraud would be the attempt to make payment to others not with money or reliable warehouse receipts for money, but with claims to debt. They would be engaged in the willful contradiction and deception of claiming to pay someone when in fact imposing on him the position of being a grantor of credit. (Capitalism, p.  958.)

There is longer discussion of “fiduciary media” and “fractional banking” on p. 511ff in his book. And if you really want to put your teeth into the subject, there are two books by Mises I can recommend: The Theory of Money and Credit and The Causes of the Economic Crisis. Both are downloadable from Mises.org. (The first one is also downloadable in the original German, in case you should prefer that language.)

And if you are a Scandinavian, you may also read this article by me.[5]


9) their silly embrace of the neo-classical myth that economics is essentially about “scarcity”…

Is this “silly embrace” shared by all “Austrians”? (I have to look into this.)

… and their acceptance of the “opportunity cost” myth (but which Reisman properly refutes).

It’s nice to see that there is at least one point where Salsman doesn’t misrepresent Reisman! (Or simply ignores him.)[6]

The Marginal Tax Rate Theory

10) their neglect (or ridicule) of the marginal tax-rate theory of supply-side economists.

I originally left this objection aside and merely wrote “I’m not familiar with this issue.” Afterwards, I received the following short comment from Stefan Karlsson:

My comment on this is that (most) Austrians do recognize that higher marginal rates of taxation reduce productive activities. I certainly do. And most Austrians would probably also agree that when tax rates are high enough, tax rate reductions can in fact increase tax revenues because of for example increased productive activities and decreased tax avoidance.

Well, this is certainly true. One thing I would like to add is that maximizing tax revenues should not be the goal of economic activity at all!

The famous “Laffer curve“, which is part of “supply side” economics, starts with a couple of rather trivial observations: if taxes were 0%, there would be no tax revenues at all – and if taxes were 100%, there would be no tax revenues either, because in that case the tax payers would starve to death or (more likely) simply refuse to pay the taxes. And so there must be some optimal point, somewhere between 0 and 100%, And then one may start to calculate exactly what that optimal percentage might be.

But why on earth should this be a big issue? Taxes should be reduced as much as possible, period. Government should be reduced in size. The ideal would be a system of voluntary taxation, such as Ayn Rand discusses in her essay “Government Financing in a Free Society” in The Virtue of Selfishness. It is of course not likely that such a system will be implemented in the foreseeable future – but at least we could fight for tax reductions, not for a system that would maximize tax revenues!

“Value-free” Economics Again

11) their claim about “value-free economics”.

I have already covered this point. It’s a valid objection.

The “Austrians” and Ayn Rand

12) their animosity (and/or indifference) towards Ayn Rand and Objectivism.

Murray Rothbard has expressed animosity towards Ayn Rand and Objectivism, and too many “Austrians” follow in his footsteps here. I won’t go into this, except for saying that I think Rothbard’s attacks are completely unfounded. But then, so are Salsman’s (and some other Objectivists’) attacks on George Reisman. I think it is time to put personal animosity aside and focus on the actual issues!

Ayn Rand’s View of the “Austrians”

A word, too, on Ayn Rand’s own view of “Austrian” economics (and economists):

It is true that she was highly (even “scathingly”) critical of some of their ideas. I think that my own criticisms about praxeology are criticisms she would agree with. But when once asked what she thought about the “Austrian” school, this was her short and succinct answer:

I think they are a school that has a great deal of truth and proper arguments to offer about capitalism – especially von Mises – but I certainly don’t agree with them in every detail, and particularly not in their alleged philosophical premises. They don’t have any, actually. They attempt – von Mises particularly – to substitute economics for philosophy. That cannot be done. (Ayn Rand Answers, p.  43.)

The only thing I might object to here is the statement that they do not have philosophical premises, because praxeology is an attempt to lay a philosophical groundwork. But it is a flawed philosophy.[7]

As Salsman notes, she never recommended Hayek, and she was in fact highly (even “scathingly”) critical of Hayek. This is a quote from Letters of Ayn Rand:

As an example of the kind of “almost” I would tolerate, I’d name Ludwig von Mises. […] As an example of our most pernicious enemy, I would name Hayek. That one is real poison. (P.  208, in a letter to Rose Wilder Lane.)

I would not go so far as to call him pure poison, but as you know, poison can kill also in small doses. And “in every compromise” …well, you know the quote.

If you have read Hayek’s book The Fatal Conceit, you know some of the poisonous ideas put forth. Its theme is that the bad thing about socialism is that it relies too much on reason. And he subscribes to possibly the worst ethical theory ever propounded: David Hume’s idea that “the conclusions of ethics are not the conclusions of our reason”.

Hayek’s reasoning in this book is very tortuous; I have tried to sort it out myself, but I have only written about it in Swedish.

A personal favorite from the “Marginalia” book is this: Hayek writes in the beginning of The Road to Serfdom:

Though this is a political book, I am as certain as anyone can be that the beliefs set out in it are not determined by my personal interest.

And Ayn Rand comments:

The damn fool! He’s crawling to begin with. Why should a man apologize for a “personal interest”?

Another “Austrian” she had a low opinion of was, of course, Murray Rothbard. Apart from Rothbard’s anarchism, which she was opposed to, the reason for it was an immoral act committed by Rothbard, and his subsequent vile attacks on her.

(My own view of Rothbard is that he is good as long as he keeps to economics, but a disaster in other areas. Again, if you are a Scandinavian, you can read what I have written about him.

So what, then, was her view of George Reisman? Well, one essay by Reisman (“Platonic Competition”) was published in her own periodical The Objectivist! And another one, “The Revolt Against Affluence: Galbraith’s Neo-Feudalism”, was reprinted in pamphlet form by The Objectivist; it had originally been published in Human Events in 1961. (Reisman told me in a mail that “Ayn Rand went out of her way to urge the editor of Human Events to publish” this essay. Would she have published them, if she had a low opinion of him?

Later on, several essays by Reisman were published in The Objectivist Forum and The Intellectual Activist, which were the leading Objectivist publications in those days. Also, his book The Government Against the Economy was favorably reviewed in both these publications.

Salsman’s contention that Reisman is a Kantian is too bizarre and too low for words.

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Another commentator:

Reisman a Kantian? That is bizarre. I love his articles on mises.org. He seems like he has his feet firmly rooted in reality. [True.]

I don’t know why Salsman considers him a Kantian, and I don’t want to wreck my brain trying to figure it out. Salsman has a record of being unfair to Reisman, anyhow.

It is of course possible that Salsman takes exception to the Kantian ingredients in praxeology and then lets this criticism “spill over” on Reisman – not noticing (or simply ignoring) the fact that Reisman also takes exception to praxeology. But this is just an educated guess.


This completes my answer to Salsman’s twelve objections. Hopefully, sometime in the future, I will be able to write something more integrated on the pros and cons of praxeology.

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Finally, I cannot resist quoting this short “review” which I received by mail from Wladimir Kraus:

I liked your piece very much. It’s forceful and to the point. If an Objectivist, after having read your analysis, still finds the nerve to believe and propound Salsman’s nonsense about the Austrian school and George Reisman in particular, he’s either fool or dishonest fool. Outstanding!

[1] More on this in my blog post Induction in Economics.

[2] According to Reisman, economics is

the science that studies the production of wealth under a system of division of labor, that is, under a system in which the individual lives by producing, or helping to produce, just one thing or at most a very few things, and is supplied by the labor of others for the far greater part of his needs. (Capitalism, p. 15.)

And later:

To claim that economics is […] a science of human choices rather than of wealth is to confuse an aspect of the science with its totality. (P. 42.)

And in a private letter to me in 1996, he wrote:

In answer to [a question I had asked], my discussions of Mises with Ayn Rand led to my abandonment of the “praxeological approach” to economics and my efforts to reinstate wealth as the central concern of the subject.

[3] See on this also my blog post Is Action an A Priori Category?

[4] It should be noted that Ludwig von Mises, too, was opposed to this practice. See Chapter 18 (p. 355–375) in The Theory of Money and Credit. And see this quote from the same book:

Now it is obvious that the only way of eliminating human influence on the credit system is to suppress all further issuance of fiduciary media [i.e. “fractional” money]. (P. 447.)

“Human influence” here means “government influence”.

Menger and Böhm-Bawerk did not write about “fiduciary media” or “fractional reserve banking”. Mises book (published in 1912) was the first attempt at applying the “Austrian” theory to this issue.

[5] I have since written several blog posts on this subject:

Fractional Reserve Banking Yesterday and Today
More on Fractional Reserve Banking
A Belated Open Letter to Ayn Rand on Fractional Reserve Banking
Debating Fractional Reserve Banking
A Short Note on Fractional Reserve Banking
Precious Metals Inflation?
Is Fractional Reserve Banking Compatible with Objectivism?

[6] Reisman’s refutation of the doctrines of “imputed income” and “opportunity cost” is in Capitalism, pp. 456–462.

[7] More on this in my blog post Rand and Mises on the Importance of Philosophy.

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