Saturday, May 3, 2014

When Murray Rothbard Schooled James Buchanan on Basic Economic Theory and Method

Rothbard_56_Sennholz_dinnerWorking for the Volker Fund during the 1950s and early 1960s provided Murray Rothbard with the opportunity to read and write reviews and memos on hundreds of books on the social sciences, especially economic theory and political economy. Happily this amazing treasure trove of Rothbardiana is available in the Rothbard archives housed at the Mises Institute.
While employed by the Volker Fund, Rothbard was also hard at work researching and writing his great treatise on economic theory,  Man, Economy, and State with Power and Market. Rothbard thus was not only reading widely but also thinking deeply about economic theory and method, as he sought to deduce new theorems to advance the mainline Austrian theoretical tradition originated by Carl Menger. This tradition included not only native Austrians like Bohm-Bawerk, Mises, and Hayek but Anglo-American economists such as Philip Wicksteed, Edwin Cannan, Lionel Robbins, William Hutt, John Bates Clark, Frank A. Fetter, and Herbert Davenport.[1]
In 1960, the 34-year old Rothbard read an economic textbook by Clark Lee Allen, James M. Buchanan, and Marshall R. Colberg.[2] In a memo to Ivan R. Bierly of the Volker Fund, Rothbard wrote:
 “The more I read of the general, all-around works of the ‘Chicago School’ of economics, the less I am impressed.”[3] Regarding the Allen, Buchanan, and Colberg book in particular, Rothbard commented, “I was impressed neither by the technical economic analysis nor by the more politico-economic sections.” 
Rothbard found fault with much of the policy analysis in the book as applied, for example, to cyclical instability and unemployment, the gold standard, monopoly, public utility regulation, collective goods, foreign aid, and taxation for egalitarian purposes. Rothbard concluded his discussion of the politico-economic aspects of the book with the following observation:
[I] think it important to emphasize that this book brings home as few have done to me how much can go wrong if one’s philosophical approach—one’s epistemology—is all wrong. At the root of all the troubles of the book lies the weak, confused, and inconsistent positivism: the willingness to use false assumptions if their ‘predictive value’ is of some use. It is this crippling positivist willingness to let anything slip by, to not be rigorous about one’s theory because ‘the assumptions do not have to be true or realistic anyway,’ that permeates and ruins this book.[4]
Rothbard gave Bierly an example of how this “pervading positivist epistemology” vitiated the technical analysis of Buchanan et al.[5] The authors constructed a “fixed-demand” curve, i.e., a perfectly inelastic or vertical demand curve. This construction was supposed to provide a counterpart to the fixed-supply curve which economists regularly and properly employed in analyzing the market in the immediate run for a good which has no use value to the seller and is either perishable or has an expected future price of zero. To illustrate the vertical demand curve construction, Buchanan et al., supposed a situation in which the number of volunteers is insufficient to fulfill the fixed demand of government for military personnel so that the government must resort to drafting the rest. To begin with, as Rothbard pointed out, coercing military service via the draft is inconsistent with the economic concept of demand. But even if the authors’ premise that the draft can be analyzed using supply and demand is granted Rothbard argued that their conclusion is absurd.
Rothbard illustrated his argument with the following example. Suppose that the government wants 100,000 men in its army but there are only 60,000 potential draftees available for various reasons. This would mean that the supply curve would become vertical to the left of the vertical demand curve, and the two curves would therefore never intersect to yield a determinate price or quantity. In this case there would be no exchange and, therefore, as Rothbard observed to Bierly, “On the authors’ own premises, then, no one would be in the army, which is clearly absurd.”[6]
Now interestingly, prior to drafting his memo to Bierly, Rothbard had written to Buchanan asking him to clear up this point, posing a similar example:
[I]f we grant that the government’s demand curve is vertical at 100,000 men, suppose then that no more than 60,000 men, say, can be obtained, even with the use of the draft—suppose that the other 40,000 were all 4-F or died in a plague. In that case the supply curve reaches its vertical at 60,000. . . . Must we now come to the conclusion that no exchanges take place? That no men will go into the army? This is clearly absurd.[7]
Buchanan’s response was enlightening. He conceded Rothbard’s point that the analysis leads to an absurd conclusion but justified his flawed construction on positivist grounds. Thus Buchanan wrote:
Your letter points up the limitations of applying too literally many of our analytical tools. You are quite right in saying that the solution to which the fixed demand tends to lead under your assumptions is absurd. But this is really the same in all of those cases in which we make rather extreme assumptions. . . . At best, the fixed demand and fixed supply models are useful in that they isolate certain forces, and in a few cases, the models themselves are useful for predictive purposes.[8]
Buchanan went on to compare the fixed-demand case to the fixed-supply case, which “many textbooks have used to illustrate rent control problems.” Had Buchanan been as familiar with the literature as Rothbard and read, for example, Wicksteed or even his contemporary Kenneth Boulding,[9] he would have realized that the two cases are by no means comparable and that the vertical supply curve is realistic and useful in economic analysis and does not lead to absurd conclusions. In any case, Buchanan weakly concluded, “I simply tried to reverse the process [of applying a fixed supply curve] and the draft example was the only thing that occurred to me as remotely suitable for illustration.”
As this exchange between Rothbard and Buchanan indicates, Rothbard was deeply immersed in technical economic theory, which always informed his politico-economic positions. [10] It also reveals how profoundly interested Rothbard was in defending economic theory not only against hardcore Friedmanite positivism but also against the “inconsistent positivism” casually embraced by economists like Buchanan who were willing to formulate or accept flawed theoretical constructs that were thought to possess “predictive value.”

[1] On the Mengerian causal-realist tradition in economics, see Joseph T. Salerno, “The Place of Mises’s Human Action in the Development of Modern Economic Thought,” The Quarterly Journal of Austrian Economic, vol. 2, no. 1 (Spring 1999): 35–65.
[2] Clark Lee Allen, James M. Buchanan, and Marshall R. Colberg, Prices, Income and Public Policy
, 2nd ed. (New York: McGraw-Hill, 1959).
[3] “Untitled Letter Critical of Chicago School Economics,” in Strictly Confidential: The Private Volker Fund Memos of Murray N. Rothbard, ed. David Gordon (Auburn Alabama: Ludwig Von Mises Institute, 2010), p. 295
[4] Ibid., p. 298.
[5] Ibid., pp. 299-300.
[6] Ibid., p. 300.
[7] Murray N. Rothbard, Letter to James M. Buchanan, January 25, 1960, Rothbard Archives, Box # DC24, Accession #002.
[8]James M. Buchanan, Letter to Murray N. Rothbard, January 28, 1960, Box # DC24, Accession #002.
[9] Philip H. Wicksteed, The Common Sense of Political Economy and Selected Papers and Reviews on Economic Theory., 2 volumes (London: Routledge and Kegan Paul, 1933), I, 213-38; II, 493-526 and 784-88.; and Kenneth Boulding, Economic analysis
(New York: Harper & Bros., 1947), pp. 51-80.
[10] For Rothbard’s mastery of the contemporary economic literature and his achievements in developing the technical theoretical apparatus of causal-realist economics, see Joseph T. Salerno, Introduction to Murray N. Rothbard, Man, Economy, and State with Power and Market, Scholars Edition, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2009), pp. xix-l.

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