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‘..disregarded the subjectivist revolution..’

‘..antiquated patterns of thinking have been at the root of a very powerful backlash against subjectivism, and this reaction is still noticeable today..’

Nevertheless in economics antiquated patterns of thinking have been at the root of a very powerful backlash against subjectivism, and this reaction is still noticeable today. Thus it is not surprising that Frank H. Knight, one of the most important authors of one of the two “objectivist” schools we will critically examine in this chapter, has stated:

Perhaps the most serious defect in Menger’s economic system . . . is his view of production as a process of converting goods of higher order to goods of lower order.2

We will now consider the ways in which the ideas of the Classical School have continued to predominate in the Monetarist and Keynesian Schools, the developers of which have thus far disregarded the subjectivist revolution started in 1871. Our analysis will begin with an explanation of the errors in the concept of capital proposed by J.B. Clark and F.H. Knight. Then we will critically examine the mechanistic version of the quantity theory of money supported by monetarists. Following a brief digression into the school of rational expectations, we will study the ways in which Keynesian economics, today in the grip of a crisis, shares many of the theoretical errors of monetarist macroeconomics.3

- Jesús Huerta de Soto, Money, Bank Credit, And Economic Cycles (pdf) page 511 and 512

Notes

[2] Frank H. Knight, in his introduction to the first English edition of Carl Menger’s book, Principles of Economics, p. 25

[3] The following words of John Hicks offer compelling evidence that the subjectivist revolution sparked off by the Austrian School lay at the core of economic development until the eruption of the neoclassical-Keynesian “counterrevolution”:

I have proclaimed the “Austrian” affiliation of my ideas; the tribute to Böhm-Bawerk, and to his followers, is a tribute that I am proud to make. I am writing in their tradition; yet I have realized, as my work has continued, that it is a wider and bigger tradition than at first appeared. The “Austrians” were not a peculiar sect, out of the main stream; they were in the main stream; it was the others who were out of it. (Hicks, Capital and Time, p. 12)

It is interesting to observe the personal scientific development of Sir John Hicks. The first edition of his book, The Theory of Wages (London: Macmillan, 1932), reflects a strong Austrian influence on his early work. Chapters 9 to 11 were largely inspired by Hayek, Böhm-Bawerk, Robbins, and other Austrians, whom he often quotes (see, for example, the quotations on pp. 190, 201, 215, 217 and 231). Hicks later became one of the main architects of the doctrinal synthesis of the neoclassical-Walrasian School and the Keynesian School. In the final stage of his career as an economist, he returned with a certain sense of remorse to his subjectivist origins, which were deeply rooted in the Austrian School. The result was his last work on capital theory, from which the excerpt at the beginning of this note is taken. The following statement John Hicks made in 1978 is even clearer, if such a thing is possible: “I now rate Walras and Pareto, who were my first loves, so much below Menger.” John Hicks, “Is Interest the Price of a Factor of Production?” included in Time, Uncertainty, and Disequilibrium: Exploration of Austrian Themes, Mario J. Rizzo, ed. (Lexington, Mass.: Lexington Books, 1979), p. 63.

Context

Ethical Affective Ambiance in the Electric Universe - Production of Money, Prices and Market

Affective Introspection