Steven Horwitz

Quotes From

Microfoundations and Macroeconomics (2000)

• By rigidly tying the quantity of money in use to the costs of producing specie, rather than the demand to hold money, 100 percent reserve banking uses signals from another market to guide the production of money, rather than relying on signals that could be provided about the demand for what they are producing in their own market. #
• Fundamentally, the advantage of free banking over central banking in maintaining monetary equilibrium is that free banking is not dependent on the centralization of information in order to generate the appropriate supply of money.#
• Keynes’ theoretical framework is constructed on the two assumptions of wage and monetary rigidity, without ever asking whether institutional changes that would make those assumptions inappropriate might better address the problems Keynes is trying to solve.#
• Where Keynesian approaches would see the difficulty as an inability to demand (a lack of ‘aggregate demand’), Hutt’s approach would argue that it is an unwillingness or inability to supply (at the market clearing price) that is starting the process.#
• We can talk of money’s ‘income velocity’, which refers to the demand to hold money relative to income, and we can talk of the ‘demand for money’ in the sense of the absolute amount of money people hold.#
• The analog of forced saving during inflation, is that there is what we might term ‘forced investment’ during deflation. That forced investment takes the form of unplanned inventory accumulations and unintended excess productive capacity.#
• Forced savings are the forced reduction in the purchasing power of non-recipients of excess supplies of money.#
• The assumption in most textbook Keynesian models of a fixed price level, or of a one-commodity world, is completely consistent with Keynesian treatments of the money- interest relationship. If the results of monetary excesses and deficiencies are all borne by the interest rate, where can one fit in the price level? Conversely, if one assumes the price level is fixed, then the adjustments to monetary disequilibria must take place through some other variable. #
• In Keynesian models, any excess supply of money that finds its way into the hands of consumers will be put into the bond market, driving up bond prices and driving down interest rates.#
• In a world where money was absent, the kinds of intertemporal exchanges we see in a monetary economy, not to mention the very capital goods that are the ultimate objects of those exchanges, would simply not exist. Conducting such a thought experiment seems to assume that the introduction of money would not change the (intertemporal) structure of the economic system. In other words, the system with money would look essentially like the system without it. This seems fundamentally at odds with an Austrian theoretical perspective that views the monetary economy as fundamentally different from a barter world. The existence of money enables the kind of calculative behavior that characterizes successful economic action and would be absent in any ‘realistic’ barter economy. Whatever validity there might be to the intuition behind the idea of the natural rate, from an Austrian perspective it should not be grounded in a money-barter comparison.#
• The value of capital is often more dependent on the overall complementarity of the capital structure (or its composition) than on the sheer quantity of physical equipment.#
• The concept of capital refers to the place of particular physical objects within the plan of the actor in question. Thus capital cannot be defined in terms of the physical qualities of the object, but rather its purpose or role in the plans of its possessor.#

“Beyond equilibrium economics: reflections on the uniqueness of the Austrian tradition” (1994)

• Consider what it would mean for human evolution to tend toward a final state. No biologist would ever say that we need to have a concept of a “fully evolved” human to understand the process of evolution. It would also seem questionable to attempt to explain evolution as a process “tending toward” such a being. That would necessitate both constructing the being and explaining the process. Similarly, the evolutionary process in economics does not refer to an end-state, but instead explains how creativity leads to complexity, while retaining a sufficient degree of coordination to make the complexity beneficial.#
• Market clearing arises when quantity supplied equals quantity demanded. Market equilibrium is achieved when the above holds, as well as an equality of marginal rates of substitution across all goods and factors, thus allowing price to equal marginal cost.#
• The equilibrium benchmark can only be justified if we take “equilibrium” to mean market clearing, rather than general equilibrium. Certainly market clearing is essential for a theory of market order. In any given market there is a tendency for supply to meet demand, but this is quite different from the mechanical metaphor of equilibration. While equilibrium implies market clearing, market clearing does not imply equilibrium, with all of its questionable assumptions. #

“Monetary Calculation and Mises’ Critique of Planning” (1998)

• Economic calculation is only necessary in a world where capital goods are understood to be heterogeneous and only possible where those heterogeneous capital goods are privately owned and exchanged for money in a genuine market.#
• Regimes that avoid inflation and deflation are to be desired not just because they stabilize the aggregate price level and ease the expectational burden on actors, but because they prevent socially unnecessary disturbances to individual money prices that undermine their ability to serve as knowledge providers in disequilibrium.#
• The Mises notion of appraisement is simply the entrepreneur spotting what he perceives as current disequilibria by creatively imagining a more equilibrating future constellation of prices. This, of course, is also the role of Kirzner’s entrepreneur.#

“Monetary Exchange as an Extra-Linguistic Social Communication Process” (1992)

• The “accuracy” of a specific price then is not a matter of corresponding to qualities in a good – or the non-monetarily expressed wants of humans – but simply a matter of finding itself in an orderly relationship with the complex of other prices that constitute a market.#
• [R]ules and traditions pre-form the ways in which we act and understand in the world. . . . [T]his is not a disadvantage of rules and traditions, because there is nothing to compare them to by which they fall short. To the contrary, this is the great power of rules and traditions; it is they that make all other reason and knowledge possible.#
• Communication in language is not a veil for reality; it is reality.#
• Language and money do not reveal some pre-existing mental constructs or preferences [respectively], rather they constitute the way in which we express those constructs and preferences. Just as we cannot help but think in terms of the words that language provides us, we cannot help but act in the market in terms of the money prices of what we want to exchange.#
• We can either observe the behavior of others, judge its success and choose to imitate it, or we can enter a verbal or textual conversation with others and rely on the persuasive powers of their articulate thoughts to provide us with knowledge. Mises argues that imitation is, in general, a more plausible way to communicate the benefits of social institutions than is articulate persuasion.#
• Not only is saleability itself not inherent in goods, knowledge of such saleability is not given to those who trade such goods. Saleability is ultimately determined by the mental processes of market actors, and the discovery of degrees of saleability is a process of drawing out and interpreting accessible traces of the contextual knowledge of those other minds, rather than uncovering some objective (outside the human mind) piece of information.#
• A market characteristic of a good, such as saleability or scarcity in comparison to wants, is not a piece of objective information in Menger’s theory. Rather, such knowledge can only be discovered and constituted through the actual process of economic exchange.#

“From The Sensory Order to the Liberal Order: Hayek’s Non-rationalist Liberalism” (2000)

• If indeed we were all the hyper-rational agents that general equilibrium theory assumes we are, then the very need for market institutions would disappear.#
• Changes in the prices of capital goods signal changes in the knowledge that underlies entrepreneurial plans and expectations.#
• If the mind can never exhaustively describe and know itself, any one mind or group of minds can surely never direct economic processes that can only be understood in terms of the phenomenal pictures (i.e., expectations) held in the minds of all of the actors in the economy.#
• Human actors require constitutional constraints because we are epistemologically unable to generate social order in any other way.#