The Liberal Economic Order. Vol 2 Money Cycles and Related Themes

[Front Matter and Series Introduction]: Title pages and series introduction for 'The Liberal Economic Order, Volume II'. It introduces the 'Economists of the Twentieth Century' series edited by Mark Perlman and Mark Blaug, which aims to collect significant articles by influential modern economists to help researchers navigate the proliferation of economic journals. [Title Page and Publication Details]: Publication details, copyright information, and cataloging data for the volume. It identifies Gottfried Haberler as the author and Anthony Y. C. Koo as the editor, noting Haberler's affiliation with the American Enterprise Institute. [Table of Contents]: The table of contents for Volume II, divided into two parts: 'Essays in the History of Economics' and 'Index Numbers, Money and Cycles'. It lists chapters covering thinkers like Fisher, Schumpeter, and Marx, as well as thematic essays on monetary stability, the Great Depression, and stagflation. [Part I: Essays in the History of Economics - Irving Fisher's Theory of Interest]: Opening header for the first part of the book and the beginning of the first essay focusing on Irving Fisher's contributions to the theory of interest. [Irving Fisher's Theory of Interest: Introduction and Résumé]: Haberler introduces Irving Fisher's revised presentation of his interest theory, addressing criticisms regarding the role of productivity. He provides a résumé of Fisher's argument, starting from the definitions of psychic, real, and money income. The segment outlines Fisher's three approximations of interest determination: the first involving fixed income streams and consumers' credit, the second introducing 'investment opportunity' and producers' credit, and the third incorporating risk. [Critical Analysis of Fisher's Theory: Income and Productivity]: Haberler critiques Fisher's formal structure, specifically questioning the measurability of psychic income and the distinction between spending and investing. He examines the role of productivity (yield-increase from roundabout processes) in Fisher's theory, comparing it to Böhm-Bawerk's 'third ground' of technical superiority. Haberler argues that the differences between Fisher and Böhm-Bawerk are largely terminological, particularly regarding the independence of the technical superiority of present goods. [Fisher, Schumpeter, and the Monetary Connection]: Haberler explores the compatibility of Fisher's theory with Schumpeter's dynamic interest theory, rejecting the notion that interest would be zero in a static society. He criticizes Fisher for failing to integrate interest into the broader capitalistic production process and for neglecting the 'institutional factors' of banking. He contrasts Fisher's view on money interest with Wicksell's 'natural rate' and mentions the developments by Mises and Hayek regarding artificial interest rate reductions and economic crises. [Notes to Irving Fisher's Theory of Interest]: Footnotes and citations for the essay on Irving Fisher's theory of interest, including references to Brown, Seager, Fetter, Flux, and Hayek. [Joseph Alois Schumpeter, 1883–1950: Biography and Early Life]: A comprehensive biographical account of Joseph Schumpeter's early life, education in Vienna, and his emergence as a universal scholar. Haberler details Schumpeter's time at the Theresianum and the University of Vienna, his participation in Böhm-Bawerk's famous seminar alongside future socialist leaders like Otto Bauer and Rudolf Hilferding, and his early academic appointments in Czernowitz and Graz. The segment highlights Schumpeter's intellectual independence and his early mastery of mathematics, history, and sociology. [Schumpeter's Intellectual Independence and Early Works]: Haberler discusses Schumpeter's intellectual influences, noting his high regard for Leon Walras and his refusal to be categorized by the 'Austrian school' or the Methodenstreit. He reviews Schumpeter's 'sacred fertility' in his third decade, producing seminal works on economic development, dogmengeschichte, and sociology. The segment emphasizes Schumpeter's early crystallization of views on interest, saving, and the social classes, which remained consistent throughout his career. [Schumpeter's Political Career: Minister of Finance]: This segment details Schumpeter's brief and turbulent foray into politics as the Austrian Minister of Finance in 1919. Haberler defends Schumpeter against charges of being a socialist, explaining his conservative fiscal plans, including a proposed capital levy and foreign loans to stabilize the currency. He describes the political chaos of post-WWI Austria, Schumpeter's conflicts with the Social Democrats over socialization and the 'Anschluss' with Germany, and the eventual failure of his financial program amidst hyperinflation. [Schumpeter's Later Career: Bonn and Harvard]: Haberler covers Schumpeter's return to academia, first in Bonn and then permanently at Harvard from 1932 until his death in 1950. He describes Schumpeter's immense productivity during this period, including the publication of 'Business Cycles' and 'Capitalism, Socialism and Democracy'. The segment touches on his personal life, his marriage to Elizabeth Boody, his political isolation during World War II due to his anti-war and anti-propaganda stance, and his final work on the 'History of Economic Analysis'. [Schumpeter's Contribution to Economics: The Grand Design]: Haberler provides a preliminary appraisal of Schumpeter's scientific achievements, focusing on his 'grand design' of the capitalist process. He contrasts Schumpeter's dynamic model of 'creative destruction' and innovation with the static equilibrium models of Walras and Böhm-Bawerk. The segment explores Schumpeter's views on the institutional nature of interest, the role of the entrepreneur, and his intellectual affinity with Marx regarding the historical and social evolution of the economic system. [The Disintegration of Capitalism and the Absence of a 'Schumpeter School']: Haberler discusses Schumpeter's thesis on the inevitable socio-political disintegration of capitalism and his refusal to found a 'school' of thought. He compares Schumpeter with Keynes and Marshall, noting that Schumpeter's lack of a 'message' or reformist zeal, combined with his complex, 'baroque' style and universal understanding of all viewpoints, prevented the formation of a compact group of disciples. The segment concludes with Schumpeter's own philosophy that economics should be a science without schools. [Notes to Joseph Alois Schumpeter Biography]: Footnotes for the biographical essay on Joseph Schumpeter, providing details on his ancestry, his views on legal education, and his early statistical seminar work under Inama-Sternegg. [Footnotes and Biographical Notes on Schumpeter and Contemporaries]: A collection of detailed footnotes (8 through 84) providing biographical context, publication history, and intellectual commentary on Joseph Schumpeter's life and work. It covers his relationships with the Austrian School (Böhm-Bawerk, Wieser, Menger), his tenure as Minister of Finance, his views on the 'tax state' (Steuerstaat), and his sociological theories on imperialism and social classes. The notes also contrast Schumpeter's theories with those of Keynes and Marx, and provide context for his major works like 'Capitalism, Socialism and Democracy'. [Bibliography of the Writings of Joseph A. Schumpeter: Books and Pamphlets]: A comprehensive list of books and pamphlets authored by Joseph Schumpeter, including various editions and translations (Japanese, Italian, English, French, Spanish). Key works listed include 'Theorie der wirtschaftlichen Entwicklung', 'Business Cycles', and 'Capitalism, Socialism and Democracy', along with posthumous projects like 'History of Economic Analysis'. [Bibliography of the Writings of Joseph A. Schumpeter: Articles and Reviews]: A chronological bibliography of Schumpeter's articles, book reviews, and review articles spanning from 1905 to 1950. It documents his contributions to major journals such as the Economic Journal, Zeitschrift für Volkswirtschaft, and the American Economic Review, covering topics from mathematical methods and price formation to appraisals of other great economists. [Marxian Economics in Retrospect and Prospect]: Opening of a new section or chapter titled 'Marxian Economics in Retrospect and Prospect', likely authored or edited by Elizabeth B. Schumpeter. [Marxian Economics in Retrospect and Prospect: Introduction and Theory of Value]: Haberler introduces a critical retrospective on Marxian economics, marking the anniversaries of the First International and the third volume of Das Kapital. He focuses strictly on Marx as an economist, setting aside his roles as a sociologist or philosopher. The section examines the internal contradictions of the Marxian theory of value and price, specifically the tension between the labor theory of value presented in Volume I and the cost-of-production theory in Volume III. Haberler highlights how Marx attempted to reconcile the 'rate of surplus value' with the reality of equalized profit rates across industries with different capital compositions. [The Critique of Marxian Value Theory: Böhm-Bawerk and Samuelson]: This segment details the intellectual refutation of Marxian value theory, primarily through the work of Eugen von Böhm-Bawerk and later Paul Samuelson. Haberler argues that Böhm-Bawerk successfully demonstrated the irreconcilable contradiction between Marx's first and third volumes. He further asserts that Marxian economics is 'operationally sterile,' noting that even Soviet planners have had to move toward 'bourgeois' neoclassical concepts like interest rates and comparative cost to manage their economies effectively. The section concludes that while neoclassical analysis is useful for resource allocation in any system, it cannot replace the incentives of a free-market system. [Marx's Economic Prophecies: Immiserization and Imperialism]: Haberler evaluates Marx's specific economic prophecies, focusing on the theory of the 'increasing misery' (immiserization) of the working class and the theory of economic imperialism. He argues that historical data on rising real wages in capitalist countries refutes the immiserization thesis, forcing Marxists to pivot to 'relative' misery or the exploitation of colonies. Haberler critiques the theory of imperialism by pointing out that former colonial powers like the Netherlands and non-colonial powers like Switzerland have prospered without empires. He also addresses and dismisses the non-Marxist 'terms of trade' arguments popularized by Myrdal and the UN. [Depressions and the Breakdown of Capitalism]: This section examines the Marxian prophecy that capitalist depressions would become increasingly severe, leading to an eventual breakdown. Haberler argues that the Great Depression of the 1930s was not an inherent feature of capitalism but the result of 'incredibly inept' monetary and fiscal policies. He critiques the 'secular stagnation' thesis and the 'Marxo-Keynesian' synthesis, asserting that modern understanding of monetary management makes the 'inevitable' collapse of capitalism due to cycles highly unlikely. He notes that even Marxists now argue that capitalists will 'refuse' to adopt stabilizing policies, which is a departure from Marx's original endogenous breakdown theory. [Concluding Remarks on the Marxian System]: Haberler concludes by reaffirming Böhm-Bawerk's 1896 judgment that the Marxian economic system is a 'house of cards' with no abiding future. He distinguishes between Marxism as a revolutionary movement and as an economic theory, noting that even socialist parties and communist states are abandoning Marxian dogmas. Paradoxically, he quotes the Communist Manifesto to show that Marx and Engels themselves provided a glowing description of capitalism's power to develop productive forces. He maintains that while Marx will remain a prominent figure in intellectual history, his economic system is closed and will not be reopened. [Notes to Marxian Economics in Retrospect and Prospect]: Comprehensive endnotes for the chapter on Marxian economics. Includes citations for the correspondence of Marx and Engels, critiques of Ricardo, detailed discussions of Bortkiewicz's role in the value debate, and references to modern empirical studies on terms of trade (Lipsey) and monetary history (Friedman and Schwartz). It also clarifies the German terminology for the immiserization theory (Verelendungstheorie). [Introduction to Schumpeter's Capitalism, Socialism and Democracy after Forty Years]: Haberler introduces a retrospective analysis of Schumpeter's 'Capitalism, Socialism and Democracy' forty years after its publication. He highlights Schumpeter's provocative thesis that capitalism's success, rather than its failure, leads to its inevitable decomposition into socialism. The segment contrasts Schumpeter's views with those of Marx and the Austrian school regarding the feasibility and efficiency of socialist regimes. [Schumpeter's Style and the Genesis of the Book]: This section examines the historical and personal context in which Schumpeter wrote CSD during World War II. Haberler describes Schumpeter's complex writing style and his deep pessimism regarding the political atmosphere in wartime Washington, specifically his aversion to Roosevelt's New Deal and the Morgenthau Plan for Germany. It also discusses Schumpeter's views on the rise of Soviet power and the unexpected postwar economic recovery of Europe. [The Intellectual Atmosphere and the Great Depression]: Haberler analyzes the intellectual climate of the 1930s and 40s, noting the confluence of Keynesian and Marxian thought. He explains Schumpeter's unique interpretation of the Great Depression as a result of 'adventitious circumstances'—such as inept New Deal policies and banking failures—rather than an inherent failure of the capitalist system. The segment also addresses Schumpeter's relative silence on Nazism and his rejection of the theory that Fascism was a late form of capitalism. [The Conceptual Framework and Economic Achievements]: Haberler clarifies Schumpeter's definitions of capitalism, commercial society, and socialism. He explores Schumpeter's defense of monopoly as a necessary 'bait' for innovation and his critique of the neo-Marxian theory of imperialism. The section emphasizes Schumpeter's belief in the civilizing power of capitalism and his rejection of the 'secular stagnation' thesis popular among Keynesians. [The Downfall of Capitalism and the Role of Intellectuals]: This segment details Schumpeter's sociological theory regarding the demise of capitalism. He argues that capitalism destroys the protective social strata (like the aristocracy and small business owners) that sustain it. Central to this is the rise of the 'intellectual' class, which, enabled by capitalist affluence and education, organizes resentment against the capitalist order and radicalizes the labor movement. [Socialism, Democracy, and Economic Efficiency]: Haberler critiques Schumpeter's claims regarding the superior efficiency of socialism and its compatibility with democracy. He argues that historical evidence from the late 20th century (e.g., East vs. West Germany) refutes the efficiency of central planning. He concludes by discussing the 'march into socialism' through high taxation and regulation, while suggesting a possible 'convergence' or a reversal of the trend through modern tax revolts. [Notes and References for Schumpeter's Vision]: Comprehensive endnotes and references for the chapter on Schumpeter. Includes detailed anecdotes about Keynes, the New Deal, the German economic miracle, and Schumpeter's personal political views, alongside a full list of cited academic works. [A New Index Number and Its Meaning: Mr Snyder's Broad Index]: Haberler introduces and evaluates Carl Snyder's broad composite index of the general price level, which includes retail, wholesale, services, real estate, and wages. While praising its statistical technique, he questions its theoretical significance and economic interpretation. [The Plurality of Price Level Concepts]: Haberler argues against the assumption of a single universal price level. He asserts that different purposes, such as measuring real income or guiding monetary policy, require distinct index numbers and definitions of the price level. [Index Numbers for Measuring Real Income]: This section discusses the technical and theoretical challenges of using index numbers to compare real incomes across different periods or social classes. Haberler analyzes the mathematical limits of Laspeyre's and Paasche's formulas, the use of Fisher's ideal formula, and the necessity of excluding non-consumable goods from such indices. [The Inclusion of Wages and Producers' Goods in Indices]: Haberler critiques the inclusion of wages and producers' goods in general price indices intended for measuring real income or deferred payments. He contrasts the 'commodity standard' with the 'labour standard' and explains why Snyder’s broad index is unsuitable for these specific economic adjustments in an advancing society. [Price Indices and Business Cycle Theory]: Haberler examines the role of price indices as symptoms of business cycles. He argues that modern cycle theory relies on specific price combinations and chronological successions rather than a single broad index, which tends to submerge relevant price movements. [The Equation of Exchange and Rapidity of Circulation]: Haberler critiques the 'equation of exchange' (MV=PT) as a tautology but acknowledges the utility of Snyder's index for indirectly measuring the rapidity of money circulation. He concludes that the index's true value lies in quantitative economic research rather than practical monetary policy guidance. [Notes to Chapter 5]: Footnotes for Chapter 5, providing bibliographic references to works by Snyder, Haberler, Walsh, and Schumpeter. [Monetary Equilibrium and the Price Level in a Progressive Economy]: Co-authored with Karl Bode, this section critiques R.F. Harrod's thesis that monetary equilibrium in a progressive economy is consistent with a stable price level. Haberler examines the assumptions regarding cash balances, hoarding, and the definitions of saving and investment used by Harrod and Kaldor. [The Concept of Saving: Harrod vs. Keynes and Robertson]: Haberler analyzes Harrod's 'unusual' definition of saving, which includes capital appreciation. He contrasts this with the monetary concepts of Keynes and Robertson, arguing that Harrod's failure to define investment in conformity with his definition of saving undermines his critique of neutral money theory. [Notes to Chapter 6]: Footnotes for Chapter 6, detailing the correspondence and academic debate between Harrod, Robertson, Kaldor, and others regarding credit expansion and saving. [The Interest Rate and Capital Formation: Classical Optimism]: Haberler discusses the relationship between interest rates, saving, and investment. He outlines the 'optimistic' classical view, which assumes a highly elastic demand for capital and an inexhaustible supply of investment opportunities, contrasting it with the short-run fluctuations analyzed in cycle theory. [Pessimism Regarding Investment Opportunities]: This section explores the 'pessimistic' view of secular stagnation, where investment opportunities are thought to be dwindling. Haberler distinguishes between technological limits, institutional frictions (like regulation and taxes), and cyclical collapses, questioning whether a physical lack of opportunities truly exists. [Liquidity Preference and the Interest Rate Floor]: Haberler critiques Keynes's theory of a liquidity-determined floor for interest rates. He argues that the propensity to hoard is often a cyclical rather than secular phenomenon and discusses how institutional factors, such as tax policy and capital market regulations, affect the supply of venture capital. [Saving, Income Level, and the Propensity to Save]: Haberler examines factors influencing the rate of saving, including the interest rate, income levels, and expectations of future income. He discusses Cassel's argument on annuities and Schumpeter's zero-interest state, concluding that a drastic fall in interest rates would likely reduce the propensity to save and threaten capital maintenance. [Monetary and Real Factors Affecting Economic Stability: Introduction and Definitions]: Haberler introduces the central thesis that contemporary economic theory overemphasizes 'real' factors while neglecting monetary factors and institutional rigidities. He defines instability as fluctuations in aggregate output and employment, distinguishing it from price instability. He argues that instability in underdeveloped countries is largely a reflection of the industrial world's business cycle or autonomous inflation. [The Nature and Measurement of Business Cycles]: The author adopts the NBER definition of business cycles as fluctuations in aggregate activity. He critiques attempts to find regular patterns or superimposed cycles (like Schumpeter's schema), arguing that each cycle is a unique historical product of endogenous and exogenous forces. He highlights the consensus among researchers on cyclical chronologies despite theoretical disagreements. [Long Waves and the Role of Effective Demand]: Haberler discusses the 'hazy' nature of long-run Kondratief cycles, preferring to view them as irregular price trends. He identifies the correlation between real output and money flows as a striking characteristic of the short cycle, concluding that fluctuations in aggregate effective demand are the proximate cause of business cycles, though the deeper causes remain debated. [Monetary vs. Real Explanations of the Cycle]: A survey of cycle theories ranging from purely monetary (Fisher, Hawtrey, Mises, Hayek) to those emphasizing real factors like innovation and the acceleration principle. Haberler notes the shift toward formalized mathematical and econometric models, expressing disappointment in their predictive power and the tendency to relegate money to a passive role. [Critique of 'Real' Models and the Importance of Monetary Factors]: Haberler critiques J.R. Hicks's 'real' model for underestimating monetary factors. He argues that major depressions, particularly the 1930s, were intensified by the collapse of the banking system and the gold standard. He emphasizes that price and wage rigidity are essential prerequisites for monetary explanations of instability. [Monetary Factors in Upswings and Real Maladjustments]: Discussion on how monetary policy during the boom phase contributes to the severity of the subsequent depression. Haberler explores different types of 'real maladjustments' (Harrod-Hicks ceiling, Schumpeterian exhaustion of investment) and argues that speculative excesses in both real and financial spheres are fueled by excessive credit expansion. [The Threat of Secular Creeping Inflation]: Haberler examines the modern tendency toward secular creeping inflation in industrial countries. He contrasts the 'push' (labor unions) and 'pull' (lax monetary policy) explanations, siding with the pessimists who believe that the low tolerance for unemployment forces monetary authorities to tolerate price rises in the face of union wage pressure. [International Balance of Payments and Monetary Policy]: The author applies his thesis to international economics, arguing that balance-of-payments disequilibria (like the 'dollar shortage') are caused by differing national 'propensities to inflate' rather than deep-seated structural defects or inelasticities of demand. He critiques the contemporary focus on 'real' gadgets over monetary explanations. [Summary: The Primacy of the Response Mechanism]: Haberler concludes that while real factors (shocks, innovations, wars) provide the 'impulse', the 'propagation'—how the economy responds—is primarily determined by monetary factors, psychology, and rigidities. He notes that modern economies can absorb massive real shocks (like post-war reconstruction) when the monetary response mechanism is stable. [Footnotes for Chapter 8]: Detailed footnotes for the chapter on monetary and real factors, providing citations for NBER studies, critiques of functional finance, historical context for the revaluation of sterling, and a critique of the Harrod-Domar growth model's assumption of fixed coefficients. [Money and the Business Cycle: The Fundamental Movement]: Haberler distinguishes between the 'primary' wavelike movement of business activity and 'secondary' accidental phenomena like panics. He argues that every cycle involves an expansion of the means of payment (money, credit, or velocity) and discusses the causal sequence between monetary impulses and commodity-side changes. [Refined Monetary Theory and the Vertical Structure of Production]: Haberler critiques the crude monetary theory that focuses solely on price level stability. He introduces a refined theory (influenced by the Austrian school) focusing on the 'vertical structure of production'. He explains how credit expansion leads to 'forced saving' and an unsustainable lengthening of the production process (over-investment), which eventually collapses when the money stream reverts to consumer goods. [Secondary Deflation and the Real Maladjustment]: The author explains that the breakdown of the production structure leads to secondary repercussions like credit deflation and pessimism. He argues that while symptomatic treatments (combating deflation) are necessary, the root cause is a 'real' physical dislocation of capital that cannot be cured by simple inflationary measures. He concludes by emphasizing that a stable price level is no safeguard against these structural distortions. [The Great Depression of the 1930s – Can It Happen Again?]: Haberler analyzes the causes and consequences of the Great Depression, arguing that it was primarily a result of massive monetary deflation and policy mistakes by the Federal Reserve rather than inherent instabilities in capitalism. He contrasts the inter-war period with the post-WWII era of growth, examining various non-monetary explanations (Marxist, secular stagnation, and Austrian maladjustment theories) before concluding that monetary contraction was the decisive factor. The essay also discusses the international spread of the depression via the gold standard, the recovery strategies of Roosevelt and Hitler, and the modern challenge of stagflation, ultimately arguing that while a deflationary depression is unlikely to recur, the policy dilemmas of inflationary recessions pose a new threat to economic stability. [The Slowdown of the World Economy and the Problem of Stagflation]: This chapter explores the transition from the post-WWII 'golden age' of growth to the era of stagflation and productivity slowdown starting in the 1970s. Haberler critiques Keynesian fine-tuning and the Phillips curve, contrasting them with monetarist and rational expectations theories. He argues that the primary obstacles to recovery are institutional rigidities, particularly downward wage rigidity and the power of 'distributional coalitions' (unions and vested interests). He advocates for 'Incomes Policy II'—a set of supply-oriented measures including deregulation, free trade, and the removal of tax disincentives—to restore efficiency. He also defends the system of floating exchange rates as a necessary and effective response to international inflation differentials. [Summary and Notes for Chapter 11]: A concluding summary of the policy implications for curbing stagflation, followed by extensive endnotes for Chapter 11. The notes provide historical context on Keynes's own views, the German 'economic miracle', and critiques of contemporary economists like James Tobin and Thomas Balogh. [References and Bibliography of Gottfried Haberler]: A comprehensive list of references cited in the text followed by a chronological bibliography of Gottfried Haberler's writings from 1930 to 1991, including books, articles, and reviews. It concludes with a Name Index for the volume.