Fritz Machlup’s Review of Erich Schneider’s Einführung in die Wirtschaftstheorie, Part III (1953)

Fritz Machlup’s book review evaluates the concluding volume of Erich Schneider’s economics textbook, devoted to money, credit, national income, and employment. Its governing judgment combines admiration for Schneider’s analytical clarity with criticism of the exclusions that make his treatment so thoroughly modern. Machlup regards the book as an outstanding teaching achievement, but questions whether contemporary macroeconomics can dispense with monetary history, velocity of circulation, and especially capital theory without sacrificing explanatory power.

His work, in this reviewer's opinion, constitutes one of the most comprehensive, most up-to-date, and pedagogically most serviceable of modern texts in economic theory.

This endorsement frames rather than cancels the subsequent objections. Machlup locates the third volume within Schneider’s larger instructional sequence: the first treats the economic circular flow largely through ex post analysis, the second examines plans and market equilibrium at the microeconomic level, and the third develops ex ante macroeconomic analysis. Its three chapters cover means of payment, the creation and cancellation of money, and the determinants and fluctuations of national income. Machlup nevertheless doubts whether the earlier emphasis on retrospective accounting was pedagogically necessary.

The review first tests Schneider’s modernity against the coverage of monetary institutions. Omitting lengthy treatments of silver and bimetallism is defensible, and Machlup welcomes relief from textbook accounts that mistake obsolete gold-standard arrangements for current realities. Yet rejecting antiquated institutional detail does not justify neglecting gold’s continuing monetary effects.

But in a textbook a discussion of the “creation of money” that does not have anything to say about gold can hardly be considered complete.

The missing subjects include bank and monetary-authority purchases and sales of gold, changes in its official price, market restrictions, and hoarding. Schneider’s treatment of contemporary German banking law shows that he does not reject institutional evidence as such; he selects what he considers theoretically important. Machlup’s objection therefore concerns the criteria of selection. The book satisfactorily explains reserve requirements, open-market operations, discount policy, and official declarations, but omits monetary-policy objectives and guides. By contrast, its account of multiple credit expansion is exemplary because it makes the expansion coefficient depend on payment habits as well as reserve requirements.

A more technical criticism concerns Schneider’s dismissal of monetary velocity. Transactions velocity receives no discussion, while income velocity is treated chiefly to deny its relevance because it is not an institutionally determined constant. Machlup rejects that inference: a variable can matter without being constant, and its upper limit may itself be institutionally constrained. He argues that such a ceiling already operates implicitly within Schneider’s admired treatment of liquidity preference and the investment multiplier.

Liquidity preference receives extensive attention in discussions of open-market policy, investment, income, and the quantity theory. Machlup suspects that its prominence owes something to Schneider’s exceptionally elegant verbal, geometrical, and algebraic exposition, despite its acknowledged restriction to short-run income analysis. His examination of the interest–income curves makes the criticism precise. At a fixed money supply, the curves describe combinations of interest rates and income compatible with speculative and transactions balances. Their horizontal ends represent infinitely interest-elastic liquidity preference; their vertical ends imply that a ceiling on velocity prevents a given money stock from financing higher real income. This monetary constraint should not be confused with full employment. Full employment would instead require the curves for different money supplies to converge on a common vertical limit beyond which additional money cannot raise real income.

Machlup’s strongest praise concerns Schneider’s presentation of multiplier theory, from Johannsen’s early formulations through Keynesian and post-Keynesian developments. The treatment of saving and the interdependence of Keynes’s fundamental functions is particularly valuable.

It is made very clear why the Keynesian multiplier formula fits only a special case, namely, the very special assumptions that the interest-elasticity of investment is zero or the interest-elasticity of liquidity preference is infinite.

Using methods developed by Tord Palander, Schneider moves beyond the elementary multiplier to a general formulation incorporating income-induced changes in interest rates and interest-induced changes in investment. Here analytical refinement also improves teaching: it exposes the restrictive assumptions behind a familiar result. Coverage of Haavelmo’s balanced-budget multiplier and discussions of the Pigou effect further supports Machlup’s judgment that the textbook is exceptionally current.

The review’s culminating objection is the absence of capital theory throughout the three-volume work. Schneider explicitly excludes long-run income analysis, but Machlup doubts that this exclusion is defensible in a comprehensive theoretical textbook. The issue becomes methodological when Schneider describes the income that would result if planned consumption and investment were realized.

Too often do we forget that one of the foremost tasks of economics is to explain and predict circumstances under which consumption and investment plans cannot be realized.

For Machlup, conditional consistency is insufficient: economics must explain failures of realization, and capital theory is needed for that task. His criticism ultimately targets the discipline’s prevailing fashion rather than Schneider alone. The textbook can be among the most comprehensive modern works while sharing modern theory’s systematic omissions. The review thus combines appreciation of short-run macroeconomic technique with a demand to recover the temporal and capital constraints that technique leaves aside.

This old-fashioned reviewer dares to predict that capital theory will be called back from its exile, for the concern with the economic problems of underdeveloped countries will eventually demonstrate that the lack of capital can neither be made good nor more palatable by a lack of capital theory.

This closing prediction gives the review its broader relevance: pedagogical elegance and theoretical currency are substantial virtues, but neither guarantees adequate coverage of the economic problems that explanation must confront.