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Man in a

complex society can have no choice but between adj usting himself to
what to him must seem the blind forces of the social process and obeying
the orders of a superior. So long as he knows only the hard discipline
of the market, he may well think the direction by some other
intelligent human brain preferable; but, when he tries it, he soon discovers
that the former still leaves him at least some choice, while the
latter leaves him none, and that it is better to have a choice between
several unpleasant alternatives than being coerced into one.
Hayek from “Individualism and Economic Order”, p.24
I have long felt that the concept
of euilibrium itself and the methods which we employ in pure
analysis have a clear meaning only when confined to the analysis of
the action of a single person and that we are really passing into a different
sphere and silently introducing a new element of altogether
different character when we apply it to the explanation of the interactions
of a number of different individuals.
I am certain that there are many who regard with impatience and
distrust the whole tendency, which is inherent in all modern euilibrium
analysis, to turn economics into a branch of pure logic, a set of
self!evident propositions which, like mathematics or geometry, are
subject to no other test but internal consistency. "ut it seems that, if
only this process is carried far enough, it carries its own remedy with
it. In distilling from our reasoning about the facts of economic life
those parts .#which are truly a priori, we not only isolate one element
of our reasoning as a sort of $ure %ogic of &hoice in all its purity but
we also isolate, and emphasi'e the importance of, another element
which has been too much neglected. My criticism of the recent tendencies
to make economic theory more and more formal is not that
they have gone too far but that they have not yet been carried far
enough to complete the isolation of this branch of logic and to restore
to its rightful place the investigation of causal processes, using formal
economic theory as a tool in the same way as mathematics. (Ind. )nd *con. +rder, &h, -*conomics and
In the traditional treatment of euilibrium analysis part of this difficulty
is apparently avoided by the assumption that the data, in the
form of demand schedules representing individual tastes and technical
facts, are eually given to all individuals and that their acting
on the same premises will somehow lead to their plans becoming
adapted to each other.
In the light of our analysis of the meaning of a state of euilibrium
it should be easy to say what is the real content of the assertion that a
tendency toward euilibrium exists. It can hardly mean anything but
that, under certain conditions, the knowledge and intentions of the
different members of society are supposed to come more and more
into agreement or, to put the same thing in less general and less exact
but more concrete terms, that the expectations of the people and particularly
of the entrepreneurs will become more and more correct. In
this form the assertion of the existence of a tendency toward euilibrium
is clearly an empirical proposition, that is, an assertion about
what happens in the real world which ought, at least in principle, to
be capable of verification. (Ibid.,p.120
3he statement that, if people know everything, they are in euilibrium
is true simply because that is how we define euilibrium.(p.140
3he conclusion, then, which we must draw is that the relevant
knowledge which he must possess in order that euilibrium may
prevail is the knowledge which he is bound to acuire in view of the
position in which he originally is, and the plans which he then makes.
It is certainly not all the knowledge which, if he acuired it by accident
would be useful to him and lead to a change in his plan. 5e
may therefore very well have a position of euilibrium only because
some people have no chance of learning about facts which, if they
knew them, would induce them to alter their plans. +r, in other
words, it is only relative to the knowledge which a person is bound
to acuire in the course of the attempt to carry out his original plan
that an euilibrium is likely to be reached.
5hile such a position represents in one sense a position of euilibrium,
it is clear that it is not an euilibrium in the special sense in
which euilibrium is regarded as a sort of optimum position. In order
that the results of the combination of individual bits of knowledge
should be comparable to the results of direction by an omniscient
dictator, further conditions must apparently be introduced.67
8ot only was my
first technical training largely scientific in the narrow sense of the
word but also what little training I had in philosophy or scientific
method was entirely in the school of *rnst Mach and later of the logical
9rom :ayek;s -Ind<*con+rd/# =3he $ure %ogic of &hoice;# )s I have suggested elsewhere in this
volume,, the tautological method which is appropriate and indispensable for the analysis of individual
action seems in this instance to have been illegitimately extended to problems in which we have to deal
with a social process in which the decisions of many individuals influence one another and necessarily
succeed one another in time. 3he economic calculus (or the $ure %ogic of &hoice0 which deals with the
first kind of problem consist of an apparatus of classification of possible human attitudes and provides us
with a tecniue for describing the interrelations of the different parts of a single plan. Its conclusions are
implicit in its assumptions# the desires and the knowledge of the facts, which are assumed to be
simultaneously present to a single mind, determine a uniue solution. 3he relations discussed in this type of
analysis are logical relations, concerned solely with the conclusions which follow for the mind of the
planning individual from the given premises. 5hen we deal, however, with a situation in which a number
of persons are attempting to work out their separate plans, we can no longer assume that the data are the
same for all the planning minds. (7>0
9or so long as we use different methods for the explanation of values as they are supposed to
exist irrespective of any influence of money, and for the explanation of that influence of money
on prices, it can never be otherwise. ?et we are doing nothing less than this if we try to establish
direct causal connections between the total uantity of money, the general level of all prices and,
perhaps, also the total amount of production. 9or none of these magnitudes as such ever exerts an
influence on the decisions of individuals ; yet it is on the assumption of a knowledge of the
decisions of individuals that the main propositions of non!monetary economic theory are based. It
is to this @ individualistic @ method that we owe whatever understanding of economic phenomena
we possess ; that the modern @ subjective @ theory has advanced beyond the classical school in its
consistent use is probably its main advantage over their teaching.($rices and $roduction, p.10
Lurking behind the assumption of "given knowledge" is another one
important for the model of perfect competition. That is the notion of
stationarity. The assumption that the market can actually attain
stationary equilibrium involves an additional empirical hypothesis
concerning the extent of change occurring at any moment. n !ayek"s
"vision" of a developed economy# the businessman is constantly
struggling to keep costs from exceeding prices in the face of
continuously changing conditions. !ayek noted how
easy it is for an inefficient manager to dissipate the differentials on which profitability
rests and that it is possible, with the same technical facilities, to produce with a great
variety of costs are among the commonplaces of business experience which do not seem
to be equally familiar in the study of the economist.*70
n contrast with !ayek"s view is the $chumpeterian one# in which
recurring "clusters" of innovation require the attention of the
entrepreneur from time to time. "%ormal" conditions correspond to the
usual construction of static equilibrium.&'(
*laborating on his interpretation of the term competition, !ayek
said that "competition is by its nature a dynamic process whose
essential characteristics are assumed away by the assumptions
underlying static analysis."&'2 The reason the economist"s construct of
competition ends up meaning "the absence of all competitive activities#"
has to do with the assumption of stationarity.&'3
The assumption of stationary conditions# implicit or explicit#
appears under a number of guises. !ayek attributed the wide,spread
belief in the possibility of rational allocation without a functioning price
system to this assumption.&') $pecifically# static cost theory is much less
applicable to allocation problems than is usually supposed. The market
process involves constant ad-ustment to ever,changing data. important
information consists of the planned actions of other transactors. /osts
are ephemeral# and profit is ever,present income.&'+ /apital is seldom
replaced by capital of the same type or of the same value. 0eturns to
owners of existing capital are quasi,rents# and have no definite relation
to market rates of interest except insofar as accounting procedures take
account of implicit revaluations of assets. t is a world in which a
"Lerner 0ule" would be unusable.&'1
The alleged differences in the rates of return of industries of
differing market concentration have been questioned. $ome have asked
whether the computed rates are merely "accounting" rates and without
economic significance. nsufficient attention# however# has been paid to
the cost,theoretic problem. *conomists in practice either confuse a
theoretical construct 2i.e.# general equilibrium3 with a statement of fact#
or they assume stationary conditions.&''
4ther difficulties in theory application result from presupposed
stationary conditions.&'5 6ut the point that will concern us is that it is
impossible to transfer a stationary state or equilibrium view to a
macroeconomic theory of short,run disequilibrium.
The meaning of "equilibrium" can be understood with reference to
the plans of a single transactor7 his plans are mutually consistent.&'8
6ut how is it that the plans of disparate# individual decision makers are
made mutually consistent9 !ayek proposed that we instead speak of a
tendency for this compatibility to come about.&5: "The division of
knowledge" is at least as important as "the division of labor#" yet the
former has been "completely neglected# although it seems to me to be
the really central problem of economics as a social science."&5(
The problem which we pretend to solve is how the spontaneous interaction of a number
of people, each possessing only bits of knowledge, brings about a state of affairs in which
prices correspond to costs, etc., and which could be brought about by deliberate direction
only by somebody who possessed the combined knowledge of all those individuals.*!
The missing link in the chain of reasoning is the mechanism that
tends to bring decisions into closer correspondence7 the price system.
!ayek# in a classic metaphor# suggested that "we must look at the price
system as...a mechanism for communicating information if we want to
understand its real function."&53 The price system is the mechanism to
be focused on in a study of the coordination problem.
;hat particularly recommends the price system to !ayek is the
"economy of knowledge" with which it operates. t is nothing short of a
The marvel is that in a case like that of a scarcity of one raw material, without an order
being issued, without more than perhaps a handful of people knowing the cause, tens of
thousands of people whose identity could not be ascertained by months of investigation,
are made to use the material or its products more sparingly" that is, they move in the
right direction. This is enough of a marvel even if, in a constantly changing world, not all
will hit it off so perfectly that their profit rates will always be maintained at the same
even or #normal# level.*$
The price system is a means of economically transmitting
information among transactors7 it produces information about changing
market conditions.&5+ The price system registers both the effects of
changing ob-ective conditions and the reactions of transactors to these
changes. <ost important# the price system is a mechanism=however
imprecise=for registering the ever,changing expectations of market
participants. ;hat is important here is the argument that the price
system is the cheapest possible system of resource allocation.
>rices are inherently future oriented, precisely because every action
in the market place ipso facto involves an expectation. ?ction is
impossible except in the context of time. all action must therefore
involve the formation of some expectations.&51 ?ction is the execution of
a plan. To argue 2as some have3 against the efficiency of a market
system because it lacks future markets is surely to miss the point. f
there are prices# the expectations of all market participants are thereby
reflected for all others to interpret.&5'
/onsistency of plans does not depend on a spurious assumption of
stationarity. 0ather one focuses on how well the mechanism functions#
and to what degree# and in what manner transactors come to anticipate
change. 6ut before a meaningful analysis may be made of coordination
mechanism failure# the circumstances under which the mechanism
performs must be analy@ed7 "6efore we can explain why people commit
mistakes# we must first explain why they should ever be right."&55 4nce
it is reali@ed that complete market coordination would involve complete
knowledge by each actor of every other actor"s plans# "imperfect"
coordination is seen as an inevitable result of the fact that individuals
differ. ;hat remains to be explained by those enamored of such
language is why the inevitable consequences of individual differences
should be called "imperfections." ;ould a world in which we were all
alike be perfection9
n the $ocialist calculation debates# !ayek argued that the market
system# with its relatively cheap communication network# is the best
possible method of allocating resources. n his work on cyclical
fluctuations# !ayek also focused on the coordination problem# this time
to explain periodic breakdowns in a system that is supposed to work.
Throughout all his work he maintained his conception of the "economic
problem" as a coordination problem# for the analysis of which the
method of "logical implication" is the appropriate tool.&58
- Here is an illuminating passage from Hayeks !"rices and "roduction! #$ic$ s$o#s t$at $e #as not
concerned #it$ !types! of credit %ut rat$er #it$ t$e effect t$at !ar%itrary or artificial! manipulation of
monetary instruments %y central aut$orities #ould $ave on !prices! as information for t$e market
allocation of economic factors. Once you consider t$e ske#ed attitude of Hayek and t$e &ustrian
'c$ool to#ard t$e !rounda%outness! of capitalist productive met$ods - #$ere !rounda%outness!
stands for !delay of consumption - you can appreciate $o# t$e role of t$e capitalist #as
c$ampioned even morally against t$at of t$ose !consuming! #orkers. It is !grass$oppers and ants!
all over again( Of course, my understanding is diametrically opposed to t$is !p$ilosop$y!) %ut see
my ot$er pieces in #olfe*c$ange on t$ese matters.
!It #ould %e easy to demonstrate %y t$e same type of analysis #$ic$ I $ave used in t$e last t#o
lectures t$at certain kinds of 'tate action, %y causing a s$ift in demand from producers goods to
consumers goods, may cause a continued s$rinking of t$e capitalist structure of production, and
t$erefore prolonged stagnation. +$is may %e true of increased pu%lic e*penditure in general or of
particular forms of ta*ation or particular forms of pu%lic e*penditure. In suc$ cases, of course, no
tampering #it$ t$e monetary system can $elp. Only a radical revision of pu%lic policy can provide
t$e remedy.!
,-&''HO""E-' &./ &.+'0 -E1I'I+E/
Entsagung 2 -enunciation. +o renounce immediate gratification of needs in e*c$ange for a future
re#ard is possi%ly one of t$e distinguis$ing features of %eing $uman. +$e very process of “reflection”, of
pausing to t$ink, involves a conscious act, a “#aiting” t$at is a #eig$ing of options 2 a process of
figuring out mentally, of pro-3ecting ideas into t$e future. +$at is t$e destiny of “tec$nology”, t$e practical
implementation 4“implement” means “instrument”, tool, tec$nical device5 of $uman ideas 2 $uman
%eings #ere $omo fa%er %efore evolving t$roug$ living la%our to t$e status of $omo sapiens.
Every tec$nical act of pro-duction t$erefore must involve a “#aiting”, a “renunciation”6.Entsagung. +$is
is t$e p$ilosop$ical foundation of &ustrian 'c$ool economics, from 'c$open$auer t$roug$ 7o$m-
7a#erk to Hayek and 'c$umpeter. In a capitalist society, “profit” is t$e re#ard of t$e capitalist or, in
'c$umpeter, of t$e innovative entrepreneur, 3ust as in 8$ristian esc$atology t$e "rotestant Et$ic
decrees t$at access to Heaven is t$e 3ust re#ard of t$e ascetic self-denial of t$e fait$ful, t$e clima* of
t$e &skesis, t$e “ascension” to paradise t$roug$ t$e steep slope of $uman sinful e*istence, or t$e
arduous clim% to t$e summit of .irvana 4'c$open$auer5.
+$is is t$e rationale t$at led 7o$m-7a#erk to 3ustify “profit” or “interest” as t$e re#ard of t$e capitalist
for employing “rounda%out” tec$nological met$ods of pro-duction t$at “delay” final consumption of
#orldly resources. Hayek $as per$aps t$e %est and most succinct illustration of t$is process of
reasoning in “"rices and "roduction” 4at p.945)-
!It seems somet$ing of a parado*6.7ut t$e fact is t$at #$en t$e gro#ing demand for finis$ed
consumers goods $as taken a#ay part of t$e non-specific producers goods re:uired,
t$ose remaining are no longer sufficient for t$e long processes, and t$e particular kinds of specific
goods re:uired for t$e processes #$ic$ #ould 3ust %e long enoug$ to employ t$e total :uantity of t$ose
nonspecific producers goods do ;not yet e*ist. +$e situation #ould %e similar to t$at of a people of an
isolated island, if, after $aving partially constructed an enormous mac$ine #$ic$ #as to provide t$em
#it$ all necessities, t$ey found out t$at t$ey $ad e*$austed all t$eir savings and availa%le free capital
%efore t$e ne# mac$ine could turn out its product.
+$ey #ould t$en $ave no c$oice %ut to a%andon temporarily t$e #ork on t$e ne# process and to
devote all t$eir la%our to producing t$eir daily food #it$out any capital. Only after t$ey $ad put
t$emselves in a position in #$ic$ ne# supplies of food #ere availa%le could t$ey proceed to attempt to
get t$e ne# mac$inery into operation.< In t$e actual #orld, $o#ever, #$ere t$e accumulation of capital
$as permitted a gro#t$ of population far %eyond t$e num%er
#$ic$ could find employment #it$out capital, as a general rule t$e single #orkman #ill not %e a%le to
produce enoug$ for a living #it$out t$e $elp of capital and $e may, t$erefore, temporarily %ecome
unemploya%le. &nd t$e same #ill apply to all goods and services #$ose use re:uires t$e co-operation
of ot$er goods and services #$ic$, after a c$ange in t$e structure of production of t$is kind, may not %e
availa%le in t$e necessary :uantity.!
.o# it is a%solutely clear #$ere t$e error in t$is reasoning lies) Hayek 4and 7o$m-7a#erk %efore $im5
$as transformed a “tec$nical” matter of production 4in fact, an engineering issue of $o# to deploy
e*isting social resources to ac$ieve a proposed level of social production5 into a 3ustification, an apology
for t$e capitalist o#ners$ip of t$e means of production, for t$eir a%ility to c$oose #$at and $o# to
produce ne# resources, and for t$eir claim to a “profita%le” distri%ution of t$e ne# resources in t$eir
favour and to t$e #orkers0 detriment( +$is is at t$e very %est a non se:uitur and at #orst an a%omina%le
O’Driscoll ‘The Co-Ordin!ion "ro#lem’
3he Aicardo effect had the same importance in :ayekBs 67>7 formulation as changes in
price margins had in Prices and Production.>C ) rise (decline0 in real wages
corresponded to a narrowing (widening0 of the price margins. In the earlier work, a
change in the interest rate altered the allocation of resources only by way of a change in
price margins. Microeconomists often contend that the interest rate is a ratio of prices.>6
"ut in practice macroeconomists often ignore this relationship.>, ) change in the interest
rate leads to systematic changes in the relation of consumer goods prices to capital goods
prices and of the prices of various kinds of capital goods to one other. &hanges in the
relative prices of (heterogeneous0 capital goods are at least as significant as the change in
the price of -consumption/ relative to -capital/ enunciated in the so!called sophisticated
macromodels. :owever, this former type of change is generally ignored. 8or do changes
in the prices of capital goods depend entirely on durability. +ther things being eual, the
more durable an asset, the greater will be the sensitivity of its present value to changes in
the interest rate. "ut, as :ayek emphasi'ed, one must not overlook how that capital good
is used in the structure of production.>>
+nce full employment is reached in industries producing consumer goods, the Aicardo
effect begins to operate. )ny further increase in the demand for consumer goods leads to
the kind of factor substitution described previously. Most important, with capital
specificity the demand is always for particular capital goods rather than for -capital./>1
:ayekBs analysis does not depend on the assumption of full employment of all factors. In
the model presented in -$rofits, Interest, and Investment,/ availability of additional
factors of a given type in the capital goods industries does nothing to alleviate an excess
demand for those factors in the consumer goods industries; the elimination of excess
demand is excluded by the assumption of factor immobility in the short!run formulation
of that model. "ut this stringent assumption, which has been critici'ed, obscures the
operation of the Aicardo effect in the more general case. If factors are generally mobile
and used in combination (that is, are complementary0, and if some factors are used in
both capital and consumer goods industries, then a rise in demand for one or more of
these general nonspecific factors in consumer goods industries will produce characteristic
effects. In other words, once one nonspecific (complementary0 factor becomes fully
employed and is bid away from firms producing capital goods, the Aicardo effect will
operate. Many other factors may be in excess supply, but if none is perfectly substitutable
in the short run for the factor in uestion, the cyclical expansion of capital goods
industries must be choked off.
In the process that :ayek described, increasing incomes of factor owners leads to an
increasing demand for goods in relatively short supply, namely, consumer goods.
Aesources have been attracted into the production of capital goods at the expense of
consumption output.>2 3hese capital goods would have been profitable to produce, ex
post, only at higher rates of planned saving. Increasing consumption in the current period
implies that the prices of consumer goods and of capital goods specific to the stages
nearest to final output will rise relative to the current wage rate. 3he value of the marginal
product of labor in these stages will rise relative to the current wage. 3hus, real wage
rates will fall. 3his basic story is not very different from that in Prices and Production.>4
If labor were completely immobile in the short run, then, as the demand for consumer
goods increased, the rates of return would rise in some industries and fall (even become
negative0 in others. )s long as the factor immobility assumption is strictly adhered to,
there will be unemployment in some industries, and the demand for labor will be high in
others.>D "ut :ayek never envisioned this type of underemployment euilibrium. 9or
:ayek the process does not end at this point.
) single firm, faced with different rates of return on different investments, would attempt
to euali'e them at the margin (net of risk differences0. 3he firm would borrow at the
going rate of interest and invest in capital goods until the marginal rate of return on all
investments is eual to the rate of interest. .aldor assumed that this model applied to the
economy as a whole.>E
:ayek responded that it is a non sequitur to apply the model of a single firm to the model
of the entire economy. In so doing, the resource constraint is violated. )n interest rate
below the euilibrium rate will lead to a progressive rise in incomes. 3he process will
continue until the rise in the rates of return in the consumer goods industries dominates
the effects of the low money rate of interest.>7 )s long as the market rate of interest is
below the euilibrium level, the marginal propensity to spend (that is, the marginal
propensity to consume plus the marginal propensity to invest0 will be greater than one.
)nd if relative prices continue to be -wrong,/ there should be some mechanism (other
than a change in the market rate of interest0 that will lead to a correction.
*ntrepreneurs will not be successful in attempts to drive the various rates of return down
to the (below euilibrium0 rate of interest. 9or what is being supplied is an infinite
uantity of credit, not an infinite uantity of labor and other factor services.
*ntrepreneursB borrowing at the depressed rates of interest in order to maintain or extend
the existing pattern of investments will promote a further rise in incomes and
consumption demand. 3here will be no tendency for rates of return to become euali'ed.
3he reason is that factor scarcity necessitates the curtailment of some production
(namely, consumer goods0 to expand the production of other goods (namely, capital
goods for capital deepening0. 3he assumption is that planned saving out of increments to
income will be less than planned investment. &onsumption demand will be greater, ex
post, than was anticipated by entrepreneurs in general.
In The Pure Theory of Capital :ayek put this more succinctly#
In long!run euilibrium, the rate of profit and interest will depend on how much of their
resources people want to use to satisfy their current needs, and how much they are willing
to save and invest. "ut in the comparatively short run, the uantities and kinds of
consumersB goods and capital goods in existence must be regarded as fixed, and the rate
of profit will depend not so much on the absolute uantity of real capital (however
measured0 in existence, or on the absolute height of the rate of saving, as on the relation
between the proportion of the incomes spent on consumersB goods and the proportion of
the resources available in the form of consumersB goods. 9or this reason it is uite
possible that, after a period of great accumulation of capital and a high rate of saving, the
rate of profit and the rate of interest may be higher than they were beforeFif the rate of
saving is insufficient compared with the amount of capital which entrepreneurs have
attempted to form, or if the demand for consumersB goods is too high compared with the
supply. )nd for the same reason the rate of interest and profit may be higher in a rich
community with much capital and a high rate of saving than in an otherwise similar
community with little capital and a low rate of saving.1C
%ured by rising prices of consumer goods, entrepreneurs may anticipate and plan for a
greater rise in the future. "ut, insofar as they do, they will discover that prices of current
period consumption output have risen faster than anticipated# -3he faster entrepreneurs
expected prices to rise, the more they would necessarily speed up this price rise beyond
their expectations./ 3he reason is that -any increase of money expenditure on the one
kind of good Gthat is, labor servicesH is found to cause an increase of money expenditure
on the other kind of good Gthat is, consumer goodsH./16
In presenting a theory of the inflationary process, :ayek provided a model in which it
was meaningful to speak of the self!perpetuating characteristics of an inflation, or of
rising prices fueled by inflationary expectations, or even of a -wage!price spiral./ 3hough
not developed as theories, these characteri'ations are descriptive of particular phases of a
:ayekian inflationary process. 9or example, as entrepreneurs bid up factor costs, an
observer within the system may believe that rising prices result from rising incomes,
which in turn are being generated by rising wage rates. 3his phenomenon might even be
described as -wage!push inflation./ 3he superficial observation is that in the later stages
of an inflationary process wages push prices up, or that inflationary expectations are
keeping the inflation going. 3he economist, however, would know that at the root of the
price inflation is the inflation of the monetary and credit media. &hanged expectations
alter the form of the inflationary process; they move the economy from one phase (say, an
investment boom0 to another phase (say, a relative expansion of consumer goods
industries0 in the expansionary part of the business cycle. "ut all these changes
presuppose an expansion of the means of payment.1, It is by no means necessary that
this expansion continue to occur in the money stock, narrowly defined. 5hether this in
fact is the case is entirely a uestion of institutions and each uniue historical
manifestation of the business cycle.
Schumpeter’s Definition of Interest:
Interest is a premium on present over future means of payment, or, as we
will say a potiori, balances. Interest is the price paid by borrowers for a
social permit to acuire commodities and services without having previously
fulfilled the condition which in the institutional pattern of capitalism is
normally set on the issue of such a social permit, i.e., without having
previously contributed other commodities and services to the social stream.
Arom BTranslatorCs >reface to 6ohm,6awerkCs D>ositive Theory of /apitalC7
f# then# interest is so purely a natural phenomenon# why has it met with so much covert
dislike# and so much scientific opposition9 There are at least three reasons. Airst# the element
on which all interest is based# namely time# has come to be a peculiarly important factor in
modern production. ?ll things come to him who waits# and# in economic life# this describes the
capitalist. 6ut this fact involves that the labouring classes who cannot wait# and cannot
compete with the productiveness of lengthy processes# are put in a position of peculiar
dependence7 hence the possibility of exploitation of wage# of usurious rates of interest# of
un-ust rents. $econd# from a moral point of view# there is much that is ob-ectionable in the
fact that interest allows certain classes to live without working and to make this possibility
hereditary in their families. Third# in this income there is no ratio between gain and desert.
Those who have little must accept $avings 6ank interest for their hard,earned shillings. those
who have much have all the chances of bonds# mortgages# -oint,stock investments and the
like. ?ll the same# so long as men do put a different valuation on present and future goods#
interest cannot be prevented. (TP.34)
:OH;-:A<ER= on ;e!hodens!rei>% http#IImises.orgIresourcesID6 It seems to me that under such
conceptions the scientific situation cannot fail to be misunderstood. 3he classical economists have probably
accomplished more in some directions than the historical economists are willing to allow. 5ith that point I am
not now concerned. It is uite certain that in other directions they have accomplished very much less. 3hey are
far from having distilled from familiar facts and hypotheses all that could have been derived by their method
uite the contrary. 3hey have but very imperfectly distilled, and in countless cases they have been unable to
derive the best conclusion from their premises. 3heir theory swarms with vital uestions, not of method alone,
which they have wrongly handled. Instead of many examples take one, the very popular and important doctrine
of value. 3he experience from which the general theory of value is to be derived was about as complete for the
classical economists as it is for us. 5hat did they make of itJ Some declared that the creative principle and
measure of value was the amount of human labor involved; others, more numerous, that it was the cost of
production. "oth definitions are false, as every one to!day knows. "ut and this is the point to be emphasi'ed they
were branded false, not by the discovery of some new and startling fact which advanced empirical investigation
has brought to light, but by the everyday experiences of the world, experiences which were necessarily as
familiar to the classical economists as they are to us. It was not that in this case their empirical knowledge was
insufficient, but that they here, as in countless other cases, @distilled@ badly.