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The current Liberty Matters debate on the work of Israel Kirzner offers some fascinating insights into the modern history of Austrian economics. It’s particularly valuable because it highlights the numerous strands of Austrian research that have developed from the writings of Menger and his followers, especially from Mises. Contrary to popular belief, Austrian economics has never been just “one thing”; instead, the Austrian tradition includes a number of different branches.

In the past few decades, the two most important representatives of these different strands of thought have been Murray Rothbard and Israel Kirzner. Both men were closely associated with Mises, and their writings frequently recognize him as the main source of their respective inspiration. Despite this apparent common ground, however, Rothbard and Kirzner interpret Mises’s tradition in different ways. This is especially true with regard to price theory — the fundamental, unique Austrian contribution to economics — a topic on which both economists wrote extensively.

For example, Rothbard was a reviewer of Kirzner’s early book Market Theory and the Price System, which he criticized on the ground that it neglected valuable elements of Austrian price theory while at the same time embracing some misguided aspects of mainstream theory.

Kirzner, however, has written very little on Rothbard’s work. One important exception is a forgotten review of Rothbard’s edited collection of Frank Fetter’s papers, Capital, Interest, and Rent: Essays in the Theory of Distribution. Kirzner’s review was published in 1980 in the Austrian Economics Newsletter, and has never been available in online form, until now (here). Although brief, it displays Kirzner’s abilities as a scholarly critic and a charitable colleague. It’s also an especially interesting read for those of us who think Kirzner’s clearest and most valuable contributions to economics are often found in some of his most obscure writings (for other examples, see here and here).

Kirzner on the Importance of Frank Fetter

Kirzner is highly supportive of Rothbard’s project to rescue Fetter’s work from the unfair neglect it had suffered since his death. In particular, Kirzner is keen to point out the importance of Fetter’s research in the history of economics:

Fetter carried forward the radical reformulation of economic theory which had begun with the marginal utility revolution of the 1870’s, but which, at the turn of the century, was still far from being complete. Along with the new insights learned from the marginal utility theorists there remained pervasive and incongruous traces of earlier misunderstandings. These were particularly troublesome in the area of distribution theory, in the treatment of rent theory, interest theory, the concept of capital. Fetter attacked these problems with keenness of in­sight, with profound clarity of under­standing, and with a delightfully lucid literary style… Not only can the modern reader learn a great deal of the history of modern economics from this volume; these papers also demonstrate how economic theorizing can be engaged in by a master.

Fetter’s work in economic theory was brilliant, and, especially in the United States, represented the best work being done at the time in the Mengerian tradition. There is some debate though about whether Fetter should be considered a member of the Austrian school or as the founder of a unique tradition in economics. Kirzner sides with the former interpretation, including Fetter alongside the British economist Phillip Wicksteed (for more on Fetter’s place in economics, see here).

In addition, Kirzner recognizes Fetter’s importance as an inspiration for contemporary Austrians:

That Fetter, while pay­ing his respects to his Austrian fore­bears, is prepared to push forward the frontiers of knowledge by his own ef­forts (one thinks particularly, in this regard, of his splendidly consistent pure time preference theory of interest), can provide a useful model for today’s Austrians. … It may be confidently hoped that many economists will be stimulated by this outstanding volume to an appreciation of the roots of modern Austrian eco­nomics, and to making their own contributions to its further wholesome development.

Sadly, some of Fetter’s political views do not fare as well after a century as his economic work does (he was in many ways a conventional progressive). Yet as an economic theorist he remains among the best of the post-marginalist era, and it is well worth the time to digest his writings.

Kirzner on Rothbard

Kirzner spends the bulk of his review discussing Rothbard’s Introduction to the collection, which Kirzner singles out for special praise:

The Introduction is a gem in its own right, giving us Murray N. Rothbard, the economist, at his very best. Careful and wide scholarship, perceptive inter­pretation and keen criticism of Fetter’s contributions, characterize this brilliant introductory essay.

Kirzner does have a criticism, however. In his Introduction, Rothbard discusses Böhm-Bawerk’s third argument for the higher value of present over future goods; namely, present goods are more valuable because they are more productive. According to Rothbard, Fetter offered the definitive refutation of this view. Rothbard suggests that because, “capital instruments only mature into consumer goods at various times in the future, capital goods are really future goods” (Rothbard, 1977, p. 11). Consequently, the explanation for, “an extra return to these (future) capital goods as being more productive ‘present goods’ becomes totally invalid” (Rothbard, 1977, p. 11).

For Kirzner, the underlying criticism is correct, but Rothbard’s expression of it involves a terminological confusion. Namely, it is potentially misleading to refer to capital goods simply as future goods. Capital goods are also present goods in the sense that they exist and produce right now. Of course, capital goods are intended, through good entrepreneurial judgment, to be transformed into consumer goods in the future. But that does not deprive them of all relevance to the present. Rather, capital goods are present means for the achievement of future ends.

This terminological distinction reveals, according to Kirzner, that Fetter’s criticism is not a refutation of Böhm-Bawerk’s third ground. Instead, it simply shows that this productivity-based argument is inconsistent with the other two arguments Böhm-Bawerk provides, both of which consider the valuation of present versus future benefits in the present. However,

In the third ground, on the other hand, it is argued that present intermed­iate goods (i.e., present means) expected to ripen into valuable future enjoyments, are valued today on the basis of these valuable future enjoyments. In this third ground, there­fore, there is no comparison between the present valuation of present enjoy­ments and that of future enjoyments—only the insight that the value of present means depends on the value of future ends.

In other words, although Fetter was an effective critic of Böhm-Bawerk, this particular argument is more of a prelude to a decisive rebuttal than the rebuttal itself. Kirzner’s point may seem narrow, and it is. But his discussion is nevertheless enlightening, and shows his keen eye for nuance.

Although it turns on a theoretical detail, I suggest that this is exactly the sort of topic that two giants of the modern Austrian school should discuss. The fundamentals and nuances of price theory that lie at the heart of economics are too important to ignore, and deserve to be studied and developed by aspiring scholars. Kirzner’s thoughtful and polite approach is a model for how younger Austrians can do that.