Home » Uncategorized » 16 Classical Economic Mistakes That AE Fixed Up.

16 Classical Economic Mistakes That AE Fixed Up.

Oddly enough, Mainstream Economics hasn’t learned much in the last hundred years, and still makes most of these ancient blunders.

Source for this article:
Mises and Austrian Economics Murray N Rothbard.mp3

and Mises and Austrian Economics Murray N Rothbard_2.pdf [full of typos, sadly]

In other words, I’m summarizing Rothbard. I’m not sure when he made the presentation. He mentions computers and calculators being cheap, and the Communist countries still being Communist, so that may give some clue. The format will be as follows. I’ll name the fallacy, then quote Rothbard about it in italic font, then mention what little I know about it. Without further ado, the big 16.

1. Too much aggregate, too little individual.
…all the other schools of economics…deal with aggregates, groups, classes, wholes of one
sort or another, without focusing on the individual first and building up
from there.
Smiling Dave: Yep, this one is still with us.
Devil’s Advocate: But Dave, you don’t explain why it’s wrong.
SD: That’s beyond the scope of the article, which is very long already. Just going to list the blunders, not refute them.

2. Consumer prices are determined by cost of production [when the truth is vice versa].
…value, economic value, price, was determined by the cost of production…
SD: I’m told this is no longer believed by the mainstream.

3. Labor Theory of Value.
the cost of production is embodied in some fashion in the product, and specifically by the quantity of labor hours embodied in it.
SD: In another mp3 in the series, his listeners tell Rothbard that no professional economists, not even Marxist economists, believe in that anymore. But among sociologists, fiction writers, and the like, people who are Marxists but have not actually studied any economics, the Labor Theory of Value is alive and kicking.

4. False Dichotomy of Exchange Value and Use Value.
…value in use and value in exchange, … and we have to deal with exchange value, and forget about use value. You see right away this sets up the conditions for a whole bunch of left wing thought in the late 19th, early 20th century. It’s still going, I suppose,…production for use and production for profit. It immediately sets that up somehow as a big distinction.
SD: I’m told that the mainstream no longer thinks like that.

5. Preoccupation With Numbers.
…science meant measurement in those days for these people. And so therefore, how do you measure value, how do you measure changes? He’s looking for some hard quantity…
SD: Oh, yes, worse than ever.

6. Distribution Theory.
...they had a separate thing called distribution, theory…trying to figure out—this is Ricardo particularly—who decides how much of the national output goes to wages, how much goes to profits, how much goes to landlords?
SD: I’m told this one is dead.

7. Class Conflict.
…a class struggle between these three mighty groups, [land, labor, and capital]. In other words, the good is produced somewhere, first they produce it, then they fight for who gets the different shares of income.
SD: Most people still believe this. I’m told that mainstream econ does not.

8. Iron Law of Wages.
…wages are determined by the iron law of wages, the Malthusian iron
law, down at the subsistence level…Everybody gets the lowest possible wages…
SD: Mainstream econ doesn’t believe this anymore, I’m told.

9. Landlords are Parasites Who Deserve to Be Paid Zero Rent.
…evil, unproductive landlords, getting an increasing share
of the national product…
SD: I think this is still believed by laymen, and I think by Keynes as well [he wanted euthanasia of someone or other]. Mainstream, I’m told, is silent about this, so it seems they no longer agree with it.

10. Focus on Equilibrium.
…focused totally on nonexistent, unreal,long-run
equilibrium. This is done right now by modern microeconomics, and
macroeconomics, for that matter…In long-run equilibrium you
don’t have to forecast anything; nothing ever changes.
SD: I’m told that this is still around.

11. Forgot about the Entrepreneur.
…they don’t talk about entrepreneurs because entrepreneurs deal with change and uncertainty. You make a profit if you can forecast better than the next guy. You make losses if you can’t forecast. In long-run equilibrium you don’t have to forecast anything; nothing ever changes…So the entrepreneur then becomes a pain in the neck. It’s messing up your neat mathematical system.
SD: Still going strong.

12. Perfect Knowledge.
Since nothing ever changes, everybody has perfect knowledge, as they
call it, perfect knowledge, everybody’s in perfect competition, there’s no
uncertainty, no risk, no profits, there are no losses.
SD: Rational Expectations Theory and Efficient Market Hypothesis seem to indicate this is still around.

13. Micro and Macro Never Meet.
…separate, divide totally the macro from the micro sphere.
We’re all familiar with that, those of us who take current economics…
Micro, you learn about supply and demand or whatever,
and then suddenly you leap into macro and nobody talks about supply and demand, they all talk about growth curves and velocity and all that, totally different.

…It’s like two hermetically sealed spheres.
There’s the microsphere where things are going on, it’s fairly
understandable, supply and demand, prices and all that. Then there’s
the macro sphere, totally cut off from the micro, where you have
money and prices bouncing up and down, with no relationship between the two.
SD: Alive and kicking.

14. Don’t Understand Interest.
…the poor anti-usury people could never
figure out… what their justification for interest
is, interest on a pure loan. They could understand about risk, they
understood about uncertainty and all that; they just didn’t understand
about, why should people be able to charge three percent or eight
percent or whatever on a pure loan.
SD: Keynes believed this. The mainstream still doesn’t understand interest, though they may think it’s OK to charge it.

15. Capital is a Homogeneous Lump.
We have capital, not as a homogeneous lump, which modern economics still tends to say, just add more capital, as if it’s somehow a blob out there.

Capital is a latticework, it’s a network, a structure which all has to fit in
together. And by the way, only the free market can fit it in. Only
entrepreneurs, the profit and loss test, profit and loss, incentive, and
free price system can do the fitting.
SD: Still around, I’m told. How else can you put Capital into an equation?

16. It Takes Time to Make Stuff, and Some Things Need More Time than Others..
…modern economics still has not learned, capital takes time, production
takes time. Capital is a time structure.
Some goods are very close to consumers, like producing Wonder Bread,
where the retailer is very close to the consumer.
On the other hand, machinery, the iron ore that goes into making the
machinery that produces Wonder Bread is way up the structure, takes
a lot of time to get to the earlier phase of production or a higher order
of production. So we have then production taking time.
SD: I’m told they don’t get this yet.

So there you have it. Mainstrean Economics gets 9 out of 16 wrong. Their grade on a test of basic economic knowledge, provable from first principles and obvious to common sense as well, that has been around for well over a hundred years, is 43%.

[Thanks to the members of the libertyhq forum for their info on what’s being taught today in the schools. All errors are mine].


  1. Daniel G. says:

    By the way, I didn’t mean to be authoritative. For academic robustness, it should be possible get to most of this conclusions by examining economics textbooks.


  2. Smiling Dave says:

    Thanks for your help, Daniel. Much appreciated.


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