The Austrian Critique – Libertarianous

Martin Elson

Costs Pushed Outside ended with a question for libertarians themselves. None of its cases was run by libertarians: not the river below the mill, not the loan signed by a dictator, not the village under the bombs. But much of the economics that calls itself right libertarian has little to say about the people they hurt. It sees two parties, a deal and a gain to both, and stops there.

This chapter asks why. The answer isn’t that Austrian economists shrug at trespass. Murray Rothbard wanted polluters to pay in full, as the last chapter showed. The gap is in the method. The Austrian school builds all value out of individual choices, and it counts a person’s interests only when that person shows them by choosing. Someone outside the deal makes no choice in it, so the theory has nothing of theirs to count.

The chapter follows that gap through three places: value, price and cost, and profit. The strongest Austrian answer, Israel Kirzner’s case that entrepreneurial profit is created rather than taken, gets a section of its own and its full weight. The chapter ends where the Austrians disagree with each other, over whether an idea can be owned.

Two parties and a gain

The Austrian school starts from a true and humane idea. Value isn’t a property of things. It lives in the people who want them, and only they can say how much. Carl Menger set this out in 1871, and Ludwig von Mises built a whole economics on it. Nobody, on this view, can know your wants better than you do, least of all a planner.

Rothbard turned the idea into a proof. In “Toward a Reconstruction of Utility and Welfare Economics” (1956), he argued that economists may only count a preference someone has shown by acting. He called this demonstrated preference. If you trade an apple for my orange, each of us has shown that we prefer what we got. So every voluntary exchange benefits both parties, at least as they expect it, and the free market, made of nothing but such exchanges, always raises what economists call social utility. Rothbard drew the conclusion himself: no act of government can ever do the same.

Then he faced an objection. What about someone who loses when others trade, the man who hates to see his neighbor do well? Rothbard’s answer was that his loss can’t be counted. He shows no preference in the exchange; he only says he is unhappy, and words, unlike actions, might be a joke or a lie. For envy, that is a fair answer. Nobody should be able to veto a trade because it makes him jealous.

But the family downstream from the mill isn’t envious. Its loss is a fouled well, not a hurt feeling. In Rothbard’s accounting it stands exactly where the envious man stands: outside the exchange, demonstrating nothing, and so off the books. His essay allows only two kinds of dealing, voluntary exchange or violence, with no third way. Pollution counts only once a court calls it violence. As the last chapter showed, courts often didn’t, and Rothbard’s own standard of proof keeps the widest harms out of court entirely.

Mises made the same move with a friendlier picture. In Human Action (1949) he called the market a democracy in which every penny is a ballot, with consumers as the bosses whom businessmen must obey. He admitted that the rich cast more votes, and answered that their wealth was itself the result of earlier voting. Critics have pressed the point ever since: in a democracy of pennies, whoever holds the most pennies decides the most. But the deeper problem is who gets no ballot at all. The village under the smoke casts no penny in the sale of cement.

A ledger that records only the people who signed will always show a profit. The act at fault is treating every loss outside the deal as if it were envy.

Cost at the mercy of price

The second place the blind spot lives is the theory of price. Classical economists from Adam Smith to David Ricardo held that, over time, the price of a good anyone can make tends toward what it costs to make. Alfred Marshall’s Principles of Economics (1890) kept that idea and joined it to the new marginal utility. Price, he said, is set like a cut made by a pair of scissors. Demand is one blade and cost is the other. In the short run, with stocks already on the shelves, demand does most of the cutting. Over longer periods, as producers decide whether to make more, cost does.

Rothbard rejected this in the strongest terms. In Man, Economy, and State (1962) he argued that the classical law ran the wrong way. Consumers’ valuations set the price of the final product, and that price then decides what producers can afford to pay for labor and materials. In his phrase, costs of production are “at the mercy of final price.” Once a thing is made, what it cost has no bearing on what it will fetch. He called Marshall’s long run a fiction, a period that never actually exists.

Kevin Carson took this apart in Studies in Mutualist Political Economy (2004), in the section “Rothbard versus the Marshallian Synthesis.” His case rests on Marshall’s own words. Marshall never claimed that a past cost mysteriously fixes a present price. He wrote that the economy is always changing, and that prices oscillate around a center which itself keeps moving. What he claimed was a tendency: prices drift toward cost because producers stop making things that don’t cover it and make more of things that pay well. And Rothbard, directly after denying that cost affects price, granted that cost decides how much gets produced, and that the amount produced later helps set the price. That is Marshall’s scissors, described from the other side.

Carson’s conclusion is that the two positions are closer in substance than Rothbard admitted. The Austrian rule that utility alone determines price holds only for stock already in existence, with supply frozen. The economist James Buchanan described the marginalist move the same way: they took the classical model for goods in fixed supply and claimed it for everything. An old master’s painting fits that model; a loaf of bread doesn’t. Maurice Dobb added a sharper point. In a world at rest, with all inputs reproducible, there would be no lasting reason for any price to stay above the cost of replacing what was used.

Rothbard was right about one thing, and Marshall agreed with him: past cost alone confers no value. A product nobody wants sells for nothing, however much was spent on it. But consider what the stronger claim does to the last chapter’s problem. If cost is whatever price allows, then there is no standard against which a price can be too high or too low. A toll collected through privilege looks like what consumers were willing to pay. A cost left out of the price, the burned field or the fouled well, has nowhere to show up, because the theory never expected price to carry cost in the first place.

Cost the Limit of Price gave a benchmark: with privilege removed, competition levels price toward cost. A gap between them is a signal to investigate. Making cost a servant of price doesn’t remove the cost. It removes the column where the missing part would show.

Sound money and whose sound it is

The blind spot has a practical side, and it shows most clearly in money. Austrian economists from Mises to Ron Paul have favored gold, or money with gold’s chief virtue: nobody can print more of it. They blame the boom-and-bust cycle on central banks that create credit and push interest rates below their natural level. Rothbard’s America’s Great Depression (1963) laid the 1929 crash at the Federal Reserve’s door. Many Austrians also defend falling prices as healthy.

Its critics press on this program with several pointed claims. Gold standards did not prevent bubbles and panics. Deflation helps those who hold money and hurts those who owe it. A free market in currencies would run into Gresham’s law, as people spend the money they trust less and hoard the money they trust more. David Schweickart, following Keynes, makes a different case in Against Capitalism (1993): wage cuts, the standard Austrian cure for unemployment, shrink the spending other firms depend on.

The record bears out more of this than an Austrian would like. The United States ran on gold from 1879, and the panics of 1884, 1893 and 1907 came under it. Irving Fisher explained in 1933 why deflation deepens a slump: when prices fall, every debt grows heavier in real terms, debtors sell to pay, and their selling pushes prices down further. Barry Eichengreen’s Golden Fetters (1992) traced the Great Depression’s spread through the gold standard itself, and found that countries recovered roughly in the order they left it. Britain left in 1931 and recovered sooner. France held on until 1936 and suffered longer.

The Austrians have answers. George Selgin argues in Less Than Zero (1997) that prices falling because of rising productivity, as in much of the late nineteenth century, do no harm and much good. The fall that hurts is the one caused by a collapse in money. That is a real distinction, and it narrows the dispute. It doesn’t remove it. The deflation after 1929 was the second kind. And even the first kind, as the farmers of the 1880s and 1890s found, is harmless only to people whose debts fall as fast as the prices of what they sell.

Now look at who carries the cost in each case. A fixed money supply is a contract between whoever holds money and whoever owes it, with the terms tilted toward the holder. In the long deflation after 1873, American farmers watched the crop prices that paid their mortgages fall year after year, while the mortgages stayed the same. William Jennings Bryan’s “Cross of Gold” speech in 1896 was their protest. The wage cut works the same way. One firm and its workers agree to it, and the loss of demand lands on every shop where those workers used to spend. Keynes’s point, in plain words, is that one person’s wage is another’s revenue.

The case for gold also rests on a story older than the Austrian school. Adam Smith, in The Wealth of Nations (1776), said money grew out of barter: people tired of trading cows for shoes settled on one good that everyone would accept. Carl Menger’s “On the Origin of Money” (1892) gave the Austrian version, and the gold standard follows from it. If money began as a thing, sound money is a thing that can’t be multiplied. On this point the Austrians didn’t break with the classical economists. They inherited them.

David Graeber, in Debt: The First 5,000 Years (2011), argued that the record runs the other way. The anthropologist Caroline Humphrey, surveying the evidence in 1985, found no example of an economy that ran on barter. In early Mesopotamia, temple and palace scribes kept accounts in silver long before most people ever handled any; the silver was a unit for recording who owed what. Money began as credit, a way of keeping track of debts, as Alfred Mitchell-Innes argued in “What Is Money?” (1913). If that is right, the supply of money is a question of who may grant credit and on what terms. That is a question about power, not about how much metal lies in the ground.

Graeber, in the last chapter, described institutions built to protect creditors. Sound money is the same instinct made into a monetary rule. Calling a rule neutral doesn’t make it so when it decides, in advance, which side of every loan carries the risk.

Profit above cost

Part VII has carried one question from its first chapter. If competition levels price toward cost, where does a lasting margin above cost come from? The answer so far has been privilege: a patent, a license, a bailout, or a cost sent to someone else. A margin taken rather than made. The strongest reply to that answer comes from inside the Austrian school, and it deserves to be stated as its best defenders would state it.

Mises drew the first line. In Human Action he separated profit from interest. Interest is the return to waiting, and it would exist even in a world where nothing changed. Profit is different. It arises only because the future is uncertain and someone judges it better than others do. In a world at rest, Mises said, there would be no profit at all. So the Austrians agree with the cost theorists on one point: in equilibrium, pure profit is zero.

Israel Kirzner, a student of Mises who taught at New York University, built on that point. In Competition and Entrepreneurship (1973) he argued that the market is never at rest, because people never know everything. Somewhere a good sells for less than it could fetch elsewhere. Somewhere a cheaper method goes unused, or a want goes unmet. The entrepreneur is the person who notices. Kirzner called the quality alertness. Its reward is pure profit, and it is not a return to any input. It needs no capital, since an alert person can borrow what the opportunity requires. It needs no labor in the usual sense, since noticing is not toil. The entrepreneur simply sees what was there and overlooked.

A real case shows the idea. In 1806 a young Bostonian named Frederic Tudor shipped a cargo of New England pond ice to Martinique. The ice was nearly worthless where it sat, and people in the tropics would pay for cold. Nobody had joined the two. Tudor lost money for years, then built a trade that reached Havana, New Orleans and Calcutta. His profit wasn’t taken from the ponds’ owners, who had sold something they barely valued. It wasn’t taken from buyers, who paid gladly for something they couldn’t get before. On Kirzner’s account, it came from a gap that existed only because no one had seen it.

In Discovery, Capitalism, and Distributive Justice (1989) Kirzner turned this into an ethics. He appealed to an intuition he called finders-keepers: an unowned object becomes the just property of whoever first discovers its value and takes possession of it. A discovered opportunity is that kind of object. Before it was seen, it was not available to anyone. Nobody owned it, nobody was using it, and nobody is poorer because the finder took it. The usual debate about justice treats the economy as a pie to be divided. Kirzner argued that discovery makes new pie, and that whoever makes it has the first claim. He went further. Every income in a market, wages and rents included, contains some element of discovery, because every choice faces an uncertain future.

This is a serious argument, and much of it should be accepted. It explains why markets improve over time in ways no planner arranged. It explains why profit is a signal worth keeping: a margin above cost tells others where to look. It treats the entrepreneur as someone who adds something, not merely someone who owns. And it fits the cost theory better than either side usually admits. On Kirzner’s own account, a discovered profit draws imitators, and the imitators compete it away. Kevin Carson quotes Joseph Schumpeter to the same effect: no particular collection of capital goods stays a source of surplus forever. Tudor’s rivals were cutting ice from other ponds within a generation. A profit made by discovery and then eroded by competition is exactly what Cost the Limit of Price would predict.

The argument has limits, and they are its own. The first is time. Kirzner’s profit lasts only until others notice. A margin that lasts for decades needs another explanation, and it is usually a barrier that keeps others from acting on what they have noticed: a patent, a license, a land title, a guarantee from the state. Finders-keepers covers the finding. It does not cover a fence built afterward to stop others finding the same thing. Tudor’s own career shows both. The find was his. He also sought exclusive rights from the authorities where he could get them, Calcutta among them, and whatever margin those rights protected came from the grant, not the discovery.

The second limit is the word unowned. Finders-keepers assumes that what was discovered belonged to nobody. Many opportunities are of another kind. A firm may discover that a river will carry its waste, that a court will let it pay once and keep polluting, or that a regime will borrow on terms its people will repay. Each is a gap others had overlooked, and Kirzner’s theory, which asks only whether something was noticed, scores it the same way. But the people downstream did have something to lose, and they lost it. The discovery was real. What it found was a way to move a cost, not a way to make one smaller.

Kirzner himself framed finders-keepers as an intuition many people share, not as a proof. That is a fair way to put a starting point, and this book’s floor, that no one is anyone’s input or anyone’s subject, is offered the same way. The two can stand together. A margin that comes from seeing what others missed, and that shrinks as they catch up, is earned. A margin that lasts because someone is kept out, or because someone outside the deal pays, is not made by discovery, however alert the person who found it.

Where this lands

A great deal of the Austrian school survives the fix. Value lives in people, not things. Prices carry knowledge no planner could gather, as What Prices Carry argued. Discovery is real, and the profit it earns, while it lasts, is earned. Rothbard’s history of how courts licensed pollution is correct, and his call for strict liability is better than the regulator’s permit. The repair is narrow. Count the people outside the deal as well as the people in it. Treat cost as a benchmark again, so that a price which leaves cost out can be seen to do so. And ask of every lasting margin the question the last chapter added: who is outside the arrangement, and were they asked?

The chapter’s argument, side by side:

Question	Austrian view	The challenge	What this book keeps
Value	Lives in individual choices (Menger, Mises)	Only those who choose are counted; people outside the deal show nothing (Rothbard, 1956)	Subjective value, with the outsiders counted too
Price and cost	Consumers’ valuations set price; cost follows (Rothbard, 1962)	True only with supply frozen; Marshall’s scissors (Carson)	Cost as the level price tends toward without privilege
Profit	Pure profit is discovery, justly kept (Kirzner)	Competition erodes it unless a barrier holds it	Discovery profit while it lasts; a lasting margin needs another explanation
Money	A commodity that arose from barter; gold as sound money (Menger, Rothbard)	Credit came first (Graeber, Mitchell-Innes); deflation burdens debtors (Fisher, Eichengreen)	Money as a question of who grants credit, and on what terms
Pollution	Trespass: the polluter pays in full, on strict proof (Rothbard, 1982)	The proof standard misses harms spread thin	Strict liability, plus commons the users govern
Ideas	Split: against IP (Kinsella), for it (Rand), copyright by contract (Rothbard)		Chapter 30

The Austrians ask that question most sharply in one place, and there they split. The place is intellectual property.

Stephan Kinsella, a patent attorney who began as a follower of Ayn Rand on the subject, published “Against Intellectual Property” in the Journal of Libertarian Studies in 2001, and the Mises Institute later issued it as a book. His argument starts from scarcity. Property exists to settle conflicts over things only one person can use at a time. An idea isn’t like that. If you copy my tune, I still have it. So a patent or a copyright can’t protect anything of mine from you. What it does is give me a claim over your printer, your factory and your paper, which you own and I don’t. On Kinsella’s account, every patent is a restriction placed on strangers who never dealt with the inventor.

Ayn Rand held the opposite. In “Patents and Copyrights,” collected in Capitalism: The Unknown Ideal (1966), she called them the legal form of the base of all property: a person’s right to what the mind produces. A thing is valuable because someone thought it up, and the thinking deserves protection even more than the matter it shapes. She wanted the terms limited, so that ideas would pass in time to everyone. Rothbard took a middle road. He rejected patents as grants of monopoly by the state, but accepted something like copyright when buyers agreed to it by contract. Rand wasn’t an Austrian economist, but she and the school shared a public, and the dispute has divided their followers ever since.

The split matters for this chapter for two reasons. The first is that Kinsella’s case is the third test in Austrian dress. A patent binds people outside the deal between inventor and buyer, and Kinsella refuses to let them be bound without their say. The school can see the outsider when the outsider is a copier. It has been slower to see the family downstream when no single smokestack can be named.

The second is profit above cost. Copying a file, a design or a formula now costs almost nothing. A price far above that cost, held there for twenty years by law, is the cleanest case of a margin that discovery can’t explain, because the law exists precisely to stop others from catching up. Benjamin Tucker counted the patent among his four great monopolies in the 1880s. In an economy built on software, data and trained models, it may now be the largest of them. The last chapter of Part VII takes up that toll, and what gets built where knowledge is cheap.

Sources

Carl Menger, Principles of Economics (1871). Value in the person, not the thing.
Murray N. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” in Mary Sennholz, ed., On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises (Van Nostrand, 1956). Demonstrated preference; the free market always raises social utility; the envious man set aside. original
Ludwig von Mises, Human Action (Yale University Press, 1949), chapter XV, “The Sovereignty of the Consumers.” The market as a democracy of pennies; profit distinguished from interest. original
Alfred Marshall, Principles of Economics (Macmillan, 1890). The scissors; the long-period tendency of price toward cost.
Murray N. Rothbard, Man, Economy, and State (Van Nostrand, 1962), chapter 5, section 8. Costs “at the mercy of final price”; the long run as fiction.
Kevin A. Carson, Studies in Mutualist Political Economy (2004; rev. 2007), chapter 1, section G, “Rothbard versus the Marshallian Synthesis.” Marshall’s actual claim; Rothbard’s concession on supply; Buchanan and Dobb. original · copy here
Robert P. Murphy, “The Labor Theory of Value: A Critique of Carson’s Studies in Mutualist Political Economy” (Journal of Libertarian Studies 20, no. 1, 2006). The Austrian reply to Carson. original
Murray N. Rothbard, America’s Great Depression (Van Nostrand, 1963). The Austrian account of 1929.
Irving Fisher, “The Debt-Deflation Theory of Great Depressions” (Econometrica 1, no. 4, 1933). Why falling prices deepen a slump.
Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (Oxford University Press, 1992). The gold standard as the channel of the Depression; recovery in order of exit.
George Selgin, Less Than Zero: The Case for a Falling Price Level in a Growing Economy (Institute of Economic Affairs, 1997). Good deflation and bad.
David Schweickart, Against Capitalism (Cambridge University Press, 1993), pp. 106–107. Wages as costs to one firm and revenue to others.
Israel M. Kirzner, Competition and Entrepreneurship (University of Chicago Press, 1973). Alertness; pure profit as discovery.
Israel M. Kirzner, Discovery, Capitalism, and Distributive Justice (Basil Blackwell, 1989; Liberty Fund, 2016). The finders-keepers ethic. original
Joseph A. Schumpeter, Capitalism, Socialism and Democracy (Harper, 1942). No collection of capital goods a source of surplus forever (as quoted by Carson).
On Frederic Tudor: Gavin Weightman, The Frozen-Water Trade (Hyperion, 2003).
N. Stephan Kinsella, “Against Intellectual Property” (Journal of Libertarian Studies 15, no. 2, 2001, pp. 1–53). Scarcity; IP as a claim on others’ property. Reissued as a book by the Mises Institute (2008).
Ayn Rand, “Patents and Copyrights,” in Capitalism: The Unknown Ideal (New American Library, 1966). The mind’s product as the base of property.
Benjamin R. Tucker, “State Socialism and Anarchism” (Liberty, 1888), in Instead of a Book (1893). The four monopolies, patents among them.
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), book I, chapter 4. Money from barter.
Carl Menger, “On the Origin of Money” (Economic Journal 2, no. 6, 1892). The Austrian account of money as a commodity.
David Graeber, Debt: The First 5,000 Years (Melville House, 2011). The myth of barter; credit before coinage.
Caroline Humphrey, “Barter and Economic Disintegration” (Man 20, no. 1, 1985). No known barter economy.
A. Mitchell Innes, “What Is Money?” (Banking Law Journal, May 1913). The credit theory of money.
John Maynard Keynes, The General Theory of Employment, Interest and Money (Macmillan, 1936), chapter 19, “Changes in Money-Wages.” Why cutting wages need not cure unemployment.