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Economics & History – Austrian Theory

Posted by Orrin Woodward on October 18, 2010

Sitting down to read one of my favorite authors (Murray
Rothbard)
, I stumbled across a description of the Austrian School
difference that stunned me, being the best description of the Austrian School Theory of History and Economics that I have ever read.  Dr.
Joseph Salerno
, who wrote this essay, is a professor at Pace University
and delivers a powerful essay on Ludwig Von Mises and Murray Rothbard in
this introduction to Rothbard’s book on banking.  If you would like to
understand why economics matters more today than ever before, being
concerned with the failure of modern day economic messiahs, then this
portion of Salerno’s essay is for you.  Leadership matters and you are only qualified to lead
in fields in which you have mastered the materials.  History, Economics
and Leadership go hand in hand if you plan on making a difference in
our world today.  Enjoy the article and please share your thoughts.  God
Bless, Orrin Woodward

Rothbard’s approach
to monetary history does not focus on measurement but on motives. Once
the goals of the actors and their ideas about the appropriate means for
achieving these goals have been established, economic theory, along with
other sciences, is brought to bear to trace out the effects of these
actions in producing the complex events and processes of history which
are only partially and imperfectly captured in statistical data. This is
not to say that Rothbard ignores the quantitative aspects of historical
monetary processes. Indeed, his book abounds with money, price, and
output data; but these data are always interpreted in terms of the
motivations of those who have contributed to their formation. For
Rothbard, a particular price datum is, no less than the Spanish-American
War, a  historical event,  and its causes must be traced back to the
subjective aims governing human plans and choices.

In flatly
rejecting the positivist approach to economic history, Rothbard adopts
the method of historical research first formulated by Ludwig von Mises.
In developing this method, Mises correctly delineated, for the first
time, the relationship between theory and history. It is Rothbard’s
great contribution in this volume—and his earlier  America’s Great
Depression —to be the first to consistently apply it to economic
history. It is worth summarizing this method here for several reasons.
First, Mises’s writings on the proper method of historical research have
inexplicably been almost completely ignored up to the present, even by
those who have adopted Mises’s praxeological approach in eco-nomics.
Second, familiarity with Mises’s method of historical research
illuminates the source and character of the remarkable distinctiveness
of Rothbard’s historical writings. In particular, it serves to correct
the common but mistaken impression that Rothbard’s historical writings,
especially on the origin and development of the U.S. monetary system,
are grounded in nothing more substantial than an idiosyncratic
“conspiracy theory of history.” Third, it gives us an opportunity to
elucidate the important elaboration of Mises’s method that Rothbard
contributed and which he deploys to great effect in explicating the
topic of this volume. And finally, we find in Mises’s method a
definitive refutation of the positivist’s claim that it is impossible to
acquire real knowledge of subjective phenomena like human motives and
that, therefore, economic history must deal exclusively with observable
and measurable phenomena.

To begin with, Mises grounds his
discussion of historical method on the insight that ideas are the
primordial stuff of history. In his words:

“History is the record
of human action. Human action is the conscious effort of man to
substitute more satisfactory conditions for less satisfactory ones.
Ideas determine what are to be considered more and less satisfactory
conditions and what means are to be resorted to to alter them. Thus
ideas are the main theme of the study of history.”

This is not to
say that all history should be intellectual history, but that ideas are
the ultimate cause of all social phenomena, including and especially
economic phenomena. As Mises puts it.

“The genuine history of
mankind is the history of ideas. It is ideas that distinguish man from
aU other beings. Ideas engender social institutions, political changes,
technological methods of production, and all that is called economic
conditions.”

Thus, for Mises, history:

“establishes the
fact that men, inspired by definite ideas, made definite judgments of
value, chose definite ends, and resorted to definite means in order to
attain the ends chosen, and it deals furthermore with the outcome of
their actions, the state of affairs the action brought about.”

Ideas—specifically
those embodying the purposes and values that direct action—are not only
the point of contact between history and economics, but differing
attitudes toward them are precisely what distinguish the methods of the
two disciplines. Both economics and history deal with individual choices
of ends and the judgments of value underlying them. On the one hand,
economic theory as a branch of praxeology takes these value judgments
and choices as given data and restricts itself to logically inferring
from them the laws governing the valuing and pricing of the means or
“goods.” As such, economics does not inquire into the individual’s
motivations in valuing and choosing specific ends. Hence, contrary to
the positivist method, the truth of economic theorems is substantiated
apart from and without reference to specific and concrete historical
experience. They are the conclusions of logically valid deduction from
universal experience of the fact that humans adopt means that they
believe to be appropriate in attaining ends that they judge to be
valuable.

The subject of history, on the other hand, “is action
and the judgments of value directing action toward definite ends.”!”
This means that for history, in contrast to economics, actions and value
judgments are not ultimate “givens” but, in Mises’s words, “are the
starting point of a specific mode of reflection, of the specific
understanding of the historical sciences of human action.” Equipped with
the method of “specific understanding,” the historian, “when faced with
a value judgment and the resulting action . . . may try to understand
how they originated in the mind of the actor, ”it is true that in
deriving theorems that apply to the specific conditions characterizing
human action in our world, a few additional facts of a lesser degree of
generality are inserted into the deductive chain of reasoning. These
include the facts that there exists a variety of natural resources, that
human labor is differentiated, and that leisure is valued as a
consumer’s good.

The difference between the methods of economics
and history may be illustrated with the following example. The economist
qua economist “explains” the Vietnam War-era inflation that began in
the mid-1960s and culminated in the inflationary recession of 1973-1975
by identifying those actions of the Fed with respect to the money supply
that initiated and sustained it. The historian, including the economic
historian, however, must identify and then assign weights to all those
factors that motivated  the various members of the Fed’s Board of
Governors (or of the Federal Open Market Committee) to adopt this course
of action. These factors include: ideology; partisan politics; pressure
exerted by the incumbent administration; the grasp of economic theory;
the expressed and perceived desires of the Fed’s constituencies,
including commercial bankers and bond dealers; the informal power and
influence of the Fed chairman within the structure of governance; and so
on.

In short, the economic historian must supply the motives
underlying the actions that are relevant to explaining the historical
event. And for this task, his only suitable tool is understanding. Thus,
as Mises puts it.
      
“The scope of understanding is the
mental grasp of phenomena which cannot be totally elucidated by logic,
mathematics, praxeology, and the natural sciences to the extent that
they cannot be cleared up by all these sciences.”

To say that a
full explanation of any historical event, including an economic one,
requires that the method of specific understanding be applied is not to
diminish the importance of pure economic theory in the study of history.
Indeed, as Mises points out, economics provides in its field a
consummate interpretation of past events recorded and a consummate
anticipation of the effects to be expected from future actions of a
definite kind. Neither this interpretation nor this anticipation tells
anything about the actual content and quality of the actual individuals’
judgments of value. Both presuppose that the individuals are valuing
and acting, but their theorems are independent of and unaffected by the
particular characteristics of this valuing and acting.

For Mises,
then, if the historian is to present a complete explanation of a
particular event, he must bring to bear not only his “specific
understanding” of the motives of action but the theorems of economic
science as well as those of the other “aprioristic,” or
non-experimental, sciences, such as logic and mathematics. He must also
utilize knowledge yielded by the natural sciences, including the applied
sciences of technology and therapeutics. Familiarity with the teachings
of all these disciplines is required in order to correctly identify the
causal relevance of a particular action to a historical event, to trace
out its specific consequences, and to evaluate its success from the
point of view of the actor’s goals.

For example, without
knowledge of the economic theorem that, ceteris paribus, changes in the
supply of money cause inverse changes in its purchasing power, a
historian of the price inflation of the Vietnam War-era probably would
ignore the Fed and its motives altogether. Perhaps, he is under the
influence of the erroneous Galbraithian doctrine of administered prices
with its implication of cost-push inflation.  In this case, he might
concentrate exclusively and irrelevantly on the motives of union leaders
in demanding large wage increases and on the objectives of the
“technostructure” of large business firms in acceding to these demands
and deciding what part of the cost increase to pass on to consumers.
Thus, according to Mises,

“If what these disciplines [i.e., the
aprioristic and the natural sciences] teach is insufficient or if the
historian chooses an erroneous theory out of several conflicting
theories held by the specialists, his effort is misled and his
performance is abortive.”
But what exactly is the historical method
of specific understanding, and how can it provide true knowledge of a
wholly subjective and unobservable phenomenon like human motivation?
First of all, as Mises emphasizes, the specific understanding of past
events is not a mental process exclusively resorted to by historians. It
is applied by everybody in daily intercourse with all his fellows. It
is a technique employed in all interhuman relations. It is practiced by
children in the nursery and kindergarten, by businessmen in trade, by
politicians and statesmen in affairs of state. All are eager to get
information about other people’s valuations and plans and to appraise
them correctly!

The reason this technique is so ubiquitously
employed by people in their daily affairs is because all action aims at
rearranging future conditions so that they are more satisfactory from
the actor’s point of view. However, the future situation that actually
emerges always depends partly on the purposes and choices of others
besides the actor. In order to achieve his ends, then, the actor must
anticipate not only changes affecting the future state of affairs caused
by natural phenomena, but also the changes that result from the conduct
of others who, like him,  are  contemporaneously planning  and  acting.
Understanding the values and goals of others is thus an inescapable
prerequisite for successful action.

Now, the method that provides
the individual planning action with information about the values and
goals of other actors is essentially the same method employed by the
historian who seeks knowledge of the values and goals of actors in
bygone epochs. Mises emphasizes the universal application of this method
by referring to the actor and the historian as “the historian of the
future” and “the historian of the past,” respectively. Regardless of the
purpose for which it is used, therefore, understanding aims at
establishing the facts that men attach a definite meaning to the state
of their environment, that they value this state and, motivated by these
judgments of value, resort to definite means in order to preserve or to
attain a definite state of affairs different from that which would
prevail if they abstained from any purposeful reaction. Understanding
deals with judgments of value, with the choice of ends and of the means
resorted to for the attainment of these ends, and with the valuation of
the outcome of actions per-formed.

Furthermore, whether directed
toward planning action or interpreting history, the exercise of specific
understanding is not an arbitrary or haphazard enterprise peculiar to
each individual historian or actor; it is the product of a discipline
that Mises calls “thymology,” which encompasses “knowledge of human
valuations and volitions.” Mises characterizes this discipline as
follows:

“Thymology is on the one hand an offshoot of
introspection and on the other a precipitate of historical experience.
It is what everybody learns from intercourse with his fellows. It is
what a man knows about the way in which people value different
conditions, about their wishes and desires and their plans to realize
these wishes and desires. It is the knowledge of the social environment
in which a man lives and acts or, with historians, of a foreign milieu
about which he has learned by studying special sources.”

Thus,
Mises tells us, thymology can be classified as “a branch of history”
since “[i]t derives its knowledge from historical experience.”24
Consequently, the epistemic product of thymo-logical experience is
categorically different from the knowledge derived from experiments in
the natural sciences. Experimental knowledge consists of “scientific
facts” whose truth is independent of time. Thymological knowledge is
confined to “historical facts,” which are unique and nonrepeatable
events. Accordingly, Mises concludes,

 All that thymology can
tell us is that in the past definite men or groups of men were valuing
and acting in a definite way. Whether they will in the future value and
act in the same way remains uncertain. All that can be asserted about
their future conduct is speculative anticipation of the future based on
specific understanding of the historical branches of the sciences of
human action. . . . What thymology achieves is the elaboration of a
catalogue of human traits. It can moreover establish the fact that
certain traits appeared in the past as a rule in connection with certain
other traits.”

More concretely, all our anticipations about how
family members, friends, acquaintances, and strangers will react in
particular situations are based on our accumulated thymological
experience. That a spouse will appreciate a specific type of jewelry for
her birthday, that a friend will enthusiastically endorse our plan to
see a Clint Eastwood movie, that a particular student will complain
about his grade—all these expectations are based on our direct
experience of their past modes of valuing and acting. Even our
expectations of how strangers will react in definite situations or what
course political, social, and economic events will take are based on
thymology. For example, our reservoir of thymological experience
provides us with the knowledge that men are jealous of their wives.
Thus, it allows us to “understand” and forecast that if a man makes
overt advances to a married woman in the presence of her husband, he
will almost certainly be rebuffed and runs a considerable risk of being
punched in the nose. Moreover, we may forecast with a high degree of
certitude that both the Republican and the Democratic nominees will
outpoll the Libertarian Party candidate in a forthcoming presidential
election; that the price for commercial time during the televising of
the Major League Soccer championship will not exceed the price for
commercials during the broadcast of the Super Bowl next year; that the
average price of a personal computer will be neither $1 million nor $10
in three months; and that the author of this paper will never be crowned
king of England. All of these forecasts, and literally millions of
others of a similar degree of certainty, are based on the specific
understanding of the values and goals motivating millions of nameless
actors.

As noted, the source of thymological experience is our
interactions with and observations of other people. It is acquired
either directly from observing our fellow men and transacting business
with them or indirectly from reading and from hearsay, as well as out of
our special experience acquired in previous contacts with the
individuals or groups concerned. Such mundane experience is accessible
to all who have reached the age of reason and forms the bedrock
foundation for forecasting the future conduct of others whose actions
will affect their plans. Furthermore, as Mises points out, the use of
thymological knowledge in everyday affairs is straightforward:
    
“Thymology
tells no more than that man is driven by various innate instincts,
various passions, and various ideas. The anticipating individual tries
to set aside those factors that manifestly do not play any concrete role
in the concrete case under consideration. Then he chooses among the
remaining ones.”

To aid in this task of narrowing down the goals
and desires that are likely to motivate the behavior of particular
individuals, we resort to the “thymological concept” of “human
character. ” The concrete content of the “character” we attribute to a
specific individual is based on our direct or indirect knowledge of his
past behavior. In formulating our plans, “We assume that this character
will not change if no special reasons interfere, and, going a step
farther, we even try to foretell how definite changes in conditions will
affect his reactions.” It is confidence in our spouse’s “character,”
for example, that permits us to leave for work each morning secure in
the knowledge that he or she will not suddenly disappear with the
children and the family bank account. And our saving and investment
plans involve an image of Alan Greenspan’s character that is based on
our direct or indirect knowledge of his past actions and utterances. In
formulating our intertemporal consumption plans, we are thus led to
completely discount or assign a very low likelihood to the possibility
that he will either deliberately orchestrate a 10-percent deflation of
the money supply or attempt to peg the short-run interest rate at zero
percent in the foreseeable future.

Despite reliance on the tool
of thymological experience, however, all human understanding of future
events remains uncertain, to some degree, for these events are generally
a complex resultant of various causal factors operating concurrently.
All forecasts of the future, therefore, must involve not only an
enumeration of the factors that operate in bringing about the
anticipated result but also the weighting of the relative influence of
each factor on the outcome. Of the two, the more difficult problem is
that of apportioning the proper weights among the various operative
factors. Even if the actor accurately and completely identifies all the
causal factors involved, the likelihood of the forecast event being
realized depends on the actor having solved the weighting problem. The
uncertainty inherent in forecasting, therefore, stems mainly from the
intricacy of assigning the correct weights to different actions and the
intensity of their effects.

While thymology powerfully, but
implicitly, shapes everyone’s understanding of and planning for the
future in every facet of life, the thymological method is used
deliberately and rigorously by the historian who seeks a specific
understanding of the motives underlying the value judgments and choices
of the actors whom he judges to have been central to the specific event
or epoch he is interested in explaining. Like future events and
situations envisioned in the plans of actors, all historical events and
the epochs they define are unique and complex outcomes codetermined by
numerous human actions and reactions. This is the meaning of Mises’s
statement.
“History is a sequence of changes. Every historical
situation has its individuality, its own characteristics that
distinguish it from any other situation. The stream of history never
returns to a previously occupied point. History is not repetitious.”

It
is precisely because history does not repeat itself that thymological
experience does not yield certain knowledge of the cause of historical
events in the same way as experimentation in the natural sciences. Thus
the historian, like the actor, must resort to specific understanding
when enumerating the various motives and actions that bear a causal
relation to the event in question and when assigning each action’s
contribution to the outcome a relative weight. In this task,
“Understanding is in the realm of history the equivalent, as it were, of
quantitative analysis and measurement.” The historian uses specific
understanding to try to gauge the causal “relevance” of each factor to
the outcome. But such assessments of relevance do not take the form of
objective measurements calculable by statistical techniques; they are
expressed in the form of subjective “judgments of relevance” based on
thymology. Successful entrepreneurs tend to be those who consistently
formulate a superior understanding of the likelihood of future events
based on thymology.

The weighting problem that confronts actors
and historians may be illustrated with the following example. The Fed
increases the money supply by 5 percent in response to a 20-percent
plunge in the Dow Jones Industrial Average—or, perhaps now, the
Nasdaq—that ignites fears of a recession and a concomitant increase in
the demand for liquidity on the part of households and firms. At the
same time, OPEC announces a 10-percent increase in its members’ quotas
and the U.S. Congress increases the minimum wage by 10 percent. In order
to answer the question of what the overall impact of these events will
be on the purchasing power of money six months hence, specific
understanding of individuals’ preferences and expectations is required
in order to  weight  and  time  the influence of each of these events on
the relationship between the supply of and the demand for money. The
ceteris-paribus laws of economic theory are strictly qualitative and
only indicate the direction of the effect each of these events has on
the purchasing power of money and that the change occurs during a
sequential adjustment process so that some time must elapse before the
full effect emerges. Thus the entrepreneur or economist must always
supplement economic theory with an act of historical judgment or
understanding when attempting to forecast any economic quantity. The
economic historian, too, exercises understanding when making judgments
of relevance about the factors responsible for the observed movements of
the value of money during historical episodes of inflation or
deflation.

Rothbard’s contribution to Mises’s method of
historical research involves the creation of a guide that mitigates some
of the uncertainty associated with formulating judgments of relevance
about human motives. According to Rothbard, “It is part of the
inescapable condition of the historian that he must make estimates and
judgments about human motivation even though he cannot ground his
judgments in absolute and apodictic certainty. ” But the task of
assigning motives and weighting their relevance is rendered more
difficult by the fact that, in many cases, historical actors, especially
those seeking economic gain through the political process, are inclined
to deliberately obscure the reasons for their conduct. Generally in
these situations, Rothbard points out, “the actor himself tries his best
to hide his economic motive and to trumpet his more abstract and
ideological concerns.”
      
Rothbard contends, however, that
such attempts to obfuscate or conceal the pecuniary motive for an action
by appeals to higher goals are easily discerned and exposed by the
historian in those cases “where the causal chain of economic interest to
action is simple and direct. ” Thus, for example, when the steel
industry lobbies for higher tariffs or reduced quotas, no sane adult,
and certainly no competent historian, believes that it is doing so out
of its stated concern for the “public interest” or “national security.”
Despite its avowed motives, everyone clearly perceives that the primary
motivation of the industry is economic, that is, to restrict foreign
competition in order to increase profits. But a problem arises in those
cases “when actions involve longer and more complex causal chains. ”
Rothbard points to the Marshall Plan as an example of the latter. In
this instance, the widely proclaimed motives of the architects of the
plan were to prevent starvation in Western European nations and to
strengthen their resistance to the allures of Communism. Not a word was
spoken about the goal that was also at the root of the Marshall Plan:
promoting and subsidizing U.S. export industries. It was only through
painstaking research that historians were later able to uncover and
assess the relevance of the economic motive at work.

Given the
propensity of those seeking and dispensing privileges and subsidies in
the political arena to lie about their true motives, Rothbard formulates
what he describes as “a theoretical guide which will indicate in
advance whether or not a historical action will be predominantly for
economic, or for ideological, motives.”39 Now, it is true that Rothbard
derives this guide from his overall worldview. The historian’s
worldview, however, should not be interpreted as a purely ideological
construction or an unconscious reflection of his normative biases. In
fact, every historian must be equipped with a worldview—an interrelated
set of ideas about the causal relationships governing how the world
works—in order to ascertain which facts are relevant in the explanation
of a particular historical event. According to Rothbard, “Facts, of
course, must be selected and ordered in accordance with judgments of
importance, and such judgments are necessarily tied into the historian’s
basic world outlook.”

Specifically, in Mises’s approach to
history, the worldview comprises the necessary preconceptions regarding
causation with which the historian approaches the data and which are
derived from his knowledge of both the aprioristic and natural sciences.
According to Mises:

“History is not an intellectual
reproduction, but a condensed representation of the past in conceptual
terms. The historian does not simply let the events speak for
themselves. He arranges them from the aspect of the ideas underlying the
formation of the general notions he uses in their presentation. He does
not report facts as they happened, but only  relevant  facts. He does
not approach the docviments without presuppositions, but equipped with
the whole apparatus of his age’s scientific knowledge, that is, with all
the teachings of contemporary logic, mathematics, praxeology, and
natural science.”
So, for example, the fact that heavy speculation
against the German mark accompanied its sharp plunge on foreign-exchange
markets is not significant for an Austrian-oriented economic historian
seeking to explain the stratospheric rise in commodity prices that
characterized the German hyperinflation of the early 1920s. This is
because he approaches this event armed with the supply-and-demand theory
of money and the purchasing-power-parity theory of the exchange rate. 
These “presuppositions” derived from praxeology lead him to avoid any
attribution of causal significance to the actions of foreign exchange
speculators in accounting for the precipitous decline of the domestic
purchasing power of the mark. Instead they direct his attention to the
motives of the German Reichs-bank in expanding the money supply. In the
same manner, a modern historian investigating the cause and
dissemination of bubonic plague in fourteenth-century Europe would
presuppose that the blossoming of religious heresy during that period
would have no significance for his investigation. Instead he would allow
himself to be guided by the conclusions of modern medical science
regarding the epidemiology of the disease.

The importance of
Rothbard’s theoretical guide is that it adds something completely new to
the historian’s arsenal of scientific preconceptions that aids him in
making judgments of relevance when investigating the motives of those
who promote or oppose specific political actions. The novelty and
brilliance of this guide lies in the fact that it is neither a purely
aprioristic law like an economic theorem nor an experimentally
established “fact” of the natural sciences. Rather it is a sociological
generalization grounded on a creative blend of thymo-logical experience
and economic theory. At the core of this generalization is the insight
that the State throughout history has been essentially an organization
of a segment of the population that forsakes peaceful economic activity
to constitute itself as a ruling class. This class makes its living
parasitically by establishing a permanent hegemonic or “political”
relationship between itself and the productive members of the
population. This political relationship permits the rulers to subsist on
the tribute or taxes routinely and “legally” expropriated from the
income and wealth of the producing class. The latter class is composed
of the “subjects” or, in the case of democratic states, the “taxpayers,”
who earn their living through the peaceful “economic means” of
production and voluntary exchange. In contrast, constituents of the
ruling class may be thought of as “tax-consumers” who earn their living
through the coercive “political means” of taxation and the sale of
monopoly privileges.

Rothbard argues that economic logic dictates
that the king and his courtiers, or the democratic government and its
special interest groups, can never constitute more than a small minority
of the country’s population—that all States, regardless of their formal
organization, must effectively involve oligarchic rule. The reasons for
this are twofold. First, the fundamentally parasitic nature of the
relationship between the rulers and the ruled by itself necessitates
that the majority of the population engages in productive activity in
order to be able to pay the tribute or taxes extracted by the ruling
class while still sustaining its own existence. If the ruling class
comprised the majority of the population, economic collapse and systemic
breakdown would swiftly ensue as the productive class died out. The
majoritarian ruling class itself then would either be forced into
productive activity or dissolve into internecine warfare aimed at
establishing a new and more stable—that is, oligarchic—relationship
between rulers and producers.

The second reason why the ruling
class tends to be an oligarchy is related to the law of comparative
advantage. In a world where human abilities and skills vary widely, the
division of labor and specialization pervades all sectors of the economy
as well as society as a whole. Thus, not only is it the case that a
relatively small segment of the populace possesses a comparative
advantage in developing new software, selling mutual funds, or playing
professional football, it is also the case that only a fraction of the
population tends to excel at wielding coercive power. Moreover, the law
of comparative advantage governs the structure of relationships within
as well as between organizations, accounting for the hierarchical
structure that we almost invariably observe within individual
organizations. Whether we are considering a business enterprise, a chess
club, or a criminal gang, an energetic and visionary elite invariably
comes to the fore, either formally or informally, to lead and direct the
relatively inert majority. This “Iron Law of Oligarchy,” as this
internal manifestation of the law of comparative advantage has been
dubbed, operates to transform an initially majoritarian democratic
government, or even a decentralized republican government, into a
tightly centralized State controlled by a ruling elite.

The
foregoing analysis leads Rothbard to conclude that the exercise of
political power is inherently an oligarchic enterprise. The small
minority that excels in wielding political power will tend to coalesce
and devote an extraordinary amount of mental energy and other resources
to establishing and maintaining a permanent and lucrative hegemonic bond
over the productive majority. Accordingly, since politics is the main
source of their income, the policies and actions of the members of this
oligarchic ruling class will be driven primarily by economic motives.
The exploited producing class, in contrast, will not expend nearly as
many resources on politics, and their actions in the political arena
will not be motivated by economic gain to the same degree, precisely
because they are absorbed in earning their livelihoods in their own
chosen areas of specialization on the market. As Rothbard explains:

“the
ruling class, being small and largely specialized, is motivated to
think about its economic interests twenty-four hours a day. The steel
manufacturers seeking a tariff, the bankers seeking taxes to repay their
government bonds, the rulers seeking a strong state from which to
obtain subsidies, the bureaucrats wishing to expand their empire, are
all professionals in statism. They are constantly at work trying to
preserve and expand their privileges.”

The ruling class, however,
confronts one serious and ongoing problem: how to persuade the
productive majority, whose tribute or taxes it consumes, that its laws,
regulations, and policies are beneficial; that is, that they coincide
with “the public interest” or are designed to promote “the common good”
or to optimize “social welfare.” Given its minority status, failure to
solve this problem exposes the political class to serious consequences.
Even passive resistance by a substantial part of the producers, in the
form of mass tax resistance, renders the income of the political class
and, therefore, its continued existence extremely precarious. More
ominously, attempts to suppress such resistance may cause it to spread
and intensify and eventually boil over into an active revolution whose
likely result is the forcible ousting of the minority exploiting class
from its position of political power. Here is where the intellectuals
come in. It is their task to convince the public to actively submit to
State rule because it is beneficial to do so, or at least to passively
endure the State’s depredations because the alternative is anarchy and
chaos. In return for fabricating an ideological cover for its
exploitation of the masses of subjects or taxpayers, these “court
intellectuals” are rewarded with the power, wealth, and prestige of a
junior partnership in the ruling elite. Whereas in pre-industrial times
these apologists for State rule were associated with the clergy, in
modern times—at least since the Progressive Era in the U.S.—they have
been drawn increasingly from the academy.

Politicians,
bureaucrats, and those whom they subsidize and privilege within the
economy thus routinely trumpet lofty ideological motives for their
actions in order to conceal from the exploited and plundered citizenry
their true motive of economic gain. In today’s world, these motives are
expressed in the rhetoric of “social democracy” in Europe and that of
modern—or welfare-state—liberalism in the United States. In the past,
ruling oligarchies have appealed to the ideologies of royal absolutism,
Marxism, Progressivism, Fascism, National Socialism, New Deal
liberalism, and so on to camouflage their economic goals in advocating a
continual aggrandizement of State power. In devising his theoretical
guide, then, Rothbard seeks to provide historians with a means of
piercing the shroud of ideological rhetoric and illuminating the true
motives underlying the policies and actions of ruling elites throughout
history. As Rothbard describes this guide, whenever the would-be or
actual proprietors and beneficiaries of the State act, when they form a
State, or a centralizing Constitution, when they go to war or create a
Marshall Plan or use and increase State power in any way, their 
primary  motivation is economic: to increase their plunder at the
expense of the subject and taxpayer. The ideology that they profess and
that is formulated and spread through society by the Court Intellectuals
is merely an elaborate rationalization for their venal economic
interests. The ideology is the smoke screen for their loot, the
fictitious clothes spun by the intellectuals to hide the naked plunder
of the Emperor. The task of the historian, then, is to penetrate to the
essence of the transaction, to strip the ideological garb from the
Emperor State and to reveal the economic motive at the heart of the
issue.

In characterizing the modern democratic State as
essentially a means for coercively redistributing income from producers
to politicians, bureaucrats, and special interest groups, Rothbard opens
himself up to the charge of espousing a conspiracy theory of economic
history. But it is his emphasis on the almost universal propensity of
those who employ the political means for economic gain to conceal their
true motives with ideological cant that makes him especially susceptible
to this charge. Indeed, the Chicago School’s theory of economic
regulation and the public choice theory of the Virginia School also
portray politicians, bureaucrats, and industries regulated by the State
as interested almost exclusively in maximizing their utility in the
narrow sense, which in many, if not most, cases involves a maximization
of pecuniary gain.  However, economists of both schools are inured
against the charge of conspiracy theory because in their applied work
they generally eschew a systematic, thymological investigation of the
actual motives of those individuals or groups whose actions they are
analyzing. Instead, their positivist methodology inclines them to
mechanically impute to real actors in concrete historical circumstances a
narrowly conceived utility maximization.

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