In an article written in 1980, Murray Rothbard opined about the significance of The Theory of Money and Credit by Ludwig von Mises. As this year marks the 100th anniversary of its publication, this old article by Rothbard reminds us why we celebrate it today.
The most important aspect of the book was the merger of micro with macro economics from an Austrian, subjectivist perspective.
“Mises’s great achievement in The Theory of Money and Credit (published in 1912) was to take the Austrian method and apply it to the one glaring and vital lacuna in Austrian theory: the broad “macro” area of money and general prices.
For monetary theory was still languishing in the Ricardian mold. Whereas general “micro” theory was founded in analysis of individual action, and constructed market phenomena from these building blocks of individual choice, monetary theory was still “holistic,” dealing in aggregates far removed from real choice. Hence, the total separation of the micro and macro spheres. While all other economic phenomena were explained as emerging from individual action, the supply of money was taken as a given external to the market, and supply was thought to impinge mechanistically on an abstraction called “the price level.” Gone was the analysis of individual choice that illuminated the “micro” area. The two spheres were analyzed totally separately, and on very different foundations. This book performed the mighty feat of integrating monetary with micro theory, of building monetary theory upon the individualistic foundations of general economic analysis.”
Additionally, Mises made fundamental contributions to monetary theory with his regression theorem regarding the origins of money and his analysis of money and credit (proto Austrian business cycle theory that was later elaborated by Hayek and Mises himself).
Rothbard concludes his article with these statements.
“With the Keynesian system in total disarray, reeling from chronic and accelerating inflation punctuated by periods of inflationary recession, economists are more receptive to Misesian cycle theory than they have been in four decades. Let us hope that this new edition will stimulate economists to reexamine the other sparkling insights in this grievously neglected masterpiece, and that Mises’s integration of money and banking with micro theory will serve as the basis for future advances in monetary thought.”
Unfortunately, it appears that mainstream economics is farther away from the view of monetary theory as espoused in The Theory of Money and Credit today than in 1980 when Rothbard wrote his review.