Joe Salerno, like Ludwig von Mises, is not only a great economist but a great teacher of economics as well. Since 2005, he has been in charge of the Mises Institute Summer Fellows program. In this program, graduate students spend a summer at the Institute. They engage in regular discussions; and, under Joe’s direction, they prepare a research paper. He has a masterly ability to discern at once the direction in which a student’s argument is heading. He then responds, with all the resources of his remarkable intelligence and learning, and offers the student careful guidance in writing the paper. Lew Rockwell aptly remarks, “No one could be more patient, rigorous, detailed, and loving. Forget Mr. Chips. We’ve got Joe Salerno.”
Given his manifest success as a mentor, as well as his warm personal relations with the Fellows, it is hardly surprising that they would wish to express their gratitude to him. What better way to do so than a volume of essays in his honor? In The Next Generation of Austrian Economics, thirteen of the Fellows have presented, in a fitting tribute to Joe, research of their own which develops some of the central themes of his work. The book includes as well a foreword by Lew Rockwell and an afterword, expertly summarizing Joe’s contributions to economics, by his friend and colleague Peter Klein.
The central theme in Joe’s work is I think best approached indirectly, by asking this question: what part does the history of thought play in economic theory? In physics, current research rarely proceeds by asking what past great scientists have had to say about a problem. Physics and the history of physics are two different disciplines. Not so in philosophy, where asking what Aristotle or Hume or Kant thought often illuminates present concerns. What about economics? Many mainstream economists ignore past theory, but Austrian economists do not.
Joe Salerno perfectly exemplifies the Austrian attitude toward past theory. At the heart of his work lies the creative appropriation for contemporary economic theory of the great Austrians of the past. He works from an unrivaled knowledge of the history of economics, especially in monetary theory. Murray Rothbard said of Joe that he “has done remarkably creative work in the history of economic thought.”
As Peter Klein notes, a key insight of Joe’s interpretation of Mises is that “what Mises means by ‘economic calculation’ is monetary calculation.” Joe puts the essence of the matter in this way: “Mises’s pathbreaking and central insight is that monetary calculation is the indispensable mental tool for choosing the optimum among the vast array of intricately-related production plans that are available for employing the factors of production within the framework of the social division of labor.” In two classic articles, “Ludwig von Mises as Social Rationalist” and “Mises and Hayek Dehomogenized,” he applied this insight to arrive at a revolutionary conclusion.
Many contemporary Austrians have followed Hayek in thinking of the market as a mechanism for coordinating dispersed knowledge, much of it tacit. No central planner could grasp the vast amount of knowledge required to coordinate the economy; but what no individual or group can do consciously, the market does automatically. The coordination of the economy is “the result of human action, but not of human design.” This insight, it is claimed, forms the basis of Mises’s famous calculation argument against the possibility of socialism.
From this view, Salerno vigorously dissents. Mises’s argument is about monetary calculation, not knowledge. Even if the central planner possessed all relevant knowledge, socialism could not work. Monetary calculation requires a market.
Several of the contributors to the book take up Joe’s theme that rational action based on calculation in money is central to the free market. Mateusz Machaj asks and responds to a question in a way that manifests Joe’s influence: “why make a difference between ‘Hayekian’ and ‘Misesian’ knowledge? We are inclined to do so, because Mises emphasized the role of prices in the economy, whereas Hayek attempted to go further and focus on something underneath prices: production functions. For the former, prices per se were of interest. For the latter something more substantial had to be hidden behind those prices.”
Machaj makes clear his agreement with Salerno that socialist calculation is impossible because the central planner lacks Misesian, rather than Hayekian, knowledge. “The central owner under socialism has precisely the following problem: he cannot know allocation activities based on current price offers. He is not in a position to recognize what private owners would do, and how they would exclude each other from the market process. He is able to gather data on past prices, or even price offers right before the complete nationalization of resources, but he cannot know which allocation activities would have been performed under private property. Even if he or she knew all the relevant Hayekian knowledge, it would not suffice to solve allocation problems under socialism, since all of the Misesian knowledge would have to be known.”
Matthew McCaffrey also fully accepts Joe’s line of reasoning. “[C]alculation provides, among other things, a basis for entrepreneurs’ judgment regarding the direction of the factors. More profoundly, calculation is actually the fundamental characteristic of a rational economic system, which is simply impossible in its absence, as in the case of socialist societies.” McCaffrey makes effective use of this point to criticize Israel Kirzner’s understanding of the entrepreneur, which “cannot incorporate ordinary economic decision making into entrepreneurship.”
As Klein notes, Joe has also stressed the importance of a distinctive Austrian approach to “mundane economics,” i.e., the explanation of value and prices. This approach, which stems from Menger and Böhm-Bawerk, is causal-realist and differs from the Walrasian views of Wieser, Schumpeter, and Hayek. Mises and Rothbard greatly extended the Mengerian approach, and it is one of Joe’s fundamental achievements to bring to light and to clarify in brilliant fashion the issues here at stake.
In an intricate discussion, Xavier Méra contributes to causal realist price theory through an analysis of Mises and Rothbard on monopoly prices. Both held that a monopoly price depends on the seller’s confronting an inelastic demand curve. Méra maintains that this is true only in what he calls the immediate run. “Matters are different however once one focuses on the production decision points, when people try to maximize net income and not necessarily gross income. Increasing one’s net income by restricting one’s production of a good is possible even if one faces an elastic demand schedule above the free market price, provided that one’s average production expenses fall at a high enough pace (or rise slowly enough). All that is really required is that total expenses fall more than total income. The decisive consideration is not inelasticity of demand.” He points out that, on occasion, Mises and Rothbard did recognize what he takes to be the correct position; but for the most part, they did not. Whether his criticism is correct I shall not attempt to assess.
In his careful attention to Rothbard, Méra illustrates another key theme of Joe’s work. Joe is not only a Misesian but a Rothbardian as well. Rothbard, he has shown again and again, was Mises’s greatest follower and in his own right one of the greatest of all economists. Joe’s devotion throughout his career to Rothbard has been steadfast.
I have been able to discuss only a few of the essays in this valuable collection; but it should be clear from what has been said already that, in the young economists represented here, the future of Austrian economics is in good hands. For this we have Joe Salerno to thank.
