The Theory of Money and Credit
16. A Methodological Comment
In a review devoted to the first edition of this book,56 Professor Walter Lotz deals with the criticism that I have brought forward against Laughlin’s explanation of the value of the Austrian silver gulden in the years 1879-92.57 His arguments are particularly interesting, inasmuch as they offer an excellent opportunity of exemplifying the difference that exists between the conception and solution of problems in modern economic theory based on the subjective theory of value on the one hand, and under the empirico-realistic treatment of the historically and sociopolitically oriented schools of Schmoller and Brentano on the other.
According to Professor Lotz it is “a question of taste” whether my arguments are “recognized as having any value.” He does not “find them impressive.” He says that he himself was not at first able to agree with Laughlin’s view, until “Laughlin mentioned information, which makes his arguments at least very probable.” Laughlin, in fact, told him that “in the eighties he received the information from the leading house of Viennese high finance, that people were reckoning with the fact that the paper gulden would be eventually converted at some rate or other.” Professor Lotz adds to this: “Certainly it was also of importance that the circulation of paper gulden and silver gulden was quantitatively very moderate, and that these means of payment were accepted by the public banks at their nominal value. All the same, the expectations for the future that the leading house of Viennese high finance had reason to nurse cannot have been quite without effect on the international valuation of the Austrian paper gulden. Consequently it may be justifiable in view of this information to ascribe some weight to Laughlin’s argument, in spite of von Mises.”
The mysterious communication made to Laughlin by “the leading house of Viennese high finance,” and handed on by him to Professor Lotz, was a secret de Polichinelle. The innumerable articles devoted to the question of the standard that appeared during the eighties in the Austrian and Hungarian papers, especially in the Neue Freie Presse, always assumed that Austria-Hungary would go over to the gold standard. Preparation for this step had been made as early as 1879 by the suspension of the free coinage of silver All the same, proof of this fact, which is denied by nobody (or at least not by me), in no way solves the problem we are concerned with, as Professor Lotz apparently supposes it to do. It merely indicates the problem that we have to solve. The fact that the gulden was “eventually” to be converted into gold “at some rate or other” does not explain why it was at that time valued at a certain amount and not higher or lower. If the gulden were to be converted into gold, and the national debt certificates into gulden, how did it come about that the interest-bearing national debt bonds were valued less highly than the gulden notes and coined gulden which did not bear interest? That is what we have to explain. It is obvious that our problem is only just beginning at the point where it is finished with for Professor Lotz.
It is true that Professor Lotz is prepared to admit that it was “also of importance” that the circulation of paper gulden and silver gulden was “quantitatively very moderate”; and he grants the validity of yet a third explanation in addition, namely that this means of payment was accepted by the Treasury at its nominal value. But the relationship of these explanations to each other remains obscure. Possibly it has not occurred to Professor Lotz that the first and second are difficult to reconcile. For if the gulden was valued only in consideration of its eventual conversion into gold, it is fair to assume that it could have made no difference whether more or fewer gulden were in circulation, so long, say, as the funds available for conversion were not limited to a given amount. The third attempt at an explanation is altogether invalid, since the “nominal value” of the gulden was only the “gulden” over again and the very point at issue is to account for the purchasing power of the gulden.
The sort of procedure that Professor Lotz adopts here for solving a problem of economic science must necessarily end in failure. It is not enough to collect the opinions of businessmen—even if they are “leading” men or belong to “leading” houses—and then serve them up to the public, garnished with a few on the one hand’s and on the other hand’s, an admittedly or so, and a sprinkling of all the same’s. The collection of “facts” is not science, by a long way. There are no grounds for ascribing authoritative significance to the opinions of businessmen; for economics, these opinions are nothing more than material, to be worked upon and evaluated. When the businessman tries to explain anything he becomes as much a “theorist” as anybody else; and there is no reason for giving a preference to the theories of the practical merchant or farmer. It is, for instance, impossible to prove the cost-of-production theory of the older school by invoking the innumerable assertions of businessmen that “explain” variations in prices by variations in costs of production.
Nowadays there are many who, busied with the otiose accumulation of material, have lost their understanding for the specifically economic in the statement and solution of problems. It is high time to remember that economics is something other than the work of the reporter whose business it is to ask X the banker and Y the commercial magnate what they think of the economic situation.
