Steven Horwitz, (2000) Microfoundations and Macroeconomics: An Austrian Perspective.
London: Routledge, pp. xii, 276.
Austrians stand in a difﬁcult relationship to mainstream economics. Their consistently
critical, not to say adversarial, stance towards it has created a degree of self-referential
isolation that should probably be credited with preserving and developing a set of important
ideas that might otherwise hardly have survived. But it has left the problem of how Austrians
are to interact with the rest of the profession so that these ideas will gain the wider inﬂuence
that they deserve and so that they will not run out of worthwhile things to say and do and
thus condemn themselves to reciting a catechism.
Steven Horwitz’s new book is also caught in this dilemma. Horwitz sets out to show that
“there is an Austrian macroeconomics that is alive and well.” He identiﬁes three Austrian
contributions to macroeconomics over the last twenty or thirty years. One consists of the ex-
tensions to the Mises-Hayek theory of the business cycle, the second is the White-Selgin free
banking theory, and the third the revival of pre-Keynesian monetary disequilibrium theory.
But, clearly, these three themes will not sufﬁce to make a self-contained macroeconomics!
They could stand as worthwhile contributions to macroeconomics but then the questions be-
comes what broader body of theory are they to ﬁt into and how is that to be accomplished?
Horwitz is willing to reach outside the Austrian circle and discusses at some length the
relationships between Austrian ideas and the works of W.H. Hutt, Leland Yeager and my-
self. Needless to say, this does not reach out far enough to make contact with the current
While three Austrian themes won’t cover the ﬁeld, they harbor both unresolved concep-
tual problems and unexploited theoretical opportunities that deserve further exploration.
Horwitz’s book should be a stimulus to such exploration. Some directions that may be
taken will be suggested below.
Capital and Interest
The B¨ohm-Bawerkian capital-theoretic component of the Mises-Hayek business cycle the-
ory offers one opportunity that has not been exploited. B ¨ohm-Bawerk’s roundabout pro-
duction may be seen as Adam Smith’s division of labor put in a temporally sequential
context. The technological productivity of roundaboutness restates the increasing returns
property of Smithian production theory—the key to the Wealth of Nations. If “the Di-
vision of Labor depends on the Extent of the Market”, so does the roundaboutness of
production. By exploiting the Smithian proposition, one might perhaps provide a more
convincing case than the Hayekian story for why overinvestment processes cannot be sus-
tained. They push the temporal division of labor beyond what the extent of markets will
General competitive analysis has shunned Smith’s production theory. That the same
increasing returns property is present in B¨ohm-Bawerk may explain why his once dominant
capital theory has also faded from view in the context of theoretical structures that do not
easily accommodate non-convexities. Perhaps modern Austrians will also be reluctant to
accept the suggestion made here, since re-asserting B ¨ohm-Bawerk’s “third ground” on this