Review of Economic Perspectives – Národohospodářský obzor
Vol. 20, Issue 3, 2020, pp. 281–288, DOI: 10.2478/revecp-2020-0014
© 2020 by the authors; licensee Review of Economic Perspectives / Národohospodářský obzor, Masaryk University,
Faculty of Economics and Administration, Brno, Czech Republic. This article is an open access article distributed under
the terms and conditions of the Creative Commons Attribution 3.0 license, Attribution – Non Commercial – No Derivatives.
Newly Discovered Gold Does Not Distort the Economy;
It Is Not A Market Failure
Walter E. Block,
Abstract: We wish to “quibble” with Murphy (2019). We mean this literally. That is,
we are in strong and enthusiastic agreement with virtually everything he writes therein,
except for one point: we think him guilty of allowing the cloven hoof of market failure
into the Austrian tent. Our purpose in the present essay is to banish market failure from
praxeological premises. To wit, he maintains that pure market processes such as a gold
discovery can “distort” prices and interest rates, and we argue to the contrary.
Keywords: distortion, interest rates, market failure, prices
JEL Classification: B53, E32, E42, E58, G21
Received: 9 November 2019 / Accepted: 17 July 2020 / Sent for Publication: 9 September 2020
In our view, there is no such thing as a market failure. Before we go any further, we do
well to define terms. A market failure is not an act that fails to maximize profits nor,
one that leads to losses. These occurrences are legion in any economy occupied by flesh
and blood mistake-making human beings. Opening a restaurant that has to close later on
is a failure, but not a market failure. Being stuck with an inventory of hula hoops that no
one wants to purchase, at least not at a price above all costs, is yet another example.
Ex-ante, every voluntary human action or interaction, is optimal from the perspective of
However, measured by some omniscient being, against some standard of
perfection (virtually always the literally impossible, and therefore ludicrous, case of
perfectly-competitive general equilibrium) – many voluntary action(s)/interaction(s) are
found wanting. Such action(s)/interaction(s) are grist for the mill of market failure,
provided that our all-knowing and all-wise leader(s) can imagine some coercion of the
Walter E. Block, Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics
Loyola University New Orleans, The Unites States of America, firstname.lastname@example.org
William Barnett II, Dr. John V. Connor Professorship in Economics and Finance and Professor
of Economics, Loyola University New Orleans, The United States of America,
That some third party(ies) may ex ante deem voluntary action(s) of another or others to be
suboptimal is irrelevant to human action. Unfortunately, it all too often becomes relevant when
the third party(ies) use coercion to impose his or their will(s) on the acting party(ies) for the
benefit, of course, of the benighted latter.
Ex post, any voluntary human action(s) or interaction(s) can be suboptimal, and that for a variety
of reasons. Judgment of such action(s) is the realm of Monday Morning Quarterbacks and others
blessed with 20-20 hindsight.
Review of Economic Perspectives
actor(s) that would lead to results superior − at least in the eyes of the leader(s) − to
those of the voluntary action(s).
In sum, a market failure is assumed to exist in any situation in which, ex-ante, coercion
can be supposed to yield superior results to voluntarism. Mainstream economists think
such cases exist in the real world.
Austrians, however, are supposedly an exception to
this general rule.
This brings us to Murphy (2019). This author is one of the most accomplished
praxeologists now active, and, yet, we fear, he errs in this regard. Now, this mistake of
his might well be no more than something akin to a typographical error, the misuse of
one single word, “distort,” but, even if so, the error goes deeper than that, since it
seemingly applies, as well, to Mises, Hayek, and Rothbard. If so, Murphy is in “good”
so it is even more important that we get to the bottom of this matter.
Consider this statement of Murphy’s (2019, emphasis added)
“Putting together all three of the block quotations from Human Action that we have
provided above, we can summarize Mises’s position as follows: The unsustainable
boom occurs when a newly created (or mined) quantity of money enters the loan market
and distorts interest rates, before other prices in the economy have had time to adjust. In
principle, this process could occur even in the case of commodity money with 100
percent reserve banking.
“However, in practice Mises believes such a theoretical possibility can be safely
neglected, because (a) the quantity of new gold (or other commodity money) entering
the economy will likely be relatively small over any short period and (b) whatever the
stock of new commodity money entering the economy as a whole, typically only a small
fraction of it would be channeled into the loan market upfront.
“Thus, even though in principle Mises’s theory of the boom-bust cycle is fundamentally
about new quantities of money hitting the loan market early on, in practice the
explanation revolves around newly-created fiduciary media being lent into the
(Bold emphasis added by present authors).
We take exception to the one word, “distort.” This implies that gold discoveries
resulting from voluntary actions are a market failure, and, in our view, the set of market
failures is the null set. In logic, to point out a self-contradiction is a devastating blow.
This is akin to an Austrian giving credence to the existence of a market failure. Can it be
really true that he who supplies newly mined gold to the economy, whether it is used in
the credit market, for jewelry, for teeth, or, for gold coins which are used as money, or
It would be silly to list publications articulating this view. Virtually all economists take this
position. Instead, we content ourselves with mentioning critics of this pernicious doctrine:
Anderson, 1998; Barnett, et. al, 2005; Block, 2001, 2002; Callahan, 2000; Cowen, 1988;
DiLorenzo, 2011; Guillory, 2005; Higgs, 1995; Hoppe, 2003; MacKenzie, 2002; McCloskey,
2018; Rothbard, 1985; Simpson, 2005; Tucker, 1989; Westley, 2002; Woods, 2009A, 2009B.
No, excellent company; these three are surely the leading lights in Austrian economics in
general, and with regard to the business cycle in particular.
Unless otherwise specified, our focus on Murphy is with regard to this one publication of his.
For support of our position, see Shostak, 2019.
We assume Murphy is referring to voluntarily mined commodity(ies).
Volume 20, Issue 3, 2020
for any other legitimate purpose, “distorts” the market? If so, there is a market failure
lurking somewhere in the underbrush, and, if we are to achieve economic prosperity, the
government would be justified in banning, or at least regulating such goings-on. This
would be anathema not only to libertarians but to praxeologists as well.
Whence the source(s) of these errors? There are several. One mistake is to think money
to be a sui generis good, rather than to understand it as a capital good.
may be classified either as work-in-process; e.g., steel that is in the process of becoming
a part of a final good; or as fixed; e.g., a final good not intended for direct consumption,
such as a delivery truck. The former move from being higher-order goods to lower-
order goods as they are processed. The latter are used to transform higher-order goods
to lower-order goods, without their own order necessarily varying, although it may.
So, also, is money qua money used to transform higher-order goods to lower-order
goods, not by effecting a physical change in the higher-order good, but rather by
mediating a change in ownership of another good(s) which lowers the order(s) thereof.
Another inaccuracy is to think that the optimal quantity of commodity money
quantity extant at any point in time and that therefore any increase in the quantity of
such a money commodity, on the one hand, misallocates resources because the
increment could have been put to alternative uses, while adding no value as money, and
on the other alters interest rates and the structure of prices in ways not in keeping with
the underlying preferences of individuals.
A third mistake is the failure to properly distinguish between a voluntary increase in
commodity money and an increase in money substitutes. Or, to quote Mises:
“Circulation credit is credit granted out of funds especially created for this purpose by
the banks. In order to grant a loan, the bank prints banknotes or credits the debtor on a
deposit account. It is the creation of credit out of nothing. It is tantamount to the
creation of fiat money … It increases the amount of money substitutes….”
Additionally, several other points need to be made. The interest rates under
consideration are money rates of interest set in credit markets. In those markets, extant
goods, specifically, capital goods in the form of quantities of money, are exchanged for
Credit transactions do not involve saving and investment.
involve the transference of ownership of preexisting goods for promises to be fulfilled
Murphy is careful to note that the quantity of the gold discovery is important. If only a small
amount of newly mined gold enters the economy, the “distortion” will be small. But, still, there
will be a “distortion” in his view, and we take the opposite perspective on this matter.
Barnett and Block (2005).
For example, a truck that is never used as a first-order; i.e., consumers’, good, is a higher-order,
fixed capital good. However when used to make a delivery of furniture to a consumer it is a
lower-order capital good than when it is used to bring furniture from the factory to the retail store.
Money is a fixed capital good whose order depends on the nature of the exchange it is mediating.
In contrast, the optimal quantity of fiat money is exactly the extant quantity. Barnett and Block
Barnett and Block (2004) and (2012).
Mises (1978, 218).
We realize that the extant good(s) are not always money; credit in modern societies almost
always takes the form of a loan of money, and thus we ignore exceptions as irrelevant.
Barnett and Block (2007A).
Review of Economic Perspectives
in the future. These preexisting goods were a form of saving when they were first
created/produced. But the transference of title thereto does not involve current saving.
“A man’s savings are always embodied in concrete capital goods” (Mises, 1998, 519).
The necessary implication of Murphy and thus also of Mises is that appropriate coercion
is superior to purely voluntary action(s), when the latter consists of an increase in gold
money, whether by converting gold from non-money to monetary uses or by producing
new money from newly mined gold. Thus, a market failure necessitates apposite
The authors of the present paper change our cash balance holdings, or, stick some
money into our mattresses, or release some from that source, and, behold, interest rates
Yes, they will change, but from whence will spring any distortion? We
claim no such thing will occur. In contradistinction to Murphy, along with Mises,
Rothbard, and Hayek, Barnett and Block (2012, 2004) demonstrate that the optimal
quantity of commodity money is whatever level is freely chosen by all market
participants. Given that, any changes that emanate from the freely chosen decisions of
people to mine gold, change their cash balances level, cannot possibly be a “distortion,”
since the optimal quantity of money is whatever results from these voluntary decisions.
Jones purchases some bread, quite a bit of it, so as to overcome the objection based on
He thus changes the price of this foodstuff; it is no longer what it would have
been in the absence of this commercial activity. But to say that he distorts this price is a
horse of an entirely different color. The former objective fact; the latter is a subjective,
value-laden, assertion. But, for those who wish to maintain the latter, it is incumbent
upon them to furnish a reason for their conclusion, and this they have not done.
Murphy also avers as follows:
“According to the FRFB writers, all this shows is that commercial banks need to pay
attention to maturity matching. It is not fraudulent, and it does not cause the business
cycle if banks sell (say) 12-month CDs and lend the funds out for 2-year projects
(hoping to roll over the CDs when they mature).5 So by the same token, there is nothing
especially risky or distortionary if we look at one end of the spectrum, where savers
lend their funds to the bank for a loan that matures in “zero” time even though the bank
uses those funds to invest in longer maturity projects” (emphasis added by present
Here is a Murphy footnote attached to the above quote:
Barnett and Block (2007A) make the point that saving is embodied in concrete (durable)
consumers’ goods, as well. Although in that paper those authors eschewed “any consideration of
‘human capital’ and its relation to saving and investment,” the present authors think that when an
individual develops his mind or body he is saving/investing in a relatively durable capital good.
Perhaps such coercion might even be performed by private individuals; i.e., criminals. E.g., in
the famous (infamous?) case of lighthouses, might not some private ship-owners improve
outcomes by coercing other ship-owners to pay to support a lighthouse, which they would not do
voluntarily? See on this Barnett and Block, 2007B, 2009; Block, 2011
To an infinitesimally-small amount, given our wealth, but we are not now concerned with the
degree of “distortion,” only with whether or not it exists; i.e., whether or not this is a cogent
Or ceases to buy a like amount. Or starts to supply some.
Volume 20, Issue 3, 2020
“In the text above, I am paraphrasing a line of argument from the FRFB camp, which
presupposes that the typical Rothbardian does not object to maturity mismatching per
se. However, some Rothbardians do argue that maturity mismatching is the fundamental
problem, of which fractional reserve banking on demand deposits is only the most
prominent example. See Block and Barnett (2017) for such a claim, and see Bagus,
Howden, and de Soto (2018) for a critical response, which contains citations to the
volleys of the running debate. Of course, those in the 100 percent reserve camp who
agree with Block and Barnett, this particular line of argument from the FRFB would fall
In principle, ceteris paribus, a spit in the ocean raises its level; however, in the real
world magnitudes are often of great importance. To bring the point home, consider
maturity mismatching, both with respect to the length of the mismatch period, and its
temporal location, and the magnitude of the credit involved. Regardless of the length of
the maturity mismatch, and the temporal length of the maturity mismatch, if the
magnitude is small; e.g., $1.00 in the circumstances of the U.S. in 2019, the
consequences will be trivial, from the point of view of the business cycle, although it
may be of immense importance to the parties directly involved.
Further, Murphy quotes Mises as follows:
“The notion of “normal” credit expansion is absurd. Issuance of additional fiduciary
media, no matter what its quantity may be, always sets in motion those changes in the
price structure the description of which is the task of the theory of the trade cycle. Of
course, if the additional amount issued is not large, neither are the inevitable effects of
the expansion.” (Mises 1998 , 439, n. 17; emphasis added.)
Murphy additionally quotes Mises:
“Everything that has been asserted with regard to credit expansion is equally valid with
regard to the effects of any increase in the supply of money proper as far as this
additional supply reaches the loan market at an early stage of its inflow into the market
system. If the additional quantity of money increases the quantity of money offered for
loans at a time when commodity prices and wage rates have not yet been completely
adjusted to the change in the money relation, the effects are no different from those of a
credit expansion… .
What differentiates credit expansion from an increase in the supply of money as it can
appear in an economy employing only commodity money and no fiduciary media at all
is conditioned by divergences in the quantity of the increase and in the temporal
sequence of its effects on the various parts of the market. Even a rapid increase in the
production of the precious metals can never have the range which credit expansion can
attain. The gold standard was an efficacious check upon credit expansion, as it forced
the banks not to exceed certain limits in their expansionist ventures. The gold standard’s
own inflationary potentialities were kept within limits by the vicissitudes of gold
mining. Moreover, only a part of the additional gold immediately increased the supply
offered on the loan market. The greater part acted first upon commodity prices and
wage rates and affected the loan market only at a later stage of the inflationary
process.” (Mises  1998, 571–72; italics added.)
Review of Economic Perspectives
That is, according to Mises, in principle, an increase in commodity credit has the same
effect as a rise in circulating credit, provided that the increase in money only finds its
way into the credit markets after commodity prices and wage rates have completely
adjusted to the change in the money relation; i.e., the increase in money. But, as we
have seen, the magnitudes are important. Moreover, it is unreasonable to suggest that
new money might wend its way through markets for goods and services, until those
markets are fully adjusted, and only then find its way into credit markets.
Murphy (21) states and agrees with: “The claim [of FRFBs] — from Mises and Hayek
through Rothbard up to writers such as Salerno in the present day — has always been
that credit expansion sets in motion an unsustainable boom.” That is, according to those
thinkers and Murphy, commodity credit in the form of new commodity money, both in
principle and under typical conditions, has the same distortionary effects as new
circulating credit; to wit: such additions to the stock of commodity money and credit
cause business cycles, and thus such additions constitute market failure. We reject this
claim, based as it is on the assertion that such additions distort interest rates. Rather we
understand such additions and the effects thereof regarding both prices and interest rates
to result from voluntary human actions; i.e., legitimate market activity. Consequently,
such actions distort nothing and do not constitute market failures, itself, the null set.
Acknowledgment: We thank two referees of this journal whose comments on an earlier
version of this paper greatly improved it. The authors thank Anthony Cesario for a
splendid editing job. The usual stipulations of course apply: the authors alone are solely
responsible for all remaining errors.
Disclosure statement: No potential conflict of interest was reported by the authors.
ANDERSON, W. L., (1998). “Market Failure?” Accessed on October 8 from
BARNETT, W. II, BLOCK W. E. (2004). “On the Optimum Quantity of Money.” The
Quarterly Journal of Austrian Economics. 7 (1): 39-52.
BARNETT, W. II, BLOCK W. E. (2005). “Money: Capital Good, Consumers’ Good, or
(Media of) Exchange Good?” Review of Austrian Economics. 18 (2): 179-194.
Reprinted in: Godart-van der Kroon, Annette and Patrik Vonlanthen, eds. 2018.
Banking and Monetary Policy from the Perspective of Austrian Economics. p. 49-64;
Springer Publishing. https://www.springer.com/gp/book/9783319758169
BARNETT, W. II., BLOCK W. E. (2007A). “Saving and Investment: A Praxeological
Approach.” New Perspectives on Political Economy. 3(2): 129-138.
Volume 20, Issue 3, 2020
BARNETT, W. II., BLOCK W. E., (2007B). “Coase and Van Zandt on Lighthouses,”
Public Finance Review, (35)6, November: 710-733
BARNETT, W. II., BLOCK W. E., (2009). “Coase and Bertrand on Lighthouses,”
Public Choice; 140(1–2): 1–13 http://www.walterblock.com/wp-
BARNETT, W. II., BLOCK W. E., (2012). “The Optimum Quantity of Money, Once
Again.” Economics, Management, and Financial Markets; (7)1, March: 9-24;
Money-Once-Again.pdf; Password: AddletonAP2009.
BARNETT, W. II., BLOCK W. E., SALIBA, M., (2005). "Perfect Competition: A Case
of ‘Market-Failure,’” Corporate Ownership & Control. (2)4, Summer: 70-75
BLOCK, W. E. (2001). “Comment on Canice Prendergast’s ‘A Theory of ‘Yesmen,’”
Quarterly Journal of Austrian Economics, (4)2, Summer: 61-68;
BLOCK, W. E., (2002). “All Government is Excessive: A Rejoinder to ‘In Defense of
Excessive Government’ by Dwight Lee,” Journal of Libertarian Studies, (16)3: 35-82;
BLOCK, W. E., (2011). “Rejoinder to Bertrand on lighthouses.” Romanian Economic
and Business Review, (6)3, Fall: 49-67; http://www.rebe.rau.ro/REBE%206%203.pdf;
CALLAHAN, G., (2000). “Market Failure Again?” Accessed on April 4 from
COWEN, T., (1988). The Theory of Market Failure: A Critical Examination, Fairfax,
VA: George Mason University Press
DILORENZO, T., (2011). “A Note on the Canard of ‘Asymmetric Information’ as a
Source of Market Failure.” Quarterly Journal of Austrian Economics, (14)2, Summer:
GUILLORY, G. (2005). “What Are You Calling Failure?” Accessed on May 5 from
HIGGS, R., (1995). “The Myth of ‘Failed’ Policies.” The Free Market. June. Vol. 13,
No. 6. http://www.mises.org/freemarket_detail.asp?control=239&sortorder=articledate
HOPPE, H. H., (2003). The Myth of National Defense: Essays on the Theory and
History of Security Production. Auburn, AL: The Ludwig von Mises Institute
MACKENZIE, D. W., (2002). “The Market Failure Myth“.Accessed on August 26 from
MCCLOSKEY, D. N., (2018). “They Hate the Chicago School and Have Never Heard
of the Austrian School.” Accessed on February 11 from
Review of Economic Perspectives
MISES, L. Von. (1998). Human Action. Scholar’s ed. Ludwig von Mises Institute.
(Original work published in 1949);
MISES, L. Von., (1946). “The Trade Cycle and Credit Expansion: The Economic
Consequences of Cheap Money.” In: Mises, Ludwig von. 1978. On The Manipulation
of Money and Credit. Free Market Books. Dobbs Ferry, N.Y.
MURPHY, R. P., (2019). “More Than Quibbles: Problems with the Theory and History
of Fractional Reserve Free Banking.” Quarterly Journal of Austrian Economics, (22)1:
ROTHBARD, M. N., (1985). “Airport Congestion: A Case of Market Failure?” The
Free Market. Auburn, AL: The Ludwig von Mises Institute, January,
ROTHBARD, M. N., (2004). Man, Economy and State, Auburn AL: Ludwig von Mises
Institute, Scholar’s Edition. (Original work published in 1962);
SHOSTAK, F., (2019). “Does the Boom-Bust Cycle Ever Result from Commodity
Money?” Accessed on August 26 from; https://mises.org/wire/does-boom-bust-cycle-
SIMPSON, B., (2005). Markets Don’t Fail. New York, N.Y.: Lexington Books
WESTLEY, C., (2002). “The Myth of Market Failure” Accessed on June 14 from
WOODS, T. E. Jr., (2009A). “Krugman Failure, Not Market Failure” Accessed on June
19 from http://www.lewrockwell.com/woods/woods116.html
WOODS, T. E. Jr., (2009B). “Response to the ‘Market Failure’ Drones” Accessed on
June 10 from http://mises.org/story/3503