Summary: “An Interview with Fritz Machlup” (1980)

This interview presents Fritz Machlup as both heir to and critic within the Austrian tradition. Its organizing movement is biographical, methodological, and then diagnostic: Machlup recalls Vienna, Mises’s seminar, and the intellectual content of “Austrian” economics, before applying that tradition to prediction, depression, inflation, capital theory, and international monetary analysis. The central thesis is not that Austrian economics supplies a complete policy machine, but that its durable contribution lies in subjectivist, individualist, relative-price reasoning—especially where rival schools flatten economic structure into aggregates.

Machlup’s recollection of Vienna begins with contrast: Wieser’s lectures were substantial but “terribly dull,” whereas Mises’s seminar had “more vitality.” His portrait of Mises combines admiration with methodological distance. On method, Machlup accepts deductive model-building while resisting the stronger Misesian claim that economics must rest on a privileged apriorism.

“Well, deductive is fine, a priori is something else.”

His conceptual move is to redescribe theory as construction: models may be internally coherent and useful without being directly falsified by experience. The “pure logic of choice” yields intelligibility, not concrete forecasts. Hence theory is powerful but incomplete.

“But it is only a skeleton without flesh and to say that this logic of choice will tell you that a steel price of twelve dollars fifty is the right price, that makes no sense.”

This distinction governs his criticism of prediction. Machlup separates conditional inference from real-world forecasting and argues that economics is strongest when identifying impossibilities or constraints, not when pretending to numerical precision.

“Now that is a negative prediction and I would say economics is most fertile in making negative predictions. For example, I can say if we print another so-and-so many billion dollars etc., etc., then it is practically impossible that we will not get a rise in prices.”

He therefore attacks probabilistic macroeconomic forecasting and regression work when detached from sound theory. The error term, in his account, often conceals misspecification rather than scientific humility; the choice of variables depends on theory, and competing specifications can generate divergent results.

“But if your theory had given you another variable, then the whole thing may have come out different again. So my trust in this kind of thing is next to zero.”

The interview’s historical core is Machlup’s definition of Austrian economics. He lists the older tenets—marginalism, diminishing marginal utility, opportunity cost, and imputation—but argues that by the twentieth century these no longer uniquely marked the school. What remains distinctive is methodological: the insistence that economic phenomena be traced back to individual choices, subjective valuations, and relative prices.

“I would say methodological individualism and subjectivism are the most important of the whole lot. Marginalism is internationally accepted. No one is an Austrian just because he is a marginalist.”

Machlup also explains why Austrian economics lost influence in the 1930s. Its microeconomic and capital-theoretic tools seemed ill-suited to mass unemployment and monetary collapse. He candidly concedes that liquidationist policy, however consistent with structural adjustment theory, failed politically and practically amid crisis.

“In the midst of the greatest contraction of money circulation, of incomes, of employment and so on, our recommendations were to let the economy be shaken down and have everything that's wrong liquidated, and let all the structural distortions be repaired. Well, at that moment, in 1933, this was not the right recipe.”

Yet the interview is not a retreat from Austrian theory. Machlup argues that the inflationary 1970s made Austrian capital and monetary analysis newly relevant. Keynesian spending, he says, produced distortions; unemployment must be understood through labor costs relative to product prices. His explanation of “stagflation” turns on the timing of price and wage inflation: monetary expansion can raise employment only while prices outrun wages; once wage costs catch up or exceed prices, inflation coexists with unemployment.

The discussion of Hayek sharpens this point. Machlup endorses the claim that stabilizing the price level during productivity growth can itself require monetary expansion that distorts investment. He accepts Hayek’s account of the 1920s boom and subsequent bust:

“The stable price level during the early twenties was the beginning of our downfall; this was a period of particularly fast growth of total output and, to keep price levels from falling, one had to create a good deal of money which was all fed into investment and this high rate of investment turned out to be unsustainable in the long run.”

This leads to his criticism of Chicago monetarism. Friedman’s focus on the price level and expectations captures something important, but misses the Austrian issue of relative prices, costs, and capital structure.

“I don't understand why he doesn't give more emphasis to relative prices, relative costs, even in an inflationary period.”

The final sections extend the same methodological caution to capital theory and the balance of payments. Machlup urges renewed study of Hayek’s Pure Theory of Capital and criticizes extreme monetary approaches to international payments for collapsing analytically distinct flows into tautological aggregates. Across topics, the interview preserves the Austrian emphasis on subjectivism, capital, and monetary distortion while rejecting both rigid apriorism and technocratic forecasting.