by Juan I. Núñez

Recently, my Marxist-Keynesian-Georgist friend Alexander Schilcher wrote an article titled “The Austrian School and the Greater Fool,” in which he attempts to revive the case for Keynesian aggregate demand management by targeting what he perceives to be a supposed fatal flaw in the Austrian tradition. His critique hinges on a specific application of the “Greater Fool” theory: the idea that in a deflationary environment, no “rational” actor would volunteer to be the first to lower prices, condemning the economy to a state of indefinite paralysis. This essay will dismantle that premise, demonstrating that Schilcher’s critique stems not from a failure of the market, but from a categorical misunderstanding of Austrian economics, competitive rivalry, and the nature of human action itself.

The Phantom Standoff

The critique built by Schilcher is predicated on a fundamental misunderstanding of what Austrians mean when they refer to price adjustment. Austrians do not claim that producers lower prices out of benevolence, nor out of foolishness. Rather, we argue that the pressure of entrepreneurial competition, differing marginal costs, and the pursuit of profit create the incentives for adjustment naturally, without requiring any central coordination from the State.

Schilcher’s argument presumes a market homogeneity that simply does not exist. Firms react to the specific, heterogeneous conditions of their own operations. Walmart operates under a different calculus than Microsoft; a shoemaker faces different constraints than a baker. These firms and entrepreneurs face distinct inventory liabilities, cash-flow pressures, and competitive landscapes. Therefore, the entrepreneur who cuts prices first does not do so because he is a “fool,” as Alexander assumes, but because his specific circumstances make it profitable—or existentially necessary—to act before his rivals.

Our Styrian friend posits a supposed “hesitation problem” where firms wait too long to reduce prices because each hopes to be the last to move. This implies a fantasy of implicit cartelization—a fictitious scenario where producers act in unison, holding hands and staring at each other to see who blinks first. In a free market, however, producers are not colleagues; they are rivals. If demand drops, the entrepreneur who refuses to lower his price does not merely “wait”; he bleeds market share to the rival who acted first. He does not risk abstract losses; he risks the concrete danger of insolvency.

Let us consider a practical example: suppose that Alexander and I are rival shoe sellers in a downturn. If I stubbornly hold my price at $100 while he cuts to $80, I do not enjoy the “higher relative income” Schilcher predicts. My revenue tends towards zero, because customers flock to my competitor. The “Last Mover” does not maximize profit; he maximizes insolvency. In a recession, cash is king. Like any business with fixed debts to service and payrolls to meet, the “First Mover” converts stagnant inventory into liquidity critical for its own survival. The risk of waiting is akin to entrepreneurial suicide. It becomes clear, then, that the true “Greater Fool” is the entrepreneur who is last to adapt to reality, for he stands to lose far more than his margins.

The Rationality Trap

A foundational error in Alexander’s critique lies in his definition of “rationality.” He conflates the hyper-competent homo economicus of neoclassical models with the Misesian concept of human action. To an Austrian, an agent is “rational” simply by virtue of engaging in purposeful behavior to achieve a subjective end. Whether a man buys a sandwich to sate his hunger, or refuses to lower prices to sate his pride, he is acting “rationally” in the praxeological sense: he is attempting to substitute a less satisfactory state of affairs for a more satisfactory one. This analysis is indifferent to whether the actor achieves the desired state or fails miserably; praxeology concerns itself with the category of action, not the wisdom of the outcome.

Schilcher argues that “irrational” actors—those stubborn about lowering prices—inflict economic damage. Austrians do not deny that obstinacy exists, but we recognize that the market possesses a ruthless built-in mechanism to punish it. If a shopkeeper refuses to discount his bread when demand collapses, customers simply walk away. His inventory rots, his revenue evaporates, and he goes bankrupt. His assets are then liquidated and transferred to a more competent steward. This is not a market failure; it is a selection process that shifts resources from the inept to the capable. By demanding the State to intervene, Alexander asks central planners—who are epistemologically limited, as any other human—to arrest this necessary hygiene. He seeks to subsidize the very incompetence he decries, insulating the “fool” from the consequences of his folly and ensuring that the economic damage is permanent rather than transient.

The Hydraulic Fallacy

This young Keynesian’s reliance on “Aggregate Demand” betrays a holistic and mechanistic worldview that obscures economic reality. He treats the market not as a complex organic process, but as a hydraulic machine, regulated solely by the pressure of the monetary fluid. To the Austrian, questions like “How much did everyone pay in total?” are not merely irrelevant; they are actively misleading. They destroy information. Demand-side economists often blind themselves to the structural reality of the market when they dissolve the distinction between the purchase of a candy bar, a haircut, and a hydroelectric dam into the meaningless slurry they call “Aggregate Demand.”

Economic coordination relies not on the volume of spending, but on its direction. If consumers stop buying luxury cars and start investing in farming equipment, “Aggregate Demand” might remain numerically unchanged, yet the structure of the economy has fundamentally shifted. By fixating on the aggregate, Schilcher ignores the crucial signals sent by relative prices—the traffic lights that tell entrepreneurs what to produce and what to abandon. Not only that, but he leans heavily on the concept of an “average price level.” This invites an obvious question: what is the “average price” of a heart bypass and a banana?

The concept of an “average price level” is a mathematical fiction. In the real world, no such level exists; there is only a chaotic array of millions of specific exchange ratios between money and individual goods. When macroeconomists obsess over this index, they implicitly assume that money is neutral—that it affects all prices equally and simultaneously. This is demonstrably false. New money does not fall uniformly from the sky into everyone’s wallets; it enters the economy at specific injection points, usually through the financial sector or government contractors. This phenomenon—the Cantillon Effect—drives up some prices before others, effecting a silent transfer of real wealth from the last receivers of the new money (the poor and the middle class) to the first receivers (the politically connected). Aggregating these distinct movements into a single “average” serves only to camouflage this orchestrated theft by the State and its cronies.

The Fetish of Full Capacity

Schilcher treats the existence of “unused capacity” as a pathology, arguing that new money must be injected to ensure every factory operates at maximum output. His diagnosis, though, relies entirely on the Nirvana Fallacy. He compares the messy, sometimes painful, but necessary adjustments of the real world to an idealized state of perfect, frictionless coordination—a fantasy that exists only in the static models of mathematical economists, but never in the dynamic reality of human action.

Here, our Austrian—though philosophically non-Austrian—friend invokes the classic Keynesian caricature of Say’s Law: “Supply creates its own demand.” This is a phrase Jean-Baptiste Say never wrote, and a doctrine no Austrian economist defends. The actual law—that products are paid for with products—merely states that our capacity to demand goods is constituted by our own production of value. It does not mean, as the straw man suggests, that a junk capitalist producing any random trinket is guaranteed to sell it at a profit. Supply only creates the power to demand, provided that the supply is actually valued by others in the market.

Ergo, Austrians posit this important question: Why should capacity be used if consumers do not want the product? Capital goods are not a homogeneous blob; they are specific. If an entrepreneur builds a factory to make BlackBerry phones or Nintendo 64 consoles in 2025, that certainly counts as “capacity.” But if the consumer has no desire for a BlackBerry or to play Conker’s Bad Fur Day on antiquated hardware, that capacity should remain idle, or be scrapped entirely. To force its activation through monetary pumping is not efficiency; it is the squandering of real, complementary resources—labor, electricity, steel—on a value-destroying enterprise.

This line of reasoning resurrects the Sunk Cost fallacy. Alexander argues that producers will resist lowering prices because they must recoup the cost of their initial investment. But economically, the cost of the factory is little more than unalterable history. The acting entrepreneur looks only forward. He asks one question: “If I run the machines today, will the marginal revenue exceed the marginal variable costs?” If the answer is yes, he produces, even at a lower price, in order to minimize his losses. If the answer is no, he halts production immediately—and he should, for continuing would mean consuming more value in resources than he creates in product.

Menger’s Law of Imputation

Schilcher frets that a producer cannot lower prices because his input costs—supplies, labor, rent—remain stubbornly high. Here, he falls victim to the pre-marginalist fallacy that costs determine prices. Yet, as Carl Menger demonstrated over a century ago, the causal chain runs in the opposite direction: prices determine costs. The value of factors of production is derived solely from the anticipated value of the final goods they help create. Price adjustments, therefore, do not stop at the retail counter; they ripple upstream, forcing the entire structure of production to realign with the new reality of consumer demand.

Consider the car manufacturer. When he slashes prices to clear inventory, he imposes immediate discipline on the steel mill. His message is not a request, but a statement of fact: “I cannot sell cars at the old price; ergo, I cannot buy your steel at the old price.” The “standoff” Alexander imagines is shattered by the necessity of cash flow—no one gets paid if the supply chain freezes. The “First Mover” is not merely the seller of the final good; he is the entrepreneur who stops validating overpriced inputs, forcing the entire cost structure to surrender to consumer valuations.

Signal, Noise, and Hesitation

Mr. Schilcher interprets the hesitation to lower prices as “damage,” a friction that prevents the machine from clearing. Austrians, by contrast, recognize it as the necessary time required for economic calculation. When entrepreneurs hesitate, they are not malfunctioning like machines; they are engaging in an organic discovery process within a world of radical uncertainty. Is the drop in demand a temporary fluctuation or a permanent structural shift? The entrepreneur is not clairvoyant. He does not know the answer immediately, so his hesitation is the prudent attempt to distinguish market noise from a true price signal.

By intervening to “fix” this hesitation with inflation, the State decides to act as a radio jammer. It corrupts the price signals that tell producers how to efficiently reallocate resources. Alexander fails to see that this vacillation is the market’s mechanism for error correction—a command to “Wait, re-evaluate, and realign.” To override this process with printed money is to jam the control tower’s radio while a pilot attempts to land in a fog, and perhaps while another plane is taking off. It does not facilitate a smooth landing; it invites certain catastrophe.

Deflation and Prosperity

If Schilcher’s theory were true—that deflation causes a universal standoff where no one acts—then economic history would be a blank page. Yet, history is replete with periods of growth amidst falling prices. The “Great Deflation” of the late 19th century saw the greatest expansion of living standards in American history, with rising wages and lowering prices. The Depression of 1920–21 is the prime example: prices plummeted by 18%—a shock that Keynesians claim should have destroyed the economy. Yet, precisely because the government did not intervene to prop up wages or prices, the economy adjusted rapidly. The “paralysis” never materialized; instead, the market cleared, unemployment vanished, and real output surged. We see this dynamic today in the technology sector, which is defined by perpetual deflation. Thirty years ago, the computing power required to write this article was a significant capital expense. Today, I carry it in my pocket for a fraction of the inflation-adjusted cost; in fact, I have dozens of devices with such computing power within my immediate vicinity, and even on my wrist. Consumers do not “hesitate” to buy smartphones simply because they will be cheaper next year; their high time preference—their desire for satisfaction now—overrides the waiting game.

Schilcher’s prescription—to “inject” new money—is not a cure; it is a poison. It spawns a “Zombie Economy,” creating a permanent class of inefficient firms kept on life support, thereby blocking the accumulation of real capital. This might be a viable strategy if one intends to engineer a crossover between The Walking Dead and Keynes’s The General Theory, but in the real world, the effects are appalling. It robs the worker of the purchasing power that lower prices would provide, sacrificing the competent entrepreneur to subsidize the incompetent. Pursued to its logical conclusion, this policy destroys money itself. The recent history of Argentina serves as a clear testament to this grim reality. Once the market understands that the State will never allow prices to fall, rational actors raise prices in anticipation of the next injection. This triggers Mises’s Crack-up Boom—a desperate flight from currency into real values that ends in hyperinflationary collapse.

Conclusion

Despite his very interesting insights elsewhere, Alexander Schilcher’s critique stands as a textbook defense of the “pretence of knowledge.” He mistakes the pain of inefficient producers for a system failure, believing the State can repair the machine by printing colorful paper promises. Consequently, he labels the market-clearing process “foolish.” We Austrians call it reality. And he labels inflationist intervention “rational.” We, however, have a more historically weighted name for it: the Road to Serfdom.

To Alexander: The entrepreneur need not care about the “aggregate” to rescue the economy. His fear of bankruptcy compels him to lower prices, inadvertently benefiting society by restoring equilibrium. The “invisible hand” functions precisely because individual survival depends on adjusting to reality, not warring against it.