Interview with Karl Socher

The Austrian Economics Newsletter

Spring 1990

The State of Economics in Austria Today

An Interview with Karl Socher

Karl Socher is professor of economics at the University of Innsbruck, Austria. He was interviewed while visiting Auburn University to present a paper to the Austrian Economics Colloquium.

AEN: What is the status of Austrian economics in its homeland today?

SOCHER: Poor, It is almost forgotten in Vienna itself. There are two or three economists in Vienna, especially Erich Streissler, who value the Austrian contribution to economics. Most of the other economists in Vienna call themselves Austro-Keynesians. They are not Keynesians in the traditional sense, but they think government should intervene heavily in the market through monetary and fiscal policy. They also believe in a social-market economy, like Germany's, where the social order is linked to the government with a social insurance system and welfare.

AEN: Is this view challenged?

SOCHER: Not often. The social security system is especially sacrosanct, Even so, the system can be explained by public-choice theory: politicians keep the tax bite for the social insurance low and the payments high. This has created a huge deficit that will be impossible to finance. That is why we need serious reform.

AEN: How were you introduced to Austrian economics?

SOCHER: While I was studying economics at the University of Vienna in 1950, I attended lectures by Hans Mayer, successor to the chair held by Friedrich von Wieser. Only later was I introduced to Keynesian economics. I was told to adopt the new economics and forget the old.

AEN: Were there other Austrian professors at the university while you were a student?

SOCHER: Yes, there was Professor Mahr under whose guidance I wrote my dissertation on monetary theory. In my studies, I concluded that Wieser was wrong about his national income theory for microeconomics. In the writings of Mises I found a more correct position. When I broke with Wieser's position, Mayer was not happy about it. He was a fierce supporter of Wieser.

AEN: What about Austrian economics at the University of Innsbruck?

SOCHER: We continue to uphold the Austrian tradition; not all of us, but some. In an article Hayek wrote for an Austrian newspaper, he said that Austrian economics is not taught in Austria anymore. So a few of us in Innsbruck wrote him a letter saying we are still Austrian economists in the old sense. We call ourselves Hayekians and Misesians. A well-known economist in Vienna once said the Innsbruck economists do not belong to Austria anymore because of their views.

AEN: What is your impression of American Austrians?

SOCHER: Very favorable. I am looking into what American Austrians are saying so we can re-import Austrian economics to Austria. I was worried that the research here looked backwards and simply re-wrote the old theories. On the contrary, I've found Austrian economics here to be fresh and alive. It is being applied to new developments: to rational expectations, to the theory of market failure, and to explain the stock market crash. I am pleased, and hope that my colleagues and I can learn from this.

AEN: What are graduate studies in economics like at the University of Innsbruck?

SOCHER: We have a University system similar to Germany's. The first grade is the masters; we have the masters in economics and masters in business administration. After the masters, we have the doctor, which is different from your Ph.D. It takes about two years after the masters and you have to write a dissertation. Then we have the habitation, which is publication and research work, something like the Ph.D. Publication is necessary for the right to teach at the University.

AEN: How many students are there and what is the curriculum like?

SOCHER: At Innsbruck we have 4000 business administration students and only 300 students of economics. We offer classes like the theory of economic policy, public choice, and public finance. And we have other fields, for instance sociology and political science. Our students are not as well versed in economic theory as you are in the United States, but we have a broad knowledge of political economy. Our students are also technically trained in mathematics and econometrics, which is not absolutely necessary for an economist, but I think it should be taught. In the doctor's program, there are seminars, but almost no regular classes. It's mostly the dissertation and the seminar work.

AEN: How is the economics curriculum set? Is it hard to introduce Austrian ideas to the graduate students at the University?

SOCHER: We cannot change much because the curriculum is decreed by the government. The actual content of the lectures is not supervised, so we can have an influence. The lecture may be called political economy, but we can add Austrian economics. If we did that all the time, however, it would be difficult for the students to pass the exams which are prepared by non-Austrians.

AEN: Are you trying to introduce a course in Austrian economics?

SOCHER: Yes, but right now we are teaching it in the "Principles" classes. It gives us a chance to refer to Mises, Hayek, and the Austrian school.

AEN: You once worked at the Austrian Institute for Business Cycle Research founded by Ludwig von Mises in 1926 and at which F.A. Hayek had worked. Is the Institute operating today?

SOCHER: Yes, it is an important and well-known research institute. It has been involved in a long and protracted battle over control. Mises set it up to be financed by businessmen or the chamber of commerce so it would be independent of the government. That idea is still on the statutes. But after the war, the government stepped in and began financing it. A big clash occurred over a speech by the director of the Institute, Dr. Nensuc, because it was favorable to free markets, Mises, and Austrian economics. After the speech, the government tried to close the Institute, but there was an outcry. Today the Institute is open, independent, and largely free from government control. The finance ministers all depend on its reports.

AEN: Is there any remnant of Austrian economic influence left?

SOCHER: There are no Austrian economists there. They are Keynesians and Keynesianism is spread via this institute. The published reports do not advise the government directly, but through informal meetings with government officials they advise interventionist policies. This problem has improved recently and the Institute is more favorable toward free markets, not because of Misesian influence, but to keep up with the climate of opinion in Germany, Britain, and elsewhere. The whole world is going in this direction. So the influence of free markets came via Germany, Britain, and the United States back to the institute.

AEN: Are there any free-market institutes in Austria besides the Carl Menger Institute?

SOCHER: There is an institute attached to the liberal party, but it doesn't do much. I have seen only two small publications. And there is the Institute for Higher Studies, which is not so attached to a political party. But the Carl Menger Institute is the main institute for free markets.

AEN: Is the current monetary system in Europe an example of Hayek's competing monies?

SOCHER: No. When Hayek wrote about free choice in currency, he was speaking of individuals choosing the currency which they thought was best. In Europe, the government chooses it for you. It is similar to Hayek's because the individual governments want to choose a currency which is stable or, at least, fix their currency to another stable currency. Currency markets have become more stable and inflation rates are lower, but only because central banks and governments have learned that it is better to have a stable currency.

AEN: Will Europe soon have a European central bank?

SOCHER: I hope not because it is a very bad idea. The push for it is mainly coming from countries, especially France, that do not like the stability of the German mark. They want a more inflationary policy than the Bundesbank provides. A European central bank would be more inflationary because it would follow a policy that averages the aims of all the countries. Each central bank would have one vote. Germany would have to follow the dictates of the European Central Bank, creating a Federal Reserve-type stop-and-go policy. Under the current system, with each country pursuing independent monetary policies, there is more competition and a more stable currency system.

AEN: The Bundesbank is often criticized for slowing growth in Europe with its conservative monetary policy. What's your view?

SOCHER: The criticism is incorrect. The Bundesbank simply slowed the rate of inflation. They still have unemployment, but it is not Keynesian unemployment where the remedy is high inflation. It is structural unemployment which is due to the conditions of the labor market. The wage policies of the government, and the structure of the labor market creates unemployment. Perhaps there are too many academics and not enough good workers. But a looser monetary policy would do nothing to reduce unemployment.

AEN: Are strong labor unions a major reason for the unemployment?

SOCHER: Yes, especially from 1975 to the beginning of the 1980s. In Austria we have a centralized federal labor union that is very powerful in making economic policy. There is no competition between the labor unions. In Austria we also have structural unemployment, but not because wages are too high. Faced with all this unemployment, the union knows it cannot overdraw.

AEN: Labor union bosses have said they don't want to disturb monetary policy. Does the labor union now realize the benefits of a stable monetary system?

SOCHER: Yes. The labor union endorsed fixing the exchange rate to the Deutschmark. Practically all the influential politicians in Austria also favored it. They now know that high wage increases endanger the exchange rate, so they have opted for stable prices and keeping wages down. Labor was told that high wages do damage. The firms would not be able to export and this would create more unemployment in the export sector. If, however, wages increase according to a monetary target, productivity would increase and so would wages. But these increases won't affect the general price level.

AEN: What are the prospects in Europe for privately issued money, gold-backed money, and more freedom in capital markets?

SOCHER: Capital controls and exchange controls are set to be lifted this year, and there is a good chance that will happen, But as long as money is stable, there is little chance for a gold-backed currency or private money. If the inflation rate reaches 10 percent or more, and exchange controls are lifted, banks could promise to pay in the most stable currency, whatever it is at the time. And if one country, say Luxembourg, opened a bank that began issuing money that was accepted in other countries, people would use it. This would be a form of private money.

AEN: What about a gold currency?

SOCHER: It doesn't have much of a chance, but it is not impossible if a small country began to issue bank notes redeemable in gold. At the moment, such a currency would be too volatile. As long as the gold price fluctuates because of differing expectations about inflation, I don't see it succeeding.

AEN: What do you think about free banking?

SOCHER: I'm still thinking about it. I don't know if it would be stable. Applying the Austrian theory of entrepreneurship to a free-banking system, it seems that the entrepreneur would look for new profit opportunities by issuing too much money. Maybe the market would slow it down if it gets too high. But if a large bank is doing the issuing, it might do harm to the value of the money by the time it is stopped. A free-banking system would surely be more stable than the system in the U.S. But I am not sure whether it would be more stable than the Swiss or German system has been in the recent years. If you had a solid monetary constitution, with rules mandating that the central bank maintain a stable currency, this would also bring about a stable monetary system.

AEN: Would you have sanctions to punish the directors of the bank?

SOCHER: Yes, punish them if they do not have a policy of high stability.

AEN: What would you do?

SOCHER: You could shorten or lengthen the duration of the directors' terms based on the inflation rate. The higher the inflation rate the shorter the term. You could also fix the nominal income of the directors. If there is inflation, their real income goes down. You would also need negative double indexation so the directors wouldn't deflate either.

AEN: Are there centers of public choice ideas in Austria?

SOCHER: It is part of the political economy. We think the main ideas of public choice are Austrian. They come from Schumpeter, with his book on democracy, and Mises, with his theory of bureaucracy. All this is very popular in Austria. After James Buchanan had lectured in Vienna and several other cities, he said the discussion in Innsbruck was the best in a long time. I was very proud of my students and the questions they asked.

AEN: Did you ever meet Ludwig von Mises?

SOCHER: Only once. It was at a meeting of the Mont Pelerin Society, in 1967, I think. We were hotly debating the relative merits of flexible versus fixed exchange rates. At the end, Ludwig von Mises stood up and said, "stability doesn't depend on the international monetary system, on whether you have more or less cooperation among the central banks, or on a new system of exchange-rate fixing. It depends on the monetary policy of each country. Each country must have a stable currency and a good monetary policy." We all agreed, and that was the end of the conference.

AEN: Was it unusual for everybody to agree?

SOCHER: Yes, especially at the Mont Pelerin Society.