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Mises Introduces the Austrian School

June 26, 2009

Tags BiographiesHistory of the Austrian School of Economics

[This article is excerpted from Memoirs by Ludwig von Mises.]

"In Austria, one did not feel it was his national duty to 'overcome' the ideas of Western Europe."

When I first came to the university, Carl Menger was nearing the end of his teaching career. There was little attention paid the Austrian School of economics at the university, and I had no interest in it at the time.

Around Christmas, 1903, I read Menger's Grundsätze der Volkswirtschaftslehre[1] for the first time. It was through this book that I became an economist.

Many years passed before I encountered Carl Menger in person. When I met him he was already over seventy years old, hard of hearing, and plagued by an eye disorder. His mind, however, was young and vigorous. I have asked myself again and again why this man did not make better use of his last decades. That he could still do brilliant work was evidenced by his essay, "Geld,"[2] which he contributed to the Handwörterbuch der Staatswissenschaften.[3]

I believe I know the cause of Menger's discouragement and premature silence. His keen intellect had recognized in which direction Austria, Europe, and the world were pointed; he saw this greatest and highest of all civilizations rushing toward the abyss. He had anticipated the atrocities with which we are faced today; he knew the consequences of the world's turning away from liberalism and capitalism, and had done what he could to battle these trends.

His book, Untersuchungen über die Methode der Sozialwissenschaften,[4] was intended as a polemic effort to counter the destructive intellectual currents with which Prussian universities were poisoning the world. He realized that his fight was futile and hopeless, and became filled with a dark pessimism that exhausted his strength. He passed this pessimism on to his student and friend, Rudolf, successor to the throne. The crown prince took his own life because of despair over the future of his empire and that of European civilization, not because of a woman. The young girl had had a death wish of her own and he took her into death with him; he did not commit suicide on her account.

My grandfather had a brother who died many years before I was born. This brother, Dr. Joachim Landau, was a liberal member of the Austrian parliament and a close friend of his party colleague, Dr. Max Menger, brother of Carl Menger. One day he told my grandfather about a conversation he had had with Carl Menger.

According to my grandfather, as told to me around 1910, Carl Menger had made the following remarks:

The policies being pursued by the European powers will lead to a terrible war ending with gruesome revolutions, the extinction of European culture and destruction of prosperity for people of all nations. In anticipation of these inevitable events, all that can be recommended are investments in gold hoards and the securities of the two Scandinavian countries.

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Menger's savings, in fact, were invested in Swedish securities.

One who so clearly foresees disaster and the destruction of everything he deems valuable before his fortieth year cannot avoid pessimism and depression. Ancient rhetoricians were careful to consider the kind of life King Priam would have had, had he at the age of twenty already foreseen the fall of Ilium![5] Carl Menger barely had the first half of his life behind him when he recognized the inevitability of the demise of his own Troy.

This same pessimism consumed all sharp-sighted Austrians. The tragic privilege attached to being Austrian was the opportunity it afforded to recognize fate. Grillparzer's melancholy and peevishness arose from this source. The feeling of being powerless in the face of impending disaster drove the purist and most able of patriots, Adolf Fischof, into isolation.

It is understandable that I discussed Knapp's Staatliche Theorie des Geldes[6] with Menger frequently.

"It is," said Menger,

the logical development of Prussian police science. What should one make of a nation whose elite, after two hundred years of economics, admire such nonsense and perceive it as an epiphany, when in fact it isn't even new? What can one expect of such a people?

Menger's successor at the University of Vienna was Friedrich von Wieser. Wieser was an honest scholar, and a man of high personal cultivation and refined intellect. He had the good fortune of becoming acquainted with Menger's work earlier than others, and it is to his credit that he recognized its significance. He added to the discipline in certain respects, but he was not an original thinker, and probably did more harm than good overall. He never really grasped the core of subjectivism, a limitation that caused him to make many unfortunate mistakes. His imputation theory is untenable. His ideas on value calculation support the claim that he cannot be called a member of the Austrian School. He had more in common with those of the Lausanne School, two brilliant representatives of which were found in Austria in Rudolph Auspitz and Richard Lieben.

What distinguishes the Austrian School and will lend it everlasting fame is its doctrine of economic action, in contrast to one of economic equilibrium or nonaction. The Austrian School makes use of the ideas of rest and equilibrium, without which economic thought cannot get along. But it is always aware of the purely instrumental nature of these ideas. The Austrian School aims to account for prices actually paid in the market, and not just prices that might be paid under certain never-realizable conditions. It rejects the mathematical method, not because of ignorance or an aversion to mathematical accuracy, but because it does not place importance upon the detailed description of the condition of a hypothetical and static equilibrium. The Austrian School has never succumbed to the fatal illusion that values can be measured, and has never misunderstood that statistical data has nothing to do with economic theory, but belongs to the history of economics alone.

"What distinguishes the Austrian School and will lend it everlasting fame is its doctrine of economic action, in contrast to one of economic equilibrium or nonaction."

Because Austrian economics is a discipline that concerns human action, even Schumpeter cannot be counted among the school's ranks. In his first books, Schumpeter aligns himself with Wieser and Walras but not with Menger and Böhm-Bawerk. To him, economics is a discipline of "economic quantities" and not one of human action. His Theory of Economic Development[7] is a typical product of this equilibrium theory.

It is necessary to correct the misunderstandings that can be called forth by using the expression "Austrian School." Neither Menger nor Böhm-Bawerk wanted to found a school in the sense customarily used in university circles. They never attempted to turn young students into blind disciples, nor did they, in turn, provide these same students with professorships. They knew that through books and an academic course of instruction they could promote an understanding suited to dealing with economic problems, thus rendering an important service to society. They understood, however, that they could not rear economists. As pioneers and creative thinkers, they recognized that one cannot arrange for scientific progress, nor breed innovation according to plan. They never attempted to propagandize their theories. Truth would prevail of its own accord when man possessed the faculties necessary to perceive it. Using impertinent means to cause people to pay lip service to a teaching was of no use if they lacked the ability to grasp its substance and significance.

Menger made no efforts to extend favors to colleagues that would be reciprocated with recommendations for appointments. As minister and then ex-minister of finance, Böhm-Bawerk could have used his influence; he always spurned such behavior. Menger did make occasional attempts, without success, to prevent the promotion of those, for example, Zweideneck, who had no sense of what was going on in economics. Böhm-Bawerk made no such attempts. In fact, he advanced rather than hindered the appointments of Professors Gottl and Spann at the Brünner Technische Hochschule.[8]

Menger's position on such questions is best illustrated by a note discovered by Hayek while perusing Menger's scientific papers. It reads, "In science, there is only one sure method for the ultimate triumph of an idea: one should allow any contrary notion to run its course completely." Schmoller, Bücher, and Lujo Brentano thought differently. They denied the opportunity to teach at German universities to those who did not follow them blindly.

Faculty positions at Austrian universities thus fell into the hands of the heirs of German historicism. Alfred Weber and Spiethoff, were, in turn, vested with a position at the University of Prague. A certain Professor Günther became professor of economics at Innsbruck. I mention all of this only to cast the claim of Franz Oppenheimer in proper light, namely, that the school of marginal utility monopolized the teaching of economic theory. Schumpeter was full professor in Bonn for many years. This was the only case in which a German university had appointed a teacher who belonged to the field of modern economics. Among the many hundreds of men who taught economics at German universities between 1870 and 1934, not one could be found who was acquainted with the works of the Austrian, Lausanne, or modern Anglo-Saxon schools. A Privatdozent[9] would never be promoted to the faculty were he suspected of belonging to one of these schools. Knies and Dietzel were the last economists on German faculties. In the German Empire they did not teach economics, but Marxism or Nazism. The same was true in Czarist Russia, where "legal" Marxism or economic history was taught in place of economics. The fact that professors and lecturers in Austria were allowed to teach economics was incompatible with the totalitarian claim of German "economic state sciences."

"The Austrian School aims to account for prices actually paid in the market, and not just prices that might be paid under certain never-realizable conditions."

The Austrian School of economics was Austrian in the sense that it emerged from the soil of an Austrian culture that National Socialism would trample down. In this soil, Franz Brentano's philosophy could take root. In this soil, Bolzano's epistemology, Mach's empiricism, Husserl's phenomenology, and Breuer's and Freud's psychoanalysis reached maturity. The air in Austria was free of the specter of Hegelian dialectics. In Austria, one did not feel it was his national duty to "overcome" the ideas of Western Europe. In Austria, eudaemonism, hedonism, and utilitarianism were not precluded, but studied.

It would be a mistake to assume that the Austrian government promoted all of these great movements. On the contrary, it withdrew the teaching assignments of Bolzano and Brentano; it isolated Mach, and did not bother at all with Husserl, Breuer, and Freud. It valued the competent official in Böhm-Bawerk, not the economist.

Böhm was a professor in Innsbruck. He grew weary of this position; the intellectual desert of this university, the city, and the province of Tirol became unbearable for him. He preferred employment in Vienna's ministry of finance. He was offered a gainful pension when he finally retired from government service, but this he rejected and requested a professorship at the University of Vienna.

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The opening of Böhm-Bawerk's seminar was a great day in the history of the University of Vienna and in the development of economics. Böhm chose the fundamentals of the theory of value as the theme of the first semester; Otto Bauer sought to pick apart the subjectivism of value theory from a Marxist point of view. The discussion between Bauer and Böhm filled the entire winter semester while other participants remained in the background. Bauer's brilliant gift was on display; he proved himself to be a worthy opponent of the great master, whose critique of Marxian economics had dealt it a fatal blow. I believe that in the end even Bauer himself had to admit to the unsustainability of the Marxian labor theory of value. He abandoned his intention to write a reply to Böhm's critique of Marx. The first volume in this series on Marxian theory yielded a sensation-causing rejoinder from Hilferding. Bauer openly admitted to me that Hilferding did not grasp the problems at hand.

I took part in Böhm's seminar regularly until I was promoted in 1913. During the last two winter semesters in which I still attended the seminar, discussions were dedicated to my theory of money and credit: my explanation of money's purchasing was dealt with in the first; the second focused on my business-cycle theory. The difference of opinion that emerged between Böhm and me on these points will be addressed later.

Böhm was a brilliant seminar leader. He considered himself more of a chairman than a teacher, and would enter into the debate on occasion. Unfortunately, babblers sometimes abused the freedom to speak that was allowed participants. Especially disruptive was the nonsense that Otto Neurath asserted with fanatical force. The sharper wielding of a chairman's upper hand could have often proven beneficial, but Böhm wanted no part in this. His thinking was in line with that of Menger, who believed that in science everyone must be allowed to speak.

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The lifework of Böhm-Bawerk lies before us in splendid proximity. His masterful critique of old economics and his own theories have become our prized possessions. And yet, one can assert that Böhm could have produced even more had the circumstances allowed for it. He developed thoughts in seminar lectures and personal conversations that far exceeded those contained in his writings. But his physical constitution could not withstand the planning of grand and new undertakings. His nerves were no longer suited to hard work. Even the two-hour seminar had its effects. It was only through the greatest ordering of daily habits that he could muster the strength he needed for science. His entire endeavor belonged to economics; relaxation and enjoyment were found in symphony concerts.

Worries over Austria's future and its culture darkened the evening of Böhm-Bawerk's life. He suffered a heart attack a few weeks after the outbreak of the war. My unit was stationed at the vanguard, east of Trampol. I was handed a newspaper carrying his obituary upon returning from patrol duty one evening early in September.

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This article is excerpted from Memoirs by Ludwig von Mises.

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Notes

[1] Principles of Economics (1871).

[2] "Money."

[3] Encyclopedia of State Sciences.

[4] Untersuchungen über die Methode der Sozialwissenschaften und der politischen Okonomie insbesondere (Investigations into the Method of the Social Sciences with Special Reference to Economics).

[5] The ancient city of Troy.

[6] The State Theory of Money. Knapp claimed that money was in its origin and its essence a pure creature of the state.

[7] Theorie der wirtschaftlichen Entwicklung.

[8] Brno University of Technology.

[9] Unsalaried lecturer.


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