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The Significance of the Austrian School

September 13, 2010

Tags Free MarketsEntrepreneurshipHistory of the Austrian School of Economics

[This is an excerpt from an essay that was originally published in the Annals of the American Academy of Political and Social Science, volume 1 (1891).]

As often happens, the Austrian economists find most to improve and correct in a department that has heretofore passed as so plain and simple that the literature of several nations — the English, for example — has scarcely a word to say about it. I refer to the doctrine of economic goods. Menger has put a logical implement into the hands of science in his conception, as simple as it is suggestive, of the subordination of goods (Guterordnungen),[1] a conception that will be useful in all future investigation. The writer of this paper has especially endeavored to analyze a conception that appears to be the simplest of all, but that is most obscure and most misused: the conception of use of goods (Gebrauch der Guter).[2]

Questions of practical political economy, on the contrary, have only just begun to be made the subjects of literary work by the Austrian economists.[3] This, however, by no means implies that they have no faculty for the practical needs of economic life, and still less, that they do not wish to connect their abstract theory with practice. The contrary is true. But we must build the house before we can set it in order, and so long as we have our hands full with simply raising the framework of our theory, there is little obligation to devote to numerous questions of practical detail that amount of time-absorbing care that their literary elaboration would require. We have our opinions upon them, we teach them from our chairs, but our literary activities have thus far been bestowed almost exclusively upon theoretical problems, for these are not only the fundamental ones but are those whose long-continued neglect by the other side — the historical school — must be repaired.

What, now, is the short meaning of this long story? What is the significance to the science as a whole of the advent of a set of men who teach this and that in regard to goods, value, cost, capital, and a dozen other subjects? Has it any significance at all? In answering this question I feel the embarrassment of belonging to the group of men whose activity is under discussion. I must, therefore, confine myself to the statement of what the Austrian economists, as a body, are trying to effect; others may judge whether or not they are successful.

What they are striving for is a sort of renaissance of economic theory. The old classical theory, admirable as it was for its time, had the character of a collection of fragmentary acquisitions that had been brought into orderly relations neither with one another nor with the fundamental principles of human science. Our knowledge is only patchwork at best, and must always remain so. But of the classical theory, this characterization was particularly and emphatically true.

With the insight of genius, it had discovered a mass of regularities in the whirlpool of economic phenomena, and with no less genius, though hindered by the difficulties that beset beginnings, it commenced the interpretation of these regularities. It usually succeeded, also, in following the thread of explanation to a greater or less distance from the surface toward the depths. But beyond a certain depth it always, without exception, lost the clue. To be sure, the classical economists well knew to what point all their explanations must be traced — to the care of mankind for its own well-being, which, undisturbed by the incursion of altruistic motives, is the ultimate motive force of all economic action.

But owing to a certain circumstance the middle term of the explanation — by means of which the actual conduct of men, in the establishment of prices of goods, of wages, rent, etc., ought to have been joined to the fundamental motive of regard for utility — was always wrong. That circumstance was the following. A Crusoe has to do only with goods; in modern economic life, we have to do with goods and with human beings from whom we obtain the goods we use — by means of exchange, cooperation, and the like. The economy of a Crusoe is explained when we succeed in showing what relation exists between our well-being and material commodities, and what attitude the care for our well-being requires us to take toward such material commodities. To explain the modern economic order there is, apparently, need of two processes: first, just as in Crusoe's economy, we must understand the relation of our interests to external goods; second, we must seek to understand the laws, according to which we pursue our interests when they are entangled with the interests of others.

"To be sure, the classical economists well knew to what point all their explanations must be traced — to the care of mankind for its own well-being, which, undisturbed by the incursion of altruistic motives, is the ultimate motive force of all economic action." 

No one has ever been deluded into thinking that this second process is not difficult and involved — not even the classical economists. But, on the other hand, they fatally underrated the difficulties of the first process. They believed that, as regards the relation of men to external goods, there was nothing at all to be explained, or, speaking more exactly, determined. Men need goods to supply their wants; men desire them and assign to them, in respect of their utility, a value in use. That is all the classical economists knew or taught in regard to the relation of men to goods. While value in exchange was discussed and explained in extensive chapters, from the time of Adam Smith to that of Mr. MacVane,[4] value in use was commonly dismissed in two lines, and often with the added statement that value in use had nothing to do with value in exchange.

It is a fact, however, that the relation of men to goods is by no means so simple and uniform. The modern theory of final utility in its application to cost of production, complementary goods, etc., shows that the relation between our well-being and goods is capable of countless degrees, and all these degrees exert a force in our efforts to obtain goods by exchange with others.

Here yawns the great and fatal chasm in the classical theory; it attempts to show how we pursue our interests in relation to goods in opposition to other men without thoroughly understanding the interest itself. Naturally the attempts at explanation are incoherent. The two processes of explanation must fit together like the two cogwheels of a machine. But as the classical economists had no idea what the shape and cogging of the first wheel should be, of course they could not give to the second wheel a proper constitution. Thus, beyond a certain depth, all their explanations degenerate into a few general commonplaces, and these are fallacious in their generalization.

This is the point at which the renaissance of theory must begin, and, thanks to the efforts of Jevons and his followers, as well as to the Austrian School, it has already begun. In that most general and elementary part of economic theory, through which every complicated economic explanation must eventually lead, we must give up dilettanti phrases for real scientific inquiry. We must not weary of studying the microcosm if we wish rightly to understand the macrocosm of a developed economic order.

This is the turning point that is reached at one time or another in all sciences. We universally begin by taking account of the great and striking phenomena, passing unobservant over the world of little everyday phenomena. But there always comes a time when we discover with astonishment that the complications and riddles of the macrocosm occur in still more remarkable manner in the smallest, apparently simplest elements — when we apprehend that we must seek the key to an understanding of the phenomena of great things in the study of the world of small things.

The physicists began with the motions and laws of the great heavenly bodies; today they are studying nothing more busily than the theory of the molecule and the atom, and from no part of natural science do we expect more important developments for the eventual understanding of the whole than from the minutiae of chemistry. In the organic world, the most highly developed and mightiest organisms once roused the greatest interest. Today that interest is given to the simplest microorganisms. We study the structure of cells and of amoebae, and look everywhere for bacilli. I am convinced that it will not be otherwise in economic theory.

"But there always comes a time when we discover with astonishment that the complications and riddles of the macrocosm occur in still more remarkable manner in the smallest, apparently simplest elements — when we apprehend that we must seek the key to an understanding of the phenomena of great things in the study of the world of small things." 

The significance of the theory of final utility does not lie in the fact that it is a more correct theory of value than a dozen other older theories, but in the fact that it marks the approach of that characteristic crisis in the science of economic phenomena. It shows for once that in an apparently simple thing, the relation of man to external goods, there is room for endless complications; that underneath these complications lie fixed laws, the discovery of which demands all the acumen of the investigator; but that in the discovery of those laws is accomplished the greater part of the investigation of the conduct of men in economic intercourse with one another. The candle lighted within sheds its light outside the house.

It may, of course, be to many who call themselves political economists a very inconvenient and unpleasant surprise to find that to the field that they have heretofore ploughed with intellectual toil, another new field is added — a field by no means small, whose tillage is particularly laborious. How convenient it has been heretofore to conclude an explanation of phenomena of price with reference to the shibboleth of "supply and demand" or "cost." And now, on a sudden, these supposed pillars tremble, and we are forced to build the foundations far deeper, at the cost of great and tedious labor.

Whether inconvenient or not, there is no other course left us than to do the work that past generations have neglected. The classical economists are excusable for having neglected it. In their time, when everything was yet new and undiscovered, investigation per saltum, scientific exploitation, so to speak, might bring rich results. But now it is otherwise. In the first place, we of later times, since we have not the merit of being pioneers of the science, should not lay claim to the advantage of pioneers: the requirements have become higher. If we do not wish to remain behind the other sciences, we too must bring into our science a strict order and discipline, which we are still far from having.

Let us not be beguiled into vain self-satisfaction. Mistakes and omissions are, of course, to be expected at any time, in every science; but our "systems" still swarm with the commonplace, superficial faults, whose frequent occurrence is a sure sign of the primitive state of a science. That our expositions end in smoke before essentials are reached; that they evaporate in empty phrases as soon as they begin to be difficult; that the most important problems are not even stated; that we reason in the most undisguised circle; that not only within the same system, but even within the same chapter, contradictory theories of one and the same matter are upheld; that by a disorderly and ambiguous terminology we are led into the most palpable mistakes and misunderstandings — all these failings are of so frequent occurrence in our science that they almost seem to be characteristic of its style. I can easily understand how the representatives of other sciences, which have become amenable to strict discipline, look down with a sort of pity upon many a famous work of political economy, and deny to the latter the character of a true science.

This state of affairs must and shall be changed. The historical school, which for the last forty years has given the keynote to all Germany, has unfortunately done nothing at all to this end. On the contrary, in its blind terror of "abstract" reasoning and through the cheap skepticism with which at almost every important point in the system it declares the given problems "insoluble" and the struggles to discover scientific laws hopeless, it has done its utmost to discourage and obstruct the scanty efforts that have been directed toward the desired end. I do not ignore the fact that in another direction, in the provision of vast empirical stores, they have conferred great benefit; but future time will impartially show how much they have helped in this direction and harmed in the other with their one-sided zeal.

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But what both the classical and the historical schools have neglected, the Austrian School is today trying to accomplish. Nor are they alone in the struggle. In England, since the days of Jevons, kindred efforts, to which the great thinker gave the impulse, have been carried forward by his worthy associates and followers; and, incited partly by Jevons, partly by the Austrian School, a surprisingly great number of investigators, of all nations, have in recent times turned to the new ideas. The great Dutch literature is devoted almost entirely to them; in France, Denmark, and Sweden they have gained an entrance. In Italian and American literature they are almost daily propagated; and even in Germany, the stronghold of the historical school, against whose resistance the ground must be fought for almost inch by inch, the new tendency has taken a strong and influential position.

Can it be that the tendency that possesses so great a power of attraction is nothing but error? Does it not in reality spring from a need of our science, and supply a need that has long been repressed by one-sided methods, but that must eventually make itself felt — the need of real scientific depth?

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This is an excerpt from an essay that was originally published in the Annals of the American Academy of Political and Social Science, volume 1 (1891).

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[1] Menger, Grundsätze, pp. 8 et seq. [See also the English translation, The Principles of Economics.]

[2] Böhm-Bawerk, Rechte und Verhaltnisse vom Standpunkt der volkwirtschaftlichen Guterichre (1881), pp. 57 et seq.; Positive Theorie, pp. 361 et seq. [See also the English translation of Böhm-Bawerk's The Positive Theory of Capital.]

[3] By Sax, for example, Die Verkehrsmittel in Volks und Staatswirtschaft (1878–1879); Philippovich, Die Bank von England (1885); Der badische Staatshaushalt (1889).

[4] Silas Marcus MacVane, McLean Professor of Ancient and Modern History at Harvard University, 1887–1911.

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