Mises Wire

Facebook icon
LinkedIn icon
Twitter icon
Home | Blog | Mises and the Foundation of Austrian Economics (lecture 1 of 34)

Mises and the Foundation of Austrian Economics (lecture 1 of 34)


I’m at the Mises University now, and I plan on transcribing my notes. This is the first lecture given. Any errors are mine, feel free to point them out so that I can correct them.

This lecture was given by Prof. Hulsmann.

Why isn’t Austrian economics taught?

  • State interventionism.


  • The State hiring economists:

    • Biased towards the government.
    • At least don’t interfere with the government.
  • It is not justeconomics, but every field where the government displaces those it doesn’t favor for those it does.

Essence of Austrian economics

  • Realism distinguishes it from all other schools of thought.
  • Realist philosophy.
  • The mainstream economists accept a dichotomy in economics:


    • Theory: Make sense out of reality existing separately, with nothing to do with reality.
    • Reality.


  • But Austrians do not accept the dichotomy


  • Mainstream “heresies”:


    • Positivism (test, never confirm/disprove)
    • Mathmatica/econometrics


  • Austrianism: realistic, immediately descriptive.


  • Immediately describe something that is relevant.

Root of the Austrian School


  • Austrian economics is representative of a tradition that reaches back much earlier than Menger, to the 14th century Orestne, who was against inflation, and wrote a treatise on the topic. There was an economics branch among the Scholastics.


  • Austrian economics is an ouflow of Realist philosophy:


    • Aristotle
    • Scholastics
      • Economics branch.
      • Austrian school is the only survivor.
      • influenced a century of economists.
    • St. Thomas Aquinas
    • First feeble attempts at economics: applying Realist philosophy to the polito-economy.
    • Branches of Realism in Italy, France, Germany; e.g., School of Salamanda, Jurists. Influenced Carl Menger. (Jurists were trained in law.)
    • Relation between law and economics — logical, rigorous, logical.


  • Jewish element:


    • Austria obtained a part of Poland with many Jewish people; actually, there were many Jewish people throughout Poland, as the Jews were not persecuted in Poland.
    • Anti-semitic laws were overturned.
    • Jewish people integrated.
    • Jews brought Liberalism to Austria (also Socialism).
    • Influence on Constitution of Austria.


  • Mises: came out of a Classical Liberal Jewish family.


    • Mises family was not religious, so no emphasis was placed on ethics; insead, emphasis was placed on Utilitarian considerations.
    • Mises is still in line with the Rationalist tradition, however.
    • Addopted from Rousseau, blend with Austrian topics.


  • Menger:


    • Very unique “brand” of economics.
    • Principalia of Economics.
    • Difficulty getting published.
    • Published himself, was widely bought; was made a Professor at the University of Vienna.
    • Study fundamental economic phenomena, and explain the properties of those phenomena, isolating them and showing how they are inter-related.
    • Trace back to most basic elements:
      • Knowledge
      • Ownership
      • Information
      • Error
    • “Empirical method”, similar to the natural sciences.
    • Price not most fundamental, but result of economic realities.
    • Trade of goods is a complex phonomena, not just the show numerical relations.
    • Greatest contribution: Methodology.
    • No such thing as mathematical research in Austrian economic; explain economic phenomena, not just show numerical realtions.
    • Merit: success in isolaing elements that correspond to reality and explain it.
    • Error, even if use superior mathematics, if rely on arbitrary facts/aggregates.
    • Must explain complex phenomena, not just assume them as given.
    • Menger’s theory of concrete prices: stress partial needs in relation to other partial needs. Value individual quantities of goods, not the whole class of goods over other goods.
    • Marginal Value — explains prices
    • Main contribution — empirical methodology, Realist Philosophy
    • How did Menger end up as the founder of the Austrian school?
    • Much opposition to Menger in academia
    • But Menger was picked as tutor for the future King
    • Became close friends with the future King.
    • Suddenly, Menger very important.
    • Used position of power to found Austrian School and appointed his best students to the chairs; e.g., Boehm Bawerk.
    • Thus, Austrians played key role Austrian.


  • Austrian Subdivisions


    • Main Line: Boehm Bawerk — most important student of Mises.
    • Wieser — Wieserian line
      • Influenced by:
        • Jevons
        • Walras
        • Menger
      • Not Menger’s number one student
    • Mises was Bawerk’s most important student.
    • Rothard was Mises’ most important student.
    • All of today’s main line of Austrians are from the Mises-Rothbard/Menger-Bawerk line.
    • Wieser’s students
      • Meyer, continued Wieserian line
      • Hayek, a studnet of Mises/Wieser. Hayek was Wiesarian in his analytical approach; reasearched things that don’t make sense from the Realist perspective. Tried to develop all theories to show how the free market zooms in on equilibrium.
      • Hayek’s most important studnets were Kirzner and Garrison.
    • Mises considers equilibrium as only a tool to explain interest vs. profit.
    • Schumpteter: side-line of the Austrian schol. Creative destruction. Tried to bridge Mises and Walras. Equilibrium is changeless, only interesting in disequilibrium.


  • Boehm-Bawerk:


    • Four-time head of Ministry of Finance.
    • His works were translated very quickly.
    • Main representative of Austrian economics outside of Austria.
    • Teacher of Mises.
    • Attracted not only Austrians, but also Socialists.
    • Three Contributions: (Capital and Interest: I & II)
      1. Time-preference to explain interest rates. Root cause.
        • Time Preference Theory of Interest.
        • Criticized Marxist “theory” of interest. Marxist theory of interest has certain parts the are plainly contrary to fact. They used “expoitation” of the working class to explain interest: predicts interest rates would be different in different industries; but in reality, there is only one interest rate.
        • Marx responds that it was really just aggregate.
      2. Bawerk responds that Marx hasn’t explained anything.
      3. “Power and Economic Law.” E.g., can labor unions or governments raise wage-rates at will? Political forces, however strong, never act against economic laws, but through economic laws. For example, what happens is that unions cause jobs to be shifted; if universal, they create mass unemployment.


  • Mises
    • Influenced/taught by Bawerk.
    • Interest in history.
    • Initially, in tradition of Historical School.
    • Then encountered Menger’s Principles of Economics, which changes his views, and demonstrated to him that there was a Realist Theory.
    • Mises was in the Realist tradition.
    • No economist with as many contributions as Mises:
      1. Theory of money.
        • Money plays very important impact on real economy.
        • Effects not spectacular, like Keynesians, though.
        • Changes in money supply causes changes in distribution of wealthy: early-ons benefit at expense of late-commers, who are harmed by increased prices.
        • Value of money determined by same laws that affect anything else.
        • Business Cycle: Changes in money suply alter entrepreneurial investments. Lower interest rates. Entrepreneurs think real time-preferences are lower, thus invest in higher order goods, with longer time-frames. Eventually, errors are revealed as they realize that the funds to complete the investments don’t exist, the products don’t sell, or a halt in the inflation reveals real time-preferences through the natural rate of interest.
      2. Calculation Critique of Socialism:
        • Rational calculation of capital is determined by profits, which are determined by money-prices. Money prices are necessary for any rational decision-making of how to distribute resources.
        • Socialism destroys money-prices. Money-prices require two owners: one of money, the other of the resource.
        • Because in a socialist “economy”, “society” owns everything, there are no money prices. No way to decide which lines are the most profitable and efficient relative to other lines.
        • Socialism — no common basis of calculation.
      3. Epistemology of economics. Economics is a sub-division of the science of Praxeology, the study of human action. Axioms are apodictic and can be shown to be absolutely true.
        • Choice. Absolutely true that we make choices. To argue against htat is contradictory because you’re making a choice.
        • Our knowledge of choice is from reflection. Can’t be proven or disproven by observations.
        • Few economists think of epistemology. Positivism and empiricism is essentially a “bad religion”.
        • No mainstream economists can intelligently discuss a priorisim. E.g., Friedman said that the only way to resolve “differences” between praxeologists is to “shoot it out”. Empirically false — no shootings here.
        • All good economics is Realist; there is no useful positivist economics.
        • Today, modern theories of money are mostly like magic. e.g., printing out money can do “great things”.
        • Commodity money can be money without being legal tender, but fiat paper money must be legal tender.


Image source:

Add Comment

Shield icon wire