[From the introduction to Classical Liberalism and the Austrian School.]
There is a sense in which economic theory per se, any analytical economics, can be said to favor the market. As Hayek (1933) remarked, regarding the attack on economics in the 19th century,
The existence of a body of reasoning which prevented people from following their first impulsive reactions, and which compelled them to balance indirect effects, which could be seen only by exercising the intellect, against intense feeling caused by the direct observation of concrete suffering, then as now, occasioned intense resentment. (p. 125) 1
But Austrian economics has been so often and so closely tied to liberalism that it is plausible to seek the connection also in its distinctive economic theories.
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The sustained theoretical attack on the possibility of rational economic planning under socialism that was initiated by Mises and then led by him and Hayek has doubtless played a major role — and rightly so — in associating the school with liberal doctrine.2 In the following decades, the common view among economists — that Mises and Hayek had been bested by their socialist adversaries — tended to confirm the sense that the Austrian position in general was antiquated and obsolete. 3
However, recent scholarship (Lavoie 1985; Boettke 1990; Steele 1992) — as well as certain well-known world events — has served to overturn the older verdict on the economic calculation debate. Indeed, the revolution in thinking has prompted one Austrian economist to remark that "it is really scandalous to observe how decades of ridicule poured upon Mises's 'impossibility thesis' [regarding rational planning under socialism] suddenly give way to an appreciation of his views as if they had been part of conventional wisdom all along" (Boehm 1990, p. 231).4
A major criticism of the market economy from at least the time of Sismondi and the Saint-Simonians has been that it is inherently vulnerable to the business cycle. In sharp contrast, the Austrian theory of the business cycle, originated by Mises and elaborated by Hayek and others (see, e.g., Mises 1949, pp. 547–583), traces the cycle of "boom–bust" to credit expansion, which systematically distorts the signals that would otherwise provide for the smooth functioning of markets.
As Rothbard states (1963, p. 35), "The unhampered market assures that a complementary structure of capital is harmoniously developed; bank credit expansion hobbles the market and destroys the processes that bring about a balanced structure." Since credit expansion is made possible by state action, the business cycle — so far from being a natural consequence of the free market and a heavy debit against it — is ultimately traceable to government, especially in the era of central banking (Rothbard 1962, volume 2, pp. 871–874, 1963, pp. 25–33).
Austrian economic theories are supportive of liberalism in other ways as well. The analysis of the market as a process precludes certain characteristic interventionist or socialist moves, for example, viewing the total of incomes of individuals and firms within a national jurisdiction as a kind of "national cake," which may be divided up at will. The concept of the market as process also helps validate the social inequalities inherent in capitalism. As Mises put it (1949),
The selective process of the market is actuated by the composite effort of all members of the market economy.… The resultant of these endeavors is not only the price structure but no less the social structure, the assignment of definite tasks to the various individuals. The market makes people rich or poor, determines who shall run the big plants and who shall scrub the floors, fixes how many people shall work in the copper mines and how many in the symphony orchestras. None of these decisions is made once and for all; they are revocable every day. (p. 308)
Another Austrian concept, of prices as surrogate information, also militates against interventionism. Streissler points out (1988, p. 195) that Mises, building on Wieser, attacked interventionism for destroying "the mechanism of the creation and dissemination of information about economically relevant circumstances, i.e., market pricing," thus impeding economic efficiency.
Kirzner's exploration of the "existential" conditions of the participants in market processes yields perhaps another close connection to the liberal doctrine. According to Kirzner (1992a),
For the science of human action, freedom is the circumstance which permits and inspires market participants to become aware of beneficial (or other) changes in their circumstances.… An understanding of Misesian economics thus permits us to see directly how it points unerringly to the social usefulness of political institutions which guarantee individual liberties and the security of individual rights to life and property. (p. 248)
But probably the clearest and most convincing grounds for identifying Austrian economics and the free market has to do with the general conception of economic life propounded by the Austrians, beginning with Menger. As Hayek (1973) wrote,
It was this extension, of the derivation of the value of a good from its utility, from the case of given quantities of consumers' goods to the general case of all goods, including the factors of production, that was Menger's main achievement. (p. 7) 5
This was a viewpoint that became standard with all of the founders. Kauder (1957, p. 418) noted that "for Wieser, Menger, and especially for Böhm-Bawerk the wants of the consumer are the beginning and end of the causal nexus. The purpose and cause of economic action are identical."
According to Kirzner (1990), it was this central vision that explains why, despite the particular policy views of its founders (see Section IX), Austrianism was perceived as the economics of the free market. The founders' works
expressed an understanding of markets which, taken by itself, strongly suggested a more radical appreciation for free markets than the early Austrians themselves displayed. It is this latter circumstance, we surmise, which explains how, when later Austrians arrived at even more consistently laissez-faire positions, they were seen by historians of thought as somehow simply pursuing an Austrian tradition that can be traced back to its founders. (p. 93, emphasis in original)
Thus, Kirzner implicitly endorses the position Mises upheld in his reply to F.X. Weiss (see section IX). What is crucial is not the historically and personally conditioned policy views of the first Austrians, but the "overall vision of the economy" that was novel in Menger and shared by his successors. The market economy was seen as
a system driven entirely and independently by the choices and valuations of consumers — with these valuations transmitted "upwards" through the system to "goods of higher order," determining how these scarce higher-order goods are allocated among industries and how they are valued and remunerated as part of a single consumer-driven process. (Kirzner 1990, p. 99) 6
In contrast to the classical economists, who saw the capitalist system as producing the greatest possible amount of material goods, Menger's view was that it was "a pattern of economic governance exercised by consumer preferences" (1990, p. 99, emphasis in original). (Later, W.H. Hutt coined the term "consumer sovereignty" for this state of affairs.) As Kirzner points out, "it was this thoroughly Mengerian insight which nourished Mises's lifelong polemic against socialist and interventionist misunderstandings of the market economy" (1990, p. 100). And, it may be added, it was this insight that terrified the Marxists. 7
- 1Cf. Mises 1969, p. 43 "All those not familiar with economics, i.e., the immense majority, do not see any reason why they should not by means of force coerce other people to do what these people are not prepared to do of their own accord."
- 2On some differences between Mises and Hayek in connection with the famous debate, see Keizer 1994.
- 3For a recent statement of this position, see März 1991, pp. 101–113, where the author, in what purports to be a scholarly work, permits himself the Marxist polemical tactic of characterizing Mises as having launched "the theoretical and ideological counter-offensive of the Austrian bourgeoisie" in his critique of socialist planning (p. 105).
- 4Karen Vaughn (1994) maintains that the use by socialist writers of neoclassical theory to derive market socialist responses to the Austrian assault sensitized both Mises and Hayek to the distinctively Austrian components of their argument.
- 5According to Streissler and Weber (1973, p. 227), Wieser identified as "the central illumination of the Principles" the proposition that, "the final determination of all prices is the valuation of goods by ultimate consumers."
- 6Cf. Dasgupta 1985, p. 80: in contrast to classical economics, "consumption, not accumulation, appears in marginalist economics as the mainspring of economic activity. The new system, so to say, substitutes 'consumers' sovereignty' for 'capitalists' sovereignty."
- 7A point awaiting elaboration, however, is whether the doctrine that sees the whole of the economic system as hinging, in the last analysis, on consumer valuations is a distinctively Austrian one, or whether it is contained in marginalism in general — for instance, in Jevons as well as Menger.