Classical Liberalism and the Austrian School

 

1	Classical Liberalism and the Austrian School

Liberalism, today often called classical liberalism (but see the essay, “Liberalism: True and False,” in the present volume) is based on the conception of civil society as by and large self-regulating when its members are free to act within the very wide bounds of their individual rights. Among these, the right to private property, including freedom of contract and exchange and the free disposition of one’s own labor, is given a high priority. Historically, liberalism has manifested a hostility to state action, which, it insists, should be reduced to a minimum.

Austrian economics is the name given to the school, or strand, of economic science that began in 1871, with the publication of Carl Menger’s Principles of Economics (Hayek 1968; Kirzner 1987; Salerno 1999). From a very early point and continuously, it has been linked—both by adherents and perhaps even more decisively by various opponents—to the liberal doctrine.1 The purpose of this essay is to examine some of the connections that exist, or have been held to exist, between Austrian economics and liberalism.

Austrian Economics and Wertfreiheit

Writers have sometimes freely referred to “the Austrian ethical position” and the “moral and ethical stance” of the Austrian economists, denoting a position with strong (liberal) implications for politics (Shand 1984: 221; Reekie 1984: 176). At first glance, this is surprising, since Austrian economists have been at pains to affirm the Wertfreiheit (value-freedom or value-neutrality) of their teachings, and thus its conformity to the strictures of Max Weber on the character of scientific theories (Kirzner 1992b). Ludwig von Mises, for instance (1949: 881) stated that: “economics is apolitical or nonpolitical . . . it is perfectly neutral with regard to judgments of value, as it refers always to means and never to the choice of ultimate ends.”2

This said, however, the fact is that all of the major figures in the development of Austrian economics habitually took positions on policy issues which they held to be somehow grounded in their economic doctrines. Mises, for instance, is widely recognized as probably the foremost liberal thinker of the twentieth century. In his magnum opus, Human Action, he shed light on the connection between value-free economics and liberal politics:

While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness, nourishment to starvation, abundance to poverty. It teaches men how to act in accordance with these valuations. . . . The liberals do not assert that men ought to strive after the goals mentioned above. What they maintain is that the immense majority prefer [them]. (1949: 154, emphasis in original)

According to Mises, then, economics teaches the means necessary for the promotion of the values most people endorse. Those means comprise, basically, the maintenance of a free market, private property economy. Thus, the economist qua economist passes no value judgments, including political value judgments. He only proposes hypothetical imperatives: if you wish to achieve A, and B is the necessary means for the achievement of A, then do B (Rothbard 1962, 2: 880–81). A question that will concern us is whether the division between Austrian theory and liberal principles is as surgically clean-cut as Mises seems to suggest.

Methodological Individualism

Methodological individualism has been a keystone of Austrian economics from the start (Christainsen 1994).3 In his Investigations, Menger wrote:

The nation as such is not a large subject that has needs, that works, practices economy, and consumes. . . . Thus the phenomena of “national economy” . . . are, rather, the results of all the innumerable individual economic efforts in the nation and . . . must also be theoretically interpreted in this light. . . .Whoever wants to understand theoretically the phenomena of “national economy” . . . must for this reason attempt to go back to their true elements, to the singular economies in the nation, and to investigate the laws by which the former are built up from the latter. (1985: 93; emphasis in original)

Methodological individualism was endorsed by the other leaders of Austrianism4 to the point where Fritz Machlup (1981: 9) could list it as the first of “the most typical requirements for a true adherent of the Austrian school.”

Probably because of the connotations of the noun, Austrians have stressed that what is at issue is methodological individualism. Israel Kirzner (1987: 148), in citing Machlup’s criterion of Austrianism, warns that this is “not to be confused with political or ideological individualism”; it refers merely “to the claim that economic phenomena are to be explained by going back to the actions of individuals.” Lawrence H. White (1990: 356), too, wishes to distance methodological individualism from any hint of politics. White criticizes Max Alter for alluding to a “political” battle in this connection, commenting: “in fact the phrase methodological individualism was coined precisely to distinguish it from other varieties of individualism, including the political variety.”

But the interesting question is not whether the characteristic methodological principle of the Austrian school is identical with individualism in the political sense (usually more or less a synonym for liberalism). Obviously, it is not. The question is whether the principle itself has any political ramifications.

It is certainly possible for someone to adopt methodological individualism and not endorse liberalism (Böhm 1985: 252–53). Jon Elster, for instance, is able to insist on the necessity of methodological individualism in the social sciences, while continuing to view himself as a kind of Marxist (1985: 4–8).5 Yet it is significant that Elster dismisses certain claims of Marx on the grounds of their incompatibility with methodological individualism. In general, it seems clear that the Austrian approach in methodology tends to preclude certain holistic ideologies that are also inconsistent with liberalism, such as classical Marxism and some varieties of racism and hyper-nationalism.6 To this extent, then, it is not simply methodological individualism.

Political factors played a role in the debate over Austrian methodology from the start. The very fact that “nation” and “state” understood as holistic entities were not primaries in his system set Menger apart from important currents of economic thought in the German-speaking world of his time. Indeed, it was on the basis of Menger’s methodology that Gustav Schmoller, leader of the German Historical School, instantly politicized the whole debate at the very start of the famous Methodenstreit (dispute over methods) (Bostaph 1978 and 1994). Reviewing the Investigations, Schmoller (1883:241) charged Menger with the cardinal sin of adhering to Manchestertum (laissez-faire), since his abstract and “atomistic” method might better be called “the Manchesteristindividualist” method.7

Friedrich von Wieser, together with Böhm-Bawerk the leader of the “second generation” of the Austrian school (after Menger), himself introduced a curious political note in discussing its origins. Wieser recalled how, as young economists, both he and Böhm-Bawerk had been struck by the contradiction in classical economics:

While the chief accusation that was raised at the time against the classical economists in Germany concerned their [political] individualism, we found that they had become unfaithful to their individualistic creed from the start. As true individualists they would have had to explain the economy starting from the meaning of the individuals engaged in economic activity who were joined together in the economy . . . (1923: 87)

Many decades later, F.A. Hayek in a sense concurred with Schmoller and Wieser. The central idea of his most extensive work on methodology, The Counter-Revolution of Science, is precisely the theoretical and historical connections between the denial of methodological individualism and the growth of socialism. Hayek assailed “methodological collectivism” for

its tendency to treat wholes like “society” or the “economy,” “capitalism” . . . or a particular “industry” or “class” or “country” as definitely given objects about which we can discover laws by observing their behavior as wholes. . . . The naive view which regards the complexes which history studies as given wholes naturally leads to the belief that their observation can reveal “laws” of the development of these wholes. (1955: 53, 73)

Furthermore, according to Hayek, the supposed discovery of such laws has resulted in the construction of philosophies of history on which major socialist projects have been erected—Marxism, of course, but particularly Saint-Simonianism, the system he dissects in his book. The followers of the early “utopian” socialist, Henri de Saint-Simon, were practitioners par excellence of scientism, the illegitimate application to the study of society of the methods of the natural sciences. And it is scientism—the negation of methodological individualism—that “through its popularizers has done more to create the present trend towards socialism than all the conflicts between economic interests . . .” (1955: 100–01). Opponents of liberalism, in criticizing Hayek for his methodological individualism, have also assumed that it was closely connected to his political philosophy.8

Some Marxist critics have further criticized Austrian methodology for stunting our understanding of social reality. According to Ronald L. Meek, through the marginalist revolution in economic theory, “bourgeois” economics—including Austrianism—took refuge in a schema centering on the psychology of isolated, atomistic individuals. In this way, it (unconsciously) diverted attention from the crucial questions of political economy that had been the focus of classical economics, including Marxism. As a result, “real-life” issues, such as the division of the social product among competing classes—“those great problems of capitalist reality which worried the man in the street—have been systematically ignored” (1972: 505).

This Marxist complaint is misguided, however. The abstracting approach of Austrianism pertains—necessarily—to its theory. Some Austrians, it may be conceded, have neglected to apply their theory to the understanding of concrete, “real-life” issues. That this failing is not intrinsic to Austrian economics, however, was demonstrated—to cite only one example—by the outstanding Austrian economist, Murray N. Rothbard, who devoted much of his extremely productive career not only to “pure economics,” but also to highly important questions of political economy, both on a theoretical level and in specific historical contexts (see, e.g., Rothbard 1963, 1970, 1995a, 1995b, 2002).9

Subjectivism

Austrian economics begins with and constantly emphasizes the action of the individual human being (Mises 1949: 11–29; Rothbard 1962, 1: 1–8). According to Ludwig Lachmann, for the Austrian school

the thought design, the economic calculation or economic plan of the individual, always stands in the foreground of theoretical interest. . . . The significance of the Austrian school in the history of ideas perhaps finds its most pregnant expression in the statement that here man as an actor stands at the center of economic events. (1978: 47, 51; emphasis in original)10

This standpoint may be contrasted to that of neoclassical theory, of which Lachmann went so far as to declare: “Fundamentally, we cannot really speak of economic activity here. As in nature, people react to the current external conditions of their economic existence: they do not act.” In support of this rather severe judgment, Lachmann cited the statement of Vilfredo Pareto: “The individual can disappear, provided that he leaves us this photograph of his tastes.”11 Incensed by such a depreciation of individual acting man, Lachmann assailed the “arid formalism” of neoclassical economics, which treats “the manifestations of the human mind in household and market as purely formal entities, on par with material resources” (1978: 51, 56, 181; emphasis in Lachmann).12

Israel Kirzner, too, has noted the uniqueness of the Austrian outlook. Both the earlier Ricardian and the current neoclassical economics exhibit a “mechanical quality,” whereby “human aspirations, human errors, and human discoveries are downplayed, ignored, or simply assumed away.”13 Austrian economics, on the other hand, highlights the alertness, inventiveness, fallibility, and resourceful creativity of all the participants in the market process, especially in the case of the entrepreneur and the entrepreneurial function. This is a distinctive Austrian outlook which Kirzner traces back to Menger, whose originality consisted in his “vision of an economy created and shaped by human action” (Kirzner 1994, 1: xiv, xxiv).14 For neoclassical economic theory, on the other hand, as one practitioner has ruefully admitted, entrepreneurs and entrepreneurship simply do not exist (Rosen 1997: 148–49).15

In this whole area there is a strong link to an important element of classical liberalism, as exemplified, for instance, in the early Wilhelm von Humboldt, Benjamin Constant, and Herbert Spencer.16 In combating authoritarian ideologies, liberal thinkers focused on the individual human being per se (i.e., irrespective of class, race, etc.) as the fountainhead of creative response to an ever-changing world. From this they derived the basic liberal demand for as wide a latitude as possible for individual freedom of choice and action.

On the level of policy, Austrianism’s individualist and subjectivist methodology tends, indirectly at least, to sway decisions in a liberal direction. Austrian economists are skeptical of the macroeconomic models devised by “mainstream economists,” with their assumption that various global magnitudes act upon one another.17 There appear to be affinities between a macroeconomic approach and anti-liberal policies. Hayek, for example, wrote, of the heightened interest in macroeconomic statistics associated with the Keynesian revolution:

It was largely a growing demand for greater deliberate control of the economic process (which required more knowledge of the specific effects to be expected from particular measures) that led to the endeavor to use the obtainable statistical information as the foundation of such predictions. (1973: 12)18

It is, of course, possible for a macroeconomist to be a liberal—and even an Austrian. The most prominent contemporary example is Roger W. Garrison (see Garrison 2001 and the Austrian Economics Newsletter 2000). Jörg Guido Hülsmann (2001) has declared that modern (i.e., post-Ricardian) macroeconomics began with Böhm-Bawerk’s Capital and Interest. But there, and in the later Austrian tradition, Hülsmann persuasively argues, the difference between macro- and microeconomics is merely nominal. It has to do with phenomena that can scarcely be affected by the choices of particular individuals and those where the effect of individual choices is crucial. Ultimately, however, all economic phenomena are generated by acting individuals, in the manner systematized in Mises’s Human Action. Macroeconomics as understood and practised by the profession’s mainstream produces the delusion of economic life as a great Machine, requiring constant manipulation by self-styled experts.

Austrians adopt a similarly skeptical outlook on welfare economics, which, they hold, also violates the principle of subjectivism. Israel Kirzner writes: “Crucial to this theory is the attempt to aggregate, in some sense, the tastes, the purposes, or the satisfaction of individuals into an entity that it is the ideal of economic policy to maximize.” Austrianism, on the other hand, provides an analytical framework “that preserves the individuality of individual purposes,” by the use of the concept of coordination of individual plans through market processes (Kirzner 1976a: 84–85, emphasis in original; see also the classic analysis by Rothbard 1997, 1: 211–54).

Individuality bears an intimate, perhaps even logical connection, to diversity, and Austrianism, in contrast to neoclassical economics, likewise accentuates the role of diversity in economic life: “The vice of formalism is precisely this, that various phenomena which have no substance in common are pressed into the same conceptual form and then treated as identical.” (Lachmann 1978: 189)

To the degree that Austrian economics emphasizes the importance of omnipresent individual differences and diversity, a statist approach to policy becomes highly problematical. It is hard to avoid the conclusion that positive government action must always in varying degrees abstract from the differences in particular cases, entailing a high degree of uniformity and thus the likelihood of a mismatch with actual social circumstances. Thus, characteristic Austrian emphases—on the role of the economic actor’s alertness to opportunities in his specific setting, on the market as a process of discovery, on the heterogeneity of the factors of production, on the ubiquity of significant differences among individuals—are so many points telling against the possibility either of socialist planning or of efficient state intervention in the economy.

The fear that clumsy and ponderous government activism would trample on “the individuality of individual purposes” was shared by a number of the great liberals of the past. Wilhelm von Humboldt, for instance, wrote (1969: 32): “The solicitude of a State for the positive welfare of its citizens must further be harmful in that it has to operate upon a promiscuous mass of individualities, and therefore does harm to these by measures which cannot meet individual cases.”

Besides having implications for policy, the Austrian concern with the diversity of human beings and their situations is strongly congruent with liberalism’s view of the nature of man.19 The epigraph which John Stuart Mill placed at the beginning of his On Liberty, from Humboldt’s Limits of State Action, epitomizes this liberal outlook: “The grand, leading principle towards which every argument unfolded in these pages directly converges is the absolute and essential importance of human development in its richest diversity” (quoted in Mill 1977: 213).

That individuality among human beings naturally leads to inequality is affirmed by both Austrian economics and liberal social philosophy, which insist on the legitimacy of widely differing levels of income and wealth. Mises, who believed in the innate physiological and intellectual inequality of human beings, stated outright that: “The inequality of incomes and wealth is an inherent feature of the market economy. Its elimination would entirely destroy the market economy.” (1978a: 27–30; 1990: 190–201; 1949: 836). Lachmann condoned the inequality of social influence and power, declaring that “the market process is closely linked with what [Vilfredo] Pareto called ‘the circulation of élites,’ perhaps the most important of all social processes,” and went on to brand “equalitarianism” as “the favorite myth of our century. No thinking person can fail to notice that as societies become more civilized, inequalities are bound to increase” (1978: 102, 108; see also Rothbard 1973b and 1997, 2: 3–35; and Bauer 1983).

Apriorism: Mises, Hayek, and Popper

The reliance on the deductive method that has always characterized Austrian economics culminated in the rigorously a priori approach of Ludwig von Mises and his followers (Rothbard 1997, 1: 28–77, 100–08; Hoppe 1995; Smith 1986, 1994a: 299–332, 1994b, and 1996). In this connection, the—rather startling—claim has been advanced that Mises’s method is inconsistent with liberal principles.

In chiding Mises for his alleged illiberalism, T.W. Hutchison posited a sharp division in methodological principles between Mises and the later Hayek (“Hayek II,” as he called him), suggesting that Hayek’s own distinction between “true” and “false” individualism was pertinent to this division (1981: 223–24; Hayek 1948: 1–32). In Hayek’s analysis, true individualism is identified with the British empirical tradition of social thought, while the false variety is tied to the French rationalist tradition stemming from Descartes. Hutchison cites Hayek:

The antirationalistic approach, which regards man not as a highly rational and intelligent but a very irrational and fallible being, whose individual errors are corrected only in the course of a social process, and which aims at making the best of very imperfect material, is probably the most characteristic feature of English individualism. (Hutchison, 1981: 224)

Hutchison held that Hayek came at least implicitly to place Mises in the category of “false individualists,” since, according to Hutchison (emphasis in original): “surely no ‘true’ individualist will lay claim to knowledge of significant a priori propositions of ‘apodictic certainty,’ which are ‘beyond the possibility of dispute,’” as did Mises. Siding with what he takes to be the position of the later Hayek, Hutchison continues:

“False” as well as “True” Individualism has been very much present among modern Austrian views on the philosophy and method of economics . . . it is important that [the Austrians’] methodology, or epistemology, should be clearly, logically, and explicitly compatible with their political principles. As well as its ethics, politics, and economics, freedom has its epistemology, which must surely be one of its most fundamental aspects and requirements. (1981: 224).20

A similar attack on Mises was launched by Milton Friedman, who stated that “the basic human value that underlies my own [political] beliefs” is “tolerance, based on humility. I have no right to coerce someone else, because I cannot be sure I am right and he is wrong.” Accusing Mises (as well as Ayn Rand) of “intolerance in personal behavior,” Friedman traced this supposed flaw in Mises’s character to “his methodological doctrine of praxeology”:

. . . his fundamental idea was that we knew things about “human action” (the title of his famous book) because we are human beings. As a result, he argued, we have absolutely certain knowledge of the motivations of human actions [sic]21 and he maintained that we can derive substantive conclusions from that basic knowledge. Facts, statistical or other evidence cannot, he argued, be used to test those conclusions. . . . That philosophy converts an asserted body of substantive conclusions into a religion. . . . Suppose two people who share von Mises’s praxeological view come to contradictory conclusions about anything. How can they reconcile their difference? The only way they can do so is by a purely logical argument. One has to say to the other, “You made a mistake in reasoning.” And the other has to say, “No, you made a mistake in reasoning.” Suppose neither believes he has made a mistake in reasoning. There’s only one thing left to do: fight. (1991: 18)

How such an argument could emanate from such a distinguished source is simply baffling. Among other problems with it: Friedman’s theory would predict the occurrence of incessant bloody brawling among mathematicians and logicians, the non-occurrence of which falsifies that theory in Friedman’s own positivist terms. Friedman’s position also entails that no religious person who felt certain about his religious beliefs could have any principled reason to respect the conflicting religious beliefs of others, which is absurd. Finally, Friedman’s “explanation” of Mises’s alleged personal “intolerance” fails to account for the personal “tolerance” of other practitioners of apriorism in economics.22

As for Hutchison, he really offers no argument at all for his strange attack on Mises.23 Instead, there is the endorsement, without argument, of Hayek’s very dubious distinction between “false,” French individualism, and “true,” British individualism, and of the confusing account of intellectual history Hayek builds on this imagined dichotomy. (See the essay on “Liberalism: True and False,” in the present volume.)24 Hutchison also makes the unsupported and no means obviously true assumption that “freedom” (presumably meaning liberal theory) must have a single epistemological (as well as ethical) foundation. Clearly, Hutchison’s candidate for the “epistemology of freedom” is the theory of knowledge of Karl Popper.

In touching on the intellectual relationship of Mises and Hayek, Hutchison claims that Hayek broke with Mises’s “false” individualism and developed his epistemological ideas in the direction of Popper’s position. Popper himself publicly alluded to this issue, when he claimed that Mises had seen in him “a dangerous opponent,” who had perhaps robbed Mises “of the complete agreement of his greatest pupil, Hayek” (Popper 1992: 10). There is no reason, incidentally, to treat as proven Popper’s unsupported speculations on Mises’s motives for keeping his distance from him.

To what extent Hayek accepted Popper’s methodological views remains unclear. In his Nobel lecture, in 1974, Hayek continued to argue that a fundamental difference exists between the subject matter of the natural and social sciences. Since the complexity of the phenomena studied in the latter usually renders empirical testing impossible, most attempts to apply the characteristic methods of the natural sciences in the social sciences are ruled out (Christainsen 1994: 14). Hutchison himself (1994: 233, n. 7) labels the claim that Hayek became a “falsificationist” as “exaggerated and misleading.” One wonders, though, what a Popperian is supposed to be if not a falsificationist.25

But those who wish to maintain that Popper’s methodology somehow undergirds the free society, understood as including economic freedom, are faced with a problem: Popper himself was wholly unaware of this supposed connection.

In his most famous work on social philosophy, The Open Society and Its Enemies, he asserts—argues for would be putting it much too strongly—that the state has an obligation not only to provide the usual welfare services, but beyond that to guarantee a livelihood to everyone willing to work, and, topping it all, to protect everyone from “inequitable arrangements” arising out of differential “economic power.” Even in 1974, Popper was advocating that the state should take over a controlling share of all “public companies” (Shearmur 1996: 51–52, 36).26

Most damaging to any claim that Popper represents authentic liberalism is the fact that he accepted the traditional mythology of industrial capitalism as a system of oppression of the working class, only gradually made tolerable by social reforms effected in part through socialist agitation. In The Open Society and Its Enemies, Popper wrote that Marx’s protests against capitalist oppression “will secure him forever a place among the liberators of mankind.” He contrasted Marx’s “invincible humanitarianism and sense of justice” with the “cynical” defense of “shameless exploitation” of workers by “hypocritical apologists,” i.e., the laissez-faire liberals of the time (1950: 310–12; see also 675 n. 13).27 As late as 1973, he declared that, although he had decisive disagreements with Marx, he respected him highly “as a fighter for a better world” (1984: 167).

That Popper uncritically embraced the most negative interpretation of the industrial revolution is not surprising, considering that his source for the condition of workers in that period was Marx’s Capital (Shearmur 1996: 52). But it is remarkable that Popper never reconsidered that interpretation, given that it was his friend Hayek himself among liberal theorists who led the fight to bring more historically correct views on this subject to the general public (Hayek 1954).28 One wonders why Popper, the fearless critical thinker, didn’t just read Capitalism and the Historians and a few of the works cited in that collection.

Popper’s case resembles that of another writer widely lionized as a great liberal, Isaiah Berlin. Berlin, too, endorsed the view that the industrial revolution and nineteenth century laissez-faire degraded and brutalized working people (Rothbard 1982: 216–17). Like Popper, Berlin seems to have had no inkling that, starting in the eighteenth century, Europe confronted an unprecedented population explosion, and that, as Rosenberg and Birdzell (1986: 147; see also Mises 1949: 613–19) put it, “the new factories and towns were a large part of the solution to Europe’s problem . . . they were not part of the problem.” From the 1920s on, economic historians like Clapham, Ashton, and Hartwell provided ample evidence for this judgment. Yet both Berlin and Popper were content to concur in archaic, politically inspired anti-capitalist myths—what Hayek called the socialist interpretation of economic history (1954: 7)—on the small matter of how the modern world came into being. It is most peculiar that, in spite of this, some persist in regarding Karl Popper and Isaiah Berlin as perhaps the premier liberal thinkers of the twentieth century.

Austrian Economic Theory

There is a sense in which economic theory per se, any analytical approach to economic questions, can be said to favor the market economy. Hayek remarked, regarding the attack on economics in the nineteenth 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. (Hayek 1933: 125)

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.

The sustained theoretical attack on the possibility of rational economic planning under socialism initiated by Mises in the early 1920s and then led by him and Hayek doubtless played a major role, and rightly so, in associating the school with the liberal doctrine.29 In the decades that followed, the common opinion 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.30 However, recent scholarship (Lavoie 1985; Boettke 1990; Steele 1992)—as well as certain well-known world events—has served to overturn the older verdict. Indeed, the revolution in thinking has prompted one scholar to remark that “it is really scandalous to observe how decades of ridicule poured upon Mises’s ‘impossibility thesis’ [on rational planning under socialism] suddenly give way to an appreciation of his views as if they had been part of conventional wisdom all along” (Böhm, 1990: 231).31

That identifying the fatal flaw of central planning was a distinctively Austrian achievement is attested to by Sherwin Rosen, an economist in the neoclassical tradition. Rosen concedes that neoclassical theory was ill-equipped to discover the defects in the “market socialist” models put forth by Oskar Lange and others. So straitjacketed were many in the economics establishment by their own approach that they ignored and even ridiculed those who ventured to question the propagandistic reports of Communist economic “successes” (1997: 145).

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, Austrian business cycle theory, originated by Mises and elaborated by Hayek, Rothbard, and others, begins by distinguishing savings-induced economic growth from growth produced by credit expansion. It is the latter that initiates the cycle of “boom-and-bust,” by systematically distorting the signals that would otherwise provide for the smooth functioning of markets. As Rothbard states: “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 action, especially in the era of central banking (Mises, 1949: 547–83; Rothbard 1963: 25–33, 35; and 1962, 2: 871–74; Garrison 1997a and 1997b).

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, e.g., treating the sum of incomes of individuals and firms within a national jurisdiction as a kind of “national cake,” which may be divided up at will. The same analysis also helps validate the social inequalities inherent in capitalism. As Mises declared unabashedly:

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. (1949: 308)

Strong support for a liberal economic order is also provided by the theory put forward by Mises according to which the system of government intervention in economic transactions is inherently unstable, i.e., must resolve itself either into laissez-faire or into complete socialism. As the latter is not a viable economic order, Mises’s argument amounts to establishing laissez-faire as the only stable regime for advanced economies (Mises 1977; see Ikeda 1997, including chapter 6, on the instability of the “minimal state”; Reisman 1998: 219–66; and Gordon 1997).

Another Austrian concept, of prices as surrogate information, also militates against interventionism. Streissler points out (1988:195) 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.

Israel Kirzner’s exploration of the “existential” conditions of the participants in market processes yields yet another close connection to the liberal position:

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. (1992a: 248, emphasis in original)

But probably the clearest and most convincing grounds for associating Austrian economics with the free market has to do with the general conception of economic life propounded by the Austrians, beginning with Menger. In Hayek’s view:

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. (1973: 7)

This was the perspective that became standard with all of the founders. Kauder (1958: 418) notes 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.” Kirzner argues that it was this central vision that explains why, despite the particular and varying policy views of its founders (see below), Austrianism was perceived to be 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. (1990: 93, emphasis in original)

Thus, Kirzner implicitly endorses the position Mises upheld in his reply to F.X. Weiss (see below). 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. They saw the market economy 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: 99)32

In contrast to the classical economists, who perceived 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.” (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” (Kirzner 1990: 99–100). And, it may be added, it was this fundamental insight into the nature of the private property system that discomfited and incensed Marxists and other socialists even to the present day.

Spontaneous Order in Society

Since liberalism is based on the recognition of the self-regulating capacity of civil society—of the social order minus the state—any social theory that centers on and explicates that capacity furnishes powerful support to the liberal viewpoint. Contemporary Austrians would find themselves in substantial agreement with Rothbard when he writes:

the network of these free exchanges in society—known as the “free market”—creates a delicate and even awe-inspiring mechanism of harmony, adjustment, and precision in allocating productive resources, deciding upon prices, and gently but swiftly guiding the economic system toward the greatest possible satisfaction of the desires of all consumers. In short, not only does the free market directly benefit all parties and leave them free and uncoerced; it also creates a mighty and efficient instrument of social order. Proudhon, indeed, wrote better than he knew when he called “Liberty, the Mother, not the Daughter, of Order.” (1963, 2: 880, emphasis in original)

From an early point, Austrianism was noted for its emphasis on “spontaneous order” in society in a sense close to and even derivative of the writers of the Scottish Enlightenment. The societal arrangements are seen as mainly the product of the unintended consequences of selfseeking individual action, which in this way gives rise to social institutions that are beneficial though undesigned (Hayek 1967: 96–105; Hamowy 1987; and Vaughn 1987).

In his Investigations, Menger broaches the issue in Chapter 2, Book 3, devoted to “The Theoretical Understanding of Those Social Phenomena Which Are Not a Product of Agreement or of Positive Legislation, but Are Unintended Results of Historical Development.” He poses the question: “How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them?” Menger points out that “Law, language, the state, money, markets, all these social structures are to no small extent the unintended result of social development,”33 and goes on to provide a brilliant and famous explanation, based on methodological individualism, of the origin of money (1985: 146, 152–55; see also Menger 1981: 256–85).

In reviewing the Investigations, Gustav Schmoller criticized Menger for praising Edmund Burke, Savigny, and Niebuhr, who understood law as (in Schmoller’s words) “the unreflective product of a higher wisdom, rather than as derived from the action of superior power [i. e., the state] . . . a transference of their doctrine to economics, Menger thinks, would have opened up ‘an immeasurable area for fruitful activity,’ in the direction of Burke.” Schmoller comments bitingly:

This lively sympathy for the mysticism of Savigny’s folk-spirit arises obviously from the Manchesterist [i.e., laissez-faire] aversion to every conscious action of the collective organs of society. Just as law originates of itself, so should the economy be left to its own devices, conceived of as merely the play of egoistic and yet harmonious interests. (1883: 250)

Leaving aside the accusatory tone of this passage, one may concede that here Schmoller makes a plausible point. As presented by Austrian economists, spontaneous-order explanations may certainly serve to validate the liberal view of the functioning of society (although the writers Menger drew on are generally regarded as conservatives).

This is especially true of Hayek’s work. Hayek even described Menger’s question, how is spontaneous order possible, as “the central problem of the social sciences,” since “the problem of the origin or formation and that of the manner of functioning of social institutions [is] essentially the same,” a point not fully appreciated until Menger’s exposition (Hayek 1955: 83; 1967: 101).

Hayek associated this view with the battle between liberalism and socialism:

From the belief that nothing which has not been consciously designed can be useful or even essential to the achievement of human purposes, it is an easy transition to the belief that since all “institutions” have been made by man, we must have complete power to refashion them in any way we desire. (1955: 83)

And yet it is by no means clear to what degree the Menger-Hayek view of the spontaneous origin—and, hence, in Hayek’s interpretation, spontaneous functioning—of institutions is serviceable to liberalism. Menger himself posited a crucial qualification:

But never, and this is the essential point in the matter under review, may science dispense with testing for their suitability those institutions which have come about “organically.” It must, when careful investigation so requires, change and better them according to the measure of scientific insight and practical experience at hand. No era may renounce this “calling.” (1985: 234).34

Thus, a certain—undefined, but presumably considerable—area would seem to exist for “social engineering.”

The real value of the notion of spontaneous order is probably best appreciated when it is contrasted to the approach of some key writers of the French Enlightenment, devotees of what may be called the “Lycurgus myth.”

Lycurgus, the semi-mythical figure who supposedly originated the institutions of ancient Sparta, was widely admired in eighteenth century France. Those institutions all appeared to dovetail smoothly to generate the ideal type of human being, Spartan Man, selflessly and totally devoted to love of country. As Rousseau expressed it, Lycurgus made the citizens of Sparta into “beings above the level of humanity” (1962: 428–29; see also Parker 1965). He was Rousseau’s chief model when he came to describe “the Lawgiver,” in the Social Contract:

The lawgiver is the engineer who invents the machine; the prince is merely the mechanic who sets it up and operates it. . . . Whoever ventures on the enterprise of instituting a people must be ready, as it were, to change human nature. . . . A sublime reason, which soars above the heads of the common people, produces those rules which the lawgiver puts into the mouth of the immortals. . . .The lawgiver’s great soul is the true miracle which must vindicate his mission. (1968: 84–87)35

This idea, that Lycurgus—or Numa Pompilius, or Moses, or some other super-human lawgiver—“instituted” a people, was shared by Mably and other influential philosophes, who could only grasp the emergence of useful patterns and structures in social life—of order—as the product of a designing mastermind. For the tradition that Hayek recommends, on the contrary, such order is best understood as coming about through a process of adaptive evolution. As Adam Ferguson wrote, in one of Hayek’s favorite quotations: “nations stumble upon establishments which are indeed the result of human action, but not the execution of human design.” Whatever the limitations of such a conception, it is clearly a great advance over the puerile notions of Rousseau and other philosophes.

The Ideological Background of the Rise of Austrian Economics

In keeping with his attempt to depict Austrian economic theory, and marginalism in general, as free of any political taint, Hayek declared:

I can find no indication that Jevons, Menger, or Walras, in their efforts to rebuild economic theory, were moved by any desire to revindicate the practical conclusions that had been drawn from classical economics. Such indications as we have of their sympathies are on the side of the current movements for social reform. (1973: 3)

But here Hayek misses the point. The question is not whether Austrian (and marginalist) economics was a defense of laissez-faire against social reform, but whether it was a defense of the basic private property, market economy against socialism.

Hayek ignored the theoretical crisis that many felt existed in economics on the eve to the marginalist revolution. Friedrich von Wieser, for instance, testified in his biographical notice on Böhm-Bawerk that both scholars were deeply troubled as they began their careers as economists. Among the problems confronting them were what appeared to be the plain implications of the classical labor theory of value (see Rothbard 1995c, 2: 88–94). If that theory was true, then

Is not the socialist critique of current conditions, is not Karl Marx with his theory of surplus value, totally correct? Is not socialist theory just the completer of the classical idea, which the classical economists themselves did not have the courage to think through to the end?

Their “intellectual distress” was instantly alleviated, however, when they happened to discover Menger’s Principles.36 It should be stressed that Wieser gives no hint of bad faith. He states that both he and Böhm-Bawerk became convinced that socialism, in consistently applying the classical concept of value as stemming from labor, was fallacious (Wieser 1923: 88).

Frank A. Fetter was another scholar who saw the emergence of marginalism as a deliverance from an ideological impasse.

Fetter elaborated on the predicament of classical economics after the middle of the nineteenth century. Of Ricardo and his labor theory of value, he stated:

with his sophistical arguments he had given to this really primitive conception the phenomenal authority of his name, and it was to go on exerting a tremendous and evil influence in ways then all unforeseen. Labor is the source of value (exchange value, virtually market price as he used it); labor is the cause of value; labor produces all wealth. Naturally follows the ethical and political conclusion: if labor produces all wealth then labor should receive all wealth. (1923: 597; see also Ross 1991)

John Stuart Mill’s attempt to salvage Ricardo, Fetter continues, was quite unsatisfactory, “a broken reed against the surplus-value attack upon the system of private industry and private property.” Then “Marxian socialism rose on the horizon” and quickly gained advocates, who often supported their view with references to the Mill-Ricardian labor theory of value. “Well I remember the confidence and gusto with which this demonstration of the truth of Marxism was still presented by socialist speakers in the nineties, as I listened to them from Berlin to San Francisco.”

Like Wieser, Fetter is quick to point out that no bad faith was involved in propagating the subjective theory.37 Yet he asserts, as against Hayek, that even a “casual examination of the works of Jevons, Menger, Clark, and of their most influential colleagues reveals from first to last evidences of this undercurrent of interest in the political bearings of the value theory.”38 The story, however, ends happily from Fetter’s point of view. The subjective-value theory left Marxism in the dust: “it would be difficult to find in the whole history of economic thought a more complete victory of one idea over another” (1923: 600–02, 605; on Fetter, see Herbener 1999).

From the opposing camp, a long line of socialist critics, from the 1890s on, pilloried marginalism as a mere rationalization for the exploitative capitalist system. The Italian socialist Achille Loria assailed the marginal approach for precluding “the possibility of a deep analysis of social relations” and eliminating “any theoretical threat against the established economic system” (Barucci 1972: 529). Karl Kautsky, the Pope of German Marxism before the First World War, took note of the Austrian challenge in the form of Böhm-Bawerk’s work, declaring: “Böhm-Bawerk’s and Marx’s theories of value are mutually exclusive. . . . That means, therefore: either-or” (cited in Chaloupek 1986: 198–99). Nikolai Bukharin (1927), who attended Böhm-Bawerk’s lectures, labeled Austrianism “the economic theory of the rentier class.”39 Decades later, Ronald L. Meek claimed, citing Menger and Jevons, that “the founders [of marginalism] were very well aware of the dangerous uses which were currently being made of these doctrines [of classical economics] in certain quarters” (1972: 503).40

What the exact role the marginalist revolution was in overturning the labor theory of value is complicated, however, by the findings of scholars who have drawn attention to theoretical developments in continental Europe in the earlier nineteenth century. T.W. Hutchison rightly complained that:

The history of economic thought in the first half or three-quarters of the nineteenth century was and still is often portrayed in very Anglo-centric terms, as though the theories which achieved for so long in Britain such an extraordinary dominance and authority. . .enjoyed a similar hold and authority elsewhere in Europe. This was not the case.41

Hutchison observes, for instance, that “the wages-fund theory had been demolished by Friedrich Hermann in 1832 and never gained significant support in Germany.” German economists had already espoused the doctrine that value was founded on utility and income distributed to the factors of production on the basis of their productivity (1972: 443, 445).

Erich Streissler amplified Hutchison’s argument, delving into works little known to Anglophone scholars, such as those of Hermann, Rau, and Mangoldt, and mining them for telling quotations, e.g., from Hermann, in 1832: the entrepreneur, in buying labor, “acts only as an agent of the consumers of the product. Only what the consumers give for the product constitutes the true remuneration of the service of the worker . . .”

So routine was the German rejection of the labor theory of value that Wilhelm Roscher, one of the founders of the “first” Historical School, could dismiss that theory as a “genuinely national English view” (1990a: 45n, 47n). Later, Karl Brandt, in reviewing Hufeland and other early nineteenth century German proponents of utility as the foundation of economic value, regarded them as continuing the French tradition of J.-B. Say (Brandt 1992: 169–84; see also Rothbard 1995c, 2: 1–45). So, even leaving aside the already centuries-old Late Scholastic tradition in economic thought and the well-known French and Italian writers of the eighteenth century, it appears that the supercession of the simplistic labor theory of value by a more sophisticated theory based on utility was well entrenched in standard continental texts, especially German ones, by the early 1800s.

But then the foregoing reports from Wieser, et al. on the state of economic theory on the eve of the “marginalist revolution” create a mystery. As Streissler notes (1990c: 164), Wieser and Böhm-Bawerk had studied in Germany and “imbibe[d] the old protoneoclassical German tradition at first hand.” As for Fetter, while his studies in Germany date from a later period, he must surely have been aware of the earlier German texts. Thus, it is hard to understand the relief the three men expressed at the supposed definitive refutation of the labor theory of value and its socialist implications by Menger and the other marginalists, if that theory had already been superseded in the mainstream of German economic thought through most of the nineteenth century.

The Social Philosophy of the Austrian Economists

Erich Streissler (1987: 1) has maintained that what united the Austrian economists into a “school” was never any theoretical concept, such as marginal utility, but simply their liberal political ideas. While this may be an exaggerated, even eccentric, judgment, the divergent political views of the leaders of the school have certainly played some part in identifying it with liberalism.

Of the founders—Menger, Böhm-Bawerk, and Wieser—it is Wieser’s views that seem to be the least problematical (Mayer 1929; Streissler 1986: 86–91).42 Though not a socialist, Wieser firmly believed that the private property, market economy was rife with flaws that cried out for interventionist remedies. Robert B. Ekelund, Jr., has noted that, for Wieser, both consumers and workers were typically tyrannized by the possessors of great concentrations of wealth, and that in Wieser’s view it was the duty of government to reduce the power of these property owners and provide for the “victims of acquisitive capitalism.” Detecting power operating everywhere in market exchanges, Wieser even favored protective tariffs for less developed nations in order to counteract the economic and political domination of the wealthier countries. He tried to deploy marginal utility theory to justify not only progressive taxation, as Hayek noted, but also state subsidies for “projects productive of high total utility” (Ekelund 1992). There seems little reason to dissent from Streissler’s characterization of Wieser as “a statist, who believed in the wisdom of the state machinery guided by a wise bureaucracy (coming from his own caste)” (1987: 14–15).43

Wieser’s last book, The Law of Force, intended as his magnum opus, has been open to widely varying interpretations (Streissler 1986: 86–91; Morgenstern 1927: 673–74; and especially Samuels in Wieser 1983: xiii–xxxvi). In any case, as a confusing hodgepodge in which all of history is explained and the whole future of mankind sketched through an obsessive application of the concepts of “power” and “leadership,” this work is fundamentally outside the tradition of the Austrian school.44 Menger’s political orientation, on the other hand, has been the most studied and remains the most disputed.

Mises (1969: 18) conveyed the impression that Menger was more or less a classical liberal, asserting that he “heartily disapproved of the interventionist policies that the Austrian Government—like almost all governments of the epoch—had adopted.” Streissler has also argued for a virtually laissez-faire Menger, seeing him as the source of the school’s commitment to the free market.45 Emil Kauder, on the other hand, saw Menger as a sympathizer with Sozialpolitik (social reform) and a critic of laissez-faire (1965: 62–64).46

Menger appears to have been exceedingly wary of expressing his policy views openly and unambiguously. Until recently, a chief source for his general ideas in this field was an article he published in the leading Viennese newspaper in 1891, titled, “The Social Theories of Classical Economics and Modern Economic Policy” (Menger 1935b). Here Menger, on the hundredth anniversary of the death of Adam Smith, attempts to rescue Smith’s doctrine from grave misunderstandings. The major misinterpretation, he finds (in the manner of the later Lionel Robbins 1953) is that Smith has been wrongly accused of supporting laissez-faire, and his doctrine unjustly amalgamated to that of the Manchester School. (Starting with the socialist agitator Ferdinand Lassalle, Manchestertum—“Manchesterism”—became in German-speaking countries the general term of abuse for the laissez-faire position.) It would be difficult for anyone reading Menger’s piece to avoid the conclusion that he considered himself more of a social than a strictly classical liberal.

Streissler, however, has claimed (1987: 20–24; 1994) that a totally new light is cast on Menger’s outlook by the notebooks kept by the Crown Prince Rudolf when he was tutored by Menger in 1876, and which were discovered in recent years by the Austrian scholar Brigitte Hamann (Menger 1994). In Streissler’s judgment (1990b: 110), these notebooks “show Menger to have been a classical liberal of the purest water with a much smaller agenda for the state than even Adam Smith.” It seems, however, that Streissler exaggerates the probative value of the notebooks (see the Note on Carl Menger’s Social Philosophy, below).

Kauder maintained that the founders of the school, including Böhm-Bawerk, displayed an “uneasy swinging back and forth between freedom and authority in their economic policy,” the result of contradictory forces working on their thought. On the one hand, they were “social ontologists. They believe that a general plan of reality exists. All social phenomena are conceived in relation to this master plan. . . . The ontological structure does not only indicate what is, but also what ought to be.” Kauder takes as an example Böhm-Bawerk’s Positive Theory of Capital, which demonstrates “the natural order under the laissez-faire mechanism. In ‘beautiful harmony’ the economic fabric is fitted together by marginal utility, discount theory of interest, and roundabout production, if the long run price (Dauerpreis) of free competition is reached” (Kauder 1958: 417, emphasis in original; see also Garrison 1999). This “social ontology”—an earlier version of Rothbard’s conception of the market economy, cited above—is deeply congruent with the liberal vision.

But, according to Kauder, the underlying intellectual tradition in Austria was one of state paternalism, to the point where even the expression of the concept of a spontaneous economic order had been actively suppressed. The founders thus “tried to compromise between British [i.e., Smithian] and Austrian tradition.” In the end, Böhm-Bawerk held that social stability was more important than progress, preaching a “social quietism akin to the ideals of the Austrian past” (Kauder 1958: 421–22).47 To make matters worse, Stephan Böhm points out that “Böhm-Bawerk’s outstanding achievement as Minister of Finance was the introduction of the progressive income tax on the total income of individuals.” (1985: 256; see also Weber 1949: 667)48

Böhm-Bawerk himself conceded that the Austrian economists had not devoted much effort to practical questions of political economy in the first two decades of their activity, adducing as an excuse that “we must build the house before we can set it in order.” He added, however, that “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.” (Böhm-Bawerk 1891: 378)

What those opinions were at this point in his career Böhm-Bawerk divulged to some extent in another essay published at in 1891. Here he labels as slanderous Lujo Brentano’s charge that the Austrian economists are indifferent to “the social question.” On the contrary, Böhm-Bawerk insists, in his view there is “much that is lamentable and in need of reform in the present condition of society,” and he looked on “an indifferent, laissez-faire, laissez-passer attitude” as completely misguided. In fact, he sympathizes “most warmly” with efforts at reform in favor of the “economically oppressed,” and, while he has not yet expressed himself on the subject in print, this, he writes, is what he always professes as a teacher (Böhm-Bawerk 1994: 112).

Later, in the 1930s, as the Austrian school gained in acceptance and prestige, attempts were made to enlist Böhm-Bawerk and the other founders as social reformers, and thus disassociate them from the principled economic liberalism of the then rising star of the school, Ludwig von Mises.

In a 1935 article, Wilhelm Vleugels defended the scientific usefulness of Austrian subjective value theory. At the same time he contended that it was perfectly compatible with the older German tradition that placed the needs of the national community above individual needs, a standpoint that at the time Vleugels wrote was, one might say, de rigueur in Germany. “If at the start [the writings of the Austrians] exhibited a certain tendency to consider the most important needs of the individual simultaneously as the most important needs of society, that tendency was forthwith surmounted” (Vleugels 1935: 550). Vleugels’s major piece of evidence (besides statements by Wieser) is an essay by Böhm-Bawerk dating from 1886, to which the title, “Disadvantageous Effects of Free Competition,” had been given.

In this essay, Böhm-Bawerk considers the claim that under conditions of free competition supply and demand are brought into the “most useful” and “socially most fruitful” equilibrium, creating “the socially greatest possible quantity of absolute [rein] utility.” Surprisingly, the expositor of this viewpoint was Albert Schäffle, known for his social-reformist attitudes, and it is Böhm-Bawerk who holds it up to criticism. Böhm-Bawerk characterizes it as “deceptive,” in that it rests upon a “confusion of high relative with high absolute gains from exchange.” Hypothesizing an “ideal standard of measurement,” Böhm-Bawerk maintains that a rich consumer who outbids a poor consumer for a given good may well gain less in utility than the poor consumer would have gained. While “cases of this kind occur, unfortunately, countless times in actual economic life,” Böhm-Bawerk takes as his example Ireland in the 1840s. Then the indigenous population could not afford to pay the market price for grain, which was exported instead. The result was that the Irish starved and died, while the grain went, in part, to meet the demand of the rich for spirits and fine baked goods (1924: 476–77, 479). Böhm-Bawerk concludes:

every unprejudiced person will recognize at once that here egoistic competition in exchange has certainly not led to the socially most fruitful distribution of the commodities wheat and corn, the distribution attaching to the greatest absolute [rein] utility for the vital preservation and development of the people [Volk]. (1924: 480)

Statements of this kind led Vleugels to declare that it was Austrian theory itself that had “scientifically brought about the collapse of the main basis of liberal theory and of the demand for laissez-faire erected upon it” (1937: 35). Later, Joan Robinson similarly argued that the implications of marginal utility theory were originally all in the direction of “progressive taxation and the Welfare State, if not more radical means [of intervening in] an economic system that allows so much of the good juice of utility to evaporate out of commodities by distributing them unequally” (1962: 52; emphasis in original).

Robinson’s use of the term juice seems significant here, and points to the fundamental error of Vleugels (and Böhm-Bawerk) on this score. The assumption seems to be that marginal utility theory deals with a mental substance called “utility,” a sort of effluvium that arises within individuals and is somehow or other susceptible of measurement. A throwback to Benthamite utilitarianism, this perspective implies that interpersonal comparisons of utility are not only possible but mandatory, if the aim is to “maximize” an aggregated “social utility.”

But this whole approach falls to the ground once the reasoning of modern Austrian analysis is understood and accepted, that utility is always ordinal, never cardinal. It always refers to the individual’s ranking of preferences in action, never to quantities of some kind of psychological substance that can be measured even for the acting individual, let alone among different individuals (Rothbard 1997, 1: 22–40; see also Kauder 1965: 215–17).

At all events, the citations from Böhm-Bawerk in the 1880s and 90s would appear to detach him rather decisively from the tradition of “doctrinaire” economic liberalism. Yet Erich Streissler is able to refer to him as “quite an extreme liberal . . . [with] a very extensive skepticism towards the state,” one who shared Adam Smith’s view of the state as both “bad” and “stupid.” What is most intriguing is that Streissler’s evidence derives from two newspaper articles published in 1914, the last year of Böhm-Bawerk’s life.

Here Böhm-Bawerk criticized both the notion that coercive intervention (by labor unions) can circumvent economic law and the tendency of politicians to buy support and temporary social peace through massive expenditure of public monies. It appears, then, that it was Böhm-Bawerk’s personal experience as Austrian finance minister that turned him into a caustic critic of political leaders and a skeptic of the governmental process itself (1987: 10–14). His thinking seems to have undergone an evolution based on first-hand observation of the political process, from an early focus on “market failure” to a more mature concern with the inevitably anti-social, “rent-seeking” aspects of state action. The question of Böhm-Bawerk’s later views is of particular interest, as Streissler indicates: Mises attended Böhm-Bawerk’s seminar in 1905–06, after the latter’s last stint in government.

A few years before Vleugels’s article was published, Franz X. Weiss, who had edited the collection of the smaller works of Böhm-Bawerk containing his 1886 essay, argued the same position as Vleugels—against Mises himself. At the 1932 meeting of the Verein für Sozialpolitik (Association for Social Policy, the major group of social scientists in German-speaking Europe) held in Dresden and attended by Mises, Hayek, and other leaders of the Austrian school, Weiss, too, attempted to distance Austrian economics from Misesian liberalism, citing various published statements from the older generation of Austrians. Among these were Menger’s assertion that it was frivolous to accuse him of being a supporter of Manchesterism; Böhm-Bawerk’s condemnation of “an indifferent policy of laissez faire, laissez passer”; and Wieser’s view that the claim that there exist immutable natural laws of the economy impervious to state action “can hardly be taken seriously anymore.”

His purpose, Weiss declared, was “to establish that a number of notable representatives [of the Austrian doctrine], among them its founders, did not draw from it the conclusions for economic policy that [Mises] believes he must draw.” Mises’s brief response to Weiss’s critique: “I am not so pious towards authority [autoritätsgläubig] and quotation-minded [zitatenfreudig], and I base my argumentation on logic and not on exegesis.” The interesting implication is that the political consequences of Austrian economics are to be gathered not from the particular views of its major early proponents, subject to the climate of opinion of their times, but from the inner logic of the system itself (Mises and Spiethoff 1933: 51–53, 131, 118).49

What writers like Weiss and Vleugels found unbearable about Mises was that, in Vleugels’s words (1935: 538), he was “a scholar who is endeavoring to reanimate decisive errors of Manchestertum, in a refined form, to be sure, but still in all its extremism.” These fundamental “errors” of the laissez-faire doctrine had, so it was thought, been safely buried once and for all in central Europe, if not throughout the civilized world. That Mises should presume to reopen the argument over the appalling and discredited ideas of laissez-faire was something his opponents, then and throughout his life, could never forgive him. It was Mises who revealed the intimate connections between Austrian economics and authentic liberalism.

Mises and Hayek

Beginning with Ludwig von Mises and F.A. Hayek, the links between liberalism and the Austrian School become intense and pervasive, since these two scholars were themselves at once the outstanding Austrian economists and the most distinguished liberal thinkers of the twentieth century. The American academic world, however, deemed none of this sufficient for them to be accorded the kind of positions to which they were clearly entitled.50 They, and in particular Mises, were also responsible to a greater degree than is generally appreciated for the upsurge of the free-market philosophy in the second half of the century.51

But since the views of the two great men are so often amalgamated, it should be emphasized that not only did they differ to an extent on economic theory (Salerno 1993; see also Kirzner 1992c: 119–36), but, more pertinently to the theme of this essay, they exhibited a sharp distinction in the degree of their liberalism.

What follows refers to Hayek’s political attitudes, not to his contributions to economic science. These were highly significant and valuable in the earlier part of his career, as he together with Mises built the theoretical foundations of the modern Austrian school.52

While Mises was a staunch advocate of the laissez-faire market economy (Mises 1978a; Rothbard 1988: 40; Hoppe 1993; Klein 1999), Hayek was always more open to what he saw as the useful possibilities of state action. He had been a student of Wieser’s, and, as he conceded, he was “attracted to him . . . because unlike most of the other members of the Austrian School [Wieser] had a good deal of sympathy with [the] mild Fabian Socialism to which I was inclined as a young man. He in fact prided himself that his theory of marginal utility had provided the basis of progressive taxation . . .” (Hayek 1983: 17).

Early in his career, Hayek stated that the lessons of economics will create a presumption against state interference, adding:

However, this by no means does away with the positive part of the economist’s task, the delimitation of the field within which collective action is not only unobjectionable but actually a useful means of obtaining the desired ends. . .the classical writers very much neglected the positive part of the task and thereby allowed the impression to gain ground that laissez-faire was their ultimate and only conclusion . . . (1933: 133–34)

This remained Hayek’s standpoint throughout his long and richly productive scholarly life. It is regrettable, but typical, that a great many confused commentators continue to characterize him as a advocate of laissez-faire.53 In fact, he always avoided using the term to describe his own views, quite unlike Mises, who gloried in it. Provocatively—and quite misleadingly—Hayek states that the supposed laissez-faire conclusions of classical economics “of course, would have been invalidated by the demonstration that, in any single case, State action was useful” (1933: 134). Here Hayek seems to have lost sight of a principle that otherwise loomed large in his thinking: that with such issues of social policy it could never be a question of “any single case,” but rather of general rules and their overall effect.

Hayek habitually displayed a penchant for a considerable degree of Sozialpolitik.54 In a radio debate in Chicago, following the publication of The Road to Serfdom, he not only stated that, “I have always said that I am in favor of a minimum income for every person in the country,” but, pressed by two aggressive if uninformed leftist opponents, even made the astonishing assertion: “That the monetary system must be under central control has never, to my mind, been denied by any sensible person” (1994b: 114, 116). Some twenty years later, in the preface to a reprint of his book, Hayek admitted that at the time he wrote The Road to Serfdom, “I had not wholly freed myself from all the current interventionist superstitions and in consequence made various concessions which I now think unwarranted” (1994a: xxiv).55 It may be that, besides his youthful inclination towards a mild Fabianism and his deep admiration for Friederich von Wieser, Hayek was influenced in this direction by the arrant statism that dominated intellectual life in Britain when he lived there in the 1930s and 40s, often involving starry-eyed admiration for the noble experiment underway in Soviet Russia. In any case, his divergence from the more consistent—or more “dogmatic”—variety of liberalism espoused by Mises endured to the end of his career.

Mises highlighted the possibilities of meeting the needs of the deserving poor through private charity and assailed Bismarckian schemes of social insurance (1949: 829–50, especially 832–36). Hayek, on the other hand, declared:

though a few theorists have demanded that the activities of government should be limited to the maintenance of law and order, such a stand cannot be justified by the principle of liberty. . . .It can hardly be denied that, as we grow richer, that minimum of sustenance which the community has always provided for those not able to look after themselves, and which cannot be provided outside the market, will gradually rise, or that government may, usefully and without doing any harm, assist or even lead in such endeavors.

As if that were not enough, Hayek raised the ante. Seemingly oblivious to any moral hazard or public choice considerations, he added:

There is little reason why the government should not also play some role, or even take the initiative, in such areas as social insurance and education, or temporarily subsidize certain experimental developments. Our problem here is not so much with the aims as the methods of government action. (Hayek 1960: 257–58)

The state, Hayek insisted, is not solely “a coercive apparatus,” but also “a service agency,” and as such “it may assist without harm in the achievement of desirable aims which perhaps could not be achieved otherwise.”56 This opening to an extensive welfare state in cases where it “involves no coercion except for the raising of the means by taxation” (sic) (Hayek, 1978: 144), has been criticized by Anthony de Jasay. De Jasay cogently remarks that Hayek put his proposal “a touch naïvely,” and adds:

Here is a clear call, or what anyone might be excused for taking as one, to re-create something like the “Swedish model” under the liberal banner. Horrified as Hayek would be by the imputation of such a proposal, his exposition is fully consistent with it, and must be classed as “loosely liberal” for that reason. (1991a: 15–16; see also 1996)57

Predictably, Hayek’s endorsement of state activism in the “social” sphere has provided knowledgeable opponents of the laissez-faire position with a rhetorical argument of the form, “even F.A Hayek conceded . . .” (e.g., Battisti 1987: 264–65, where the author uses Hayek to undercut the minimal state position of Wilhelm von Humboldt).

Hayek and Mises may be contrasted in other respects as well. J.C. Nyiri points out that Hayek’s social philosophy resembles not only the British Whig (moderate liberal) tradition, which Hayek explicitly recognized, but also that of Austrian Altliberalismus (Old Liberalism), which in some respects compromised liberalism even further than did Whiggism. As Nyiri states: “There is a haunting traditionalism, or conservatism, in Hayek’s position . . .” Austrian Altliberalismus had a marked attraction for inherited institutions and a skepticism towards the concept of individual rights (whether understood as natural or positive). Many of its representatives were “definitely averse to unrestricted social mobility”—which mainly meant, in Austria-Hungary, the self-betterment of the Jews (Nyiri 1986: 104, 106).

In contrast, Mises was more radical in this as in other areas (see Rothbard 1981). While a strong proponent of traditional “bourgeois” (not aristocratic) culture, which he regarded as essentially harmonious with what we know of human nature, Mises understood that culture to be founded on a commitment to reason as a way of life.

Tributes to the faculty of human reason are strewn throughout his works, e.g., reason is “the mark that distinguishes man from animals and has brought about everything that is specifically human”; and, “Man has only one tool to fight error: reason” (Mises 1949: 91, 187; see also especially Salerno 1990). This stands in stark contrast to Hayek’s disparagement of reason in his later works (especially Hayek, 1988).58

As for tradition, Mises’s attitude was perhaps best expressed in Theory and History:

History looks backward into the past, but . . . it does not teach indolent quietism; it rouses men to emulate the deeds of earlier generations. . . . Faithfulness to tradition means to the historian observance of the fundamental rule of human action, namely, ceaseless striving to improve conditions. It does not mean preservation of unsuitable old institutions and clinging to doctrines long since discredited by more tenable theories. (1957: 294, 296)59

Later Austrian economists, following in Mises’s footsteps, have by and large adopted a more radical form of liberalism. One of the most prominent of them, Murray Rothbard (1970, 1973a; Block and Rockwell [eds.] 1988), surpassed even his mentor in his anti-statism. It is to a large degree due to Rothbard’s “libertarian scholarship and advocacy” (Kirzner 1987: 149) that Austrianism is associated in the minds of many with a defense of the free market and private property to the point of the very abolition of the state and so of the total triumph of civil society (Hoppe 1987 and 1999; Lemieux 1988). It should be noted that Rothbard dealt extensively with questions of international relations, foreign policy, and war and peace, a dimension relatively neglected by other Austrians (e.g., Rothbard 1972, 1978; but see also Mises 1944). In this area, as in all others, Rothbard sought to further the core liberal ideal of combating the power of the state at every turn.

APPENDIX

A Note on Carl Menger’s Social Philosophy

In analyzing the notebooks of Crown Prince Rudolf, Erich Streissler assumes that they reflect the policy views of the Crown Prince’s tutor, Carl Menger. If that is so, Menger at this time harbored a very restrictive notion of the proper functions of the state, limiting them (beyond justice and defense) to remedying certain “externalities.” “Only abnormal cases permit the intervention of the state; in the normal situations of economic life we shall always have to declare such a procedure to be harmful,” Rudolf wrote. The state’s duties are to be limited to implementing measures against the spread of cattle diseases; negotiating trade treaties with other states; building roads, railroads, canals, and schools; and imposing a maximum of fifteen hours a day on adult labor in factories and abolishing factory child labor altogether. (Streissler 1987: 22–23)

What to make then of Menger’s later statements that appear to endorse Sozialpolitik? In dealing with the 1891 essay on Adam Smith, Streissler (1990b: 109–10; also Menger 1994: 13–14) distorts Menger’s position in a passage which he himself quotes in German in a footnote. Streissler writes: “What [Menger] actually says is simply that Adam Smith did not consider justice always to be on the side of the employers in all their conflicts with and all their demands against their workers (obviously true!); and that Smith was not against all types of state actions in all cases (again obviously true).”

In the quotation he gives, however, this is what Menger says: “A. Smith places himself in all cases of conflict of interests between the poor and the rich, between the strong and the weak, without exception, on the side of the latter. . . . State intervention in favor of the poor and the weak is so little rejected by Smith, that he instead endorses it in all cases in which he expects a favoring . . . of the propertyless classes” (quoted in Streissler 1990b.: 109n., emphasis in Menger’s original).

In defending Smith, Menger states that in fighting for the “poor” against the “rich” Smith went beyond support of the abolition of mercantilist measures harming the poor to outright advocacy of positive legislation. “Smith is even for legal determinations of the level of wages, insofar as they are set in favor of the workers, and declares such wage controls always just and fair. . . . Indeed, A. Smith goes so far as to designate the profit on capital as a deduction from the full return to labor, and ground-rent even as the income of those who wish to harvest where they have not sown.” (Menger 1935b: 224, 230–31, emphasis in original) Menger treats J.-B. Say in the same manner. Say’s—and Smith’s—alleged support of tariffs to give an advantage to national industry is linked to the ideas of Friedrich List. Menger declares that the German social reform thinkers (the Socialists of the Chair, advocates of Sozialpolitik) were

in part right in their fight against the representatives of capitalistic Manchesterism—the distorted image of classical economics, in regard to social policy—not however against Smith and classical economics. The final shape that classical economics assumed is not found in Cobden, Bright, Bastiat, Prince-Smith, and Schulze-Delitzsch, but in John Stuart Mill, that social philosopher who, next to Sismondi, must be characterized as the most important founder of the modern social reform [social-politischen] school, insofar as it has an objective scientific character. (Menger 1935b: 232–33, emphasis in original)

Further on, Menger explains the differing positions of the classical economists and the social reformers by referring to the conditions of their respective times. While the earlier economists sought to remove politically erected hindrances, now the stress has been on the positive intervention of the State, “a further development of the efforts for the betterment of the condition of the working class.” (1935b: 234–55)

Menger had already disassociated himself from laissez-faire in 1884, in his rebuttal to Schmoller’s review of his Investigations). Here Menger writes in a confusing and apparently contradictory manner. First he asserts that

to be a supporter of the so-called Manchester school is, to be sure, no dishonor; it means only adhering to a series of scientific convictions, of which we can well characterize as the most important the proposition that the free play of individual interests best promotes the common good. Social philosophers intellectually much superior to Schmoller, men guided by the noblest love of truth, have professed themselves supporters of the above principle and the maxims of economic policy resulting from it. Menger 1935c: 92n.)

Menger goes on to say, however:

If anything reconciles me to Schmoller’s activity in the field of our science, odious in so many respects, then it is the circumstance that he is fighting with an unmistakable devotion on the side of honorable men against social evils and for the fate of the weak and the poor. This is a struggle in which, as different as the direction of my researches may be, my sympathies lie entirely on the side of such efforts. I may devote my meager power to the investigation of the laws in accordance with which the economic life of men is shaped; but nothing is further from the trend of my thinking than service in the interest of capitalism. No accusation of Schmoller’s is more contrary to the truth, no reproach more frivolous, than that I am a supporter of the Manchester party . . . (Menger 1935c: 93)60

Note that in this passage Menger implies that laissez-faire writers are in service to “the interest of capitalism.”

Similarly, in 1906, Menger published in a Berlin newspaper an appreciation of John Stuart Mill on the hundredth anniversary of Mill’s birth. Here he praises Mill for having devoted so much effort in his Principles to social questions, “and in this way attempted for England in many respects what a few decades later the so-called Kathedersozialismus [the Socialists of the Chair] tried to accomplish for German economics and Cauwès and Gide for the French.” In doing this, Mill’s work

in particular contributed essentially to the fact that in the educated circles of all countries and in the public discussion today, social problems are to a far lesser degree than before comprehended from the standpoint of a one-sided class interest. (Menger 1935a: 290)

Once again, there is the implication that the laissez-faire position serves the interests of capitalists to the detriment of the rest of the community.

Streissler, incidentally, is quite misleading when he says (1990b:128) that, “J.S. Mill . . . was considered, at least by Menger, hardly better than a socialist.” As the quotations from the essays of 1891 and 1906 show, Menger viewed Mill with great respect, as a social reformer whose work represented the culmination of classical economics.

Streissler tries to discount these later statements by Menger: “There is not a shred of evidence in his writing that [Menger] did change his position towards a more muted liberalism [after the period of the Crown Prince’s notebooks]. His general pronouncements just appear more in favor of social policy; but he never gives concrete examples in conflict with the lecture notes.” (1990b: 112, emphasis in original). But as Streissler himself writes of the founders of the Austrian school (1987:11), they “were all theoreticians and thus almost never wrote anything on their political views, although they certainly had quite pronounced views on economic policy.” “Concrete examples” of Menger’s overall policy views appear to be rare, except possibly as reported indirectly, in the notebooks.

On the other hand, Menger was surely aware that terms like Sozialpolitik and Kathedersozialismus denoted support for a quite activist state in economic affairs. If Menger was “a classical liberal of the purest water,” as Streissler claims, why did he write so favorably of Sozialpolitik and Kathedersozialismus—to the point of conceding Schmoller’s great services in furthering the cause of “social reform” in the midst of a diatribe against him?61 Why did he attack Manchesterism so vehemently? Unless the explanation is to be found in political opportunism, these statements represent a great mystery, given Streissler’s interpretation.

As against Menger’s published statements spanning the years 1883–1906, Streissler sets what he takes to be implications of the notebooks of 1876. But it is clear from Streissler’s own valuable researches that in certain respects the notebooks do not correspond to Menger’s views (although they very probably reflect Menger’s lessons to Rudolf): “The Crown Prince was taught pure classical wage theory, in absolute contrast to Menger’s Principles. He is explicitly taught the ‘Iron Law of Wages,’ as F. Lassalle had termed this theory.” Streissler’s analysis culminates in what comes close to a reductio ad absurdum: “If one judges by the Notebooks Menger must have considered his innovations only unimportant frills on the great edifice of classical economics created by Adam Smith.” (Menger 1994: 19–21)

Actually, Streissler himself suggests plausible grounds for Menger’s teaching the Crown Prince a version of economics in which he himself did not believe, “in many instances . . . the exact opposite of what he had forcefully argued was the only possible correct theoretical position . . .” According to Streissler, Menger

took the politically wise as well as the most economical course: he hardly presented his own ideas at all; he did not teach from his own published work. Instead he taught almost exclusively from world-famous, i.e., from old books. . . . In this way, he guarded himself against possible criticism.

But in that case what reason is there to think that the notebooks unfailingly reflect Menger’s “mature judgment?” (Menger 1994: 9, 6, 23)

Margarete Boos cites the letter Menger wrote to Kaiser Franz Josef, in which he outlined his political views. Here Menger distinguishes between the “individualists” and the “ethicists” (Ethiker); “the ethicists [also] hold freedom of economic activity to be the natural and normal state of affairs, but are aware of conflicts between individual and common interest in economic affairs, and attribute to the state. . .the right to influence economic affairs in the direction of the common interest.” He himself, he writes, adheres to the “moderate school of the ethicists.” Later, in an anonymous obituary for Rudolf published in a Vienna paper, Menger made a point of putting on record that the Crown Prince had been tutored from a point of view “as distant from Manchesterism as from protectionism.” (Boos, 1986: 29, 31)

The fact is, as Boos points out, that Menger was under suspicion at the Imperial Court of being far too liberal. At an early point he was even subjected to police reports on his political inclinations. Thus, it may be that political opportunism—within the framework of a state where the expression of radical-liberal opinions could be highly damaging—really does explain, at least partially, Menger’s endorsement of Sozialpolitik and his sometimes odd and contradictory statements on economic policy.

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62One adherent of the school and historian of liberal ideas, Raimondo Cubeddu 1997, persuasively presents the doctrines of Austrianism, starting with methodological individualism and subjectivism, as the theoretical foundation of a new and intellectually much more potent form of liberalism in the twentieth century, the successor to the “classical liberalism” of earlier times.

63Lorenzo Infantino 1998: 114–30 discusses some interesting parallels between Mises and Max Weber in regard to methodological individualism, as well as the contrasts in their notions of rationality in human action.

64Erich Streissler 1990a.: 60 has even maintained that it is in this area that Menger’s achievement is to be found, and not in co-initiating the marginalist revolution.

65Eugen von Böhm-Bawerk, for instance, stated (1891: 380–81): “We must not weary of studying the microcosm if we wish rightly to understand the macrocosm of a developed economic order . . . we must seek an understanding of the phenomena of great things in the study of the world of small things.” F.A. Hayek, who probably did more than anyone else to identify Austrianism with methodological individualism, wrote (1973: 8): “The consistent use of the intelligible conduct of individuals as the building stones from which to construct models of complex market structures is of course the essence of the method that Menger himself described as ‘atomistic’ (or occasionally, in manuscript notes, as ‘compositive’) and that later came to be known as methodological individualism.”

66Elster makes the important point (1985: 5; emphasis in original): “It is not only our confidence in the explanation, but our understanding of it that is enhanced when we go from macro to micro, from longer to shorter time-lags. To explain is to provide a mechanism, to open up the black box and show the nuts and bolts, the cogs and wheels, the desires and beliefs that generate the aggregate outcomes.”

67The Austrian method also involves a universalism that has strong affinities with liberalism, in contrast to certain forms of conservatism. As Mises stated (1969: 38): “As against the declarations of Schmoller and his followers, [the Austrians] maintained that there is a body of economic theorems that are valid for all human action irrespective of time and place, the national and racial characteristics of the actors, and their religious, philosophical, and ethical ideologies.”

68On the general philosophical background of the Austrian School, see especially Gordon 1993, also Smith 1994c. Pearson 1997: 31 attempts to minimize the differences between the German Historical School and the early marginalists (including the Austrians), maintaining that both were allegedly reacting against the Classical School (of mainly British political economy), rather than one another. His analysis fails to inspire confidence, however, since it is based on his assumption that the marginalists “displace[d] interest away from ‘value,’ that transcendent quality that had never quite lost the imprint of natural law, and toward ‘price,’ a frankly social phenomenon . . .”

69See Gellner 1968: 256 n. 4, where M. Ginsberg is cited: “those who refuse to accept methodological individualism . . . are well aware . . . of the dangers of concentrated power. But they deny that the only choice open to us is between a spontaneous competitive order on the one hand, and a system of all-pervading control on the other.” See also Gellner’s own comment on the same page: “[Methodological] individualists who attempt to save us, in the name of logic and liberty, from misconstruing our situation, are not wholly free at all times from suspicion that a little propaganda for laissez-faire is being hitched on to those very general issues.”

70In his account of the Great Depression (1963), as well as other works, Rothbard applies theory to help explain quite concrete historical events, often interpreting those events in the light of the “class” (or, “caste,” in the stricter, Misesian-Rothbardian terminology) interests involved. See also the comment by Garrison and Kirzner (1989: 121) that, among other scientific merits, “Hayek’s business cycle theory provided a basis for interpreting much of 19th-and 20th-century economic history.”

71Cf. White 1984: 4: “The subjective approach to economic phenomena builds economic analysis upon the insight that every individual chooses and acts purposively. . . . This approach has been the hallmark of the Austrian School from its inception in the 1870s to the present day, although different members have defended their method in different ways.” Cf. also Vaughn 1990: 382: “The human being that is the subject of Menger’s study . . . cannot be summarized by a static and fully defined preference function. . . . He is an active creator both of himself and of his world. And creation is a process rather than a state of affairs.”

72In contrast to Pareto, in the Austrian view, consumers are viewed, not as fixed loci of consumption functions, but as sources of incessant change, who also play an entrepreneurial role (Mises 1949: 253–54). As for Pareto, despite the positivism and apparent “anti-individualism” of his methodology, he was all his life a fervent economic liberal; see Finer 1968 and the essay on “Ludwig von Mises’s Liberalism on Fascism, Democracy, and Imperialism,” in the present volume.

73Cf. Kirzner’s remarks 1976b: 59: “It is easy to see how foreign the notion of the ‘automatic maintenance of capital’ [the Clark-Knight concept] must have appeared to Mises. An approach that concentrates analytical attention—as Austrian economics does—on the purposive and deliberate decisions of individual human beings when accounting for all social economic phenomena must treat the notion of capital as a spontaneously growing plant as not merely factually incorrect but simply absurd.”

74Cf. the statement of the self-described Austrian “fellow traveler,” Leland Yeager 1995: 219: “economics deals with human choices and actions, not with mechanistically dependable relations. The economy is no machine whose ‘structure’ can be ascertained and manipulated with warranted confidence.” There are no constants in economics comparable to those in the natural sciences, and “no amount of cleverness with econometrics can make the nonexistent exist after all.” See also Yeager 1997, where, after a judicious evaluation of Austrian economics, the author suggests some reasons for the relative neglect of the Austrian school by the mainstream of the profession.

75See especially the works attempting to develop Misesian ideas on this topic by Israel M. Kirzner, beginning with Kirzner 1973; and the exposition by Rothbard 1997, 2: 245–53. Jaffé 1976 argues that decisive differences between the Austrian and neoclassical approaches that existed from the start have been overlooked because of the tendency to “homogenize” Menger, Jevons, and Walras as co-founders of “the marginalist revolution.”

76For an informative discussion of other contrasts between Austrianism and neoclassicism, see Huerta de Soto 1998.

77Herbert Matis remarks (1974: 257) of the early Austrian school that “this new intellectual approach in economics was subjective, relative, and psychological, since it started from the human being and not from abstract concepts; it signified, therefore, to that degree a departure from classical liberalism.” The confusions evident here are not untypical of the superficial treatment of liberalism by many writers on its history.

78Cf., for instance, Edward G. Dolan’s critique 1976b: 6, 11 of “mainstream economics”: “it necessarily omits an important component of reality—the concept of purposive action,” while Austrianism “insists on laying bare the true causal relationships at work in the social world and is not content to simply establish empirical regularities among dubious statistical aggregates.” Austrianism offers “a microeconomic approach to macroeconomic problems.”

79See also the trenchant analysis in two essays on the subject by Rothbard 1997, 2: 180–84 and 217–25.

80Cf. the perceptive and important comment by Lawrence Birken (1988: 256): “Only with the emergence of marginalism was individual taste decidedly emancipated from the idea of universal need. With occasional exceptions, pre-marginalist thought had ignored or downplayed the significance of the idiosyncratic consumer, thus precluding the recognition of consumer preference as a mark of individuality. Early economic thought, functioning as a kind of secular morality which sought to uphold the idea of the ‘normal,’ conceived of need or utility in universal terms. . . . Only with the advent of marginalism do we see the emergence of a genuinely individualistic desire.” Birken’s analysis, however, would appear to apply much more to the Austrian than the neoclassical variant of marginalism.

81Hayek himself lent some support to Hutchison’s distinction between Mises and “Hayek II” in his foreword to a reprint of Mises’s Socialism (Mises 1981: xxiii-xxiv), when he criticized Mises’s claim that “all social cooperation [is] an emanation of rationally recognized utility,” as both “factually mistaken” and an expression of Mises’s “extreme rationalism.” But the general thrust of this passage is to downplay his disagreement with Mises. Hayek states, for instance, that Mises “largely emancipated himself from that rationalist-constructivist starting point,” and that “Mises as much as anybody has helped us to understand something which we have not designed.”

82Mises never claimed that the specific motivations of human action, in the psychological sense, were relevant to economics; rather it was a question of preferences as demonstrated in action.

83It should be noted that Friedman expressed these views in a popular address. Still, it is difficult to see how his argument could be made substantially more rigorous or coherent. Friedman declares, for example, that we must “beware of intolerance [such as Mises supposedly displayed] if we’re going to be really effective in persuading people,” yet concedes, very graciously, that “there is no doubt in my mind that Ludwig von Mises has done more to spread the fundamental ideas of free markets than any other individual” (1991: 18). Friedman’s brief account of Ayn Rand’s allegedly a priori philosophy is simply uninformed and incorrect.

84To those familiar with Mises’s achievements (see Rothbard 1988; Hoppe 1993; Reisman 1998; Zlabinger 1994; Ebeling 1981), the attempt of Hutchison and others to minimize them is more ludicrous than troubling, e.g., Erich Streissler’s assertion, regarding Mises (1990b: 109; see also 1988: 200) that, “not without truth, though certainly with little charity, [he] might be called the arch-lobbyist for entrepreneurial concerns in interwar Austria.”

85On the question of apriorism, it is worth noting that Hayek (1955: 221 n.1) wrote of John Locke that he regarded “the moral sciences” (ethics, political theory, etc.) “as a priori sciences comparable with mathematics and of equal certainty with it.” The context makes it clear that Hayek is here passing a favorable judgment on Locke. It is doubtful whether either Hayek or Hutchison would have wished to classify Locke as “a false individualist.”

86For an incisive critique of Popperian falsificationism, see Gordon 1993: 34–41.

87See also de Jasay 1991b. Gerard Radnitzky 1995: 49–84, especially 50, 64, 83, has criticized Popper’s oft-repeated praise of Marx as a “humanist,” as well as his political philosophy in general. He holds Popper’s concessions to “a not thought-through social democracy” to have been a “survival strategy,” which permitted him to find a wide readership for his views. This Radnitzky contrasts to Mises, who simply refused to compromise with the statist spirit of the times. Radnitzky’s view paints Popper as a hypocrite and an opportunist, which does not seem right.

88Popper’s knowledge of the history of liberal thought was astonishingly deficient. He held, for instance, 1992: 10 that Hayek originated the notion that complete socialism entailed political enslavement (and that Mises derived it from Hayek). But this idea was a commonplace among late-nineteenth century liberals, as evidenced by Herbert Spencer’s essay, “The Coming Slavery,” Yves Guyot’s La tyrannie socialiste, Eugen Richter’s Pictures of a Social-Democratic Future, and other works.

89On the influence of Capitalism and the Historians, see Taylor 1997: 162–64. In a learned study, Jeremy Shearmur (1996) has argued that, despite Popper’s evident social-democratic attitudes, the implications of his ideas are more closely related to classical liberalism than Popper himself understood. Whatever the validity or scope of that claim, there is the anterior and more fundamental question—whether Popper’s ideas on politics, based as they are on grossly incorrect historical and economic notions, are even important enough to warrant extended examination in the first place. Popper’s superficiality in dealing with political issues is nowhere more obvious than in his 1956 tour d’ horizon of the world scene, “The History of Our Time: An Optimist’s View” (1962: 364–76). Here he declares that “our own social world is the best that has ever been”—neglecting, among other things, the Chinese, around one-fifth of the human race and then living under the Maoist terror regime. He not only implies, for no good reason, that the disappearance of “class differences” is desirable, but announces, absurdly, that in the United States (and elsewhere) “we have, in fact, something approaching classless societies.” Similarly, in a tribute to Hayek (Popper 1997: 321, from a talk given in 1992), Popper recalls that often in conversations with Hayek, he criticized Mises’s conduct of the fight against “what was then called . . . protectionism, or state-protectionism” (sic—presumably, Popper is referring to what everyone else calls interventionism), because “in a complex society, anything approaching a free market could only exist if it enjoyed the protection of laws, and therefore of the state. Thus the term ‘free market’ should always be placed in inverted commas, since it was always bound, or limited, by a legal framework and made possible only by this framework.” On Popper’s “logic,” then, terms like “freedom of the press” and “religious freedom” should also always be placed in inverted commas, for the same reason.

90On some differences between Mises and Hayek in connection with the famous debate, see Keizer 1994.

91For a statement of this position, see März 1991: 101–05, where the author, in what purports to be a scholarly work, adopts 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.

92Karen 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.

93Cf. Dasgupta 1985: 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.’”

94It should be noted that by including the state in the same category as such social formations as language and markets, Menger is obscuring the crucial liberal distinction between state and civil society, coercion and voluntarism.

95Emil Kauder 1965: 61 points out that Menger opposed religious bigotry, anti-Semitism, militarism, dueling, and the glorification of war, and “was very critical of the feudal pillars of the Habsburg monarchy—clergy, army, and nobility.” A number of these are traditions or institutions which, it could well be argued, had developed “spontaneously.”

96In his last work on politics, Considerations on the Government of Poland, Rousseau, who is still viewed by many as a serious political thinker, continued his idolization of Lycurgus, while spelling out the totalitarian implications of his childish infatuation: “He showed them [the Spartans] their country unceasingly, in their laws, their games, their homes, their loves, their feasts. He did not allow them a moment to be by themselves alone. And from this continual constraint, ennobled by its object, was born that ardent love of country . . .” See Crocker 1973: 335.

97Wieser maintained 1923: 91–92 that, before Menger, all the schools of economic thought “pursued the interests of one of the great economic parties . . . [and] sought evidence for their partisan interest.” Very oddly, he even employs the Marxist terminology of “bourgeois” and “proletarian” economists, going so far as to assert that the “proletarian,” i.e. socialist, economists, will be able to learn from Menger’s economic theory, without “in any way giving up their fundamental standpoint”; rather, they will be able to “strengthen their standpoint.”

98It was left for Erich Streissler among non-socialists to impute a class interest to the Austrian economists (1988: 200–01): “after the end of the monarchy the members of the School belonged to the old ruling class dispossessed of power and mostly expropriated through the hyperinflation which had abolished their rentier capital. No wonder they were particularly critical of the state.”

99Fetter 1923: 602 noted that the negative implications of the subjective theory for Marxian economics appears more clearly in Wieser’s and Böhm-Bawerk’s works, but maintained that “this application had, however, been recognized from the very beginnings of the subjective school.” While he cites no particular evidence, he may have had in mind, for instance, Menger’s critique of Rodbertus’s claim that capitalists and landowners expropriate the product of labor and thus “live without working.” To this Menger 1981: 168 n. 30 countered that they live “upon the services of their land and capital which have value, just as do labor services, both to individuals and to society.”

100Streissler 1990a: 64 makes the peculiar statement that: “Perhaps Bukharin is not that far off the mark after all when he thinks it [Austrian economics] is the economics of the rentier.” However, Günther Chaloupek, an author sympathetic to Marxism, is considerably closer to the mark when he states 1986: 221, in discussing Bukharin’s critique of Austrianism: “But: if the marginal utility school drew attention to demand, this was certainly not in the first instance a symptom of the beginning of age of the rentier, but rather a reflex of the increased standard of living of the masses as well in the train of capitalist expansion.”

101Joan Robinson, on the other hand, argued 1962: 52, emphasis in original, that while “the whole point of utility was to justify laisserzfaire,” the theory had inherently egalitarian and redistributionist implications.

102That the approach to the history of economic thought centering on the British tradition from Smith to Mill must be abandoned is argued by Murray N. Rothbard (1976a). Rothbard persuasively claims 1976a: 53 that a more informed interpretation would see “Smith and Ricardo, not as founding the science of economics, but as shunting economics onto a tragically wrong track, which it took the Austrians and other marginalists to make right.” Citing works by Marjorie Grice-Hutchinson and Raymond de Roover, Rothbard emphasizes the importance of medieval and early modern thinkers, particularly the Spanish Late Scholastics. These themes also pervade Rothbard’s history of economic thought 1995c, where the Late Scholastics are treated in 1: 97–133. See also Jesús Huerta de Soto 1999.

103Oscar Morgenstern 1927: 673–74, however, had a sharply different interpretation of Wieser’s last work, Gesetz der Macht, and incongruously characterized Wieser as a “convinced pacifist.”

104Streissler 1986: 100 points out that Wieser’s constant references to “the socialist state of the future” influenced his student Joseph Schumpeter in the latter’s assessment of the probable course of historical development.

105Even as regards Wieser’s economic theory, Mises 1978b: 36 concluded that he “could not be called a member of the Austrian School, but was rather a member of the Lausanne School . . .” This viewpoint is cogently set forth in Hoppe and Salerno 1999.

106Cf. Streissler’s insightful remark 1987: 24: “Through Menger his school became a vessel of economic liberalism, at a time when in other countries it stood under an unlucky star. This school took over a then ‘lost cause,’ and nursed liberalism at the time of its deepest ebb—especially in the period between the wars.”

107Kauder 1965: 64 asserts of Menger: “He was not a consistent defender of free competition, and he was not a socialist, although his brother, the famous socialist Anton Menger, had some influence on him.”

108Paul Silverman, however, 1990: 85, 90–91 criticizes Kauder on the nature of the Austrian background of Menger’s work (as well as on Menger’s alleged methodological dependence on Aristotle). Silverman points up the importance in Austrian history of a school of liberal cameralists, including the key figure of Joseph von Sonnenfels, who posited “a system of preestablished social harmony which the state was to watch over and protect.” Josef von Kudler, whose work on economics was the standard textbook in Austrian universities in the decades before the appearance of Menger’s Principles, likewise displayed “a staunchly liberal outlook.” In Silverman’s view, the impact of the “Austrian tradition” on Menger was not in the direction of conservatism, spurring the search for a Metternichian stability; instead, it may mainly have worked to convey the notion of objective, rational ends for man in society. This set a limit to Menger’s subjectivism, leading him, for instance, to differentiate real from imagined needs.

109Böhm 1990: 232 n. 2 suggests that Mises’s extreme liberal viewpoint was out of step with the general position of the founders of Austrianism, who tended towards “a kind of ‘enlightened conservatism’ (in the European sense), or ‘paternalistic conservatism’—allegations of laissez faire repeated ad nauseam notwithstanding.”

110At the University of Vienna, Hans Mayer, who was all that was left of the Austrian school after the Anschluss with Nazi Germany, also held that Mises’s radical liberal conclusions were not inherent in the school’s teachings (Craver 1986: 10–11). This is easily understandable, given Mayer’s position as a functionary of the new National Socialist regime. The tradition of attempting to disassociate Mises’s “personal,” “Manchester-liberal” world-view from “the objective findings of the Austrian school” was carried on by Weber 1949: 644.

111Hans-Hermann Hoppe puts the matter very well. When Mises arrived in the United States in 1940, he was already “an international scientific celebrity,” and his influential works, The Theory of Money and Credit and Socialism had been available in English for years. “But while every third-class European Marxist or ‘Marxian’ of the time found a respectable academic position without any difficulty, in the land of capitalism the American universities and intellectuals plainly and shamelessly turned a cold shoulder to Mises, the great theoretician of liberalism and capitalism.” Mises finally obtained a position at New York University, but only as permanent guest professor, and the university did not pay his salary, which was covered from private sources. Hoppe 1993: 27–28, 30, 34 n. 24. Hayek’s situation was analogous. While he did become a professor on the Committee on Social Thought, he was deemed unsuitable, not “scientific” enough (i.e., not sufficiently positivist) by the economics department of George Stigler and Milton Friedman, and his salary was likewise paid from outside sources.

112Cf. Steele 1992: “The fact that there were capable liberal thinkers in Europe after World War II is mainly due to the influence of Die Gemeinwirtschaft [Mises’s Socialism] during the inter-war years. There might not have been any West German ‘economic miracle’ without the existence of a handful of active people converted from socialism by Mises.” See also Roll 1945: 176: “Hayek and his Viennese colleagues have been the leaders of an astonishing movement of revival [of individualism and liberalism] which in the early thirties began to appear also in England. . .There in nothing quite comparable to this movement in the United States.”

113See in particular Joseph T. Salerno’s perceptive introduction to Hayek’s Prices and Production and Other Works, “Hayek on the Business Cycle,” Mises Daily, October 8, 2008.

114On Hayek’s position, see Shearmur 1997. The German “neo-liberal” Alexander Rüstow was one of many who could not differentiate the position of Hayek from that of “his master Mises,” viewing both as “the last surviving examples” of the “old liberalism,” fit to be placed in a museum; see Kathrin Meier-Rust 1993: 69–70. Meier-Rust herself (91) discusses the sharp differences between the German “neo-” and “Ordo-liberal,” and the “classical laissez-faire champions” like Hayek.

115See also Streissler 1987: 10: “pronounced liberals, at least in the eighteenth and nineteenth centuries, were rather averse to a redistributive function [of the state]. On the other hand, Friedrich von Hayek, for instance, is no longer of this opinion. He believes only that the pursuit of Sozialpolitik should not be attempted with the help of the market but through transfers independent of the market.”

116Hayek also later remarked that another error in The Road to Serfdom was his neglect of the significance of the experience of Soviet Communism, adding, rather oddly, that this was a fault “which is perhaps pardonable when it is remembered that when I wrote Russia was our wartime ally.” This is a curious inversion of the strange criticism leveled at The Road to Serfdom by Erich Roll, in the American Economic Review (1945: 180): “Hayek might have stopped to reflect upon the very different development during the last few pre-war years in Germany and in the Soviet Union, and he might have had the grace, at the least, to acknowledge the very different manner in which the war itself has been conducted by the enemy and by our ally: we have yet to be shown that Maidanek is an inevitable corollary of a collective economy” (1945: 180). Evidently, Professor Roll and his equally ignorant editors at the American Economic Review had somehow never heard of the Ukrainian terror famine, the mass executions, or the system of forced labor camps known today as the Gulag, all conducted by our noble wartime ally, the model terror state of the twentieth century.

117Cf., e.g., Mises, 1949:149: “State or government is the social apparatus of compulsion and coercion. It has the monopoly of violent action. . . . The state is essentially an institution for the preservation of peaceful interhuman relations. However, for the preservation of peace it must be prepared to crush the onslaughts of peace-breakers.”

118Hans-Hermann Hoppe 1994: 67 has ventured to assert that “Hayek’s view regarding the role of market and state cannot systematically be distinguished from that of a modern social democrat.” But see the attack on Hayek for his rejection of the concept of social justice by a social democratic writer, in Plant 1994.

119Late in his life, Hayek 1994: 68, 72–73 referred to his “curious relationship” to Mises, from whom “I probably learnt more than from any other man.” Here Hayek made the confusing claim that “Mises remained in the end himself a rationalist-utilitarian, and with a rationalist-utilitarianism, the rejection of socialism is irreconcilable. . . . If we remain strict rationalists, utilitarians, that implies that we can arrange everything according to our pleasure.” At an earlier stage, Hayek’s judgment of Mises had been much more positive. In 1952, Hayek wrote 1952: 729–30 of Mises that “since the early twenties [he] has been building a new edifice of liberal thought more consistently, more systematically, and more successfully than anyone else . . . his work resemble[s] that of the great social philosophers of the eighteenth century much more than the labors of a contemporary expert . . . he alone has given us a conclusive treatment of all economic and social thought,” Hayek asserted, adding, “whether or not one concurs with him in every detail.”

120A comprehensive examination of what Hayek criticized as Mises’s “extreme rationalism” (foreword to Mises, 1981: xxiii) is presented, with a critique of Hayek’s position, in Salerno 1990.

121Menger adds in a footnote 1935c: 93 n.: “I certainly attack the so-called ‘ethical’ tendency in political economy in a number of places in my Investigations, while strictly distinguishing it from the ‘social-political’ [social reform] tendency in economic research.” Streissler, incidentally, cites Menger’s clash with Schmoller, but omits his praise of Schmoller’s crusade for Sozialpolitik (Menger 1994: 24 n. 8).

122By 1891 Menger (1935b: 244–45) also had some harsh criticisms of the policies of the social reformers: “The self-interest that the advocates of Sozialpolitik so utterly despise has not disappeared from the world. Rather, it has degenerated into a collectivist, national and class egoism, which strives not for the increase of the total product (of the object to be divided up!) but for as great a portion of the total product as possible for each individual social class.”

• 1Ludwig von Mises
• 2Raico’s profound and extensive knowledge of intellectual, political, and economic history are evident in each of the following essays and, in fact, virtually on each page of this book. His readers will also appreciate the warm passion he brings to the study of his subject, as well as his dry wit. Drawing from original sources in German, French, and Italian, as well as English, Professor Raico provides us with original scholarship on the history of liberalism from a decidedly liberal, though not exclusively Anglo-Saxon perspective. What is more, he definitely has the talent to rouse his readers to emulate the deeds of earlier generations. It was through Raico’s book Die Partei der Freiheit (The Party of Freedom) that I and many other Germans first heard of Eugen Richter, the champion of true liberalism in fin de siècle Germany. Forgotten by virtually everyone except for his social-democratic detractors, Richter has made a comeback in the past ten years and some of his major writings are again in print. Today his words and deeds inspire a new generation of intellectuals and politicians. Thank you for that lesson, Professor Raico! If Germany returns to the tradition of true liberalism, we shall have in Berlin a Raico Straße leading to the Richter Platz.
• 3Erich Streissler 1990a.: 60 has even maintained that it is in this area that Menger’s achievement is to be found, and not in co-initiating the marginalist revolution.
• 4Eugen von Böhm-Bawerk, for instance, stated (1891: 380–81): “We must not weary of studying the microcosm if we wish rightly to understand the macrocosm of a developed economic order . . . we must seek an understanding of the phenomena of great things in the study of the world of small things.” F.A. Hayek, who probably did more than anyone else to identify Austrianism with methodological individualism, wrote (1973: 8): “The consistent use of the intelligible conduct of individuals as the building stones from which to construct models of complex market structures is of course the essence of the method that Menger himself described as ‘atomistic’ (or occasionally, in manuscript notes, as ‘compositive’) and that later came to be known as methodological individualism.”
• 5Elster makes the important point (1985: 5; emphasis in original): “It is not only our confidence in the explanation, but our understanding of it that is enhanced when we go from macro to micro, from longer to shorter time-lags. To explain is to provide a mechanism, to open up the black box and show the nuts and bolts, the cogs and wheels, the desires and beliefs that generate the aggregate outcomes.”
• 6The Austrian method also involves a universalism that has strong affinities with liberalism, in contrast to certain forms of conservatism. As Mises stated (1969: 38): “As against the declarations of Schmoller and his followers, [the Austrians] maintained that there is a body of economic theorems that are valid for all human action irrespective of time and place, the national and racial characteristics of the actors, and their religious, philosophical, and ethical ideologies.”
• 7On the general philosophical background of the Austrian School, see especially Gordon 1993, also Smith 1994c. Pearson 1997: 31 attempts to minimize the differences between the German Historical School and the early marginalists (including the Austrians), maintaining that both were allegedly reacting against the Classical School (of mainly British political economy), rather than one another. His analysis fails to inspire confidence, however, since it is based on his assumption that the marginalists “displace[d] interest away from ‘value,’ that transcendent quality that had never quite lost the imprint of natural law, and toward ‘price,’ a frankly social phenomenon . . .”
• 8See Gellner 1968: 256 n. 4, where M. Ginsberg is cited: “those who refuse to accept methodological individualism . . . are well aware . . . of the dangers of concentrated power. But they deny that the only choice open to us is between a spontaneous competitive order on the one hand, and a system of all-pervading control on the other.” See also Gellner’s own comment on the same page: “[Methodological] individualists who attempt to save us, in the name of logic and liberty, from misconstruing our situation, are not wholly free at all times from suspicion that a little propaganda for laissez-faire is being hitched on to those very general issues.”
• 9In his account of the Great Depression (1963), as well as other works, Rothbard applies theory to help explain quite concrete historical events, often interpreting those events in the light of the “class” (or, “caste,” in the stricter, Misesian-Rothbardian terminology) interests involved. See also the comment by Garrison and Kirzner (1989: 121) that, among other scientific merits, “Hayek’s business cycle theory provided a basis for interpreting much of 19th-and 20th-century economic history.”
• 10Cf. White 1984: 4: “The subjective approach to economic phenomena builds economic analysis upon the insight that every individual chooses and acts purposively. . . . This approach has been the hallmark of the Austrian School from its inception in the 1870s to the present day, although different members have defended their method in different ways.” Cf. also Vaughn 1990: 382: “The human being that is the subject of Menger’s study . . . cannot be summarized by a static and fully defined preference function. . . . He is an active creator both of himself and of his world. And creation is a process rather than a state of affairs.”
• 11In contrast to Pareto, in the Austrian view, consumers are viewed, not as fixed loci of consumption functions, but as sources of incessant change, who also play an entrepreneurial role (Mises 1949: 253–54). As for Pareto, despite the positivism and apparent “anti-individualism” of his methodology, he was all his life a fervent economic liberal; see Finer 1968 and the essay on “Ludwig von Mises’s Liberalism on Fascism, Democracy, and Imperialism,” in the present volume.
• 12Cf. Kirzner’s remarks 1976b: 59: “It is easy to see how foreign the notion of the ‘automatic maintenance of capital’ [the Clark-Knight concept] must have appeared to Mises. An approach that concentrates analytical attention—as Austrian economics does—on the purposive and deliberate decisions of individual human beings when accounting for all social economic phenomena must treat the notion of capital as a spontaneously growing plant as not merely factually incorrect but simply absurd.”
• 13Cf. the statement of the self-described Austrian “fellow traveler,” Leland Yeager 1995: 219: “economics deals with human choices and actions, not with mechanistically dependable relations. The economy is no machine whose ‘structure’ can be ascertained and manipulated with warranted confidence.” There are no constants in economics comparable to those in the natural sciences, and “no amount of cleverness with econometrics can make the nonexistent exist after all.” See also Yeager 1997, where, after a judicious evaluation of Austrian economics, the author suggests some reasons for the relative neglect of the Austrian school by the mainstream of the profession.
• 14See especially the works attempting to develop Misesian ideas on this topic by Israel M. Kirzner, beginning with Kirzner 1973; and the exposition by Rothbard 1997, 2: 245–53. Jaffé 1976 argues that decisive differences between the Austrian and neoclassical approaches that existed from the start have been overlooked because of the tendency to “homogenize” Menger, Jevons, and Walras as co-founders of “the marginalist revolution.”
• 15For an informative discussion of other contrasts between Austrianism and neoclassicism, see Huerta de Soto 1998.
• 16Herbert Matis remarks (1974: 257) of the early Austrian school that “this new intellectual approach in economics was subjective, relative, and psychological, since it started from the human being and not from abstract concepts; it signified, therefore, to that degree a departure from classical liberalism.” The confusions evident here are not untypical of the superficial treatment of liberalism by many writers on its history.
• 17Cf., for instance, Edward G. Dolan’s critique 1976b: 6, 11 of “mainstream economics”: “it necessarily omits an important component of reality—the concept of purposive action,” while Austrianism “insists on laying bare the true causal relationships at work in the social world and is not content to simply establish empirical regularities among dubious statistical aggregates.” Austrianism offers “a microeconomic approach to macroeconomic problems.”
• 18See also the trenchant analysis in two essays on the subject by Rothbard 1997, 2: 180–84 and 217–25.
• 19Cf. the perceptive and important comment by Lawrence Birken (1988: 256): “Only with the emergence of marginalism was individual taste decidedly emancipated from the idea of universal need. With occasional exceptions, pre-marginalist thought had ignored or downplayed the significance of the idiosyncratic consumer, thus precluding the recognition of consumer preference as a mark of individuality. Early economic thought, functioning as a kind of secular morality which sought to uphold the idea of the ‘normal,’ conceived of need or utility in universal terms. . . . Only with the advent of marginalism do we see the emergence of a genuinely individualistic desire.” Birken’s analysis, however, would appear to apply much more to the Austrian than the neoclassical variant of marginalism.
• 20Hayek himself lent some support to Hutchison’s distinction between Mises and “Hayek II” in his foreword to a reprint of Mises’s Socialism (Mises 1981: xxiii-xxiv), when he criticized Mises’s claim that “all social cooperation [is] an emanation of rationally recognized utility,” as both “factually mistaken” and an expression of Mises’s “extreme rationalism.” But the general thrust of this passage is to downplay his disagreement with Mises. Hayek states, for instance, that Mises “largely emancipated himself from that rationalist-constructivist starting point,” and that “Mises as much as anybody has helped us to understand something which we have not designed.”
• 21Mises never claimed that the specific motivations of human action, in the psychological sense, were relevant to economics; rather it was a question of preferences as demonstrated in action.
• 22It should be noted that Friedman expressed these views in a popular address. Still, it is difficult to see how his argument could be made substantially more rigorous or coherent. Friedman declares, for example, that we must “beware of intolerance [such as Mises supposedly displayed] if we’re going to be really effective in persuading people,” yet concedes, very graciously, that “there is no doubt in my mind that Ludwig von Mises has done more to spread the fundamental ideas of free markets than any other individual” (1991: 18). Friedman’s brief account of Ayn Rand’s allegedly a priori philosophy is simply uninformed and incorrect.
• 23To those familiar with Mises’s achievements (see Rothbard 1988; Hoppe 1993; Reisman 1998; Zlabinger 1994; Ebeling 1981), the attempt of Hutchison and others to minimize them is more ludicrous than troubling, e.g., Erich Streissler’s assertion, regarding Mises (1990b: 109; see also 1988: 200) that, “not without truth, though certainly with little charity, [he] might be called the arch-lobbyist for entrepreneurial concerns in interwar Austria.”
• 24On the question of apriorism, it is worth noting that Hayek (1955: 221 n.1) wrote of John Locke that he regarded “the moral sciences” (ethics, political theory, etc.) “as a priori sciences comparable with mathematics and of equal certainty with it.” The context makes it clear that Hayek is here passing a favorable judgment on Locke. It is doubtful whether either Hayek or Hutchison would have wished to classify Locke as “a false individualist.”
• 25For an incisive critique of Popperian falsificationism, see Gordon 1993: 34–41.
• 26See also de Jasay 1991b. Gerard Radnitzky 1995: 49–84, especially 50, 64, 83, has criticized Popper’s oft-repeated praise of Marx as a “humanist,” as well as his political philosophy in general. He holds Popper’s concessions to “a not thought-through social democracy” to have been a “survival strategy,” which permitted him to find a wide readership for his views. This Radnitzky contrasts to Mises, who simply refused to compromise with the statist spirit of the times. Radnitzky’s view paints Popper as a hypocrite and an opportunist, which does not seem right.
• 27Popper’s knowledge of the history of liberal thought was astonishingly deficient. He held, for instance, 1992: 10 that Hayek originated the notion that complete socialism entailed political enslavement (and that Mises derived it from Hayek). But this idea was a commonplace among late-nineteenth century liberals, as evidenced by Herbert Spencer’s essay, “The Coming Slavery,” Yves Guyot’s La tyrannie socialiste, Eugen Richter’s Pictures of a Social-Democratic Future, and other works.
• 28On the influence of Capitalism and the Historians, see Taylor 1997: 162–64. In a learned study, Jeremy Shearmur (1996) has argued that, despite Popper’s evident social-democratic attitudes, the implications of his ideas are more closely related to classical liberalism than Popper himself understood. Whatever the validity or scope of that claim, there is the anterior and more fundamental question—whether Popper’s ideas on politics, based as they are on grossly incorrect historical and economic notions, are even important enough to warrant extended examination in the first place. Popper’s superficiality in dealing with political issues is nowhere more obvious than in his 1956 tour d’ horizon of the world scene, “The History of Our Time: An Optimist’s View” (1962: 364–76). Here he declares that “our own social world is the best that has ever been”—neglecting, among other things, the Chinese, around one-fifth of the human race and then living under the Maoist terror regime. He not only implies, for no good reason, that the disappearance of “class differences” is desirable, but announces, absurdly, that in the United States (and elsewhere) “we have, in fact, something approaching classless societies.” Similarly, in a tribute to Hayek (Popper 1997: 321, from a talk given in 1992), Popper recalls that often in conversations with Hayek, he criticized Mises’s conduct of the fight against “what was then called . . . protectionism, or state-protectionism” (sic—presumably, Popper is referring to what everyone else calls interventionism), because “in a complex society, anything approaching a free market could only exist if it enjoyed the protection of laws, and therefore of the state. Thus the term ‘free market’ should always be placed in inverted commas, since it was always bound, or limited, by a legal framework and made possible only by this framework.” On Popper’s “logic,” then, terms like “freedom of the press” and “religious freedom” should also always be placed in inverted commas, for the same reason.
• 29On some differences between Mises and Hayek in connection with the famous debate, see Keizer 1994.
• 30For a statement of this position, see März 1991: 101–05, where the author, in what purports to be a scholarly work, adopts 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.
• 31Karen 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.
• 32Cf. Dasgupta 1985: 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.’”
• 33It should be noted that by including the state in the same category as such social formations as language and markets, Menger is obscuring the crucial liberal distinction between state and civil society, coercion and voluntarism.
• 34Emil Kauder 1965: 61 points out that Menger opposed religious bigotry, anti-Semitism, militarism, dueling, and the glorification of war, and “was very critical of the feudal pillars of the Habsburg monarchy—clergy, army, and nobility.” A number of these are traditions or institutions which, it could well be argued, had developed “spontaneously.”
• 35In his last work on politics, Considerations on the Government of Poland, Rousseau, who is still viewed by many as a serious political thinker, continued his idolization of Lycurgus, while spelling out the totalitarian implications of his childish infatuation: “He showed them [the Spartans] their country unceasingly, in their laws, their games, their homes, their loves, their feasts. He did not allow them a moment to be by themselves alone. And from this continual constraint, ennobled by its object, was born that ardent love of country . . .” See Crocker 1973: 335.
• 36Wieser maintained 1923: 91–92 that, before Menger, all the schools of economic thought “pursued the interests of one of the great economic parties . . . [and] sought evidence for their partisan interest.” Very oddly, he even employs the Marxist terminology of “bourgeois” and “proletarian” economists, going so far as to assert that the “proletarian,” i.e. socialist, economists, will be able to learn from Menger’s economic theory, without “in any way giving up their fundamental standpoint”; rather, they will be able to “strengthen their standpoint.”
• 37It was left for Erich Streissler among non-socialists to impute a class interest to the Austrian economists (1988: 200–01): “after the end of the monarchy the members of the School belonged to the old ruling class dispossessed of power and mostly expropriated through the hyperinflation which had abolished their rentier capital. No wonder they were particularly critical of the state.”
• 38Fetter 1923: 602 noted that the negative implications of the subjective theory for Marxian economics appears more clearly in Wieser’s and Böhm-Bawerk’s works, but maintained that “this application had, however, been recognized from the very beginnings of the subjective school.” While he cites no particular evidence, he may have had in mind, for instance, Menger’s critique of Rodbertus’s claim that capitalists and landowners expropriate the product of labor and thus “live without working.” To this Menger 1981: 168 n. 30 countered that they live “upon the services of their land and capital which have value, just as do labor services, both to individuals and to society.”
• 39Streissler 1990a: 64 makes the peculiar statement that: “Perhaps Bukharin is not that far off the mark after all when he thinks it [Austrian economics] is the economics of the rentier.” However, Günther Chaloupek, an author sympathetic to Marxism, is considerably closer to the mark when he states 1986: 221, in discussing Bukharin’s critique of Austrianism: “But: if the marginal utility school drew attention to demand, this was certainly not in the first instance a symptom of the beginning of age of the rentier, but rather a reflex of the increased standard of living of the masses as well in the train of capitalist expansion.”
• 40Joan Robinson, on the other hand, argued 1962: 52, emphasis in original, that while “the whole point of utility was to justify laisserzfaire,” the theory had inherently egalitarian and redistributionist implications.
• 41That the approach to the history of economic thought centering on the British tradition from Smith to Mill must be abandoned is argued by Murray N. Rothbard (1976a). Rothbard persuasively claims 1976a: 53 that a more informed interpretation would see “Smith and Ricardo, not as founding the science of economics, but as shunting economics onto a tragically wrong track, which it took the Austrians and other marginalists to make right.” Citing works by Marjorie Grice-Hutchinson and Raymond de Roover, Rothbard emphasizes the importance of medieval and early modern thinkers, particularly the Spanish Late Scholastics. These themes also pervade Rothbard’s history of economic thought 1995c, where the Late Scholastics are treated in 1: 97–133. See also Jesús Huerta de Soto 1999.
• 42Oscar Morgenstern 1927: 673–74, however, had a sharply different interpretation of Wieser’s last work, Gesetz der Macht, and incongruously characterized Wieser as a “convinced pacifist.”
• 43Streissler 1986: 100 points out that Wieser’s constant references to “the socialist state of the future” influenced his student Joseph Schumpeter in the latter’s assessment of the probable course of historical development.
• 44Even as regards Wieser’s economic theory, Mises 1978b: 36 concluded that he “could not be called a member of the Austrian School, but was rather a member of the Lausanne School . . .” This viewpoint is cogently set forth in Hoppe and Salerno 1999.
• 45Cf. Streissler’s insightful remark 1987: 24: “Through Menger his school became a vessel of economic liberalism, at a time when in other countries it stood under an unlucky star. This school took over a then ‘lost cause,’ and nursed liberalism at the time of its deepest ebb—especially in the period between the wars.”
• 46Kauder 1965: 64 asserts of Menger: “He was not a consistent defender of free competition, and he was not a socialist, although his brother, the famous socialist Anton Menger, had some influence on him.”
• 47Paul Silverman, however, 1990: 85, 90–91 criticizes Kauder on the nature of the Austrian background of Menger’s work (as well as on Menger’s alleged methodological dependence on Aristotle). Silverman points up the importance in Austrian history of a school of liberal cameralists, including the key figure of Joseph von Sonnenfels, who posited “a system of preestablished social harmony which the state was to watch over and protect.” Josef von Kudler, whose work on economics was the standard textbook in Austrian universities in the decades before the appearance of Menger’s Principles, likewise displayed “a staunchly liberal outlook.” In Silverman’s view, the impact of the “Austrian tradition” on Menger was not in the direction of conservatism, spurring the search for a Metternichian stability; instead, it may mainly have worked to convey the notion of objective, rational ends for man in society. This set a limit to Menger’s subjectivism, leading him, for instance, to differentiate real from imagined needs.
• 48Böhm 1990: 232 n. 2 suggests that Mises’s extreme liberal viewpoint was out of step with the general position of the founders of Austrianism, who tended towards “a kind of ‘enlightened conservatism’ (in the European sense), or ‘paternalistic conservatism’—allegations of laissez faire repeated ad nauseam notwithstanding.”
• 49At the University of Vienna, Hans Mayer, who was all that was left of the Austrian school after the Anschluss with Nazi Germany, also held that Mises’s radical liberal conclusions were not inherent in the school’s teachings (Craver 1986: 10–11). This is easily understandable, given Mayer’s position as a functionary of the new National Socialist regime. The tradition of attempting to disassociate Mises’s “personal,” “Manchester-liberal” world-view from “the objective findings of the Austrian school” was carried on by Weber 1949: 644.
• 50Hans-Hermann Hoppe puts the matter very well. When Mises arrived in the United States in 1940, he was already “an international scientific celebrity,” and his influential works, The Theory of Money and Credit and Socialism had been available in English for years. “But while every third-class European Marxist or ‘Marxian’ of the time found a respectable academic position without any difficulty, in the land of capitalism the American universities and intellectuals plainly and shamelessly turned a cold shoulder to Mises, the great theoretician of liberalism and capitalism.” Mises finally obtained a position at New York University, but only as permanent guest professor, and the university did not pay his salary, which was covered from private sources. Hoppe 1993: 27–28, 30, 34 n. 24. Hayek’s situation was analogous. While he did become a professor on the Committee on Social Thought, he was deemed unsuitable, not “scientific” enough (i.e., not sufficiently positivist) by the economics department of George Stigler and Milton Friedman, and his salary was likewise paid from outside sources.
• 51Cf. Steele 1992: “The fact that there were capable liberal thinkers in Europe after World War II is mainly due to the influence of Die Gemeinwirtschaft [Mises’s Socialism] during the inter-war years. There might not have been any West German ‘economic miracle’ without the existence of a handful of active people converted from socialism by Mises.” See also Roll 1945: 176: “Hayek and his Viennese colleagues have been the leaders of an astonishing movement of revival [of individualism and liberalism] which in the early thirties began to appear also in England. . .There in nothing quite comparable to this movement in the United States.”
• 52See in particular Joseph T. Salerno’s perceptive introduction to Hayek’s Prices and Production and Other Works, “Hayek on the Business Cycle,” Mises Daily, October 8, 2008.
• 53On Hayek’s position, see Shearmur 1997. The German “neo-liberal” Alexander Rüstow was one of many who could not differentiate the position of Hayek from that of “his master Mises,” viewing both as “the last surviving examples” of the “old liberalism,” fit to be placed in a museum; see Kathrin Meier-Rust 1993: 69–70. Meier-Rust herself (91) discusses the sharp differences between the German “neo-” and “Ordo-liberal,” and the “classical laissez-faire champions” like Hayek.
• 54See also Streissler 1987: 10: “pronounced liberals, at least in the eighteenth and nineteenth centuries, were rather averse to a redistributive function [of the state]. On the other hand, Friedrich von Hayek, for instance, is no longer of this opinion. He believes only that the pursuit of Sozialpolitik should not be attempted with the help of the market but through transfers independent of the market.”
• 55Hayek also later remarked that another error in The Road to Serfdom was his neglect of the significance of the experience of Soviet Communism, adding, rather oddly, that this was a fault “which is perhaps pardonable when it is remembered that when I wrote Russia was our wartime ally.” This is a curious inversion of the strange criticism leveled at The Road to Serfdom by Erich Roll, in the American Economic Review (1945: 180): “Hayek might have stopped to reflect upon the very different development during the last few pre-war years in Germany and in the Soviet Union, and he might have had the grace, at the least, to acknowledge the very different manner in which the war itself has been conducted by the enemy and by our ally: we have yet to be shown that Maidanek is an inevitable corollary of a collective economy” (1945: 180). Evidently, Professor Roll and his equally ignorant editors at the American Economic Review had somehow never heard of the Ukrainian terror famine, the mass executions, or the system of forced labor camps known today as the Gulag, all conducted by our noble wartime ally, the model terror state of the twentieth century.
• 56Cf., e.g., Mises, 1949:149: “State or government is the social apparatus of compulsion and coercion. It has the monopoly of violent action. . . . The state is essentially an institution for the preservation of peaceful interhuman relations. However, for the preservation of peace it must be prepared to crush the onslaughts of peace-breakers.”
• 57Hans-Hermann Hoppe 1994: 67 has ventured to assert that “Hayek’s view regarding the role of market and state cannot systematically be distinguished from that of a modern social democrat.” But see the attack on Hayek for his rejection of the concept of social justice by a social democratic writer, in Plant 1994.
• 58Late in his life, Hayek 1994: 68, 72–73 referred to his “curious relationship” to Mises, from whom “I probably learnt more than from any other man.” Here Hayek made the confusing claim that “Mises remained in the end himself a rationalist-utilitarian, and with a rationalist-utilitarianism, the rejection of socialism is irreconcilable. . . . If we remain strict rationalists, utilitarians, that implies that we can arrange everything according to our pleasure.” At an earlier stage, Hayek’s judgment of Mises had been much more positive. In 1952, Hayek wrote 1952: 729–30 of Mises that “since the early twenties [he] has been building a new edifice of liberal thought more consistently, more systematically, and more successfully than anyone else . . . his work resemble[s] that of the great social philosophers of the eighteenth century much more than the labors of a contemporary expert . . . he alone has given us a conclusive treatment of all economic and social thought,” Hayek asserted, adding, “whether or not one concurs with him in every detail.”
• 59A comprehensive examination of what Hayek criticized as Mises’s “extreme rationalism” (foreword to Mises, 1981: xxiii) is presented, with a critique of Hayek’s position, in Salerno 1990.
• 60Menger adds in a footnote 1935c: 93 n.: “I certainly attack the so-called ‘ethical’ tendency in political economy in a number of places in my Investigations, while strictly distinguishing it from the ‘social-political’ [social reform] tendency in economic research.” Streissler, incidentally, cites Menger’s clash with Schmoller, but omits his praise of Schmoller’s crusade for Sozialpolitik (Menger 1994: 24 n. 8).
• 61By 1891 Menger (1935b: 244–45) also had some harsh criticisms of the policies of the social reformers: “The self-interest that the advocates of Sozialpolitik so utterly despise has not disappeared from the world. Rather, it has degenerated into a collectivist, national and class egoism, which strives not for the increase of the total product (of the object to be divided up!) but for as great a portion of the total product as possible for each individual social class.”
• 62Ludwig von Mises, Theory and History (New Haven: Yale University Press, 1957), p. 294.
• 63R. Raico, Die Partei der Freiheit (Stuttgart: Lucius & Lucius, 1999). The book is available online at http://docs.mises.de/Raico/die_partei_der_freiheit_raico.pdf
• 64Methodological individualism has been a keystone of Austrian economics from the start (Christainsen 1994). In his Investigations, Menger wrote:
• 65Methodological individualism was endorsed by the other leaders of Austrianism to the point where Fritz Machlup (1981: 9) could list it as the first of “the most typical requirements for a true adherent of the Austrian school.”
• 66It is certainly possible for someone to adopt methodological individualism and not endorse liberalism (Böhm 1985: 252–53). Jon Elster, for instance, is able to insist on the necessity of methodological individualism in the social sciences, while continuing to view himself as a kind of Marxist (1985: 4–8). Yet it is significant that Elster dismisses certain claims of Marx on the grounds of their incompatibility with methodological individualism. In general, it seems clear that the Austrian approach in methodology tends to preclude certain holistic ideologies that are also inconsistent with liberalism, such as classical Marxism and some varieties of racism and hyper-nationalism. To this extent, then, it is not simply methodological individualism.
• 67It is certainly possible for someone to adopt methodological individualism and not endorse liberalism (Böhm 1985: 252–53). Jon Elster, for instance, is able to insist on the necessity of methodological individualism in the social sciences, while continuing to view himself as a kind of Marxist (1985: 4–8). Yet it is significant that Elster dismisses certain claims of Marx on the grounds of their incompatibility with methodological individualism. In general, it seems clear that the Austrian approach in methodology tends to preclude certain holistic ideologies that are also inconsistent with liberalism, such as classical Marxism and some varieties of racism and hyper-nationalism. To this extent, then, it is not simply methodological individualism.
• 68Political factors played a role in the debate over Austrian methodology from the start. The very fact that “nation” and “state” understood as holistic entities were not primaries in his system set Menger apart from important currents of economic thought in the German-speaking world of his time. Indeed, it was on the basis of Menger’s methodology that Gustav Schmoller, leader of the German Historical School, instantly politicized the whole debate at the very start of the famous Methodenstreit (dispute over methods) (Bostaph 1978 and 1994). Reviewing the Investigations, Schmoller (1883:241) charged Menger with the cardinal sin of adhering to Manchestertum (laissez-faire), since his abstract and “atomistic” method might better be called “the Manchesteristindividualist” method.
• 69Furthermore, according to Hayek, the supposed discovery of such laws has resulted in the construction of philosophies of history on which major socialist projects have been erected—Marxism, of course, but particularly Saint-Simonianism, the system he dissects in his book. The followers of the early “utopian” socialist, Henri de Saint-Simon, were practitioners par excellence of scientism, the illegitimate application to the study of society of the methods of the natural sciences. And it is scientism—the negation of methodological individualism—that “through its popularizers has done more to create the present trend towards socialism than all the conflicts between economic interests . . .” (1955: 100–01). Opponents of liberalism, in criticizing Hayek for his methodological individualism, have also assumed that it was closely connected to his political philosophy.
• 70This Marxist complaint is misguided, however. The abstracting approach of Austrianism pertains—necessarily—to its theory. Some Austrians, it may be conceded, have neglected to apply their theory to the understanding of concrete, “real-life” issues. That this failing is not intrinsic to Austrian economics, however, was demonstrated—to cite only one example—by the outstanding Austrian economist, Murray N. Rothbard, who devoted much of his extremely productive career not only to “pure economics,” but also to highly important questions of political economy, both on a theoretical level and in specific historical contexts (see, e.g., Rothbard 1963, 1970, 1995a, 1995b, 2002).
• 71the thought design, the economic calculation or economic plan of the individual, always stands in the foreground of theoretical interest. . . . The significance of the Austrian school in the history of ideas perhaps finds its most pregnant expression in the statement that here man as an actor stands at the center of economic events. (1978: 47, 51; emphasis in original)
• 72This standpoint may be contrasted to that of neoclassical theory, of which Lachmann went so far as to declare: “Fundamentally, we cannot really speak of economic activity here. As in nature, people react to the current external conditions of their economic existence: they do not act.” In support of this rather severe judgment, Lachmann cited the statement of Vilfredo Pareto: “The individual can disappear, provided that he leaves us this photograph of his tastes.” Incensed by such a depreciation of individual acting man, Lachmann assailed the “arid formalism” of neoclassical economics, which treats “the manifestations of the human mind in household and market as purely formal entities, on par with material resources” (1978: 51, 56, 181; emphasis in Lachmann).
• 73This standpoint may be contrasted to that of neoclassical theory, of which Lachmann went so far as to declare: “Fundamentally, we cannot really speak of economic activity here. As in nature, people react to the current external conditions of their economic existence: they do not act.” In support of this rather severe judgment, Lachmann cited the statement of Vilfredo Pareto: “The individual can disappear, provided that he leaves us this photograph of his tastes.” Incensed by such a depreciation of individual acting man, Lachmann assailed the “arid formalism” of neoclassical economics, which treats “the manifestations of the human mind in household and market as purely formal entities, on par with material resources” (1978: 51, 56, 181; emphasis in Lachmann).
• 74Israel Kirzner, too, has noted the uniqueness of the Austrian outlook. Both the earlier Ricardian and the current neoclassical economics exhibit a “mechanical quality,” whereby “human aspirations, human errors, and human discoveries are downplayed, ignored, or simply assumed away.” Austrian economics, on the other hand, highlights the alertness, inventiveness, fallibility, and resourceful creativity of all the participants in the market process, especially in the case of the entrepreneur and the entrepreneurial function. This is a distinctive Austrian outlook which Kirzner traces back to Menger, whose originality consisted in his “vision of an economy created and shaped by human action” (Kirzner 1994, 1: xiv, xxiv). For neoclassical economic theory, on the other hand, as one practitioner has ruefully admitted, entrepreneurs and entrepreneurship simply do not exist (Rosen 1997: 148–49).
• 75Israel Kirzner, too, has noted the uniqueness of the Austrian outlook. Both the earlier Ricardian and the current neoclassical economics exhibit a “mechanical quality,” whereby “human aspirations, human errors, and human discoveries are downplayed, ignored, or simply assumed away.” Austrian economics, on the other hand, highlights the alertness, inventiveness, fallibility, and resourceful creativity of all the participants in the market process, especially in the case of the entrepreneur and the entrepreneurial function. This is a distinctive Austrian outlook which Kirzner traces back to Menger, whose originality consisted in his “vision of an economy created and shaped by human action” (Kirzner 1994, 1: xiv, xxiv). For neoclassical economic theory, on the other hand, as one practitioner has ruefully admitted, entrepreneurs and entrepreneurship simply do not exist (Rosen 1997: 148–49).
• 76Israel Kirzner, too, has noted the uniqueness of the Austrian outlook. Both the earlier Ricardian and the current neoclassical economics exhibit a “mechanical quality,” whereby “human aspirations, human errors, and human discoveries are downplayed, ignored, or simply assumed away.” Austrian economics, on the other hand, highlights the alertness, inventiveness, fallibility, and resourceful creativity of all the participants in the market process, especially in the case of the entrepreneur and the entrepreneurial function. This is a distinctive Austrian outlook which Kirzner traces back to Menger, whose originality consisted in his “vision of an economy created and shaped by human action” (Kirzner 1994, 1: xiv, xxiv). For neoclassical economic theory, on the other hand, as one practitioner has ruefully admitted, entrepreneurs and entrepreneurship simply do not exist (Rosen 1997: 148–49).
• 77In this whole area there is a strong link to an important element of classical liberalism, as exemplified, for instance, in the early Wilhelm von Humboldt, Benjamin Constant, and Herbert Spencer. In combating authoritarian ideologies, liberal thinkers focused on the individual human being per se (i.e., irrespective of class, race, etc.) as the fountainhead of creative response to an ever-changing world. From this they derived the basic liberal demand for as wide a latitude as possible for individual freedom of choice and action.
• 78On the level of policy, Austrianism’s individualist and subjectivist methodology tends, indirectly at least, to sway decisions in a liberal direction. Austrian economists are skeptical of the macroeconomic models devised by “mainstream economists,” with their assumption that various global magnitudes act upon one another. There appear to be affinities between a macroeconomic approach and anti-liberal policies. Hayek, for example, wrote, of the heightened interest in macroeconomic statistics associated with the Keynesian revolution:
• 79It was largely a growing demand for greater deliberate control of the economic process (which required more knowledge of the specific effects to be expected from particular measures) that led to the endeavor to use the obtainable statistical information as the foundation of such predictions. (1973: 12)
• 80Besides having implications for policy, the Austrian concern with the diversity of human beings and their situations is strongly congruent with liberalism’s view of the nature of man. The epigraph which John Stuart Mill placed at the beginning of his On Liberty, from Humboldt’s Limits of State Action, epitomizes this liberal outlook: “The grand, leading principle towards which every argument unfolded in these pages directly converges is the absolute and essential importance of human development in its richest diversity” (quoted in Mill 1977: 213).
• 81“False” as well as “True” Individualism has been very much present among modern Austrian views on the philosophy and method of economics . . . it is important that [the Austrians’] methodology, or epistemology, should be clearly, logically, and explicitly compatible with their political principles. As well as its ethics, politics, and economics, freedom has its epistemology, which must surely be one of its most fundamental aspects and requirements. (1981: 224).
• 82. . . his fundamental idea was that we knew things about “human action” (the title of his famous book) because we are human beings. As a result, he argued, we have absolutely certain knowledge of the motivations of human actions [sic] and he maintained that we can derive substantive conclusions from that basic knowledge. Facts, statistical or other evidence cannot, he argued, be used to test those conclusions. . . . That philosophy converts an asserted body of substantive conclusions into a religion. . . . Suppose two people who share von Mises’s praxeological view come to contradictory conclusions about anything. How can they reconcile their difference? The only way they can do so is by a purely logical argument. One has to say to the other, “You made a mistake in reasoning.” And the other has to say, “No, you made a mistake in reasoning.” Suppose neither believes he has made a mistake in reasoning. There’s only one thing left to do: fight. (1991: 18)
• 83How such an argument could emanate from such a distinguished source is simply baffling. Among other problems with it: Friedman’s theory would predict the occurrence of incessant bloody brawling among mathematicians and logicians, the non-occurrence of which falsifies that theory in Friedman’s own positivist terms. Friedman’s position also entails that no religious person who felt certain about his religious beliefs could have any principled reason to respect the conflicting religious beliefs of others, which is absurd. Finally, Friedman’s “explanation” of Mises’s alleged personal “intolerance” fails to account for the personal “tolerance” of other practitioners of apriorism in economics.
• 84As for Hutchison, he really offers no argument at all for his strange attack on Mises. Instead, there is the endorsement, without argument, of Hayek’s very dubious distinction between “false,” French individualism, and “true,” British individualism, and of the confusing account of intellectual history Hayek builds on this imagined dichotomy. (See the essay on “Liberalism: True and False,” in the present volume.) Hutchison also makes the unsupported and no means obviously true assumption that “freedom” (presumably meaning liberal theory) must have a single epistemological (as well as ethical) foundation. Clearly, Hutchison’s candidate for the “epistemology of freedom” is the theory of knowledge of Karl Popper.
• 85As for Hutchison, he really offers no argument at all for his strange attack on Mises. Instead, there is the endorsement, without argument, of Hayek’s very dubious distinction between “false,” French individualism, and “true,” British individualism, and of the confusing account of intellectual history Hayek builds on this imagined dichotomy. (See the essay on “Liberalism: True and False,” in the present volume.) Hutchison also makes the unsupported and no means obviously true assumption that “freedom” (presumably meaning liberal theory) must have a single epistemological (as well as ethical) foundation. Clearly, Hutchison’s candidate for the “epistemology of freedom” is the theory of knowledge of Karl Popper.
• 86To what extent Hayek accepted Popper’s methodological views remains unclear. In his Nobel lecture, in 1974, Hayek continued to argue that a fundamental difference exists between the subject matter of the natural and social sciences. Since the complexity of the phenomena studied in the latter usually renders empirical testing impossible, most attempts to apply the characteristic methods of the natural sciences in the social sciences are ruled out (Christainsen 1994: 14). Hutchison himself (1994: 233, n. 7) labels the claim that Hayek became a “falsificationist” as “exaggerated and misleading.” One wonders, though, what a Popperian is supposed to be if not a falsificationist.
• 87In his most famous work on social philosophy, The Open Society and Its Enemies, he asserts—argues for would be putting it much too strongly—that the state has an obligation not only to provide the usual welfare services, but beyond that to guarantee a livelihood to everyone willing to work, and, topping it all, to protect everyone from “inequitable arrangements” arising out of differential “economic power.” Even in 1974, Popper was advocating that the state should take over a controlling share of all “public companies” (Shearmur 1996: 51–52, 36).
• 88Most damaging to any claim that Popper represents authentic liberalism is the fact that he accepted the traditional mythology of industrial capitalism as a system of oppression of the working class, only gradually made tolerable by social reforms effected in part through socialist agitation. In The Open Society and Its Enemies, Popper wrote that Marx’s protests against capitalist oppression “will secure him forever a place among the liberators of mankind.” He contrasted Marx’s “invincible humanitarianism and sense of justice” with the “cynical” defense of “shameless exploitation” of workers by “hypocritical apologists,” i.e., the laissez-faire liberals of the time (1950: 310–12; see also 675 n. 13). As late as 1973, he declared that, although he had decisive disagreements with Marx, he respected him highly “as a fighter for a better world” (1984: 167).
• 89That Popper uncritically embraced the most negative interpretation of the industrial revolution is not surprising, considering that his source for the condition of workers in that period was Marx’s Capital (Shearmur 1996: 52). But it is remarkable that Popper never reconsidered that interpretation, given that it was his friend Hayek himself among liberal theorists who led the fight to bring more historically correct views on this subject to the general public (Hayek 1954). One wonders why Popper, the fearless critical thinker, didn’t just read Capitalism and the Historians and a few of the works cited in that collection.
• 90The sustained theoretical attack on the possibility of rational economic planning under socialism initiated by Mises in the early 1920s and then led by him and Hayek doubtless played a major role, and rightly so, in associating the school with the liberal doctrine. In the decades that followed, the common opinion 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. However, recent scholarship (Lavoie 1985; Boettke 1990; Steele 1992)—as well as certain well-known world events—has served to overturn the older verdict. Indeed, the revolution in thinking has prompted one scholar to remark that “it is really scandalous to observe how decades of ridicule poured upon Mises’s ‘impossibility thesis’ [on rational planning under socialism] suddenly give way to an appreciation of his views as if they had been part of conventional wisdom all along” (Böhm, 1990: 231).
• 91The sustained theoretical attack on the possibility of rational economic planning under socialism initiated by Mises in the early 1920s and then led by him and Hayek doubtless played a major role, and rightly so, in associating the school with the liberal doctrine. In the decades that followed, the common opinion 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. However, recent scholarship (Lavoie 1985; Boettke 1990; Steele 1992)—as well as certain well-known world events—has served to overturn the older verdict. Indeed, the revolution in thinking has prompted one scholar to remark that “it is really scandalous to observe how decades of ridicule poured upon Mises’s ‘impossibility thesis’ [on rational planning under socialism] suddenly give way to an appreciation of his views as if they had been part of conventional wisdom all along” (Böhm, 1990: 231).
• 92The sustained theoretical attack on the possibility of rational economic planning under socialism initiated by Mises in the early 1920s and then led by him and Hayek doubtless played a major role, and rightly so, in associating the school with the liberal doctrine. In the decades that followed, the common opinion 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. However, recent scholarship (Lavoie 1985; Boettke 1990; Steele 1992)—as well as certain well-known world events—has served to overturn the older verdict. Indeed, the revolution in thinking has prompted one scholar to remark that “it is really scandalous to observe how decades of ridicule poured upon Mises’s ‘impossibility thesis’ [on rational planning under socialism] suddenly give way to an appreciation of his views as if they had been part of conventional wisdom all along” (Böhm, 1990: 231).
• 93a 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: 99)
• 94In his Investigations, Menger broaches the issue in Chapter 2, Book 3, devoted to “The Theoretical Understanding of Those Social Phenomena Which Are Not a Product of Agreement or of Positive Legislation, but Are Unintended Results of Historical Development.” He poses the question: “How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them?” Menger points out that “Law, language, the state, money, markets, all these social structures are to no small extent the unintended result of social development,” and goes on to provide a brilliant and famous explanation, based on methodological individualism, of the origin of money (1985: 146, 152–55; see also Menger 1981: 256–85).
• 95But never, and this is the essential point in the matter under review, may science dispense with testing for their suitability those institutions which have come about “organically.” It must, when careful investigation so requires, change and better them according to the measure of scientific insight and practical experience at hand. No era may renounce this “calling.” (1985: 234).
• 96The lawgiver is the engineer who invents the machine; the prince is merely the mechanic who sets it up and operates it. . . . Whoever ventures on the enterprise of instituting a people must be ready, as it were, to change human nature. . . . A sublime reason, which soars above the heads of the common people, produces those rules which the lawgiver puts into the mouth of the immortals. . . .The lawgiver’s great soul is the true miracle which must vindicate his mission. (1968: 84–87)
• 97Their “intellectual distress” was instantly alleviated, however, when they happened to discover Menger’s Principles. It should be stressed that Wieser gives no hint of bad faith. He states that both he and Böhm-Bawerk became convinced that socialism, in consistently applying the classical concept of value as stemming from labor, was fallacious (Wieser 1923: 88).
• 98Like Wieser, Fetter is quick to point out that no bad faith was involved in propagating the subjective theory. Yet he asserts, as against Hayek, that even a “casual examination of the works of Jevons, Menger, Clark, and of their most influential colleagues reveals from first to last evidences of this undercurrent of interest in the political bearings of the value theory.” The story, however, ends happily from Fetter’s point of view. The subjective-value theory left Marxism in the dust: “it would be difficult to find in the whole history of economic thought a more complete victory of one idea over another” (1923: 600–02, 605; on Fetter, see Herbener 1999).
• 99Like Wieser, Fetter is quick to point out that no bad faith was involved in propagating the subjective theory. Yet he asserts, as against Hayek, that even a “casual examination of the works of Jevons, Menger, Clark, and of their most influential colleagues reveals from first to last evidences of this undercurrent of interest in the political bearings of the value theory.” The story, however, ends happily from Fetter’s point of view. The subjective-value theory left Marxism in the dust: “it would be difficult to find in the whole history of economic thought a more complete victory of one idea over another” (1923: 600–02, 605; on Fetter, see Herbener 1999).
• 100From the opposing camp, a long line of socialist critics, from the 1890s on, pilloried marginalism as a mere rationalization for the exploitative capitalist system. The Italian socialist Achille Loria assailed the marginal approach for precluding “the possibility of a deep analysis of social relations” and eliminating “any theoretical threat against the established economic system” (Barucci 1972: 529). Karl Kautsky, the Pope of German Marxism before the First World War, took note of the Austrian challenge in the form of Böhm-Bawerk’s work, declaring: “Böhm-Bawerk’s and Marx’s theories of value are mutually exclusive. . . . That means, therefore: either-or” (cited in Chaloupek 1986: 198–99). Nikolai Bukharin (1927), who attended Böhm-Bawerk’s lectures, labeled Austrianism “the economic theory of the rentier class.” Decades later, Ronald L. Meek claimed, citing Menger and Jevons, that “the founders [of marginalism] were very well aware of the dangerous uses which were currently being made of these doctrines [of classical economics] in certain quarters” (1972: 503).
• 101From the opposing camp, a long line of socialist critics, from the 1890s on, pilloried marginalism as a mere rationalization for the exploitative capitalist system. The Italian socialist Achille Loria assailed the marginal approach for precluding “the possibility of a deep analysis of social relations” and eliminating “any theoretical threat against the established economic system” (Barucci 1972: 529). Karl Kautsky, the Pope of German Marxism before the First World War, took note of the Austrian challenge in the form of Böhm-Bawerk’s work, declaring: “Böhm-Bawerk’s and Marx’s theories of value are mutually exclusive. . . . That means, therefore: either-or” (cited in Chaloupek 1986: 198–99). Nikolai Bukharin (1927), who attended Böhm-Bawerk’s lectures, labeled Austrianism “the economic theory of the rentier class.” Decades later, Ronald L. Meek claimed, citing Menger and Jevons, that “the founders [of marginalism] were very well aware of the dangerous uses which were currently being made of these doctrines [of classical economics] in certain quarters” (1972: 503).
• 102The history of economic thought in the first half or three-quarters of the nineteenth century was and still is often portrayed in very Anglo-centric terms, as though the theories which achieved for so long in Britain such an extraordinary dominance and authority. . .enjoyed a similar hold and authority elsewhere in Europe. This was not the case.
• 103Of the founders—Menger, Böhm-Bawerk, and Wieser—it is Wieser’s views that seem to be the least problematical (Mayer 1929; Streissler 1986: 86–91). Though not a socialist, Wieser firmly believed that the private property, market economy was rife with flaws that cried out for interventionist remedies. Robert B. Ekelund, Jr., has noted that, for Wieser, both consumers and workers were typically tyrannized by the possessors of great concentrations of wealth, and that in Wieser’s view it was the duty of government to reduce the power of these property owners and provide for the “victims of acquisitive capitalism.” Detecting power operating everywhere in market exchanges, Wieser even favored protective tariffs for less developed nations in order to counteract the economic and political domination of the wealthier countries. He tried to deploy marginal utility theory to justify not only progressive taxation, as Hayek noted, but also state subsidies for “projects productive of high total utility” (Ekelund 1992). There seems little reason to dissent from Streissler’s characterization of Wieser as “a statist, who believed in the wisdom of the state machinery guided by a wise bureaucracy (coming from his own caste)” (1987: 14–15).
• 104Of the founders—Menger, Böhm-Bawerk, and Wieser—it is Wieser’s views that seem to be the least problematical (Mayer 1929; Streissler 1986: 86–91). Though not a socialist, Wieser firmly believed that the private property, market economy was rife with flaws that cried out for interventionist remedies. Robert B. Ekelund, Jr., has noted that, for Wieser, both consumers and workers were typically tyrannized by the possessors of great concentrations of wealth, and that in Wieser’s view it was the duty of government to reduce the power of these property owners and provide for the “victims of acquisitive capitalism.” Detecting power operating everywhere in market exchanges, Wieser even favored protective tariffs for less developed nations in order to counteract the economic and political domination of the wealthier countries. He tried to deploy marginal utility theory to justify not only progressive taxation, as Hayek noted, but also state subsidies for “projects productive of high total utility” (Ekelund 1992). There seems little reason to dissent from Streissler’s characterization of Wieser as “a statist, who believed in the wisdom of the state machinery guided by a wise bureaucracy (coming from his own caste)” (1987: 14–15).
• 105Wieser’s last book, The Law of Force, intended as his magnum opus, has been open to widely varying interpretations (Streissler 1986: 86–91; Morgenstern 1927: 673–74; and especially Samuels in Wieser 1983: xiii–xxxvi). In any case, as a confusing hodgepodge in which all of history is explained and the whole future of mankind sketched through an obsessive application of the concepts of “power” and “leadership,” this work is fundamentally outside the tradition of the Austrian school. Menger’s political orientation, on the other hand, has been the most studied and remains the most disputed.
• 106Mises (1969: 18) conveyed the impression that Menger was more or less a classical liberal, asserting that he “heartily disapproved of the interventionist policies that the Austrian Government—like almost all governments of the epoch—had adopted.” Streissler has also argued for a virtually laissez-faire Menger, seeing him as the source of the school’s commitment to the free market. Emil Kauder, on the other hand, saw Menger as a sympathizer with Sozialpolitik (social reform) and a critic of laissez-faire (1965: 62–64).
• 107Mises (1969: 18) conveyed the impression that Menger was more or less a classical liberal, asserting that he “heartily disapproved of the interventionist policies that the Austrian Government—like almost all governments of the epoch—had adopted.” Streissler has also argued for a virtually laissez-faire Menger, seeing him as the source of the school’s commitment to the free market. Emil Kauder, on the other hand, saw Menger as a sympathizer with Sozialpolitik (social reform) and a critic of laissez-faire (1965: 62–64).
• 108But, according to Kauder, the underlying intellectual tradition in Austria was one of state paternalism, to the point where even the expression of the concept of a spontaneous economic order had been actively suppressed. The founders thus “tried to compromise between British [i.e., Smithian] and Austrian tradition.” In the end, Böhm-Bawerk held that social stability was more important than progress, preaching a “social quietism akin to the ideals of the Austrian past” (Kauder 1958: 421–22). To make matters worse, Stephan Böhm points out that “Böhm-Bawerk’s outstanding achievement as Minister of Finance was the introduction of the progressive income tax on the total income of individuals.” (1985: 256; see also Weber 1949: 667)
• 109But, according to Kauder, the underlying intellectual tradition in Austria was one of state paternalism, to the point where even the expression of the concept of a spontaneous economic order had been actively suppressed. The founders thus “tried to compromise between British [i.e., Smithian] and Austrian tradition.” In the end, Böhm-Bawerk held that social stability was more important than progress, preaching a “social quietism akin to the ideals of the Austrian past” (Kauder 1958: 421–22). To make matters worse, Stephan Böhm points out that “Böhm-Bawerk’s outstanding achievement as Minister of Finance was the introduction of the progressive income tax on the total income of individuals.” (1985: 256; see also Weber 1949: 667)
• 110His purpose, Weiss declared, was “to establish that a number of notable representatives [of the Austrian doctrine], among them its founders, did not draw from it the conclusions for economic policy that [Mises] believes he must draw.” Mises’s brief response to Weiss’s critique: “I am not so pious towards authority [autoritätsgläubig] and quotation-minded [zitatenfreudig], and I base my argumentation on logic and not on exegesis.” The interesting implication is that the political consequences of Austrian economics are to be gathered not from the particular views of its major early proponents, subject to the climate of opinion of their times, but from the inner logic of the system itself (Mises and Spiethoff 1933: 51–53, 131, 118).
• 111Beginning with Ludwig von Mises and F.A. Hayek, the links between liberalism and the Austrian School become intense and pervasive, since these two scholars were themselves at once the outstanding Austrian economists and the most distinguished liberal thinkers of the twentieth century. The American academic world, however, deemed none of this sufficient for them to be accorded the kind of positions to which they were clearly entitled. They, and in particular Mises, were also responsible to a greater degree than is generally appreciated for the upsurge of the free-market philosophy in the second half of the century.
• 112Beginning with Ludwig von Mises and F.A. Hayek, the links between liberalism and the Austrian School become intense and pervasive, since these two scholars were themselves at once the outstanding Austrian economists and the most distinguished liberal thinkers of the twentieth century. The American academic world, however, deemed none of this sufficient for them to be accorded the kind of positions to which they were clearly entitled. They, and in particular Mises, were also responsible to a greater degree than is generally appreciated for the upsurge of the free-market philosophy in the second half of the century.
• 113What follows refers to Hayek’s political attitudes, not to his contributions to economic science. These were highly significant and valuable in the earlier part of his career, as he together with Mises built the theoretical foundations of the modern Austrian school.
• 114This remained Hayek’s standpoint throughout his long and richly productive scholarly life. It is regrettable, but typical, that a great many confused commentators continue to characterize him as a advocate of laissez-faire. In fact, he always avoided using the term to describe his own views, quite unlike Mises, who gloried in it. Provocatively—and quite misleadingly—Hayek states that the supposed laissez-faire conclusions of classical economics “of course, would have been invalidated by the demonstration that, in any single case, State action was useful” (1933: 134). Here Hayek seems to have lost sight of a principle that otherwise loomed large in his thinking: that with such issues of social policy it could never be a question of “any single case,” but rather of general rules and their overall effect.
• 115Hayek habitually displayed a penchant for a considerable degree of Sozialpolitik. In a radio debate in Chicago, following the publication of The Road to Serfdom, he not only stated that, “I have always said that I am in favor of a minimum income for every person in the country,” but, pressed by two aggressive if uninformed leftist opponents, even made the astonishing assertion: “That the monetary system must be under central control has never, to my mind, been denied by any sensible person” (1994b: 114, 116). Some twenty years later, in the preface to a reprint of his book, Hayek admitted that at the time he wrote The Road to Serfdom, “I had not wholly freed myself from all the current interventionist superstitions and in consequence made various concessions which I now think unwarranted” (1994a: xxiv). It may be that, besides his youthful inclination towards a mild Fabianism and his deep admiration for Friederich von Wieser, Hayek was influenced in this direction by the arrant statism that dominated intellectual life in Britain when he lived there in the 1930s and 40s, often involving starry-eyed admiration for the noble experiment underway in Soviet Russia. In any case, his divergence from the more consistent—or more “dogmatic”—variety of liberalism espoused by Mises endured to the end of his career.
• 116Hayek habitually displayed a penchant for a considerable degree of Sozialpolitik. In a radio debate in Chicago, following the publication of The Road to Serfdom, he not only stated that, “I have always said that I am in favor of a minimum income for every person in the country,” but, pressed by two aggressive if uninformed leftist opponents, even made the astonishing assertion: “That the monetary system must be under central control has never, to my mind, been denied by any sensible person” (1994b: 114, 116). Some twenty years later, in the preface to a reprint of his book, Hayek admitted that at the time he wrote The Road to Serfdom, “I had not wholly freed myself from all the current interventionist superstitions and in consequence made various concessions which I now think unwarranted” (1994a: xxiv). It may be that, besides his youthful inclination towards a mild Fabianism and his deep admiration for Friederich von Wieser, Hayek was influenced in this direction by the arrant statism that dominated intellectual life in Britain when he lived there in the 1930s and 40s, often involving starry-eyed admiration for the noble experiment underway in Soviet Russia. In any case, his divergence from the more consistent—or more “dogmatic”—variety of liberalism espoused by Mises endured to the end of his career.
• 117The state, Hayek insisted, is not solely “a coercive apparatus,” but also “a service agency,” and as such “it may assist without harm in the achievement of desirable aims which perhaps could not be achieved otherwise.” This opening to an extensive welfare state in cases where it “involves no coercion except for the raising of the means by taxation” (sic) (Hayek, 1978: 144), has been criticized by Anthony de Jasay. De Jasay cogently remarks that Hayek put his proposal “a touch naïvely,” and adds:
• 118Here is a clear call, or what anyone might be excused for taking as one, to re-create something like the “Swedish model” under the liberal banner. Horrified as Hayek would be by the imputation of such a proposal, his exposition is fully consistent with it, and must be classed as “loosely liberal” for that reason. (1991a: 15–16; see also 1996)
• 119Tributes to the faculty of human reason are strewn throughout his works, e.g., reason is “the mark that distinguishes man from animals and has brought about everything that is specifically human”; and, “Man has only one tool to fight error: reason” (Mises 1949: 91, 187; see also especially Salerno 1990). This stands in stark contrast to Hayek’s disparagement of reason in his later works (especially Hayek, 1988).
• 120History looks backward into the past, but . . . it does not teach indolent quietism; it rouses men to emulate the deeds of earlier generations. . . . Faithfulness to tradition means to the historian observance of the fundamental rule of human action, namely, ceaseless striving to improve conditions. It does not mean preservation of unsuitable old institutions and clinging to doctrines long since discredited by more tenable theories. (1957: 294, 296)
• 121If anything reconciles me to Schmoller’s activity in the field of our science, odious in so many respects, then it is the circumstance that he is fighting with an unmistakable devotion on the side of honorable men against social evils and for the fate of the weak and the poor. This is a struggle in which, as different as the direction of my researches may be, my sympathies lie entirely on the side of such efforts. I may devote my meager power to the investigation of the laws in accordance with which the economic life of men is shaped; but nothing is further from the trend of my thinking than service in the interest of capitalism. No accusation of Schmoller’s is more contrary to the truth, no reproach more frivolous, than that I am a supporter of the Manchester party . . . (Menger 1935c: 93)
• 122On the other hand, Menger was surely aware that terms like Sozialpolitik and Kathedersozialismus denoted support for a quite activist state in economic affairs. If Menger was “a classical liberal of the purest water,” as Streissler claims, why did he write so favorably of Sozialpolitik and Kathedersozialismus—to the point of conceding Schmoller’s great services in furthering the cause of “social reform” in the midst of a diatribe against him? Why did he attack Manchesterism so vehemently? Unless the explanation is to be found in political opportunism, these statements represent a great mystery, given Streissler’s interpretation.