The Great Austrian Economists

INTRODUCTION:
THE AUSTRIAN SCHOOL PAST AND PRESENT RANDALL G. HOLCOMBE

AT THE END of the twentieth century, the Austrian School of economics is exerting a significant influence both on the development of academic economics and on the application of economic theory to public policy. An increasing number of economics professors are sympathetic with the fundamental ideas of Austrian economics, and academic journals are taking more account of the Austrian School.1 A half century ago, few academic economists would even have been familiar with the Austrian School, except superficially, and among those who were, most would have disagreed with its methods and conclusions. Today, the ideas of Austrian economics are closer to the mainstream of economic thought, not because Austrian economics has changed, but because mainstream economics has moved toward the Austrian point of view. A similar shift has occurred in the public-policy arena. The policy implications of Austrian economics, once rejected as extreme, are now embraced as true. In the process, the Austrian School has become increasingly visible as an intellectual force.

Despite the significant advances that Austrian economics has made, it still plays a minor role in academic economics, and only a small minority of academic economists consider themselves members of the Austrian School. The Austrian School of economics is growing, but is not yet a part of the mainstream of academic economics. Its impact on public policy is more difficult to judge, because in many policy areas, other schools of thought arrive at similar conclusions. For example, the Chicago School, led by the ideas of Milton Friedman, often supports public policies consistent with Austrian economics, so the ideas of these schools can reinforce each other. Policy initiatives may find their intellectual foundations in many different schools of thought, but it should be apparent that the laissez-faire approach to public policy so often promoted by the Austrian School is much more accepted at the end of the twentieth century than it was in the middle. Ideas do have consequences, and an appreciation for the workings of the market system, always a hallmark of the Austrian School, has found its way into the public-policy debate.

If the ideas of Austrian economics have made such inroads, one might wonder why, in the academic arena, Austrian economics does not play a bigger role. Part of the answer has to do with academic institutions themselves. Most university faculty teach at state institutions, which by itself may bias them toward supporting the state and being suspicious of laissez-faire ideas. Most university faculty have tenure, which slows the turnover of personnel, and perhaps of ideas. Furthermore, academic ideas find their outlets largely in academic journals, and the editorial boards of those journals tend to be controlled by the academic mainstream, further promoting mainstream ideas over alternative schools of thought.2 Because publication in academic journals is often a prerequisite for promotion and tenure in a university environment, academic survival often pushes young scholars in the direction of the mainstream methods and ideas in their discipline.

Austrian economics has fought an uphill battle for acceptance for several reasons, but at the same time, the Austrian School has been gaining in strength, and is becoming more accepted in academia. A growing number of economics professors align themselves with the Austrian School, and even among those who do not, Austrian ideas are becoming more recognized and respected. Interestingly enough, the late-twentieth-century resurgence of interest in the Austrian School has been concentrated in the United States. This is largely due to Ludwig von Mises’s migration, and his Austrian economics seminar at New York University. One might go so far as to argue that the modern Austrian School would not exist were it not for the influence of Ludwig von Mises on his American students.3

Of course, economists before Mises developed the foundation on which he built his ideas, and he had like-minded contemporaries who also influenced the direction of Austrian economics. By the late 1940s, the Austrian School was scarcely wider than Mises and those who studied directly under him at New York University. From there, the students of Mises found their own students, and by the 1970s the Austrian School had begun to blossom.

AUSTRIAN ECONOMICS BEFORE 1950

Carl Menger is generally regarded as the founder of the Austrian School, but prior to about 1920, Austrian economics was not very different from economics in general. Economic theory had taken a great leap forward in the 1870s when the concept of marginal utility was independently discovered by Léon Walras, William Stanley Jevons, and Carl Menger.4 Each of these three individuals pushed the concept in different directions, but the integration of the marginal theory of value into economics was a major leap for all of economics. Eugen von Böhm-Bawerk’s capital theory, now seen as Austrian, was viewed more generally as a part of economics when it was published in the 1880s and 1890s, and Ludwig von Mises’s Theory of Money and Credit, published in 1912, established him as a leading authority on monetary economics.5

Although there was a recognizable Austrian School at the time with its own distinct identity, the Austrian School was a part of mainstream economics in the same way that the Keynesians and monetarists were two mainstream schools in the 1970s. The characterization of the Theory of Money and Credit as a mainstream work stands in stark contrast to the profession’s assessment of Human Action, which was published in 1949. The 1947 appearance of Paul Samuelson’s Foundations of Economic Analysis defined the cutting edge of the mainstream at that time, and a comparison of the two books shows how different Mises’s conception of economics was from mainstream economics at the middle of the twentieth century.

There are two main factors that served to separate Austrian economics from the mainstream in the first half of the twentieth century. The first had to do with the development of economics as an academic discipline. Economists and policymakers wanted to extend concepts of scientific management, introduced around the turn of the century, to management of the economy as a whole. This led economists to adopt more sophisticated mathematical and statistical techniques. Following models developed by physicists, economic models increasingly became focused on the mathematical properties of equilibrium, neglecting the analysis of market processes that has always been a core part of Austrian economics. By focusing on equilibrium, the role of economic profits became secondary, and entrepreneurial activities were completely neglected. In short, as economic theory developed, the issues it addressed became narrower and excluded facets of the economy that were central to the Austrian School.

The development of macroeconomics following the publication of John Maynard Keynes’s The General Theory of Employment, Interest, and Money in 1936, further pushed mainstream economics away from the fundamental tenets of Austrian economics. Austrian economics always begins with individuals as the unit of analysis, while Keynesian macroeconomics was built on economic aggregates that could not easily be traced to individual behavior. In addition, the Austrian business-cycle theory developed by Mises and F.A. Hayek emphasizes malinvestment as an underlying cause of business cycles, whereas most macroeconomic models, even today, make the simplifying assumption that capital is homogeneous, ruling out the kind of malinvestment that occurs in Austrian macroeconomic models. In the 1930s, Mises and Hayek were among the leading macroeconomic theorists in the world (although the term macroeconomics was not yet in use). By the 1940s, their ideas had been swept aside by the Keynesian revolution.

The divergence of mainstream economic science from Austrian economics was in part a matter of government policy. The idea that the economy could be managed more scientifically brought with it the support of government policymakers who believed that with better economic models, government policy could engineer the economy to perform better. Advances in economic theory were envisioned as tools for creating a more potent government that would better be able to control the nation’s economy.

In order to be applied, advanced models required better economic data to measure the performance of the economy and the impacts of policy. In the early 1920s, the National Bureau of Economic Research was created with the support of government, academic institutions, and the private sector, to make economic theories more scientific, and to develop economic data to aid in applying economic theory. National income accounting was developed in the 1920s and implemented in the 1930s, using better data and more precise models developed with the encouragement of the federal government. Thus, government policy pulled mainstream economics away from the core Austrian ideas by promising economists more power to control public policy, and by providing financing for economic research aimed at devising better methods for controlling the economy through government intervention. Economists who cooperated with the government’s agenda were rewarded with money, power, and prestige, but the government’s agenda was quite at odds with the ideas of Mises and Hayek, the leading Austrian economists of the time.

Herbert Hoover, an engineer by training, served as Secretary of Commerce from 1921 to 1929, throughout the entire administrations of Harding and Coolidge, before ascending to the presidency himself. Hoover was one of the key individuals pushing economics to become more like engineering, to use mathematical modeling, and to develop better data for analysis. With the onset of the Great Depression, the desire to use economics to engineer the economy back to prosperity was even stronger, and was encouraged even more by government policymakers. The lure to economists was powerful, for economists were offered the opportunity to move from being passive observers of economic activity to being active policymakers, and the temptation pulled the economics profession ever toward developing models of optimal government intervention. Meanwhile, Austrian economics, emphasizing the perils of government intervention, was left by the wayside.

Thus, the main factor that pushed mainstream economics away from Austrian ideas was the increased emphasis on mathematical and statistical techniques. The theoretical focus was on the mathematical properties of equilibrium, and the policy focus was on designing interventionist policies to produce prosperity. The Austrian emphasis on the market process was inconsequential to mainstream analysis, and the policy implications of Austrian economics suggested less intervention rather than more, putting Austrian economics at odds with the mainstream.

An additional factor that pushed Austrian economics from the mainstream was the socialist calculation debate. In 1919, shortly after the Soviet Union was formed, Ludwig von Mises presented an article to a professional meeting making the claim that centrally planned economies were doomed to failure. Mises followed up on this idea in later works and continued to defend his claim until his death in 1973. Hayek conspicuously joined Mises’s side of the debate, but most other economists weighed in on the other side, creating what was referred to as the socialist calculation debate. The consensus of the economics profession was that Mises was wrong, and that not only was central planning viable, it was superior to the market as a method of allocating economic resources. Mises, the preeminent spokesman for the Austrian School, was so closely identified with his stance in the socialist calculation debate that it cast a shadow on all of Austrian economics. By 1950, any economist expressing allegiance to the Austrian School was implicitly taking what was generally viewed as the losing side on the debate. Few academic economists were willing to do so.

By the middle of the twentieth century, economic theory focused on the mathematical conditions for economic equilibrium, and economic policy focused on the ways that government intervention in the economy could foster prosperity. Austrian economics, with its emphasis on the market process rather than equilibrium conditions, with its focus on entrepreneurship rather than zero-profit competitive equilibrium in markets, and with its focus on market allocation rather than government planning, had moved from a major force at the center of economic thought to the fringes of economics.

AUSTRIAN ECONOMICS AFTER 1950

By 1950, all that was left of the Austrian School was Ludwig von Mises and his students at New York University. Mises and Hayek, the two most visible Austrians, were always identified with their insistence that socialist economies were doomed to failure, discrediting them in the eyes of most academic economists. Hayek migrated to the University of Chicago, and might well be identified as a Chicago economist today were it not for the modern revival of the Austrian School. Mises had prominent supporters like W.H. Hutt and Henry Hazlitt, both profiled in this volume, but none of his supporters were teaching Austrian economics as an alternative to the academic mainstream. Meanwhile, Mises promoted the ideas of Austrian economics to a handful of followers at New York University. Had he not done so, Austrian economics as an identifiable school of thought probably would have vanished. It is not much of a stretch to argue that by 1950, the Austrian School had only one academic economist actively promoting its ideas as a consistent body of thought.

While Ludwig von Mises is not the founder of the Austrian School, he is beyond a doubt solely responsible for its survival to the end of the twentieth century. Mises did two things to ensure the survival of the school. First, he wrote Human Action, which clearly laid out the intellectual foundations of Austrian economics. Through Human Action, readers could see that Austrian economics consisted of a comprehensive and consistent body of ideas, and they could also see how Austrian economics differed from the mainstream economic ideas of the day. Human Action provided a ready reference to the fundamental ideas of Austrian economics in much the same way that Paul Samuelson’s Foundations of Economic Analysis provided a ready reference to fundamental concepts of mainstream economic theory. Second, through his seminars at New York University, Mises attracted a group of students who recruited other students, giving Austrian economics an academic rebirth. Two of Mises’s American students stand out for their academic achievements and for their impact on the modern Austrian School: Israel M. Kirzner, an author of one of this volume’s chapters, and Murray N. Rothbard, an author of two chapters and is profiled in a third chapter. Both established reputations as insightful economists, prolific authors and—more to the point for present purposes—strong proponents of the Austrian School. They influenced students, not only at their own universities, but at other universities as well, by giving seminars and speaking at conferences, and of course through the impact of their writing. While Austrian economists are still rare in academic institutions, many of those students influenced by Kirzner and Rothbard now hold academic positions, and are in turn influencing a new generation of students.

From its low point in the middle of the twentieth century, Austrian economics has continued to gain visibility both inside academia and out. F.A. Hayek won the Nobel prize in economics in 1974, giving the Austrian School attention and respectability. By then, a small Austrian revival was already underway, led by Kirzner and Rothbard, and Hayek’s Nobel prize gave the revival additional momentum. Still, the Austrian School was branded by being on the losing side of the socialist calculation debate. In 1973, the year Mises died, Paul Samuelson, another Nobel laureate in economics and among the most prominent of mainstream academic economists, argued in his introductory textbook that even though the Soviet Union had roughly half the per capita income of the United States, their superior economic system based on central planning gave them faster growth. Based on this, Samuelson projected that per capita income in the Soviet Union could catch up to that of the United States as early as 1990, and almost surely by 2015.6 Keep in mind that Samuelson’s projection was in his best-selling introductory college textbook, and was the standard line taught in college classrooms at the time. Clearly, the mainstream had not accepted the ideas of Austrian economics.

Ironically, the socialist calculation debate that so tarnished Austrian economics because Mises and Hayek refused to concede became one of the crowning achievements of Austrian economics once the Berlin Wall came down in 1989, followed by the collapse of the Soviet Union in 1991. Mises was right, it turned out, and critics of the Austrian School who had once dismissed its outlandish claims were converted to, if not fans, at least curiosity seekers. Economists who at one time dismissed the Austrian School wanted to discover what insights had led Mises and only a handful of others to have been so certain of their ideas, despite the almost unanimous disapproval of academic and professional economists.

As the twentieth century draws to a close, many of the ideas that at one time differentiated Austrian economics from the mainstream are now being explored by mainstream economists. Decades ago, macroeconomists recognized that they needed to disaggregate their theories to the level of individual behavior, and economists are increasingly recognizing the importance of uncertainty and imperfect information to the way that individuals make decisions and the way that markets operate. Still, there remains a wide gulf in many areas, perhaps the most obvious is the mainstream’s continuing focus on the mathematical properties of equilibrium, in contrast to the Austrian focus on the market process.

Much could be written comparing and contrasting the Austrian School of economics with other schools of economic thought, but the purpose of this volume is to focus on some of the people who have made the Austrian School what it is today. All of the individuals here have steered the development of the Austrian School in ways that go beyond just their expositions of economic theory.

In many cases, seeing the context in which they developed their ideas helps to clarify why they chose to promote the ideas of the Austrian School, and also helps to illustrate the personal and intellectual integrity shown by so many of these great minds. The individuals profiled in this volume have contributed to the development of Austrian economics in vastly different ways. Some predated Carl Menger’s founding of the Austrian School, but laid the foundations upon which Menger and later Austrians built. Mariana, Turgot, Bastiat, Say, and Cantillon fall into this category. The insights of these economists laid a solid foundation for the understanding of the functioning of markets that led to the founding of the Austrian School. With the development of modern neoclassical economics, the contributions of these individuals have been largely ignored. Many of the fallacies that have found their way into mainstream economic thought were long ago dealt with and refuted by these economists, and it is worthwhile to profile these predecessors to the Austrian School both to celebrate their contributions and to show how their ideas remain relevant today.

Some featured here, such as Wicksteed and Fetter, were contemporaries of Menger, Böhm-Bawerk, and Mises, and developed ideas consistent with the Austrian School even as Austrian economics was developing its own identity as a school of economic thought. Some were won over by the power of the ideas of a more mature Austrian School, and went on to make their own contributions to the development of Austrian economics. Hutt, Hazlitt, Röpke, and Rothbard are in this group. Of course, there have been many other prominent Austrian economists who are not profiled here, and the choice of these fifteen economists in no way should be taken as an indication that these are the fifteen most important Austrian economists. Rather, they are an interesting cross-section of individuals who have contributed to the Austrian School in a variety of ways.

The individuals profiled in this volume make up a diverse group, but they share a deep insight into the fundamental concepts of economics, and the ability to effectively communicate those concepts in writing. Each of them has had a substantial and lasting influence on the development of economic ideas.

 

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7Two recent examples are the review article by Israel M. Kirzner, “Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach,” Journal of Economic Literature 35, no. 1 (March 1997): 60–85; and Sherwin Rosen, “Austrian and Neoclassical Economics: Any Gains From Trade?” Journal of Economic Perspectives 11, no 4. (Fall 1997): 139–52. Both of these journals are publications of the American Economic Association, indicating the degree to which Austrian ideas are at least recognized, if not embraced, by the profession’s mainstream.

8See Leland B. Yeager, “Austrian Economics, Neoclassicism, and the Market Test,” Journal of Economic Perspectives 11, no. 4 (Fall 1997): 153–65, for an insightful discussion on the challenges that an alternative to mainstream ideas faces in the academic marketplace.

9See Karen I. Vaughn, Austrian Economics in America: The Migration of a Tradition (New York: Cambridge University Press, 1994), for a good discussion of the development of the modern Austrian School. Also see Murray N. Rothbard, “The Present State of Austrian Economics,” Money, Method, and the Austrian School, vol. 1, The Logic of Action (Cheltenham, U.K.: Edward Elgar, 1997).

10The first edition of Menger’s Principles of Economics was published in German in 1871. While it was generally recognized as a landmark contribution in economics, an English translation was not published until 1950.

11Murray N. Rothbard, in Ludwig von Mises: Scholar, Creator, Hero (Auburn, Ala.: Ludwig von Mises Institute, 1988), p. 13, notes that Mises’s early work on monetary theory, while controversial, was published in the Economic Journal, one of the leading mainstream economic journals of the time.

12Paul A. Samuelson, Economics, 9th ed. (New York: McGraw-Hill, 1973), p. 883.

• 1Two recent examples are the review article by Israel M. Kirzner, “Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach,” Journal of Economic Literature 35, no. 1 (March 1997): 60–85; and Sherwin Rosen, “Austrian and Neoclassical Economics: Any Gains From Trade?” Journal of Economic Perspectives 11, no 4. (Fall 1997): 139–52. Both of these journals are publications of the American Economic Association, indicating the degree to which Austrian ideas are at least recognized, if not embraced, by the profession’s mainstream.
• 2See Leland B. Yeager, “Austrian Economics, Neoclassicism, and the Market Test,” Journal of Economic Perspectives 11, no. 4 (Fall 1997): 153–65, for an insightful discussion on the challenges that an alternative to mainstream ideas faces in the academic marketplace.
• 3See Karen I. Vaughn, Austrian Economics in America: The Migration of a Tradition (New York: Cambridge University Press, 1994), for a good discussion of the development of the modern Austrian School. Also see Murray N. Rothbard, “The Present State of Austrian Economics,” Money, Method, and the Austrian School, vol. 1, The Logic of Action (Cheltenham, U.K.: Edward Elgar, 1997).
• 4The first edition of Menger’s Principles of Economics was published in German in 1871. While it was generally recognized as a landmark contribution in economics, an English translation was not published until 1950.
• 5Murray N. Rothbard, in Ludwig von Mises: Scholar, Creator, Hero (Auburn, Ala.: Ludwig von Mises Institute, 1988), p. 13, notes that Mises’s early work on monetary theory, while controversial, was published in the Economic Journal, one of the leading mainstream economic journals of the time.
• 6Paul A. Samuelson, Economics, 9th ed. (New York: McGraw-Hill, 1973), p. 883.
• 7AT THE END of the twentieth century, the Austrian School of economics is exerting a significant influence both on the development of academic economics and on the application of economic theory to public policy. An increasing number of economics professors are sympathetic with the fundamental ideas of Austrian economics, and academic journals are taking more account of the Austrian School. A half century ago, few academic economists would even have been familiar with the Austrian School, except superficially, and among those who were, most would have disagreed with its methods and conclusions. Today, the ideas of Austrian economics are closer to the mainstream of economic thought, not because Austrian economics has changed, but because mainstream economics has moved toward the Austrian point of view. A similar shift has occurred in the public-policy arena. The policy implications of Austrian economics, once rejected as extreme, are now embraced as true. In the process, the Austrian School has become increasingly visible as an intellectual force.
• 8If the ideas of Austrian economics have made such inroads, one might wonder why, in the academic arena, Austrian economics does not play a bigger role. Part of the answer has to do with academic institutions themselves. Most university faculty teach at state institutions, which by itself may bias them toward supporting the state and being suspicious of laissez-faire ideas. Most university faculty have tenure, which slows the turnover of personnel, and perhaps of ideas. Furthermore, academic ideas find their outlets largely in academic journals, and the editorial boards of those journals tend to be controlled by the academic mainstream, further promoting mainstream ideas over alternative schools of thought. Because publication in academic journals is often a prerequisite for promotion and tenure in a university environment, academic survival often pushes young scholars in the direction of the mainstream methods and ideas in their discipline.
• 9Austrian economics has fought an uphill battle for acceptance for several reasons, but at the same time, the Austrian School has been gaining in strength, and is becoming more accepted in academia. A growing number of economics professors align themselves with the Austrian School, and even among those who do not, Austrian ideas are becoming more recognized and respected. Interestingly enough, the late-twentieth-century resurgence of interest in the Austrian School has been concentrated in the United States. This is largely due to Ludwig von Mises’s migration, and his Austrian economics seminar at New York University. One might go so far as to argue that the modern Austrian School would not exist were it not for the influence of Ludwig von Mises on his American students.
• 10Carl Menger is generally regarded as the founder of the Austrian School, but prior to about 1920, Austrian economics was not very different from economics in general. Economic theory had taken a great leap forward in the 1870s when the concept of marginal utility was independently discovered by Léon Walras, William Stanley Jevons, and Carl Menger. Each of these three individuals pushed the concept in different directions, but the integration of the marginal theory of value into economics was a major leap for all of economics. Eugen von Böhm-Bawerk’s capital theory, now seen as Austrian, was viewed more generally as a part of economics when it was published in the 1880s and 1890s, and Ludwig von Mises’s Theory of Money and Credit, published in 1912, established him as a leading authority on monetary economics.
• 11Carl Menger is generally regarded as the founder of the Austrian School, but prior to about 1920, Austrian economics was not very different from economics in general. Economic theory had taken a great leap forward in the 1870s when the concept of marginal utility was independently discovered by Léon Walras, William Stanley Jevons, and Carl Menger. Each of these three individuals pushed the concept in different directions, but the integration of the marginal theory of value into economics was a major leap for all of economics. Eugen von Böhm-Bawerk’s capital theory, now seen as Austrian, was viewed more generally as a part of economics when it was published in the 1880s and 1890s, and Ludwig von Mises’s Theory of Money and Credit, published in 1912, established him as a leading authority on monetary economics.
• 12From its low point in the middle of the twentieth century, Austrian economics has continued to gain visibility both inside academia and out. F.A. Hayek won the Nobel prize in economics in 1974, giving the Austrian School attention and respectability. By then, a small Austrian revival was already underway, led by Kirzner and Rothbard, and Hayek’s Nobel prize gave the revival additional momentum. Still, the Austrian School was branded by being on the losing side of the socialist calculation debate. In 1973, the year Mises died, Paul Samuelson, another Nobel laureate in economics and among the most prominent of mainstream academic economists, argued in his introductory textbook that even though the Soviet Union had roughly half the per capita income of the United States, their superior economic system based on central planning gave them faster growth. Based on this, Samuelson projected that per capita income in the Soviet Union could catch up to that of the United States as early as 1990, and almost surely by 2015. Keep in mind that Samuelson’s projection was in his best-selling introductory college textbook, and was the standard line taught in college classrooms at the time. Clearly, the mainstream had not accepted the ideas of Austrian economics.