“After all, money, as they say, is miraculous.”
—Thomas Carlyle
The economics profession, like many other branches of the social sciences, long ago had to decide whether to adopt positivist methods, as if its objects of study were organisms of constant and predictable motion, or to account for the infinite variety in human affairs by building a theory of the patterns of human action. We know which direction it chose: it attempted to pass itself off as a physical science, a fact we are reminded of every October when the Nobel Prize committee rewards an economist for some path-breaking scientific discovery, alongside great physicists and biologists. It is all but entirely forgotten that “the economy” is simply the composite choices of real human beings acting to improve their lot, which is not always defined b) their bank accounts.
The branch of economics called the Austrian School, founded 120 years ago but having roots in late-Scholastic economic thought, chose a different path and as a result has been shunned by the dominant members of the profession for decades. The school has also sheltered this century’s primary opponents of socialism and champions of free markets, many of whom have been heroes to the old American Right, including Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, F. A. Hayek, Henry Hazlitt, Wilhelm Roepke, and a series of modern Austrian economists, including Israel M. Kirzner and Murray N. Rothbard.
The connection between humane methodology and free markets is not incidental. The number-crunching economist is an essential player in the modern project to manage the economy as if it were a hydraulic machine. This machine has three primary levers—fiscal policy, monetary policy, and regulatory policy—and an endless number of secondary levers. And the mathematical models that dominate the profession—whether Keynesian, monetarist, or supply side—assume sectors of the economy to be homogeneous units subject to scientific control—ignoring who is being controlled and for what ends. Economists are sympathetic to varying degrees of economic planning for the same reason that foreign policy experts like globalist ideology: without it, the value of their opinions and services would be greatly diminished. No matter that the attempt to fulfill the macromanagerial project has been an abysmal failure, as have economists’ attempts to predict the future with precision.
The Austrian School offers an entirely different program. It constructs a deductive theory of economic laws that both applies universally and attempts to account for heterogeneity in consumer preferences, material resources, labor skills, and time horizons. It makes a sharp distinction between theoretical economics, which requires no accumulation of data, and history. Conflating the two can be dangerous, as when in the 1970’s economists assumed that a pattern showing an inverse relationship between unemployment and inflation was an economic law, though in fact it was only a historical contingency. This flawed assumption led policymakers to pull their levers to create a stagflation consisting of both high inflation and high unemployment. For the Austrian School, constructing an economic theory from data is akin to constructing a system of morals from the experience of one generation.
The school’s prominence has ebbed and flowed since its founding 120 years ago with a smashing economic treatise by Carl Menger (Principles of Economics) showing that Adam Smith’s theory of economic value (also Marx’s) was fatally flawed. Economic value, Menger said, is determined by individual preferences, unique to each person, and not by how much work is used to produce goods. His book, still pleasurable to read, played a role in revolutionizing economic thinking. But his school fell into near obscurity with the Great Depression, which seemed to discredit market theory and bolstered the idea that central planning should be the way of the future.
The Austrian School gained new adherents when a Nobel Prize committee recognized Hayek’s argument that central banking creates business cycles by manipulating interest rates. But it has taken the collapse of socialism to make the names and ideas of Menger and his followers (Mises most prominently) widely recognized. Austrian economics now finds itself in a boom phase, from having been almost alone in predicting the abysmal consequences of central economic planning and collectively owned property. The intellectual edifice it built to counter socialism, explaining the workings of the market economy and the results of tampering with its operations, makes it profoundly relevant in the postsocialist epoch.
Today economists sympathetic to the Austrian School span the globe, and they are quietly infiltrating economics departments long dominated by variants of Keynesian ideology. If the trend continues, this decade will see a renaissance of the Austrian tradition, Wc will know it has occurred when the writers of history-of-thought texts are forced to see the tradition as living on beyond the late 19th century and even offering an alternative paradigm to today’s mainstream economic opinion.
Of the thousands of articles and books in this tradition, what single work offers a comprehensive introduction? Remarkably such a volume did not exist until now, which is why the volume edited by Professor Richard Ebeling of Hillsdale College is a landmark. It is simply and appropriately titled Austrian Economics: A Reader; in putting it together. Professor Ebeling made a series of inspired decisions. A similar volume about the Keynesian School would lead the reader into a miasma, a world clouded by contradictions, confused interpretations, recurring retractions. But the preoccupations of Austrian School tradition are soundly demonstrated here: methodological individualism, the market as an instrument of economic coordination and social cooperation, and state intervention as a source of economic chaos.
From Menger to modern theorists like Rothbard and Roger Garrison, and including the many in between, this book collects some of the school’s most important essays. The first sections flesh out the philosophical foundation of the school, with contributions by Ludwig Lachmann (carving out a special place for the school), Ebeling (contributing two bibliographic essays), Rothbard (defending the “logic of action” or praxeology), Hayek (arguing for the centrality of individual decision-making), Mises (distinguishing social from natural science), Leland B. Yeager (easting doubt on the postulate that science means collecting numbers), Menger (theorizing about the sources of social evolution), and Mario Rizzo (hitting so-called econometrics as riddled with fallacy).
The section arguing against macroeconomic management, showing how the market serves its own coordinative function, highlights the writings of Hayek and Mises, along with E.G. Pasour’s ideas on subjectivism and cost, and includes a piece on the role of entrepreneurship by Kirzner. The section on capital and interest—which centers on the issue of the passage of time—brings the forgotten work of Eugen von Böhm-Bawerk (a finance minister in the Austrian government) into the forefront with an essay he wrote in 1901 and demonstrates what an excellent theorist and writer he was. Through patient deduction, he explains the way time factors into the production process creating distinctions among types of goods, how long it takes to create them, and the extent to which they are desired on the market. He predicts that by effectively abolishing the structure of production, socialism will make “a relatively small amount of consumption goods available for the nation’s population.” Ebeling also includes a fascinating rebuttal by proto-Keynesian L.G. Bostedo, arguing against the importance of savings, and a response by Böhm-Bawerk.
Austrian capital theory also encompasses the controversial (within economics) idea that interest rates (earned and paid) are determined by “time preference,” the idea that people always prefer goods sooner rather than later but in different degrees. Both Rothbard and Vernon A. Mund bolster the case, along with an article by Kirzner on Mises’ capital and interest theory.
Menger’s argument that money itself originates in the market—not with the government or a social compact—is included here, along with Mises’ theory of the business cycle. Though hysterically attacked as reactionary by both monetarists and Keynesians, Misesian cycle-theory tells a story of central banks skewing investment decisions by manipulating interest rates. The last section, once again resting on two contributions by Mises, brings the reader to issues of public policy and to the importance of legal institutions, which protect property and the private economy from invasion.
For those wanting a look at the kinds of issues that modern Austrian economists are working with, the book’s companion volume—Austrian Economics: Perspectives on the Past and Prospects for the Future—is a great place to start. Twenty-three contributors cover a range of topics. Some notable contributions include: Hans-Hermann Hoppe’s methodological tour de force touching on ethics; Peter Boettke’s explanation of why Soviet socialism failed for reasons more fundamental than the West’s military buildup; Jack High’s linkage of the emergence of the regulatory state with the habit of viewing the market as an entity frozen in time, rather than as a continuing process; and Roger Garrison’s argument that Keynesians and monetarists are more alike than is conventionally supposed. Each paper has two appended commentaries, and none shrinks before rigorous criticism.
Before the turn of the century, Menger gave up economics and polities because he feared that nothing could be done to stop the onslaught of war, socialism, and the managerial state. Were he alive today, he might argue that his pessimism was justified, but he would be proud to see that his own school has held to first principles, resisting the temptation to join the legions of wouldbe state managers who call themselves economists today.
[Austrian Economics: A Reader, edited by Richard M. Ebeling (Hillsdale, Michigan: Hillsdale College Press) 692 pp., $19.95]
[Austrian Economics: Perspectives on the Past and Prospects for the Future, edited by Richard M. Ebeling (Hillsdale, Michigan: Hillsdale College Press) 516 pp.. $19.95]
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