The Foundations of Modem Austrian Economics; The Economics of Ludwig von Mises: Toward a Critical Reappraisal

The Foundations of Modern Austrian Economics, edited by Edwin G. Dolan, Kansas City: Sheed Andrews & McMeel, 1976, 238 pp., $12/$4.95

The Economics of Ludwig von Mises: Toward a Critical Reappraisal, edited by Laurence S. Moss, Kansas City: Sheed Andrews & McMeel, 1976, 129 pp., $12/$3.95

These two books are part of Studies in Economic Theory—"Austrian" economic theory—a series being edited by Laurence S. Moss and published under the cosponsorship of the Institute for Humane Studies of Menlo Park, California. The Austrian school is so called for the nationality of its founders. Beginning with Carl Menger in the 1870's, these men worked out the theories of marginal utility and marginal productivity and promoted their absorption into the mainstream of economics. Several distinguished Austrian economists migrated to the United States in the 1930's and 1940's. Persuaded by the teachings and writings of their European mentors, American economists have come to form a numerical majority of what is still called the Austrian school.

Members of this school seek to trace all economic phenomena back to the preferences, choices, and actions of individual persons. Denying that outcomes are inexorably fated by impersonal physical conditions, they scorn aggregative concepts—such as gross national product—that lack clear contact with the actions of individuals. They are less concerned than mainstream economists with describing and comparing "equilibrium" situations of abstract theory. Instead, they stress the market processes of adaptation to ever-changing conditions amidst inescapable uncertainty. In contrast with so much of mainstream theory, they do not tacitly assume that market participants automatically possess all knowledge relevant to their decisions. On the contrary, the Austrians make it their task to explain how the market communicates and mobilizes vital knowledge of kinds that could not be centralized and that must remain dispersed among millions of separate persons. They appreciate the role of the entrepreneur or promoter, who creatively ferrets out opportunities posed by the incomplete exploitation of knowledge or the incomplete meshing of individuals' plans.

As might be expected, then, the Austrians reject maximization of some sort of collective utility as the goal of economic policy. Instead, they see individuals pursuing their own highly diverse goals and cooperating with one another through market transactions. So they emphasize personal freedom and the value, indeed the necessity, of decentralized decision making. Great contrasts are perceived between market processes, on the one hand, and political and bureaucratic processes, on the other. Inflation, depression, and other disorders are traced to governmental meddling, notably with money. Accordingly, Austrians advocate policies of the free market and laissez faire.

Austrian studies focus on decentralized cooperation and coordination. With its emphasis on individual action, subjectivity, uncertainty, dispersed knowledge, entrepreneurial alertness, and coordinative market processes, the Austrian school is skeptical about the use of mathematics and statistics in economics. These tools, they contend, promote a dehumanized static view of the world and block appreciation of ongoing processes.

Dolan's book contains, besides his editorial introduction, 13 papers presented before some 50 conference participants at Royalton College, Vermont, in June 1974. Gerald P. O'Driscoll and Sudha R. Shenoy apply Nobel Laureate F.A. Hayek's theory of money and relative price relations to explain "Inflation, Recession, and Stagflation." Murray Rothbard, Israel Kirzner, and Ludwig Lachmann contribute four papers each. Most of these deal with methodological themes, broadly conceived; but Kirzner and Rothbard also write on capital theory, and Rothbard treats the theory of money and scholastic and other earlier precursors of the Austrian school. As one might expect of the materials from a week-long conference, much repetition and overlapping occur. Informal discussions presumably added coherence and cleared up obscurities.

Moss's book is better organized, and understandably so. It consists of four main papers, along with a biographical sketch of Ludwig von Mises, a discussion of the papers, and opening and closing remarks. The papers were written for a single session—held during the November 1974 Southern Economic Association Convention—in memory of von Mises, who had died one year before. At his death, aged 92, Mises was dean of the Austrian school, an uncompromising champion of its distinctive methodology, and a staunch opponent of government economic intervention. The session was chaired by Fritz Machlup, a former student of Mises and for many years a distinguished professor at Princeton University. Moss presented a paper on Mises' monetary theory, Israel Kirzner on his subjectivist view of capital and interest, Murray Rothbard on his highly influential analysis of why economic calculation would be impossible under socialist central planning, and William Baumgarth (a young expert on F.A. Hayek's political philosophy) on Mises' liberal (libertarian) outlook on government and politics. Karen Vaughn skillfully wove together the leading themes of the four main papers and added perceptive comments.

The two books under review provide a sampling of modern Austrian economics, but they hardly provide, by themselves, an introduction to it. For readers already sympathetic with the Austrian position, they will provide pleasure and deeper understanding. Most of the papers in them, instead of making contributions on the frontiers of knowledge, are expository or exegetical. Still, Moss does offer original insights into the supposed circulatory problem in applying marginal utility theory to money.

With Moss again providing an example, contributors to the two books do not engage in mere adulation of Mises and other eminent Austrians. They notice errors and problems. Vaughn, Rothbard, Baumgarth, and Kirzner raise questions about Mises' basic philosophical position, a rather unsubtle version of utilitarianism. Mises believed that even as a value-free economic scientist he could forthrightly advocate or condemn particular lines of policy. He claimed to be evaluating policies on the basis, not of his own values or goals, but of the values or goals of the proponents and intended beneficiaries of the policies. Rothbard finds this position untenable. As he among others correctly notes, no one can recommend or condemn policies without having adopted some set of values or other. The question then arises whether such values must be arbitrary, subjective, and undiscussable or, on the contrary whether they—and, more broadly, ethics—can have an objective basis that makes them amenable to scientific investigation. In passages reminiscent of Ayn Rand, Rothbard inclines toward the latter view. (It might seem inconsistent to espouse subjectivism in economic theory yet objectivism in ethics, but the apparent inconsistency could be dispelled. In their respective contexts, the words "subjectivism" and "objectivism" are not opposites.) For me, Rothbard's, Vaughn's, and Baumgarth's remarks along these lines are the most interesting contributions to the two books. Unfortunately, they are brief.

What is the relation between Austrian economics and mainstream economics, including the Chicago School? Both books contain references to a remark of Milton Friedman's at the 1974 conference in Vermont—that there was no such thing as Austrian economics, only good economics and bad economics. But this is a rather epigrammatic and easily refuted statement. The Austrians do tend to be interested in distinctive topics, to employ distinctive methods, and to come up with distinctive insights. If Friedman meant to say, however, that there need be no clash between Austrian and Chicago economics, then it's a different story. It would be a healthy ambition for the Austrians—and Lachmann in particular seems to harbor it—to have their contributions absorbed into the mainstream as a major influence on it. Austrian and other approaches to economics are complementary goods. It is not enough to know Austrianism alone, and libertarians should beware of adopting a house brand of economics, especially if they think it's at loggerheads with other brands.

Complementarity holds for method as well as substance. The Austrians can show that their favorite methods or approaches, including introspection, yield valuable results. Success speaks. But neither they nor other researchers should issue sweeping taboos against others' favorite methods or topics. To show how mathematics and statistics—or, on the other hand, how introspection—have been misapplied in particular cases is not at all the same as showing that no one could ever fruitfully apply those methods to any economic questions. Any such claim would manifest tremendous arrogance. It would be unworthy of the Austrians, with their emphasis on personal preference, diversity, unpredictability, and discovery. Back in 1946, the physicist P.W. Bridgman warned against too narrow a view on the question of scientific method. He liked "to say that there is no scientific method as such, but that the most vital feature of the scientist's procedure has been merely to do the utmost with his mind, no holds barred."

Leland B. Yeager teaches economics at the University of Virginia.