Mises Daily – March 9, 2011

March 9, 2011

Mises Daily

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The Austrian School in Brief
by Eugen-Maria Schulak on March 9, 2011

After several years of preparatory work and many interruptions, it seems an odd coincidence that the authors completed their manuscript at the very time a global crisis in the financial sector suddenly became evident to all. Economic developments since that time appear only to confirm many fundamental insights of the Austrian School of economics, especially those in monetary and business-cycle theory. Long-standing, low-interest-rate policies in the United States and a steady increase in the money supply and money equivalents in industrial nations seem to have led to a staggering volume of misallocations and countless unsustainable business models.

The attempts of industrial nations to quell the pent-up need for correction through government intervention will in time lead to a gain that is deceptive at best — but hardly a real solution. These astonishingly purposeful government interventions are certainly no accident. In recent decades, the so-called welfare states have entered into a very close symbiosis with the financial sector. In no other sector of the economy — save perhaps the armaments industry in certain countries — are institutions, people, and the economy so closely interwoven with the state as is the case with the finance industry. It has often been possible in recent years to get the impression that welfare states might be competing, in the most imaginative and opportunistic ways, with the banking industry in their efforts to circumvent the basic laws that rule economics, money, and the market.

While welfare states, with their increasing national budget deficits, have for many years nourished the illusion of growing prosperity, banks and financial institutions have on the one hand provided finances for these deficits. But on the other hand, and to the wider public, they have acted as impresarios of an everything-is-affordable philosophy. Hence the crisis, which has not yet come near reaching its full magnitude, will affect both the global financial sector and individual countries much more deeply than all crises seen thus far.

Based on the assumption that the individual was the decisive economic agent, and thus centering its research on individual preferences and on the intersubjective balancing of these preferences in the context of markets, the Austrian School has consistently pointed to the fact that institutions such as money, states, and markets had emerged without any planning, without any central purpose, and without force. They had emerged on the basis of human interaction alone, and in a manner that was therefore natural, befitting both humans and human logic. This basic insight counters all political and economic ideologies that view such institutions as working arenas for the establishment or development of authoritarian activity aimed at influencing or even controlling the direction of individual preferences or their intersubjective balance.

This meant that during the interwar period in Austria, the Austrian School was attacked, sometimes fiercely, by political parties of both the Left and the Right. The Austrian school not only denied the legitimacy but also the efficacy of many economic policies. Furthermore, the school had always identified itself with a universal science in which there was no room for national, religious, or class-oriented constrictions. In ways it even represented a kind of alternate world to many of the country’s idiosyncrasies: it focused exclusively on the individual and asserted that individual action on the basis of subjective preferences was the starting point for research; it was based on a realistic image of humanity that was not suited for inconceivable flights of idealistic fantasy and therefore not amenable to cheap political exploitation; it was free of magniloquent utopias, upheld the principles of self-determination and nonviolence, and was united in its fundamental criticism of any monopolistic and forceful intervention of the state. In addition, it emanated a highly scholarly ethos that made possible the emergence of an uncommonly cosmopolitan and tolerant discourse.

It follows that among the many intellectual legacies of the Austrian monarchy, the Austrian School of economics was one of the very few traditions that did not become entangled in vice and guilt in the midst of the political upheavals of the 20th century. The same ideologies — of both Left and Right — which in the 20th century so often caused bloodshed and large scale destitution and misery, accused — with great impudence — the Austrian School of blindness to the urgent economic questions of the period. It was due to this perspective as well that the history and philosophy of the Austrian School were not to be incorporated into the foundation and reconciliation myth of the Second Republic’s grand coalition.

The Austrian School in Brief

The Austrian School of economics, also called the Viennese School of economics, was founded by Carl Menger in Vienna during the last third of the 19th century. From that time until today, its vibrant teaching tradition has had a significant influence on the formation and further development of the modern social sciences and economics in Europe and the United States.

In the 1930s, a general change of economic paradigms proceeded to push the Austrian School ever closer to the academic sidelines. This trend was further intensified by the emigration of many of the school’s proponents, and finally through the expulsion of its last remaining representatives when the National Socialists seized power. After World War II, the political atmosphere of coalition and cooperation across party lines did not lend itself to a restoration of the School. Held by many to be the intellectual heir of the French and English Enlightenments and political and economic liberalism, it was considered too old-fashioned. The Austrian School was no longer welcome in Austria. By means of their teaching and scholarly publications, however, Ludwig von Mises and Friedrich Hayek were more or less able to sustain the tradition in the United States. From the 1970s onward, it has experienced a renaissance as the modern Austrian School of economics.

Until 1938, the research agenda of the Austrian School was characterized by an astonishing multitude of diverse, and in some cases even contradictory, conclusions. Its 40 or so economists had in common their education in law, their almost exclusively elite or aristocratic public-service backgrounds, and their employment with state-funded universities, the civil service, or institutions like banks or chambers of commerce that too had close ties with the state. In any case, the proponents of the Austrian School were highly successful socially and professionally: five became government ministers, many held senior positions in the government or state-owned banks, and quite a few were granted aristocratic titles.

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All branches of the school shared the conviction that the subjective feelings and actions of the individual are those that drive economic activity. Based on this conviction, explanations for economic phenomena such as value, exchange, price, interest, and entrepreneurial profit were derived, and step by step expanded into a comprehensive theory of money and business cycles. Because of their subjectivist-individualistic approach, economists of the Austrian School regarded any kind of collective as unscientific in rationale. This led to fierce arguments with the Marxists, the German Historical School, and later with the promoters of planned economy and state interventionism — and solidarity within the school itself.

In the modern Austrian School of economics, questions regarding knowledge, monetary theory, entrepreneurship, the market process, and spontaneous order placed themselves in the foreground — subjects that the older Austrian School, with remarkable foresight, had already taken up or dealt with in detail. This book endeavors to trace the development of this multifaceted tradition, with all of its ideas, personalities, and institutions.