What Does It Mean to Be an Austrian Economist?

Joe Salerno's SDAE Presidential Address was excellent.  In it he developed his argument about the Mengerian causal realist tradition, and the role that Mises and then Rothbard played in the further development and refinement of that tradition.  Mises used the term "modern subjectivist economics" to capture this tradition.  Joe pointed out that in essays in the 1930s to the late 1960s, Mises actually argued that the label "Austrian" was only useful for an episode of intellectual history.  Similarly, Hayek in his Encyclopedia of the Social Sciences essay on The Austrian School implies that it is a useful historical label that does not have contemporary relevance.

What was most fascinating about Joe's talk was his discussion of Rothbard.  Relying on Rothbard's letters and notes concerning the writing of Man, Economy and State, Joe was able to demonstrate that Rothbard shared this assessment with Mises and Hayek, and was thoroughly engaged with the economics profession of his day (1950s).

In the 1970s, however, Rothbard changed his position and began to advocate a more thorough going commitment to the Austrian School of Economics?  What changed between the 1950s when Rothbard was starting his career, and the 1970s when Rothbard was engaged in efforts to build a modern Austrian movement?

The simple answer is that the economics profession was transformed between 1950 and 1970 in a way that had lost sight of the central message of what Mises called "modern subjectivist economics."  The propositions of the "Austrian School" were ignored so action needed to be taken by Rothbard (and Kirzner) to bring back an apreciation for these core propositions of economic science if economic thought was to advance.

I have recently written a survey article on the Austrian school for David Henderson's Concise Encyclopedia of Economics where I try to stated the 10 propositions that define the Austrian approach.

What do you think sets the Austrian school apart in the discipline of economics and do they warrant viewing the Austrian school as a distinct tradition within economic research and education, with its own schools, journals, conferences, etc., or should contemporary students and faculty simply follow the lead of Rothbard in the 1950s and remain thoroughly engaged with the economics profession?

Comments

[zachary kurtz]

Austrians need to stay engaged with their contemporary economists, or risk being left behind altogether. From a theoretical POV, I understand why they wouldn't want to do this. But from a practical, policy view, Austrians need to come back into a position of political power for the good of the country. They can't do this from the sidelines.

[Mario Rizzo]

Upon listening to Joe's talk, I thought of one fairly simple reason that neither Mises nor Hayek were keen on being seen as advancing Austrian economics. The Austrians were on the "wrong" side of two world wars and the contributions of the "Austrian" economists were not peculiar to a particular country or culture -- after all they were not historicists! It would have been like calling your ideas "Kraut economics." Not good. This reason is not incompatibe. however, with the idea that subjectivism seemed to have become a part of all modern economics. However, in retrospect this does not seem to have been the case.

[Don Lloyd]

Peter,

"...I have recently written a survey article on the Austrian school for David Henderson's Concise Encyclopedia of Economics where I try to stated the 10 propositions that define the Austrian approach...."

Very nice.

Regards, Don

[Nick]

I kind of see where Zachary is coming from. Having said that, if you read Pete's 10 propositions, it is clear that Austrian economics isn't "out there" and crazy. It's the application of good economics. Am I being simplistic?

[Richard Ebeling]

As an amusing aside, in 1938, the French liberal, Louis Rougier, arranged a international conference in Paris about Walter Lippman's "The Good Society."

The conference brought together many of the leading (classical) liberal thinkers of the day. The proceedings volume has a page listing the participants. After each individual's name is the country from which he came.

For example, after Hayek's name it lists his country as Great Britain (since he was residing there, teaching at the LSE).

However, after the Ludwig von Mises's name and Wilhelm Roepke's name it merely says "the Austrian School."

Neither of them, clearly, wanted to be affliated with the Third Reich, and preferred not to be labelled as from Switzerland, where both were teaching in Geneva at the Graduate Institute of International Studies.

Their country was -- "the Austrian School."

Considering the direction the United States seems to be taking, I think I'd like to apply for a citizenship from the same "country" as Mises and Roepke!

Richard Ebeling

[liberty]

I am not sure that I can offer advice on whether the Austrian school should stay a separate thread from mainstream economics or not. But, I do think that Austrian-leaning economists should penetrate the mainstream and force other economics to face the insights and wins made by the Austrian school.

I was searching my email box for something this morning when I ran into a note that I wrote to myself last spring, and it occurred to me that it would make a good forum discussion. I would love to see a forum at Mason that invited economists from all schools to come together to address the following as a panel discussion or mini-conference. If it went well, it could become a regular event. Here is how it could be sold:

"The socialist calculation debate brought to light many fundamental economic issues, and problems of the classical and neo-classical modeling. While classical economists believed strongly in markets, their models could not explain exactly why socialism would not work. But, while the calculation problem provided a lot of insight and generated a lot of profound and interesting investigations, it did not resolve the issue. In fact, Lange's concept of market socialism for some time was considered a refutation of the arguments against socialism. A new set of economic theory rose from the ashes of that debate, focused on beneficial government interventions. Comparative political economists continued to ask which system worked best, and market failure theorists worked out how government could solve the problems of the market. But then the "other" system fell, and upon cracking open revealed a rotting interior. In fact, the critics appeared to be correct after all. All of the problems they pointed out turned out to be true.

Now what? How has this revelation begun to change the face of economic theory? Is some of the faith in the ability of government to solve market failure on the way out? Do we now consider government failure as often as market failure? Do we now focus on the institutions that make markets possible- what of the old institutions of socialism, can we learn from why they failed? Can we still learn from the calculation debate, by considering why the socialists were wrong and what was wrong with their models and by looking again at the arguments of the opponents of socialism? If the old models could not prove the problems of socialism, do we now have new models which can? Many of the core problems with the old models concerned their static nature and dependence upon equilibrium. Are we finally moving away from those kind of models, to a more dynamic approach? Should we look to the Austrians, the most adamant critics of socialism, for a better starting point and methodology? How has the science benefited so far, and what more can we learn?"

[matthew mueller]

I have a post on Joseph Salerno and his connection to the Austrian school here:

http://post-austrianeconomics.blogspot.com/

[Roger Koppl]

Austrian economics should be "a distinct tradition within economic research" that is "thoroughly engaged with the economics profession."

[matthew mueller]

Professor Koppl's argument is too easy. Here are the facts as I see them:

1) The mainstream has ignored the Austrian literature.

2) The Austrians have retreated to political quarters.

Fact (2) precludes any engagement with the economics profession because the Austrian program advocates market anarchism. This is only going to get worse before it gets better, as evidenced by the work of the most recent generation of the Austrian members.

And as to fact (1), it seems to elude Austrians that neglect can be viewed as sufficient grounds for refutation. To go back to Professor Salerno, one of his most common remarks has always been "Austrian economics was never refuted, it was simply forgotten." But because no theory can ever be conclusively refuted, this is the only practical way we can consider a theory to be at least tentatively refuted. And such theories must be refuted if science is going to advance.

My own view is that Austrians should aim to remain thoroughly distinct and separate from the mainstream profession, but that they should not seek their identity in the libertarian cause. As Lachmann demonstrated (going back to Menger), it is possible to appreciate the market process without becoming a libertarian hothead!

[Nick]

Matthew,

What precisely do you mean when you say that the Austrians have retreated to political quarters?

Nick

[Nick]

Also, when you consider that Hayek is the most cited (or very nearly) Nobel prize winner in the economics literature, it hardly seems that the mainstream has ignored Austrian ideas. Perhaps it is in the interpretation.

[matthew mueller]

Nick,

The political quarters comment is hardly controversial. Look at the newest members of the Austrian school --- Leeson, Stringham, D'Amico, etc. --- these people are anarco-capitalists. They take laissez faire to an extreme and make it political. Even the leaders of the Austrian school have conducted research in this area (Mercatus Center, for example). The basic analysis is as follows: Governments mess things up; therefore, let markets alone so that they can work! And if markets work, why not let them control everything?

And the influence of Hayek. I know that Pete Boettke repeats this line a lot. Look, Hayek was a social theorist. Nearly all the rest of the economics Nobel Prize winners are strictly formal economic theorists. It is no surprise to find that Hayek is the most widely cited among the Nobel Prize winners in economics. Ask yourself this: Is Hayek cited for the work for which he was awarded the Nobel Prize, namely Austrian business cycle theory and monetary analysis? Or is he instead cited in his analysis of spontaneous orders, law and legislation, pyschology, scientism, etc. etc.?

This line of argument is not very convincing. Hayek is not cited as an economist ONLY, but as a social theorist. Now when it comes to pure economic theory, I doubt Austrians would continue to insist that he has been the most influential among the Nobel Prize winners.

[Rafe Champion]

Prodding the local Keynesians.
http://clubtroppo.com.au/2008/11/25/austrian-economics-in-ten-points/

[Vedran]

I partially agree with Matthew Mueller. Hayek is the non-economist's economist, a large reason for his popularity.

Also, I agree that we don't need to all be libertarians. Great I think markets work....so why should that be joined with accepting socially liberal values, civil liberties, or specific foreign policy prescriptions?

[Nick]

Matthew,

I didn't suggest that you were being controversial. I still don't understand your political quarters comment - I predict that if you asked 99% of economists what one of their key motivations was it would be to improve policy. So in that sense you are right - but the same is true for every school of thought.

You appear to ignore the importance that Austrian economists (including those in the modern school) attach to institutions. So what you think is the basic argument is just that - basic. Not controversial, just basic.

I do partially agree with you - hayek may have been more than a straightforward, easy to classify economist, but the fact that he is cited so widely is peer reviewed (economics) journals means something? Doesn't it?

Nick

[Robert]

In the cited encyclopedia article, Peter Boettke writes, "If the price system is distorted, investors will make mistakes in aligning their capital goods." As I understand it, Austrian school economists also believe that if the price system is not distorted, investors will make mistakes in aligning their capital goods. ABCT is either vacuous or incorrect. (Clicking on my name demonstrates the latter claim.)

Since prices are not scarcity indices - see Hahn's article on the neo-Ricardians, for example, - Hayek's tin example (cited in Boettke's proposition 5) is incorrect.

[matthew mueller]

I agree with everything Robert wrote above!

One way of looking at this is to do the following: (1) Shackle showed us that economics moved beyond scarcity in the early 1930's and into the area of uncertainty and expectations. (2) Therefore, prices cannot reflect relative scarcity because psychological expectations almost always swamp any impact caused by material conditions. In other words, the "physical" effects of production cannot possibly keep up with the purely "mental" impact of economic expectations on investment activity.

[Danny Shahar]

Take the following with a "He's not an economist at all, and almost certainly has no idea what he's talking about! Get your head back in the clouds, cretin!"-sized grain of salt:

It appears to me that the Austrian research program works to establish a social scientific paradigm by which we can understand how individuals come to make choices, and to use that paradigm to understand why certain influences might be expected to have certain effects through their impacts on individuals' decisions. By defining terms in order to refer to very specific types of circumstances (to preserve the capacity for Misesian "a priori" reasoning), Austrians are vulnerable to an inherent inability to rigorously model social phenomena (insofar as they are acting as Austrian economists). But where Austrian methodology gives ground in its ability to model mathematically, it gains ground in its capacity to provide tools for understanding why social phenomena "make sense," or "might have been expected." That's why Austrian economics is often seen as being the only school that makes intuitive sense, and can be understood by lay people.

Where the Austrian program is a social scientific one, it appears to me that other prevalent schools of economic thought are more geared towards providing tools for policy making and forecasting. Through an Austrian lens, one might look at these schools as running a fool's errand; as statistical regularities are upset by fundamental changes in the nature of the phenomena with which they are concerned, economists' models will inevitably collapse with them. But as fragile as these models are, there remains a demand for them. And I think that Austrians are somewhat ill suited for creating them (though perhaps to their credit).

To the extent that mathematical modeling and economic forecasting are helpful and useful, I think it makes sense to embrace the separate approaches to economics embodied in the current state of the profession. Austrian insights can help to inform the efforts of the more mathematically-minded economists, and remain valuable on their own. Of course, if the social scientific approach to economics is the only one that's worthwhile, then we would have reason to "advocate" Austrianism. But if there's a constructive role for both approaches, it makes sense to accept and preserve the distinction.

[Nick]

Robert/Matthew,

Of course investors will make mistakes - they don't have absolute knowledge and foresight (i.e. Kirzner, Hayek etc). Through their mistakes opportunities can be spotted by other entrepreneurs. Thei mistakes also act in providing discipline for the market. Isn't that all a key part of Austrian economics? Also, prices are a function of value.

Nick

[Sukrit]

Nobody is born a libertarian. The natural tendency is to be statist but then to progress towards free-market economics along a scale of "extremism". For example, I first discovered the power of markets through Milton Friedman. Then, I discovered David Friedman. Then, I discovered Murray Rothbard. Then, I discovered Bob Murphy's argument for anarchy.

Recognising this natural tendency for people to progress from "moderate" to "extreme" ideas, I think Austrians should aim to publish research at ALL points along this spectrum. But primarily, Austrian economics (and the associated Jeffersonian philosophy) should be uncompromising. Let the Chicago School be the moderates. But Austrian economists should strive to be the 'end-point' of the intellectual progression. Austrian economics should be the most radical defence of free-markets known to mankind. They should constantly critique the mainstream in an uncompromising and rigorous fashion. As long as they are honest and admit their mistakes, this is the approach that yields the most long-term benefits.

Yes, in the short to medium-term, such a radical approach will not work very well. But look at how Mises' ideas have influenced a movement that is now the "gold standard" of free-market economics. Unless you desire prestige and money in your lifetime, there is no point in conceding even one-inch in your beliefs (e.g. "some welfare state is justified" instead of "abolish the welfare state"). Rothbard, for example, was practically a pauper compared to Friedman; he taught at a third-rate university. But I predict he will have more long-term influence as the intellectual climate shifts.

[Richard Ebeling]

If I may go back to Peter's original observation that Mises, Hayek, and Rothbard did not speak of a distinct Austrian School in the period of 1920s to the 1950s other than a contribution by a group of thinkers during a stage in the development of the history of economic ideas.

My reading has made it fairly clear to me that the reason for this was that "Austrians" in the first half of the 20th century did not fully appreciate how they were different from many of their fellow economists.

Even Menger, who was "severe" on Bohm-Bawerk in supposedly getting the "Mengerian" themes somewhat wrong, did not see that his ideas were not the same as the "mainstrean" at the beginning of the 20th century.

In 1903, Menger said to a visiting American scholar: “It is entirely indifferent to me whether the name Austrian School be preserved. The important thing is that every economist worthy of the name has now virtually adopted every essential thing that I stood for.”

To repeat Menger's words: "every economist worthy of the name" had "virtually adopted every essential thing" that Menger stood for by 1903?!

And Mises said in 1969:

"About the time of Menger's demise (1921), one no longer distinguished between an Austrian School and other economics. The appellation ‘Austrian School’ became the name given to an important chapter of the history of economic thought; it was no longer the name of a specific sect with doctrines different from those held by other economists.”

If Menger and Mises meant in the most generalized sense, "marginal utility," "opportunity cost," "subjective value," "methodological individualism," -- then, yes, the profession had adopted these ideas.

But were they entirely what Menger, or Bohm-Bawerk, or even Wieser fully meant by the ideas captured in these words in, say, 1903?

When I've tried to carefully read the history of economic ideas during that time (with admittedly the perspective of "now," not 1903) Menger, Bohm-Bawerk and Wieser are not saying the SAME things as Walras, Pareto, Edgeworth, J.B. Clark, Irving Fisher. . .

They all use the same terms and are applying versions of the same concepts, but. . . they are not the same concepts in terms of what is implied and included in the writings of the "Austrians."

Perhaps only from a later perspective of seeing how the ideas developed over the decades can we appreciate more clearly what they did not at that time.

Surely, it is less controversial to say that "Austrians" like Mises and Hayek only fully came to see and understand elements of their own ideas in the process of facing various theoretical and policy debates in the 1920s, 1930s, and 1940s.

What they "took for granted" turned out not to be the way other economists saw things, including the policy implications.

I recall coming across one of Mises's letters to Hayek written in 1939 or 1940 (if I remember correctly)that is among Hayek's correspondence at the Hoover Institution, in which Mises bemoaned the fact that there were only a handful of "Austrian" economists left.

(In either the same letter or a different one from the same period, he also dispaired that there were only about six "real" liberals left in the world! O.k. Mises was one of them, and I presume Hayek was another since the letter was addressed to Hayek; but who were the other four "real" liberals in the ENTIRE world at that time by Mises's standard? A mystery that will always be with us!)

It was only during the Neo-Classical zenieth in the years following the Second World War, and the near-monopoly position of Keynesian Economics in that same period after 1945, that those who were the "remnent" of the "Austrian School" were fully awakened to the fact that they were not part of the economics profession as it then was taught in virtually every university and published in every economics journal.

In the 1960s, Ludwig Lachmann thought that he would be the "last" Austrian Economist. Certainly in the 1940s and 1950s, when Lachmann already was writing his distinct articles on capital structure, subjectivism, and market process, he did not think that what he was saying was the same as the mainstream of the profession.

It is said that no two languages can ever be perfectly translated one into the other. There is always something "lost in translation."

This applies, in my view, to how the Austrians and the "mainstream" of the profession conceptulize, theorize, and present their ideas.

Trying to "reduce" the Austrian view of things to a Neo-Classical or "mainsteam" formulation of things will leave out many elements and ingredients that have traditionally been viewed by Austrians as essential to proper and successful social and market analysis.

And trying to put the Neo-Classical approach into the Austrian framework will change a good part of the character and "feel" of how many if not most mainstream economists think economics should be formalized and applied.

At one level, "never the twain shall meet."

That does not mean an attempt should not be made. And in this I whole heartedly agree with Peter and others that Austrians should do what they can to get mainstrean economists to see what they, the Austrians, are talking about.

And that includes when and if it seems possible to express "Austrian" ideas in the language that the mainstreamer's can understand and hopefully appreciate.

But just because German writers, say, want Frenchman to know their ideas, and therefore have their works translated into French, does not mean that in the desire for Frenchmen to appreicate what those Germans are trying to say the Germans should therefore discard German altogether and just write directly in French.

To do so may mean the loss of certain ideas or their expression, or nuances, or "feeling" that cannot be completely expressed in the same way in the other language.

Thus, in the quest to make Austrian economics more accessble and appreciated by the mainstream of the profession, we should not at the same time completely lose the uniqueness of much of the Austrian approach in the process.

It may be too precious to be "lost in translation."

Richard Ebeling

[Roger Koppl]

To pick up on your language analogy, Richard, we want Austrian economics to be a living language such as Italian, not a dead language such as Latin. It's true that Latin gives us possibilities that Italian does not. Italian, however, is pretty much modern Latin; it is flexible and well adapted to modern life. Latin is not. The Ricardian Law of Association tells us what is needed to keep a language alive: trade. Thus, we need to keep up trade with other traditions if we are to have a living tradition ourselves.

[Richard Ebeling]

Roger:

I was not suggesting that the Austrian "language" should be a dead language like your example of Latin vs. modern Italian.

Indeed, I think that the Austrian "language" is a live and well. It is not frozen in time.

And, yes, I agree that every "language" gains through interacting with other languages. French is a better language, I'm sure, for having adopted so many English words and phrases!

(Now if the French would only start actually pronouncing more of the letters in their words, communication with them would even be more advanced!)

And it is true, sometimes languages die out. Some have natural deaths -- the people who spoke it have passed out of existance.

Sometimes an imperialist conquorer suppresses the language and kills it by prohibiting its use. For example, there are ethnic Tibetians in the province of Qanghai (that borders on Tibet) who cannot speak or read Tibetian because the Chinese government has forbidden its use and made children only learn Chinese in school.

Sometimes a linguistic minority will choose to learn and primarily converse in the language of the majority linguistic group. Why? Because that is the language of commerce or political and social advancement. The minority's language does not die not, perhaps, but it becames secondary as a means of conveying ideas in various settings.

Or there is migration, which results in the "new comers" learning the nlanguage of their adopted country, because few or no one there does business and interacts in the language of the person's "old country."

Or sometimes two or more languages coexist and are known and used by many of the social members or citizens. Switerland would be a case today; the old Austro-Hungarian Empire was partly another (though in the latter there was an asymmatry, in that Czechs and Slovenes may have been fully conversant in German, but only some Germans understood fluently those languages, and is more an example of the lingustic minority learning a more dominent language of social intercourse).

Every "Austrian" economist finds it necessary to be fully (or at least fairly) conversent in the Neo-Classical "language" due to the fact that no Austrian can get through virtually any graduate economics program without demonstrating this ability.

That same Neo-Classical community has attempted to suppress the use of the type of language that the Austrians have almost always expressed their ideas in -- common language.

This has come partly from the contempt against natural language as a means to convey "scientific" ideas.

Schumpeter seemed to delight in the idea that economics would no longer be accessable to the interested and informed citizen through a natural language.

In a lecture that he delivered in Japan in 1931, Schumpeter said, in explaining the mathematical formalization of economic theory: "The severance from every day forms of thought is perfect, and the general reader is made to realize that the thing is beyond his reach."

(Frank Knight, on the other hand, in his contribution on marginal utility to the "Encyclopedia of the Social Sciences" around the same time praised Menger's exposition over that of Jevons and Walras: "In fact, the entire theory is much more convincing in the loose, common-sense formulation of Menger than it is in the more refined mathematical version of Jevons and Walras.")

The scientistic prejudice has made it "unseemly" to develop and express economic theorizing in any form other than in the mathematized version. This is similar to the dominent lingustic group that refuses to admit that a language spoken by the linguistic minority is even a dialect -- it is something more "primative," unworthy of "real" discourse. "Austrian" language is the embarressing "country bumpken" language.

As a result, speakers of the Neo-Classical "language" feel no need to waste their time learning this out-of-date 19th century Austrian language. After all, they already have "marginal utility" and "opportunity cost" and "time preference" in their language -- and, of course, expressed "correctly," in proper formalized and quantitative terms.

The reply to all that I've said might be, "See, you've proven my point. The Neo-Classical language is the dominent language, so just get over it and speak Neo-Classical."

No problem, then translate Austrian into Neo-Classical as best as we can when talking in the wider profession.

And,yes, there are advantages in absorbing what one learns when thinking and speaking in Neo-Classical back into one's original "Austrian."

But there are also advantages to not losing the ability to think, read and write in "Austrian." Because that original language -- while growing, evolving, and adapting various things from the dominent approach, still represents, at least in my view, insights and ways of looking at things that the more dominent languages just miss or at least miss many valuable subtlties of understanding.

Richard Ebeling

[Rafael Guthmann]

One question:
There exists some serious attempt to translate to mathematical/formal language the austrian theory of the market process?

I have read Franklin Fischer's book Disequilibrium foundations for equilibrium economics, it comes close to this idea (market process). But there exists something similar but austrian?

[Peter Boettke]

Rafael,

I agree with Richard's point about Lost in Translation, however to answer your question I would point to Andy Yates's paper in JET and also earlier papers by Stephen Littlechild that attempt to capture Austrian insights on the market process in modern game theoretic form.

You can see the evolution of this work in the volumes edited by Prychitko and I entitled Theories of the Market Process (2 volumes).

Pete