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Primer: The Rise of the Austrian School of Economics July 2, 2009

Posted by Will Thomas in EWP Primer, History of the Human Sciences.
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Ludwig von Mises (1881-1973)

Ludwig von Mises (1881-1973)

The “Austrian School” in economics traces its tradition to the work of Carl Menger (1840-1921).  Menger’s theoretical development of the origins of price has grouped him with the contemporary “Lausanne School” (identified with the axiomatic mathematical economics of Leon Walras) and the work of British economist William Stanley Jevons, all as part of the “marginalist revolution” in economics, which grounded the mechanism of price-setting in the value attributed to various quantities of goods by their buyers and sellers—a keystone of neoclassical economic theory and a critical element in the argument against the control of the economy by the state.

Menger developed his theories in opposition to the “German Historical School” headed by Gustav Schmoller (1838-1917), which gave Menger and his followers the label “Austrian”, intending the label as derogatory.  Schmoller insisted that theoretical economics disregarded essential differences in national traditions, and that only detailed historical investigations could arrive at a firm understanding of political and economic activity. The opening of the conflict between Menger and Schmoller occurred following the publication of Menger’s Principles of Economics (1871), a mere four years after Menger had received his law degree.  An anonymous review signed “G. Sch.” in a literary journal criticized the text’s scientific pretensions.  When Schmoller dismissed Menger’s Investigations into the Method of the Social Sciences with Special Reference to Economics (1883) in the Historical School’s house journal, it provoked what became known as the Methodenstreit (“battle over methods”).

To summarize with brutal brevity, the Methodenstreit revolved around whether or not the abstract principles of economic theory could be said to have any sort of epistemological validity.  While not denying the possibility of theory, Schmoller argued that any meaningful social and political theory was necessarily a project for the distant future (which could only be accomplished through detailed historical study), and that theoretical economics was nothing but an apologetic for advancing the dogma of the self-interested economic actor.  In what would remain a stock argument of economic theorists, Menger observed the inevitability of theoretical presupposition in political and historical explanation and defended his practice of abstracting the regularities of a side of human life that was of special importance in establishing and analyzing economic policy.

In any event, Schmoller was an influential figure within the German state university system, and the conservative statist policies his school endorsed were amenable to the policies of the unified German state under the chancellorship of Bismarck.  The School would only decline in importance with the failure of economists trained in the Historical School to offer useful policy recommendations during World War I (prompting the state to turn to the industrialist Walther Rathenau).  This failure followed the influential methodological critique that Max Weber (1864-1920), a disillusioned product of the Historical School, initiated in his landmark 1904 essay “‘Objectivity’ in Social Science and Social Policy”, which (among other things) criticized any approach that denigrated theory but still claimed relevance for policy.

Meanwhile, the economics of the Austrian school was carried into the twentieth century by Menger’s students Friedrich von Wieser (1851-1926) and his brother-in-law, Eugen Böhm-Bawerk (1851-1914), through whom Austrian economics would enter the English-speaking world.  Following World War I, Ludwig von Mises (1881-1973), who had studied at the University of Vienna and was a friend of Weber, became the principal proponent of Austrian economics.  Mises was confronted with a socialist government (“Red Vienna”) and the new “logical positivist” epistemology of the Vienna Circle, and set himself up as an eager opponent of both.

Mises, like his forebears, had deep methodological concerns, which he exercised in his criticisms of logical positivism’s philosophical attempt to provide knowledge (and thus governance) with certain foundations.    He spelled out his own notions in the 1933 work Epistemological Problems of Economics, which again offered a justification for abstract economic theory based on a priori principles, and the idea that “All human action is rational”, i.e. goal-seeking.  He also carried the anti-socialist side against Vienna Circle mainstay Otto Neurath and allies in the “socialist calculation debate” of this era, arguing that a state with ownership of all property had no viable mechanism to replace money and the market as a means for allocating goods efficiently.  The debate would become a major cultural reference point in later political battles within economics.

In the 1930s, the Austrian school was uprooted.  Mises accepted a position in Geneva before moving on to the United States in 1940.  Another key standard-bearer of the Austrian School, Friedrich Hayek (1899-1992), who was a student of Wieser and a member of Mises’ circle in the 1920s, moved to the London School of Economics in 1931, where he would become a critic of the influential John Maynard Keynes, and where he would remain until 1950.

The early history of the Austrian School played out in the perpetual shadow of other economic programs, whether Schmoller’s Historical School, British Keynesian economics, or the more axiomatic formulations of neoclassical theory.  Nevertheless, the School’s work has had enduring influence in economic discourse.  Its opposition to socialist planning and New Deal and countercyclical fiscal policies, and Friedrich Hayek’s popular anti-socialism tract Road to Serfdom (1944) and his central role with Milton Friedman in the Mont Pèlerin Society have served to link the School to more recent conservative political and economic thought (though School members such as Hayek were more amenable to certain kinds of targeted state intervention).  Further, the School’s advocacy of transcendental theory and its role in battles against the German Historical School, as well as (with Karl Popper) its later protest against the “scientism” of the logical positivists, place its participants in a decidedly complex position within 20th-century debates concerning the relationship between epistemology, science, economics, political freedom, and public policy.

This post is undertaken safe in the knowledge that there is an enormous literature—as well as landmine-filled debate—surrounding the validity of various programs in economics and their influential political legacies.  Thus the historiography is, to this day, firmly encased in the hermeneutics accompanying disciplinary jockeying.  Rather than attempt to sort out this literature (to which I am a neophyte), I’ll simply note that I have generally relied here on historian of economic thought Bruce Caldwell’s very useful, and I think measured, introduction to the subject in the first part of his generally laudatory intellectual biography, Hayek’s Challenge (2002).

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