DREI METHODENSTREITE AND INTRAMURAL STRIFE
A University Thesis Presented to the Faculty
of
California State University, Hayward
In Partial Fulfillment
ofthe Requirements for the Degree
Master ofArts in Economics
By
Christopher R. Inama
February, 1996 Copyright © 1996 by Christopher R. Inama
ii DREI METHODENSTREITE AND INTRAMURAL STRIFE
By
Christopher R. Inama
Approved: Dated:
iii TABLE OF CONTENTS l. INTRODUCTION
II. 7lfF METHODENSTREIT 2 A. ORIGINS OF THE GERMAN HISTORICAL SCHOOL OF ECONOMICS 2 1. Some Forerunners ofthe German Historical School ofEconomics .,. 5 2. An Initial Criticism ofHistoricism , 10 B. THE GERMAN HISTORICAL SCHOOL OF ECONOMICS , 12 C. MENGER'S CHALLENGE 20 D. THE OUTCOME 27
III. FIFTY YEARS LATER 30 A. HAYEK'S THEORY 33 B. KEYNES'S THEORY 40 C. THE DISPUTE 43 D. THE OUTCOME 45
IV. AN ONGOING DEBATE 51 A. POSITIVISTS, COLLECTIVISTS, AND OTHERS OF THEIR ILK 52 B. AUSTRIAN RESPONSES TO THAT ILK 68 I. ADDITIONAL PHILOSOPHICAL INFLUENCES ON AUSTRIAN THOUGHT 68 2. SOME VARIATIONS WITHIN THE AUSTRIAN SCHOOL 80 C. SOME METHODOLOGICAL ISSUES 82 I. Internal Contradictions ofLogical Positivism 82 2. Is Empirical Knowledge Inconsistent with the Austrian Theory? 84 D. HAYEK'S CRITICISMS OF DIFFERENT FORMS OF POSITIVISM 85
IV. AN INTRAMURAL FRAY 90 A. SOME DIFFERENCES BETWEEN MISES AND HAYEK 90 B. A MISESIAN BRANCH OF THE FAMILY TREE 95 C. ANOTHER STUDENT OF MISES CLAIMS THE MIDDLE-GROUND 106 D. RADICAL SUBJECTIVISTS DESCENDED THROUGH HAYEK .... 108
V. CONCLUSION 111
BIBLIOGRAPHY ...... 113
APPENDIX 123
iv OREI METHODENSTREITE AND INTRAMURAL STRIFE
I. INTRODUCTION
Why have Austrian Economists become embroiled in so many acrimonious disputes over methodology? Are Austrian Economists particularly contentious or, even, obnoxious,
or do they have a peculiar Austrian way oftheorizing that is inconsistent with or unacceptable to practically all other schools ofthought?
The first two sections ofthis paper will describe two historical Methodenstreite that
have been more-or-less concluded, introducing the combatants and their theories and
describing the debates and their outcomes. The third section will attempt to describe an
ongoing, but fundamental, debate over methodology that has gone on at least throughout
modern history and still has not been concluded. In the final section, the paper will discuss an intramural Methodenstreit being prosecuted by one branch of the Austrian School,
apparently against any other follower ofthe Austrian School, as it may be loosely defined.
5 II. THE METHODENSTREIT
A. ORIGINS OF THE GERMAN HISTORICAL SCHOOL OF ECONOMICS
The Older Gelman Historical School (ofEconomics) was part ofa German reaction against the Enlightenment. In the nineteenth century, Great Britain and France had been unified for some centuries, but Germany was only then becoming consolidated. During that difficult time oftransition to unification, many Germans looked to their cultural past, believing that "Reason" offered no universally valid rules on which they could found social institutions.
Historicism became the specifically German reaction to the Enlightenment, hostile to both the "natural law" and "utilitarian" traditions. Further, there was a time-lag in economic development in Germany, so disputes arose there that were already long-settled elsewhere.
But, "in the end, historicism could degenerate into an idolatry of naked power. There was not only an absence of general principles but a disdain for them, a cynical contempt for anyone who would appeal to the rules ofhumanity. "I
Gemlan historicism reached its peak in the deterministic philosophy ofG.W.F. Hegel
(1770-1831), who suggested that the study ofhistory was the necessary and proper approach to the study of society. Hegel's non-traditional (even anti-Christian) moral positivism suggested that "everything that is real is reasonable, and everything that is reasonable is real,"
I Henry William Spiegel, The Growth ofEconomic Thought, rev. ed. (Durham: Duke University Press, 1983), 411-413; Eric RoB, A History of Economic Thought, 5th ed. (London: Faber and Faber, 1992), 190; Joseph A. Schumpeter, History ofEconomic Analysis (New York: Oxford University Press, 1954),422-423.
6 7 and equated "might with right" and "power with morality. ,,2 Indeed, Hegel posited that the individual does not lose his freedom in the collective whole but, instead, is lifted to a higher sphere in which his real will is realized. As the State is the embodiment ofabsolute power, its policies should not be judged on the basis ofa "subjective" morality.3
While Gem1an historical economists would have no use for the theories developed by
Adam Smith and his classical followers, they were receptive to some ofthe ideas ofEdmund
Burke (1729-1797), an English liberal who was, nevertheless, a fervent anti-revolutionary and a traditionalist, who had made a strong impression on the German Romantics. Like some of the forerunners ofthe Older German Historical School, Burke believed in a "corporate" State, whose members did not exercise political rights as individuals, but as members ofa guild-like social or economic group 4 For Burke, true liberty is not individual, because individual liberty can become arbitrary power (as in the case ofa monarch). Since man is, by nature, a political animal, his liberty must be a "social freedom", preventing any individual from exercising
2 Spiegel, 414-415; 1.0 Urmson and Jonathan Ree, eds., The Concise Encyclopedia of Western Philosophy & Philosophers, new & rev. ed. (London: Unwin Hyman, 1989), "Hegel", by Walter Kaufmann, 125-128.
3 Paul Johnson, Enemies ofSociety (New York: Atheneum, 1977), 77-78.
I Spiegel, 415; Leo Strauss and Joseph Cropsey, eds, History ofPolitical Philosophy, 3rd ed. (Chicago: Univ. ofChicago Press, 1987), "Edmund Burke", by Harvey Mansfield, Jr., 688-689, 700; Carl Menger, Investigations Into the Methods of the Social Sciences With .s'peciaL~(;;ference to Economics ["Investigations"], ed. Louis Schneider, trans. Francis 1. Nock (New York: New York University Press, 1985), 173-177. 8 arbitrary power. 5.6
5 Peter J Stanlis, Edmund Burke and the Natural Law (Shreveport, La.: Huntington House, 1986), 67-68.
6 Ironically, F.A v. Hayek wrote approvingly of Burke's "true liberalism", distinguishing it from Continental liberalism and the form ofliberalism practiced in England in the twentieth century (and, presumably, the form ofleft-wing political activity practiced in the twentieth century United States under the co-opted name, "liberalism"). The Constitution of Liberty (Chicago: Univ. of Chicago Press, 1960),407-408; Roll, 193. 9
I. Some Forerunners ofthe German Historical School ofEconomics
Among the German economic thinkers leading up to the Older Historical School are:
a.) Friedrich Gentz (1764-1832), a German devotee of Burke, did not accept
economic liberalism, as it developed in Great Britain, in its entirety, and later rejected
liberalism's political and economic precepts. Ironically, contact with the Austrian state
machine7 gave Gentz the idea that public finance could be used to mold the activity ofan
economy. He became a strong proponent of placing the power to issue inconvertible
paper money with the State. Later, he expressed an idealized view offeudalism 8
b.) Johann Gottlieb Fichte (1762-1814) was a nationalistic philosopher and
considered the Gennan people to be "in deep existential crisis". He considered the loosely
organized, even moribund, Holy Roman Empire to be a victim of the vital and unified
French nation under Napoleon.
Fichte "interpreted the role ofphilosophy as explicitly political; his words were not
to be construed as mere detached, scholarly observations, but rather interjections into the
course ofworld history. He even compared his lectures to a new gospel for a new age. ,,9
For Fichte, the State was a corporate one, with a controlled economy. He
7 Emperor Francis Joseph II did not start liberalizing his regime until the 1850's, culminating in a most liberal constitution in 1867. (C.A. Macartney, The House of Austria (Edinburgh: R. & R. Clark, Ltd., 1978), 125, et seq).
x Roll, 195-196.
<) Elliot Neaman, "Mutiny on Board Modernity: Heidegger, Sorel, and Other Fascist Intellectuals", Critical Review, vol. 9, no. 3 (Summer 1995): 388. 10 rejected laissez-faire because, under it, power was too unevenly divided. The State needed to act positively to give its members what they needed. Fichte would insure the efficacy ofdomestic controls and maintain the value offiat money by fixing just prices and regulating international economic relations. 10
Fichte also asserted that education was not for self-development, but "spiritual and practical labor for the good ofthe collectivity", which must include military and manual labor for preparation to serve the German State. II
c.). Adam Muller (1779-1829) was a critic ofcapitalism and liberalism, who felt free enterprise and competition would generate disorder, and, early, a critic of Fichte.
After first questioning the wisdom ofthe State, Muller later suggested that money was a creation of the State and that intellectual capital in the form of cultural values and scientific experience was part ofnational wealth. He also suggested that the State should be thought ofas an organism, whose individual members could not be thought ofoutside the totality ofthe State. He idealized the Middle Ages and expressed opposition to the abolition ofrural serfdoml2 Like Gentz, at the end ofhis career, Muller worked for the
Austrian government (again, before Austria's liberal regime)13
d.) Friedrich List (1789-1846) was a German nationalist (although a naturalized
10 Spiegel, 417; Roll, 197-198.
II Neaman, 388-389.
12 Spiegel, 416-47; Roll, 197-204.
u Roll,.196-197. 11
United States citizen) and proponent ofa form ofdirected industrial capitalism, who also
rejected laissez-laire and argued for external tariffs to protect Germany's infant industries,
1 and who described a historical "stage" theory ofeconomic development. -l List's "infant
industry" protection proposals were made without an understanding of the theory of
comparative costs underlying the classical doctrine offree trade, and he saw a strong role
for national power in an international "division oflabor" .15
For List, Adam Smith was guilty of "cosmopolitanism" and "individualism"I6
Instead, List invoked the views of Alexander Hamilton and considered his Report on
Manuutctures a textbook on economics. 17 He was exposed to Hamilton's views, in fact,
during a long stay in the United States, to which he fled from his native Germany. He
returned with those Hamiltonian views to Germany as the United States consul after an
exile of seven years. IS
Hamilton believed that a young country like the United States could not compete
1.+ Spiegel, 417; Roll, 204-208; Schumpeter, 504-505.
15 Mark Blaug, Great Economists Before Keynes (Cambridge: Cambridge Univ. Press, 1986), 129-130.
H; Robert Lekachman, The Varieties of Economics, Vol. 1 (Gloucester, Mass.: Meridian, 1962), 156.
17 Edward Meade Earle, "Adam Smith, Alexander Hamilton, Friedrich List: The Economic Foundations of Military Power", Makers of Modern Strategy, ed. Peter Paret (Princeton: Princeton University Press, 1986), 231.
18 Ibid., 243-244. 12 with a count!)' like Great Britain, with its long-established industrial manufacturing. 19 In addition to adopting Hamilton's ideas for State protection for infant industries, List also admired the political unification of the young United States, its nationalism, and its enthusiasm for railways and canals. 20
List was concerned with power, and he linked power with welfare. In this, like
Hamilton, he was reverting from Smithian capitalism to old-fashioned mercantilism. He saw productive power as a key to national security. Tariffs and other restrictions could be used to help develop a nation's powers and resources. 21
List drew his conclusions from four historical circumstances:
I. Ifa count!)' experienced rapid economic development, as in England, the nation was strong and unified.
2. The productive power of individuals did not depend on the individuals' ingenuity or ability, but were a consequence of social conditions and human institutions. Individuals, as products ofsociety, must subordinate their interests to the greater good.
3. Navigation and trade could flourish only if manufacturing prospered. Protective tariff restrictions for infant industries should be placed on foreign trade.
4 Internal national freedom was an essential condition to economic progress. Thus, internal restrictions on trade must be avoided. 22
19Ib"dI ., 2""-2""4-'-' -' "
20 Ibid., 245, 254-258"
21 Ibid., 246-248, 260.
22 Lekachman, 156- ]57. 13
2J A precursor ofthe German Historical School ofEconomics , List suggested five
principal historical stages ofsocietal development: the savage state; the pastoral state; the
agricultural state, the agricultural and manufacturing state; and the agricultural,
manufacturing, and commercial state. 24
When List died (by his own hand) in 1846, he had not witnessed much personal
success in the field ofpolitical economy. However, two years later, liberal revolutionary
movements swept Germany. They failed and lead to a regime ofconservative nationalism.
Under Bismarck, the German national state did impose inclusive tarifTs and protections
for the benefit of the nobles and industrialists. Unfortunately, List had also laid a
foundation for the worst aspects ofPan-Germanism and National Socialism that would
cause so much discord in the twentieth century.25
23 Ernesto Screpanti and Stefan Zamagni, An Outline of the History of Economic Thought, trans. David Field (Oxford: Clarendon Press, 1995), 171.
24 Friedrich List, "Infant Industries", National System of Political Economy (Philadelphia, 1856),72-82, in Lekachman, 157-166.
25 Earle, 258-260, 14
2. An Initial Criticism ofHistoricism
However useful may be "stage" theories of societal development like List's (or
Comte's, or Schmoller's, or Dewey's, each described infra) to help classifY historical occurrences and developments, they are misused when they treat events in such a manner as to make the evidence conform to a previously established theory. Before List, Frenchman
Claude Henri Saint-Simon (1760-1825), a collaborator ofComte, in addition to arguing for the extension of the methods of natural science into the study of social science, tried to demonstrate a historical theory ofeconomic development, which came to have great influence on the intellectual climate ofEurope26 Then, as in the case ofhistoricism, economic theory became merely a tautology. Anecdotal evidence, and even apparent historical trends, perceived from some series ofevents, cannot provide a logical foundation for historical or economic "laws". Max Weber (1864-1920) was a Gemmn social scientist working during and shortly after the high-water mark ofinfluence ofthe Younger Historical School. 27 He pointed out that it is impossible to deduce a historically necessary result where there are countless historical circumstances that cannot be reduced to any economic "law". Political processes,
26 Blaug, Great Economists Before Keynes, 209-210.
27 Weber was, by the way, friendly with Ludwig von Mises, the Austrian economist and mentor to F.A. v. Hayek. They developed a close personal and academic relationship in 1918, when Weber spent the summer at the University of Vienna. Weber later described Mises's l'l1eorie des Geldes lind der Umlaufsmittel as "the most acceptable work on the subject." (F.A. v. Hayek, "Ludwig von Mises (1881-1973)", The Fortunes of Liberalism: Essays on Austrian Economics and the Ideal of Freedom, ed. Peter G. Klein (Chicago: University ofChicago Press, 1992), 13 7, 144, 156. 15 for example, are not susceptible to economic explanation. 28 As discussed more fully, iI?fra, the historicist's error lies in believing that discovery oflaws ofdevelopment held "the only key to true historical understanding. ,,29
28 Dirk Kasler, Max Weber: an introduction to his life and work (Chicago: University ofChicago Press, 1988),81; Max Weber, The Protestant Ethic and the Spirit ofCapitalism, trans. Talcott Parsons (New York: Charles Scribner's Sons, 1958), 90-92.
29 F.A. v. Hayek, The Counter-Revolution of Science, (Indianapolis: Liberty Press, 1979),383. 16
B. THE GERMAN HISTORICAL SCHOOL OF ECONOMICS
Following Gentz, Fichte, Muller, and List, a school of German empirical historical economics formed around Wilhelm Roscher (1817-1894), Bruno Hildebrand (1812-1878),
Karl Knies (1821-1989), and K. T. Inama-Sternegg (1843 _1908)30 The original core ofthe
message ofthe historical economists stressed the historical methodological element which was to become the characteristic feature ofGerman economic thought 31
The Gernmn Historical School ofEconomics was an off-shoot of Savigny's Historical
School ofJurisprudence, although Savigny and his followers were outspoken opponents of
Hegel, while the historical economists deemed Hegel to be the most important philosopher
of history.32 The Historical School was descended from German Romanticism and would
remain the most influential school of economic thought, at least in the German-speaking
countries, for forty years (until successfully attacked in 1883 by Carl Menger, as described
.W My cousin, K. T. Inama-Sternegg, was friendly with Franz von Juraschek, the maternal grand-father of F.A. v. Hayek, led a seminar with students including Joseph Schumpeter, Ludwig von Mises, and members of the Austrian School's third generation, taught at the University ofInnsbruck with Eugen von Bbhm-Bawerk, and was a minister in the Austrian government. (Valerie Milller, Karl Theodor von Inama-Sternegg: Ein Leben fur Staat und Wissenschaft (Innsbruck: Universitatsverlag Wagner, 1976), 31, 33, 59). Perhaps cousin Inama-Sternegg was not in the very first rank of the Historical School, but he was "eminent" and expounded a "Manorial Theory", suggesting that "the organization of the manor was the primary factor in shaping markets, towns, and industrial life in the dawn of capitalism". (Schumpeter, 813; Henri Pirenne, Economic and Social History of Medieval Europe (San Diego: Harvest/HBJ, 1937)).
31 Spiegel, 420; C. Menger, Investigations, 178-180; Schumpeter, 807-808.
32 Max Alter, Carl Menger and the Origins ofAustrian Economics (Boulder, Colo.: Westview Press, 1990),41. 17 i/!fra).33
Roscher intended to use his historical method to establish "laws" of economic development, derived from the investigation ofnational histories, including historical legal, political, and cultural institutions, as well as specifically economic institutions, that formed a whole from its independent parts. Roscher's theory was relativistic, tying theory to place and time, with economic truths valid only for a specific set of national and historical
3 circumstances. -l He suggested that nations pass through economic stages ofyouth, manhood, and senile decay.
Hildebrand's theory was less systematic and more critical than Roscher's, condemning the views ofboth the classical economists and the socialists. He also hoped to establish laws ofeconomic development, but he did not state such clear methodological principles. Instead,
Hildebrand sought to explore historical reality through statistics. Unlike Roscher,
Hildebrand's stages represented linear progress, with a final stage depicted as a goal for the economy that could not yet be observed empirically. 35
Like Hildebrand, Knies believed in linear progress, and for this reason, he was less inclined to accept social science "laws" on the same level as the laws ofthe natural sciences.
Economics could only provide analogous examples or disclose regularities between sequences of development, not cause-and-etTect relationships typical ofthe natural sciences. He also
33 Roll, 276.
3~ Spiegel, 420-421; Blaug, Great Economists Before Keynes, 207-208.
.15 Spiegel, 421-423. 18 thought it wrong to ground absolute laws ofeconomics in the self-seeking pursuit ofprivate interest, as the classical economists had contended. Such a tendency would work against the national unity ofGermany and its tradition ofactive economic policy.36
It is said that these three economists were not successful in developing a historical method for the study of economics and left conventional economic theory standing, only to be "judged" from a historical point ofview. As a result, their economic theory suffered from a "paralysis", leaving it useless as a "guide to action". In Germany, "policies of interventionism and noninterventionism came to be decided on an inadequate ad hoc basis, there being no firm principles to adhere to in the face ofan all-pervasive relativism. ,,37
Some later commentators suggested that the Older School was not strictly "historical"
(although Menger did not make that distinction)38 However, the next generation ofGerman economists were certainly "historical", in the deterministic sense, being called the Younger
German Historical School. They were characterized by support for active and unprincipled intervention by the State, attempting to garner the support of the working class for the
German monarchy.39
The Younger School, under the leadership of Gustav von Schmoller (1838-1917), rejected economic theory altogether, replacing it with the study of economic history, from
J() Ibid., 423
37 Ibid., 424-425.
38 Roll, 277; Schumpeter, 507.
3<) Spiegel, 426. 19
which, they hoped, general conclusions ofobjective (if relative and incongruous) truth might
be drawn. The history that the Younger School would study consisted of microscopic
descriptions ofminute detail, especially relating to the history ofpublic administration40
Unlike Savigny's Historical School of Jurisprudence or Roscher and his earlier
historical economists, Schmoller and his followers were not interested in the study and
analysis of unique historical events, but in empirical study of historical development, from
which they hoped to arrive at "laws of development of social wholes" and "historical
necessities governing each stage ofthis development. "oll
In 1872, the leaders ofthe Historical School were among the founders ofthe Verein
.fifr Sozialpoli/ik to promote their prescriptions to prevent competition, which they claimed
did not guarantee the common welfare, to promote the welfare state and to subordinate
narrow interests ofclasses "to the lasting and higher destiny ofthe whole. "ol2 Close enough
to the European non-Marxist socialist program, the members ofthe 1'erein became known
as Ka/hedersozialis/en ("socialists ofthe professorial chair").ol3
Schmoller, himself, undertook historical research on an unprecedented scale, even
olD Ibid., 425-426.
oll F.A. v. Hayek, "Carl Menger (1840-1921)", The Fortunes ofLiberalism, Peter G. Klein, ed. (Chicago: University ofChicago Press, 1992), 78.
ol2 Jurgen Herbst, The German Historical School In American Scholarship: A Study in the Transfer of Culture (Ithaca, NY: Cornell University Press, 1965),145, citing Jahrhiicherfiir Na/ionakjkonomie und S'/a/is/ik, XXI (1873), 123.
ol] Hayek, "Carl Menger (1840-1921)",77; Herbst, 146. 20 taking part in editing documents relating to the history ofPrussian public administration. 44
For these historical economists, economics was the science ofnational economy. The national economy was an organism whose life transcended that ofindividuals, interest groups, and even single generations. For them, a social body had a history ofits own, and no a priori theory could account for it. 45
Schmoller and his followers criticized Adam Smith and others for superimposing personal value judgments on their research, but the Historical School seem also to have asserted their own value judgments with ardor. 46 For Schmoller, "genuine theory can only be the final outcome of an enormous amount of normative work on past as well as present events, inst itutions, and social structures. ,,47
Schmoller stopped short of"reducing the whole historical process to the action ofone or two processes," although the importance he and his followers placed on historical fact, their low level oftheoretical economics, and the supreme importance they attributed to the
State served to isolate the school to the German milieu 48 For example, decades after the issue seemed to be settled, Sclunoller, following List, tried to justify mercantilism as a system
44 Schumpeter, 810.
45 Herbst, 13 1.
4(, Schumpeter, 811.
47 Kurt R. Leube, "Social Policy: Hayek and Schmoller Compared" ("Hayek and Schmoller") International Journal ofSocial Economics, 16,9/10/11 (1989): 107.
48 Schumpeter, 811-812. 21 of state-building perfectly suitable for its time and circumstances49
Schmoller's work was lacking on the analytical level, and it failed to reach a new way of doing economic theory. In the end, "Schmoller's influence on the development of economic science in Germany was harmful, especially because it helped to isolate the German economists from the rest ofthe world for more than half a century. ,,50
Werner Sombart (1863-1941), another leading member ofthe Younger School started as a Marxist5l and ended as a Nazi. Eugen von Bbhm-Bawerk criticized Sombart and his
Marxism for inconsistency. 52 Later, Sombart asserted strange theories about capitalism and the Jews, even distorting Max Weber's connection between Protestantism and capitalism by suggesting theory that "Puritanism is Judaism". In the end, he attempted to analyze the social problems ofthe time from the point-of-view ofthe Nazis. 53
·19 Blaug, Great Economists Before Keynes, 213-214.
50 Screpanti, 172.
51 Interestinb'Y, the word, "capitalism", was unknown to Karl Marx and never used by him, but was first used in Sombart's 1902 book, Del' modeme Kapilalism. (F.A. v. Hayek, The Fatal Conceit, (Chicago: Univ. OfChicago Press, 1988), Ill).
52 Eugen von Bbhm-Bawerk, "Unresolved Contradictions in Marxian System", Shorter Classics (South Holland, III.: Libertarian Press, 1962), Chap. V, 288, el seq. Ludwig von Mises called Sombart's historical theory (about the blissful Middle Ages) "mere fantasy". (JheoryJtnd H~1illY (Auburn, Ala.: Ludwig von Mises Inst., 1985),238).
5.1 Blaug, Great Economists Before Keynes, 237-238; Publisher's Note, Sholier Classics ofEugen Bbhm-Bawerk, 301-302, citing Mises's, Planning for Freedom (Libertarian Press, 1952), 43, citing Sombart, Deutscher Sozialismus, (Charlottenburg, 1934), 213 (American edition: A New Social Philosophy, trans. K.F. Geiser (Princeton, 1937), 194); Sombart, "Jewish Influence", The Jews and Modem Capitalism, trans. M. Epstein (Free Press ofGlencoe, 1951) 3-10, 21, in Lekachman, vol. 2,293-298. 22
Even as late as the 1950's, at least one other prominent follower of the Younger
Historical School was still trying to justify the purely historical approach. Arthur Spiethotf, in his papers, "The Historical Character ofEconomic Theories" (1952) and "Pure Theory and the Economic Gestalt Theory" (1953), continued to argue in defense of the traditional standpoint ofGerman historical economists, expressed in new language. Sol
Somewhat sympathetic to the Germans, Joseph Schumpeter55 suggested that their work meant a tremendous advance in the knowledge about social processes. 56 However, the
Younger Gennan Historical School never offered its own precise definition of"social policy", as sharp conceptual definitions were not of much concern. 57 Another commentator, more critical than Schumpeter stated, "[T]he historical approach did not yield settled truths at all, and what the German economists lacked were established principles from which to derive
Sol Blaug, 239-240.
55 Although Schumpeter had been a leading member ofBohm-Bawerk's seminar, he also absorbed the teaching of Walras and Pareto, ofthe Lausanne School, and adopted the positivist approach to science expounded by physicist Ernest Mach, ofthe Vienna Circle, and he moved away from the characteristic tenets ofthe Austrian School. (F.A. v. Hayek, "Joseph Schumpeter (1883-1950)" and "The Austrian School of Economics", The Fortunes of Liberalism, 51, 160). He was also a member of Inama-Sternegg's seminar, whose affinity to the Older German Historical School is mentioned supra, p. 12,. Furihermore, after the Viennese bank of which he was president failed, he returned to academic life in Bonn, Germany. (Hayek, "The Economics ofthe 1920's as Seen From Vienna", The Fortunes of Liberalism, 34).
56 Schumpeter, 810.
57 Leube, "Hayek and Schmoller", 107. 23 guidance. ,,58
Indeed, Carl Menger's novel abstract theories were ignored in Germany, not because the German historicists thought he was wrong, but because they considered all theoretical analysis to be useless59 or irreIevant. 6o
58 Ironically, on his own deathbed, Schmoller would repent, deploring the decline of economic theory in Germany, that his followers were no longer familiar with theory. (Spiegel, 427).
59 F.A. v. Hayek, introduction to Principles of Economics, by Carl Menger ["Principles"], trans. James Dingwall and Bert F. Hoselitz (New York: New York University Press, 1981), 23.
60 Blaug, Great Economists Before Keynes, 214. 24
C. MENGER'S CHALLENGE61
Before Hegel, there was Immanuel Kant (1724-1804), whose philosophy arose out ofthe two most important philosophical theories of his time: (I) the rationalism ofLeibniz and Wolff, and (2) the empiricism ofHume. In Kant's fusion ofrationalism and empiricism, he agreed with the empiricists' claim that there cannot be innate ideas in the sense of any material fact known prior to any sense experience, but he would not go as far as their claim that all knowledge must be derived from experience.
For Kant, the apparatus ofhuman sensibility and understanding must, itself, have some form or structure which, in some manner, molds or contributes to our experience (e.g., synthetic a priori knowledge). The world is divided into two realms: the world ofphenomena
(world ofthings in their manifestation or appearance--the world ofsensibility and science) and the world of noumena (world of things as they are in themselves, or as they might be, if knowledge of them could be had without mediation of experience--the world of understanding and morality). Kant's twelve "categories" (including, for example, "causation") are independent of experience and are applied by humans to make judgments about and classifY experience.
What sets Kant apart from strict empiricists, like those ofthe two German Historical
Schools ofEconomics is his attitude that historicists' judgments about empirical events are
61 A detailed recital ofMenger's economic theories is beyond the scope ofthis paper, which is intended only to describe his methodological dispute with the Younger German Historical School of Economics. 25
,~Yf1thetic (i. e., they can be denied without contradiction, whether true or false). Their truth or validity can only be detennined a posteriori (e.g., abstracted from actual sense perceptions in time, not independent ofexperience).62 Therefore, such observed events can only form a basis for inductive logic, and not for deductively deriving a theory and empirically testing it ex post.
Kant's idealism treated the phenomena ofthe external world as creations ofthe human mind. As such, there was some affinity between Kant's philosophy and the theory propounded by Carl Menger in his Principles ofEconomics (which, for instance, suggested economic value is derived from the individual human's state ofmind)63
There seems little evidence that Aristotle had much direct influence on Menger's methodology. For example, Menger mentioned Aristotle seven times in his Investigations, but none of his comments involved Aristotle's metaphysics, and only two involved
(,2 Urmson & Ree, "Kant", by Stephen Korner, 156-164; Anthony Flew, A Dictionarv of PhilosoJiliy, rev. 2nd ed. (New York: St. Martin's Press, 1979), 189-193; Strauss & Cropsey, "Immanuel Kant", by Pierre Hassner, 582, 586-587; Jeffrie G. Murphy, Kant: the Philosopl1Y-Qf Right (London: Macmillan, 1970), 16-38.
(,3 However, some commentators suggest that Kant had little direct influence on Menger. One proposes that there is a peculiarly Austrian method of "doing philosophy" which is to be distinguished from the methods ofKant and other Germans. (Barry Smith, "On the Austrianness of Austrian Economics", Critical Review, vol. 4, nos. 1-2 (Winter/Spring 1990): 212, et seq; and Austrian Philosophy: The Legacy ofFranz Brentano (Chicago: Open Court, 1994),300). Another suggests that Kant influenced Menger's methodological heirs, Mises and Hayek, but "the whole question ofwhether the external world can be truly known reveals a Kantian influence that was alien to Menger." He also claims Kantian methods of other social scientists show "only superficial affinities with Menger's classification." (Raimondo Cubeddu, The Philosophy of the Austrian School, trans. Rachel M. Costa (London: Routledge, 1993), 8, 19).
CAL STATE UNIVERSITY, HAYWARD LIBRARY 26 epistemological questions64 Rather, the influence ofAristotle seems to have been indirect, by way of Leibniz, WoltT, and the cameralists6S , who received classical political economic theory under the influence ofKantian philosophy.66
In introducing his theory to the world in 1871, Menger, the founder ofthe Austrian
School, stated:
"Just as a penetrating investigation ofmental processes makes the cognition of external things appear to be merely our consciousness ofthe impressions made by external things upon our persons, and thus, in the final analysis, merely the cognition ofstates ofour own persons, so too, in the final analysis, is the importance that we attribute to things of the external world only an outflow ofthe importance to us of our continued development (life and well being). ,,67
Interestingly, some German economists in the early part of the nineteenth century
(before the formation of the Historical School) enthusiastically pursued the theory of subjective valuation. Thus, G. Hufeland, in 1807, was an admirer ofAdam Smith, but a critic ofSmith's explanation ofvalue and prices and looked for an explanation of social institutions as unintended consequences of intended actions. "Hufeland believed that only the link of
(,I Paul Silverman, "The Cameralistic Roots ofMenger's Achievement", Carl Menger and His Legacy in Economics: Annual Supplement to Volume 22, History of Political Economy, ed. Bruce 1. Caldwell (Durham: Duke Univ. Press, 1990), 73, 76; Cubeddu, 7-8.
6S Silverman, 77-78, 90.
66 Ibid., 86.
(,7 C. Menger, Principles, 116. 27 subjective value theory and methodological individualism68 provides the possibility of satisfactory explanations ofthe origin, development, and functioning of social institutions."
For Hufeland, nothing was a good in and of itself, and value was not determined by real relationships, but by the opinions formed by individuals ofthe relations. However, as German economics developed, Hufeland's link was lost, and Roscher (unwilling to accept individual goal-oriented optimizing behavior) specifically rejected methodological individualism. 69
Hayek pointed out that it appears Menger was not familiar with the overlooked work of another nineteenth century German economist, Heinrich Gossen, who had anticipated
Menger with a solution for the problem ofthe relation between value and utility.70
By Menger's time, the field in Germany was dominated by the historical economists, who had no use for abstract economic analysis and proposed to replace it by descriptive studies ofconcrete economic detail. Therefore, and with the political circumstances (liberal constitutional regime) and intellectual tradition (natural law, Enlightenment) then prevailing
68 The term, "methodolgical individualism" was not used by Menger, but was introduced by Joseph Schumpeter in 1908. (F.A. v. Hayek, "The Austrian School of Economics", 50).
69 Karl Milford, "In Pursuit ofRationality: a Note on Hayek's The Counter-Revolution (~f Science", Hayek, Co-ordination, and Evolution, eds. Jack Bimer and Rudy van Zipp (London: Routledge, 1994), 325-326; P. Silverman, 86; Erich E. Streissler, "German Predecessors ofthe Austrian School", the Elgar Companion to Austrian Economics, ed. Peter 1. Boettke (Hants, England: Edward Elgar, 1994),494,497.
70 F. A. v. Hayek, "The Place of Menger's Grund\iitse in the History of Economic Thought", New Studies in Philosophy, Politics, Economics, and the History of Ideas (London: Routledge and Kegan Paul, 1978), 273; "Bastiat, Dupuit, Gossen", The Trend ofEconomic Thinking, W.W. Bartley III and Stephen Kresge, eds. (Chicago: University ofChicago Press, 1991), 352-371; "The Austrian School ofEconomics", The Fortunes of Liberalism, 44. 28 in Vienna, it was no accident that an Austrian economist, rather than a German, developed these ideas into an integrated theory ofeconomics. 71 Surprisingly, Menger may have had no
Austrian economist for a personal role model, since there were practically no economists native to Austria in the early nineteenth century. 72
Although Menger dedicated his PILIlcjpl~s73 to Roscher, Roscher and his colleagues did not understand Menger's intention in his Principles of emphasizing the link between methodological individualism and the subjective valuation theory7~, and they responded badly.
Disappointed by the Germans' reactions, Menger published his Investigations. In his
1883 challenge to the Historical School, Menger pointed out the Historical School's logical problem ofinductive inference75 and showed that, because human phenomena are not strictly typical, and also as a result ofhuman free will, "empirical laws (?f absolute strictness are out of the question in the realm ofphenomena of human activity"76 In this challenge, Menger
71 Spiegel, 531-532.
72 Hayek, introduction to C. Menger, Principles, 15.
7J C. Menger, Principles, p. 43. When Menger's Principles appeared in 1871, "it was only 95 years since the Wealth ofNations, only 54 since Ricardo's Principles, and a mere 23 since the great restatement ofclassical economics by John Stuart Mill. (Hayek, "The Place ofMenger's Grundsatze", 270).
7~ Hayek, "Carl Menger", 79-80.
75 Milford, 327.
76 C. Menger, Investigations, Appendix V, 214-215. (emphasis in original) 29 emphasized the necessity ofa strictly individualistic method ofanalysis. 77 The response of the German Historical School was immediate and furious. Schmoller published an extremely hostile and nasty review of Menger's second book, and Menger countered with his own pamphlet (Hayek later wrote admiringly of the powerful and brilliant rhetoric ofMenger's reply to Schmoller). The two leaders' followers entered the fray with an extreme degree of passionate hostility7X
The intensity ofthe Germans' antagonism is somewhat surprising, since Menger did not propose to eliminate considerations ofhistory entirely from theoretical research, and he acknowledged complementary roles for both abstract theory and history7'J Furthermore, he expressed admiration for one ofthe leaders ofthe Older Historical School (Knies), and while he disagreed with another (Hildebrand), he did not speak too disparagingly ofhim. 80
However, Menger did question the concept of "national economy", proposing methodological individualism and the causal-genetic approach instead ofcollectivism, because such complex or compound social phenomena are the results ofall the innumerable individual economic efforts in a nation 81 Furthermore, he enunciated the idea that, while some social
77 Hayek, introduction to C. Menger, Principles, 23-24.
78 Ibid., 24; "Carl Menger", 80.
79 Lawrence H. White, introduction to C. Menger, Inyestigation..5., x.; C. Menger, Investigation~, Book 1, Chap. 4.
80 C. Menger, Investigations, 185-192.
81 Ibid, 93-94,195-196. 30 phenomena are the results ofa common will directed toward their establishment, others are the unintended result ofhuman efforts aimed at attaining individual goals. 82
Perhaps, too, Menger did not limit his criticism to the Historical School's flimsy epistemological foundations and methodological approach. His criticism were also directed against an ideological approach which refused "to recognize the relevance ofthe' marginalist revolution'" and attempted "to consider economics as a tool ofpolitics and ethics. ,,83
82 Ibid., 133.
83 Cubeddu, 2, 13 -14. 31
D. THE OUTCOME
Menger had suggested a mediating position that acknowledged both the theoretical and the historical, but the pending controversies between natural sciences and human sciences seemed to force adoption of "simple, dichotomized polarizations" Max Weber tried to mediate the dispute by detaching it "from its connection with problems ofpolitical economy alone" and placing it in the context of"philosophical background. ,,8ol
However, the fundamental mistake made by the Younger German Historical School was to consider society as an "empirical and naturalistic whole", which led them to employ an "inductive-comparative method" to find "laws governing society and history" and "could not lead to theoretically acceptable results." In Menger's challenge, he regarded social bodies as products of individual choices, which required analysis of concrete, complicated phenomena, interpreting human history as an evolution, not like a natural science. 85
In the immediate aftermath, Schmoller declared that no member of the "abstract" school was fit to teach in a German university. As a result, for decades after the dispute,
Germany was less affected by Menger's triumphant ideas than any other important country.
However, in spite of Schmoller's attacks, the reputation of the new Austrian School was established internationally. It is even suggested that the notoriety ofthe dispute attracted
80l Kasler, 187. However, while Weber was influenced by Menger, Weber seems to have misunderstood Menger, or was "separated" from Menger, "shifting'subjectivity' (as relativity) from vallies to theOlY (i.e., the typical idea schemas through which the reality of phenomena can be known). (Cubeddu, 19).
85 Cubeddu, 3-4, 24-25. 32 foreign students to Menger. 86
In the United States, important aspects ofGerman historical economics, including the concept ofsocial organism, rejection ofspeculative theories, reliance on empirical data, and use ofthe comparative method, marked the work ofa group of so-called "new" economists. 87
Max Weber "gave the deathblow to the methods applied by the schools of Schmoller
and [Lujo] Brentano by demonstrating the unscientific character ofjudgments of value. ,,88
Menger's prescription for methodological individualism "marked the beginning ofa
period in which economic theory was largely identified with microeconomics." The principle
task ofeconomic theory became the investigation ofthe behavior of economizing individuals
and the unplanned institutions, including markets and division oflabor, resulting therefrom.
It has also been suggested that Menger's methodological individualism "forestalled systematic
attention to the behavior ofeconomic aggregates, the determination ofnational income, and
the overall performance of the economy, which before the advent ofKeynesian economics
received only casual treatment by business cycle specialists. ,,89
Menger's individual subjectivism may have been expanded beyond his examination of
86 Hayek, introduction to C. Menger, Principles, 25; "The Austrian School of Economics", 49-50; "Carl Menger", 81; R.S. Howey, The Rise ofthe Marginal Utility School, 1870-] 889 (New York: Columbia University Press, 1989), 176-177.
87 Herbst, 134.
88 Ludwig von Mises, "Epistemological Relativsm", Money, Method, and the Market Process (Norwell, Mass.: Kluwer Academic Publishers, 1990), 39.
89 Spiegel, 536. 33 human preferences to human expectations. However, many "have come to take it for granted that ours is a world of relentless positivism... For most ofus, 'laws of nature' are empirical laws, in principle falsifiable. But we have to remember that Menger was an Aristotelian for whom the quest for 'essence' constituted the central task ofthe human intellect, and that he wrote before Mach and Poincare revolutionized philosophy after the turn ofthe century. ,,90
Thus, subsequent to the Methodenstreit, various schools of positivist methodology rose to
91 dominance in the fields of social science , as discussed i/!fra.
90 Ludwig Lachmann, "Carl Menger and the Incomplete Revolution ofSubjectivism [1978]", Expectations and the Meaning ofInstitutions ["Expectations"], Don Lavoie, ed. (London: Routledge, 1994),213-217.
91 White, introduction to C. Menger, Investigations, xii. III. FIFTY YEARS LATER
During the fifty years after Menger's Methodenstreit, many of his intellectual heirs were forced to meet other challenges in Methodenstreite, defending Austrian economic theories against serious challenges, such as the dispute between the Austrian, Ludwig von
Mises, and the socialist, Oskar Lange, over the theoretical and practical unfeasibility of economic calculus in socialism 92
One dispute is notable, although not quite as momentous as the main one between
Hayek and John Maynard Keynes. Therefore, it will be briefly noted that, during the 1930's
Hayek defended the Austrian theory of capital against an attack by American economist,
Frank Knight. This was really the revival ofan old controversy in which the Austrian, Eugen von Bbhm-Bawerk, had been engaged earlier in the century, concerning "the notion of 'true capital' as a 'fund', a quantity ofvalue".9~
Knight criticized Austrian theory because it is impossible to distinguish between permanent and nonpermanent resources or between the services ofthese resources, because it is irrelevant and often impossible to distinguish between expenditures incurred to maintain resources and expenses incurred to replace resources, and because there is no necessary
92 Karen I. Vaughn, "The Socialist Calculation Debate", The Elgar Companion to Austrian Economics, ed. Peter 1. Boettke (Hants, England: Edward Elgar, 1994),478, et seq.
93 Lachmann, "The Salvage ofIdeas: Problems ofthe Revival of Austrian Economic Thought [1982]", Expectations, 176.
34 35 correlation between the "period ofproduction" and the quantity of capital. 94
Hayek recognized an ancient fallacy in Knight's criticism. He perceived that Knight's mistake was in considering capital to be a "fund" which maintains itself automatically, so
"once an amount of capital has been brought into existence, the necessity ofreproducing it
presents no economic problem. "95
Knight and Hayek looked at the world from two different perspectives. Knight
viewed a nation's capital stock as a macroscopic aggregate entity. Hayek had entirely
discarded classical notions in favor ofa catallactic perspective, concerned with the activities
and choices ofthe millions ofindividuals in the multitude ofmarkets.96
Lachmann concluded, "In order to turn the heterogeneous stock of capital into a
homogeneous value aggregate, such as a 'fund', we need either a coherent and constant price
system which no market can offer us or the unity ofan evaluating mind. "97 Ofcourse, neither
the constant price system nor the unity of an evaluating mind exists in the world. As
Lachmann says ofKnight's error, "Perhaps in an era in which philosophers would not let us
say that men have minds but societies do not, economists and other social scientists were
94 Ibid., 177, quoting N. Kaldor, "Annual Survey ofEconomic Theory: The Recent Controversy on the Theory ofCapital", Econometrica (1937) 5: 201-32.
95 Ibid., 178, quoting F.A. v. Hayek, "The Mythology ofCapital", Quarterly Journal ofEconomics (1936), 50: 19-228, 202.
% Ibid., 180.
97 Ibid., 181-182. 36 predisposed to commit such blunders. ,,98
As grave as Knight's challenge was, during the worldwide depression, "in the 1930's, the voices of the Austrians were almost drowned in the fanfare of the Keynesian orchestra... ,,99 Before describing the dispute itself, it seems appropriate to set out, in brief, the competing theories.
98 Ibid., 182.
9'1 Ibid., 165. 37
A. HAYEK'S THEORY
Hayek perceived the business-cycle problem to arise from overinvestment100. In Prices and Production (1931) and journal articles during the early 1930's, the essential feature was
"scarcity ofcapital". With a market rate ofinterest below the natural rate ofinterest, at which real investment would be held to the rate ofvoluntary saving, the banking system was able to "initiate cumulative movement away from equilibrium." Credit expansion could also result from an increase in opportunities for profitable investment, and from forced saving, which would raise the natural rate of interest over the market rate offered by banks. A change in the quantity of money could influence relative price levels, whether or not it changed the
1
Hayek recognized empirically established pattern regularities in the course ofphases ofbusiness cycles, as the end ofthe depression when commodity stocks have dropped to a minimum, followed by an upswing in economic activity. The upswing was characterized regularly by an increase in output of raw materials and capital goods and falling relative prices, followed by an increase in productive activity and rising relative prices, as the upswing slows. The rise in relative prices was seen to be more pronounced and felt first in those industries producing raw materials and capital goods, and to be felt later in the industries producing consumer goods. The increase in relative prices was seen to cause diminished demand, leading to a downswing in economic activity. 102
For Hayek, "To explain the causal relationships existing between [these regularities] must be the next task ofthe theory ofcyclical phenomena. ,,103 A main cause ofthe end ofthe upward swing and the inevitability of the downswing is the role played "by the differences between the situations in which the various sectors ofthe economy find themselves. Such differences must inevitably arise when there is a rapid rise in general prices, for such a rise is never felt equally in each ofthe various sectors. ,,10~
lO] Fritz Machlup, "Hayek's Contribution to Economics", Essays on Hayek, (Hillsdale, Mich.: Hillsdale College Press, 1976), 19-24.
102 F.A. v. Hayek, "The Monetary Policy ofthe United States After the 1920 Crisis", 8.
10, Ibid.
10\ Ibid, 9-10. 39
Extension of credit by banks, not strictly linked to the growth of savings, allows an increase in demand for finished products to lead to a "disproportionate expansion of the apparatus with which they are produced, and especially a greater rise in the prices of raw materials and capital goods and thereby the elimination of profits." Banks grant to entrepreneurs the power to purchase productive goods, even ifno one has "refrained from exercising to a corresponding extent the purchasing power which they possess." Banks become able to offer interest rates lower than "that which corresponds to the proportion which the increased demand bears to the supply of real capital." Hayek continued, "This extension of credit gives rise to a short-lived inflation and leads to the emergence of disproportions between the individual sectors of the economy to which the accompanying stimulation ofbusiness always gives rise. The crisis then becomes the only way ofeliminating these disproportions. "lOS
In other words:
"A rate ofinterest which is inappropriately low offers to the individual sectors of the economy an advantage which is greater the more remote is their product from the consumption stage. This is so because the time over which interest is saved with respect to the ultimate final product is correspondingly longer, and the price which the purchaser at the next stage can offer is higher by the entire amount ofthe interest saved on the path to the consumer. It is not so much the effect ofinterest as a cost element in one's own production- this could be the same in all branches ofproduction--which is decisive in this context. Rather it is the summation ofthe increased demand exerted by all those participating at later stages of production (inclusive of commerce) because of the greater possibilities of profit offered to each of them by the lower interest rate. In addition, the value offixed capital depends not upon
lOS Ibid ., 10 . 40
a price achieved at any point in time but on the yield expected over a longer time period. Hence it is influenced to a much greater degree by the current interest rate at which the yield is capitalized than is the price of circulating capital (materials, labor), which is consumed during a period ofproduction and obtains a single price which must be discounted. A relatively lower interest rate therefore raises the price offixed capital, and hence the prospect ofprofits in its production, far more than is the case with circulating capital. ... Consequently, this factor makes an essential contribution to explaining why an interest rate which is too low calls forth an expansion of the individual sectors ofthe economy which is greater the more remote is their product from the consumption stage."
"To prevent a disproportionate development of the production of goods of higher order, the interest rate must always be sutl1cientiy high to restrict it to that level at which the capital necessary for the maintenance of output in the later stages under unchanged conditions can also be procured. Since the interest on capital ... represents the necessary limit to a disproportionate expansion ofthe capitalistic mode ofproduction, an interest rate which is temporally too low must give rise to an excessive accumulation ofcapital... The initial strengthening ofthe demand for raw materials, due to the prospects for increased profits in the sectors converting them into manufactures, must decline as soon as the savings used up in the production of goods of higher order are no longer sutl1cient to permit a corresponding expansion of the goods of lower order (i.e., under equally profitable conditions, hence at an interest rate which has not yet risen)." 106
An increase to the supply of money is the culprit. Where does the increase come from? "The influx of the additional money into the system always takes place at some particular point... It may be spent in the first instance by government on public works or increased salaries, or it may be first spent by investors mobilizing cash balances or borrowing for the purpose... The process will take very different forms according to the initial source or sources ofthe additional money stream; and all its ramifications will soon be so complex that
1\1(, Ibid., 27-28, /l. 4. 41 nobody can trace them. ,,107
Hayek's vital point is, "... the different prices will rise, not at the same time but in succession, and that so long as the process continues some prices will always be ahead ofthe others and the whole structure ofrelative prices therefore very different from what the pure theorist describes as an equilibrium position." 108
In terms of methodology, Hayek emphasized the "knowledge problem" at various points in his discussion ofthe business cycle. He asserted that a cyclical movement does not become apparent from an increase in the general price level or index, but only from changes in relative prices of individual groups of commodities. Furthermore, two other issues will persist, unresolved: "whether... fluctuations in the general price level may not arise from causes other than those of a monetary nature and hence cannot or must not in all cases be rectified by monetary means; and to what extent index numbers in general afford an appropriate picture ofmovements in the value ofmoney. ,,109
Decision-makers may be unable timely to perceive regularities in changes in anyone aspect of the economy ("level of output, employment, or commodity stocks, or their relationship to one another or to the movement ofprices"), since the relationships between
107 F.A. v. Hayek, "Can We Still Avoid Inflation?", 37.
lOS Ibid.
109 F.A. v. Hayek, "The Monetary Policy ofthe United States After the 1920 Crisis", 17-18. 42 them are not regular in their recurrence nor easily recognizable. 110
Nor will the decision-makers know when to put their schemes into effect. There is bound to be some lag oftime before they react. As Hayek pointed out, "... prevention ofa reversal in the level of economic activity would probably require a rise in interest rates to be effected before they could be recognized as actually being too IOW'I1I1
In a methodological criticism reminiscent ofMenger's critique ofthe Younger German
Historical School ofEconomics in the original Methodenstreit, Hayek reproached economic researchers in the United States in the years preceding the Great Depression for their statistical methods, stating,
"They do not begin from a definite, basic conception ofthe economic process, but content themselves with gaining as detailed as possible a picture ofthe typical course ofa cycle with the aid ofdetailed statistical investigation ofthe individual factors in each phase ofthe cycle. It is their hope that, from the insights they thereby gain into the relative behavior ofthe individual branches of production, etc., they will then be able to derive theories as to the nature of the interrelationships between them. The result is a type of .symptomatology ofthe course ofthe cycle. ,,112
"... It may be that such a procedure will ultimately arrive at a complete description embracing all the essential characteristics ofthe cycle, which is the task of theory, but it must be said that being still in the early stages of development, it does not offer the comprehensive understanding attainable with a theory derived from general economic principles. It is of little help when what is at issue is not detailed interconnections but the cause of cyclical fluctuations in general. Ifthe aim is to combat cyclical fluctuations at their root, then most researchers into the cycle also have recourse consciously or
110 Ibid., 20.
111 Ibid ., 23 .
112 Ibid., 6. 43
unconsciously to the explanations offered by 'abstract' theories"113
In the meantime, Hayek added, "The naive confidence in this respect which is shared by many of the most eminent American scholars can be explained only by the derogatory attitude displayed by most of them toward the insight into necessary interrelationships between economic phenomena provided by theory. ,,114
Like Hayek, at least two other Austrian economists, Ludwig von Mises and Felix
Somary (Menger's last assistant at the University of Vienna and, later, a Swiss banker educated at the University of Vienna), also used the theoretical methods of the Austrian
School to anticipate the Great Depression. 115 Economists from the West seem generally to have missed predicting the economic disaster ofthe 1930's.
113 Ibid., 7.
114 Ibid., 21.
115 Mark Skousen, ~conomics on Trial (Homewood, IL: Business One Irwin, 1991), 104-105. 44
B. KEYNES'S THEORY
John Maynard Keynes's first book, A Treatise on Probability (1921), was concerned with a philosophical problem that suggested that empirical knowledge, arrived at by means of induction, would not yield perfect certainty. He felt that probability is only a logical relation that cannot be defined or measured numerically, but can be based on beliefarising out ofempirical knowledge, as well as intuition116 In this, Keynes shows his inductive theory of knowledge to be opposite to Hayek's deductive methodology, about which more will be said in the third section ofthis paper.
In his Treatise on Money (1930), Keynes expounded a theory of prices based on the
"flow of money income earned by the production of consumption goods and investment goods and expended on con'sumption and saving. ,,117 He aimed to find a method of eliminating cyclical fluctuations under conditions of price stability and to refute classical and
Austrian theories that, to prevent the economic depression, it was necessary to prevent the economic boom. 11K
Keynes expanded this theory in The General Theory of Employment, Interest, and
Money (1936) ["General Theory"], after the onset of the Great Depression. Mainstream economists ofthe day counted on elastic wages and balanced government budgets. Keynes
116 Spiegel, 601.
117 Ibid., 605.
11K W.T. Hutt, The Keynesian Episode: A Reassessment (Indianapolis: Liberty Press, 1979), 29. 45 overcame them politically, if not logically, with his proposals for positive government intervention by spending to promote consumption and investing, to overcome inadequate private spending and investment and return the economy to full employment.
Novel elements ofKeynes's theory included the "consumption function" to facilitate making predictions about how much consumers would spend out of their incomes; the
"multiplier", to indicate how a change in investment would generate a multiple change in consumption expenditure and, therefore, income; equality ofsaving and investment ("Whereas in the Treatise, savings and investment are defined as unequal, they were made equal by definition in the General 7heory since both were described as the difference between income and consumption during the same period. "119); and inducement to invest, including monetary policy to expand cash balances and reduce interest rates. 120 Perhaps his principal innovation was the idea of "involuntary unemployment" .121 However, in the General Theory, Keynes quietly abandoned any suggestion that his proposals were consistent with long-run price stability. 122
Describing Keynes's self-promotion, George Selgin states, "As if to further distance his work from those ofhis (mainly unacknowledged) rivals, Keynes departed from standard
119 Spiegel, 608.
120 Ibid., 607-610.
121 John B. Egger, "Psychologist ofthe ills ofcapitalism", Critical Revjew , vol. 3, nos. 3 & 4 (Summer/Fall 1989): 458; Skousen, 106.
» I ~- Hutt, 29. 46 terminolob'Y throughout the General Theory, coining new expressions even when the concepts involved were clearly the same as those invoked in more familiar terms by less unorthodox writers... comparisons were a thing Keynes himself seemed anxious to avoid. He wished to promulgate the impression that his theory of depression was altogether lacking in close substitutes; it was to be seen as truly revolutionary--a quantum leap from orthodoxy. ,,123
m George Selgin, "More revolutionary than thou", Critical Revie~, vol. 3, nos. 3 & 4 (Summer/Fall 1989): 438. 47
C. THE DISPUTE
Hayek (with his London School ofEconomics colleague, Lionel Robbins), was the primary challenger ofKeynes's theories in the 1930'S.124
Interestingly, Keynes had been critical ofAustrian thinking as early as 1914, when he
reviewed Mises's Theorie des Geldes und der Umlaufsmittel in the Economic Journal. 125
In his 1931 "rejoinder" to Keynes's Treatise on Money, Hayek criticized Keynes's
theory directly, arguing that, by ignoring the intertemporal structure of production and
intertemporal complementarity ofstages ofproduction, Keynes failed to identifY the market
process that could achieve coordination. Keynes's "aggregates" concealed the most
fundamental mechanisms ofchange. Furthermore, Keynes failed to address the harm caused
by policies ofinjecting newly-created money into an economy.126 In Prices and Production,
Hayek reasserted the importance ofmethodological individualism, stating that "none ofthese .J ~: magnitudes [i.e., aggregates] as such ever exerts an influence on the decisions of ., ..I ,l;
124 Mark Blaug, "Hayek Revisited", Critical Review, vol. 7, no. 1 (Winter 1993): 53; Skousen, 282.
125 Lachmann, "John Maynard Keynes: a View from an Austrian Window", Expectations, 185. Gregory B. Christainsen, "Methodological Individualism", The Elgar Companion to Austrian Economics, 11-12. Hayek suggests that Keynes's education in economics was "somewhat narrow", and he reviewed Mises's book "without in any way profiting from it." (Hayek, "Personal Recollections of Keynes and the 'Keynesian Revolution"', New Studies, 284).
126 Roger W. Garrison & Israel M. Kirzner, "Friedrich August von Hayek", The New Palgrave: The Invisible Hand (New York: Macmillan Press Limited, 1989), 127-128. 48 individuals. ,,127 In 1934, Hayek argued that government policies to increase demand would not avoid or cure economic depression. 128
From the other side, in 1932, prior to the publication ofthe General Theory, Keynes, as editor of the Economic Journal, assigned Pierro Sraffa to review Hayek's Prices and.
Production. Hayek was assigned by the editor ofEconomica to review Keynes's Treatise on
Money. Thus began the twentieth century Methodenstreit. 129
"Sraffa's review was an onslaught conducted with unusual ferocity, somewhat out of keeping with the tone ordinarily adopted by book reviewers in the t:c9nomi c; Journal. ,,130
Lachmann has described the bewilderment with which economists read Sraffa's review, which
"appeared to proceed fi'om assumptions no more familiar than were Hayek's. ,,131 As it turned out, SrafTa was the protagonist in a "neo-Ricardian counter-revolution", in which he would attempt to discredit the subjective theories ofthe Austrian School through Hayek. 132
Other exchanges by the partisans of each were published, and in 1936, Keynes
published the General Theory.
127 Machlup, 24.
128 Ibid., 22.
129 Ibid., 18
130 Lachmann, "Austrian Economics Under Fire: The Hayek-Srafh duel in retrospect [1968]", E:wectations, 148.
1TI Ibid.
132 Ibid., 149-150; Jean-Pierre Potier, Piero Sraffa--unorthodox economist (1898 198]): A biographical es~ (London: Routledge, 1987). 49
D. THE OUTCOME
The controversy between Hayek and Keynes was restrained, compared with Menger's nineteenth century Methodenstreit,133 and with the publication ofKeynes's General Theory, the "drama" was over. 134
Notwithstanding, Keynes had misdiagnosed the causes ofthe Great Depression, and by implying that the Depression was caused by "market failure", Keynes diverted attention away from the many government failures that truly caused it.
It seems common sense that involuntary unemployment must be short-lived in a market economy. However, Keynes asserted that real wage cuts would not necessarily restore employment, because the cuts would reduce aggregate demand, prices, and output, leaving no real change in wages after all. He also suggested that wages are too sticky to move downwards, so real wages will not adjust to clear labor markets. In his analysis,
Keynes apparently overlooked or ignored the real political interventions and other causes of the Depression (in the U.S.), including (but not limited to): President Hoover's "jaw-boning" ofcorporate employers to maintain high wages; passage ofthe Davis-Bacon Act to increase labor costs on government constructions; and the Smoot-Hawley tariff act. 135 In addition, the
LB William N. Butos, "The Hayek-Keynes Macro Debate", The Elgar Companion to Austrian Economics, 471: "Hayek and Keynes conducted their debate at a very abstract, technical level and directed it towards specialists in monetary theory"; also, D.P. O'Brien, "Hayek as an Intellectual Historian", Birner & van Zipp, 362.
l.H Machlup, 26.
m Tyler Cowen, "Why Keynesianism triumphed or, how could so many Keynesians have been wrong?", Critical Review, vol. 3, nos. 3 & 4 (Summer/Fall 1989): 519-524; Hutt, 50
Federal Reserve instituted strong deflationary measures and ineptly allowed the failure ofone- half ofU. S. commercial banks, so the monetary system collapsed136
In Europe, many countries owed massive war debts to the United States government following World War I. Refinancing principal and interest, their debts deepened as they borrowed more and more without collecting compensatory amounts oftax revenue. With the increase of international governments' debt, world-wide foreign trade collapsed. 137
Ultimately, the bubble burst. President Hoover declared a debt holiday to save Germany from financial collapse, so the United States also had to forego collecting debts owed by Great
Britain, France, Belgium, Italy, and others to the United States Treasury. Former European
Allies had to forego collecting war reparations from Germany, or to collect and immediately lend like amounts back to Germany. There was an international run on the gold held by the
Bank ofEngland, and the British socialist Labor government collapsed138. Germany suffered from hyperinflationlJ9 and begged other countries for a rescue, while threatening other
147-148, re: price flexibility, including wages, for coordination.
136 Skousen, 108.
137 Garet Garrett, "From A Bubble that Broke the World", (originally published in 1932), The Great Depression and New Deal Monetary Policy (San Francisco: Cato Institute, 1980),1-4.
138 In 1925, England had returned to the gold standard--but at the pre-World War I parity; a prolonged process ofdeflation became inevitable, and in 1931, England abandoned the gold standard. (Hayek, "The Campaign Against Keynesian Inflation", New Studies, 198.
139 Ludwig von Mises suggests that the attitudes ofdecision-makers leading up to the German inflation might be a "necessary sequel to the whole system of social and economic 51 countries with dumping German coal on the European markets. France invaded Germany's industrial Ruhr region, trying unsuccessful1y to col1ect reparations through force. I~O
By these positive interventions, governments foreclosed al1 other potential remedies.
Government malfeasance, not failure ofprivate markets, caused the Great Depression. As
Hayek later stated, "It is not the market economy (or'the capitalist system') which is responsible for this calamity but our own mistaken monetary and financial policy"W
In the 1930's, Hayek's prescription of "waiting out" the Depression was
"inopportune". W It has been suggested, on the other hand, that the General Theory would have its "unparalleled influence" because of "its demerits as a contribution to thought." That is, its solutions appeared to have been chosen for their "political attractiveness", but the book was responsible for "a setback to scientific thinking about human economic relations at a crucial epoch'tl~3
Therefore, in spite ofKeynes's severe diagnostic errors, the reaction to the General
Th~ was like a "fever" that "swept through both England and the United States, producing
philosophy as taught by the school of Schmol1er." ("The Great German Inflation", Money, Method, and the Market Process, 98).
l~O Garrett, 44-78.
1~1 Hayek, "The Campaign Against Keynesian Inflation", 193.
1~2 Machlup, 26.
1~3 Hutt, 11-12; Hayek, "The Campaign Against Keynesian Inflation", 192: "The seductive doctrine that a government deficit, as long as unemployment existed, was not only innocuous but even meritorious was ofcourse welcome to most politicians." 52 adherents by the score, even converting some previous devotees ofthe classical view to the
'new Economics'. "l~~ During the same period, the Econometric Society was being formed, whose members were part ofthe larger movement that contended that
"a greater use of statistical analysis offered the prospect of efficient social planning that could help to foster a more humane and just world. The social sciences would thereby become both more 'scientific' and more 'social'. Keynes theories, and the associated call for active government management ofeconomic affairs, fit in nicely with many ofthese ideas. ,,1~5
Describing the almost complete disappearance of Austrian ideas during the 1930's,
Lachmann cited Sir John Hicks's 1967 work, The Hayek Story, in which it was stated,
"Hayek's economic writings ... are almost unknown to the modern student; it is hardly remembered that there was a time when the new theories ofHayek were the principal rival ofthe new theories of Keynes'I1~6
Blaug contended that the reason Keynes's theory swept the field so rapidly was
Hayek's withdrawal from the fray. He suggested that Hayek assumed that Keynes would eventually change his mind, but Hayek's Pure Theory ofCapital, published in 1941, had little impact in the wake of Keynes's conquest. Blaug believed that "Hayek failed to engage
Keynes after the publication of the General Theory because he could not formulate an
Austrian countertheory ofthe slump that was proofagainst purely technical objections to the
l~~ Lowell Gallaway & Richard Vedder, "The Keynesian Performance", Critical Review, vol. 3, nos. 3 & 4 (SummerlFall 1989),490.
1~5 Christainsen, 13-14.
1~6 Lachmann, "The Salvage ofIdeas", Expectations, 166. 53 standard Austrian measurement ofcapital. ,,147
Late in his life, however, Hayek still insisted that he made no response to the General
Theory because Keynes had told him that Keynes no longer believed that theory. Hayek adds that, at the time, he did not yet recognize a fundamental point because the differences between macroeconomics and microeconomics had not become clear, and he was struggling with writing The Pure Theory ofCapital, and then World War II came. 148 Hayek still contended that the philosophical justification ofKeynes's approach seemed "highly questionable", as it disregarded the relationships that really govern the economic system. 149
In the "long run", Keynes and his "animal spirits" were dead, and even many
Keynesians came to express doubts about Keynesianism. T. W. Hutchinson (Keynes Versus the Keynesians) argued Keynes, himself, would not support the policies his disciples have promoted in his name, and John R. Hicks (The Crisis in Keynesian Economics) stated that the impact ofthe General Theory was disastrous. 150
As Hayek stated in 1975, because Keynesian economists never realized that, although inflation might eliminate unemployment in the short run, it produces more unemployment later, so public pressure to reignite inflation must be resisted whenever unemployment
ll7 Blaug, "Hayek Revisited", 53-54.
148 Hayek, "Personal Recollections OfKeynes, etc.", 284; Stephen Kresge and Leif Wenar, eds., Hayek on Hayek (Chicago: Univ. ofChicago Press, ]994),90; Butos, 476-477.
149 Hayek, "Personal Recollections ofKeynes, etc", 289.
150 Hutt, ]9; Lachmann, "John Maynard Keynes", Expectations, ]90. 54
Increases. Hayek stated that the majority ofeconomists should be ashamed for not realizing this. 151
HuH (no Keynesian) asserted that Keynes began to retreat immediately after
152 publication of the General Theory, but it was inadequate to undo the harm , and since
Keynes's death, his "followers appear to have been spasmodically relinquishing reliance on the theoretical stmcture ofthe General Theory while mostly clinging to its terminology, its form, and its policy implications. ,,153 Another commentator suggests that Keynes's General Theory
"is virtually an ink-blot test for economists; an economist's perceptions of its contents tells
more the beliefs ofthe reader than the contents ofthat book'I154
J51 Hayek, "The Campaign Against Keynesian Inflation", 209.
152 Hutt, 19-20, 42.
153 Ibid., 34.
154 Gerald P. O'Driscoll, Jr., "Spontaneous Order and the Coordination ofEconomic Activities, in New Directions in Austrian Economics, Louis M. Spadaro, ed. (Kansas City: Shed Andrews and McMee1, Inc., 1978), 112. IV. AN ONGOING DEBATE
Menger's intellectual progeny are characterized more-or-Iess by methodological individualism and methodological subjectivism. However, even within the Austrian School of Economics, there remain methodological differences over a priorism, falsifiability, and other points (described more fully in the final section ofthis paper).
Since F.A. v. Hayek seems to have the most completely and coherently developed ideas in these regards, the focus ofthis section will be on him, with somewhat less attention directed toward his Austrian School colleagues. First, I will describe some ofthe methods and ideas standing in opposition to the methodological subjectivism and individualism ofthe
Austrian School, and then I will turn to Hayek's views.
55 56
A. POSITIVISTS, COLLECTIVISTS, AND OTHERS OF THEIR ILK
In addition to the disputes described above, following is a description of personalities representing a few of the methodologies with which the Austrian School has been in disagreement:
a) Auguste Comte (1798-1857) was the founder of the positivist movement,
"empirical sociology", preferring the deliberately created over that which was not rationally designed, and "demonstrated" over "revealed" morals. Comte "did not consider the possibility ofany origins from a process of selective evolution. ,,155
Although Comte's demise preceded the "founding" of the Austrian School, his pernicious influence persisted, and even continues to persist today. Comte promoted his utopian ideology in the guise of social scienceI56, and he was to have enormous influence on the leading figures oftwo later significant positivist movements: Gustav von Schmoller, the leader ofthe Younger German Historical School ofEconomicsI57(discussed supra), and John
Dewey, leader of the "pragmatic" movement in the United States in the mid-Twentieth
Centuryl58 (discussed il?fra).
155 F.A. v. Hayek, "The Errors ofConstructivism", New Studies, 14.
156 David E. Pearson, "Community and Sociology", Society, vol. 32, no. 5 (July/August 1995): 44.
157 Leube, "Hayek and Schmoller", supra, 107.
158 E.W.F. Tomlin, The Western Philosophers: An Introduction (New York: Harper & Row, Perennial Library, 1963), 298; Paul Gottfried, "In Search of a Liberal Essence", Society, vol. 32, no. 6 (Sept/Oct. 1995): 45. 57
In Comte's ideal community, "peaceable definition ofduties" would replace "stormy discussions about rights", and "useless disputes for the possession of power" would be superseded by inquiries into the "rules that should regulate its wise employment." Power wisely employed was synonymous with power employed by the wise. 159
Comte's intellectual ancestry can be traced at least as far back as Francis Bacon and the British empiricist school of the seventeenth and eighteenth centuries, through Saint-
Simon. Comte purported to trace the development of human thought and society from its theological and metaphysical stages to a positive stage, characterized by collection and correlation ofobserved facts and rejection ofunverifiable speculation about first causes and final ends. For him, all genuine knowledge was "scientific", and it was necessary to abandon the claim to have any means ofattaining knowledge not available to science. 16o
To establish a foundation for a scientific study of society, he developed "social physics" (i.e., sociology), which could be found at the end of a sequence from mathematics, through astronomy, physics, chemistry, and biology (which included psychology).161 Thus, for Comte, all human knowledge is "knowledge of invariant relations between given phenomena on whose causation there is no sense speculating. ,,162
159 Pearson, 49, citing Comte's The Positive Polity.
160 F. A. Hayek, The Counter-Revolution of Science, 2nd ed.(Indianapolis: Liberty Press, 1979), 254-255; Flew, 69, 283; Gottfried, 45.
16l Ibid., 325-338; Ludwig von Mises, Theory and History, 241; Urmson & Ree, "Comte", by RB. Acton, 63-64.
162 Schumpeter, 415. 58
In accusing classical economists of "unscientific" thinking, he meant the opposite of what the Historical School meant in their later criticism; unlike the historicists, who did not want to isolate the "economic" element and looked to "the real phenomenon in all its historical facets--with the economic, ethnic, legal, and cultural facets all simultaneously considered", Comte wanted to adopt the method ofthe physicist. However, Comte failed to see that physicists "do separate or isolate individual aspects and then theorize about them with a boldness that far surpasses anything that economists ever ventured to do." Schumpeter concluded that, if Comte wanted to be "scientific", he should have adopted the methods of his classical predecessors, instead ofattempting to derive theories from unanalyzed historical or ethnological facts.](,]
b) Logical Positivism was the philosophical movement emanating from the "Vienna
Circle". The main features ofthis movement were a thoroughgoing empiricism, tempered by an exaggerated respect for the achievements and capabilities of modern scienceI6~, and a thoroughgoing rejection of metaphysics as meaningless. As empiricists, they held that all knowledge is ultimately derived from experience. Since the propositions of metaphysics, epistemology, and ethics transcend ordinary experience, no empirical evidence can confirm or discredit their conclusions. 165
16' Ibid., 417-418.
1('~ Scientific theories are a posteriori systems of concepts, whose truths must be capable of observed facts. (Urmson & Ree: "Schlick", P.L. Heath, 293). But what about Hume's "problem ofinduction"?
165 Urmson & Ree: "Logical Positivism", P.L. Heath, 183-184. 59
The logical positivists appear to be phenomenalists (vh:e Husserlian
phenomenologists), holding that we can know nothing that is not given in sense experience and denying the validity ofinferences derived from things outside our sense-experience and
conclusions ofthe existence oftranscendental things. 166
Following is a list ofa few members ofthe Vienna Circle:
I) Ernest Mach (1838-1916) was an extreme positivist and radical empiricist,
even the "father of logical positivism" and acknowledged as their guide by the Vienna
Circle. His main aim was to give an account ofthe nature ofscience that would free it
from all metaphysical and non-empirical elements. For him, the mind has no power to
know or understand things beyond its own sensations, and scientific theory is not the
discovery ofreal things, but a device for predicting their course. 167
Mach even rejected absolute space and time, because they are unobservable. In
fact, he proposed to eliminate from science all notions without counterparts that are
actually or, at least, potentially observable. He emphasized immediate sense data, calling
them "elements" and using them to construct "complexes", such as the ideas ofthe things
surrounding us and, even, ofourselves. For Mach, the way a man combines sense data
166 Urmson & Ree: "Phenomenalism", Anthony Quinton, 231-233; The logical positivists methodology may lead to paradoxes and threaten the foundations of communications, however, since "meaning", defined in terms of private experience, is inaccessible to anyone else. (Urmson & Ree: "Schlick", P.L. Heath, 293-294).
167 Urrnson & Ree, "Mach", by lO. Urmson, 188-189; A. Flew, 217; F.A. v. Hayek, "Ernst Mach and the Social Sciences in Vienna", The Fortunes ofLiberalism, 174. 60
into complexes is influenced by others, especially the ones who taught him to speak, then
his teachers, and then those with whom he exchanges information and views. Thus, he
is influenced by language and by all the information his ancestors have communicated. 168
ii) Moritz Schlick (1882-1936) was originally a physicist before he took over the
University of Vienna's chair in Philosophy of the Inductive Sciences from Mach and
became the actual founder ofthe Vienna Circle of logical positivists. In opposition to
Kant, he argued from an empiricist standpoint that propositions oflogic and mathematics
are not synthetic a priori, but true by definition (analytic), and therefore, empty of
content. Scientific theories must be capable of a posteriori verification by observed
facts. 169
Schlick emphasized that the postulates of a theory are implicit definitions of its
basic concepts. 170 According to Schlick, only logical form or structure can be
communicated, and a thing experienced by one cannot be communicated to another.
Thus, Schlick insisted on the verifiability criterion of factual meaningfulness--meaning
depends on verification. 171
iii) RudolfCarnap (1891-1970) articulated his "construction theory" to try to
168 Karl Menger, introduction to The Science ofMechanics, by Ernst Mach, 6th ed. (LaSalle, IL: Open Court, 1960), vii, xii, xvi, xviii).
169 Urmson & Ree, "Schlick", by P.L. Heath, 293-294
170 K. Menger, introduction to The Science ofMechanics, xvii.
171 Herbert Feigl and Albert E. Blumberg, introduction to General Theory of Knowledge, by Moritz Schlick (LaSalle, Ill.: Open Court, 1925), xxi. 61
show how highly theoretical statements that do not apparently describe immediate
experience are reduced by definitions to ones that do. l72 Carnap combined a sympathy
for the anti-metaphysical positivism of Mach with the cultivation of logical analysis as
practiced by Bertrand Russell and Ludwig Wittgenstein, 173, 174 and together with
Wittgenstein, he influenced Schlick and the rest ofthe Vienna Circle to look on the issue
of "realism" versus "positivism" as a metaphysical pseudo-problem,17s Carnap also
adopted a "verifiability theory ofmeaning", by which the meaning ofa statement consists
in the sensory or introspective data which establish the statement directly and
conclusively. Thus, metaphysical statements, which cannot be verified by experience
become nonsensical, and most, if not all, scientific statements also become meaningless.
Later, Carnap proposed that a statement can be meaningful if, and only if, it or some of
its logical consequences can be tested empirically. 176
iv) For Hans Kelsen (1881-1973), law was "a deliberate construction, serving
l72 Flew, 56.
173 Urmson & Ree, "Carnap", by Ernest Nagel, 58,
174 Wittgenstein was, by the way, a second-degree cousin of Hayek, who described his passion for truth, antipathy for convention, and high-strung, "mad" character. (F.A. v. Hayek, "Remembering my cousin Ludwig Wittgenstein", The Fortunes ofLiberalism, 177).
175 Feigl & Blumberg, introduction to General Theory ofKnowledge, xvii.
176 Urmson & Ree, 58. 62
known particular interests. ,,177 In this, he followed the form oflegal positivism expounded
earlier by Thomas Hobbes and John Austin, "to whom every rule must be derivable from
a conscious act oflegislation."178 Common to the whole oflegal positivism was the idea
that the concept ofjustice was eliminated from the law. In this regard, Kelsen declared
that "justice is an irrational idea. ,,179
Kelsen tried to formulate a II' pure theory oflaw'... kept free from all the elements
foreign to the specific method of a science whose only purpose is the cognition oflaw,
not its formulation. A science has to describe its object as it actually is, not to prescribe
how it should be or should not be from the point of view of some specific value
judgments. "ISO Kelsen continued:
"The pure theory of law considers its subject not as a more or less imperfect copy ofa transcendental idea. It does not try to comprehend the law as an offspring ofjustice, as the human child ofa divine parent. The pure theory of law insists upon a clear distinction between empirical law and
177 Hayek "The Errors ofConstructivism", 9; Kurt R. Leube, "Law and Economics. Some Preliminary Remarks on Hayek's Early Student Years and his Development of the Theory ofSpontaneous Order", Contending With Hayek: On Liberalism,-.S.Qontaneous Order, and the Post-Communist Societies in Transition, Christopher Frei and Robert Nef, eds. (Bern: Peter Lang, 1994), 166.
178 Hayek, "The Errors ofConstructivism", 15.
179 Ibid., 17; Leube, "Law and Economics", 166: "He was right when he argued that we can never positively prove what is or may be 'just'. But this ofcourse, does not preclude our ability to say when a rule is unjust, or that through the persistent application of such a negative test ofjustice we may not be able to progressively approach justice."
180 Hans Kelsen, General Theory of Law and State, trans. Anders Wedberg (Cambridge: Harvard Univ. Press, 1945), xiv. 63
transcendental justice by excluding the latter from its specific concerns'1181
Later, Kelsen claimed that the theory of positive law is parallel to the empirical science of nature, and the philosophy of natural law is akin to metaphysics, so an analytical description ofpositive law as a system ofnorms is no less empirical than natural science restricted to a material given by experience. 182 For Kelsen, man's collective confidence in "the vigor ofhis own senses and his reason" has, in modern times, become sufficiently strong to overcome his metaphysical superstition and confine his scientific attention to empirical reality. 183
Kelsen also asserted that the State is the community created by a "national legal order", describing the State circularly as an "order and as community constituted by order" and anthropomorphically as a "sociological unity"184 Among his methodological errors, Kelsen failed to distinguish between "order" and "validity"185 Like Comte before him, Kelsen believed that an elite class would rise in authority over others, "where they could assist in replacing conflict with peaceful cooperation in society, and complication with functional efficiency in social institutions. ,,186
181 Ibid., xiv-xv.
182 Ibid., 163 .
183 Ibid., p. 433.
184 Ibid. 181-183.
185 Cubeddu, 170.
18(, Leube, "Law and Economics", 166. 64
Hayek concluded that Kelsen's "pure theory oflaw" was a pseudoscience, "like
Marxism or Freudianism, which are represented as irrefutable because all their statements
are true by definition but tell us nothing about what is the fact. ,,187 Hayek pointed out
that, from Kelsen's "scientific", positivist point ofview, the "law (Recht) under the Nazi
government was law (Recht)", which we might regret but cannot deny, by definitionl88 .
v) Ernst Cassirer (1874-1945) maintained that, in addition to Kant's categories,
there are also forms of mythical thinking, historical thinking, and everyday practical
thinking, which could be brought to light by the study of forms of expression in
language. 189 Cassirer suggested that natural science is a "very late achievement of the
human mind"I90, but he was less sanguine than Kelsen regarding man's independence from
metaphysics, stating, "The magic word takes precedence over the semantic word"191
Thus, small groups might succeed (at least for the short-run) in enforcing their wishes
upon entire nations by misusing language and rites. In Although Cassirer made an in-
depth analysis oftotalitarianism from a philosophical perspective, he failed to make the
187 Ibid., 171.
188 F.A. v. Hayek, Law, Legislation, and Liberty: The Mirage of Social Justice, vol. 2 (Chicago: Univ. OfChicago Press, 1976), 55-56.
189 Urmson & Ree, "Cassirer", by lO. Urmson, 59.
I'Xl Ernst Cassirer, The Myth ofthe State (New J-Iaven: Yale Univ. Press, 1946),293.
191 Ibid ., 283 .
1')2 Ibid., 295. 65
same connection between scientism, economic planning, and totalitarianism that Mises
and Hayek made in their analyses. 193
c) Pragmatists, represented by John Dewey (1859-1952), replaced the problem of truth with a normative problem ofvalue, suggested that "the true is that which works" and the good is only relative. 194 Dewey became acquainted with the positivism ofAugust Comte during his university studies. 195 He was also influenced by Hegel and the English Hegelian,
T.H. Green (who tried to make a case for the "ethically engaged state"Y96, and there were parallels between the historical relativism ofthe nineteenth century German social scientists
(social process or history, accompanied by moral evaluation and practical reforms, leading to emergence ofthe ultimate discoverable social end) and the ethical relativism of Dewey and the American pragmatists. 197
Dewey's form ofpragmatism is often called "instrumentalism", having two underlying tenets: (1) interdependence ofpositivistic and value propositions, due to interdependence of their truth on their practical consequences in real-world problem-solving situations, and (2) importance of the test of workability, making truth dependent on use as an instrument in
193 Cubeddu, 144.
194 Urmson & Ree, "Dewey", by James Ward Smith, 79-80.
195 Tomlin, 298.
196 Gottfried, 44.
197 Herbst, 157. 66 attaining ends determined by the context ofthe problem at hand. 198
Dewey's philosophy addressed itself to social progress, concentrating on the contemporary state ofthings rather than on any supposedly eternal, fixed condition, although he would not join those positivists who insisted that men cannot deal rationally with questions of value, but only with questions of fact. 199 On the other hand, he concluded, "Economic determinism is now a fact, not a theory. ,,200 Further, he proclaimed the triumph ofthe natural sciences in the physical realm and proposed extending their method to every sphere ofhuman existence, after overcoming disputes as to benefits and harms through consensus. 201 By application ofDewey's "method ofintelligence", these issues can be evaluated by a standard that transcends selfish interests. 202
Like Comte, Dewey hoped to raise up the State from its position as umpire of disputes, so it can realize its positive contribution to "growth" (transcendence of selfish interests),20] contending that it is the responsibility of the State to provide conditions for the
198 Glenn L. Johnson, Research Methodology for Economists: Philosophy and Practice (New York: Macmillan, 1986), 36, 66.
J'J9 Strauss & Cropsey, "John Dewey", by Robert Horwitz, 851-852.
200 Ibid., 853 .
201 Ibid ., 855-856.
202 Ibid., 857.
203 Ibid., 861. 67 maximum "growth" ofeveryone, regardless ofeconomic or other handicaps.204 Dewey's good democratic regime depends on an enlightened, public-spirited, and active citizenry, and an ignorant, selfish, or apathetic population must be guarded against by a government school system designed for that system. 205
Regrettably, while the doctrines presented in his works are ambiguous, and while he was a "dreadful lecturer", "Dewey wrote about everything, and almost everything he wrote was influential. ,,206
d) "Positive Economics", especially in the United States, is pursued by a number of organizations, including the National Bureau ofEconomic Research and the Bureau of Labor
Statistics. Perhaps the most prominent individual economist who endorses positivism is
Milton Friedman (1912- )207
Dewey's pervasive influence appears to have touched even Friedman, a standard- bearer ofconservatism/libertarianism in the United States, in his famous (and controversial208 ) methodological essays. Like Dewey, Friedman argued that disagreements about policy
204 Ibid., 863.
205 Ibid., 866.
206 Roger Scruton, "Progressive Mischief', review ofJohn Dewey and the High Tide ofAmerican Liberalism, by Alan Ryan (Norton, 1995), in Wall Street Journal, 20 July 1995, AI0.
207 Glenn L. Johnson, 78.
208 Friedman's essays on methodology "generated considerable, as yet unabated, controversy and confusion, bringing with it a mass of literature." (Deborah A. Redman, Economics and the Philosophy ofScience (New York: Oxford Univ. Press, 1993), 9911. 14.. 68 prescriptions among disinterested people grow out oftheir differences in perceiving results ofthe different proposals, and this disagreement can be eliminated by positivistic research209
"It was Friedman who gave the appellation positive its positivistic tenor. Friedman, in his famous essay on positive economics (1953, pp. 4-5), ties empiricism to the is-ought dichotomy. ,,210
Friedman described his positivist methodology as independent ofany particular ethical position or normative judgment, stating:
"Its task is to provide a system ofgeneralizations that can be used to make correct predictions about the consequences ofany change in circumstances. Its performance is to be judged by the precision, scope, and conformity with experience ofthe predictions it yields. In short, positive economics is, or can be, an 'objective' science, in precisely the same sense as any of the physical sciences. Of course, the fact that economics deals with the interrelations of human beings, and that" the investigator is himself part ofthe subject matter being investigated... raises special difficulties in achieving objectivity at the same time that it provides the social scientist with a class ofdata not available to the physical scientist. ,,211
For Friedman's instrumentalist methodology, it is not necessary that the assumptions of a hypothesis be accurate or realistic; the evidence in favor ofa hypothesis consists only ofits repeated failure to be contradicted, so the decisive test is whether the hypothesis works for the phenomena it purports to explain. 212
209 Glenn L. Johnson,.78
210 Redman, 93 .
2ll Milton Friedman, "The Methodology ofPositive Economics", Essays in Positive Economics (Chicago: University ofChicago Press, 1953),4-5.
212 Ibid., 8-9. 69
Writing in support ofFriedman's methodology, Lawrence A. Boland stated, "So long as a theory does its intended job, there is no apparent need to argue in its favor (or in favor ofany ofits constituent parts)... a theory's predictive success is always a sufficient argument in its favor." According to Boland, instrumentalists (like Friedman) are not concerned with the truth of their theories, hypotheses, or assumptions, so long as their conclusions are
"successful" .213
On the other hand, Mark Blaug (who has elsewhere been critical of the Austrian methodology) asserted that science ought to do better than just predict accurately. He states,
"[T]he moment the predictions fail, the theory has to be discarded in toto because it lacks an underlying structure ofassumptions, an explanans that can be adjusted or improved to make better predictions in the future. ,,214
Daniel Hausman, a philosopher, remarked:
"Most methodological writing on economics is by economists. Although the bulk is produced by lesser members of the profession, almost all leading economists have at one time or another tried their hand at methodological reflection. The results are usually poor. If one read only their methodology, one would have a hard time understanding how Milton Friedman or Paul Samuelson could possibly win Nobel Prizes. It is thus less surprising that the economics profession professes such scorn for philosophizing than that its members spend so much oftheir time doing it. ,,2lS
213 Lawrence A. Boland, "A Critique of Friedman's Critics", Journal of Economic Literature, vol. XVII (June 1979): 508-509.
214 Mark Blaug, The Methodology ofEconomics, Or How Economists Explain, 2nd ed. (Cambridge: Cambridge Univ. Press, 1992),98-99.
215 Daniel M. Hausman, "Philosophy and Economic Methodology", in PSA 1984, vol. 2, eds. Peter D. Asquith and P. Kitcher (East Lansing, Mich.: Philosophy of Science Assn., 70
James M. Buchanan, sympathetic to the Austrian School, criticized Friedman for his tendency to identify "society" as the entity with which economists are concerned, instead of society's "meaningful individual components". For Buchanan, Friedman's loose definition
"makes it al1 too easy to slip across the bridge between personal or individual units ofdecision and "social" aggregates?16 In a further statement, Buchanan suggested that Friedman objects to the Austrian subjectivist approach, because Friedman has a naive notion about the
application of methodological subjectivism. Buchanan stated, "Admittedly, a connection between accumulated empirical evidence and paradigm shifts must exist, but this is not nearly so direct as Friedman seems to think." Buchanan does not think that any economist who does
not espouse a variant ofAustrian subjectivism knows what he is doing. 217
Final1y, Hayek stated, "I prefer true but imperfect knowledge, even ifit leaves much
indetermined and unpredictable, to a pretence ofexact knowledge that is likely to be false. 2l8
1984), quoted in Redman, 101.
216 James M. Buchanan, "What Should Economists Do?", What Should Economists Do? (Indianapolis: Liberty Press, 1979), 22.
217 James M. Buchanan, "General Implications ofSubjectivism in Economics", What Should E~onomllits Do?, 90-91.
218 F.A. v. Hayek, "The Pretence ofKnowledge", 29. 71
B. AUSTRIAN RESPONSES TO THAT ILK
1. ADDITIONAL PHILOSOPHICAL INFLUENCES ON AUSTRIAN THOUGHT
While he appears to be wrong in his conclusion that Kant had little or no influence on the philosophy of the Austrian Schoof19, Barry Smith otherwise provides an interesting summary by which Austrian philosophy can be characterized:
a) inspiration by or close connection to empirical science;22o
b) concern with the language of philosophy;
c) a special relation to realism (both in an ontological sense and an epistemological sense,
leaving no divorce between the phenomenal and noumenal worlds, so the world
experienced and known is the same as the world as it is;
d) realism associated with an Aristotelian commitment to ontological adequacy, that is,
a concern for how the paI1s ofa thing fit together to form a whole;
e) a concern for the unity ofscience, although the followers ofBrentano see a milder form
than that espoused by the Vienna Circle;
219 B. Smith, 212-213. However, Smith said later that the Austrians would apply the synthetic a priori to a broader range ofoccurrences than Kant. (Ibid., 221). Hayek ascribed an extremely important role to Kant and his concepts of "law as the protection ofindividual freedom" and the "Rule ofLaw", placing him (along with von Humboldt and Schiller) among the greatest and earliest ofContinental liberals. (F.A. v. Hayek, "Liberalism", New Studies, 127,134-135).
220 B. Smith, placing Carl Menger in the context ofAustrian philosophy, stated, "Both Mach and Brentano were 'empiricists', but there is a striking difference between the phenomenalist empiricism ofMach and what we might call the qualitative and structuralist empiricism ofBrentano and his circle.... [T]he Austrian economists will be seen to be allied with Brentano and his heirs" (300-301). 72
f) a special relation to the a priori, revealed, for example, by the willingness to accept
disciplines like phenomenology and Gestalt theory221;
g) an overriding interest in the relation between macro-phenomena and mental
experiences or other micro-phenomena that underlie or are associated with them; and,
h) a sympathy toward British empiricist philosophy222, that is, "a concern to develop a
philosophy 'from below', on the basis of detailed examination of particular examples,
rather than 'from above', in the fashion ofmany German philosophers. ,,223
In addition to the other philosophical influences discussed in previous sections, following are some ofthe thinkers who had influence on the Austrian School:
a) Gottfried Wilhelm Leibniz (1646-1716)-- Along with Descartes, his
formulation ofthe a priori concept is still current. He stated that there is knowledge that
is universal, necessary, and wholly independent of experience (distinguished from a
posteriori, or empirical, i.e., depending on experience or observation). The a priori
argument is one in which a conclusion follows deductively from premises, so that, ifthe
premises are true and the argument valid, no experience is needed to confirm the
221 A. Flew, p. 131: "Gestalt theory was originally set up on general principles in opposition to the prevailing psychological atomism ofthe empricist tradition... For Gestalt theory, seeing is essentially a phenomenological process in so far as what is 'seen' is what appears to the seer rather than what may actually be there."
222 For example, see F.A. v. Hayek, "The Legal and Political Philosophy of David Hume (11711-1776), The Trend ofEconomic Thinking, 101-118.
223 B. Smith, 213-215, 219. 73
conclusion, and no experience could refute ie24 (although Hayek, influenced by Sir Karl
Popper in this regard, would acceptfalsijication ofa theory225).
Leibniz also developed the concept of monad, meaning "unit" or "unity"226.
Monads enter into composites but are, themselves, the simplest ofbeings and indivisible.
On the other hand, monads have internal complexity in the form of a multitude of
simultaneous modifications as they "perceive" or relate to other monads. 227
However, monads should not be thought of as material substance. Leibniz
described them as "incorporeal automata". They are soul-like beings that unite with an
organic body to fOlm an organism or living creature. 228 Leibniz conceived ofthe monad
as a combination ofvolitional and cognitive elements, "a spontaneous principle ofaction,
which tends toward change unless it is in some way impeded; and it tends toward change
in accordance with the law of final causes, i.e., it aims to attain the greatest possible
good. ,,229
Leibniz distinguished between three grades of monads, with gradations In
224 J.O. Urmson and 1. Ree, "A priori", by P.H. Nowell-Smith 19-20.
225 Urmson & Ree: "Popper", Ernest Nagel, 252-253.
226 Flew, "Monadology", 236-237.
m Donald Rutherford, "Metaphysics: the Late Period", The Cambridge Companion to Leibniz, ed. Nicholas Jolley (Cambridge: Cambridge University Press, 1995), 133-134.
228 Ibid., 140 .
229 Ibid ., 141 . 74
between, based on "the relative quality oftheir faculty ofperception". At the lowest level
are those simple substances having no sensory awareness and no self-conscious reflection
on the contents of their perceptions. At the next level, Leibniz locates "souls", with
sensation and memory, which can reason according to the lessons ofexperience and habit.
At the highest level are "spirits" or "rational minds", which can know necessary truths,
acquired through reflection on the nature oftheir own minds. 230 Such minds or rational
souls are capable ofdiscovering eternal truths. 231
Leibniz anticipated the Austrian School of Economics in its methodological
subjectivism Like Aristotle before him and the Austrian economists after him, Leibniz
held that "desire is consequent on opinion rather than opinion on desire; for the thinking
is the starting point. lIm
The idea of natural law was central to Leibniz's moral and political theory. He
distinguished between positive and natural law and criticized "the error ofthose who have
made justice dependent on power", which he attributed to a "confounding [of] right and
230 Ibid., 142-143.
231 Gregory Brown, "Leibniz's Moral Philosophy", The Cambridge Companion to Leibniz, 427. "... Kant's account ofthe understanding and its transcendental functions can best be appreciated as a creative adaptation and transformation ofthe Leibnizian conception of the intellect or 'soul-monad'." (Henry E. Allison, "Gurwitsch's Interpretation of Kant: Reflections ofa Former Student", Idealism and Freedom: Essays on Kant's Theoretical and Practical Philosophy (Cambridge: Cambridge Univ. Press, 1996), 67.
m G . Brown,.412 75
law."2H For Leibniz, "no action could be tmly just unless it proceeded from appropriate
motives." That is, anyone acting out ofhope ofreward or fear ofpunishment, which are
calculating and mercenary motives, is not just.234 "Justice, then, demands that we love
others disinterestedly and not seek their good solely as a means, even as a means to
pleasing God. ,,235 Thus, Leibniz precedes the Austrian School in viewing man
optimistically, with social institutions evolving out ofhuman action and cooperation, not
out offierce Hobbesian battles among men.
b) Christian von Wolff (1679-1754)-- a follower of Leibniz who believed that
philosophy is strictly the study ofessence, not existence, and all maxims and assumptions
are derivable from Leibnizian principles ofsufficient reason and identity.236 Actually, even
into the nineteenth century, Leibniz was sometimes regarded as a foremnner ofWolff,
who had systematically organized Leibniz's scattered writings. 237 Wolffwas controversial
in his native Prussia, but his works were known in Vienna. 238
Wolff anticipated the methodology of the Austrian School of Economics by
2.H Ibid., 413-414.
234 Ibid., 421.
m Ibid., 426.
236 Flew, 377.
237 Catherine Wilson, "The Reception of Leibniz in the Eighteenth Century", The Cambridge Companion to Leibniz,444.
m Ibid., 450-451 . 76
advocating that the general form of scientific method was hypothetico-deductive. 239 He
also accepted the duality ofthe physical and the psychological 240 Wolffbelieved that in
contests between method and dogma, dogma would have to give way.241
An important development ofthe "Leibniz-Wolff' philosophy resulted from their
interpretation of"psychology" as a substitute for "metaphysics". This had an important,
lasting impact on the development ofpsychology, and even anthropology, in austria until
the destruction ofthe Freud's"Austrian School ofPsychoanalysis".
c) Franz Brentano (1838-1917) (not to be confused with his positivist brother,
Lujo Brentano) was a former Catholic priest who introduced a doctrine of
"intentionality", distinguishing and characterizing mental events as "the direction ofthe
mind to the object" in perception, judgment or belief, and approval or disapproval. 242 By
"intentionality", Brentano means "what is revealed by the fact that most mental verbs are
senseless (or only elliptically significant) in the absence ofappropriate ohject-expressions,
which state what the mental activity expressed by the verb is concerned with."
Furthermore, "intentionality is not a relation between mind and object; it is merely
239 Ibid., 446.
240 Ibid., 447.
241 Ibid., 448. In this, perhaps, Wolff anticipated the intramural debate between branches ofthe Austrian School in the United States in the twentieth century discussed in the final section ofthis paper.
242 Flew, 48-49. 77 relational or relationlike... ,,243
"[W]here Mach saw science in terms ofalways provisional hypotheses concerning the orderings (functional relations) ofelements constantly in flux, Brentano held that we can achieve scientific knowledge in the sense ofknowledge ofqualitative universal laws, laws pertaining precisely to the structures of elements and to their combinations into wholes of different sorts." Followers of Brentano have not felt limited, as have the followers of Mach, to science as a predictive enterprise, limited to what is capable of
being expressed numerically or in a model. Followers ofBrentano have felt free to look
at the things in themselves. 244
Brentano instructed his pupils in a "way of doing philosophy" that involved
acceptance offive principles:
1. Description is psychologically prior to explanation and seeks to establish the
laws governing the unfolding ofevents in time;
2. The tasks ofthe philosopher and the empirical scientist cannot and should not
be pursued in separation, since philosophy is not pursued in abstraction from other
disciplines but as part ofthe attempt to come to grips scientifically with the world
and, thus, forms a continuum with science;
3. The general traits ofreality exist only in whatever are the relevant instances.
243 Urmson & Ree, "Brentano", by IN. Findlay, 55.
244 B. Smith, "On the Austrianness ofAustrian Economics", 217. 78
It is the existence of ;mmanent un;versals in the things which makes science
possible;
4. Given segments ofreality can be described by appropriate empirical methods,
and description proceeds, not by building abstract models ofthe phenomena, but
by concerning itself directly with the things in themselves; and,
5. The appropriate form of description involves construction of a taxonomy of
the different kinds ofbasic constituents in whatever is the relevant domain and of
the different forms of relation between them. Thus, ontological theories of
relations and ofpart and whole come to enjoy a uniquely privileged status within
the edifice of science.m
In this, Brentano was greatly responsible for the spread ofmodern scientific ideas and scientific philosophy around the Habsburg Empire. 246
d) Edmund Husser! (1859-193 8)--student of Brentano, was the founder ofthe phenomenology movement for the pursuit of conceptual, as opposed to empirical, knowledge by the study ofthings as they appear in consciousness. Like Kant, he wished to discover a prh)f'; principles governing mind, law, society, ethics, religion, etc. 247 As a phenomenologist (as opposed to phenomenalist), he proposed to begin from a scrupulous inspection ofone's own conscious processes, an a prhJr; investigation ofthe
245 B. Smith, Austrian Philosophy, 30-31.
246 B. Smith, "On the Austrianness ofAustrian Economics", 218.
247 Urmson & Ree: "Husser!", IN. Findlay, 145. 79
essences or meanings common to the thought ofdifferent minds.2-l8
Associated with the phenomenologist movement is the concept of"Gestalt", which
implies that what is "seen" is what appears to the subject, rather than what may actually
be there249 This seems to be another way of saying that "things are what [subjective]
acting people think things are." Gestalt is one ofthe roots from which methodological
individualism springs. 25o
In his philosophy, Husserl tried to disclose the ultimate grounds ofrationality, to
rescue it from the falsifying interpretations of positivist and historicist modes of
skepticism. 251 For him, science and philosophy must not take for granted the assumptions
of science or ordinary experience. 252 On the other hand, the manner in which reason
constitutes meanings has certain invariable features (a priori), i.e., "reason's unchanging
essence to seek clarity about ultimate grounds. But, those grounds are to be found in its
own activity," while "how the 'surrounding' or 'natural' world is conceived, as something
m Flew, "Phenomenology", 266.
m Ibid., "Gestalt", 131.
250 Hayek seems to take the side ofthe phenomenologists in the sense that he disputes the validity of the phenomenalist/positivist thesis that phenomena are subject to invariable laws ifthe term, "phenomenon", is taken in its strict meaning ofthings as they appear to us. (Hayek, "Philosophical Consequences [1952]", The Essence ofHayek, eds. C. Nishiyama and K.R. Leube (Stanford, Calif.: Hoover Institution Press, 1984) 233 ). [emphasis added].
251 Strauss & Cropsey, "Edmund Husserl", by Richard Velkley, 871.
252 Ibid ., 872. 80
'external' to rationality, has nothing permanent about it. ,,253
25 Anticipating Hayek, Husser! criticized historicism -l and psychologism (the
attempt to reduce objects to mere psychological attributes or states ofmind). 255
e) Kar! Popper (1902-1994) defined scientific statements as ones which deny that
something logically conceivable is actual1y realized, that is, it is insufficient that there
should be only confirming empirical evidence, and it is essential that the statement be
capable of being disproved by "some conceivable spatio-temporally located event
exemplifying a possibility which the statement excludes." This feature of falsifiability
demarcates science from non-science. Contrary to the inductive method ofthe procedure
of Bacon and, later, the positivists, modern science calls for a "hypothetic-deductive
method. ,,256
Popper's starting point was a criticism of the logical positivism of the Vienna
Circle and their "verifiability principle ofmeaning.257 He returned the debate to the logical
258 problem ofinduction , that is, the problem ofdetermining how logically to infer anything
253 Ibid., 874.
25-l Ibid., 874, 878-88 I.
255 Ibid., 875-878.
256 Urmson & Ree, "Popper", by Ernest Nagel, 252-253.
257 Blaug, The Methodology ofEconomics, 12.
258 David Hume (1711-1776) had concluded that an inductive argument (i.e., from experience) must be without rational foundation. For Hume, ideas cannot be drawn from observations ofthe external world, but only from "perceptions ofmind", which are projected 81
about future experience on the basis of nothing but past experience. At some point,
induction requires an illogical leap, where true premises lead to false conclusions. 259 For
Popper, the problem of induction arose "from a mistaken solution to the problem of
demarcation--from a mistaken (postivist) belief that what elevated science over
pseudoscience was the 'scientific method' of finding true, secure, and justifiable
knowledge, and that this method was the method ofinduction; a beliefthat erred in more
ways than one. ,,260
Since we can never demonstrate that anything is materially true, but we can
demonstrate that some things are materially false, Popper concluded that science is a body
ofsynthetic propositions about the real world that can, at least in principle, be falsified by
empirical observations261
Like Husserl, Popper anticipated Hayek in criticizing psychologism262 and
historicism26~ Like Hayek, Popper was influenced by Kant, although he declared himself
out onto the world. Popper maintained that Hume had succeeded in demonstrating the invalidity ofinduction and went on to say that respectable science advances by hypothetico deductive methods, rather than induuctive methods. (Flew, 155-156, 172).
259 Blaug, The Methodology ofEconomics, 13-14.
260 Karl Popper, Unended Ouest: An Intellectual Autobiography (LaSalle, Ill.: Open Court, 1982), 53, 86-87, 145-148.
261 Blaug, 13-14.
262 Popper, "The Empirical Basis (1934)", Popper Selections, ed. David Miller (Princeton: Princeton Univ. Press, 1985), 152-161.
263 Popper, "Historicism (1936)", Popper Selections, 289-303. 82 to be an "unorthodox" Kantian264 On the other hand, unlike Hayek, Popper proposed an analogy between social engineering and physical engineering, so long as the social engineering is "piecemeal" (as opposed to holistic or Utopian).265
26~ Karl Popper, Unended Quest, 82-83.
265 Popper, "Piecemeal Social Engineering (1944)", Popper Selections, 304-318. 83
2. SOME VARIATIONS WITHIN THE AUSTRIAN SCHOOL
Beginning with Menger, the various representatives ofthe Austrian School produced their own responses to the methodological problem. One commentator even suggested that
"the nature of Hayek's epistemological position is totally different from that of other representatives of the Austrian School. Apart from Hayek, who developed a deductivist position, the Austrians developed inductivist positions which for internal reasons are all invalid. ,,266
Menger distinguished between strict empiricism or positivism, on the one hand, and a priorism, on the other. He tried to establish the latter by introducing a theory ofinduction.
Bohm-Bawerk concluded that the social sciences are empirical, in that experience may require that their theories be discarded, so they can claim only partial certainty. Wieser and Mises concluded that social theories are a priori valid. Schumpeter, an Austrian by nativity, and later only distantly associated with the Austrian School ofEconomics, considered the social sciences to be systems ofimplicit definitions. Finally, Hayek"developed an epistemological position that one may label 'hypothecism', a form ofcritical rationalism," according to which the social sciences are empirical sciences whose theories are falsifiable, but not verifiable, and therefore, always hypothetical. 267
Hayek's deductivist solution was based on Popper's critical rationalism, where Popper
266 Milford, 336.
267 Ibid., 328. 84 developed his solution to the problems ofinduction and demarcation. 268
Although nearly contemporary, Mises and Hayek did hold different attitudes regarding this issue (discussed more fulIy in the final section ofthis paper). Mises held stronger views
about the a priori, believing that alI economic hypothesis can be inferred from fundamental
postulates about human behavior, which are known to be true independently of any
experience ofreality, and denying the need to test economic theories empiricalIy, because to
do so would 10gicalIy contradict his Kantian a priorism. On the other hand, Hayek
recognized validity in empirical falsification .269
268 Ibid., 338.
269 F.A. v. Hayek, Law, Legislation, and Liberty: the Mirage of Social Justice, 43-44. 85
C. SOME METHODOLOGICAL ISSUES
I. Internal Contradictions ofLogical Positivism
The positivists contended that knowledge (i.e. empirical knowledge) must be verifiable or, possibly, falsifiable by experience, that nothing can be known to be true a priori, and that a priori statements have no factual content, are true only by convention, and are merely tautological information about the use of symbols and their transformational rules. 270
The position is fatally flawed by inconsistency. The very fact that the positivists' fundamental axiom relies on a priori knowledge defeats their claim. That is, on their own terms, their contention is either an empty tautology, or it is empirical and subject to falsification, but without having some a priori knowledge ofthe criteria by which its truth can be assessed, the investigation cannot proceed. 271 Experience demonstrates that two sequential observations can only be classified as "repetition" or "nonrepetition", and to elevate such observations to positive confirmation or negative falsification, one would be forced to consider "constant, time-invariably operating causes", in addition to the empirical observation.272
In a different context (the original Methodenstreit), Carl Menger pointed out that, because human phenomena are not strictly typical, and also as a result of human free will,
270 Hans-Hermann Hoppe, "Austrian Rationalism in the Age of The Decline of Positivism", Champions of Freedom, vol. 17, Ed. R. Ebeling (Hillsdale, Mich.: Hillsdale College Press, 1991),68.
271 Ibid., 74.
272 Ibid., 75. 86
"empirical laws (!!ahsolute strictness are out ofthe question in the realm ofphenomena of human activity. lIm
Hayek, himself, recognized that there is an empirical or experiential component of human knowledge. 274 However, he also pointed out that, while experience shapes our mind and consciousness, our minds and consciousness must classifY our experience according to its significance, at least in part according to the order ofapparatus ofclassification that has been built up by pre-sensory linkages. 275
m C. Menger, Investigations, Appendix V, 214-215. (emphasis in original)
m Hayek, "Philosophical Consequences", 225.
275 Ibid., 226-227, 229-230. 87
2. Is Empirical Knowledge Inconsistent with the Austrian Theory?
It has been suggested that Hayek's own mentor, Ludwig von Mises, held that his basic axiom of action, and its logically deductive implications, cannot and need not be tested empirically, on the ground that the concept ofhuman action is prior to all experience. It is also arb'Ued, on the other hand, that the issue ofhuman action is a matter for observation and has a strong empirical basis. Ironically, the attempt to refute the axiom is, itself, an action and automatically defeats the refutation effort. 276
In any event, Hayek, following Popper's teaching, recognized that it can be appropriate to test a theory to distinguish between what is scientific and what is not. 277 Even so, as Hayek asserts, in the study ofhuman action, we must always start with introspection ofour mental processes, "which to us remain irreducible entities. ,,218
276 Alexander H. Shand, The Capitalist Alternative: an Introduction to Neo-Austrian Economics (New York: New York University Press, 1984),2.
277 Hayek, "The Pretence ofKnowledge", New Studies, 31-32.
m Hayek, "Philosophical Consequences", 248-249. 88
D. HAYEK'S CRITICISMS OF DIFFERENT FORMS OF POSITIVISM
In at least two ofhis books, Hayek criticized the various positivists described above.
In The Sensory Order, Hayek criticized the "psychology of perception and the philosophy of mind from before 1918, both ofwhich were dominated by the ideas ofErnst
Mach" and "added to his former criticism ofMach new objections to behaviorism and Gestalt theory. ,,279 In fact, Mach provided Hayek with his starting points on the issues ofknowledge and the applicability ofthe methods ofthe physical sciences to the social sciences. 28o Unlike
Mach, Hayek drew a distinction between the phenomenal order and the physical order to derive an "event ontology", concluding that the contrast between the two orders "is based on the differences of events in their effects upon each other and the differences in their effects
on us. ,,2Xl Further, Hayek accepted that scientists must look beyond the phenomenal world and postulate elements, events, states, and processes which have no sensory character to extend the reach of science beyond description to explanation. 282
In his Counter-Revolution of Science, Hayek criticized the vanous forms of
Comteian-intluenced positivism, showing how facts had been misconstrued and misused through attempts to apply the methods ofthe physical sciences to the social sciences. He did
279 Robert P. de Vries, "The Place of Hayek's Theory of Mind in the History of Philosophy and Psychology", Birner & van Zipp, 311.
280 Ibid., 314.
281 Ibid ., 318.
2X2 Ibid., 319. 89 not attack the inductive fallacy directly, but argued that the subjective nature ofthe subject matter ofthe social sciences (human beings, human action) were not bound by strict general laws, but could be unpredictable in their behavior.
Hayek called the faulty application of the methods of the physical sciences to the social sciences "scientism"283 and its use as a justification for controlling society
"collectivism". The error is in mistaking provisional theories for facts, i.e., in equating social phenomena with institutions, which are only structures ofreiationships between some ofthe many things (people) we can observe in a given space and time284 In the end, objectivism, scientism, and collectivism, and historicism "all fail because they do not take into account that the opinions and evaluations ofindividuals as well as their different knowledge in fact trigger the social sphere. ,,285
Like Popper, Hayek saw the problem as one ofdemarcation, that is, "distinguishing the social sciences from ideologies or from other areas ofenquiry such as the natural sciences, mathematics and logic, morality and ethics, philosophy and metaphysics. ,,286 The difference for Hayek between the physical sciences and economics and other disciplines that deal with complex phenomena is that the physical sciences study events that are directly observable and
283 The scientism with which Hayek was concerned was the "slavish imitation ofthe method and language of Science". Hayek, Counter-Revolution of Science, 24.
2X4 Ib·dI .,94-97, 100-101.
285 Milford, 330; Kresge & Wenar, introduction to Hayek on Hayek, 15-16.
286 Milford, 323. 90 measurable, while the study of complex phenomena like markets involve the actions of countless individuals whose behavior cannot be observed or measured. Thus, the circumstances leading to an outcome of a complex process may never be known or measurable. To rely on spurious measurements will lead to false conclusions. 287 For example, the "correlation between aggregate demand and total employment ... may be only approximate, but as it is the only one for which we have quantitative data, it is accepted as the only causal connection that counts. ,,288
Hayek observed that both kinds of scientific knowledge might, In some sense, ultimately be reconciled. He stated,
"... only the recognition of the primacy of the abstract in the production of mental phenomena can enable us to integrate our knowledge ofmind with our knowledge of the physical world. Science can only deal with the abstract. The processes ofclassification and specification by superimposition ofmany classes, which would turn out to be the determinants ofwhat we experience subjectively as events in our consciousness, appear then as processes ofthe same general kind as those with which we are familiar in the general sciences.... [A] complete reduction of the subjectively experienced mental qualities to exhaustively defined places in a network ofphysical relations is in principle impossible for us, because ... we can never become consciously aware ofall the abstract relations which govern our mental processes. ,,289
287 F.A. v. Hayek, "The Pretence ofKnowledge", 24.
288 IbOdI ., ')_ 5.
289 F.A. v. Hayek, "The Primacy ofthe Abstract", New Studies, 48. Hayek continued to hold, however, that there might be unresolvable tensions between the methods of the physical sciences and the social sciences. He stated, "There are some special problems, however, in connection with those essentially complex phenomena ofwhich social structures are so important an instance, which makes me wish to restate in conclusion in more general terms the reasons why in those fields not only are there absolute obstacles to the prediction of specific events, but why to act as if we possessed scientific knowledge enabling us to 91
No such reconciliation had been achieved by the various positivists ofthe past. "The consequence of historicism and scientism was a failure to grasp that individual action
produces socially coherent unplanned systems. ,,290 The individual makes plans based on his knowledge and anticipations, subject to the pure logic of choice. In this world, where
knowledge of facts relevant to individuals' actions are extremely widely dispersed (and
success is neve..r guaranteed), it is the individual actor and what he knows in interacting with
his fellow-actors that make every economic transaction desirable and appropriate291 It is the
individual actor's efforts, in competition with his fellow-actors, that brings about spontaneous
order and efIiciency, where economic subjects' expectations can be mostly realized. 2n
The same market operations that make the sale and purchase ofgoods and services
feasible contributes "involuntarily" to the spontaneous development ofan extended order in
society, where competition provides for a process of selection that shapes customs and
morality in the midst of a swirling myriad of factual circumstances, more diverse than any
individual can perceive, so that even our traditions may be said to be superior to, or "wiser"
than, our human reason. 293
transcend them may itself become a serious obstacle to the advance ofthe human intellect." ("The Pretence ofKnowledge, 32).
290 D.P. O'Brien, "Hayek as Intellectual Historian", Bimer & van Zipp, 352.
291 Hayek, "The Use ofKnowledge in Society [1945]", Essence ofHayek, 214, 218.
292 Hayek, "Competition as a Discovery Procedure", New Studies, 184.
293 Hayek, The Fatal Conceit (London: University ofChicago Press, 1988) 75. IV. AN INTRAMURAL FRAY
A. SOME DIFFERENCES BETWEEN MISES AND HAYEK
Although Hayek was a student ofMises, Hayek's methodology developed away from
Mises's system. However, the difference may not have become so great as some ofMises's more dogmatic followers have declared it to be. In speaking ofone ofMises's major works,
Socialism, Hayek paid tribute to his mentor, saying, "I still do not agree with all ofit, nor do
I believe that Mises would. He certainly was not one to expect that his followers receive his conclusions uncritically and not progress beyond them. In all, though, I find that I differ rather less than I expected. ,,29.\
One ofthe issues on which Hayek differed from his teacher was Mises's utilitarianism.
Hayek stated that, in one passage with which he disagreed, "Mises asserts ... that liberalism
'regards all social cooperation as an emanation of rationally recognized utility, in which all power is based on public opinion, and can undertake no course of action that would hinder the free decision of thinking men.",m Hayek pointed out, "It certainly was not rational insight into its general benefits that led to the spreading ofthe market economy.... Man has chosen it only in the sense that he has learned to prefer something that already operated, and through greater understanding has been able to improve the conditions for its operation. ,,296
29.\ F.A. v. Hayek, "Ludwig von Mises (1881-1973)", The Fortunes ofLiberalism, 141- 142.
295 Ibid., 142, citing Ludwig von Mises, Socialism, 1981 edition, 418.
296 Ibid.; Cubeddu, 212, 222.
92 93
Elsewhere it has been suggested that Mises's work on the market economy "parallels" the legal positivist Kelsen's (and, therefore, Comte's before him) treatment of political democracy. As for Kelsen, for Mises, "the economy is a form of social organization in which a normative order is used to coordinate the activities ofa large number ofindividuals. Like the democratic state, the market serves as a means through which the application ofviolence in social affairs could be reduced to a minimum, and as an instrument through which individuals could cooperate to reduce the size ofthe gap between the IS and the OUGHT which they confronted in the course oftheir daily lives. ,,297
It may be significant in this regard that Kelsen and Mises were both students of
Friederich von Wieser, who was also Hayek's teacher. However, Hayek points out that though Wieser was an early representative ofthe Austrian School ofEconomics, he was more ofa Fabian socialist. 29X
This Misesian viewpoint ofintentional order should be contrasted with Hayek's vision ofspontaneous order. 299 For Hayek, the market is a result ofthe "Logic ofChoice", not an a priori social institution, a position that cannot be reconciled with Mises's apparently strict a priorism. 300
On another, more fundamental methodological issue, the two differed in their very
297 Leube, "Law and Economics", 167.
29X Hayek, "Ludwig von Mises", 156.
~)99 Leub'de, 'Law an EconomIcs",. 168-169.
.,00 Ibid., 169. 94 understanding of application of the a priori..~ol In this, Hayek was the more sceptical, following Popper's critical rationalism and allowing for empirical refutability oftheories, and
Mises was the more dogmatic. In some passages, Mises denied entirely the possibility of discovering laws by induction and defended the possibility of a purely a priori system of economic theory; he contended that economics as a science was not concerned with the motives behind human action, but only with the implication ofactions themselvesJ02
However, Mises's strict application of the a priori seems to lead into logical contradiction. For Mises, the fundamental axioms "are not derived from experience. ,,303 He continued,
"They are, like those of mathematics, a priori. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp ofhistorical facts. Without them, we should not be able to see in the course ofevents anything else than kaleidoscopic change and chaotic muddle. ,,304
Elsewhere, however, Mises asserted that action does involve apprehension (?f causal relations and (?f regularities ill the phenomena; that action presupposes being in a position to it?fluellce causal relations andje/tuneasiness; that action involves the exercise (?f reason;
301 Israel M. Kirzner, The Meaning ofMarket Process: Essays in the Development of Modern Austrian Economics (London: Routledge, 1992), 119-120.
302 Lawrence H. White, "The Methodology of the Austrian School of Economics" (Auburn, Ala.: Ludwig von Mises Inst., 1977), 15.
303 Ludwig von Mises, Human Action, 3rd rev. ed. (Chicago: Contemporary Books, 1949,1963),32.
.~04 Ibid. 95 that action is a striving to substitute a more sati,~factmyfor a less sali.~factory state of
(~ffairs; that acting man tran.~fers the valuation (~f end\' he aims at to means he anticipates utilizing; that action takes time and presupposes choosing between various opportunities
(~fferedfor choice; that action involves the expectation that purposeful behavior has the power to remove or at least alleviate uneasiness; that action presupposes the uncertainty ~f the future and involves meanings 'rl'hiCh the acting parties allribute to the situation. Since these various experiential, temporal, and logical incidents cannot be reduced to the single concept of action simultaneously and without circularity, if Mises's a prim"ism is applied dogmatically, it contradicts itsele05
If, as Murray Rothbard and his dogmatic followers claim, Mises insisted that the a priori must be strictly applied, with no exception for experience, then Mises's theories would seem to come into conflict with the theories of the very founder of the Austrian School, himself'O(' It should be remembered that Carl Menger ordained, "All things are subject to the law of cause and effect. This great principle knows no exception... ,,307 He continued,
"The idea of causality, however, is inseparable from the idea of time. A process of change has a beginning and a becoming, and these are only conceivable as processes in time. Hence it is certain that we can never fully
305 B. Smith, Austrian Philosophy, 3I 5-316, citing Mises, Human Action, Chapters IV and V, and Epistemological Problems ofEconomics (New York: New York University Press, 1981).
306 Perhaps this is not too far-fetched. Screpanti points out, at p. 197, that "Mises, who, while considering himself as the real heir of Menger, from the methodological and philosophical points ofview had little in common with the founder ofthe School.
307 C. Menger, Erinciples, 51. 96
understand the causal interconnections of the various occurrences in a process, or the process itself, unless we view it in time and apply the measure oftime to it. ,,308
Menger also stated,
"The real phenomena of economy actually present to us types and typical relationships, real regularities in the recurrence of phenomena, real regularities in coexistence and succession, which, to be sure, are not of absolute strictness, but to determine which is under all circumstances the task oftheoretical economics and particularly its realistic orientation.
"Both the exact and the realistic orientation oftheoretical research are therefore just{fied Both are means for understanding, predicting, and controlling phenomena, and to these aims each ofthem contributes in its own way. But whoever denies the justification and usefulness of the one or the other is comparable to a natural scientist who one-sidedly values physiology highly, perhaps under the pretext that chemistry and physics are based on abstractions, and would deny the justification ofthe latter or their justification as means for the understanding oforganic structures. Or else, conversely, he resembles a physicist or chemist who would deny to physiology the character of a science because its laws are for the most part only 'empirical. ",,1309
Barry Smith, iterating his description of the peculiar Austrian way of doing philosophy, under the influence ofBrentano and others, states, "Indeed Austrian economics seems to be like other a priori disciplines in that it involves a multiplicity of concepts connected together not hierarchical1y but rather in a dense holistic network of mutual connections whose order is not capable ofbeing antecedently established. ,,310
308 Ibid., 67 .
309 C. Menger, Investigations, 64 (emphasis added).
310 B. Smith, Austrian Philosophy, 316. 97
B. A MISESIAN BRANCH OF THE FAMILY TREE
Some ofMises's American disciples carried his strict a prioris/11 to dogmatic extremes.
Murray N. Rothbard was, perhaps, the staunchest defender ofMises's extreme a priorism. 311
Echoing his teacher, Rothbard proclaimed, "Correct theory is based on the true and unrefutable axiom that human beings act, and proceeds by deducing the logical--and therefore--true implications from that formal fact. ,,312
In a paper published in 1992, Rothbard argued that "several different and clashing paradigms have been allowed to develop and fester, all in the name of' Austrian economics'; that a great deal of confusion and incoherence have resulted; and that this coexistence of contradictory doctrine and proliferation of clutter should be brought to an end. ,,313 He attributed the "clutter" to a "proliferation oferror and of false leads and byways" associated with the contemporary revival in interest in Austrian Economics that had not yet been cleaned up by "corrective forces"31~ Rothbard's solution was to declare,
"[T]he correct Austrian paradigm is and can only be the Misesian, i.e. the paradigm ofMisesian praxeology--that the competing Austrian paradigms, in particularly [sic] the fundamentally irrational 'evolved rules,' 'knowledge,' 'plans,' and 'spontaneous order' paradigm of Hayek; and the more extreme .ultra-subjectivist' or nihilist paradigm ofLachmann, have both been fallacious
311 White, 30.
312 Murray N. Rothbard, "The Present State ofAustrian Economics" (Auburn, Ala.: Ludwig von Mises Inst., ]992), 8.
3D Ibid., 5.
31~ Ibid., 6. 98
and pernicious... ,,315
Against representatives of other branches of the Austrian School of Economics,
Rothbard made the following methodological criticisms:
1. Lachmann intoned the mantra, "The past is, in principle, absolutely knowable; the future is absolutely unknowable." Therefore, for Lachmann's economic man, there can be no economic law, no law ofcause and effect, and no vas/ehen ofpatterns that are likely to occur in the future. Rothbard contended that, since Lachmann denied the possibility ofknowing the future at all, he inevitably became a "mere institutionalist", a "mere historian ofthe record of man's past economic activities. ,,31G Further, although Rothbard acknowledged that Austrian
Economics is not concerned with unattainable equilibrium states, he scolded Lachmann for disregarding final equilibrium altogether. 317
2. Hayek was "obsessed" with the idea ofpervasive and systemic ignorance. For him, general laws could only emerge from "the blind, unconscious forces of 'evolution'--the evolved rules that the later, post-Misesian Hayek... wishes us to worship and follow blindly lest we perish'Lm319 Rothbard contrasted the "Misesian Man", who uses the power ofreason
315 Ibid., 7.
316Ibid ., 11 .
317 Ibid., 14.
m Ibid., 12 .
319 In a footnote, Rothbard attributes Hayek's use of the word, "evolutionary", to "pseudo-science". In making this groundless criticism, Rothbard seems to ignore Hayek's explanation that his use of the term to explain the development and survival of social 99 to deduce economic theory.320
In emphasizing differences between Mises and Hayek, Rothbard emphasized, at one point, the Misesian idea of"acting man" ("Hayek's emphasis on ignorance and 'knowledge' is misplaced and misconceived. The purpose ofhuman action is not to 'know' but to employ means to achieve goals. "321). At another point, Rothbard emphasized the Misesian idea ofthe
"reasoning man" ("Man ... is the uniquely rational animal; reason is man's unique and essential instrument to find out what his needs and preferences are and to discover and employ the means to achieve them. "322) Rothbard accused Hayek of "deviousness"m, but in Rothbard's own contradictory analyses, it is impossible to determine which ("action" or "reason") was more meaningful for him and his mentor.
Finally, in an adhominem criticism, Rothbard disparaged Hayek for leaving the United
States for Germany for personal financial reasons.32-l
3. Rothbard also criticized Israel M. Kirzner. Rothbard queried, "If superior alertness accounts for entrepreneurial profits, what in the Kirznerian world can count for
institutions does not relate to Darwinism. (F.A. v. Hayek, The Fatal Conceit (Chicago: University ofChicago Press, 1988),23).
320 Rothbard, 13.
321 Ibid., 20.
322 Ibid., 22.
.'13 Ibid., 23 .
32~ Ibid ., 41-42. 100 entrepreneurial losses? The answer is nothing." For unfathomable reasons, Rothbard denied that Kirzner's entrepreneur is, like Mises's entrepreneur, a risk-taker and active in taking his risks. 325 But even ifit remained unemphasized by Kirzner, it is impossible to imagine how entrepreneurial alertness might lead to entrepreneurial profit in the absence of some associated action326 Is not even "discovery" an act (like choosing not to act), even under Misesian a priorism? Rothbard's strong criticism seems to imply a distinction without a difference.
4. Rothbard criticized Professor Karen Vaughn, because her history ofthe modern
Austrian revival was a "strictly biased account from the HayekianlLachmannian point of view"327 The bias criticism is unconvincing in the absence ofevidence that the point ofview of the critic, himsel( is not unbiased. 328 In yet another ad hominem attack, Rothbard described Vaughn as a "bedazzled youth" .329
In contrasting the positions of Hayek and Mises, perhaps unintentionally, Rothbard
325 Ibid, 13-14.
326 Charles Baird, "Profit and Loss", The Elgar Companion to Austrian Economics, 145-146, citing Israel M. Kirzner, "Alertness, Luck and Entrepreneurial Profit, Perception, Opportunity, and Profit (Chicago: Univ. ofChicago Press, 1979): "The entrepreneur notices what is to him a real profit opportunity, and he attempts to grasp it. ... The entrepreneurial vision is an active originatingjorce that sets in motion the series oftransactions.... Alertness to hitherto unnoticed preferred possibilities is purposive human action." (emphasis added).
327 Rothbard, 40.
328 For instance, Rothbard accused Prof Vaughn ofleaving out "some significant facts from her starry-eyed account" because she was on the board ofProf Don Lavoie's Center for the Study ofMarket Processes. (Ibid., 40). However, in his article, Rothbard never disclosed his own close relationship with the Ludwig von Mises Institute.
329 Ibid., 42. 101 even seemed to imply that Mises's (and, therefore, Rothbard's own) methodology was really positivistic by asserting an un-Mengerian claim that language was not a spontaneous development ofhuman action, but a rational creation ofhuman design:no
Rothbard may have taken his criticisms beyond the point to which his mentor would have taken them. 331 Going beyond merely pointing out the methodological differences between him and his intellectual cousins, Rothbard's criticisms seem unnecessarily pejorative and nasty.
The tone ofRothbard's protege, David Gordon, is not as nasty, but his criticism seems equally dogmatic and groundless. Gordon vigorously objected to the use by a group of
Austrian economists ofhermeneutics, describing it is a "relatively new Continental style of philosophy".332.m While acknowledging that the hermeneutics movement's "principal work
310 Ibid., 29.
3>1 Hayek, "Ludwig von Mises", 148: "If [Mises's] emphasis on the a priori character oftheory sometimes gives the impression ofa more extreme position than the author in fact holds, it should be remembered that in a certain sense the abstract description of a kind of pattern, as it is provided by logic and mathematics, is always deductive and analytical; only the assertion that this or that pattern will be found in certain circumstances can be tested empirically. Thus, on examination, the differences between the views which Professor Mises has long held an the modern 'hypothetico-deductive' interpretation oftheoretical science (e.g., as stated by Karl Popper in 1935) is comparatively small..."
.H2 David Gordon, "Hermeneutics Versus Austrian Economics", (Auburn, Ala.: Ludwig von Mises Inst., 1986), 3.
133 The implication that hermeneutics is "Continental" disregards that Austrian Economics comes from the same continent. The claim that hermeneutics is "new" disregards that, not including earlier efforts at biblical interpretation, it pre-dates Austrian Economics by several decades. (see Francis Lieber, Legal and Political Hermeneutics (Boston: Little and Brown, 1839). I wrote to Doctor Gordon on July 31, 1995, (copy attached as Appendix A), 102 is the massive and erudite Truth and Method, by the German philosopher Hans-Georg
Gadamer";B4 Gordon aims most ofhis criticism at Martin Heidegger, a German academic of questionable integrity (he was accused of endorsing the Nazis),335 under whom Gadamer studied. 336 Although it seems beyond any question ofmetaphysical certitude that Gadamer's book is objectively difficult to get through, it appears that Dr. Gordon objects to hermeneutics mainly because he does not understand it to fit into any economic theory or method. 337
Gordon also protested that the hermeneuticists never address the
MisesianiRothbardian claim "to have established a science ofhuman action based upon logical deduction from self-evident axioms. ,,338 In asserting this objection, Gordon failed, first, to recognize some logical contradiction arising from dogmatic application of a prim'ism
(discussed supra).
However, in pressing his claims, Gordon seems to have overlooked Mises's own statement, contradicting the idea that his a priorism must necessarily be applied dogmatically,
"Understanding, by trying to grasp what is going on in the minds ofthe men concerned, can
asking for clarification, but I have never received any reply from him.
334 For a very readable summary ofGadamer's theory, see Tom G. Palmer, "Gadamer's Hermeneutics and Social Theory", Critical Review, vol. 1 no. 3 (Summer 1987): 91-108.
m Neaman, 382-385, 395-397.
336 Gordon, 4, 8.
m Ibid., 6, 7, 8, 9.
338 Ibid., 10 . 103 approach the problem offorecasting future conditions.... [A]rbitrary judgments must not and cannot obscure the fact that understanding is the only appropriate method ofdealing with the uncertainty offuture conditions. ,,339
Mises even employed the idea of"thymology" (to be distinguishes from "psychology") to describe the analytical combination of "an offshoot ofintrospection" and "a precipitate of historical experience". 340 Thymological [like hermeneutic] observation of people's choices necessarily refers to the past in the way historical experience [and hermeneutics] does. 341 As with hermeneutics, all that thymology can relate is that men acted one way in the past; whether they will do likewise in the future remains uncertain and speculative. 342
Gordon failed to recognize the many points at which Mises's thinking intersected and, even, overlapped with Gadamer's hermeneutics. For instance, Mises stated,
"The social sciences in general and economics in particular cannot be based on experiences in the sense in which this term is used by the natural sciences. Social experience is historical experience... what distinguishes social experience from that which forms the basis ofthe natural sciences is that it is always the experience ofa complexity ofphenomena. ,,343
Likewise, Gadamer stated,
m Mises, Human Action, 118.
340 Mises, Theory and History, 265-266, 312-.
341 Ibid., 272.
342 Ibid.
343 Ludwig von Mises, "Social Science and Natural Science", Money, Method, and the Market Proc~ss, 4. 104
"... the specific problem that the human sciences present to thought is that one has not rightly grasped their nature if one measures them by the yardstick of progressive knowledge of regularity. The experience of the sociohistorical world cannot be raised to a science by the inductive procedure of the natural sciences.... historical research does not endeavor to grasp the concrete phenomena as an instance of a universal rule. The individual case does not serve only to confirm a law from which practical predictions can be made. ,,34-l
" historical knowledge is based on a kind of experience quite different from the one that serves in investigating natural laws. ,,3~5
"... the perspectives that result from the experience of historical change are always in danger ofbeing exaggerated because they forget what persists unseen. 3~6
Elsewhere, Mises stated,
"This specific understanding of human action as it is practiced by everybody in all his interhuman relations and action is a mental procedure that must not be confused with any of the logical schemes resorted to by the natural sciences and by everybody in purely technological or therapeutical activities.... The specific understanding aims at the cognition ofother people's actions. It asks in retrospect: What was he doing, what was he aiming at? What did he mean in choosing this end? What was the outcome of his action?"347
"Both the acting man and the purely observing historian have not only to conceive the categories of action as economic theory does; they have besides to understand (verstehen) the meaning of human choice.... The specific understanding of the historical sciences is not an act of pure rationality. It is the recognition that reason has exhausted all its resources and
3~~ Hans-Georg Gadamer, Truth and Method, 2nd rev. ed., trans. J. Weinsheimer and Donald G.Marshall (New York: Continuum, 1994),4-5.
HS Ibid., 8-9.
3~6 Ibid ., xxiv .
3n Mises, Theory and History, 3 10. 105
that we can do nothing more than to try as well as we may to give an explanation ofsomething irrational which is resistant to exhaustive and unique description. These are the tasks which the understanding has to fulfill. ,,348
"The Verstehen is not a method or mental process which the historians should apply or which epistemology advises them to apply. It is the method which all historians and all other people always apply in commenting upon social events ofthe past and in forecasting future events. ,,349
"The Verstehel7 is in the realm ofhistory the substitute, as it were, for quantitative analysis and measurement which are unfeasible with regard to human actions outside the field oftechnology. ,,350
Similarly, Gadamer stated,
"The hermeneutics developed here is not, therefore, a methodology of the human sciences, but an attempt to understand what the human sciences truly are, beyond their methodological self-consciousness, and what connects them with the totality ofour experience ofworld. Ifwe make understanding the object of our reflection, the aim is not an art or technique of understanding, such as literary and theological hermeneutics sought to be. Such an art or technique would arrogate to itself a false superiority. ,,351
At least in their statements of purpose (i.e., to achieve a correct understanding
(verstehell) ofphenomena encountered in the study ofhuman action), there seems to be some affinity between Mises and Gadamer. It may only be their dogmatic application of strict a priorism that causes Rothbard and Gordon to perceive any gaping abyss between the two methods.
348 Mises, "Social Science and Natural Science", 12-13.
349 Ludwig von Mises, II' Irrationality' in the Social Sciences", Money, Method, and the Market Process, 26.
350 Ibid., 29.
351 Gadamer, Truth and Method, xxiii. 106
However, it is not clear that a strict application ofa priorism gives a complete view of Mises's method. First, Mises's distinction between theory and history may have been misinterpreted, and the two cognitive processes need not be dichotomized to exclude each other. Second, there may be ambiguity surrounding Mises's use ofthe words, "Praxeology" and "a priorism". "[I]n some cases Mises used these words in a much wider sense, to refer not to how he thought economics should be, but how it is and has been, throughout the history ofthe science. "m
Further, contrary to Gordon's denunciation ofhermeneuticists, other economists not included among Rothbard's and Gordon's accuseds, have written approvingly about the use ofhermeneutics as a tool in economic analysis. For example, Richard M. Ebeling, an Austrian economist who is not included expressly with the Austrian hermeneuticists whom Gordon criticized, has stated,
"[T]he economic problem can usefully be understood as a hermeneutical problem, i.e., as a problem of interpreting and understanding what another means and intends in his words and deeds, what Max Weber called the problem of "mutual orientation" in the arena of social action. A leading implication ofthis arblUment is that, once the assumption ofperfect knowledge is dropped, the question, How is market coordination possible? becomes a subset ofthe question, How is society possible? And, thus, the sociological aspect to market activity that economists have traditionally taken as given or
352 Don Lavoie, "Euclideanism versus Hermeneutics: A Reinterpretation ofMisesian Apriorism", Subjectivis111. Intelligibility, and Economic Understanding, ed. Israel M. Kirzner (New York: New York Univ. Press, 1986), 194; "The Interpretive Turn, The Elgar Companion to Austrian Economics, 54, 60. 107
implicit background to economic analysis rises to the foreground. ,,353
Austrian economics and hermeneutics are not necessarily mutual1y exclusive.
Gadamer's hermeneutics "is not such a counterforce to [for example, Rothbard's and
Gordon's] methodical science as, instead, a reflection on the scope and meaning of its results.... [H]e argues that the' objectivity' ofthe methodical sciences is limited by their own
hermeneutic situation and not that hermeneutics opposes the critical attitude they bring with them. ,,354
353 Richard M. Ebeling, "Toward a Hermeneutical Economics: Expectations, Prices, and the Role ofInterpretation in a Theory ofMarket Process", Subjectivity, Intel1igibility, and Economic Understanding, 40, 42, 44-46.
354 Georgia Warnke, Gadamer: Hermeneutics, Tradition, and Reason (Stanford: Stanford University Press, 1987), 137. 108
C. ANOTHER STUDENT OF MISES CLAIMS THE MIDDLE-GROUND
The Austrian approach perceived by Israel M. Kirzner involves alert individual decision-makers noticing and grasping opportunities, rather than mechanically allocating known means to fixed ends, subject to given constraints. 3S5
Kirzner attempts to avoid one extreme view (promoted by T.W. Schultz) that the market is always fully coordinated356 He also tries to avoid the other extreme view, the nihilism ofradical subjectivists, such as Ludwig Lachmann and G.L.S. Shackle, who deny that market outcomes are ever likely systematically to manifest any equilibriating tendencies.
Kirzner does so by injecting the entrepreneurial element into the study of economic systems. 3S7 In this way, Kirzner also avoids the dilemma presented by a Misesian hypothetical equilibrium, in which there is no longer any action or uncertainty and, therefore, no economic problems. Such an equilibrium is not more than a limiting case, and a situation that is nearly inconceivable because, "in the economy consisting of individuals coping with an uncertain future, it is almost always easy to imagine a more favorable situation. ,,358 Mises's conception ofhuman action implies pervasive disequilibrium. 359
355 White, 29.
356 Kirzner, The Meaning ofMarket Process, 6.
357 Ibid.; also, Kirzner, "The Subjectivism ofAustrian Economics", New Perspectives on Austrian Economics, Gerrit Meijer, ed. (London: Routledge, 1995), 19.
.m Emil Wubben, "Austrian Economics and Uncertainty", New Perspectives on Austrian Economics, 115-117,128-129.
359 Ibid., 116. 109
Claiming a middle ground, developed from Misesian insights, Kirzner "finds entrepreneurship incompatible with the equilibrium state, but compatible with, and indeed essential for, the notion ofequilibrium process.... Pursuing this third view ... can enable us to salvage elements ofimportant validity from each ofthe more extreme views. We can, with
Shackle, retain our appreciation ofthe originative (i.e., the entrepreneurial) aspect ofhuman choice. Yet we need not surrender the insight concerning the co-ordinative role of the entrepreneur which was emphasized by Schultz. ,,360
361) Kirzner, The Meaning ofMarket Process, 6-7. 110
D. RADICAL SUBJECTIVISTS DESCENDED THROUGH HAYEK
"That the Austrian School's subjectivism bears a resemblance to Max Weber's method of Verstehen (understanding) has been emphasized by economist Ludwig Lachmann, a contemporary ofHayek who has developed subjectivist themes in his own personal way. ,,361
Lachmann specifically derived his subjectivism from his analysis of Carl Menger's theory, although he denied the possibility ofMenger's asserted level ofcomplete knowledge on the part ofeconomic actors362 and, instead, asserted the virtual impossibility ofrelevant accurate knowledge; such uncertainty ofthe future must confound and frustrate human rationality, and decision-makers assessments can only reflect their expectations offuture events. 363
The radical subjectivists have been criticized for their complete denial of systematically equilibriating market tendencies. In their view, each economic choice is a "creative act" and a "new beginning... , in principle wholly disengaged from all previous history"364, which may be more representative ofthe spirit ofindividualist, subjectivist, dynamic Austrian Economics than the dogmatic formalism oftheir Misesian critics.
Applauding the main contribution the Austrians made to the subjective revolution,
361 White, 26 .
362 Kirzner, "The Subjectivism of Austrian Economics", 13, 14, 17. Kirzner asserts five times in this article that Menger's subjectivism was incomplete in several respects, including an apparent and unfortunate assumption of "complete knowledge", a disregard for "the unavoidable imperfection of man's knowledge", an "assumption of complete relevant information", or the "troubling Mengerian assumption ofperfect knowledge".
363 Ibid., 15 .
364 Ibid., 18-19. 111
Lachmann endeavored to explore the possible consequences if a similar "interpretive turn"
3 could be achieved !>5 He suggested,
"In its essence Austrian economics may be said to provide a voluntaristic theory of action, not a mechanistic one. Austrians cannot but reject a conceptual scheme, such as the neoclassical, for which man is not a bearer of active thought but a mere 'bundle of dispositions' in the form of a 'comprehensive preference field'. Austrians are thus compelled to look for conceptual schemes informed by style ofthought that is altogether different. Perhaps hermeneutics can provide us with an answer. ,,366
Lachmann posited that "hermeneutics is in conformity with the maxims of critical rationalism. Our interpretations of a text is in principle always 'falsifiable'. ,,367 He added,
"Hermeneutic interpretation ofeconomic phenomena... has to take place within a horizon of established meanings. ,,3!>8
In orthodox economics, institutions are treated as externally gIven conditions.
Observation oftheir operations cannot disclose "what meaning their objects have to those enmeshed in them, a meaning that varies from group to group and over time." Orientation and interpretation permit us to grasp the significance ofinstitutions and operations, as they
3 change over time. C>9
3!>5 Lachmann, "Austrian Economics: A hermeneutic approach (1991 )", Expectations, 277.
3G(, Ibid., 278.
367 Ibid ., 281 .
M Ibid ., 282.
369 Ibid., 283-285. 112
The hermeneutic method ("interpretive turn") applied by these Austrian economists
IS not merely a "return" to an older hermeneutic method, but "the culmination of a confrontation ofthe hermeneutic tradition with Edmund Husserl's phenomenology, resulting in a transformation ofboth ofthe philosophical schools. ".no
Gregory R. Johnson attempted to explain hermeneutics in the context of Husserl's phenomenology371 He defined hermeneutics as "the phenomenological study of the temporally articulated processes by which we can identifY things through and against the horizon ofpast experiences. ,,312 He argued that hermeneutics, in this sense, can "recover man from [methodological] objectivism. ,,373
Finally, Don Lavoie argued, "A hermeneutical approach to these issues would, however, refuse to privilege either theory or history, so that theory 'tests' historical facts, in the sense that facts need to be checked for theoretical coherence, and the facts test theories, in the sense that theories need to be tried out on real world circumstances to be sure they are relevant." He concludes that a hermeneutical approach "exemplifies the ideal of an interpretive social science. ,,374
370 Don Lavoie, "The Interpretive Turn", 54.
171 Gregory R. Johnson, "Hermeneutics: A Protreptic", Critical Review, vol. 4, nos. 1 & 2 (Winter/Spring 1990).
312 Ibid., 187.
m Ibid., 190-192.
374 Don Lavoie, Introduction to Lachmann, Expectations, 4,6. V. CONCLUSION
From Malthus and Marx to Paul Ehrlich and Ralph Nader, positivists ofvarious stripes think they know better. One could go on at much greater length (many others have) than I have in this paper. However, the scope ofthis paper was limited to the analysis of specific historical Methodenstreite.
In each ofthose battles over methods, it appears that the Austrian economists have presented the more rational argument. However, the positivist argument seem always to have had the greater popular appeal.
As Hayek noted, "... since it is the creditors who are harmed [by an unforeseen depreciation of the value of money] and the debtors who benefit, most people do not particularly mind, at least until they realize that in modern society the most important and numerous class ofcreditors are the wage earners and the small savers, and the representative groups ofdebtors who profit in the first instance are the enterprises and credit institutions. lIm
He continued, "The early pleasant effects and the later necessity of a bitter choice constitute indeed a similar dilemma [to being dragged by a tiger by the tail]. Once placed in this position it is tempting to rely on palliatives and be content with overcoming short-term difficulties without ever facing the basic trouble about which those solely responsible for monetary policy indeed can do little. ,,376
375 F.A. v. Hayek, "Can We StilI Avoid Inflation", 36.
376 Ibid., 40-41.
113 114
The prospect offinding a solution to that dilemma seems to present a Herculean labor that is beyond the simple historical review described in this paper.
Perhaps the first step is to try to reconcile the methodological differences of the various branches ofthe Austrian School. Unfortunately, since the criticisms ofat least one branch seem to be personality-driven, that outcome may be impossible to achieve. However, it seems unlikely that the Austrian School can achieve wider acceptance, as long as such furious, but petty, criticisms emanate from within it. BIBLIOGRAPHY
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125 Pomeroy & Inama A Professional Association Attorneys at Law 790 Laurel St. San Carlos, Ca. 94070
CHRISTOPHER R. INAMA TELEPHONE EDWARD C. POMEROY July 31, 1995 (415) 593-7639 David Gordon, Ph.D. c/o Mises Institute Auburn University Auburn, Ala., 36849-5301 Dear Dr. Gordon,
After practicing law for a number of years, I got a chance to return to school to study Austrian economics at Cal. State Univ., Hayward. Kurt Leube is my primary professor, so I suppose I have acquired some predisposition toward the teachings of the Hayekians insofar as there is intramural debate within the Austrian School.
Preparing for my master's thesis, which will focus on three historical methodenstreiten, I had occasion to read your pamphlet, "Hermeneutics Versus Austrian Economics 1'. I should confess that I have read nothing by Heidegger or Gadamer, and little by Lavoie (and Lachmann). However, I am troubled by your article.
For example, you remark that Mises and Rothbard established a science of human action deducted from self-evident axioms. Doesn't this sound like "metaphysical certitude"? (Apologies to John McLaughlin). Such a science is valued by its adherents because it. is continually "verified"--but isn't there a problem of induction? And how do we "know", but for unquestioning faith, that it may not be "falsified" someday?
If, as you say, Lavoie, et al., elevate hermeneutics over science, then they commit logical error. Even Karl Popper agreed that there is objective truth, though we may only know it sUbject.ively. On the other hand, if t.hey intend to employ hermeneutics for construction and interpretation of signs or communications, since there is no "direct communion" between the minds of men, then isn't hermeneutics a valid and valuable tool?
This last idea is taken from Legal and Political Hermeneutics, by Francis Lieber, 1839, predating Truth and Method by a century.
I hope you will clarify these points for me, as I want to address them in my thesis. Thank you for your attention to this.
Very truly yours,
Christopher R. Inama