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The Austrian School of Economics THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION Thorsten Polleit [email protected] University of Bayreuth 24–25 April 2020 Preliminary version. Please do not quote. THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION 1. Introduction The purpose of this handout is to provide an elementary introduction to the theories of the Austrian School of Economics. The issues and their practical applications presented therein draw heavily on the work of many brilliant ‘Austrian’ scholars. I hope that studying this handout will be rewarding and eye-opening, especially so at a time when mainstream economics is increasingly embracing anti-free-market– and anti-freedom– minded methodologies and teachings. Thorsten Polleit Königstein i. T., April 2020 Version April 2020 2 Preliminary version, please do not quote. THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION Schedule Friday, 24 April 2020 1 11:30 12:15 The 'Austrians' – a brief overview 2 12:15 13:00 On the theory of knowledge 3 Lunch 4 14:00 14:45 On positivism, empiricism, falsificationism 5 14:45 15:30 Scientific method: Praxeology I 6 15:45 16:30 Scientific method: Praxeology II 7 16:30 17:15 Value and price theory 8 17:15 18:00 The theory of the interest rate Saturday, 25 April 2020 9 09:00 09:45 Saving, investment, and economic growth 10 09:45 10:30 Liberalism and capitalism 11 10:45 11:30 Socialism and interventionism 12 11:30 12:15 The theory of the state Lunch 13 13:30 14:15 The Ethics of Liberty 14 14:15 15:00 The theory of money 15 15:15 16:00 Digression: From commodity money to fiat money 16 16:00 16:45 The Austrian business cycle theory 17 16:45 17:30 Q & A “Nun weiss ich sehr wohl, dass die Beseitigung wissen- schaftlicher Irrthümer, welche sich in den Geistern der Ge- lehrtenwelt festgesetzt haben, selbst wenn sie offen lie- genden Thatsachen widersprechen, zu den mühevollsten Aufgaben wissenschaftlicher Kritik gehört, zumal wenn die zur Herrschaft gelangten Irrthümer durch die Inte- Carl Menger ressen einflussreicher Bevölkerungsgruppen gestützt 1840 – 1921 werden.“ —Carl Menger (1891), Die Social-Theorien der classischen National-Oekonomie und die moderne Wirth- schaftspolitik, p. 222. Version April 2020 3 Preliminary version, please do not quote. THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION “Economics must not be rele- gated to classrooms and statis- tical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns every- body and everything. It is the pith of civilization and of man’s human existence.” ––Mises (1996), Human Action, p. 878. Ludwig von Mises 1881 – 1973 Version April 2020 4 Preliminary version, please do not quote. THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION 2. The 'Austrians' - an overview SUGGESTED READINGS: Hoppe, H.-H. (2006), Democracy, The God That Failed, The Economics and Politics of Monarchy, Democracy, and Natural Order, Transaction Publisher, New Brunswick, Ney Jersey, pp. ix – xxiv, esp. footnote 5. HISTORICAL SETTING The list of great names associated with the late 19th/early 20th century in Vienna of the Habsburg monarchy – that is the pre-democratic Austro- Hungarian Empire – is seemingly endless: ù Philosophers: Ludwig Boltzmann, Franz Brenta- no, Rudolph Carnap, Edmund Husserl, Ernst Mach, Alexius Meinong, Karl R. Popper, Moritz Schlick, Ludwig Wittgenstein. ù Mathematicians: Kurt Gödel, Hans Hahn, Karl Vienna Menger, Richard von Mises. End of the 19th century ù Economists: Eugen von Böhm-Bawerk, Gottfried von Haberler, Friedrich August von Hayek, Carl Menger, Fritz Machlup, Ludwig von Mises, Oskar Morgenstern, Joseph Schum- peter, Friedrich von Wieser. ù Psychologists: Alfred Adler, Joseph Breuer, Karl Bühler, Siegmund Freud. ù Historians and sociologists: Max Adler, Otto Bau- er, Egon Friedell, Heinrich Friedjung, Paul Lazarfeld, Gustav Ratzendorfer, Alfred Schütz. ù Writers and literary critics: Hermann Broch, Franz Grillparzer, Hugo von Hofmannsthal, Karl Kraus, Fritz Mauthner, Robert Musil, Arthur Schnitzler, Georg Trakl, Otto Weininger, Stefan Zweig. ù Artists and architects: Gustav Klimt, Oskar Kokoschka, Adolf Loos Egon Schiele. ù Composers: Alban Berg, Johannes Brahms, Anton Bruckner, Franz Lehar, Gustav Mahler, Arnold Schönberg, Johann Strauss, Anton von Webern, Hugo Wolf. Version April 2020 5 Preliminary version, please do not quote. THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION MAIN REPRESENTATIVES Carl Menger ° Born 28 February 1840, died 26 February 1921. ° In 1871, published Menger his pathbreaking Grundzüge der Volkswirthschaftslehre (Principles of Economics). ° Together with the Léon Walras (1834 – 1919) and Wil- liam Stanley Jevons (1835 – 1882), Menger spelled out the theory of marginal utility – which has become the cornerstone of value and price theory. ° Menger also put forward a theory of the origin of money: Money emerged spontaneously from free market activi- ties, and out of a commodity. ° In 1872, Menger became a Privatdozent in the Faculty of Law and Political Science at the University of Vienna. ° In 1873, he was promoted to the position of a paid, full- IMPORTANT WORKS: time associated professor. Principles of Economics ° In 1876, Menger became a tutor for economics to Rudolf (1871), Investigations into the von Habsburg (1858 – 1889), the Crown Prince of Aus- Method of the Social Sciences tria. with Special Reference to Eco- ° In 1879, Menger was appointed to the Chair of Political nomics (1883), The Errors of Economy in Vienna's Law Faculty as a professor ordi- Historicism in German Eco- narius or full professor. nomics (1884). ° With his Investigations (1883), Menger battled the Ger- man Historical School, which considered historicism as the appropriate method of economics and rejected any notion of economic laws. ° In 1884 Menger published The Errors of Historicism in German Economics, thereby kicking off the infamous Methodenstreit, which basically established the Austrian School of Economics. Version April 2020 6 Preliminary version, please do not quote. THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION Eugen von Böhm-Bawerk ° Born 12 February, 1851, died 27 August 1914. ° From 1881 to 1889, Böhm-Bawerk taught at the University of Innsbruck and became professor in 1884. ° In his History and Critique of Interest Theories (1884), Böhm-Bawerk reveals the fallacies in the history of thought concerning the interest rate. ° In Positive Theory of Capital (1889), he argues that capital is not homogeneous but an intricate and di- verse structure that has a time dimension. A growing economy is not just a consequence of increased capi- tal investment, but also of longer processes of pro- duction (roundaboutness). ° Böhm-Bawerk argues that the interest rate is deter- IMPORTANT WORKS: mined by three factors: (1) Current needs are typical- History and Critique of Inter- ly less well satisfied than future needs; (2) human est Theories (1884), Positive beings tend to underestimate future needs; (3) a Theory of Capital (1889) (sec- technical factor that determines time preference: ond volume of Capital and In- higher physical productivity of roundabout methods terest), Value and Price (part of production. of the second volume), Further ° Böhm-Bawerk engages in an intellectual battle with Essays on Capital and Interest the Marxists over the exploitation theory of capital (1921) (third volume), Karl (Karl Marx and the Close of His System (1896)). He Marx and the Close of His Sys- refutes the socialist doctrine of capital and wages tem (1896). (actually long before the communists came to power in Russia) by demonstrating that capitalists save money, pay labor, and wait until the final product is sold to receive profit. ° Böhm-Bawerk held a regular seminar that would later become the model for Mises’s Vienna Privatseminar. ° He was Austrian Minister of Finance in 1895, 1897 – 1898 and 1900 – 1904. Version April 2020 7 Preliminary version, please do not quote. THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION Friedrich von Wieser ° Born 10 July, 1851, died 22 July 22, 1926. ° Friedrich von Wieser became professor of eco- nomics at the German University of Prague (1884), and in 1903 he succeeded Carl Menger’s position at the University in Vienna. ° Wieser became Minister of Commerce in 1917 and, after the collapse of the Austro-Hungarian Empire at the end of World War I, returned to teaching. ° Wieser made the following major contributions: First, he established the theory of imputation, saying that factor prices are determined by out- put prices (rather than the other way around, as IMPORTANT WORKS: the Classicals had it). Natural Value (1889), Social Second, Wieser developed the theory of oppor- Economics (1914). tunity cost as the foundation of value theory. Both achievements have become fundamental “subjectivist” pillars in economic theory. And third, Wieser actually invented the term marginal utility (Grenznutzen). Version April 2020 8 Preliminary version, please do not quote. THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION Ludwig von Mises ° Born 29 September 1881, died 10 October 1973. ° In The Theory of Money and Credit (1912), Mises extended Austrian marginal utility theo- ry to money, and he developed the regression theorem, showing that money must have emerged from a commodity. ° In 1920, Mises proved, based on economic science, that socialism was impossible and doomed to fail. ° In his magnum opus Human Action (originally published as Nationalökonomie in 1940), Mis- es reconstructed the science of economics along the line
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