THE VIENNESE SCHOOL of ECONOMICS Ual

This draft is not the final edition e Viennese School of Economics Eugen-Maria Schulak and Herbert Unterköfler Translated by Robert Grözinger Copyright © 2010 by the Ludwig von Mises Institute 10 9 8 7 6 5 4 3 2 1 Published under the Creative Commons Attribution License 3.0. http://creativecommons.org/licenses/by/3.0/ Ludwig von Mises Institute 518 West Magnolia Avenue Auburn, Alabama 36832 mises.org able of ontents e Viennese School in brief iii Preface v Vienna in the Mid-th Century Economics as an academic discipline e discovery of the self: e theory of subjective value e emergence of the Viennese School in the Methodenstreit Carl Menger: Founder of the Viennese School Time is money: e Austrian theory of capital and interest Friedrich von Wieser: From economist to social scientist Eugen von Böhm-Bawerk: Economist, minister, aristocrat Emil Sax: e recluse of Voloska Other supporters and students of Menger Money makes the world go round: the monetary theory of the business cycle Joseph A. Schumpeter: A colorful maverick i ii Schumpeter’s theory of economic development e Viennese School’s critique of Marxism and the consequences: the impending collapse Between the wars: from re-formation to exodus Ludwig von Mises: the logician of freedom Friedrich August von Hayek: Grand seigneur on the fence Other members of the younger Viennese School Praxeology, a new beginning by Ludwig von Mises Friedrich August von Hayek’s model of society and his theory of cul- tural evolution e entrepreneur e rejected legacy: Austria and the Viennese School after e renaissance of the Viennese School: the Austrian School of Eco- nomics List of Abbreviations Selected Introductory Bibliography Bibliography e iennese chool in brief e Viennese School of Economics, also called the Austrian School of Eco- nomics, was founded by Carl Menger in Vienna during the last third of the th century, and enjoys to this day a vibrant teaching tradition. Since the early s this teaching tradition has been a significant influence on the ed- ucation and further development of modern social sciences and economics in Europe and the US. In the s a general change of economic paradigm increasingly pushed the Viennese School on to the academic sidelines. is development inten- sified when many of its exponents left Vienna and the last remaining repre- sentatives were finally driven out after the National Socialists seized power. After the Second World War, in the political climate of consensus of the grand coalition in Austria, it was no longer possible to re-form the Viennese School, which was considered by many to be the intellectual legacy of the French and English Enlightenment and of political and economic liberalism. However, by means of their scholarly publications and their teaching, Ludwig von Mises and Friedrich von Hayek were, to a greater or lesser extent, able to maintain the tradition in the US, so that from the s onwards it experienced a revival as the Modern Austrian School of Economics. Until , the research program of the Viennese School was character- ized by an astonishing multitude of differing, in some cases even contradictory, conclusions. What the or so economists had in common was their educa- tion in law, their almost exclusively elite or aristocratic public service back- ground, and their employment by state-funded universities, in public service or in institutions close to the state, such as banks or chambers of commerce. Socially and professionally in any case, the exponents of the Viennese School were highly successful: five were honored with the post of government minister, many filled senior positions in officialdom or in banks with close ties to the state, and quite a few were bestowed with aristocratic titles. All branches of the School shared the common conviction that the decisive actor behind economic activity was the subjectively feeling and acting individ- iii iv THE VIENNESE SCHOOL OF ECONOMICS ual. e subsequent explanations, derived from this conviction, for economic phenomena such as value, exchange, price, entrepreneurial profit or interest, were gradually assembled into a comprehensive theory of money and business cycles. is subjective-individualistic outlook and approach made any kind of collective appear as an unscientific “construct”, which led to fierce argu- ments—incidentally bringing the members of the School closer together—with the Marxists, with the German Historical School and later with the exponents of a planned economy and state interventionism. In the Modern Austrian School of Economics more emphasis was then placed on questions regarding knowledge, monetary theory, entrepreneurship, the market process and spontaneous order, subjects which the older Viennese School, with remarkable foresight, had already taken up or dealt with in detail. is book endeavors to trace the multifaceted tradition of the Viennese School, with all its ideas, people and institutions. reface It seems an odd coincidence that after several years of preparatory work and numerous interruptions, the authors finalized their manuscript just when signs of a global crisis in the financial sector suddenly became visible to all. Since then, economic developments appear simply to confirm many fundamental insights of the Viennese School of Economics, especially those in monetary and business cycle theory. A low interest rate policy over many years in the US, and a steady increase of the supply of money and money substitutes in the industrial nations seem to have led to a staggering volume of misallocations and generated countless unsustainable business models. e attempts of industrial nations to impede, by means of government intervention, the suppressed need for correction, will at best lead to a decep- tive gain in time, but hardly to a real solution. However, the astonishingly purposeful government interventions are certainly no accident, for in recent decades the so-called welfare states have entered into a very close symbiosis with the financial sector. In no other sector of the economy—apart from maybe the armaments industry in certain countries—are the institutions, people and economy so closely interwoven with the state as in the finance industry. Consequently, in recent decades it has been possible on several occasions to get the impression that welfare states were almost competing with the banking industry in their efforts to circumvent, in the most imaginative and oppor- tunistic ways, the basic laws that rule economics, money and markets. While for many years the welfare states, with their ever increasing national budget deficits, nourished the illusion of growing prosperity, banks and financial in- stitutes functioned, on the one hand as financiers of these deficits, and on the other hand as strong advertising messengers of an everything-is-affordable philosophy for the wider public. e crisis, which at the present time has nowhere near reached its full extent, will therefore profoundly affect both the global financial sector and the individual countries much more deeply than all previous crises. e Viennese School, working on the assumption of the individual as v vi THE VIENNESE SCHOOL OF ECONOMICS the essential economic agent, and subsequently centering its research on individual preferences and on the intersubjective balancing of these preferences in the context of markets, consistently pointed out that institutions such as money, states and markets had emerged without any planning, central pur- pose or force, but simply on the basis of human interactions, in a way that be- fitted both humans and human logic and was therefore natural, as it were. Of course, this basic insight got in the way of all those political and economic ide- ologies, which viewed such institutions as operational areas for establishing or developing authoritarian activities and which aimed specifically at influencing or even controlling the emergence of individual preferences or the balancing out of these preferences between individuals. In practice this meant that in Austria during the interwar period the Vi- ennese School was attacked, sometimes ferociously, by political parties both of the right and the left, because it not only denied the legitimacy, but also the efficacy, of many economic policies. Furthermore, the School always considered itself a universal science in which there was no room for national, re- ligious or class-oriented constrictions. In a way it even represented a sort of alternate world to many of this country’s idiosyncrasies: it focused exclusively on the individual and declared that individual action on the basis of subjective preferences was the starting point of research; it proceeded from a realistic image of humanity, which could not possibly lend itself to flights of idealistic fantasy and which for this reason alone did not lend itself to cheap political exploitation; it was free of magniloquent utopias, upheld the principles of self- determination and non-violence and was fundamentally critical of any state intervention occurring under a monopoly of the use of force. In addition, it emanated a highly scholarly ethos, which made possible the emergence of an uncommonly cosmopolitan and tolerant discourse. Accordingly, among the many intellectual legacies of the Austrian monar- chy, the Viennese School of economics was one of the few traditions which in the political upheavals of the th century did not become entangled in vice and guilt. In fact, it was those very ideologues, of both left and right, who in the th century so often caused bloodshed and large scale destitution and misery, who, with the greatest impudence, accused the Viennese School of blindness to the urgent economic questions of the period. Not only from this perspective, the history and philosophy of the Viennese School refuse to be ab- sorbed into the foundation and reconciliation myth of the Second Republic’s grand coalition. Against this backdrop it is commendable when Prof. Dr. Hubert Christian Ehalt, the publisher of the series “Enzyklopädie des Wiener Wissens” (“Ency- clopedia of Viennese Learning”), makes space for this almost forgotten piece of Viennese intellectual and scholarly history.

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