e Austrian School of Economics e Austrian School of Economics A History of Its Ideas, Ambassadors, and Institutions Eugen Maria Schulak and Herbert Unterköfler Translated by Arlene Oost-Zinner Ludwig von Mie Intitute AUBURN,ALABAMA Copyright © 2011 by the Ludwig von Mises Institute 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 Ph: (334) 844-2500 Fax: (334) 844-2583 mises.org 10 9 8 7 6 5 4 3 2 1 ISBN: 978-1-61016-134-3 Translator’s Note e goal of this translation is accurately to convey the content of its original German counterpart, as well as the breezy style of its unmistakably Austrian authors. Word choice was of prime consideration throughout, followed by clear English syntax and contemporary idiomatic usage. e book contains many citations from German works never before translated. All passages falling into this category have been rendered in English for the first time in this edition. e translator wishes to thank Douglas French and Jeffrey Tucker of the Mises Institute for bringing this important project to her attention; Nathalie Charron Marcus for countless hours of tracking down details; and Robert Grözinger, whose preliminary translation proved helpful throughout. Auburn, Alabama February , v Contents Preface to the English Edition ix Preface xi e Austrian School in Brief xv 1 Vienna in the Mid-Nineteenth Century 2 Economics as an Academic Discipline 3 e Discovery of the Self: e eory of Subjective Value 4 e Emergence of the Austrian School in the Methodenstreit 5 Carl Menger: Founder of the Austrian School 6 Time is Money: e Austrian eory of Capital and Interest 7 Friedrich von Wieser: From Economist to Social Scientist 8 Eugen von Böhm-Bawerk: Economist, Minister, Aristocrat 9 Emil Sax: e Recluse from Voloska 10 Further Students of Menger and Other Supporters 11 Money Makes the World Go Round: e Monetary eory of the Business Cycle vii viii CONTENTS 12 Joseph A. Schumpeter: Maverick and Enigma 13 Schumpeter’s eory of Economic Development 14 e Austrian School’s Critique of Marxism 15 and the Consequences of War: e Imminent Collapse 16 Between the Wars: From Re-formation to Exodus 17 Ludwig von Mises: e Logician of Freedom 18 Friedrich August von Hayek: Grand Seigneur on the Fence 19 Other Members of the Younger Austrian School 20 Praxeology: A New Start from Ludwig von Mises 21 Friedrich August von Hayek’s Model of Society and His eory of Cultural Evolution 22 e Entrepreneur 23 e Rejected Legacy: Austria and the Austrian School After 24 e Renaissance of the old ‘Viennese’ School: e New Austrian School of Economics Abbreviations References Index Preface to the English Edition When preparations for the German edition were complete, the prospect of an English translation lay in the far distance. at it would come about so quickly, only shortly after the German edition’s appearance in , is owed to our friend and mentor, Hans-Hermann Hoppe. He not only lent his support and good counsel in the case of the first German edition— now in its second edition—but also brought it to the attention of the Ludwig von Mises Institute, suggesting it publish a translated edition. is development is without doubt a great joy for the authors. Along with it comes the expectation that the recast contents will reach a much wider audience than ever before. Whoever believes that the honor of having one’s work translated in- cludes the convenient self-contentment of looking on as others labor with the same text one had successfully concerned himself with years before, makes a formidable error. Rendering a comprehensive bibliography in an- other language in a user-friendly way is alone a task that can scarcely be brought to perfection. All in all, the pitfalls of translation are numerous, unexpected, and theoretically endless, especially in the scientific literature. is is ever more the case when intellectual or political schools of thought are to be conveyed across culture or language groups, preferably without losing meaning. e many discontinuities, violent upheavals, and con- tradictions in the history of middle Europe, wherein ideas, institutions, and terms were repeatedly in need of turning upside down and reframing, pose unusual problems. Take the question, for example, of whether cer- tain historical personalities should be cited according to their legal names or according to the inherited, aristocratic titles they carried with them to foreign lands. Further, one stumbles upon the limits of language when ix x THE AUSTRIAN SCHOOL OF ECONOMICS fundamental, historically authentic but long antiquated German terms are to be rendered in a modern foreign language; or if no English equivalents for the baroque multiplicity of official titles, position descriptions, and service categories of the Austrian bureaucracy or European universities are readily found. A first translation was undertaken by Robert Grözinger and financed by André Homberg, and appeared as an online version at Mises.org. Upon the wish of the publisher and the authors, it was replaced by the present edition, which Arlene Oost-Zinner attended to in an exemplary manner. Veronika Poinstingl offered significant help with research and correction, as did Rahim Taghizadegan and Gregor Hochreiter of the Institut für Werte- wirtschaft (Institute for Value-Based Economics) in Vienna. e title of the German edition, Die Wiener Schule der Nationalöko- nomie (e Viennese School of Economics), which emphasized Vienna’s natural role in the history of the “old” Austrian School of Economics, was modified. We ultimately decided that the internationally established, tech- nical term was the most appropriate for the English edition, despite the fact that the Austrian School originated in Vienna and it was there that it experienced its first bloom and first international recognition. We thank all of our friends, advisors, translators, and supporters for their work and cooperation on this book. eir efforts have made the present edition possible. Special thanks are due our publisher, Douglas French, president of the Ludwig von Mises Institute in Auburn, Alabama, who actively supported our work. Finally, we wish to extend our sincere and loving thanks to those in closer proximity—Elvira and Veit Georg, and Kerstin—for their abundant support. Eugen Maria Schulak Herbert Unterköfler Vienna, January Preface After several years of preparatory work and many interruptions, it seems an odd coincidence that the authors completed their manuscript at the very time a global crisis in the financial sector suddenly became evident to all. Economic developments since that time appear only to confirm many fundamental insights of the Austrian School of economics, especially those in monetary and business cycle theory. Longstanding, low interest rate policies in the U.S. and a steady increase in the money supply and money equivalents in industrial nations seem to have led to a staggering volume of misallocations and countless unsustainable business models. e attempts of industrial nations to quell the pent-up need for cor- rection through government intervention will in time lead to a gain that is deceptive at best—but hardly a real solution. ese astonishingly purpose- ful government interventions are certainly no accident. 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—save perhaps the armaments industry in certain countries—are institutions, people, and the economy so closely interwoven with the state as is the case with the finance industry. It has often been possible in recent years to get the impression that welfare states might be competing, in the most imaginative and opportunis- tic ways, with the banking industry in their efforts to circumvent the basic laws that rule economics, money, and the market. While welfare states, with their increasing national budget deficits, have for many years nourished the illusion of growing prosperity, banks and financial institutes have on the one hand provided finances for these deficits. But on the other hand, and to the wider public, they have acted as impresarios of an everything-is-affordable philosophy. Hence the crisis, which has not yet come near reaching its xi xii THE AUSTRIAN SCHOOL OF ECONOMICS full magnitude, will affect both the global financial sector and individual countries much more deeply than all crises seen thus far. Based on the assumption that the individual was the decisive economic agent, and thus centering its research on individual preferences and on the intersubjective balancing of these preferences in the context of markets, the Austrian school has consistently pointed to the fact that institutions such as money, states, and markets had emerged without any planning, without any central purpose, and without force. ey had emerged on the basis of human interaction alone, and in a manner that was therefore natural, befitting both humans and human logic. is basic insight counters all political and economic ideologies that view such institutions as working arenas for the establishment or development of authoritarian activity aimed at influencing or even controlling the direction of individual preferences or their intersubjective balance. is meant that during the interwar period in Austria, the Austrian School was attacked, sometimes fiercely, by political parties of both the left and the right. e Austrian school not