The Viennese School of Economics: A History of its Ideas, Proponents, and Institutions

157 Pages·2010·2.85 MB·English

by  Eugen-Maria Schulak, Herbert Unterköfler

This draft is not the final edition
e Viennese School of Economics
Eugen-Maria Schulak
and
Herbert Unterköfler
TranslatedbyRobertGrözinger
Copyright©2010bytheLudwigvonMisesInstitute
10987654321
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able of ontents
eVienneseSchoolinbrief iii
Preface v
 ViennaintheMid-thCentury 
 Economicsasanacademicdiscipline 
 ediscoveryoftheself: etheoryofsubjectivevalue 
 eemergenceoftheVienneseSchoolintheMethodenstreit 
 CarlMenger: FounderoftheVienneseSchool 
 Timeismoney: eAustriantheoryofcapitalandinterest 
 FriedrichvonWieser: Fromeconomisttosocialscientist 
 EugenvonBöhm-Bawerk: Economist,minister,aristocrat 
 EmilSax: erecluseofVoloska 
 OthersupportersandstudentsofMenger 
 Moneymakestheworldgoround: themonetarytheoryofthebusi-
nesscycle 
 JosephA.Schumpeter: Acolorfulmaverick 
i
ii
 Schumpeter’stheoryofeconomicdevelopment 
 eVienneseSchool’scritiqueofMarxism 
 andtheconsequences: theimpendingcollapse 
 Betweenthewars: fromre-formationtoexodus 
 LudwigvonMises: thelogicianoffreedom 
 FriedrichAugustvonHayek: Grandseigneuronthefence 
 OthermembersoftheyoungerVienneseSchool 
 Praxeology,anewbeginningbyLudwigvonMises 
 FriedrichAugustvonHayek’smodelofsocietyandhistheoryofcul-
turalevolution 
 eentrepreneur 
 erejectedlegacy: AustriaandtheVienneseSchoolafter 
 erenaissanceoftheVienneseSchool: theAustrianSchoolofEco-
nomics 
ListofAbbreviations 
SelectedIntroductoryBibliography 
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sthisteachingtraditionhasbeenasignificantinfluenceontheed-
ucationandfurtherdevelopmentofmodernsocialsciencesandeconomicsin
EuropeandtheUS.
Inthesageneralchangeofeconomicparadigmincreasinglypushed
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.
AftertheSecondWorldWar,inthepoliticalclimateofconsensusofthegrand
coalitioninAustria,itwasnolongerpossibletore-formtheVienneseSchool,
whichwasconsideredbymanytobetheintellectuallegacyoftheFrenchand
English Enlightenment and of political and economic liberalism. However,
bymeansoftheirscholarlypublicationsandtheirteaching,LudwigvonMises
and Friedrich von Hayek were, to a greater or lesser extent, able to maintain
thetraditionintheUS,sothatfromthesonwardsitexperiencedarevival
astheModernAustrianSchoolofEconomics.
Until , the research program of the Viennese School was character-
izedbyanastonishingmultitudeofdiffering,insomecasesevencontradictory,
conclusions. Whattheorsoeconomistshadincommonwastheireduca-
tion in law, their almost exclusively elite or aristocratic public service back-
ground, andtheiremploymentbystate-fundeduniversities, inpublicservice
or in institutions close to the state, such as banks or chambers of commerce.
Sociallyandprofessionallyinanycase,theexponentsoftheVienneseSchool
were highly successful: five were honored with the post of government min-
ister,manyfilledseniorpositionsinofficialdomorinbankswithclosetiesto
thestate,andquiteafewwerebestowedwitharistocratictitles.
AllbranchesoftheSchoolsharedthecommonconvictionthatthedecisive
actorbehindeconomicactivitywasthesubjectivelyfeelingandactingindivid-
iii
iv THEVIENNESESCHOOLOFECONOMICS
ual. esubsequentexplanations,derivedfromthisconviction,foreconomic
phenomena such as value, exchange, price, entrepreneurial profit or interest,
weregraduallyassembledintoacomprehensivetheoryofmoneyandbusiness
cycles. is subjective-individualistic outlook and approach made any kind
of collective appear as an unscientific “construct”, which led to fierce argu-
ments—incidentallybringingthemembersoftheSchoolclosertogether—with
theMarxists,withtheGermanHistoricalSchoolandlaterwiththeexponents
ofaplannedeconomyandstateinterventionism.
In the Modern Austrian School of Economics more emphasis was then
placedonquestionsregardingknowledge,monetarytheory,entrepreneurship,
themarketprocessandspontaneousorder,subjectswhichtheolderViennese
School,withremarkableforesight,hadalreadytakenupordealtwithindetail.
isbookendeavorstotracethemultifacetedtraditionoftheVienneseSchool,
withallitsideas,peopleandinstitutions.
reface
It seems an odd coincidence that after several years of preparatory work and
numerousinterruptions,theauthorsfinalizedtheirmanuscriptjustwhensigns
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
theindustrialnationsseemtohaveledtoastaggeringvolumeofmisallocations
andgeneratedcountlessunsustainablebusinessmodels.
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
maybethearmamentsindustryincertaincountries—aretheinstitutions,peo-
pleandeconomysocloselyinterwovenwiththestateasinthefinanceindustry.
Consequently, in recent decades it has been possible on several occasions to
gettheimpressionthatwelfarestateswerealmostcompetingwiththebanking
industry in their efforts to circumvent, in the most imaginative and oppor-
tunisticways,thebasiclawsthatruleeconomics,moneyandmarkets. 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
theotherhandasstrongadvertisingmessengersofaneverything-is-affordable
philosophy for the wider public. e crisis, which at the present time has
nowherenearreacheditsfullextent,willthereforeprofoundlyaffectboththe
globalfinancialsectorandtheindividualcountriesmuchmoredeeplythanall
previouscrises.
e Viennese School, working on the assumption of the individual as
v
vi THEVIENNESESCHOOLOFECONOMICS
the essential economic agent, and subsequently centering its research on in-
dividualpreferencesandontheintersubjectivebalancingofthesepreferences
in the context of markets, consistently pointed out that institutions such as
money, states and markets had emerged without any planning, central pur-
poseorforce,butsimplyonthebasisofhumaninteractions,inawaythatbe-
fittedbothhumansandhumanlogicandwasthereforenatural,asitwere. Of
course,thisbasicinsightgotinthewayofallthosepoliticalandeconomicide-
ologies,whichviewedsuchinstitutionsasoperationalareasforestablishingor
developingauthoritarianactivitiesandwhichaimedspecificallyatinfluencing
or even controlling the emergence of individual preferences or the balancing
outofthesepreferencesbetweenindividuals.
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
theefficacy,ofmanyeconomicpolicies. Furthermore,theSchoolalwayscon-
sidereditselfauniversalscienceinwhichtherewasnoroomfornational, re-
ligious or class-oriented constrictions. In a way it even represented a sort of
alternateworldtomanyofthiscountry’sidiosyncrasies: itfocusedexclusively
on the individual and declared that individual action on the basis of subjec-
tivepreferenceswasthestartingpointofresearch;itproceededfromarealistic
imageofhumanity,whichcouldnotpossiblylenditselftoflightsofidealistic
fantasy and which for this reason alone did not lend itself to cheap political
exploitation;itwasfreeofmagniloquentutopias,upheldtheprinciplesofself-
determination and non-violence and was fundamentally critical of any state
intervention occurring under a monopoly of the use of force. In addition, it
emanatedahighlyscholarlyethos, whichmadepossibletheemergenceofan
uncommonlycosmopolitanandtolerantdiscourse.
Accordingly,amongthemanyintellectuallegaciesoftheAustrianmonar-
chy,theVienneseSchoolofeconomicswasoneofthefewtraditionswhichin
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
inthethcenturysooftencausedbloodshedandlargescaledestitutionand
misery, who, with the greatest impudence, accused the Viennese School of
blindnesstotheurgenteconomicquestionsoftheperiod. Notonlyfromthis
perspective,thehistoryandphilosophyoftheVienneseSchoolrefusetobeab-
sorbedintothefoundationandreconciliationmythoftheSecondRepublic’s
grandcoalition.
AgainstthisbackdropitiscommendablewhenProf.Dr.HubertChristian
Ehalt,thepublisheroftheseries“EnzyklopädiedesWienerWissens”(“Ency-
clopediaofVienneseLearning”),makesspaceforthisalmostforgottenpieceof
Viennese intellectual and scholarly history. Despite some delays on the part
of the authors, he has always remained a patient and loyal supporter of our