The Marginal Revolutionaries
The Fifth Risk
Capital without Borders
Ethics and Public Policy
The Inheritance of Wealth:
Justice, equality, and the
right to bequeath
Reason after Its Eclipse: On Late Critical Theory
Can Microfinance Work?
Boudewijn de Bruin
Ethics and the Financial Crisis: Why Incompetence is Worse than Greed
Nicholas Morris &
Capital Failure: Rebuilding Trust in Financial Services
Looking at Warhol's Flowers
Swimming With Diana Dors
Fire and Ashes: Success and
Failure in Politics
Securities Against Misrule
Edmund Burke: Philosopher, Politician, Prophet
What Money Can't Buy: The Moral Limits of Markets
Bring up the Bodies
Paper Promises: Money, Debt and the New World Order
Jeffrey Friedman &
Engineering the Financial Crisis: Systemic Risk and the Failure of Regulation
Man with a Blue Scarf
A Revolution of the Mind
T. J. Clark
The Sight of Death
Recent Paintings by
The Blue Sweater
Matthew Bishop &
On Human Rights
The Second Bounce of the Ball
The Mind of God and the Works of Man
Just before the mid-point of the twentieth century, four books were published that contributed significantly to the way in which social scientific research influenced public policy during the second half of the century. Schumpeter's Capitalism, Socialism and Democracy (1942), Mises's Bureaucracy (1944), Hayek's Road to Serfdom (1944) and von Neumann and Morgenstern's The Theory of Games and Economic Behaviour (1944) were all written by men associated with the Austrian School of Economics. Schumpeter, Mises, Hayek and Morgenstern all knew each other from their days in Vienna – in particular the traumatic years following the collapse of the Habsburg empire in 1918 – and all shared an intellectual heritage, principally supplied through the teaching and patronage of a previous generation of economists, notably Menger, Bðhm-Bawerk and von Wieser.
The Viennese contribution to literature, painting, and music at the start of the twentieth century – Hofmannsthal, Schnitzler, Klimt, Schiele, Mahler and Schönberg – is widely acknowledged, and so too is its contribution to philosophy and psychology during the following decades: Schlick, Neurath, Carnap, and Wittgenstein; Breuer, Adler and Freud. The impact of economists trained in the Austrian tradition, whose influence on public policy has grown in importance over the last hundred years, has been less thoroughly documented and less widely understood.1 Wasserman's book attempts to remedy this lack. In the case of economics, he shows that the migration of the Austrian School to the United States was essential for its influence to become more than parochial.
In his Introduction, Wasserman explains that he is "less interested in saying what the Austrian School is or what it believed than in what it did." (p.9). His book, therefore, is not a history of economic analysis,2 but rather a study of the way in which a certain approach to economic analysis came to influence public policy. One of the characteristics of the Austrian School was the commitment of its members to building institutions as well as theories. In addition to teaching at universities and publishing in academic journals, they established regular private seminars that attracted a diverse range of intellectuals and political activists,3 together with networks of like-minded business leaders and journalists, holding conferences and symposia that blended scholarship with advocacy, founding societies, and leading both formal and informal groups of policy advisors,4 all of which helped to disseminate and publicise their ideas. Austrian Economics was - and is - both a school and a campaign.
That said, the School was heterogenous in personality and outlook. Members often disagreed with each other on matters of substance and, as is common in associations of intellectuals, there were many personal rivalries, and moments of jealousy at each other's successes. Nonetheless, the Austrians created a network of influence and assistance, helping each other to flee Europe in the late 1930s, recommending each other for academic jobs in the US, and reviewing each other's books sympathetically. The cultural traditions and values that held the group together were stronger than their many differences over theory and practice.
There are three main ideas that characterise the Austrian School. The first, and perhaps the most important, is subjectivism, that is the focus on the consumer rather than the producer as the source of the value of goods in market exchanges. What determines the price of a good or service? Neither the labour nor the commodities that have gone into making or providing it, but the degree to which the consumer judges that her needs and desires will be satisfied by obtaining it. This is not just Daniel Bernoulli's point, made in the mid-eighteenth century, that "the utility resulting from any small increase in wealth will be inversely proportionate to the quantity of goods previously possessed" 5 ; additionally it is that, in the words of Menger, "the value to this person of any portion of the whole available quantity of the good is equal to the importance to him of the satisfaction of least importance among those assured by the whole quantity and achieved with an equal portion." 6 It is the final – or marginal – unit of consumption that determines value; and this value is discovered through the observation of market processes, rather than an analysis of the conditions under which markets might achieve equilibrium.
The second central strand of Austrian Economics is the concern with the methodology of economics, and its place within the social sciences. Members of the school were drawn both to the importance of social factors in determining economic behaviour (for example, Schumpeter's Capitalism, Socialism and Democracy) and the importance of mathematical logic in modelling the structure of our choices in economic and social decision making (for example, von Neumann and Morgenstern's The Theory of Games and Economic Behaviour). They were also critical of standard – neoclassical – economic models which used the idea of 'equilibrium' without explaining how such a state might come about or be sustained (see, for example, Hayek's 'Economics and Knowledge', Economica 4 (1937)), and the role of information and ideas within the market process. The members of the Austrian School did not share a methodological approach, but together they repeatedly attacked their opponents – whether the German Historical School in the 1880s, the Marxists in the early 1900s, or the Keynesians in the 1930s et seq. – for failing to subject their theoretical assumptions to rigorous examination.
Third, the Austrians were always determined to explore the application of their economic ideas for politics. They believed, in the words of Hayek, that "nobody can be a great economist who is only an economist". By background, most of the Austrian School were bourgeois liberals. The first generation sought to modernise the Habsburg empire through gradualist economic reforms, taking a progressive stand against the conservatives; the second were forced into alliance with the conservatives post-1918, in order to resist the demands first of the socialists and then of the fascists; the third became the intellectual stimulus for the rise of new forms of libertarianism and conservatism, in opposition to the growth of the welfare-state post-1945. The stable theme of this political odyssey was the concern to protect the freedom of the individual to make economic choices for themselves, which they saw as essential for an efficient allocation of resources in the economy. Once the voice of the consumer became drowned out by the activities of the state, then individual's needs would no longer be optimally satisfied.
It was this third theme – the connection between economics and politics – which made the Austrian School's work visible to a wider public, tarnishing their reputation in the process. Hayek's endorsement of Pinochet's dictatorship in Chile – Wasserman reports that he described members of Pinochet's government as "educated, reasonable and insightful men" (p.262) – suggested a decisive abandonment of the liberalism of the first generation.7 Since the 1930s, Mises had given priority to economic liberty over political liberty, believing the former to be constitutive of the latter. This privileging of economic exchange was designed as a rebuttal not just of Marxian economics, but also the expansion of the welfare-state in the liberal democracies of Western Europe and North America. It has become the ideological touchstone of much libertarian and conservative political though in the US, but – somewhat paradoxically – it has also informed the survival strategy of the Chinese Communist Party: consumer goods for all, political power only for the elite.
What is puzzling about this, is that the most celebrated members of the Austrian School – Mises and Hayek – achieved political influence by insisting on restricting the principle of subjectivism solely to the preference for certain goods and services traded on an open market. Unlike Schumpeter and Morgenstern, who saw the importance not only of generalising the results of economic theory to wider questions of social choice, but also of drawing in to economic analysis knowledge from other scholarly disciplines, Mises and Hayek viewed social choices as if they were purely economic choices, and treated economic choices as if they were simple preferences for one good rather than another. They became guilty, to paraphrase another famous Viennese thinker, of excess repetition and insufficient working-through.
Wasserman provides a thorough introduction to the leading members of the Austrian School over several generations, their support for and arguments with each other, their determination to maintain a distinctive approach to economic thought, and their growing influence on conservative politics in the US. He does not explore the ways in which certain ideas – for example, the role of the entrepreneur in economic life, which was a preoccupation of Schumpeter in the 1940s and of Kirzner from the 1970s 8 – might lead to very different approaches to public policy and forms of politics to those endorsed by Hayek. Nor does he consider how the idea of subjectivism, which lies at the heart of Austrian economic thought, might fit with other methodological approaches in the social sciences and humanities. The existence of options from which to choose, and the ability to make choices between options, are assumed in economics; elsewhere they are problems to be investigated.
To put the point another way, Wasserman succeeds in showing how the School became established, survived its transplantation from Europe to America, and contributed significantly to an influential strand of contemporary political thought. However, within the intellectual resources of the Austrian School of Economics there are other, more interesting ways in which the focus on the satisfaction of subjective need might be theorised; in which alertness to changes in circumstances might lead to improved economic exchanges; and more attractive ways by which public policy might support the various processes by which needs are discovered and met. The marginal revolution is not yet complete.
Karl Polanyi – author of The Great Transformation (1944) – and Karl Popper – author of The Open Society and its Enemies (1945) – were also part of this heritage, although never full-members of the Austrian School.
2 Unlike Joseph Schumpeter's posthumously published History of Economic Analysis (1954).
3 For example, attendees at Böhm-Bawerk's seminar - which ran from 1905 up to August 1914 – included not only Mises and Schumpeter, but at various times Rudolf Hilferding, Otto Bauer, Otto Neurath and Nikolai Bukharin.
4 For example, the Mont Pèlerin Society (Frederick Hayek), the Bellagio Group (Fritz Machlup), and General Agreement on Tariffs and Trade (Gottfried von Haberler).
5 Daniel Bernoulli, "Exposition of a new theory on the measurement of risk" (1738). Published in English translation by Louise Sommer in Econometrica 22 (1954).
6 Carl Menger, Principles of Economics (1871). Quoted in Wasserman, p. 25.
7 Both Böhm-Bawerk and von Wieser, when members of the Austrian government in the 1890s, had argued in favour of progressive taxation: the wealthy benefitted most from the provision of public services so they should pay more towards them.
8 Joseph Schumpeter, Capitalism, Socialism and Democracy (1942); Israel Kirzner, Competition and Entrepreneurship (1973). See also, Deirdre McCloskey, "A Hayek/Kirznerian
Economic History of the Modern World", in Hayek and Behavioural Economics (2013)