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The Philosophy
of Austrian Economics

The Philosophical Origins of Austrian Economics. By
David Gordon. Auburn, Alabama: Ludwig von
Mises Institute, 1993.

Barry Smith

origins of Menger’s theorizing in economics. As the author
points out in his conclusion: philosophy has been an accom-
panying presence at every stage in the development of Austrian
economics. Moreover, “Action, that leitmotif of praxeology, has in the
Austrian tradition received a distinctly Aristotelian analysis. Aus-
trian economics and a realistic philosophy seem made for each other.”

Gordon packs considerable material into a short span, and inevi-
tably some simplifications arise. Thus in defending a view according
to which Austrian economics arose in reaction to the “Hegelianism”
of the German Historical School, he ignores the differences which
existed between the views of Knies, Roscher, Schmoller and other
members of the German school, as he ignores also recent scholarship
which points to hitherto unnoticed similarities between the work of
some of these thinkers and that of Menger.

Underlying Gordon’s treatment of nineteenth-century philosophi-
cal thinking in the German-speaking world is the idea of a division
into two camps. On the one hand (and here I, too, am guilty of some
simplification in expounding Gordon’s views) is the camp of German
philosophy, which Gordon sees as being Hegelian, anti-science, and
organicist. On the other hand is the Austrian camp, which he sees as
Aristotelian, pro-science, and individualist in its methodology. The
members of the Historical School are placed in the former camp and

T= is a useful, clearly written study of the philosophical

*Barry Smith is professor of philosophy at State University of New York at Buffalo.

The Review of Austrian Economics Vol.7, No. 2 (1994): 127-132
ISSN 0889-3047

127


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1928 The Review of Austrian Economics Vol. 7, No. 2

are described as having embraced a Hegelian position inimical to the
development of economic science. Menger, in contrast, falls squarely
in the latter camp, and is presented as having shown the way towards
a genuinely scientific theory of the “principles” of economics, a theory
capable of being applied at all times and to all cultures.

~The simplification involved in this two-camp hypothesis can be
seen already in the fact that Brentano, normally and correctly re-
garded as the Austrian philosopher (and as the philosophical repre-
sentative of Austrian Aristotelianism) par excellence, was in fact born
in Germany, and his Aristotelianism was decisively influenced by the
thinking of the German metaphysician F. A. Trendelenburg. What is
more, Hegel himself was seen by his contemporaries as having been
responsible precisely for a revival of Aristotelianism, and Aristotelian
elements are quite clearly present in the thinking of those whom he
influenced (not least, as Meikle and others have shown, in that of
Marx).

Interestingly, the two schools of Brentanian philosophy and of
Mengerian economics were in a number of ways intertwined—to the
extent that the Brentano school was dubbed the “second” Austrian
school of value by analogy with the “first” school of Menger. It is
difficult to establish the degree to which Brentano influenced Menger
(the history of philosophy is, as Gordon himself points out, not an
apodictic science), and in my own writings on this matter I have
preferred to leave this question open. Gordon writes (p. 27) that
Brentano revived the study of Aristotle in Austria; this, too, is a
simplification: a certain institutionalized Aristotelianism had sur-
vived in Austria (a Catholic country), as it had not survived in those
Protestant parts of the German-speaking world influenced by Kant
and by the Kantian criticism of all “metaphysics.” Both Menger and
Brentano were able to flourish in Austria in part because of this
Aristotelian background, but all of this makes still more urgent the
question as to the precise difference between the “Aristotelianism” of
Hegel, Marx, the German Historical economists, and the “Aris-
totelianism of the Austrians.

Both groups embraced a suspicion of mathematics. And both
groups embraced a form of essentialism: they saw the world as being
structured by “essences” or “natures” and they awarded a central role
to the necessary laws governing these. (The propositions expressing
universal connections amongst essences are called by Menger “exact
laws.” It is such laws which constitute a scientific theory in the strict
sense, as Menger sees it. The general laws of essence of which such
a theory would consist are moreover subject to no exceptions. In this
respect they are comparable to the laws of geometry or mechanics,


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Smith: The Philosophy of Austrian Economics 129

and contrasted with mere statements of fact and with inductive
hypotheses.)

Both groups held that we can know what the world is like in virtue
of its conformity to laws, so that the laws are in some sense intelligi-
ble, a matter of what is accessible to reason. And both held further
that general essences do not exist in isolation from what is individual.
Thus they each embraced a variety of immanent realism: they were
interested in essences and laws as these are manifested in this world,
and not in any separate realm of incorporeal Ideal Forms of the sort
which would absorb the attentions of philosophers of a Platonistic
bent.

Both groups would thus stand opposed to the positivism which
has been dominant in philosophical circles for the bulk of the present
century and serves as the unquestioned background of almost all
contemporary theorizing among scientists themselves. For positivists
the world consists of elements that are associated together in acci-
dental and unintelligible ways; all intelligible structures and all
necessities are the result of thought-constructions introduced by
man, and the necessities involved can accordingly be exposed without
remainder as matters of logic and definition. The positivist sees only
one sort of structure in re, the structure of accidental association. The
two groups of Aristotelians, in contrast, see also non-trivial yet
intelligible and law-governed worldly structures, of a sort that one
can understand. Hence where the positivist sees only one sort of
change—accidental change (for example of the sort which occurs
when a horse is run over by a truck)—the Aristotelian sees in addition
intelligible or law-governed change, as, for example, when a foal
grows up into a horse (or when a state-managed currency begins to
lose its value in relation to other goods). The presence of intelligible
change implies, moreover, that there is no “problem of induction” for
either group of Aristotelians. When we understand a phenomenon as
the instance of a given species, then this understanding relates also
to the characteristic patterns of growth and evolution of the phenome-
non in the future and to its characteristic modes of interaction with
other phenomena.

In what respects, then, do the German and Austrian Aristotelians
differ? First, we mention one minor point (which plays too central a
role in Gordon’s exposition): the two groups differ in their respective
estimations of the role and potentialities of scientific theory, and offer
different accounts of the relations between history and philosophy,
and also between both of these and “exact” and empirical science. Yet
these differences are a matter of emphasis only. Thus Marx himself
embraces the assumption that science is able to penetrate through


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130 The Review of Austrian Economics Vol. 7, No. 2

the ideological obfuscations by which the commonsenical mind (as he
conceives things) is of necessity affected. Other German philoso-
phers saw philosophy itself as a science, indeed as a rigorous
science in something like the Mengerian sense.

The first major difference between the two groups concerns the
account they give of the degree to which the laws of a science such
as economics are strictly universal. For Menger and Brentano (as
for Aristotle before them) strict universality is the necessary pre-
supposition of any scientific theory in the genuine science. Such
universality is however denied by Marx, for whom laws are in every
case specific to a given social organism.’

The second such difference concerns the issue of methodologi-
cal individualism—a feature which is of course characteristic of
Menger and his school. Note, however, that Menger was opposed
not only to the holism or collectivism of the sort that was pro-
pounded by (among others) Marx, but also, at the opposite extreme,
to atomistic doctrines of social organization. For methodological in-
dividualism deals with individuals not as isolated, independent at-
oms, but as nodes in different sorts of complex, cross-leaved rela-
tional systems. Society and its institutions (including the market)
are not merely additive structures; they share some of the qualities
of organisms. The behavior of such structures is, for the methodo-
logical individualist, to be understood in the last analysis entirely
in terms of complex systems of desires, reasons, and motivations
on the parts of individuals; but the institutional structures them-
selves are for all that real, and the desires, reasons, and motiva-
tions—and thus also the actions—of the constituent members of
such structures exist and have the texture and content that they
have only in virtue of the existence of the given institutional
surroundings. We may recall, in this connection, Aristotle’s view of
the city-state as an organic entity: these and other organicist
elements in Aristotle’s thinking were, I want to suggest, taken over
by Menger, too, though mediated through the latter’s theory of the
essential laws governing the world of economic and other social
phenomena. Economics is methodologically individualist when its
laws are seen as being made true in their entirety by patterns of
mental acts and actions of individual subjects, but economic phe-
nomena are then grasped by the theorist precisely as the results
or outcomes of combinations and interactions of the thoughts and
actions of individuals.

Cf. S. Meikle (1985), p. 6, n. 4.


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Smith: The Philosophy of Austrian Economics 131

The third major difference turns on the fact that, from the per-
spective of Menger, the theory of value is to be built up exclusively on
“subjective” foundations, which is to say exclusively on the basis of
the corresponding mental acts and states of human subjects. Thus
value for Menger—in stark contrast to Marx—is to be accounted for
exclusively in terms of the satisfaction of human needs and wants.
Economic value, in particular, is seen as being derivative of the
valuing acts of ultimate consumers, and Menger’s thinking might
most adequately be encapsulated as the attempt to defend the possi-
bility of an economics which would be at one and the same time both
theoretical (dealing in universal principles) and subjectivist in the
given sense. Among the different representatives of the philosophical
school of value theory in Austria (Brentano, Meinong, Ehrenfels, etc.)
subjectivism as here defined takes different forms.? All of them share
with Menger however the view that value exists only in the nexus of
human valuing acts.

Finally, the two groups differ in relation to the question of the
existence of (graspable) laws of historical development. Where Marx,
in true Aristotelian spirit, sought to establish the “laws of the phe-
nomena,” he awarded principal importance to the task of establishing
laws of development, which is to say, laws governing the transition
from one “form” or “stage” of society to another. He treats the social
movement as a process of natural history governed by laws,’ and he
sees the social theorist as having the capacity to grasp such laws and
therefore also in principle to sanction large-scale interferences in the
social organism which is the state. Marx himself thereby saw social
science as issuing in highly macroscopic laws, for example to the
effect that history must pass through certain well-defined “stages.”
The Aristotelianism of the Austrians is in this respect more modest:
it sees the exact method as being restricted to essences and to simple
and rationally intelligible essential connections only, in ways which
set severe limits on the capacity of theoretical social science to make
predictions. It is in this connection that the methodological individu-
alism of the Austrians has been criticized by Marxists as a form of
atomism, though such criticisms assume too readily that methodo-
logical individualism trades in mere “sums.”

What, now, of the German historical economists? As already
noted, Aristotelian doctrines played a role also in German economic

2See, on this, the papers collected in Grassl and Smith, eds. (1986).

Passage cited by Marx himself in the “Afterword” to the second German edition of
volume 1 of Capital and adopted as a motto to Meikle 1985.


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132 The Review of Austrian Economics Vol. 7, No. 2

science, not least as a result of the influence of Hegel. Thus for
example, Roscher, as Streissler has shown, developed a subjective
theory of value along lines very similar to those later taken up by
Menger. Such subjectivism was accepted also by Knies. Moreover,
Knies and Schmoller agreed with the Austrians in denying the exist-
ence of laws of historical development. In all of these respects,
therefore, the gulf between Menger and the German historicists is
much less than has normally been suggested. The German histori-
cists are still crucially distinguished from the Austrians, however, in
remaining wedded to an inductivistic methodology, regarding history
as providing a basis of fact from out of which mere empirical gener-
alizations could be extracted. (Schmoller, especially, attacked the idea
of universal laws or principles of economics.) For an Aristotelian such
as Menger, in contrast, sheer enumerative induction can never yield
that sort of knowledge of exact law which constitutes a scientific
theory. For this, reason and insight are indispensable to the science
of economics as the Austrian conceives it; and (as Mises has stressed)

a knowledge of the science of human action is in fact an indispensable
presupposition of that sort of fact-gathering which is the task of the
historian.

References

Grassl, W. and Barry Smith, eds. 1986. Austrian Economics: Historical and
Philosophical Background. London and Sydney: Croom Helm.

Meikle, S. 1985. Essentialism in the Thought of Karl Marx. London: Duck-
worth.

Streissler, Erich. 1990. “The Influence of German Economics in the Work of
Menger and Marshall.” In Carl Menger and His Economic Legacy,
Bruce Caldwell, ed. Durham, N. C. and London: Duke University Press.