WEBVTT NOTE The Austrian School in 'The American Economic Review' 1 00:00:00.000 --> 00:00:05.240 I'd like to thank the Mises Institute for having me. My first scholars' conference 2 00:00:05.240 --> 00:00:11.000 was in 1999, and they keep getting better over the years. I'd like to briefly explain 3 00:00:11.000 --> 00:00:18.000 my interest in this topic. I deal a lot with the news media at the think tank where I work. 4 00:00:19.020 --> 00:00:25.240 And one question that I'm asked, we're dealing with very abstract ideas that do have a practical 5 00:00:25.240 --> 00:00:32.240 One question I'm asked all the time is, well, who are these Austrian school economists? 6 00:00:32.240 --> 00:00:45.240 And I find that being able to take popular culture, examples from popular culture, and cite them to the news media helps them understand these very abstract ideas. 7 00:00:45.240 --> 00:00:54.240 And one way that I've introduced Ludwig von Mises and his story to many journalists over the years is to remind them that there was a great movie, 8 00:00:54.240 --> 00:01:00.240 A Great Musical, The Sound of Music. It's about the Anschluss. And of course, as Dr. 9 00:01:00.240 --> 00:01:07.560 Hulsman's book notes, Ludwig von Mises got out of Vienna just ahead of the Nazis. But 10 00:01:07.560 --> 00:01:14.520 it really clarifies for a lot of people in the media that I've dealt with who he is 11 00:01:14.520 --> 00:01:22.280 and what we are. We're pro-freedom, pro-liberty, and we're involved with ideas as he was. 12 00:01:22.280 --> 00:01:30.160 So what I'm going to do is I'm going to go through real quickly what I found in reviewing 13 00:01:30.160 --> 00:01:33.440 100 years of the American Economic Review. 14 00:01:33.440 --> 00:01:40.440 It's my contention that the Austrian School gets a bum ramp from people that just don't 15 00:01:40.440 --> 00:01:49.780 know how many institutions, serious institutions, have taken our work very seriously. 16 00:01:49.780 --> 00:01:55.720 Two papers that I presented here in the past dealt with the Austrian School in the Reviews 17 00:01:55.720 --> 00:02:02.000 of the Federal Reserve System and the Austrian School in the National Bureau of Economic 18 00:02:02.000 --> 00:02:09.280 Research's Business Cycle Studies. Those were published in 2006 and 2010 in the Quarterly 19 00:02:09.280 --> 00:02:14.360 Journal of Austrian Economics. This paper kind of grew out of that. My question became 20 00:02:14.360 --> 00:02:21.680 Well, what about the AER? The AER, which was first published in 1911, is the leading peer-reviewed 21 00:02:21.680 --> 00:02:28.060 economics journal in the United States. Thirteen presidents of the AER, which publishes on 22 00:02:28.060 --> 00:02:34.000 a quarterly basis, have won the Nobel Prize in Economics, and AER has been identified 23 00:02:34.000 --> 00:02:40.440 as a flagship economics journal. Despite this, articles that explore academic interest in 24 00:02:40.440 --> 00:02:48.440 and the Austrian School overlook the AER, so I began hoping I could correct this oversight. 25 00:02:48.440 --> 00:02:53.860 Now what I found is that the AER has published a reference to an Austrian economist each 26 00:02:53.860 --> 00:02:59.720 year in its 100 year history, that's my appendix, and these include references to 27 00:02:59.720 --> 00:03:06.920 Benjamin Anderson, Eugene von Boehm-Bawerk, Gottfried Haberler, Friedrich Hayek, Israel 28 00:03:06.920 --> 00:03:13.920 Israel Kirzner, Fritz Machlip, Carl Menger, Ludwig von Mises, Oskar Morgenstern, Murray 29 00:03:13.920 --> 00:03:21.920 Rothbard, Joseph Schumpeter, Hans Senholtz, Richard Striegel, and Friedrich Wieser. 30 00:03:21.920 --> 00:03:27.520 There is clarity of Austrian views for much of the AAR's history, from the first reference 31 00:03:27.520 --> 00:03:35.320 in 1911 to the last, that was a reference to Hayek, in 2010 by Oliver Williamson, who 32 00:03:35.320 --> 00:03:40.760 who was co-laureate in 2009, Nobel Economics Prize. 33 00:03:40.760 --> 00:03:46.920 And these references include articles, presidential addresses, book reviews, abstracts, comments 34 00:03:46.920 --> 00:03:51.520 and replies authored by or in reference to Austrian economists. 35 00:03:51.520 --> 00:03:58.320 The range of Austrian concepts is broad and includes the business cycle, capital theory, 36 00:03:58.320 --> 00:04:03.880 economic history, government interventionism, information and knowledge, marginalism, Marxism, 37 00:04:03.880 --> 00:04:12.880 Methodological Individualism, Socialism and the Soviet Union, Monetary Policy and the Price System, including the Danger of Government Controls. 38 00:04:12.880 --> 00:04:21.880 So here's the point, I'm oftentimes asked by members of the press, why is any of this, this is not really relevant, is it? 39 00:04:21.880 --> 00:04:25.880 The Austrian School of Economics, they're from Austria, okay, right? 40 00:04:25.880 --> 00:04:31.880 Well no, they are in fact, many of them are from Austria, but here's the point. 41 00:04:31.880 --> 00:04:40.640 They're cited in the flagship economics journal in the United States every year from the first year the journal was published, 1911. 42 00:04:40.640 --> 00:04:49.120 That might be a little, that might speak a little bit to the credibility of this school, and you should pay attention to it, is my argument. 43 00:04:49.120 --> 00:04:58.880 So, I'm going to give you the first reference. The first reference to the Austrian school is Mitchell, Wesley Mitchell, incidentally, in 1916. 44 00:04:58.880 --> 00:05:28.880 and he notes that Bimbawik, Menger, Wieser and Schumpeter are all affiliated with the school and he says quote among recent tendencies in economic theory none seems to me more promising than the tendency to make the use of money the central feature of economic analysis so the Austrian school is identified early on with monetary policy Ludwig von Mises' leading works including Human Action have 45 00:05:28.880 --> 00:05:34.320 have been reviewed in the AER and since we're dealing this week with the 100th anniversary 46 00:05:34.320 --> 00:05:39.320 of one of his books at this conference, I might mention that the first reference to 47 00:05:39.320 --> 00:05:46.800 von Mises occurred in 1913, that was Lutz, and Lutz wrote, he wasn't a big fan of Mises, 48 00:05:46.800 --> 00:05:51.920 but he wrote that Mises' book apparently represents an effort to develop a theory of 49 00:05:51.920 --> 00:05:57.360 money which will be in accord with the utility theory of value in its most extreme subjective 50 00:05:57.360 --> 00:06:13.480 The Austrian School is identified with monetary policy. In the 30s, Mises was cited on numerous 51 00:06:13.480 --> 00:06:19.700 occasions and one author, Loeffler, noted that the Austrian accepts Wichsel's distinction 52 00:06:19.700 --> 00:06:24.680 between the natural rate of interest and the money rate of interest, but disagrees with 53 00:06:24.680 --> 00:06:30.480 with the idea the rate always tends towards equilibrium through banking operations. 54 00:06:30.480 --> 00:06:41.120 And then Mises' criticism of socialism is noted in 1923, in fact, and this is how Van 55 00:06:41.120 --> 00:06:46.380 Sickle describes it in the pages of the AAR, it's a quote, a complete rejection of all 56 00:06:46.380 --> 00:06:51.400 forms of collectivism and all compromise with the forces which in the opinion of the author 57 00:06:51.400 --> 00:06:58.300 threaten the foundation of existing society. Mises rejects socialism on two grounds. First, 58 00:06:58.300 --> 00:07:03.160 because it affords no possibility of rational price fixation. Second, because there is no 59 00:07:03.160 --> 00:07:09.180 possibility of an appropriate organization of production. Just as an aside, at the time 60 00:07:09.180 --> 00:07:15.920 in the 1920s, there was very little understanding in the West of what was actually occurring 61 00:07:15.920 --> 00:07:17.920 in the Soviet Union. 62 00:07:17.920 --> 00:07:24.120 This becomes clear as you read the AER and it really puts von Mises's insight that 63 00:07:24.120 --> 00:07:30.180 socialism wouldn't work in a class of its own because you just don't find these kinds 64 00:07:30.180 --> 00:07:33.760 of articles or arguments even in the AER. 65 00:07:33.760 --> 00:07:38.480 What you find actually into the thirties, through the twenties and thirties, are a lot 66 00:07:38.480 --> 00:07:47.480 and a lot of conflicting and just confusing accounts about what is actually occurring in the Soviet Union. 67 00:07:47.480 --> 00:07:54.480 You don't find a lot of the type of analysis that you would find in von Mises. 68 00:07:54.480 --> 00:08:03.480 Now, Dr. Holzman's book refers to book reviews by Mises. I mentioned that his books had been reviewed. 69 00:08:03.480 --> 00:08:12.980 The book reviews that occurred in the 40s led him to end his involvement with the AER. 70 00:08:12.980 --> 00:08:19.980 What happened was a critic wrote about one of his reviews and he was not given the chance to respond to that review. 71 00:08:19.980 --> 00:08:22.980 And so he ended his association with the AER. 72 00:08:22.980 --> 00:08:27.480 However, the AER still continued to publish references to Mises. 73 00:08:27.480 --> 00:08:39.480 One of them was a gentleman by the name of Schuller who trashed, I'll just say that without reading what he actually had to say, but he trashed human action. 74 00:08:39.480 --> 00:08:53.480 And this led to Murray Rothbard actually, who at that point was 25, 26 years old, he was in his mid-20s, writing in and defending Mises against Schuller. 75 00:08:53.480 --> 00:09:07.880 And what Murray did, and I consider myself privileged to have known Murray from 1980 to the mid-90s when he passed away, 76 00:09:07.880 --> 00:09:13.480 just reading this defense of Mises brought back a lot of memories, personal memories that I had, 77 00:09:13.480 --> 00:09:17.780 but it was a 12-point defense of Mises against Shuler's criticism. 78 00:09:17.780 --> 00:09:26.980 Shuler then attacked Murray, and then of course Murray, as he oftentimes did, had so many compelling arguments that he cited back against Shuler. 79 00:09:26.980 --> 00:09:32.980 But if you're interested in Murray's treatment in the AER, that's the exchange to focus on. 80 00:09:32.980 --> 00:09:36.980 That occurred in 1950 and 1951. 81 00:09:36.980 --> 00:09:47.380 And then in 1963, Schaeffer, writing in the AER, noted that Murray's book on the Panic of 1819 represents the only published book-length economic treatise 82 00:09:47.380 --> 00:09:52.900 on the remedies that were proposed, debated and enacted in attempts to cope with the crisis of 1819. 83 00:09:53.940 --> 00:09:57.380 That's also true in the Federal Reserve publications. You'll find if you read the 84 00:09:57.380 --> 00:10:02.420 Federal Reserve member bank reviews, Murray Rothbard is accepted in those Fed reviews as 85 00:10:02.420 --> 00:10:08.260 the authority on the Panic of 1819. There is no other authority. Now real quick on Hayek, 86 00:10:09.220 --> 00:10:16.580 when the AER celebrated its 100th anniversary here recently, a group of blue chip 87 00:10:17.380 --> 00:10:23.540 I guess blue-chip economists including some Nobel laureates went back and with their staffs they 88 00:10:23.540 --> 00:10:30.180 reviewed 100 years of the AER and they focused in on the top 20 articles in the AER's first century. 89 00:10:31.300 --> 00:10:38.740 One of them was Hayek 1945. This is his article on the knowledge problem and they note that Hayek 90 00:10:38.740 --> 00:10:44.180 argues that authorities lack the knowledge to plan an economy. Quote, the peculiar nature of the 91 00:10:44.180 --> 00:11:04.180 The problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. 92 00:11:04.180 --> 00:11:12.500 This article has been cited dozens of times in the AER by everybody from professors to 93 00:11:12.500 --> 00:11:21.960 Nobel laureates. This article by Hayek is commonly cited and is an example of his work 94 00:11:21.960 --> 00:11:31.600 being taken seriously. I'd like to conclude with what I'm arguing is a bizarre synthesis 95 00:11:31.600 --> 00:11:38.680 that has emerged in the AER in recent decades. And these are articles that rely on econometrics, 96 00:11:38.680 --> 00:11:44.920 that is mathematical modeling, that use, believe it or not, references to Austrian economics. 97 00:11:44.920 --> 00:11:49.400 This was a new one even for me. I thought growing up in Detroit I'd seen everything, 98 00:11:49.400 --> 00:11:55.800 but this was new, that they're actually taking Austrian School economists and citing 99 00:11:55.800 --> 00:12:01.200 them in these elaborate econometric articles that are published in the AER. 100 00:12:01.200 --> 00:12:08.120 So just like to point out that Austrian School economists have criticized econometrics. Mises 101 00:12:08.120 --> 00:12:16.500 was unrelenting in his criticism of mathematical economics. Papandreau in 1963 in the AER observed 102 00:12:16.500 --> 00:12:22.900 that Mises singled out macroeconomics, mathematical economics and econometrics, quote, as the 103 00:12:22.900 --> 00:12:29.940 outstanding forms of degradation in economic thought. Mises termed econometrics a childish 104 00:12:29.940 --> 00:12:36.660 Play, which at best represent an attempt to deal with history in a quantitative way. Murray 105 00:12:36.660 --> 00:12:43.100 Rothbard, Mises's leading student, rejected the positivism of econometrics. So you actually 106 00:12:43.100 --> 00:12:49.780 get in the AER, believe it or not, earlier in the AER's history, economists saying this 107 00:12:49.780 --> 00:12:56.780 is what the Austrians say about econometrics. It's silly. But now, it starts in the mid-70s, 108 00:12:59.940 --> 00:13:06.860 In the 1970s, those of you who never liked disco could relate to this, bad things occurred 109 00:13:06.860 --> 00:13:13.540 in the 70s, but this is when this trend started in the 1970s of citing Austrians in these 110 00:13:13.540 --> 00:13:15.540 econometric articles. 111 00:13:15.540 --> 00:13:20.060 And so here's just a couple of examples of this. 112 00:13:20.060 --> 00:13:26.100 Hurley and McDonough in 1995 consider the Hayek hypothesis stated by Vernon Smith in 113 00:13:26.100 --> 00:13:33.000 in the AER as it relates to the, quote, favorite long shot bias in paramutual betting, which 114 00:13:33.000 --> 00:13:37.260 is that favorites win more often than the betting odds indicate and long shots win less 115 00:13:37.260 --> 00:13:44.780 often than the betting odds indicate. 116 00:13:44.780 --> 00:13:52.080 Hubbard in 2003 cites Hayek in developing a model that examines capacity utilization gains 117 00:13:52.080 --> 00:14:00.140 from On-Board Computers in the Trucking Industry, Duffy and Manso in 2007 cite Hayek's paper 118 00:14:00.140 --> 00:14:07.020 from 1945 that I mentioned, and they create, quote, a simple model of percolation of information 119 00:14:07.020 --> 00:14:12.340 through a large market. They write, quote, our model allows a relatively explicit solution 120 00:14:12.340 --> 00:14:20.900 for the cross-sectional distribution of posterior beliefs at each time t in italics. So these 121 00:14:20.900 --> 00:14:26.740 These models, as they progress, become more complicated and complex and there's less 122 00:14:26.740 --> 00:14:30.380 clarity of view as to what the Austrians are actually saying. 123 00:14:30.380 --> 00:14:36.840 So I'll conclude real briefly that this deviation, a bizarre synthesis, is most apparent 124 00:14:36.840 --> 00:14:42.960 in these econometric articles that cite Hayek and Mises who, like Murray, noted the limitations 125 00:14:42.960 --> 00:14:45.380 of mathematical economics. 126 00:14:45.380 --> 00:14:52.540 Hayek's 1945 article notes economists' growing preoccupation with statistical aggregates, 127 00:14:52.540 --> 00:14:58.340 a propensity he later observed in the AER to, quote, imitate as closely as possible the 128 00:14:58.340 --> 00:15:05.340 procedures of the brilliantly successful physical sciences lead to nothing, really. 129 00:15:05.340 --> 00:15:10.240 Mises in Human Action notes there are economists who hold, quote, the only appropriate method 130 00:15:10.240 --> 00:15:16.680 of Dealing with Economic Problems is the mathematical method. These economists derided the logical 131 00:15:16.680 --> 00:15:22.780 economist as literary economist. I love how he uses sarcasm in answering his critics. 132 00:15:22.780 --> 00:15:28.800 He's very good at that. Mises rejected econometrics because it starts from, quote, false assumptions 133 00:15:28.800 --> 00:15:35.800 and leads to fallacious inferences. And then finally, Murray Rothbard in the AER observes 134 00:15:35.800 --> 00:15:40.080 mathematical equations are appropriate and useful when there are constant quantitative 135 00:15:40.080 --> 00:15:46.080 Relations Among Unmotivated Variables," that's Man Economy and State from 1962. 136 00:15:46.080 --> 00:15:49.440 They are singularly inappropriate in economics. 137 00:15:49.440 --> 00:15:54.500 And then Murray concludes, training in math is, quote, no more necessary to the realization 138 00:15:54.500 --> 00:16:01.760 of its uselessness for an inapplicability to the sciences of human action than for example 139 00:16:01.760 --> 00:16:07.740 training in agricultural techniques is essential to knowing they are not applicable on board 140 00:16:07.740 --> 00:16:09.960 an ocean liner. 141 00:16:09.960 --> 00:16:15.900 So Austrian economics in the AAR second century, which we've now just begun, should be presented 142 00:16:15.900 --> 00:16:21.200 free of the econometric straitjacket that only serves to obscure the school's insights 143 00:16:21.200 --> 00:16:26.840 and should be presented with the clarity that it was for most of the journal's history. 144 00:16:27.840 --> 00:16:29.840 Thank you very much.