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NOTE 24. The Renaissance of the Old ‘Viennese’ School: The New Austrian School of Economics

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Chapter 24 The Renaissance of the Old Viennese School,

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the new Austrian School of Economics In the 1930s it became clearer than ever

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before that the fundamental theoretical assumptions of the Austrian School ran decidedly counter

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to the dominating spirit of the age, which appeared increasingly dedicated to the salvation-promising

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and collectivist ideologies of the left and right. This trend was felt even in those societies

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which had remained democratic. It meant that John Maynard Keynes's presumptuous claim

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of being able to secure the future welfare of mankind readily found zealous supporters.

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The Austrian School had already been on the sidelines for some time when it finally collapsed

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under the strain of external forces after the annexation of 1938. The ideas of the school

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All seem to sink into oblivion after the Second World War. Social policy in the Western democracies

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was oriented toward ideas of a welfare state and was bolstered by economists promising the

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affluent society, Galbraith, 1958. One of the fundamental insights of the Austrian

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School, namely that utopian societies designed by social engineers are nothing but unscientific

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Allusions seemed destined to disappear. That Menger's Principles of Economics was first

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translated into English in 1950 made no difference to the fact that the 1950s and 1960s would

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become years in the wilderness. Most of the exiled members of the Austrian School joined

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the neoclassical mainstream soon after emigration. Fritz Machlup, for example, who became the

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pioneer of information economics in the United States. His stance on American monetary policy

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University caused a rift between himself and his father-like friend Ludwig von Mises, which

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lasted for many years.

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Oskar Morgenstern advised American government agencies and primarily published works on

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game theory, economic forecasting and methodology, Paul Rosenstein-Rodan became a highly esteemed

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expert on developing countries and Gottfried Habeler worked for the American Central Bank

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System. They all felt a lifelong bond to the Austrian School, but did not continue to conduct

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research on its behalf. It was therefore possible to have the impression that Austrian School

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theories had entered into mainstream economics. It's to Friedrich von Hayek's, and in particular

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to Ludwig von Mises' credit, that it was not only possible to keep the legacy of the Austrian School

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alive in a new environment, but also to perpetuate its marked development with only a few

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Among others, Hayek's later and most influential students from his time at the London School of Economics were Ludwig Lachmann, 1906-1990, and George L.S. Shackle, 1903-1992. Lachmann, who taught in Johannesburg, South Africa from 1948 on, and who developed a radical form of subjectivism, challenged altogether the information character of prices on the grounds of constant change and the resulting unpredictability of knowledge.

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College. Having begun his doctoral thesis under Hayek, Shackel pursued a similar path,

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but ultimately turned toward radical subjectivism, steering it toward nihilism. The Austrian School

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tradition came to a sudden halt when Hayek was appointed to the University of Chicago

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in 1949. Having there been assigned to the Committee of Social Thought, Hayek increasingly

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moved away from the terrain of economic research in the strict sense, which suited his interests

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quite well. He subsequently applied himself to the study of the legal and institutional

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frameworks of a free society. Even though his contributions to the theories of law and

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politics were closely connected to his economic theory and were logically cohesive, his faculty

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colleagues soon labelled him a social and law philosopher, and others with smug overtones

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placed his work in the category of conventional wisdom. In contrast, Ludwig von Mises remained

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true to his original profession. After his arrival in New York in 1940 and with the help

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of Machloop's contacts, he was able to have Omnipotent Government 1944, Bureaucracy 1945

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and Human Action 1949 printed. In 1945, by then 64 years old, Mises obtained a guest

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professorship at New York University with the help of friends and former students. He

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He remained active in the position until reaching the grand old age of 87.

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The response to his first two books published in the United States was modest.

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Human Action, however, became a great success.

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Critics of the then prevailing New Deal statism soon recognized in Mises a welcome comrade

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in arms.

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Particularly impressed by Mises was the brilliant journalist Henry Hazlitt, 1894-1993, who published

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Two Influential Books, Economics in One Lesson, 1946, and The Failure of the New Economics,

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1959, which contained ideas that were very similar to those of the Austrian School.

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A heterogeneous stream of freedom thinkers gradually emerged who, since the label liberal,

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had already been taken by the American Democrats, referred to themselves as libertarians. Admittedly,

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their critical and at times hostile attitude toward the state sometimes went too far for

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In New York, Mises managed once again to assemble a sustainable circle of students from which eminent economists in the tradition of the Austrian School would arise.

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In Market Theory and the Price System, 1963, and Methodological Individualism, Market Equilibrium and Market Process, 1967, Israel M. Kirzner developed a theory of markets and entrepreneurs,

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Kirzner's Theory of the Entrepreneur as Discoverer is considered groundbreaking to this day.

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Hans F. Zenholz, 1922-2007, another student of German origin, who had later become a professor

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at Grove City College and the president of the Foundation for Economic Education, translated

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many of Mises's writings from German into English. With his published books and especially his numerous

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talks, Zenholz contributed to the early dissemination of the Austrian positions on monetary theory and

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and Monetary Policy, and attempted to bridge the gap between the economic sciences and

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intellectual Protestant American circles. Quite possibly the most distinguished of Mises'

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students in the New World was Murray N. Rothbard, 1926-1995, who had later become professor

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at the University of Nevada at Las Vegas. In his opulent early work in True Volumes,

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Man, Economy and State, 1962, Rothbard succeeded in expanding on his teacher's approach, especially

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in the areas of Monetary Theory, the Theory of Monopoly and the Theory of Capital and

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Interest. Using his extensive knowledge of theoretical economics and history, he demonstrated

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in America's Great Depression, 1963, how inflation of the money supply, responsible

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for the artificial boom in the Golden Twenties, had developed, and how it inevitably led to

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the stock market crash of 1929. His explanation contradicted the Keynesianism-biased interpretation

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of Black Thursday that prevails to this day.

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With An Austrian Perspective on the History of Economic Thought, 1995, a two-volume work,

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Rothbard presented a comprehensive history of economic theory from the Austrian perspective.

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Aside from his teaching assignments in New York and Nevada, he wrote well over a thousand

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articles and 25 books, including works on political philosophy and natural rights ethics.

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As a political agitator, he sharply criticized the US's aggressive foreign policy and the

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expansion of the state as well as the curtailment of basic freedom rights, and he evolved into

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a radical advocate of the libertarian movement, all the while maintaining his pacifist stance.

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Even though a succession of talented and later well-known economists emerged from Mises's

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New York seminar, for example, Louis Spadaro, George Reisman, Percy L. Graves Jr. and his

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In the mid-1960s, many established economists considered the Austrians represented by Hayek

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and Mises mere historic relics who fought aggressively and bitterly in a hopelessly

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quixotic manner against the mainstream and who made one mistake after another on questions

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of Economic Policy. In the academic community, they were but a small minority whose way of

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thinking was incompatible with the neoclassical paradigm. The three basic assumptions of neoclassical

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economics, optimization behavior, fixed order of preference and equilibrium, was diametrically

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opposed then as now to the basic positions of the Austrians, expedient action, individual

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Natural Preferences and Dynamic Processes. Moreover, the Austrians categorically rejected

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a mathematical treatment of economic problems because, in the sphere of action, there is

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no unit of measurement and no measuring. Very few essays appeared in academic journals with

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the consequence that Austrian economics was perceived predominantly as a book-science

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of little consequence. During this phase of noticeable academic isolation, the Mont-Pélerin

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Hayek founded a society established in 1947 in a hotel on Mont-Pelerin-Ner-Bébé on

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Lake Geneva, was the most important bridge to old Europe for both Hayek and Mises. As

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well as the former Italian President Luigi Ainaudi, 1874-1961, and the philosopher Bruno

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Leoni, 1913-1967, the author of Freedom and the Law, 1961, members of the society Hayek

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Ludwig founded, included, among others, the French expert on finance and political theoretician

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Jacques Ruff, 1896-1978. After the First World War, Ruff successfully proved in every single

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case that the money that had been handed out by central banks in the countries suffering

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from hyperinflation, France, Italy, Germany, Poland and Austria, had been used primarily

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to finance budget deficits. After the Second World War, he introduced currency stabilization

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measures under President de Gaulle, and later recorded his insights and experiences in the

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monetary sin of the West. Other members of the Mont-Bélerin Society included the Economics

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Minister and later Chancellor of West Germany Ludwig Ehrhardt 1897-1977, Walter Eucken 1891-1950,

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Alfred Müller, Ahmach, 1901-1978, Alexander Rüstorf, 1885-1963, and Wilhelm Röpke, 1899-1966,

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who as ordo-liberals attempted to find a third way between socialism and laissez-faire capitalism.

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Much like Hayek in his later works, Röpke paid particular attention to cultural factors

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like morals and tradition. Moreover, he warned against the modern anti-individualist tendencies

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and against the domestication and convenient stable feeding of people by the welfare state.

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Whereas Hayek maintained an ongoing close relationship with the auto-liberals,

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Mises repudiated them categorically. The Montpellierin Society, however, hardly played

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a direct role in the rebirth of the Austrian School as modern Austrian economics. Instead,

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it was the historical recollection of its central protagonists and the fundamental themes of the

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The School that brought about a new beginning. In 1967, influential English economist John

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Richard Hicks remembered the crucial debates between Hayek and Keynes at the beginning

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of the 1930s, which he called quite a drama, and rehabilitated Hayek's then-defeated position.

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One year later, Hayek published the second edition of the collective works of Carl Menger

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in four volumes for German readers. The 1971 centennial of the publication of Carl Menger's

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The UDGs of Mises's life's work after his death in 1973 at Hayek's Nobel Prize for Economics in 1974 subsequently created a growing interest in the rich legacy of the old Austrian School.

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This return to the roots led to a complete re-evaluation of Carl Menger.

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The voluminous literary tradition of the Austrian School had not infrequently obscured a direct view of Menger's original mindset.

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mindset. Menger, along with Leon Walras and William Stanley Jevons, was counted among

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economic theory's marginalist revolutionaries. With Menger's distinguishing characteristic,

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his strict rejection of the mathematical approach being mainly attributed to his mathematical

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inexperience. Mathematician Carl Menger, the son of the school's founder, would provide

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evidence that his father's verbally formulated, logically constructed concept of marginal

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and marginal utility was indeed more comprehensive than that which Walrass had formulated mathematically.

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The differences between the three revolutionaries were more clearly outlined in a notable article

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some years later. The effort to carve out Carl Menger's original position within the

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Austrian School's body of tradition peaked with Max Alter 1990 and Sandi Gloria Palermo

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1999, both of whom painted a very complex and sophisticated picture of Menger. Gloria

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Roger Palermo was able to point out the considerable methodological differences between Menger and

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Boehm-Bawerk. In the same year, Hans-Hermann Hoppe and Joseph T. Salerno, continuing Mises's

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work, demonstrated with great detail that Friedrich von Mises had made a crucial departure

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from Menger on fundamental questions of methodology and economic policy. The consequence was Mises's

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final expulsion from the pantheon of Austrians. Whereas the symposium held in Vienna in 1971

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The contributions of Ludwig Lachmann, George L. Schackel, Israel M. Kirzner, and Murray Rothbard seemed radical, enriching, and boldly refreshing, but they threatened to split the already small

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The split even began manifesting itself institutionally, and often appeared more confusing than appealing

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to outsiders.

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In 1981, Kirzner and Lachmann of New York University, along with George Mason University

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in Fairfax, Virginia, were challenged with the founding of the Ludwig von Mises Institute,

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First in Washington D.C. and later in Auburn, Alabama by Margaret Mises, Murray and Rothbard,

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and public intellectual Llewellyn Rockwell, where to this day researchers and students

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from all over the world become acquainted with the teachings of the Austrians.

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The controversy centering on the question of whether Hayek was opposed to or in agreement

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with Mises' theory flared anew in the 1990s.

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Contributing to the growing appeal of the Austrians and to a noticeable rise in funding

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was replaced at their disposal for research, teaching and publications, was the fact that

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from the 1970s on and in light of developments in the real economy, inflation and high unemployment,

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the neoclassical Keynesian paradigm suffered a real crisis of interpretation.

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Alternative models of explanation were in stronger demand once more.

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Since then, the Austrians have tirelessly pointed out that it is quite impossible for

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Neoclassicism, with its model of equilibrium, neglect of dynamic market processes, negation

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of subjective information, knowledge and learning, and its unconditional application of macroeconomic

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aggregates, to reach a well-founded understanding of the real economy. In contrast to Neoclassicism,

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Austrians have a much more realistic, coherent and prolific paradigm. The academic network

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The work of the Austrians has grown considerably in recent decades, and since the 1980s has extended beyond the United States to the whole world.

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A program of study in the tradition of the Austrian school was offered at New York University up until Kirzner went into retirement.

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It produced numerous economists who either considered themselves members of the school or who were significantly inspired by it.

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For example, Don LeVoy, Sanford Aikida, George Selgin, Roger Garrison, Llew Ellen H. Rockwell, Jeffrey Herberner, Randall G. Holcomb, Peter G. Klein, George Reisman, Roger Garrison, Walter Block, Bruce Caldwell, Richard Langlois, Stefan Boehm, Ouskari Maki, Frederic Sauter, David Harper, and Mario G. Rizzo.

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Notable Austrians have been involved in research and teaching at George Mason University in Fairfax, Virginia up to the present as well. For example, Peter Butka, Don Boudreau and Karen I. Vaughan.

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Economists adhering to the Austrian creed currently work at Loyola University, Baltimore, Thomas Lorenzo, the University of Missouri in Columbia, Missouri, Pace University in New York, Florida State University in Tallahassee, Florida,

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Alexander, Auburn University in Alabama, the University of Nevada at Las Vegas, and at

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Grove City College in Pennsylvania, for example, Don LeVoy, Sanford Aikida, George Selgin,

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Roger Garrison, Bruce Coldwell, Richard Langlois, Stephen Boehm, Ouskali Maki, Frederic Sautet,

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David Harper, and Mario G. Rizzo.

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Professor Barry Smith at the University at Buffalo, New York, should also be mentioned.

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Two academic journals available to Austrians today are the Quarterly Journal of Austrian

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Economics and Review of Austrian Economics. Beyond the United States, economists and philosophers

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of the Austrian persuasion are currently at work at universities in Great Britain. Stephen

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Littlechild, Norman B. Barry, Holland, William J. Kaiser, Gerrit Meijer, Alcolin, Italy,

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Raimondo Cubedo, Enrico Colombato, Lorenzo Inventino, Franz-Jörg Guido Hoesman, Pascal

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Salin, Jacques Garello, Gérard Brombolet, Philippe Nataf, Antoine Gentier, Georges Lannes,

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Nicolas Gertzsche, Portugal, José Manuel Moreira, Spain, Jesús Huerta de Soto Ballesté, Rubio

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and in the Czech Republic, Joseph Sima, Don Stastny, Jan Havel.

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No dedicated Austrian chair exists in Germany, Austria or Switzerland, but a number of experts

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and Authors, a Christian Watin, Roland Wobel, Victor Van Berg, Erich Wedde, Gerd Hammermann,

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Manfred E. Streit, Thorsten Polleit, Roland Badr, Raheem Toukhri Sordegaon, Gregor Hochreiter

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and Marc Faber identify themselves with the research agenda of the Austrians.

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In Europe today, the leading representatives of the revitalized Austrian School, the Austrian

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Hans-Hermann Hoppe, Jörg Guido Hülsmann, Jesus Huerta de Soto

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Hans-Hermann Hoppe, born 1949, a native German, wrote his dissertation in philosophy under

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Jürgen Habermas, born 1929. After its completion, he departed in order to study in the United

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States, where he eventually took over the chair of his long-standing teacher Murray

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Murray and Rothbard, at the University of Nevada at Las Vegas.

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In his Kritik der Causalwissenschaftlichen Sozialforschung, 1983, Kritik of Causal Scientific

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Principles in Social Research, Hoppe made a substantial contribution to the refutation

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of empiricism and positivism. It would be logically impossible to research causality

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in social science, as such research is incompatible with the statement that learning is possible,

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A statement implicitly acknowledged as valid by every scientist and which cannot be denied

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without contradiction. Economics, therefore, cannot be an empirical social science, but

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has to be understood instead as an a-prioristic science of action.

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In A Theory of Socialism and Capitalism, 1989, Hoppe defines socialism as an institutionalised

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system of aggression against property, a deeply immoral social system which by no means corresponds

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to a Natural Order.

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This key idea was further expanded in Democracy, The God that Failed, 2001, and augmented by

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a fundamental and comprehensive critique of democracy.

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Hoppe has written numerous books and articles on theoretical questions of the Austrians and

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on natural rights ethics, and has also criticised prevailing economic fallacies with his focus

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on monetary theory and public goods.

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In 2006 he founded the Property and Freedom Society, a forum committed to intellectual

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radicalism in the tradition of Mises and Rothbard. German economist Jörg Guido Hülsmann, born

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1966, of the University of Angers, France, pointed to the interest debate in a completely

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new direction with the publication of a theory of interest in 2002. According to Hülsmann,

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interest reflects the difference in value between ends and means resulting from the

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and the logic of action.

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Unlike Boehm-Bawerk and Mises, Hoesman no longer traced interest back to the factor

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time.

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In his work on the problem of money, Hoesman emphasized that until now advocates of the

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subjectivist theory of value have laid too much stress on the material aspect, that is,

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the economic aspect in the narrow sense.

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In the Ethics of Money Production, 2008, he defined inflation as that part of money production

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which arises from the violation of property rights and classed the problem primarily as

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an ethical one. Quite generally, says Hoetman, state intervention in the monetary system

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produces a continually perverse internal dynamic that ultimately leads to either the destruction

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of the currency or to total state control. With The Last Night of Liberalism, he provided

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a comprehensive biography of Ludwig von Mises using English, French, German and Russian

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sources. Jesus Huerta de Soto, born 1956, the current

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Vice President of the Montpédalin Society and a leading economist in the Hayekian tradition,

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is a professor at the Universidad Rey Juan Carlos in Madrid. A master's and Ph.D. program

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devoted specifically to the Austrian School have been set up under his guidance. With

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money, bank, credit and economic cycles, 1998-2009, Huerta de Soto, who majored in economics,

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Law, and Actuarial Mathematics, succeeded in presenting a comprehensive fundamental

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work on the Austrian theory of business cycles. He also published a comprehensible book, The

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Austrian School, Market Order and Entrepreneurial Creativity, 2008, Spanish 2000, offering an

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easily readable exposition of the Austrian approach.

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Another focus of his work is research into creative, entrepreneurially driven market

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Processes. Huerta de Soto has also become well known for his theory that Spanish late

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scholasticism should be considered the forerunner of the Austrian School. He has yet to provide

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the crucial missing link between the scholastic tradition and Menger.

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The newly awakened interest in the tradition of the Austrian School and its modern form,

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the Austrian School of Economics, has led to an increased number of publications in

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in the last two decades. Austrians today are focusing primarily on the theory of institutional

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coercion, price theory, and the theory of monopoly and competition, the theory of capital

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and interest, the theory of money, credit and financial markets, and questions of the

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welfare economy and its implications. Other areas of activity proven fruitful are the

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new institutional economics, the branch of law and economics, and the analysis of law

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and Ethics. Irrespective of the multitude and diversity of these contributions, the

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original canon of issues of the Austrian School is still strongly discernible in the current

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research agenda of modern Austrians. Nothing could be better proof of the astonishing longevity

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and freshness of the Austrian School, arguably the most significant Austrian contribution

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to modern economics. As we enter the third millennium, Austrians

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Experts are endeavouring more than ever to intensify the dialogue with mainstream economics,

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to find allies beyond the boundaries and effectively to reach an audience of interested experts.

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In doing so, they share with Carl Menger, the founder of their tradition, the strong

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conviction that they indeed have the better ideas at their disposal. They want to use

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these ideas actively to influence economic and political discourse and not rely merely

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on the Hope of a Mature Menger, who once penned the following. In science, there is only one

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secure way that leads to the final triumph of an idea, to allow each and every opposing

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school of thought to live itself out completely.