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How many pinheads can dance on a virtual Austrian?


The sky may be falling on the real economy, but academic economists still have time to debate precisely what Austrian School or Chicago School economists believe—or should believe if they are orthodox. Mark Thoma posted here an excerpt from a textbook on economic history and got over 100 comments, making it one of his most provocative posts. It was a clash about religious beliefs, not about provable facts or which of the ideas might have the most utility for solving diverse economic problems. Still, I got some new-to-me insights about how this fits into "Conservative" economic philosophy and links to sources I may read. After summarizing a few salient points below, I propose a warning label all these folks ought to use on their utterances.

The excerpt said the differences between the Austrian School (based on the work of Carl Menger, Ludwig von Mises, and Friedrich Hayek) and the Chicago School (led by Milton Friedman) were insignificant and proceeded to summarize the essential beliefs and then criticize them. It turns out that Austrians and Chicagoans are as offended at being lumped together as were Catholics and Protestants in Martin Luther's time.

There were bitter and arcane arguments over doctrinal differences and whether certain precepts were orthodox or apostasy or simply expressed inaccurately. (I expected arguments about whether precepts were sound or unsound, and there was some of that, but the dominant discussion was about who is entitled to be called a Chicagoan or an Austrian.) A few self-avowed Austrians weighed in, including the author of the official write-up of Austrian economics on the Library of Economics and Liberty website, and others referred us to for even more official information.

The author of the quoted textbook was branded a Marxist by some, as was Mark Thoma for publishing the excerpt. It turns out that the Austrian School (which either is or is not the foundation for the Chicago School) developed in large part as a reaction to the theories of Karl Marx. One comment (by Dan Zale) provides this quotation from von Mises:

The characteristic feature of the market economy is the fact that it allots the greater part of the improvements brought about by the endeavors of the three progressive classes—those saving, those investing the capital goods, and those elaborating new methods for the employment of capital goods—to the non-progressive majority of people. ... The market process provides the common man with the opportunity to enjoy the fruits of other peoples' achievements. It forces the three progressive classes to serve the non-progressive majority in the best possible way.

Everybody is free to join the ranks of the three progressive classes of a capitalist society. These classes are not closed castes. ... What is needed to become a capitalist, an entrepreneur, or a deviser of new technological methods is brains and will power.

Source: "The Anti-capitalistic Mentality" (1956) p. 40.

Of course, this stands in stark contrast to—and was meant to be in stark contrast to—Marx's idea (which was also Adam Smith's idea) that the value of everything consists entirely of its labor content. In the Mises view, all value comes from capital, innovation, and entrepreneurship, which values may then be shared (or not) with the non-productive masses.  Sound familiar?

One comment (by Michael Cain) quoted from Hayek to show that modern Chicagoans and Austrians are quite capable of ignoring the words of the original theoreticians when those words contradict the extreme individualism philosophy of those claiming the mantle today.

Hayek, at least, recognized a moral argument that there should be constraints imposed on outcomes, and that government redistribution was probably the only way to impose those constraints (from the condensed version of Road to Serfdom):

There is no reason why, in a society which has reached the general level of wealth ours has, (the certainty of a given minimum of sustenance) should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.

The difference between that and modern conservatism seems to be that the contemporary group believes that everyone could make "adequate provision" for those risks, if only the government would get out of the way.

(I have noted that some of these abusers of Hayek similarly misrepresent Adam Smith.)

The whole dialog reinforced the insight I got while reading this earlier Mark Thoma post and comments: For many economists, economics is a virtual world they prefer to the real one, and I suggested they and other social scientists preface everything they say or write with a disclaimer along these lines.

WARNING! The following is a discussion of a virtual world that differs in very material ways from the real, physical world in which we live. Although I take this stuff very seriously and am trying to improve my skills—like players of Grand Theft Auto or Dungeons and Dragons—many of the things I say (I won't tell you which ones) are not meant to describe or make predictions in the real world. Therefore, nothing I say should be construed as advice for surviving and prospering in the real world or for establishing norms for the ordering of the real world. Basically, if you're not a gamer like me, you should just ignore me.



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