Chapter 4 is one of the longest chapters of the book. It is densely packed with a fairly detailed account of a number of highly significant points concerning the origin of the Austrian school of economics, distinctiveness of the contributions of its main representatives, its relation to other schools and currents in economic theory.All these elements go a long way toward understanding the nature and course of Mises’s later intellectual development. Because of that it will take more than one blog post to appreciate the importance of this chapter and dissect its numerous propositions.
When Carl Menger published his Principles of Economics, economists almost everywhere in the world followed the footsteps of great British classical economists. With Germany being the only significant exception where German Historical School reigned supreme, the ideas and teachings of Adam Smith and David Ricardo constituted the essence of the theoretical understanding of the nature of capitalist economic system. The iron logic of their conclusions provided a firm intellectual support to free trade over mercantilism and trade wars, to freedom of contract and economic competition over legally protected guilds, government franchises and monopolies, fiscal conservatism replaced unrestrained government spending. Nevertheless, significant cracks in the conceptual, methodological, and in actual theoretical content of their contributions were quickly seized upon and exploited by thinkers of different outlooks.
Dr. Hülsmann quite accurately describes the rise of the new subjectivism paradigm as a reaction to a crisis in classical economics that resulted from its failure to ground its proposition in a theory of individual human action with its cardinal element â€“ the theory of (marginal) utility. Instead, as goes the favorite explanation, classical economists relied on “fictitious postulates and on such arbitrarily constructed aggregates as price level, capitalists, landowners, and laborers.â€
I tend to disagree that concepts referring to such aggregates are fictitious, hence illegitimate, constructions. It is clear that these concepts do not refer to specific entities actually existing in reality. Nevertheless, they are most emphatically not fictitious postulates, nor are they arbitrary constructs. On the contrary, these are valid concepts reflecting units of concretes united by certain common attributes. Furthermore, in science as well as in ordinary life it is absolutely impossible to do without using broad categories of species of animals, certain category of cars (luxury cars, middle class cars etc.), the free-market, or, indeed, the economy.
They all are aggregates, in the sense of concepts, and as such they are no less actually existing and thus valid, even though they are not independent and distinct entities. The accusation of fictitiousness and arbitrariness, as far as the use of aggregates is concerned, is, therefore, completely invalid. As a matter of fact, treatises of all major Austrian economists make extensive use of broad categories of capitalists, workers, (aggregate) spending for consumption, investment, or government purposes to explain various prices, the phenomena of profit, interest, business cycle, inflation etc.
However, the bulk of the chapter is devoted to the difference between Menger’s “empirical methodâ€ and methods of other two founders of the marginalist school, Jevons and Walras, whose ideas gave rise to the neoclassical school of economics. Dr. Hülsmann convincingly argues for the inclusion into the ranks of neoclassicals of two major Austrian economists â€“ Friedrich Wieser and Joseph Schumpeter, but for different reasons.
In Wieser we have a pure theorist who conceived of economics as a branch of applied psychology. The connection between Wieser and the founders of the neoclassical school is via Hermann Heinrich Gossen, a German economists and predecessor of the marginalist approach. Gossen’s work found strong and enthusiastic endorsement on the part of both Jevons and Walras, while Menger tended to deny any substantial resemblance between his work and that of Gossen. What united Gossen, Wieser, Jevons, and Walras was their insistence that units of satisfaction from consumption of goods can somehow be calculated, compared, and brought in connection with real world prices. Quite interesting is Dr. Hülsmann’s discussion of Wieser’s view of the nature of economic calculation. We read that according to Wieser “[p]rices are merely ‘objective exchange value’â€”they are ‘subjective exchange value’ made visible. Businessmen could theoretically do without money prices and perform their calculations directly in terms of value and so could a socialist planning board.â€
In case of Joseph Schumpeter, we see a slightly different development. Schumpeter was very conscious about grave shortcomings of the psychological approach, arguing that “it was futile to inquire after the psychological or biological causes of human valuations; economic analysis could be based entirely on a formal characteristic of valuation, namely, that the utility of any given unit of a homogeneous good decreased as its quantity increased.â€ It is precisely this “purely formal law of want satiationâ€ that bears strong resemblance with Mises’s later works. The neoclassical element in Schumpeter’s work is to be found in his positivism which was “probably inspired by the works of the Vienna physicist-philosopher Ernst Mach, who was an extremely influential thinker at the time and in the decades to come. Mach paved the way for the Vienna Circle of the Logical Positivists in the 1930s.â€ Incidentally, Schumpeter’s ideas in methodology, according to Dr. Hülsmann, survived until the present and reappear in a much less elaborated and consistent form in Milton Friedman’s essay on methodology.