Many of us are often asked, “What exactly is Austrian economics?” Why do we care so much about the economy of Austria (or Australia)?
The label “Austrian” describes a particular tradition in economic analysis, one that dates back to Viennese economist Carl Menger’s 1871 Principles of Economics (hence the geographic identifier). The Austrian approach is often associated, particularly in applied fields like industrial organization, firm strategy, and entrepreneurship, with Hayek’s ideas about dispersed, tacit knowledge, Kirzner’s theory of entrepreneurial discovery, and an emphasis on time, subjectivity, process, and disequilibrium. Even Lachmann’s “radical subjectivism” is getting some play. I’ve argued that Austrian capital theory has some implications for entrepreneurship.
Despite this renewed interest in the Mengerian tradition, the Austrian approach to “basic” economic analysis–value, production, exchange, price, money, capital, and intervention–hasn’t gotten much attention at all. Indeed, it’s widely believed that the Austrian approach to mundane topics such as factor productivity, the substitution effect of a price change, the effects of rent control or the minimum wage, etc. is basically the same as the mainstream approach, just without math or with a few buzzwords about “subjectivism” or the “market process” thrown in. Even many contemporary Austrians seem to hold this view.
In a new paper, “The Mundane Economics of the Austrian School,” I suggest instead that the Austrians offer a distinct and valuable approach to basic economic questions, an approach that should be central to research by Austrians on theoretical and applied topics in economics and business administration.
From the introduction:
While I agree . . . that the Austrian tradition is part of a larger, liberal movement, I argue here that Austrian economics is nonetheless a distinct kind of economic analysis, and that the essence of the Austrian approach is not subjectivism, the market process (disequilibrium), or spontaneous order, but what I call mundane economics–price theory, capital theory, monetary theory, business-cycle theory, and the theory of interventionism. Call this the “hard core” of Austrian economics. I argue that this hard core is (1) distinct, and not merely a verbal rendition of mid-twentieth-century neoclassical economics; (2) the unique foundation for applied Austrian analysis (political economy, social theory, business administration, and the like); and (3) a living, evolving body of knowledge, rooted in classic contributions of the past but not bound by them.
My main target is Karen Vaughn’s 1994 book on the “Austrian revival” of the 1970s and 1980s — not her account of the revival itself (though that has been strongly disputed by critics), but her understanding of the economics of the founding Austrians. “Vaughn consistently characterizes the price theory of Menger, Böhm-Bawerk, Mises, and Rothbard as backward-looking, inconsistent, and often wrong. Their elaborations of mundane economics, she says, are mainly verbal ‘neoclassical’ economics, because they rely heavily on equilibrium constructs; indeed, Menger’s price theory is that of a ‘half-formed neoclassical economist’ (Vaughn 1994, p. 19).” Instead, I claim,
Austrian economists from Menger to Rothbard were fully aware of time, uncertainty, knowledge, expectations, institutions, and market processes. Indeed, their understanding of these issues was sophisticated. They employed equilibrium theorizing, but in a precise and deliberate manner. They understood clearly the distinction between their own understandings of mundane economics and that of their Walrasian and Jevonian colleagues. They devoted their energies to developing and communicating the principles of mundane economics, not because they failed to grasp the importance of knowledge, process, and coordination, but because they regarded these latter issues as subordinate to the main task of economic science, namely the construction of a more satisfactory theory of value, production, exchange, price, money, capital, and intervention.
Check it out at the link above. Comments and suggestions are welcome.
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11 Responses
The Austrian theories are superficially similar to the neoclassical theories, but there are often significant differences, e.g. the Austrian approach to valuation is far more rigorous IMO than the neoclassical one (even if both are nominally “marginalist”) and helps avoid pitfalls the neoclassical economist cannot avoid (e.g. seeing Giffen goods as an “exception” to the law of demand, when it is not, if one engaged in more reflective reasoning.)
This site should have a page with a list of all the theorems (e.g. Coase theorem), laws (e.g. Say’s law), explanations (e.g. a priori), and definitions (e.g. inflation) for Austrian thought with references for each one. This blog post would make a good intro for the methodology of the founders of Austrian economics.
Hello,
I feel compelled to rush to Mrs. Vaughn’s defense after reading Professor Klein’s post. Now most Austrians do not bother with Karen Vaughn’s work for the sole reason that she was critical of the economics of Ludwig von Mises and Murray Rothbard; but her own positive contributions to Austrian economics are very important. But because Professor Klein has “targeted” her 1994 book, let me focus on only this.
First of all, Karen Vaughn never grouped Menger together with Wieser, Bohm-Bawerk, Mises, and Rothbard and called them “backward-looking.” This applies only to the latter group, according to Mrs. Vaughn. Vaughn believed that mainstream Austrian economics diverted from the path Menger set out in the 1870′s, and this path was only re-discovered by the work of Ludwig Lachmann. That is her thesis in the book. Real Austrian economics goes from Menger —> Hayek —> Lachmann, and *not* from Menger —> Bohm-Bawerk —> Mises —> Rothbard.
I would encourage the readers of this blog to give her 1994 book a careful reading because I think her chapters on Mises, Kirzner and Rothbard are great (although critical). For Vaughn, Menger had “mundane economics” right; unfortunately, Mises and Rothbard lost their “Mengerian” way in their emphases on the coordinating abilities of the market process. This “Mengerian vision” has been carried on by Lachmann and Hayek.
Now this thesis has been debated, and I am not saying that Vaughn is right in every respect. But I think we should at least be clear about what Vaughn was arguing. Contra Klein, Vaughn did not believe that: “Menger’s price theory is that of a ‘half-formed neoclassical economist’.”
Matthew, thanks for the comment. If you read my paper, however, you’ll see that Vaughn distinguishes sharply between the Menger of the Principles (1871) and the Menger of the Investigations (1883), finding considerable value in the latter but less so in the former. Referring to the Principles, she calls Menger “an incomplete neoclassicalist” (p. 17) and a “primitive neoclassicalist” (p. 18). More specifically: “Although one can argue over the full definition of neoclassical economics, it seems clear that neoclassical eocnomics is a theory of the determination of equilibrium prices under varying degrees of competition in markets. On this score . . . Menger seems to be in the neoclassical camp” (p. 18). In Vaughn’s interpretation, Hayek and Lachmann correctly developed themes in Menger’s Investigations, while pushing aside the neoclassical economics of the Principles. She quite clearly puts Menger’s price theory with that of Boehm-Bawerk, Mises, and Rothbard.
Hello all,
I really enjoyed reading Professor Klein’s response to my post, but I must continue to raise some objections to his interpretation of Vaughn’s account of Mengerian economics, though I would hasten to add that these comments are being made with the respect and admiration that is due to any scholar of Klein’s calibre.
First of all, it wasn’t Vaughn that called Menger an incomplete neoclassicalist; it was instead mainstream economics. According to Vaughn, “the method of his presentation” (p. 17) and “his innocence of nineteenth-century physics” (p. 6) were the factors contributing to what resulted in many neoclassicals regarding Menger as an “incomplete neoclassicalist;” Vaughn never meant to call him that in the manner you are suggesting.
Menger never spoke of “diminishing marginal utility” in a way that was satisfying to neoclassicals, so they chose to dismiss his work. “Hence he was credited with developing only part of the neoclassical theory of consumer choice.”
You seem to be suggesting that, according to Vaughn, Menger’s economics was a crude and confusing representation of the more refined neoclassical theory, and for this reason it is better to call him “primitive” and backward. But for Vaughn, Menger should be seen instead as an “alternative theorist” (p. 19) and not as a crude imitator of mainstream economic theory. And it is not necessary, moreover, to consult Menger’s 1883 book to see this. First of all, Menger’s “revolution” was conceived in his 1871 book, and all of the major implications flow from the arguments contained in that earlier book (cause and effect, human progress, knowledge, error, time, etc.) (pp. 19-26). Vaughn is all very clear about this. The issues relevant to Menger’s later book (1883) include methodology and unintended orders (pp. 27-32), and these contributions, while important, are not seen by Vaughn as distinguishing Menger from Bohm-Bawerk, Mises, and Rothbard. Most of his work in the 1871 book sets him apart from these economists.
Now Lachmann and Hayek clearly were influenced a great deal by Mengerian methodology and spontaneous order, but I don’t think it is correct to argue that they dismissed or assigned an inferior role to Menger’s 1871 book. Equally important to Lachmann and Hayek were issues involving time, knowledge and uncertainty; and these are found everywhere in Menger’s 1871 book. Vaughn is very clear on this point as well.
Thanks for the post.
With much respect,
Matthew Mueller
For an analysis by Murray Rothbard of the arguably distinct strands of Austrian Economics and of Professor Vaughn’s arguments, see his,
“The Present State of Austrian Economics†(1995). In Rothbard, The Logic of Action One: Method, Money, and the Austrian School. Cheltenham, U.K.: Edward Elgar, 1997.
Also, for an article, as opposed to book length, analysis of Menger’s contributions, I would recommend Professor Joseph Salerno’s,
“Carl Menger: The Founder of the Austrian School.†In Fifteen Great Austrian Economists. Ed. Randall G. Holcombe. Auburn, Ala.: Ludwig von Mises Institute, 1999. Pp. 71–100.
A good idea for a paper–it’s easy to get confused over basics or fundamentals, especially for us non-economist types who aren’t too rigorous about our definitions.
How very academic (respectfully and sarcastically).
In evaluating the ideas and evolution of any school of thought in any discipline, it is important to remember that it did not emerge as a seamless whole.
Menger’s “Principles” of 1871 was meant to be the first of four volumes. In the introduction to the 1923 reprint of the “Principles” (in German) the editor (Karl Menger, Jr.) gives an outline of what were to be the never-completed remaining three volumes. There were to be discussions of the actual workings of the formation of wages, prices and interest in the market processs; a detailed discussion of capital, rent and land values; and an analysis of international trade, the financial markets, and various aspects of economic policy.
What Menger did was to lay out the essential aspects of a unique and insightful “research program” (to the use the jargon of more modern times) on what was the basis and origin of value; the inescapability of causality, time, and uncertainty in all human (and market) decision-making; the relationship between the various “orders-of-production,” and the core elements of how prices are formed on markets (monopoly and competitive), and the process by which money emerges in the market.
These strands have been picked up by each new generation of economists inspired by this Mengerian “vision” (in a way that Schumpeter used the term), and they have attempted to extend, elaborate, and refine it.
And inevitably, there arise differences of emphasis on even “core” concepts, their implications, and their application.
Economics is a strange subject. It simultaneously involves “objective” elements of the physical world, the subjective and intersubjective values and meanings of the actors being analyzed, and then attempts to trace out the resulting processes when these and related elements interact — continuously through time and space, with tendencies but no real world final state of rest (or equilibrium).
Furthermore, since the human actor thinks about the future and reflects on the past, the analysis must by necessity be both “forward-looking” (how do the actors see the world, and based on their respective perspectives what do plan for the future, plus how and why?) and “backword-looking” (did the actor’s plans turn out as they had hoped and to what extent, and how did they or not match with the plans and activities of others; and what that implies about the circumstances in which those actors now find themselves for the next “round” of future-oriented planning and action?).
J.M. Keynes said that he once asked the famous mathematician, Ernst Mach, if he had ever thought of studying economics. Mach replied that, in fact, he had tried to do so, but gave it up because there were just too many variables interacting at the same time to reach any certain conclusions.
We should keep all of these things in mind, may I suggest, when analyzing, understanding, and interpreting the evolution of the Austrian School and the focus or emphasis that particular members have given to their respective contributions.
Fifty or a hundred years from now, future historians of economic thought will be looking at our contributions (great and small) with very different eyes they we see our own lines-of-thought today as we are thinking about and writing them down.
Richard
Vaughan said that Mises’s contribution is just verbal ‘neoclassical’ economics?
Here is Mises from The Ultimate Foundations of Economic Science:
“Although logic, mathematics, and praxeology are not derived from experience, they are not arbitrarily made, but imposed upon us by the world in which we live and act and which we want to study. They are not empty, not meaningless, and not merely verbal. They are—for man—the most general laws of the universe, and without them no knowledge would be accessible to man.”
Take from it what you will. Combined with Mises’s adamant rejection of positivism and mathematical econ, how can one deny a certain uniqueness in Austrain Theory?
Mises wrote, also in Ultimate Foundations:
“No competent mathematician can fail to see through the fundamental fallacies of all varieties of what is called mathematical economics and especially of econometrics.â€
Thanks for the interesting paper, Dr. Klein. I like your conclusion:
“Austrian economics emerged as a causal, realistic alternative to the historicism of its day, and remains today an alternative both to mechanistic neoclassical economics and to the noneconomics of old-style institutionalism.â€
Thanks to all for the interesting and helpful comments. While I continue to disagree with Matthew’s interpretation of Vaughn (which is not, by the way, a major issue in the book itself, just a framing device), I’m sure we agree that interested readers should consult the relevant sections of Vaughn’s book (especially chapter 2) to decide for themselves.