CHAPTER 16 Between the Wars: From Re-formation to Exodus

Friedrich Wieser, then seventy years old, was considered the doyen of the Austrian School after World War I. He had wandered away from several doctrinal areas over the years and had in fact devoted himself to questions of sociology and political science. The second edition of his Theorie der gesellschaftlichen Wirtschaft (1924) (Social Economics, 1914/1927) remained largely unaltered. The new edition of Menger’s Principles (1923), compiled by Menger’s son, Karl, from his father’s legacy, also remained the same in many ways. As such it documented the standstill which had arisen in the School in the meantime: the term “marginal utility,” long since established, was curiously enough not mentioned even once (cf. Weiss 1924, pp. 152–153). But then again Menger integrated “collective need” (“Kollektivbedürfnis”) in his revised demand theory (cf. Menger 1923, pp. 7–9), which, when looked upon with subjectivist hindsight, would make the new edition appear to be a step backward when compared to the first (cf. Mises 1960/2003, pp. 183–184).

Wieser had named his pupil, Hans Mayer, his successor. He was able to persuade the widely respected legal scholar, Hans Kelsen (1881–1973) to support Mayer, who was not uncontroversial, with a newspaper article (NFP of December 7, 1922, p. 7). Mayer had very few publications to his name, and had received his first untenured professorship in Freiburg without having first obtained his Habilitation. Carl Grünberg’s (1861–1940) chair became vacant shortly after Mayer’s appointment; Grünberg had moved to Frankfurt after having been demoralized and worn out by the quarrels within the faculty (cf. Mayer 1952a, p. 259). Mises and Schumpeter were not considered once again, for different reasons. Schumpeter accepted an appointment at the University of Bonn in 1925. In 1927, after much quarreling, the Viennese chair went to Ferdinand Degenfeld-Schonburg (1882–1952), whose writings demonstrated a simple-mindedness which one would hardly expect in an academic environment.

Othmar Spann began training a growing number of young lecturers after assuming his professorship in 1919. In contrast, the only Habilitant whom the Austrian School produced after Mises was Richard Strigl. It follows that a lot was expected where Mayer was concerned, and he was indeed able to recruit a succession of talented assistants initially, all of whom would later become successful: Oskar Morgenstern (1902–1977), Paul Rosenstein-Rodan (1902–1985), and Alexander Gerschenkron (1904–1978). But Mayer was hardly in a position, nor was he willing, to offer a university post to everyone interested in the Austrian School. Ludwig von Mises felt himself so hampered by this—owing to jealousies and a patronizing administration during his time as an external private lecturer—that he even compared Mayer to Spann (cf. Mises 1978/2009, pp. 78–79). Spann himself missed no opportunity to publicly proclaim his contempt for the individualism of the Austrian School (cf. Hennecke 2000, p. 53). The feud was even fought out in newspapers for a time, and culminated in crude anti-Semitic diatribes from Othmar Spann and his circle, in which the theory of marginal utility was called a “spawn of Polish-Jewish minds” and Menger and Böhm-Bawerk were pejoratively referred to as “Jews” (cf. Mayer 1952a, pp. 250, 252, 256). It was by no means a voluntary “decoupling from the university” (cf. Milford and Rosner 1997), but an unwanted marginalization within the university establishment that forced the scattered remnants of the Austrian School and its new generation to attempt reconvening outside of the universities and within private initiatives that had ties to each other: in the Rockefeller Foundation, the Mises-Privatseminar, Hayek’s Geistkreis, the Nationalökonomische Gesellschaft, and in the Österreichische Institut für Konjunkturforschung.

In 1924, the Rockefeller Foundation had begun to award scholarships to European social scientists. The person responsible was historian Karl Francis Pribram (1859–1942), whose choice of students proved fortunate. Oskar Morgenstern, Alexander Mahr (1896–1972), Gottfried Haberler, Paul Rosenstein-Rodan, and Ewald Schams (1889–1949) all established good reputations for themselves later on. The scholarships provided funding for study visits of one to three years’ duration in the US—and later in European countries as well—or for research and/or publication projects (cf. Fleck undated, pp. 2–4).

The Mises-Privatseminar (Mises’s private seminar) was without doubt the most important training arena for the Austrian School. Mises was teaching at the University of Vienna, but in 1919 he started gathering young social scientists to his office in the Viennese chamber of commerce at “Stubenring 8–10” every other Friday evening. “Important problems of economics, social philosophy, sociology, logic, and the epistemology of the sciences of human action” (Mises 1978/2009, p. 81) were debated, and the private seminar soon became an established institution. All members of the Austrian School frequented the seminar with a few exceptions (Mayer, Weiss, and Mahr). Alongside trained economists, the group—amounting to almost thirty regular participants (ibid., p. 83)—included representatives of other disciplines as well, many of whom had studied two subjects or were exceptionally talented in more than one area. Seminar members later included such well-known historians as Friedrich Engel-Janosi (1893–1978), sociologists such as Alfred Schütz (1899–1959), constitutional law experts such as Eric [Erich] Voegelin (1901–1985), and law philosophers such as Felix Kaufmann (1895–1949). The meetings continued for several years and, as a result of the intensive exchange of ideas alone, had the effect of propagating a school of thought. The main topics were monetary theory, methodology, and questions concerning economic policy; there were also regular lectures from visiting foreign speakers (cf. Browne 1981, pp. 112–115). The ingenious Felix Kaufmann came up with a catchphrase for the seminar: “Das Verstehen verstehen” (“to understand understanding”) (cf. Engel-Janosi 1974, pp. 111–112).

Another discussion group was started up by Friedrich A. Hayek and Herbert Fürth (1899–1995) after Othmar Spann had prohibited the open exchange of ideas in his seminar in the fall of 1921. Only men were permitted to participate in the discussion. This prompted Vienna’s first female doctoral student, Martha Stephanie Braun to give the gathering the designation Geistkreis.¹ Almost all of the (male) Mises-Privatseminar economists were members of the Geistkreis as well. Furthermore, members made efforts to attract outstanding representatives from other faculties. In this way the circle grew from fourteen founding members in 1921 to twenty-five in 1938 (cf. Hennecke 2000, p. 54).

Members of both circles earned their living in various ways: there were entrepreneurs (Engel-Janosi, Machlup), bankers (Bloch, Lieser, Herzfeld, Schlesinger, Schütz), managers (Kaufmann), attorneys (Fröhlich, Fürth, Schreier, Winternitz), chamber of commerce employees (Mises, Haberler), civil servants (Schams, Bettelheim-Gabillon), clerks at the chamber of employees (Strigl), a journalist (Braun), and staff members of the Konjunkturforschungsinstitut (“Business Cycle Research Institute”) (Hayek, Morgenstern, Mintz, Lovassy, Schiff, Gerschenkron) (cf. Hülsmann 2007a, p. 463). Through individual members, both groups were also connected with the circles of Hans Kelsen, Moritz Schlick (1882–1936), and Rudolf Carnap (1891–1970), and with Karl Menger’s Mathematisches Kolloquium (“Mathematical colloquium”). The multi-faceted Felix Kaufmann captured this remarkable and intellectually charged atmosphere in song. Core issues of the Austrian School were articulated in verse form, set to Viennese Melodies, and sung at the close of seminar sessions: “The Last Grenadier of the Marginal Utility School,” “The Mises–Mayer Debate,” “The Lament of the Mises Circle,” and others (cf. Kaufmann 1992 and 2010; Haberler 1981, pp. 124–125). Mises wistfully recalled this time after his escape: “Within this circle Viennese culture experienced one of its last flowerings” (Mises 1978/2009, p. 81; similarly Browne 1981, p. 115).

Whereas the tradition of the Austrian School was resumed and further developed within these circles, Spann and Mayer were disspating their energies with a downright running battle that also affected Mises and the students (cf. Mises 1978/2009, pp. 77–78; Craver 1986, pp. 12–13). From the very start, great tensions had existed between the very active Spann and Mayer, who in some respects was out of his depth. Even cursory observers noted that “they hated each other” (cf. Fleck undated, p. 4). They had gotten themselves into a kind of perennial logjam that affected all of their common dealings: the business of lecturing and examining, postdoctoral graduation procedures, the Nationalökonomische Gesellschaft and the Zeitschrift für Volkswirtschaft und Sozialpolitik (“Journal of Economics, Social Policy, and Administration“), which was published by Friedrich von Wieser, Ernst von Plener, and Othmar Spann. The delicate balance between the antagonists toppled after Wieser’s death in 1926. After a fierce clash, Spann was expelled from the Nationalökonomische Gesellschaft, the society Mises had established as platform for opinion leaders from business, administration, attorneyship, and academia (cf. Mises 1978/2009, p. 82; cf. also Leube 1998, pp. 308–309). It was not possible to publish the Zeitschrift für Volkswirtschaft und Sozialpolitik from 1927 onward. As a result of these controversies, the Austrian School ended up stronger in the end (cf. Mayer, p. 249). Mayer was elected president, Hayek secretary, and Machlup bursar of the Nationalökonomische Gesellschaft (cf. Müller 2004, p. 250). Mayer also found himself on the board of trustees at the Österreichisches Institut für Konjunkturforschung, which was established by Mises during this same time. As it provided a number of positions relevant to the discipline (Hayek, Morgenstern, Schiff, Lovassy, Gerschenkron), publication opportunities in the institute’s own book series, and a strong network for international contacts, the institute quickly became a critical center for the School.

The reconstitution of the Austrian School, both in terms of content and personnel, was presented for the first time publicly at the Zurich convention of the Verein für Sozialpolitik in 1928, where participants of the Mises-Privatseminar set new standards and received much attention for their contributions to business cycle research. The Austrian School blossomed spectacularly from then on and until the time of political upheaval in central Europe. The unveiling of a memorial to Carl Menger in the Arkadenhof (inner courtyard) of the University of Vienna (cf. Mises in NFP of January 29 and 30, 1929) during a grand academic celebration provided a clear sign of recognition. Friedrich A. Hayek, Oskar Morgenstern, and Gottfried Haberler received their Habilitation in 1928 and 1929, and, with their courses alongside those of Mayer, Mises, and Strigl, served as a quantitative counterbalance to Spann and his circle of students for the first time in many years (cf. Vorlesungsverzeichnis 1929–1930, p. 12). Even so, personal and content-related differences made for irritation—between Mises and Mayer in particular. It was those in Mayer’s circle, of all things, who questioned the foundations of the “Austrian monetary business cycle theory” (cf. Weber 1966, p. 2).

1930, in turn, saw the reappearance of the School’s traditional journal under a new name: Zeitschrift für Nationalökonomie (ZfN) (“Journal of Economics”). New standards were set in the hands of its publishers— Hans Mayer, Richard Reisch, and Richard Schüller—and editors, Paul Rosenstein-Rodan and Oskar Morgenstern. The first volume boasted a good 800 pages—with a total of forty-three essays and shorter contributions —plus eighty-three collective and individual reviews of altogether fifty-nine national and international authors, and a non-German speaking readership was expressly targeted with abstracts of every essay in English and French.

During these years, the Austrian School intensified its contact with foreign economists by recurrently inviting them to lectures or events— particularly to those at the Mises-Privatseminar or at the Nationalökonomische Gesellschaft (cf. Mayer 1952a, p. 251; and Hülsmann 2007a, pp. 674– 675). As a result of these new contacts, Hayek received an invitation to the London School of Economics in 1931, which ultimately led to an appointment to one of its professorships (cf. Hennecke 2000, p. 74). A high point of this international cooperation was the appearance of the four volume anthology, Die Wirtschaftstheorie der Gegenwart (Mayer et al. 1927–1932) (“Economic Theory of the Presence”), edited by Hans Mayer, Richard Reisch, and Frank A. Fetter, which united a total of eighty-one authors from eighteen countries in more than 1,400 pages. It was only in the course of this intensive intellectual exchange that it became readily apparent to the advocates of the Austrian School that they diverged decidedly from the marginalist mainstream on some crucial points, and from the mathematically oriented Lausanne School in particular (cf. Bayer 1929, pp. 499–500). While the Lausanne School’s approach was basically static, Rosenstein-Rodan (1930) and Schams (1932) pointed out that time is an important factor for the Austrian School, for example. Hans Mayer revealed further fundamental differences: he criticized the unrealistic nature of some of the assumptions of the Lausanne School in the most significant of his academic essays, claiming that the utility of a good can neither be measured, nor infinitely divided, nor indefinitely substituted. In addition, he claimed that the variable relationships between economic factors were not readily “reversible” because effects of quantitative changes in income on the variables of mathematical economic models are unpredictable and disproportional rather than proportional. Mayer then compared the “functional,” “mechanical” price theory of the Lausanne School to the “causal–genetic” price theory, which did not exhibit the aforementioned shortcomings (Mayer 1932).

It is something of a tragedy that the Austrian School enjoyed a greater general recognition in Germany than ever before on the very eve of the seizure of power by the National Socialists. Hans Mayer was able to take on a guest professorship for two semesters at the University of Kiel (cf. Mayer 1952a, p. 254) in 1931. And Ludwig von Mises, with typical tenaciousness, succeeded in placing the problem of value (as one of the main subjects) on the agenda of the convention of the Verein für Sozialpolitik in Dresden (1932) (cf. Mises 1978/2009, p. 85). Though the fiercest adversaries of the subjectivist theory of value did not take part in the verbal discussion in the end, the convention resulted in a marked gain in renown for the teachings from Austria (cf. Mises and Spiethoff 1931–1933).

The School’s international recognition and networking encouraged the translation of further standard works into English, including Wieser’s Theorie der gesellschaftlichen Wirtschaft (Social Economics, 1927), Hayek’s Geldtheorie und Konjunkturtheorie (Monetary Theory and the Trade Cycle, 1933), or the Theorie des Geldes und der Umlaufmittel (The Theory of Money and Credit, 1934/1981), and Die Gemeinwirtschaft (Socialism: An Economic and Social Analysis, 1936/1951) by Mises. Moreover, the many foreign scholarships led to the first foreign language primary editions like Hayek’s Prices and Production (1931/1935), or the biographical sketch, Carl Menger (1934). Some of these publications were not—or only much later—translated into German, such as Rosenstein-Rodan’s La Complementarità (1933) or Haberler’s Prosperity and Depression (1937; first German edition in 1945). This is an obvious reflection of the gradual disengagement of the Austrian School from its German language and Austrian intellectual and cultural traditions. Mises, filled with misgivings, wrote to his student and friend Machlup, in 1934, that as a consequence of “Hitlerism,” the German language would lose its prominence and that English would become the future language of economics (cf. Hülsmann 2007a, pp. 694–695).

By the 1930s, personal and academic connections with the English-speaking world already served as links to professional careers outside the country. Hayek and Rosenstein-Rodan received appointments in London in the same year (1931). Haberler accepted an invitation to Harvard University (1931), moved to the League of Nations in Geneva (1934), and returned to Harvard again later on. Indeed, the atmosphere at home contributed in no small part to the younger generation’s trying to make its fortune elsewhere. The smug to hostile treatment of intellectual elites at that time has aptly been described as “embezzlement” (“Veruntreuung”) (Müller 2004, p. 238). The politically unstable situation, the establishment of a corporative state, and the noticeable receptiveness for the social theories of Spann were accompanied by an increasingly aggressive repudiation of everything “liberal” or “individual,” or what was thought of as such. For this purpose, Spann came up with the derogatory epithet neuliberal (“neo-liberal”) (cf. Spann 1931, p. 658). Faced with censorship, the advocates of the Austrian School finally gave up their attempt to influence public opinion, and their retreat was the first step towards “inner emigration” (cf. Klausinger 2006c, p. 12).

Furthermore, the increase in open anti-Semitism made some members of the School exiles in their own countries. Fritz Machlup, for example, was told at the University of Vienna that his application for Habilitation would not be facilitated due to anti-Semitic reservations (cf. Craver 1986, pp. 23–24). The seriousness and hopelessness of the situation had in the meantime been demonstrated by Mises’s relocation to Geneva, where he was at least able to obtain a very well-paid teaching post (cf. Hülsmann 2007a, p. 693). After that the Viennese Privatseminar ceased to exist. In a letter to Machlup in the year that followed, Hayek summed up a recent visit to Vienna, commenting that he had found the city comparatively unchanged, but that the intellectual atmosphere had declined visibly, particularly in the field of economics (cf. Hennecke 2000, p. 126).

After the exodus of Mises, Hayek, Haberler, Machlup, and Rosenstein-Rodan, the director of the Institut für Konjunkturforschung, Oskar Morgenstern, became the most important representative of the School in Austria. Morgenstern carried out policy changes in two ways. First, both the Institut and the Zeitschrift für Nationalökonomie were opened up to mathematical economists. Between 1935 and 1937, Karl Schlesinger, Abraham Wald (1902–1950), and Johann von Neumann (1903–1957) wrote five important essays—in close contact with the Mathematisches Kolloquium of the younger Menger—which prepared the ground for the neoclassical theory of equilibrium (cf. Müller 2004, p. 251). Next, Morgenstern attempted, with only modest success, to establish himself as advisor of the corporative regime— until he had no choice but to realize that the structure of the corporative state was inevitably based on lobbyism (cf. Klausinger 2006c, pp. 27–30). The geographical separation of the Austrian School members who had emigrated was accompanied by a content-related and personal estrangement.

The annexation (Anschluss) of Austria by Nazi Germany in March 1938 abruptly ended the beginnings of mathematically-oriented economics rooted in the Austrian School. Jewish Hungarian Karl Schlesinger, a long-time patron of the Austrian School and himself a qualified economist oriented toward mathematics, was one of the first victims: He committed suicide on the day of the invasion. In the days that followed, his dismal assessment of the situation proved well founded for most of the other remaining members of the school: Helene Lieser and Herbert Fürth were imprisoned for a short time, Erich Schiff was taken into custody and forced to clean toilets, and Erich Voegelin had to endure a house search (cf. Hennecke 2000, p. 127). At the universities, all lecturers and professors who were either Jewish or otherwise disliked by the Nazis lost their license to teach, among them Schüller, Haberler, and Morgenstern, and Wilhelm Winkler, a statistics professor sympathetic to the School. Hans Bayer, who originated from and sympathized with the Austrian School, was suspended from duty at the University of Innsbruck (cf. Maislinger 1984, p. 418). Morgenstern was abroad at the time of annexation and did not return. He was replaced as director of the Institute in Austria by his deputy, Richard Kamitz (1907–1993), who later became finance minister. Meanwhile Hans Mayer, as president of the Nationalökonomische Gesellschaft, implemented the so-called Arierparagraph and excluded all Jews from the society (Müller 2004, pp. 267–268).

Most members of the Austrian School left the country in the following weeks—some of them under perilous circumstances. The list includes Erich Voegelin, Felix Kaufmann, Alfred Schütz, Viktor Bloch, Marianne von Herzfeld, Helene Lieser, Erich Schiff, Gertrud Lovassy, Alexander Gerschenkron, Ilse Mintz-Schüller and her father Richard Schüller, and also Martha Stephanie Braun. Among those who stayed was Ludwig Bettelheim-Gabillon, who later died in a concentration camp. Leo Illy (Schönfeld) and Richard Strigl retreated into “inner emigration.” With his paper about “Wicksell’s Process” (“Der Wicksellsche Prozess”), Strigl—before he died of a brain tumor in 1942—made one more unequivocal stand against the predominant belief in an endless political possibility of shaping economic conditions (Strigl 1942). Hans Mayer, Alexander Mahr, and Ewald Schams remained in Austria and tried to adjust to the new circumstances. All the same, the Zeitschrift für Nationalökonomie could only be published sporadically and in a reduced form. The Carl Menger memorial, which in 1929 had been unveiled in the inner courtyard of the university and subsequently removed by the university administration, was defiled by Nazi students shortly after the annexation.

When Mayer and Mahr resumed their lectures at the University of Vienna after the war—Schams did the same at the Technische Hochschule, and with some difficulty—they did not even come close to reconnecting with the past. The seventy-year-old tradition of the Austrian School soon fell into oblivion. In “a ‘balance sheet’ showing the losses of the emigration,” (such was the title of an essay by Karl H. Müller: “Verlustbilanz der Emigration,” 1988/2004), the Austrian School would appear only as a noted item. The substance of such a balance sheet item, however, is in its hidden assets, lying dormant in the residual value.

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¹Literally “circle of spirit”, an ironically intended allusion to the self-perception of its members as a circle of exclusive highbrows.