CHAPTER 24 The Renaissance of the old ‘Viennese’ School: The New Austrian School of Economics

In the 1930s, it became clearer than ever before that the fundamental theoretical assumptions of the Austrian School ran decidedly counter to the dominating spirit of the age—which appeared increasingly dedicated to the salvation-promising, collectivist ideologies of the left and right. This trend was felt even in those societies which had remained democratic; it meant that John Maynard Keynes’s presumptuous claim of being able to secure the future welfare of mankind readily found zealous supporters. The Austrian School had already been on the sidelines for some time when it finally collapsed under the strain of external forces after the annexation of 1938. The ideas of the School seemed to sink into oblivion after World War II. Social policy in the western democracies was oriented toward ideas of a welfare state, and was bolstered by economists promising The Affluent Society (Galbraith 1958). One of the fundamental insights of the Austrian School, namely, that utopian societies designed by social engineers are nothing but unscientific illusions, seemed destined to disappear (Salerno 2002, p. 115). That Menger’s Principles of Economics was first translated into English in 1950 made no difference to the fact that the 1950s and 1960s would become “years in the wilderness” (Zijp 1993, p. 73).

Most of the exiled members of the Austrian School joined the neoclassical mainstream soon after emigration: Fritz Machlup, for example, who became the pioneer of information economics in the US. His stance on American monetary policy caused a rift between himself and his father-like friend, Ludwig von Mises, which lasted for many years (cf. Hülsmann 2007a, pp. 860–861). Oskar Morgenstern advised American government agencies and primarily published works on game theory, economic forecasting, and methodology. Paul Rosenstein-Rodan became a highly-esteemed expert on developing countries, and Gottfried Haberler worked for the American central bank system. They all felt a lifelong bond to the Austrian School, but did not continue to conduct research on its behalf. It was therefore possible to have the impression that Austrian School theories had entered into mainstream economics (cf. Hayek 1973, pp. 13; and Boettke 1994b, p. 1).

It is to Friedrich A. von Hayek’s and, in particular, to Ludwig von Mises’s credit that it was not only possible to keep the legacy of the Austrian School alive in a new environment, but also to perpetuate its marked development with only a few colleagues and new students. 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. Having begun his doctoral thesis under Hayek, Shackle pursued a similar path, but ultimately turned toward radical subjectivism, steering it toward nihilism.

The Austrian School tradition came to a sudden halt when Hayek was appointed to the University of Chicago in 1949. Having there been assigned to the “Committee of Social Thought,” Hayek increasingly moved away from the terrain of economic research in the strict sense—which suited his interests quite well. He subsequently applied himself to the study of the legal and institutional frameworks of a free society (Hennecke 2000, pp. 229–232). Even though his contributions to the theories of law and politics were closely connected to his economic theory and were logically cohesive (cf. Huerta de Soto 1998/2009, p. 90), his faculty colleagues soon labeled him a “social and law philosopher” (cf. Boettke 1994a, p. 613). And others—with smug overtones—placed his work in the category of “conventional wisdom” (cf. Galbraith 1958, p. 6).

In contrast, Ludwig von Mises remained true to his original profession. After his arrival in New York in 1940 and with the help of Machlup’s contacts, he was able to have Omnipotent Government (1944), Bureaucracy (1945), and Human Action (1949) printed. In 1945, by then sixty-four years old, Mises obtained a guest professorship at New York University with the help of friends and former students. He remained active in the position until reaching the grand old age of eighty-seven. The response to his first two books published in the US was modest. Human Action, however, became a great success (cf. Hülsmann 2007a, pp. 883–888). Critics of the then-prevailing New Deal statism soon recognized in Mises a welcome comrade-in-arms. Particularly impressed by Mises was the brilliant journalist Henry Hazlitt (1894–1993), who published two influential books, Economics in One Lesson (1946) and The Failure of the “New Economics” (1959), which contained ideas that were very similar to those of the Austrian School. A heterogeneous stream of freedom thinkers gradually emerged, who, since the label “liberal” had already been taken by the American Democrats, referred to themselves as libertarians. Admittedly, their critical and at times hostile attitude toward the state sometimes went too far for Mises, whose origins were in European liberalism (cf. Hülsmann 2007a, pp. 857–862).

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. 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 which explained an economy’s endogenous tendency—helped by entrepreneurial action—toward equilibrium. According to Kirzner, the entrepreneur is characterized by an outstanding “alertness” that enables him to detect price differences, and thus, deficiencies in coordination. What follows is that the profit motive instructs the entrepreneur to act as a coordinating force. Kirzner’s theory of the entrepreneur as “discoverer” is considered groundbreaking to this day. Hans F. Sennholz (1922–2007), another student of German origin who would later become a professor at Grove City College and the president of the Foundation for Economic Education, translated many of Mises’s writings from German into English. With his published books and especially his numerous talks, Sennholz contributed to the early dissemination of the Austrian positions on monetary theory and monetary policy, and attempted to bridge the gap between the economic sciences and intellectual Protestant-American circles.

Quite possibly the most distinguished of Mises’s students in the new world was Murray N. Rothbard (1926–1995), who would later become professor at the University of Nevada at Las Vegas. In his opulent early work in two volumes, Man, Economy, and State (1962/2000), Rothbard succeeded in expanding on his teacher’s approach, especially in the areas of monetary theory, the theory of monopoly, and the theory of capital and interest. Using his extensive knowledge of theoretical economics and history, he demonstrated in America’s Great Depression (1963) how inflation of the money supply—responsible for the artificial “boom” in the “golden 20s”—had developed, and how it inevitably led to the stock market crash of 1929. His explanation contradicted the Keynesianism-biased interpretation of “Black Thursday” that prevails to this day. With An Austrian Perspective on the History of Economic Thought (1995), a two-volume work, Rothbard presented a comprehensive history of economic theory from the Austrian perspective. Aside from his teaching assignments in New York and Nevada, he wrote well over a thousand articles and twenty-five books, including works on political philosophy and Natural Rights ethics. As a political agitator, he sharply criticized the US’s aggressive foreign policy and the expansion of the state as well as the curtailment of basic freedom rights; and he evolved into a radical advocate of the libertarian movement, all the while maintaining his pacifist stance.

Even though a succession of talented and, later, well-known economists emerged from Mises’s New York seminar,¹ there was hardly any mention of a Modern Austrian School of Economics prior to 1970. Until the mid 1960s many established economists considered the Austrians, represented by Hayek and Mises, mere historic relics who fought aggressively and bitterly in a hopelessly quixotic manner against the mainstream, and who made one mistake after another on questions of economic policy (cf. Tieben and Keizer 1997, p. 5). In the academic community they were but a small minority whose way of thinking was incompatible with the neoclassical paradigm. The three basic assumptions of neoclassical economics (optimization behavior, fixed order of preference, and equilibrium) was diametrically opposed, then as now, to the basic positions of the Austrians—expedient action, individual preferences, and dynamic processes (cf. Boettke 1994a, pp. 602, 604). Moreover, the Austrians categorically rejected a mathematical treatment of economic problems, because “in the sphere of action” there is “no unit of measurement and no measuring” (cf. Mises 1953, p. 663). Very few essays appeared in academic journals (cf. Salerno 2002, pp. 116–117), with the consequence that “Austrian Economics” was perceived predominantly as a “book science” (ibid., p. 602) of little consequence.

During this phase of noticeable academic isolation, the Mont Pèlerin Society, established in 1947 in a hotel on Mont Pèlerin near Vevey on Lake Geneva, was the most important bridge to old Europe for both Hayek and Mises. As well as the former Italian president Luigi Einaudi (1874–1961) and the philosopher Bruno Leoni (1913–1967), the author of Freedom and the Law (1961), members of the society Hayek founded included, among others, the French expert on finance and political theoretician Jacques Rueff (1896–1978). After World War I, Rueff successfully proved—in every single case—that the money that had been handed out by central banks in the countries suffering from hyperinflation (France, Italy, Germany, Poland, and Austria), had been used primarily to finance budget deficits. After World War II, he introduced currency stabilization measures under President de Gaulle and later recorded his insights and experiences in The Monetary Sin of the West (French 1971). Other members of the Mont Pèlerin Society included the economics minister and later chancellor of West Germany Ludwig Erhard (1897–1977), Walter Eucken (1891–1950), Alfred Müller-Armack (1901–1978), Alexander Rüstow (1885–1963), and Wilhelm Röpke (1899–1966), who, as “ordoliberals,” attempted to find a “third way” between socialism and laissez-faire capitalism. Much like Hayek in his later works, Röpke paid particular attention to cultural factors like morals and tradition. Moreover, he warned against the modern, anti-individualist tendencies, and against the “domestication” and “convenient stable feeding” of people by the welfare state (cf. Röpke 1942/1979, p. 267). Whereas Hayek maintained an ongoing, close relationship with the ordoliberals, Mises repudiated them categorically.

The Mont Pèlerin Society, however, hardly played a direct role in the rebirth of the Austrian School as Modern Austrian Economics. Instead, it was the historical recollection of its central protagonists and the fundamental themes of the School that brought about a new beginning. In 1967 influential English economist John Richard Hicks remembered the crucial debates between Hayek and Keynes at the beginning of the 1930s— which he called “quite a drama”—and rehabilitated Hayek’s then-defeated position (Hicks 1967, p. 203). One year later, Hayek published the second edition of the collected works of Carl Menger in four volumes for German readers (Hayek 1968–1970). The 1971 centennial of the publication of Carl Menger’s Principles, the eulogies of Mises’s life’s work after his death in 1973, and Hayek’s Nobel Prize for Economics in 1974 subsequently created a growing interest in the rich legacy of the old Austrian School.

This return to the roots led to a complete reevaluation of Carl Menger. The voluminous literary tradition of the Austrian School had not infrequently obscured a direct view of Menger’s original mindset. Menger, along with Léon Walras and William Stanley Jevons, was counted among economic theory’s “marginalist revolutionaries,” with Menger’s distinguishing characteristic, his strict rejection of the mathematical approach, being mainly attributed to his mathematical inexperience (cf. Vaughn 1994/1998, pp. 12–13). Mathematician Karl Menger, the son of the School’s founder, would provide evidence that his father’s verbally formulated, logically constructed concept of marginal utility was indeed more comprehensive than that which Walras had formulated mathematically (cf. K. Menger 1973, p. 40). The differences between the three “revolutionaries” were more clearly outlined in a notable article some years later (cf. Jaffé 1976). The effort to carve out Carl Menger’s original position within the Austrian School’s body of tradition peaked with Max Alter (1990) and Sandye Gloria-Palermo (1999), both of whom painted a very complex and sophisticated picture of Menger. Gloria-Palermo was able to point out the considerable methodological differences between Menger and Böhm-Bawerk (cf. Gloria-Palermo 1999, pp. 39–50). In the same year, Hans-Hermann Hoppe and Joseph T. Salerno, continuing Mises’s work, (cf. Mises 1978/2009, pp. 27–28), demonstrated with great detail that Friedrich von Wieser had made a crucial departure from Menger (cf. Hoppe and Salerno 1999) on fundamental questions of methodology and economic policy. The consequence was Wieser’s final expulsion from the Pantheon of Austrians.

Whereas the symposium held in Vienna in 1971 commemorating the centennial of the publication of Carl Menger’s Principles proceeded in a obligatory fashion, respectfully maintaining tradition, conferences organized by American Austrians in the 1970s were distinguished by lively, indeed sometimes vehement discussions. The contributions of Ludwig Lachmann, George L. S. Shackle, Israel M. Kirzner, and Murray Rothbard seemed radical, enriching, and boldly refreshing, but they threatened to split the already small camp of Austrians into “Lachmannians,” “Kirznerians,” and “Rothbardians.” This split even began manifesting itself institutionally (cf. Salerno 2002, pp. 119–123), and often appeared more confusing than appealing to outsiders. In 1981 Kirzner and Lachmann of New York University, along with George Mason University in Fairfax (Virginia), were challenged with the founding of the Ludwig von Mises Institute, first in Washington, D.C., and later in Auburn (Alabama), by Margit Mises, Murray N. Rothbard, and public intellectual Llewellyn Rockwell, where to this day researchers and students from all over the world become acquainted with the teachings of the Austrians. A controversy centering on the question of whether Hayek was opposed to or in agreement with Mises’s theory flared anew in the 1990s (cf. Salerno 2002, pp. 119–120; and Boettke 1994a, p. 613).

Contributing to the growing appeal of the Austrians and to a noticeable rise in funding placed at their disposal for research, teaching, and publications, was the fact that from the 1970s on, and in light of developments in the real economy—inflation and high unemployment, the neoclassical–Keynesian paradigm suffered a real crisis of interpretation. Alternative models of explanation were in stronger demand once more. Since then, the Austrians have tirelessly pointed out that it is quite impossible for neoclassicism, with its model of equilibrium, neglect of dynamic market processes, negation of subjective information, knowledge, and learning, and its unconditional application of macroeconomic aggregates, to reach a well-founded understanding of the real economy. In contrast to neoclassicism, Austrians have a “much more realistic, coherent and prolific paradigm” (Huerta de Soto 2000/2008, p. 100).

The academic network of the Austrians has grown considerably in recent decades, and since the 1980s has extended beyond the US to the whole world. A program of study in the tradition of the Austrian School was offered at New York University up until Kirzner went into retirement; it produced numerous economists who either considered themselves members of the School, or who were significantly inspired by it.² Notable Austrians have been involved in research and teaching at George Mason University in Fairfax (Virginia) up to the present as well.³ Economists adhering to the Austrian creed currently work at Loyola University Baltimore (Thomas DiLorenzo), the University of Missouri in Columbia (Missouri), Pace University in New York, Florida State University in Tallahassee (Florida), Auburn University in Alabama, the University of Nevada at Las Vegas, and at Grove City College in Pennsylvania.⁴ Philosopher Barry Smith at the University at Buffalo (New York) should also be mentioned. Two academic journals available to Austrians today are The Quarterly Journal of Austrian Economics and Review of Austrian Economics.

Beyond the United States, economists and philosophers of the Austrian persuasion are currently at work at universities in Great Britain (Stephan Littlechild, Norman B. Barry), Holland (William J. Keizer, Gerrit Meijer, Auke Leen), Italy (Raimondo Cubeddu, Enrico Colombatto, Lorenzo Infantino), France (Jörg Guido Hülsmann, Pascal Salin, Jaques Garello, Gérard Bramoullé, Philippe Nataf, Antoine Gentier, Georges Lane, Nikolay Gertchey), Portugal (José Manuel Moreira), Spain (Jesús Huerta de Soto Ballester, Rubio de Urquía, José Juan Franch, Ángel Rodríquez, Oscar Vara, Javier Aranzadi del Cerro, Gabriel Calzada) and in the Czech Republic (Josef Šima, Dan Stastny, Jan Havel). No dedicated “Austrian chair” exists in Germany, Austria, or Switzerland, but a number of experts and authors like Christian Watrin, Roland Vaubel, Viktor Vanberg, Erich Weede, Gerd Habermann, Manfred E. Streit, Torsten Polleit, Roland Baader, Rahim Taghizadegan, Gregor Hochreiter, and Marc Faber identify themselves with the research agenda of the Austrians (cf. further listing in Baader 2005, p. 120).

In Europe today, the leading representatives of the “revitalized” Austrian School, the Austrian School of Economics, are Hans-Hermann Hoppe, Jörg Guido Hülsmann and Jesús Huerta de Soto.

Hans-Hermann Hoppe (b. 1949), a native German, wrote his dissertation in philosophy under Jürgen Habermas (b. 1929). After its completion he departed in order to study in the US, where he eventually took over the chair of his long-standing teacher, Murray N. Rothbard, at the University of Nevada at Las Vegas. In his Kritik der kausalwissenschaftlichen Sozialforschung (1983) (“Critique of Causal Scientific Principles in Social Research”), Hoppe made a substantial contribution to the refutation of empiricism and positivism: It would be logically impossible to research causality in social science, as such research is incompatible with the statement that learning is possible—a statement implicitly acknowledged as valid by every scientist, and which cannot be denied without contradiction. Economics, therefore, cannot be an empirical social science, but has to be understood instead as an aprioristic science of action. In A Theory of Socialism and Capitalism (1989), Hoppe defined socialism as an institutionalized system of aggression against property; a deeply immoral social system which by no means corresponds to a “natural order.” This key idea was further expanded in Democracy: The God That Failed (2001), and augmented by a fundamental and comprehensive critique of democracy. Hoppe has written numerous books and articles on theoretical questions of the Austrians and on Natural Rights ethics, and has also criticized prevailing economic fallacies with his focus on “monetary theory” and “public goods.” In 2006, he founded the Property and Freedom Society, a forum committed to intellectual radicalism in the tradition of Mises and Rothbard.

German economist Jörg Guido Hülsmann (b. 1966), of the University of Angers, France, pointed the interest debate in a completely new direction with the publication of A Theory of Interest in 2002. According to Hülsmann, interest reflects the difference in value between ends and means resulting from the logic of action. Unlike Böhm-Bawerk and Mises, Hülsmann no longer traced interest back to the factor time. In his work on the problem of money, Hülsmann emphasized that until now, advocates of the subjectivist theory of value have laid too much stress on the material aspect, i.e., the economic aspect in the narrow sense. In The Ethics of Money Production (2008), he defined inflation as that part of money production which arises from the violation of property rights, and classed the problem primarily as an ethical one. Quite generally, says Hülsmann, state intervention in the monetary system produces a continually perverse internal dynamic that ultimately leads to either the destruction of the currency, or to total state control. With The Last Knight of Liberalism (2007a), he provided a comprehensive biography of Ludwig von Mises using English, French, German, and Russian sources.

Jesús Huerta de Soto (b. 1956), the current vice president of the Mont Pèlerin Society and a leading economist in the Hayekian tradition, is a professor at the Universidad Rey Juan Carlos in Madrid. A Masters and Ph.D. program devoted specifically to the Austrian School have been set up under his guidance. With Money, Bank Credit, and Economic Cycles (1998/2009), Huerta de Soto, who majored in economics, law, and actuarial mathematics, succeeded in presenting a comprehensive, fundamental work on the Austrian theory of business cycles. He also published a comprehensible book, The Austrian School: Market Order and Entrepreneurial Creativity (2008, Spanish 2000), offering an easily readable exposition of the Austrian approach. Another focus of his work is research into creative, entrepreneurially-driven market processes. Huerta de Soto has also become well known for his theory that Spanish late scholasticism should be considered the forerunner of the Austrian School; he has yet to provide the crucial “missing link” between the scholastic tradition and Menger.

The newly-awakened interest in the tradition of the Austrian School and its modern form, the Austrian School of Economics, has led to an increased number of publications in the last two decades. Austrians today are focusing primarily on the theory of institutional coercion, price theory, and the theory of monopoly and competition; the theory of capital and interest, the theory of money, credit, and financial markets, and questions of the welfare economy and its implications. Other areas of activity proving fruitful are the New Institutional Economics, the branch of “law and economics” and the analysis of law and ethics (cf. Huerta de Soto 2000/2008, pp. 102–106; and Boettke 1994a, pp. 608–611). Irrespective of the multitude and diversity of these contributions, the original canon of issues of the Austrian School is still strongly discernable in the current research agenda of modern Austrians; nothing could be better proof of the astonishing longevity and freshness of the Austrian School, arguably the most significant Austrian contribution to modern economics.

As we enter the third millennium, Austrians are endeavoring, more than ever, to intensify the dialog with mainstream economics, to find allies beyond the boundaries, and effectively to reach an audience of interested experts (cf. Boettke 1994a, pp. 604, 610). In so doing, they share with Carl Menger, the founder of their tradition, the strong conviction that they indeed have the better ideas at their disposal. They want to use these ideas actively to influence economic and political discourse, and not rely merely on the hope of a mature Menger who once penned the following (cf. Hayek, Hicks, and Kirzner 1990, p. 88): “In science there is only one secure way that leads to the final triumph of an idea: to allow each and every opposing school of thought to live itself out completely.”

---

¹For example, Louis Spadaro, George Reisman, Percy L. Greaves, Jr., and his wife Bettina Bien Greaves, Leonard P. Liggio, and Ralph Raico.

²For example Don Lavoie, Sanford Ikeda, George Selgin, Roger Garrison, Llewellyn H. Rockwell, Jeffrey Herberner, Randall G. Holcombe, Peter G. Klein, George Reisman, Roger Garrison, Walter Block, Bruce Caldwell, Richard Langlois, Stephan Boehm, Uskali Mäki, Frederic Sautet, David Harper, and Mario J. Rizzo.

³For example Peter Boettke, Don Boudreaux, and Karen I. Vaughn.

⁴For example Don Lavoie, Sanford Ikeda, George Selgin, Roger Garrison, Bruce Caldwell, Richard Langlois, Stephan Boehm, Uskali Mäki, Frederic Sautet, David Harper, and Mario J. Rizzo.