The Austrian School in 'The American Economic Review'

0:00I'd like to thank the Mises Institute for having me. My first scholars' conference was in 1999, and they keep getting better over the years. I'd like to briefly explain my interest in this topic. I deal a lot with the news media at the think tank where I work. And one question that I'm asked, we're dealing with very abstract ideas that do have a practical One question I'm asked all the time is, well, who are these Austrian school economists? And I find that being able to take popular culture, examples from popular culture, and cite them to the news media helps them understand these very abstract ideas.

0:45And one way that I've introduced Ludwig von Mises and his story to many journalists over the years is to remind them that there was a great movie, A Great Musical, The Sound of Music. It's about the Anschluss. And of course, as Dr. Hulsman's book notes, Ludwig von Mises got out of Vienna just ahead of the Nazis. But it really clarifies for a lot of people in the media that I've dealt with who he is and what we are. We're pro-freedom, pro-liberty, and we're involved with ideas as he was. So what I'm going to do is I'm going to go through real quickly what I found in reviewing 100 years of the American Economic Review.

1:33It's my contention that the Austrian School gets a bum ramp from people that just don't know how many institutions, serious institutions, have taken our work very seriously. Two papers that I presented here in the past dealt with the Austrian School in the Reviews of the Federal Reserve System and the Austrian School in the National Bureau of Economic Research's Business Cycle Studies. Those were published in 2006 and 2010 in the Quarterly Journal of Austrian Economics. This paper kind of grew out of that. My question became Well, what about the AER? The AER, which was first published in 1911, is the leading peer-reviewed economics journal in the United States. Thirteen presidents of the AER, which publishes on a quarterly basis, have won the Nobel Prize in Economics, and AER has been identified as a flagship economics journal. Despite this, articles that explore academic interest in and the Austrian School overlook the AER, so I began hoping I could correct this oversight.

2:48Now what I found is that the AER has published a reference to an Austrian economist each year in its 100 year history, that's my appendix, and these include references to Benjamin Anderson, Eugene von Boehm-Bawerk, Gottfried Haberler, Friedrich Hayek, Israel Israel Kirzner, Fritz Machlip, Carl Menger, Ludwig von Mises, Oskar Morgenstern, Murray Rothbard, Joseph Schumpeter, Hans Senholtz, Richard Striegel, and Friedrich Wieser. There is clarity of Austrian views for much of the AAR's history, from the first reference in 1911 to the last, that was a reference to Hayek, in 2010 by Oliver Williamson, who who was co-laureate in 2009, Nobel Economics Prize.

3:40And these references include articles, presidential addresses, book reviews, abstracts, comments and replies authored by or in reference to Austrian economists. The range of Austrian concepts is broad and includes the business cycle, capital theory, economic history, government interventionism, information and knowledge, marginalism, Marxism, Methodological Individualism, Socialism and the Soviet Union, Monetary Policy and the Price System, including the Danger of Government Controls. So here's the point, I'm oftentimes asked by members of the press, why is any of this, this is not really relevant, is it? The Austrian School of Economics, they're from Austria, okay, right?

4:25Well no, they are in fact, many of them are from Austria, but here's the point. They're cited in the flagship economics journal in the United States every year from the first year the journal was published, 1911. That might be a little, that might speak a little bit to the credibility of this school, and you should pay attention to it, is my argument. So, I'm going to give you the first reference. The first reference to the Austrian school is Mitchell, Wesley Mitchell, incidentally, in 1916. and he notes that Bimbawik, Menger, Wieser and Schumpeter are all affiliated with the school and he says quote among recent tendencies in economic theory none seems to me more promising than the tendency to make the use of money the central feature of economic analysis so the Austrian school is identified early on with monetary policy Ludwig von Mises' leading works including Human Action have have been reviewed in the AER and since we're dealing this week with the 100th anniversary

5:34of one of his books at this conference, I might mention that the first reference to von Mises occurred in 1913, that was Lutz, and Lutz wrote, he wasn't a big fan of Mises, but he wrote that Mises' book apparently represents an effort to develop a theory of money which will be in accord with the utility theory of value in its most extreme subjective The Austrian School is identified with monetary policy. In the 30s, Mises was cited on numerous occasions and one author, Loeffler, noted that the Austrian accepts Wichsel's distinction between the natural rate of interest and the money rate of interest, but disagrees with with the idea the rate always tends towards equilibrium through banking operations.

6:30And then Mises' criticism of socialism is noted in 1923, in fact, and this is how Van Sickle describes it in the pages of the AAR, it's a quote, a complete rejection of all forms of collectivism and all compromise with the forces which in the opinion of the author threaten the foundation of existing society. Mises rejects socialism on two grounds. First, because it affords no possibility of rational price fixation. Second, because there is no possibility of an appropriate organization of production. Just as an aside, at the time in the 1920s, there was very little understanding in the West of what was actually occurring in the Soviet Union.

7:17This becomes clear as you read the AER and it really puts von Mises's insight that socialism wouldn't work in a class of its own because you just don't find these kinds of articles or arguments even in the AER. What you find actually into the thirties, through the twenties and thirties, are a lot and a lot of conflicting and just confusing accounts about what is actually occurring in the Soviet Union. You don't find a lot of the type of analysis that you would find in von Mises. Now, Dr. Holzman's book refers to book reviews by Mises. I mentioned that his books had been reviewed.

8:03The book reviews that occurred in the 40s led him to end his involvement with the AER. What happened was a critic wrote about one of his reviews and he was not given the chance to respond to that review. And so he ended his association with the AER. However, the AER still continued to publish references to Mises. One of them was a gentleman by the name of Schuller who trashed, I'll just say that without reading what he actually had to say, but he trashed human action. And this led to Murray Rothbard actually, who at that point was 25, 26 years old, he was in his mid-20s, writing in and defending Mises against Schuller.

8:53And what Murray did, and I consider myself privileged to have known Murray from 1980 to the mid-90s when he passed away, just reading this defense of Mises brought back a lot of memories, personal memories that I had, but it was a 12-point defense of Mises against Shuler's criticism. Shuler then attacked Murray, and then of course Murray, as he oftentimes did, had so many compelling arguments that he cited back against Shuler. But if you're interested in Murray's treatment in the AER, that's the exchange to focus on. That occurred in 1950 and 1951. And then in 1963, Schaeffer, writing in the AER, noted that Murray's book on the Panic of 1819 represents the only published book-length economic treatise on the remedies that were proposed, debated and enacted in attempts to cope with the crisis of 1819.

9:53That's also true in the Federal Reserve publications. You'll find if you read the Federal Reserve member bank reviews, Murray Rothbard is accepted in those Fed reviews as the authority on the Panic of 1819. There is no other authority. Now real quick on Hayek, when the AER celebrated its 100th anniversary here recently, a group of blue chip I guess blue-chip economists including some Nobel laureates went back and with their staffs they reviewed 100 years of the AER and they focused in on the top 20 articles in the AER's first century. One of them was Hayek 1945. This is his article on the knowledge problem and they note that Hayek argues that authorities lack the knowledge to plan an economy. Quote, the peculiar nature of the The problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

11:04This article has been cited dozens of times in the AER by everybody from professors to Nobel laureates. This article by Hayek is commonly cited and is an example of his work being taken seriously. I'd like to conclude with what I'm arguing is a bizarre synthesis that has emerged in the AER in recent decades. And these are articles that rely on econometrics, that is mathematical modeling, that use, believe it or not, references to Austrian economics. This was a new one even for me. I thought growing up in Detroit I'd seen everything, but this was new, that they're actually taking Austrian School economists and citing them in these elaborate econometric articles that are published in the AER.

12:01So just like to point out that Austrian School economists have criticized econometrics. Mises was unrelenting in his criticism of mathematical economics. Papandreau in 1963 in the AER observed that Mises singled out macroeconomics, mathematical economics and econometrics, quote, as the outstanding forms of degradation in economic thought. Mises termed econometrics a childish Play, which at best represent an attempt to deal with history in a quantitative way. Murray Rothbard, Mises's leading student, rejected the positivism of econometrics. So you actually get in the AER, believe it or not, earlier in the AER's history, economists saying this is what the Austrians say about econometrics. It's silly. But now, it starts in the mid-70s,

12:59In the 1970s, those of you who never liked disco could relate to this, bad things occurred in the 70s, but this is when this trend started in the 1970s of citing Austrians in these econometric articles. And so here's just a couple of examples of this. Hurley and McDonough in 1995 consider the Hayek hypothesis stated by Vernon Smith in in the AER as it relates to the, quote, favorite long shot bias in paramutual betting, which is that favorites win more often than the betting odds indicate and long shots win less often than the betting odds indicate. Hubbard in 2003 cites Hayek in developing a model that examines capacity utilization gains from On-Board Computers in the Trucking Industry, Duffy and Manso in 2007 cite Hayek's paper from 1945 that I mentioned, and they create, quote, a simple model of percolation of information through a large market. They write, quote, our model allows a relatively explicit solution for the cross-sectional distribution of posterior beliefs at each time t in italics. So these

14:20These models, as they progress, become more complicated and complex and there's less clarity of view as to what the Austrians are actually saying. So I'll conclude real briefly that this deviation, a bizarre synthesis, is most apparent in these econometric articles that cite Hayek and Mises who, like Murray, noted the limitations of mathematical economics. Hayek's 1945 article notes economists' growing preoccupation with statistical aggregates, a propensity he later observed in the AER to, quote, imitate as closely as possible the procedures of the brilliantly successful physical sciences lead to nothing, really. Mises in Human Action notes there are economists who hold, quote, the only appropriate method of Dealing with Economic Problems is the mathematical method. These economists derided the logical economist as literary economist. I love how he uses sarcasm in answering his critics.

15:22He's very good at that. Mises rejected econometrics because it starts from, quote, false assumptions and leads to fallacious inferences. And then finally, Murray Rothbard in the AER observes mathematical equations are appropriate and useful when there are constant quantitative Relations Among Unmotivated Variables," that's Man Economy and State from 1962. They are singularly inappropriate in economics. And then Murray concludes, training in math is, quote, no more necessary to the realization of its uselessness for an inapplicability to the sciences of human action than for example training in agricultural techniques is essential to knowing they are not applicable on board an ocean liner.

16:09So Austrian economics in the AAR second century, which we've now just begun, should be presented free of the econometric straitjacket that only serves to obscure the school's insights and should be presented with the clarity that it was for most of the journal's history. Thank you very much.