14. The Austrian School’s Critique of Marxism

0:00Chapter 14 The Austrian School's Critique of Marxism Council republics were established in Hungary and Bavaria, according to the Russian-Soviet model shortly after the First World War. Violent revolts erupted in many places in Germany. Vienna, too, was dominated by this revolutionary atmosphere, which middle-class circles embraced with Calculated Opportunism. Ludwig von Mises, who at the time was a civil servant in the Chamber of Commerce of Lower Austria, recalled the following, People were so convinced of the inevitability of Bolshevism that their main concern was securing a favourable place for themselves in the new order. Bank directors and industrialists hoped to make good livings as managers under the Bolshevists.

0:50Otto Bauer was State Secretary in the Foreign Department at this time, the leading Austro-Marxist and later Chairman of the Nationalisation Commission. Mises knew him very well. They had attended Boehm-Bawerk's economic seminar together. At the time, Mises wrote of the winter of 1918-1919 in his memoirs, I was successful in convincing the Bauer's that the collapse of a Bolshevist experiment in Austria would be inevitable in a very short time perhaps within days. I knew what was at stake. Bolshevism would lead Vienna to starvation and terror within a few days, plundering hordes would take to the streets, and a second bloodbath would destroy what was left of Viennese culture. After discussing these problems with the Bauers over the course of many evenings, I was finally able to persuade them of my view. In January of 1919 Bauer finally made the announcement in the Arbeit at Saitung that he wanted to carry out expropriations with reimbursements in heavy industry and large-scale landholding. The Arbeitszeitung, or workers' newspaper, was started in 1889 and functioned

1:55as the main organ of the Austrian Socialist Party until 1989. It was banned from 1934 to 1945. It ceased publication as an independent newspaper in 1991. Organisational measures were to be taken in preparation for nationalisation in other industries as well. The convincing Mises did in those memorable nighttime discussions was directed towards socialist political intentions that had the potential of endangering the short and unstable store of supplies available to the Viennese population even further. Of all the voluminous literature circulated during the subsequent debate on socialisation, Schumpeter noted that even the most able were writing the most banal things. Mises was one One of the few who kept his focus on the possible consequences of state intervention with sobriety and a sense of reality. The government-run war and transitional economy had provided numerous examples of the inevitable failure of central economic planning and had also proven the lesser economic productivity of public enterprises. Moreover, Mises realised early on that the The interests of the Viennese Sozialisierungskommission, Commission for Nationalisation, were by no

3:11means identical to the interests of the Federal States, in any case. These nightly talks put such a strain on his relationship with Bauer that Mises tended to believe Bauer had tried to have him removed from the teaching staff at the University of Vienna. Mises was indeed no longer considered for the position of tenured professor in Vienna when it became vacant in 1919. It was given instead to Ottmar Spann, 1878-1950, a former colleague of Bauer in the Wissenschaftliche Komitee für Kriegswirtschaft, Academic Committee for War Economy in the Royal Imperial Ministry of War. During the course of the nationalisation debate of 1919, Mises defended private property and the market economy with the argument of economic efficiency of supply, but he had to argue the position almost single-handedly, as many members of the Austrian School had been appointed to senior positions in the Central War and Transition Economy offices, thereby joining this statist camp.

4:11It almost seemed as if they had, over the course of their careers, completely forgotten that the academic dispute with Marxism had at no university been so profound and productive as it had been in Vienna. When the subjective theory of value had begun to take hold in the 1880s, other theories that competed with those of the Austrian School had also come to the fore, for example the labor theory of value. In Capital and Interest, a Critical History of Economical Theory, 1884, Eugen von Boehm-Bawerk devoted a complete section to socialist notions, the exploitation theory, and subjected them to fastidious and detailed criticism. In 1885, Gustav Gross authored one of the first biographical sketches on Karl Marx.

4:59In the very same year, he produced a separate biography, Karl Marx, eine Studie, Karl Marx's study. Shortly thereafter, he reviewed the second volume of Das Kapital, Capital. Hermann von Schulen zu Schottenhofen, first scholarly publication was Die Lehre von den Produktionsfaktoren in den sozialistischen Theorien, 1885, Study of the Factors of Production in Socialist Theories. The dispute with the Socialists was soon to become a permanent fixture of the Austrian School. It is an irony of history that it was this school of thought that first introduced academic discourse about socialism into the seminar rooms and libraries of established economics departments. Criticism was aimed primarily at the labor theory of value, whose contradictions and shortcomings were thought to have been overcome once and for all with the subjective theory of value.

5:53The socialist theory did not represent progress but rather regression. Fierce controversy between Boehm-Bawerk, Dietzel and even Zocacandl, among others, brought competition between the two doctrines to a head. Dietzel held to the labor theory of value and held fast to the view that the principle All of marginal utility was, in the end, nothing more than the good old law of supply and demand. Disputes with socialism soon went beyond the labor theory of value and brought the socialist state into question in many respects. Boehm-Bawerk, for example, regarded interest as an economic category wholly independent of the social system. Interest would exist even in the socialist state. Mises criticized socialist writers for their inadequate teaching of values' role in the socialist state. He came to the conclusion that not for one day could the socialist economic state of the future be administered according to any such reading of value, for Mises, in the socialist theory of value, pretty nearly everything is wrong.

6:58Johann von Komorzinski extended the analysis to political science. He distinguished between and a true philanthropic socialism and a delusory socialism aimed purely at class interests. After the posthumous edition of the third volume of Das Kapital 1895, two in-depth contributions of the Austrian School marked the temporary cessation of its critique of Marxism. In one perceptive essay, Komorczynski tried to prove that Marxist theories were at the greatest possible odds with the real economic processes. The contradiction stemmed from the basic principle, not from the utopian thinking. In his famous Zum Abschluss des Marxischen Systemes, 1896, Karl Marx and the close of his system, Boehm-Bawerk summarized his previous critique and came to the conclusion, based on the well-known contradictions between the first two and the third volumes of Das Kapital, that the final Marxist theory contains as many cardinal errors as there are points in They bear evident traces of having been a subtle and artificial afterthought contrived to make a preconceived opinion seem the natural outcome of a prolonged investigation.

8:09The Marxian system, according to Boehm-Bawerk, has a past and a present but no abiding future. A clever dialectic may make a temporary impression on the human mind, but cannot make a lasting one. In the long run, facts and the secure linking causes, in effect, win the day. Boehm-Bawerk foresaw that the belief in an authority, which has been rooted for thirty years in Marxist apologetics, forms a bulwark against the incursion of critical knowledge that will slowly but surely be broken down. And even then, socialism will certainly not be overthrown with the Marxian system, neither practical nor theoretical socialism. By the end of the 1880s, the law faculty of the University of Vienna became a centre of research into socialism.

8:59In his sensational work, Das Recht auf den vollen Arbeitsertrag in geschichtlicher Darstellung, 1886, The Historical View of the Right to Full Labour Revenue, Anton Menger, 1841-1906, One of Carl Menger's brothers, professor of civil litigation law and the first socialist of the monarchy with a tenured professorship, made a case for the nationalisation of the means of production. Carl Grünberg, 1861-1940, a scientific Marxist, taught economics there starting in 1892 and was one among many of Mises's teachers. In 1924 he was appointed of Frankfurt, where he founded the Institut für Sozialforschung, Institute for Social Research, and edited the works of Marx.

9:44Anton Menger, Carl Grünberg and later even Boehm-Bawerk came to attract the young socialist elite – Marx and Friedrich Adler, Otto Bauer, Carl Renner, Julius Tantler, Emil Lederer, Robert Dannenberg, Julius Deutsch and Rudolf Hilferding. From Hilferding's pen came the first Marxist anti-critique directed at Boehm-Bawerk, and his Das Finanzkapital 1910, Finance Capital, was a remarkable outcome of the culture of the seminar. In it, he comments on the role of banks and their symbiosis with the state, seemingly anticipating the monetary and business cycle theory of the Austrian School, which was sceptical of both. On the eve of the First World War, the continuing The prevailing exchange of ideas between these talented young people nurtured in Boehm-Bawerk the belief that the labor theory of value had lost ground in theoretical circles in all countries in recent times.

10:40Theoretical arguments that had evolved over the years did not play much of a role in the post-war debate on nationalization at first. In fact, ideas about the organization of the economy and economic policy were prevalent, It soon appeared that the ideas of nationalisation functionaries had been openly inadequate. Many nationalised business establishments fell upon economic hard times. Entrepreneurs proved reluctant to invest when expropriations were announced, and amazingly enough Otto Bauer seemed surprised at this reaction. In the federal states, state claims made the process of nationalisation stall or fail altogether, but most notable was the threat of starvation in Vienna. In 1919, 150,000 of the 186,000 school children were undernourished or severely undernourished. This was an indirect consequence of a controlled war economy that had led to a quadrupling of fallow land. Schumpeter, who in 1919 had had to resign as finance minister over the question of nationalisation, took stock two years later.

11:46Though it has political appeal, nationalisation accompanied by a comfortable lifestyle and a simultaneously abundant provision of goods, and the childish idea of bedding oneself in existing affluence is just nonsense. Nationalisation, which is not nonsense, is politically possible today, but only so long as no one attempts it in earnest. Just when the politics of nationalisation were beginning to lose momentum, Mises gained recognition for his spectacular essay Die Wirtschaftsrechnung im sozialistischen Gemeinwesen, Economic Calculation in the Socialist Commonwealth. It was expanded substantially two years later and published as the book Die Gemeinwirtschaft Untersuchungen über den Sozialismus, 1922, Socialism and Economic and Sociological Analysis. Mises made the point that rational economic management, that is resource conserving production and distribution of goods, which takes consumer preferences into account, can only be guaranteed with a free price system, the free exchange of goods and freedom to implement all possible uses of the goods, and that with central planning these goals can never be achieved.

12:56If the means of production are not privately owned, then efficient business leadership and the consequent satisfying of consumer interests cannot be ensured. The core problem according to Mises is that in the socialistic community economic calculation would be impossible. In any large undertaking the individual works or departments are partly independent in their accounts. They can reckon the cost of materials and labour and it is possible at any time to sum up the results of their activities in figures. In this way it is possible to ascertain with what success each separate branch has been operated and and thereby to make decisions concerning the reorganisation, limitations or extension of existing branches or the establishment of new ones.

13:43It seems natural then to ask why a socialistic community should not make separate accounts in the same manner, but this is impossible. Separate accounts for a single branch of one and the same undertaking are possible only when prices for all kinds of goods and services are established in the market and furnish Socialism, therefore, is not able to calculate. This is the main assertion of Mises' argument, otherwise known as the calculation problem. There would be neither discernible profits nor discernible losses. Success and failure remain unrecognized in the dark. A socialist Management would be like a man forced to spend his life blindfolded.

14:37Mises did not allow for the argument made by many bourgeois economists that socialism could not be realized because humans were still too underdeveloped in a moral sense. According to Mises, socialism would be bound to fail not because of morality, but because the problems that a socialist order would have to solve present insuperable intellectual difficulties. The impracticability of socialism is the result of intellectual, not moral, incapability. Mises's brilliant and overpoweringly logical analysis was not new. Its main features were already part of an inventory belonging to the early marginal utility theoreticians, but this was little acknowledged. Hermann Heinrich Gossen, 1810-1858, had already established that only in a society based on on Private Property could the economy be adequately and most expediently managed.

15:31The central agency assigned by the communists to allocate various jobs, Gossen said, would learn very soon it had set itself a task whose solution was beyond the ability of human individuals. In terms of the early Austrian School, Friedrich von Mises had already placed clear emphasis on the necessity of economic calculation. He was one of the first economists to recognize the relevance of the informational nature of Value in an Economy, Value, Wieser stated, is the form in which utility is calculated and thus value comes to be the controlling power in economic life. Apart from a few sporadic contributions in the foreign literature, the problem of economic calculation in socialism was scarcely considered until 1919, not even by socialist economists.

16:17Erwin Wiesel, 1930-2005, the Viennese economist and historiographer of the Austro-Marxist This debate on socialization even claimed that one wanted to ignore the problem. At the height of the socialization debate in spring 1919, Menger's student and business attorney Markus Ettinger warned that only market price could be a reliable regulator of demand and for the in and outflow of capital and labor from one area of production to another. It is interesting that Max Weber, 1864-1920, who was in close contact with Mises during Mises' fundamental critique received international recognition into the 1920s. The notion that central planning without a price system would automatically be inefficient was seldom denied.

17:17But in the early 1930s, economists in the English-speaking world began responding with models for a socialist calculation in answer to Mises that included the idea of competition socialism. It prevailed and survived in socialist circles until the 1980s. The idea was that planners could adequately stimulate market development with trial and error loops in between individual planning periods. Subsequent calculations could then be made. Both Mises and Hayek responded in detail and Hayek presented a concise summary of the complete debate in in 1935. He first and foremost centred in on the hubristic notion of being able to plan economic and social systems comprehensively. Socialism in all its right and left wing varieties was an ideology born out of the desire to achieve complete control over the social order and the belief that it is in our power to determine deliberately in any manner we like every aspect of this social order. In contrast to Mises, Hayek emphasized the indispensable Information Function of Market-Induced Prices. That a market system has greater knowledge

18:25of facts than any single individual or even any organization is the decisive reason why the market economy outperforms any other economic system. Amid heated debate, the Austrians were hardly aware of the fact that Hayek and Mises were pursuing two ultimately different paradigms. Mises' massive attack on the utopia of an economically efficient socialism did not evoke much in the way of a direct counter-reaction. Because the instigators of nationalisation were aiming only at partial socialisation, they were able to get out of a tight spot by pointing to organisational issues. The counter-attack came only after two years, when Helene Bauer, 1871-1942, diagnosed the bankruptcy of the marginal theory of value in the party organ of the Socialist Party Bankrott, der Grenzwertheorie, 1924. Using revolutionary rhetoric and warlike language, she insinuated that the marginal utility theory served a frightened bourgeoisie as a bulwark and was used as the predominant theory to agitate against Marxism at the university level. But Bauer touched the achilles heel of the marginal utility theories on one point.

19:36She called their imputation theory inadequate. The denunciatory intention of depicting the The Marginal Utility Theory as an Ideology of the Bourgeois Owner Class was particularly obvious in Russian Theoretical Economist and Philosopher Nikolai Ivanovich Bukharin's 1888-1938 Economic Theory of the Leisure Class, 1919. Bukharin's personal attacks on Boehm-Bawerk occasioned an unemotional counter-criticism. Ludwig von Mises was a specially easy target for this kind of appraisal on the part of socialist authors. Mises held the conviction and that liberalism was the only idea that could effectively oppose socialism. Liberalism, said Mises, is applied economics in another work from the previous year. He had even stated that classical liberalism was victorious with economics and through it.

20:27The theory of marginal utility nevertheless found some support in Germany in the 1920s even from socialist writers or others with socialist leanings. While preparing for the Dresden Convention of the Verein für Sozialpolitik in 1932, Mises repeated his junction of modern economics and liberalism and was promptly criticized even by advocates of the subjective theory of value. Despite the polarization, a young participant of the Dresden Convention, the post-doctored graduate, attorney and political scientist Hans Zeisel, 1905-1992, in the United States Hans Zeissel, Sports Correspondent of the Socialist Arbeiter-Zeitung and, until 1938, contributor to the now classical Marienthal-Studie, attempted the first sentences in Marxismus und Subjektive Theorie 1931, Marxism and the Subjective Theory of Value.

21:20According to Zeissler, the notion of value had developed into a concept of human elective action. The goods concept had given way to the relational concept of possible uses. The so-called laws of the subjective theory of value were of a statistical nature and received their cognitive value when they are applied to empirically discerned demand systems. If one were to replace demand systems with demand with purchasing power, One would immediately recognize that demand is allocated according to class. The crucial Marxist line of thought that the level of wages and interest rates, etc., are dependent on class structure could be precisely articulated in the subjectivist theory of value. Subsequent changes in the political arena rendered any continued development of this interesting synthesis of praxeological thinking and the Marxist theory of distribution impossible.