History of the Austrian School of Economics: Question and Answer Session

0:00Professor Lachmann would be very happy to try to answer some of your questions you might have. And so I will turn it back to him if some of you have some questions. If not, I have a question I'd like to ask him. It seems to me from my reading that in the late 30s, that Professor George Stiegler was very sympathetic to the Austrian School and his first edition of Price Theory, I forget the exact name of it, I've been told by some is essentially an Austrian work, but since the end of the war, he is, I would say, antagonistic towards the Austrian approach. I wonder if you have any ideas on that? If my interpretation is correct first, then secondly, if it is correct, what about the change do you think?

0:58I don't think Stigler has ever had much of, as it were, sympathy for the Austrians. We mustn't forget that Stigler, of course, was the favorite pupil of Knight. Now, Knight's position on this, as on so many other things, was somewhat ambivalent. Unfortunately, at the very moment when the Austrians ought to have concentrated all their efforts on dealing with Keynes, which was the great challenge of the 1930s, They spent part of their effort on a quarrel with night for night and in a series of articles attacked the Boehm-Bawerkian theory of capital and in the very month, February 36, in which Kinzel's general theory was published.

2:11Hayek, as it were, started a whole polemic against Knight, called the mythology of heaven. So that, in addition to everything else, the Austrians had this quarrel with Frank Knight on their hands, I think that explains Stigler's attitude. Surely what he has to say about Boehm-Bawerk and the history of production and distribution theories is anything but friendly. Yes, I wonder if you would give us some insights as to the type of policy recommendations that are likely to be generated by economists in the Austrian School.

2:58We know what Keynes' approach is and the need for fiscal policy, we know for instance what Friedman feels in the way of monetary policy. Is there any sort of policy outlook that the Austrian School would say that? Yes, there is, in favor of the market. The market will work in such a way that whatever knowledge there exists in any corner of society will become diffused because it is profitable for those who possess such knowledge to make use of it. But you cannot make use of knowledge you have without letting others know. This is fundamentally Hayek's argument, if you like, for the free market. You find in the article the use of knowledge in society, which is reprinted in Hayek's volume, Individualism and Economic Order.

4:00Question in the back. Do you consider Milton Friedman to be essentially Austrian in his viewpoint, and if not, where are the differences between him and the Austrian school? I would say, on all practical matters, so far as I can see, Austrians agree with Friedman. Whatever Friedman has to say in defense of the market economy, I'm sure all Austrians agree with him.

4:46Where we disagree, of course, is on methodology. I would say that what Professor Friedman appears to regard as a methodology isn't a methodology. If, for instance, I read Friedman's Nobel Prize lecture on inflation and unemployment, I'm willing to go along with everything except the beginning and the end. Except the beginning, because the beginning again contains a summing up of what he appears to regard as his methodology and in the end where he as it were contrasts his own position with that of Keynes and I think he is somewhat unfair to Keynes.

5:45Man is an old man. After all, it is permissible to ask, where would Friedman be without hands? But one doesn't have to be an Austrian to ask that sort of question. The Austrian School has a view on macroeconomic policy, a set of policy prescriptions for the macroeconomy, I imagine directly towards the government. The Austrian policy prescriptions for a macroeconomy simply follow from what I said, that if you interfere with the market, you prevent some knowledge which exists from becoming diffused.

6:50In the British situation of 1932, Hayek and his friends rejected the proposals of Keynes and some non-Keynesian British economists that at the bottom of the depression the government Hayek has now realized that that was wrong. That is to say, I think Austrians today would not reject all measures to relieve unemployment and increase employment in a situation in in which nothing really is scarce.

7:48In this respect, I think Austrians would have, Austrians have learned. It remains a fact that I think most Austrians will hold that as long as we are living in in a world in which money wage rates can only rise but never fall, it is inevitable that we should have a more or less permanent inflation, which is bound to be worse. That is Hayek's view and I think most Austrians would accept that. What do you think of Hayek's proposals for the denationalization of money?

8:34I am asked a question about Hayek's new pamphlet on denationalizing money. I am afraid I have not quite understood that proposal, I am sure. I have thought about it, I have talked to Hayek Could we take something very alive to this? What would the Austrian position be on the role of gold, then, in a monetary system? And secondly, what might Mises' idea be as opposed to the Austrian one?

9:25Now, Mises, of course, was a great defender of the gold standard, and Mises appears to have thought that in the end only a gold standard can vouchsafe us a world without inflation. I don't think that all Austrians would agree to this. Speaking for myself, seems to me obvious, that in the present world, in a world in which money, wage, rights can only rise but never fall, any attempt to return to the gold standard will simply defeat itself. The price of gold will always turn out to have been too low.

10:19As regards the Friedman Proposals, Hayek's view has been that since this is better than nothing and certainly better than the world we have got, he would be willing, as it were, to go along with it, but he didn't feel sure that modern credit creation would not be enough. be able to, as it were, to find loopholes for inflation even in such a Friedmanian world. Yes, it seems to me that, from the Austrian point of view, there is nothing in principle against Friedman's proposal of a fixed rate of increase in what is called high-powered Suppose the Austrian economics came into power in a country where currently there was a great unequal distribution of wealth based on past non-Austrian pre-market principles, the original The Austrian point of view is that it is quite wrong in a market economy, if we are talking about it, to speak of any given distribution of wealth. In a market economy there is a

11:59In the stock exchange every day capital gains and losses are being made. There is no such thing as a given distribution of wealth. There may be one today, next month, two months time, it will be different. The Austrian point is that as the market not merely distributes incomes It also distributes wealth, and any attempt to interfere with the wealth-distributing function of the market must have the, as it were, the obvious consequences.

12:46Let me put it to you like this, suppose you, society could agree that the existing distribution The distribution of wealth is unjust, so we'll have some system of capital levies, as a result of which, on the 1st of January, 1978, we'll have a distribution of wealth which is completely just. As long as we have a market economy, the distribution of wealth in February will be different from what it was on the 1st of January, and in April it will be even more different. Professor McKee Whatever one may think of that came to the forewell of the neoclassicalism synthesis, it has generated a number of empirically testable hypotheses.

13:43To consumption function to name just one, both in the aggregate and for individuals. I was wondering what empirically testable hypotheses the Austrian School has generated The answer, sir, is that the Austrian economics is not that sort of economics. I tried to explain that a social science cannot be practiced the way a natural science can be because there There are problems of which the natural sciences know nothing, the problems of the interpretation of meaning.

14:28If you in any case, an empirical hypothesis testable, presumably would be only testable in over a certain time, at another time it would be different. It is not that Austrians despise statistics. Austrians interpret statistics or Austrians regard all statistics as essentially historical records, records from which we can learn a lot about history, of course, and in so far as history moves slowly, we can learn A lot from them about the present, but this particular formulation, the testable hypothesis, is presupposing an unchanging world, because testable, presumably, a la Friedman, by making predictions.

15:32And I spent some time at the beginning to explain why, where human action is concerned, is not possible. You will ask, and rightly, what do we do then about assumptions? We have to make some assumptions. How do we distinguish sensible assumptions from others if we cannot test? The answer is precisely because we cannot test hypothesis. We have to be very careful When we introduce assumptions, we can't generalize without introducing assumptions. But we should be very, very careful when introducing such assumptions.

16:21That seems to me to be one of the lessons. What in the view of the Austrian School is the proper role of government? I mean, how big should government be? What kind of a role does it play? How much should taxing and spending influence economic activity? Should it be completely hands-off, laissez-faire, or does it regulate the market, and if so, how? The Austrian view is the view, as far as I can see, of classical liberalism. The market cannot exist, to be sure, without a certain institutional framework. That is true. So there must be a state. Most Austrians are not anarchists, though they are some who are.

17:19Now, the role of the state, on the other hand, should be confined fundamentally to upholding property and contract, protecting property and protecting contract. But there is no doubt, Austrians will point out, that there is a difficult problem in In modern democracy, where the distribution of votes is such that everybody has one vote, those who are economically unsuccessful can, with their voting papers in their hands, partly nullify that distribution of wealth and incomes that the market has brought about.

18:10This is, I think, the fundamental problem of modern democracy, which Hayek has not always accepted, but he now does accept it, that there is a problem of society in which the market distributes incomes in one way and then the voters try to redistribute it in another way. There is a problem. Is Austrian methodology consistent with Carl Popper's theory of scientific discovery? It is completely consistent, sir, with the latest version of Popper's methodology, the One he presented to the Mont Pelerin Society in 1972 under the characteristic title, Indeterminism is not enough.

19:09And where Popper says that there are three worlds, there is the world of nature, which we deal with in the ordinary way by natural science, there is the world of our feelings and Sentiments, which to which there is no scientific access, but there is what he calls world three and I permit myself to add, as it were, in parenthesis or in a footnote as it doesn't belong to my theme, so far as I can see is what Hegel meant by the realm of Objective Mind, the manifestations of the human mind which are accessible to us.

19:58It seems to me that Austrian methodology is consistent with that distinction between the world of nature which is not accessible to our understanding and the world of human action which is. I may add that this also was Keynes's view. I have, at the end of the review, that Professor Glan was kind enough to quote. I have a quotation from Keynes, from a letter of his to Herod, on the matter of natural and social sciences. I will, as I've learned Cane's in a letter to Herod, 16th July 1938, upgrades him for not having defended sufficiently and very strongly the methodological independence of the social sciences, saying the social sciences are moral sciences and we must continuously say so. And then he continues trying to explain to Herra the difference between the social sciences and natural sciences. It is as though the fall of the apple to the ground depended on the apple's motives, on whether it was

21:39on whether the ground wanted the apple to fall and on mistaken calculations on the top of the apple as to how far it was from the center of the earth. I'm very interested in either yours or the Austrian's solution to this fundamental problem of democracy versus the market that you've outlined in the previous question. This depends now on what you believe of human nature. If you believe that all men are rational in the sense that they will learn from experience. If you believe that it is possible to persuade workers that trade unions are not really in their interest but that a world without trade unions would be a better world for them too. Then, if you like, that is the way out. There is nothing those who have these, who are inspired by these ideas, but continuously to go about and telling their fellow citizens that this is so. If we do not succeed in this, all I

23:20What I can do is to retreat to the position, the general position that the future is unknowable or not unimaginable. Thank you very much.