History of the Austrian School of Economics

0:00It's my pleasure to begin this year's series in Austrian Economics. As you can tell, they're somewhat biased into the future since the remaining four will occur in March. Today, we're very fortunate to have with us, through the generosity of the William Koch Foundation, Professor Ludwig M. Lachmann. Professor Lachmann was born in Berlin in 1906. And he received his equivalent of our bachelor's degree in November 1927. And as he says in his note here, I'll read this verbatim because it's humorous, it is almost exactly 50 years in these October days that I might call myself a professional economist.

0:50Considering everything that has happened in those years, we may regard this as a dotful merit. He received his degree of Dr. Rerum Politicarum Cum Laude in Berlin in 1930, then as the result of certain political events, found himself leaving Germany and was in England in 1933 where he began research at the London School of Economics under Professor Friedrich Hayek. She received a Master of Science degree in economics from the London School of Economics in 1935. He was the Leon Research Fellow at the University of London from 1938 to 1940.

1:40He was an assistant lecturer at the University College of London, 1941, and was acting head of the Department of Economics at the University of Hull from 1943 to 1948. at which time he moved to Johannesburg and was professor of economics and economic history at the University of the Wittwatersrand. He retired in 1972 from that position and has been since that time a visiting professor of economics at New York University. He has also served as the president of the Economic Society of South Africa from 1961 through 1963. Professor Lachmann has written many articles, reviews, there is a review in the latest issue of the Journal of Economic Literature, you might want to look at, I found it very informative.

2:32His books include Capital and Its Structure, which I understand will be reprinted by Sheaton Ward early next year, The Legacy of Max Weber, Macroeconomic Thinking and the Market Economy, of which I have a copy here, here, and due out in November, November 14th to be exact, we hope, is a book entitled Capital Expectations and the Market Process, also be published by Sheed and Ward. Professor Lachman today will be speaking to us on the subject of the history of the Austrian School of Economics. Professor Lachman. Thank you very much Mr. Chairman for the kind words you've said about me. I duly appreciate the honor the University of Colorado has done to me by inviting me to give this talk here.

3:37I am of course delighted, both for myself and for the sake of Austrian economics. Now, a talk on the history of Austrian economic thought, however condensed it will have to be for the and the obvious reasons had better start with some definition of what Austrian economic thought is. Now, I must warn you that Austrian economics has recently had a kind of revival, And, of course, not all Austrian economists see eye to eye in respect of everything.

4:34With these qualifications, I would say that what distinguishes Austrian economics are three things. Subject 1, subjectivism, 2, a certain attitude to time, and 3, a distrust of macroeconomic entities. Now, I briefly, but only briefly, have to explain what the three mean. The world of nature, when we study it, consists of facts.

5:22The social world consists of facts and the perspectives in which the acting individuals see these facts. A social science, as distinct from a natural science, has to pay attention attention to the perspectives in which the acting individuals see facts no less than to the facts themselves. That essentially is subjectivism for you. That is to say that

5:57when ever in the social sciences a causal explanation is given, such explanation must

6:08Social phenomena are to be explained in terms of human action. All human action is oriented to means and ends. But means and ends only exist in our minds, of course. Hence, acts of our minds have to be taken account of. In fact, all explanation ultimately has to run in terms of them. Brief description, I wouldn't dare to call it definition of subjectivism. Secondly, the Austrian attitude to time. The future is unknowable, though not unimaginable.

7:02It is a different future to each of us. The past is irrevocable. It consists of facts

7:12which are accessible to all of us. The present is always a solitary instant. Future, present

7:23and past are therefore entirely different things. These three kinds of time are heterogeneous The heterogeneity of time is, I would claim, an important Austrian insight, for which most of the credit surely must go to George Shackle in his writings. Once we have grasped this, we shall presumably look with some distrust at any kind of formula Where it appears, be it in the numerator, be it in the denominator, such expressions as DT, DQ over DT or DY over DT is the kind of expression which Austrian economists will look at with some suspicion.

8:273. The distrust of macroeconomic entities, or rather the way certain models in which these entities play a part. Austrian economists don't deny that macroeconomic entities exist, that investment, consumption, export, imports exist of cost. What Austrian economists take Umbridge Ed is a way of looking at macroeconomics as though it were a mechanics of these entities that as it were in the same way as the various planets of our solar system act on each other Investment, Consumption and other macroeconomic entities are supposed to act on each other without any thought ever being given to those forces that govern these entities from the inside.

9:49That is to say, it is not one has no quarrel with macroeconomic entities. One has a quarrel with explaining them only in terms of the effects which these entities are supposed to have on each other when the question why so much is invested is never asked. Now, happily, it's easy for me to beat the origin of Austrian economics. Everybody presumably knows 1871, publication of Menger's Principles of Economics. All of you know that this is The same year in which Revens published The Theory of Political Economy, everyone knows that Menger's name is coupled with that also of Walras, who a few years later published the Element d'Economie Politique Pure.

11:09Now happily I can save myself the task of explaining at some length the important differences is between the three thinkers, because we have now an excellent article by William Traffey, an economic inquiry, December last year, December 1976, in which is called, perhaps the title The truth is, the elegance of the title is not quite up to, doesn't quite match the importance of the content. Jevons, Walras and Menger de-homogenized.

11:55But Jeffy really is concerned with explaining that though all the three thinkers had something to say about marginal utility, exploit the notion of marginal utility one way or another, their aims were really completely different. Let me say briefly that contrary indistinction to Jevons, Menger had no extra grind. Jevons, you all know, was very much the conscious rebel against classical English and Political Economy. Menger was not a rebel against anything in particular. He was on the whole a conservatively minded man. For Walrass, marginal utility was really important within the context of his general equilibrium model. Menger had no such model. For him marginal Marginal utility was important, as it were, in itself, because in it, in subjective value, he found the key to the explanation of all economic processes.

13:16It is, of course, and his formulation was, of course, an act of deliberate rejection of the Ricardian Theory of Value. Menger says essentially that value is not a quality inherent in an object, in a good, in a chair, or in an automobile. Value is a relationship between an appraising and therefore active mind and an object, essence of the Subjective Theory of Value. Unfortunately, Menger got involved in the famous Metodensprite, the dispute on method with certain economists of the drama and historical school about the whole episode, the less said, The better are Menger-Howe. If Menger had taken a somewhat less extreme position on a subject that mattered to him, the task of economics, he said, is to formulate exact laws in the The same way, he said, as is the task of the natural sciences. He then distinguished between exact laws and empirical laws. Exact laws were laws that were not simply verifiable,

15:01but laws which were necessarily so. The task of economics, as of all other sciences, Menger of God, who in this way betrayed the essentially Aristotelian quality of his mind to find the essence of phenomena and to formulate the essence of phenomena in terms of the laws that govern them. It was this more than anything else that made it difficult for the empirically to accept Menger's point of view. Menger also in the 90s, Menger made an important contribution

15:53to the theory of money. He retired from the chair of political economy in 1990. He retired

16:05In 1903, to write those books, that series of books of which the principles of 1871 were supposed to have been only the first. But these books, I regret to say, never were written. So Menger, after his retirement in 1903, lived another 18 years. He never completed another book. Now the other two members of the first generation of Austrian economics were Boehm-Bawerk,

16:55and Visa, Visa in 1884 formulated the principle that you know as the Principle of Money, of Do you know as the principle of opportunity cost, needless to say, a utility theory of value, such as Menger's, at first face the problem that utility can only explain the value of consumption goods which have immediate utility to consumers. Then what about the value of Capital Goods, which have no such direct utility. Classical economics had no difficulty about them. But, now, the Austrians did face this problem. As I said, visa formulate principle of opportunity cost. That what is called cost is really opportunity for gone, utility for I have something more to say about Boehm-Bawerk. Boehm-Bawerk was, in reality, half in Austria,

18:35Half Menger's devoted disciple and half a Ricardian. This should not unduly surprise or, I hope, disturb you. Mises once said, the first Austrians no more knew they were Austrian economists than Columbus and his people knew they had discovered America. They simply regarded themselves as people who made contributions to some important problems. Now, Boehm-Bawerk took up the old Ricardian question. What is the origin and nature of the rate of interest?

19:27When Boehm-Bawerk talks about interest, he means exactly what Ricardo and the English classical economists mean by profit. Now, the question, as it were, is inherent in Ricardo. How is it possible in a competitive economy in which capital goods can be produced and acquired by anyone in a market economy? How is it possible for the owners of augmentable resources like capital goods to derive a permanent income from their resources? We can understand why landlords can derive a permanent income because land is scarce, land cannot be multiplied.

20:16But machines can be multiplied, ships can be multiplied, so why can ship owners derive a permanent income was Boehm-Bawerk's problem. Now in the course of trying to solve this problem of interest. He began to develop a theory of capital which was essentially Ricardian and which did not really differ from Jevenson's. That is to say that production takes time and from which he derived the notion that it would be possible to describe the quantity of capital in a society in terms of a time measure, the so-called length of the average period of production.

21:22Now, Menger never liked Boehm-Bawerk's theory, though for reasons that I'm sure largely lie on the fairly high Austrian standard of academic conduct. Menger repeatedly did make this clear, and also the reason for his dissent, knowing that in 1889 Bernbauer would be publishing the second and most important part of his Vagrant of Capital, The Positive Theory of Capital. Menger, in 1888, the year before, published in a drama journal an article called The Theory of Capital, in which he quite clearly rejected the whole Ricardian approach, in which he says it is quite wrong to look at capital as the produced means of production, which of course is the notion of capital that Boehm-Bawerk had taken over from Ricardo.

22:51Menger's own theory of capital, I regret to say, is something somewhat more difficult to derive. By having read the article several times, I have never been able to make out what Menger's definition would be. In general, what he seems to say is we must regard as capital whatever the market regards as capital. Now, I turn from the generation of the founders to the, as it were, next decade, Robert Hayek in his brief article in the International Encyclopedia of the Social Sciences has called the golden decade of Austrian economics, roughly speaking, 1940-1914, from Menger's resignation to the outbreak of the First World War and the death of Boehm-Bawerk, who died in August Now, this was the decade in which Boehm-Bawerk, who had spent 15 years trying to keep the finances of the Austro-Hungarian Empire in some sort of state of repair, sometimes as

24:32The Minister of Finance, most of the time as the Secretary for Finance, Boehm-Bawerk at the end of 1904 resigned from the Austrian government, and though on his merits and being a close friend of the Emperor Franz Josef, he could have had almost anything he wanted, All he asked for is that a special chair should be created for him at the University of Vienna. Now in this golden decade, when the fame of the Austrian School began to spread, we say Even the gold of that decade was not entirely untarnished.

25:35What Boehm-Bawerk should have done is entirely to rewrite his book on capital and interest in the light of various criticisms. Somehow he never got around to do it and in general spent a decade writing various articles defending his own position and or clarifying it. Also In this, the golden decade, the Austrian School produced three brilliant young men, of whom only one, alas, remained, as it were, as an Austrian. I mention the other two, one you may not know, Rudolf Hilferding, who became the leading Marxist theorist, published a book In 1910, the financial capital contained essentially a defense of Marxism against the revisionism that had been growing in Germany.

26:58Most of what you know as Marxist theories today and virtually all the ideas of Rosa Luxemburg and Lenin were derived from Hilfer Dinsburg. His idea being fundamentally, capitalism has now changed in character. Marx dealt with a competitive capitalism. The modern capitalism as of 1910 is a monopolistic one. He insisted that the monopoly was an artificial one which which the banks had imposed on the industry. Now, the second brilliant young man, so well known that I only need mention him, Schumpeter. It was of course a great tragedy of the Austrian School that Schumpeter somehow dissociated himself from the Austrian School and now became Schumpeter regarded Wallrasian general equilibrium as the most important economic idea ever in judgment to which the other Austrians, of course, would not agree. Therefore, Schumpeter And Salerno has to be regarded as one of the most, if not the most important Austrian economists.

28:30He did not belong to the Austrian school properly, properly speaking and certainly would not have regarded, would not have regarded himself. So now the third was finally Ludwig von Mises. Mises in 1912 wrote a book on the theory of which contains some thoughts which, though the book, the monetary economics of the book is essentially Riccardian economics, yes, Mises himself would rest classical, contains And some interesting new ideas about how these thoughts would have to be extended to credit.

29:32If you are at all interested, if you read Cain's review of this book by Mises in the The Economic Journal, September 1914. You will easily understand why Mises hated him ever after.

29:58I turn to the 1920s. In the decade of the 1920s, we find, as it were, a new man in Austrian economics. Boehm-Bawerk Diet in 1914, Visa Diet in 1921. I should mention as one of the great Austrian achievements of the Golden Decade, that when German economists published an encyclopedia, Grundriss der Soziale Ökonomik edited by the famous Max Weber, it was Wieser who was asked to write the volume on economic theory, a book called in English, The Theory of the Social Economy, published by Julian Schumpeter in 1914. It shows you that by then the Methodenstreit suddenly was over.

31:25Also, young Schumpeter wrote the volume on the history of methods and dogmas. In the particular drama set, let's say the methodological part, the part on the history of methodology was contributed by Schumpeter and was of course a brilliant effort. Schumpeter's history of economic analysis, which you all know, is simply a father. It is based on his 1914 contribution to the Gondres. Now, I turn to the 1920s when we see new men and a new generation coming In the 1920s, the Austrian school seems to have had two poles, etc.

32:36At the University, there was a new man, Hans Meyer, and on the other hand, Mises was, throughout of the 20s, Secretary of the Chamber of Commerce, Around Mises there gathered three young men, Havela, and Fritz Machlopp, whose name I'm sure you know.

33:35Since you all know about the work of Havela, Machlopp, I needn't say much more. Iyer, on the other hand, had two pupils, one Schoenfeld Lee, and one P. N. F. Rosenstein-Rhoder.

34:16I'll say something about Hayek's work in a minute. Mayer himself, right through the 20s, contributed to the further elaboration of the Austrian, of the Austrian Method, and though Meyer was a strange man in many ways, he has made important contributions to Austrian economics. Now Schoenfeld in 1923 and above, never been translated into on Marginal Utility and the Economic Calculers, Jens Sonsen and Richard Zwerchner, tried to extend the theory of marginal utility to what we would now call the equilibrium of the individual.

35:28Vice-Rosenstein Rodin was honored by being asked to write the article on marginal utility for the German encyclopedia, the Huntwerter book in 1929, a very great honor for such a young man and a task he equated himself of brilliantly. Now the main important events of the 20s were that Mises now emerged as a prominent Austrian economist as it were in In his own right, early in the decade, 1922, he had asserted that a socialist economy could never work unless it had markets and unless actual prices were charged. You probably feel Unimpressed by such statements, but in considering the views that were put forward by many members of the left in those days, the turbulent days after the First World War, there was some considerable merit in this, and even as far with the socialist as Oscar Lange confirmed and the importance of Mises' contribution by saying that in any future socialist society

37:10there should somehow be a statue for Mises simply for having directed their intention to an important problem. Now the other respect in which Mises came to look for was now as Menger's air as regards methodology. Most of the Austrians had on the whole thought rather shy of Menger's insistence on the exact laws that we must find, that it is not enough to find empirical laws, anyone can do that. We have to find laws that are logically necessary. Mises, of course, would He did not accept the Aristotelian philosophy inherent in Menger.

38:18He borrowed some ideas from the German neo-Kentian philosophers of the first part of the first decade of the century and in particular of one idea of the great German thinker Max Weber In a discussion with one of the members of the historical school hostile to the Austrian School, Weber, though describing himself as no Austrian, said that there is such a thing as a logic of success, that it remains a fact that if we wish to attain ends, we must employ of Certain Means. There is such a thing as a logic of success, which is true, as it were, a priori. Mises built his own, a priorism, more or less, on this argument of labor.

39:31I now come to the next talk at the early thirties, or the decade of the thirties, which I better describe as a brief moment of glory. Hayek had started as a trade cycle, as a trade cycle in Germany in the 1920s, in 1931 in the book Prices and Production, and again in the days of the Great Depression, in which anyone who had some new explanation of what was the cause of the depression could be reasonably sure of at least a hearing.

40:39Now, Hayek combined Boehm-Bawerk's theory about the structure of production with the Wixilian notion that differences between the money and the natural rate of interest would would have important effects. Now, Wichsel himself had always rejected the notion that the difference between money and natural rate could be used for any explanation of the trade cycle and had warned his fellow by those Swedish economists against such fallacies, but Hayek, as it were, did combine the two and for a moment became a famous man. The moment of triumph was when in 1931 he was appointed to a chair at the London School of Economics.

41:53Another remarkable event of the time was the great success of Robin's book on the nature and the significance of economic science. At the same time, Streatis, economic on November 31 and February 1932, the next step and one can see now the first step at the decline of the influence of Austrian economics was and in the end the triumph of kinesianism made an end for the time being of the moment of glory of the Austrian School.

43:08When we came to the London School of Economics in the spring of 1933, I think it's fair to say that with a very few exceptions everybody was an Austrian. When in September 1939 the London School of Economics closed for the war, I think Hayek and I were the only Austrians Now, I have a few minutes, I think, to talk about the years in the wilderness and the recent The revival of Austrian economics. Even in the years of the wilderness, I think at least one important, I would say at least two important contributions were made to Austrian thought.

44:07One is Mises' great book, Human Action, which was published in English in 1949. Mises, who who had left his native Austria in 1934 and had first settled in Geneva and later on in New York, for once found the time to write a comprehensive treatise. It means that human action still is the most comprehensive treatise on the social sciences and not economics only that the Austrian School has got. The other important contribution, I would say, was Sheckle's first writings from Expectations in Economics in 1949, and in particular his Otterdam Lectures of 1957, Time in Economics, He first presented the thoughts on time that I try to condense in my few introductory remarks.

45:16It looks as though at the moment we are having an Austrian revival. There are, I think, certain straws in the wind, and I would regard certain preferences by Sir John Hicks as the most important among them. I simply state certain facts. In Hicks's Capital and Growth of 1965, we Austrians rated exactly one footnote, in which In 1967, we find the Hayek's story as the last of his critical essays in Monetary Theory, and Monetary Theory, in which he explicitly says Hayek has been misunderstood, he has some important things to say, perhaps he misunderstood himself, he thought he was a business cycle theorist when he really was a growth theorist. And in 1973, as you know, Sir John has published a book, Capital and Time, which is quite clearly in the spirit of Boehm-Bawerk and which is officially described, he describes, as a neo-Austrian, as a neo-Austrian theory. But the most important

47:01contribution to the Austrian revival, I think, is George Shackel's book of 1972, hardly exists In English, I better put it down, epistemics and economics. Epistemic simply means a word for knowledge. Clearly, it is about the importance of knowledge for economics. I must not omit to mention my colleague Israel Kirzner's important book of 1973, Competition and Entrepreneurship.

47:57I would like a conclusion. I think I should say that as so often events external to those who were the ultimate, who were the beneficiaries, started a course of events which enabled certain Beneficiaries to Draw Benefits. If the famous neoclassical symphonies of Hicks and Samuels hand-lived had been viable for longer than it has proved to be, I think the Austrian revival would have been far more difficult. Most economists, now I take it except, and Not only since Leon Heffert and the neoclassical synthesis, the strange combination of Keynesian macroeconomics and Samuel Tzionian microeconomics is simply not viable.

49:04The two parts belong to different worlds, and I think there is a realization of this which has somehow helped the Austrian revolution.