The Book That Saved Economics

0:00According to conventional accounts, the scientific doctrine and influence of Austrian economics developed steadily from 1871, when it was founded, until well into the 1930s. By 1936, the Austrian school was riding high and at the peak of its international influence. However, suddenly, tragically and completely, the school was buried under the Keynesian avalanche of statist nonsense. The Austrian School was not revived until 1974 when Friedrich Hayek, the most eminent member of the fourth generation of the school, was awarded the Nobel Prize in Economics. Now, this conventional story of the development of Austrian Economics is wrong on two counts. First, Austrian Economics, in terms of its core doctrine of value and price theory, reached really the pinnacle of its influence not in 1936, but in 1914.

0:57From that point, its influence declined rapidly until by the early 1920s in most countries, including Austria herself, it had been substantially displaced by two rival approaches, which I'll talk about, two rival schools of thought. The second problem with the conventional story is that it neglects the crucial role of human action in the revival. In my talk I will present a revised account of how and why the Austrian School already had become a closed chapter of the history of economic thought by 1936, the year of the Keynesian Revolution and its supposed demise. And I also shall address how Mises single-handedly diverted the entire course of intellectual history by writing and publishing Human Action and thus reviving the Austrian School.

1:50Let me begin my story with the founding of the Austrian School in 1871 by Carl Menger. Menger's purpose in writing his great book, The Principles of Economics, which I highly recommend to everyone, it's certainly amenable to reading by laypeople, was to formulate What he called a theory of price based on reality. Menger realized that the explanation of how actual prices are determined on real markets is the core of economic theory. The theory of price originated not only, that Menger originated, was not only realistic, but it was also systematic. It explained all economic phenomena, by that we simply mean prices, wages and interest rates, exclusively in terms of consumer values and choices. At about the same time, a Swiss economist, Leon Walras, independently arrived at the conclusion that human values and choices are important in the process of determining market prices.

2:43However, unlike Menger, whose theory was based on verbal, common sense, cause and effect analysis, Walras tried to explain price formation using the mathematical equations of astronomy and classical mechanics. As a result, Oratze's theory, which came to be known as general equilibrium theory, described a timeless and mechanical economy that was peopled by pre-programmed robots, and it was wholly unrealistic. Later on in 1890, a British economist named Alfred Marshall attempted to develop a realistic theory of price by focusing on the decisions confronting businessmen. But Marshall's so-called partial equilibrium approach to economic theory turned out to be superficial rather than realistic.

3:31It neglected the fact that the ultimate causes of all prices and costs lay not in the ledgers of the businessman, but in the very souls of consumers. So those are the two schools that at the time were competing with the Austrian School, the general equilibrium school, the mechanical school of thought, and the partial equilibrium school, School, which ignored a large part of economic phenomenon. Against this background, I will now briefly trace the development of Austrian economics after World War I. It should be kept in mind that the heart of all systems of economics is the explanation or theory of price. Mises himself said that, quote, economics is mainly concerned with the analysis of the determination of money prices of goods and services exchanged on the Market."

4:21The heart of Austrian economics was beginning in 1871 and continues to this day to be Menger's causal realistic analysis of price, the simple, obvious cause and effect analysis that begins with human wants. Okay, now let me, again, just talk about the heyday of Austrian economics prior to World War I. In the early 1880s, Menger's first followers of Boehm-Bawerk and the latter's friend and and brother-in-law, Friedrich von Mises, began to publish, and as the decade progressed, the growing stream of publications by these people, by these men, and by others who had been influenced by Menger in Austria and elsewhere, increased to a flood. By the end of the decade, there emerged an identifiable Austrian school that was known to the rest of the world. So by 1889-1890, there was an Austrian school with an international reputation.

5:13It is important to note that even at this early stage, the Austrian School was deeply divided on a crucial issue. On the one hand, Boehm-Bawerk fully absorbed Menger's approach to price theory and tried to develop it further and apply it to new areas. On the other hand, Wieser, Boehm-Bawerk's brother-in-law, who refused to talk with him about economics for whatever reason, maybe because he knew he was wrong, sees now only on Menger's subjectivism and completely ignored the structure of reality-based price theory that Menger had tried to build. Mises' purpose was to construct his own unique mechanical general equilibrium price theory, linking it through the concept of marginal utility, which was Menger's concept, to the foundations in human psychology.

6:02But despite this early split, in the three decades, from 1884 to 1914, the Austrian School flourished and substantial progress was made in developing Menger's approach into a complete theory of price. Just to mention some names that are important in this period, the progress was embodied especially in the works of Boehm-Bawerk, Wickstede in Great Britain, J.D. Clarke, Frank Fetter and Herbert Davenport, who were the members of an important school in the United States. The peak of the influence of Menger's theory coincided with the publication of treatises by Wickstede, Davenport, and Fedder in the years 1910, 1913, and 1950. And Hayek, as I said, a member of the fourth generation, wrote, quote, In the early post-war period, the work of the American theorists John Bates Clarke, Thomas Nixon Carver, Irving Fischer, Federer and Davenport was more familiar to us in Vienna than that of any foreign economist except perhaps the Swedes.

7:02So by this point, the Austrian School was truly international by World War I. Come next to the reasons for the decline of the Hungarian tradition, which had reached this zenith of influence. Unfortunately, the Austrian School and its causal-realistic method declined swiftly from the peak of its influence. There are four basic causes of this decline. The first involved events that occurred in Vienna in the decade leading up to the First World War. These included, most importantly, the premature withering of Boehm-Bawerk's vital and creative powers. He was really the leader of the Austrian School from 1890 onwards. I'll explain why his creative powers didn't decline.

7:47He died very young in 1914. At the same time, there occurred a flowering of the creativity and intellectual influence of Joseph A. Schumpeter, someone who's always ignored in the story of the Austrian School. The second factor was a rapid rise of the partial equilibrium of Marshallian economics in English-speaking countries to almost complete dominance by the 1920s. Austrian economics was shunted aside in the United States and Great Britain by the early 1920s. The third factor that served to undermine Austrian price theory was a great stimulus given to research in general equilibrium analysis at the London School of Economics either by Ludwig von Mises and Friedrich Hayek in 1931. Finally, the Mangerian approach itself contained important problems. There were only two generations of economists that were working on this approach up in 1914. They couldn't solve all problems, and they left a few glaring holes in the theory.

8:46And unfortunately, what this allowed people to do was to confuse the Austrian theory with the other two theories, the Mechanical General Equilibrium Theory and the Unrealistic and Partial Marshallian Theory. And I'll say a few words about each of these, but especially on the first. Why did the Austrian School begin to decline in Austria in about 1903? Well, as I said, Boehm-Bawerk had assumed the mantle of leadership of the Austrian School for Menger by 1890. He was now an international personality. The problem, however, was that in 1889, Boehm-Bawerk went into government service, which was a big problem, where he remained for 15 years.

9:32Now, he did write during these years and he did follow the literature and the evolution of Austrian economics. But when he returned to full-time academic pursuits in 1905, he was, in common parlance, completely burned out. He himself said that he was an old man. I'm already an old man. He was in his fifties. Which is scary because I'm nearing that. Mises himself noticed this about Bomerberg. Mises said, Bomerberg could have produced much more if conditions had permitted it, But his physical constitution could no longer stand the hard work necessary to embark upon great works. His nerves were failing him. The two-hour seminar already taps his strength.

10:18Well, I teach a two-hour class and my nerves fail me. Well, I have to deal with the students during that period of time. But this seemed to be more deep-seated. One of the reasons for this was that Boehm-Bawerk undertook an enormous workload while he was in government for the fifteen years. Took a very long, great toll on his health. Meanwhile other problems were brewing in Vienna. Menger retired from the University of Vienna in 1902 and Wieser, the bad guy, acceded to his chair the following year. And as we said Wieser followed the Volrasian generally moving approach, the Price Theory. Now this wouldn't be so bad, but at about the same time Trumpeter, a brilliant man, entered the University of Vienna in 1901. in 1901, and he began to study economics under Wieser in 1903.

11:07The fateful meeting of these two men as teacher and pupil marks the beginning of the downfall of the Mengerian approach to price theory in Austria itself. Schumpeter was deeply influenced by Wieser, I'm quoting here, and quote, their ideas on many topics in economic theory bear great similarity, unquote. Schumpeter himself identified von Ross, a mechanically delivering theorist, and Wieser, In this first book, quote, as the two authors to whom I felt closest affinity. This book, which was translated as, actually it wasn't translated, but the title translated as The Nature and Essence of Theoretical Economics, was published in 1908 and was an attempt to explain and defend the use of the model of general equilibrium as the main tool of pure economic analysis.

11:55The book immediately propelled Schumpeter to the front ranks of economic theorists on on the Continent and established him as the preeminent member of the third generation, that's Mises' generation, of the Austrian School. Wieser, Walras, Clark, great names in international economics all favorably reviewed the book by Schumpeter. However, Boehm-Bawerk bitterly attacked the book, which was on grounds that were legitimate. However, unfortunately, for reasons I can't understand, Boehm-Bawerk did not have anything, well, he did not have anything good to say about this book, Das Bessen, which is the essence. He evidently considered Schumpeter an outstanding economic theorist, who had just gone wrong.

12:44Now, Boehm-Bawerk, this is a very strange situation in the history of economic thought, which up to this point hasn't been dealt with. Boehm-Bawerk's strangely ambivalent attitude towards Schumpeter, his contempt for his work, but his esteem for his abilities, is starkly revealed in letters that he wrote to another great economist, in a letter dated July 9th, 1912, Boehm-Bawerk wrote, Schumpeter is also very young, and of course, he neither could possibly have been able to master the gigantic undertaking, meaning his book, that he has ventured to tackle. But I consider him to be very talented. About his next, second book, you will probably be shocked even more. He has developed his theory of interest, which I consider to be totally wrong. So he thinks Schumpeter is totally wrong at everything.

13:29In fact, Boehm-Bawerk penned a bitter 60-page attack on Schumpeter's theory of interest. And after a 40-page reply by Schumpeter, he returned to the attack and a 20-page rejoinder. Yet in another letter, in April 1913 written in a big cell, Boehm-Bawerk alluded to, quote, the clever but insubstantial fantasies of Schumpeter, unquote. But in correspondence a few months later, in September 1913, Boehm-Bawerk was again singing the praises of Schumpeter's many talents, while dismissing his work as superficial, quote, So, with our young economists, I am also not in agreement. Schumpeter I consider to be the most gifted among them, and if he could find his way from his present cursoriness to solid and meticulous research, he could, with his ability, make important contributions to science.

14:21We hadn't yet done this after two books, but yet Boehm-Bawerk held that great hope. Now, it's instructive at this point to contrast Boehm-Bawerk's treatment of Schumpeter with that received by Mises in these same letters to Vicksel. Whereas Schumpeter is affectionately portrayed as a brilliant, if rambunctious and willful child, Boehm-Bawerk's references to Mises do not portray the slightest degree of personal regard or appreciation for his abilities. Despite the fact that Mises had been a regular participant in his seminar for seven years, for example, a letter dated August 1912, Boehm-Bawerk requested that Vicksel write a review of Mises' Theory of Money and Credit. We mark it, quote, You have probably also recently received a book on the theory of money by a young Viennese scholar, Dr. von Mises.

15:09Mises is a student of myself and Professor Bieser, which, however, does not mean I would want to take responsibility for all his views. I have just begun to read this book myself, and am not yet familiar with its content. It's strange that he would mention that. Similarly, in the three subsequent letters written over the next twenty months, in which Boehm-Bawerk referred to Vicksel's review of Mises's book, there is not a positive word conveyed concerning Mises's contributions or abilities. From this, it must be concluded that even Boehm-Bawerk, despite his profound objections to Schumpeter's approach to price theory, considered him far and away the most promising of the Third Generation of Austrian Economists. Now, this had tremendous consequences. From a worldwide point of view now, Boehm-Bawerk, or Schumpeter, was being proclaimed by his teachers, Wieser and Boehm-Bawerk, as their most brilliant student, and he was attaining, at the same time, the youngest full professorship in Austria-Hungary's second-most prestigious university.

16:09And that full professorship was gotten in his behalf by Balderberg. When his second book, The Theory of Economic Development, appeared in 1911, it was greeted with broad acclaim and almost immediately established his reputation among the international community of scholars. According to one of his biographers, Schumpeter's development book, as he had called, made him world famous among serious economists almost overnight in 1911. While his first book had alerted the profession to a rising new star, his second one and cemented his position as the wunderkind of economics and identified him as the most outstanding theorist of social and economic development. So now this is the leading member of the third generation of the Austrian School. The decade leading up to World War I best represented the watershed decade for the Austrian School in the nation of its birth.

17:00A physically debilitated Boehm-Bawerk, although still an influential teacher, was no longer able to undertake original work with pure theory, while Menger had already retired from active teaching and publishing in 1903. In this situation, the publication of Schumpeter's two books sparked a powerful movement to recast the price theory of Austrian economics along the lines of verbal Eurasian general equilibrium analysis. Basically, it's mechanical analysis without the math, but still not the dynamic analysis of Menger. The publication of Wieser's treatise, which occurred in 1914, added momentum to this movement. Remember, Wieser was Schumpeter's mentor, and he also was a volatilist. Since Wieser's book, which was later translated into English as Social Economics, was the first comprehensive treatise on economics produced by the Austrian School, this meant that the field of pure theory was now almost completely dominated by the general equilibrium wing of the school.

18:01Now, the momentous consequences were this. The fourth generation, that was Hayek's generation, entered the University of Vienna after World War I. Who was their teacher? Their teacher was Wieser. Hayek called him the Grandseigneur of the Austrian School. He also called him my revered teacher. And Hayek always considered himself an adherent of the Wieser tradition, rather than the Boehm-Bawerk and Mises tradition. Also, Magluck called Wieser his first major teacher. Fritz Magluck was another important member of the fourth generation. Gottfried Haveler, another member of this generation, took Wieser's course. And Oscar Morgenstern, another member of this generation, also was very close to Wieser.

18:48So now here we have the upcoming generation of the Austrian School having fallen under the wing of the General Equilibrium part of the school. So even more important than Wieser's treatise, which they all read when they went through his course, was Schumpeter's first book, which as I said was called Das Vestige, in which he defended the General Equilibrium model as a core concept of pure economic theory. Hayek referred to this book in 1980, looking back, as his first brilliant book, quote-unquote, and argued that the ideas in this work are certainly essential enough to the understanding of the development of economic theory. Hayek also revealed that, quote, of course, Schumpeter's two pre-war books and his essay on money were familiar to all of us of the fourth generation, unquote.

19:38Morgenstern, one of Hayek's cohorts, recollected that, quote, The work was read abidantly in Vienna even long after the First World War, and its youthful freshness and vigor appealed to the young students. I myself remember what sort of revelation it was to me when I first laid hands on it, and like many others of my generation, I resolved to read everything Schumpeter had written and would ever write. So my thesis then is that Schumpeter, this is a controversial thesis, had an enormous influence on Hayek and his cohorts. But what of the tradition of Menger and Boehm-Bawerk during the 1920s? Wasn't Menger's principals, after all, still the guiding star of the Austrian school? And wasn't Mises, the long-time student of Boehm-Bawerk, now teaching a university seminar and conducting his own privat seminar, basically a private seminar in his own office?

20:30Regarding Menger's direct influence during this period, although he was still alive, It was more a myth than a reality to quote Hayek to the fourth generation, particularly since his book had become a great rarity which was practically unobtainable as a copy that even disappeared from the libraries unquote. And though it is true that Mises was a popular lecturer at the university, he lectured as an unsalaried, pre-bac-dos-en, basically an unpaid professor who taught one course a semester, unlike us who are unpaid professors that teach three or four courses a semester. In the early 1920s, Mises hardly rivaled Beezer in prestige as a teacher, or Schumpeter in reputation as a pure theorist.

21:16In addition, Mises' university course was an advanced seminar that reflected Mises' research interests and did not really focus on value and price theory. Regarding Mises' private seminar, this was even less focused on pure theory. And students were only allowed to attend after they had already received their degree, so it was unlikely that he had a formative influence on Hayek and the others in theory. In fact, and I won't go into too much detail, Mises did influence Hayek, but through his political-economic writings and through his monetary writings, not in terms of his pure theory. Theory. His book Socialism, Hayek said, did greatly affect the world view of the fourth generation. But that was basically on political grounds, not on purely theoretical grounds.

22:08I also want to put forth another controversial thesis. If you look at the works of this fourth generation in 1930, Machlif Borkenstein Habler and Hayek himself, were all generally political If you look at Hayek's early work on business cycle theory, monetary theory and trade theory, he made it clear that successful business cycle theory must be logically integrated with the fundamental propositions of the theory of equilibrium. And by equilibrium theory, Hayek explicitly understood primarily the modern theory of the general interdependence of all economic quantities, and Quantities, which was most perfectly expressed by the Lausanne School of Theoretical Economics. All that means is that Hayek believed that the Bolrasian equations were the core of economics, something that Menger and later Mises completely rejected.

23:00Now it's true, Hayek himself did try to break out his Bolrasian box. and he struggled mightily between 1933 or so and 1945 to try, he realized the inadequacies of general equilibrium theory and he tried to replace it but he was really unable to. In 1945 he came to the conclusion that, well, the economy was always near enough to general equilibrium that all the data, the scattered knowledge in the economy was brought together and the result was that we got prices and we got outputs that were very like general equilibrium. So, it was still the center of his theoretical view. Now, that's the first factor I wanted to deal with. That economics in Austria itself led to a decline of dynamic, mangarian, causal realistic analysis.

23:54A second factor, I'm just going to state it, I'm not going to talk too much about it, is the rise of the economics of Alfred Marshall. Basically, as I said before, it's a superficial view. It's focused on the businessman and not on basic human, fundamental human values and choices. Marshall was a very unlikable man, but he was able to gain a very great influence in English-speaking economics for various reasons. So that by the 1920s, British economic theory was all Marshallian, Except for one particular section, which we'll talk about, and that was at the London School of Economics in the Rockies. And even in the United States, I won't go into too much detail, the great Austro-American school of Clark, Fedder and Davenport, due to personal animosity between two of the people, Davenport and Fedder, they hated each other's guts basically, they failed to really generate a second generation, or produce a second generation of Austro-American economists.

24:54And in fact, Hayek himself, when he visited America in the early 1920s wrote, I must confess that from my predominantly theoretical interest, the first impression of American economics was disappointing. I soon discovered that the great names which were household words to me were regarded as old-fashioned men by my American contemporaries. That work on their lines had moved no further than I knew already. So by 1921, 1922, the American-Austrian School is dead. Okay, and then Hayek attends it to that. Also, I deal with, in my paper, and I'll just briefly mention it, that the Austrian School did make them headway in France and Italy, but it soon lost out to a sort of eclectic, bastardized combination of German historical economics and classical economics.

25:47Okay, so by 1920, it was really gone in Italy and in France. In Germany, Germany was under the influence of the historical school, which didn't believe in theory. They began to become curious about theory again in the early 1920s, but the book that reawakened their curiosity was not an Austrian book, but it was a book by a Swede named Gustav Kassel, and it was basically of Eurasian verbal general equilibrium, basically mechanical equilibrium without the equations. Which brings us to the third factor. This is Hayek and his influence in transforming economics at the London School. By 1930, there remained one seemingly impregnable academic stronghold of mangarian economics in Europe. The economics department of the London School of Economics headed by Robbins, Lionel Robbins. But events were already developing elsewhere Here in Europe, that would rapidly and fundamentally transform the character of LSE economics.

26:54In the early 1930s, the Austrian School had begun to melt away in Austria as more attractive prospects abroad, or the national socialist threat drove the leading Austrian economists to emigrate to Great Britain, United States and Switzerland. So, all the great Austrian economists, or most of them, Hayek, Matlab, Haber, Morgan, Stern, and Mises, all left Austria by the mid-1930s. Ironically, this great Austrian migration was the third factor contributing to the downfall of the Mangerian tradition, particularly in Great Britain. For it was under Hayek's influence that economists at the LSE, especially John Hicks, began to introduce Volrasian General Equilibrium Theory, as reformulated by an Italian, Alfredo Paredo, you can tell by the vowel at the end of each of these two names, to Anglo-American economists.

27:47However, more important than the direct influence, Hayek's direct influence on Hicks, was the profound effect that Hayek's verbal general equilibrium approach had on the Mangerian Robbins. Marion Robbins, Robbins was the head of the London School of Economics. He was the very heart and soul of LSE Economics. Between 1927 and 1934, Robbins had written a series of brilliant papers elaborating and applying causal-realistic price theory and criticizing the Marshallian variety of partial equilibrium economics. In addition, he wrote a great book called Essay on the Nature and Significance of Economic Science which was first published in 1932. And this clearly revealed the author's, quote, a special indebtedness, unquote, to the works of Mises and Wicksky, two Mengerians.

28:38And he argued with Menger that economic theory was indeed based upon reality. Robin's book quickly succeeded in demonstrating to most of the profession that the Mengerian method of formulating economic theory was both obvious and realistic. And as Robbins characterized this method, he said, quote, The propositions of economic theory, like all scientific theory, are obviously deductions from a series of postulates. And the chief of these postulates are all assumptions involving, in some way, simple and indisputable facts of experience, relating to the way in which the scarcity of goods, which is the subject of our science, actually shows itself in the world of reality. So he was a very firm staunch follower of Carl Menger.

29:26By the mid-1930s, however, Robbins had begun to fall under the sway of Hayek and Hicks, confusing the dynamic Menger-Wicksky analysis with the Volrasian general equilibrium analysis as the essence of economic theory. For example, in a syllabus for his course on general principles of economic analysis, which he gave during 1934-1935, and Life. Robbins included under the heading, Modern Works and General Theory, the treatises by Bumperberg, Rick Steedfeder, Clark and Davenport, all great Mengerian treatises. But he added alongside those, alongside of those, the treatises of Cassell, Pareto and other Volrasian economists. In a revealing note in the syllabus, Robbins wrote, quote, the treatment will be non-mathematical in character.

30:14Students who wish to witness the same problems treated mathematically should attend course First Number 66, unquote. For Robbins evidently, the choice between the causal realistic and the mechanical generally equilibrium approaches was now merely a matter of taste. Further evidence of Robbins' drift away from the Mangerian camp can be found in the second edition of The Nature and Significance, that great book I talked about, which was published in the second edition in 1935. In this edition there were still numerous footnotes to the works of Fenner, Davenport, Wixfeed, Mises and Richard von Schriegel, but now they coexisted with The footnote references to the work suddenly of Pareto and Hicks. Apparently, this was not the case in the first edition. I haven't seen the first edition. It's very scarce. But as Richard M. Eberle, who compared the two editions, explains, quote, the footnote references in this first edition show more clearly the strongly Austrian influence on Roberts' thinking than in the second edition of 1935, in which modifications in the text and deletions and additions to the footnote references

31:17and the impression of different authorities having influenced Robbins. And significantly, in the second edition, Robbins thanks Hayek and another student of Bieser, Paul Rosenstein-Rodan, for the advice and criticism in helping him make these changes. That was absent in the first edition, evidently. Finally, I want to say a word about the socialist calculation debate, which Hayek, Mises and Robbins were involved in on the same side. They were criticizing the ability of the socialist regime to calculate. Both Hayek and Robbins, however, in their critiques of socialist central planning, emphasize impracticality of the full and timely discovery by the central planning board of the widely dispersed knowledge that was needed to solve the system of simultaneous equations that were supposed to substitute for monetary calculations of entrepreneurs.

32:20So while admitting that if you could solve these equations, you would have an efficient economy, Hayek and Robbins really said, well, you'll never be able to get the information needed. Things are changing continually and it's very difficult to get all the information together to solve these equations. Now, for Mises, the economy was always in deep and fundamental disequilibrium, and these equations were therefore completely irrelevant to the problem of economic calculation. Moreover, the problem of incomplete knowledge, especially due to the uncertainty of the future, was a problem that afflicted, according to Mises, both central planners and private entrepreneurs. No one could know the future. Everybody was in the same position. Even with the price system, the entrepreneurs could not know more than the central planners, more in the future, in the sense of planners.

33:08Now, I won't quote it here, but there was an argument that Mises never really criticized Hayek. You know, there were very few antisocials in the 1930s, and certainly it was strategic not to criticize him, but in a French journal, he did draw attention to the differences between him and Hayek, and we'll probably translate this article and publish it in the quarterly journal of Wall Street Economics. In any case, let me get back to Robbins momentarily, for further evidence, I'm sorry. Actually, let me go on to the fourth problem, and then I'll show how Mises overcame all these problems. The fourth factor in the decline of Austrian economics were certain problems that existed within Menger's paradigm, his overall system.

33:55Remember, there were only two generations, as I said, of Austrian economists before 1914. 2014 are really able to work on these problems of value of price, and they left two big gaps. Unfortunately, the gaps they left allowed many people, many economists, to portray Austrian economics as really simply a less rigorous verbal rendition of mechanical Eurasian economics. Two things that they did not do, which Mises finally did do. One, they did not integrate money and price theory. In other words, in the theory of general equilibrium, there is no money, there is no uncertainty, everybody knows exactly what they want, no one needs to hold money in order to buy different things in the future.

34:42To make a long story short, the other reason why this competing theory is unrealistic is because it doesn't create money prices. It's really a theory of a barter economy. Well, Mises saw this, this was a problem, and Menger and Boehm-Bawerk did not solve this problem. Even the later, more sophisticated treatises of Wick, Steed and Fedder didn't solve this problem. They tried to, but they did not. So that was one problem. The second problem was that it was difficult to define the role of equilibrium. I mean, obviously the Volrasians were wrong about saying that generally equilibrium represented the real world economy in some sense. But yet there is a role in economic theory, an important role for general equilibrium, okay, verbally specified, not in terms of mathematical equation.

35:30So since the Austrians did not do, the old Austrians did not address this question and solve this problem, it was thought later on in the 20s and 30s that they were really just general equilibrium peers too. And so this was a second problem. And I go into much more detail about the problems. I don't want to belabor them. There were two serious problems. So these were the four factors that brought down Austrian economics. By the mid-1930s, there were no Austrian economists in the sense of a causal realistic analysis of prices. One School of Economics in Robbins were pretty much gone by 1935-1936.

36:16There, as I said, in the United States and Italy and France and so on, the Austrians were a chunk of the side. Now, it is true that there were important Austrian contributions to money, capital, and business cycle theory that continued to pour forth from the LSC throughout the 1930s, most of them from the Panopiah himself. by Hayek himself. But they were progressively weakened by the fact that they were not well-grounded in a dynamic price sphere. The culmination of this unfortunate trend was Hayek's Pure Theory of Capital, which was published in 1941 and was really ignored. And it was largely unsuccessful, precisely because it was an attempt to reconstruct Austrian Capital Theory on the basis of an inter-temporal, Mises must have been fully aware of this disaster state of affairs when he immigrated to Switzerland in 1934.

37:26He was comfortably ensconced as a full-time salary faculty member for the first time that he didn't have to worry about earning a paycheck in government or that he could devote his full time to economics. For the first time, he could focus his attention on academic research. Mises used this opportunity to write National Economy, the German language predecessor of Human Action, and a book that was intended to revive the Hungarian approach and elaborate it into a complete and unified system of economic theory. As evidence of the importance that Mises attached to this book, and of the time and energy he poured into it, he wrote very little else in the years leading up to its publication in 1940. Previously an enormously prolific writer, The extent of his output from 1934 to 1939 is comparatively meager.

38:17In addition to book reviews, short memos, newspaper and magazine articles, notes and introductions, there was only one substantial article during these five years for an academic audience. In retrospectively describing his purpose in writing National Economy, Mises left no doubt that he sought to address the two burning issues left unresolved by his by his Mangerian forerunners, the status of the equilibrium construct, and the split between monetary and value theory. Regarding the former Mises-Roe, quote, I try in my treatise to consider the concept of static equilibrium as instrumental only, and to make use of this purely hypothetical abstraction, only as a means of approaching and understanding a continually changing world. It is one of the shortcomings of many economic theorists, and he here could have been referring to Rothenheim, that they have forgotten the purpose underlying the introduction of this hypothetical concept into our analysis.

39:15So, and he also addressed the problem of the split between money and prices. Now I don't want to go into that in too much detail, there is detail on that in my paper, But let me just sum up by saying that the national economy marked the culmination of the Mengerian theoretical approach, in a real sense, the rebirth of the Austrian School of Economics. Now this book was published in 1940. The causal realistic approach now had the great systematic treatise it needed in order to definitively distinguish itself from the rival approaches to price theory. When one compared national economy to the influential restatement of the general equilibrium approach John Hicks had presented in Value and Capital, the fundamental and irreconcilable differences between the Mangerian and the Moravian approaches were at last starkly and unmistakably revealed.

40:11With the Austrian School poised for a vigorous comeback on the strength of the publication of national economy in early 1940, disaster struck. Cut off from the German-speaking market by the war in Europe, its Swiss publisher went out of business and the sale and distribution of Mises' treatise ceased. By the time the English language edition was published by Yale University Press in 1949 as Human Action, the moment had passed for the immediate restoration of the influence of Mengerian price theory within the mainstream of economic theory. Now, my discussion suggests a revisionist thesis regarding the main reason why the influence of Austrian economics, seemingly at its international peak in the mid-1930s, should have declined so precipitously that by 1940, and certainly by the end of World War II, it was absolutely nil.

41:01The conventional view was that Austrian economics, as I said earlier, was buried by the Keynesian avalanche. But this is only true if we acquiesce in the mistaken identity of the essence of Austrian economics as money and business cycle theory. No, causal realistic price theory was a quintessence of Austrian economics. And it was not suddenly undone in its pride by the thunderous eruption of Keynesian macroeconomics in the mid-1930s in Great Britain. Britain. Rather it was abandoned by almost all of its defenders while still in an immature state. It had begun to be silently usurped by a rival approach many years before in the land of its birth. Returning to Mises' achievement, the writing of National Economy then was a profoundly lonely venture. By the late 1930s, Mises could count on no intellectual allies in his solitary quest The Austrian School of Economics was virtually a closed chapter in the history of economic thought as Mises toiled away in Geneva at the close of the 1930s.

42:08When the first fruits of his labor withered on the vine unattended by a world otherwise occupied by war, Mises persisted and delivered human action into a positively hostile and uncomprehending world almost a decade later. later. It was this great work that, however improbably, diverted the course of intellectual history by reigniting the modern revival of research in the Mangerian paradigm. Which started in the early 1960s with the brilliant work of Murray and Rothbard. And it's continued to flourish down to this very day. But on account of this chapter, the post-Human Action chapter, of the Austrian School has yet to be written. Thank you very much.