The Austrian School of Economics: The Bogeyman of Our Time?

by Scott B. Nelson

30 January 2020

The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas
by Janek Wasserman
Yale University Press, 368 pp., $35.00

This review was originally published on 30 January 2020 on the Austrian Economics Center Blog.

Janek Wasserman of the University of Alabama has written an engaging and interesting history of the Austrian School of economics. The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas seeks to examine the historical and social origins of the movement and to answer questions such as: “How did it emerge and evolve over the years? Who were its members? What did they believe? And why do we still care about the school, and should we?” (p. 3). By the end he hopes that his narrative will have encouraged us “to reconsider the interrelation of ideas, institutions, and power.” (p. 292). Wasserman’s account is not without certain faults, but overall it reads well and its author should be commended for attempting most of the time not to indulge too obviously in biases that distort, whether favourably or unfavourably, our understanding of the Austrian School.

Wasserman is not unaware that the School itself has suffered identity crises over its lifetime. Its intellectual father is considered to be Carl Menger, who made a name for himself in the famous Methodenstreit in the 1880s, in which the German Historical School, headed by Gustav Schmoller, was confronted by the (at the time derisively termed) Austrian School. At stake in this “history of wasted energies” was no less than the pride and honour of German vs Austrian scholars, not to mention the use of history in social science and whether the central object of investigation in economics should be a collective category, such as the people or the nation, or the individual. Menger had plumped for the latter already in his 1871 Principles of Economics, and with that work’s inauspicious appearance, the intellectual foundation for the Austrian School had been laid.

Its institutional support – the actual birth of the school – came with Eugen von Böhm-Bawerk and Friedrich von Wieser. As Wasserman writes, “if Böhm and Wieser were the true fathers of the new school, Menger was the holy spirit.” (p. 39). In Wasserman’s reading, this second generation was crucial not only in connecting Austrian ideas to British and US trends, but also in directing their polemic against socialism. It is perhaps in this critique of socialism, more than anywhere else, that the Austrian School achieves its unity, its Golden Age in the two decades leading up to the First World War. There were nevertheless disagreements even amongst Böhm and Wieser, the former taking a more theoretical economic focus while the latter adopted a more sociological approach. Variations on this split would be replicated in successive generations with some thinkers, such as Oskar Morgenstern, preferring mathematical applications to economics, while others, the most famous of them being Friedrich August von Hayek, would write some of their most recognizable works in the field of political philosophy rather than in economics.

While Wasserman describes some of these thinkers’ most important intellectual contributions, he is more interested in their capacity for networking. In addition to the foothold already established in academia, various publications (Neue Freie Presse, Neues Wiener Tagblatt, Der Deutsche Volkswirt, Der Österreichische Volkswirt) and associations (Nationalökonomische Gesellschaft and Society of Austrian Economists, to name a couple), one of the best networking opportunities were the “Kreise” (circles) hosted by various members of the school, one of the most important being the Mises-Kreis, which convened every second Friday at 19:00 in Ludwig von Mises’ office in the Lower Austrian Chamber of Commerce from the mid-1920s until the mid-1930s. The Mises-Kreis absorbed the members of an earlier Kreis, the Geist-Kreis, founded by Hayek after he had been excommunicated from Othmar Spann’s Kreis. The participants came from a wide array of disciplines: philosophy (Alfred Schütz, Felix Kaufmann, Eric Voegelin), history (Friedrich Engel-Janosi), psychoanalysis (Robert Wälder), art history (Otto Benesch, Emmanuel Winternitz), and, of course, Austrian economics (Herbert von Furth, Oskar Morgenstern, Gottfried Haberler, Fritz Machlup). This network was made international in 1938 with the Colloque Walter Lippmann, which sought to define neoliberalism as a sort of third way between 19^th century laissez-faire liberalism and various forms of interventionism (Keynesian, socialist, or otherwise), attracting French liberals Raymond Aron and Jacques Rueff, the Hungarian-British philosopher Michael Polanyi, and the German ordoliberals Wilhelm Röpke and Alexander Rüstow.

These sorts of connections stood them in good stead as a depressed Europe inched towards war in the 1930s. Hayek left for the United Kingdom in 1931; Joseph Schumpeter became a professor at Harvard University in 1932; Mises took up a visiting professorship in Geneva thanks to William Rappard, who had been involved in the Colloque Walter Lippmann; Haberler also profited from the Swiss connection before Schumpeter could bring him to Harvard in 1936. The Rockefeller Foundation was instrumental in paying the salaries of some of these émigrés, such as Machlup, who ended up taking a job at the University of Buffalo. The Austrians were indefatigable in using any and all connections to help each other escape Europe and find employment.

The School was also transformed in this new context: Morgenstern, Machlup, and Haberler stuck to public policy, with Morgenstern pioneering game theory and becoming involved with US defence and government. Hayek and Schumpeter, on the other hand, became public intellectuals, writing works meant for mass consumption – The Road to Serfdom and Capitalism, Socialism, and Democracy, respectively – and cemented ties with pro-business organizations and institutions interested in spreading free market ideas.

The protagonists of the school as we know it today also come into the foreground in these years. In 1940 Machlup could still complain about Mises’ “aristocratic, elitist bearing. The Austrian’s excessive salary demands doomed any prospect of tenured employment, whether at UCLA or elsewhere. Machlup lamented to Hayek, ‘Mises is still my problem child. My efforts to reopen negotiations with Los Angeles – whose call Mises turned down in March – were without success. Mises had some possibilities at New York University, but nothing came out of this.’” (p. 170). But when the Hayek-inspired Mont Pèlerin Society (MPS), whose first meeting took place in April 1947, received funding from anti-New Deal US businesspeople, Mises’ participation in the Society was essential. “Two of the MPS’s primary backers, Crane and Pierre Goodrich, who founded the Liberty Fund in 1960…stressed to Hayek the indispensability of Mises, since he embodied uncompromising dedication to principle: ‘This is Hayek’s society, of course…but there is also in this First American Meeting a top place for Von Mises. I would not be suggesting this if I did not also think that Von Mises had a great deal to contribute. It is no argument against Von Mises that he may seem to some people to be more clear and adamant in his theories than some others are.’” (pp. 202-203).

This shift was accompanied by a younger generation of “non-Austrian Austrians”, such as Murray Rothbard, Ludwig Lachmann, and Israel Kirzner, further complicating the story of the Austrian School. It was paradoxically around the time of the Austrian School’s revival (taking Hayek’s acceptance of the Nobel Prize in 1974 as a convenient benchmark) that its tradition was most unclear. When Emil Kauder wrote his history of the Austrian School he placed Mises and praxeology at the very centre, writing out Schumpeter, the non-market works of Böhm-Bawerk and Wieser, and Hans Mayer, an Austrian economist who did not flee in the 1930s, but had rather joined the Nazis. Similarly, Machlup’s account initially excluded not only Schumpeter but even himself from the tradition. The place of the “non-Austrian Austrians” – the American inheritors of the Austrian legacy – was also problematic. The original Austrians were uneasy about associating Austrian economic theory with radical libertarianism. Of the non-Austrian Austrians, Machlup’s early draft accordingly included only Kirzner, who sought to separate politics and ideology from economic science, but who also thought that either Rothbard and Lachmann should be included or they should all be left out. As Wasserman explains: “These alternatives produced a dilemma. Kirzner doubted whether ‘Rothbard’s work should or will have lasting value within the Austrian School,’ yet without him, Machlup’s account of Mises’s students would be ‘seriously incomplete.’ Rothbard’s inclusion, however, could lead to the accusation that Austrian economics was a political program. Kirzner had identified the crux of the problem: Austrian economics had become as much about ideology as economics for many US practitioners.” (p. 245).

What was less controversial was Hayek’s centrality in the tradition: “He remained an economist, but he was also more than that: a social theorist, a political philosopher, a philosopher of science. He was also an institution builder, a neoliberal policy advocate, and a conservative public intellectual in a growing, global epistemic community in the late 1970s and 1980s. He was simultaneously a scholar, a hero, a seer, and a soothsayer. Hayek the individual and the icon shaped the legacy of the Austrian School more than anyone else.” (p. 259). Hayek’s MPS inspired the creation of the Institute of Economic Affairs (IEA) in the UK, whose activist model was taken up by the Heritage Foundation, the Cato Institute, and the American Enterprise Institute (AEI) in the US.

What was once a coterie of friends singing drinking songs and engaged in vigorous intellectual debate on all matters until the wee hours of the morning in the side streets of Vienna had now grown into an elaborate institutional powerhouse spread across the United States. By the end of Marginal Revolutionaries we find Wasserman pulling out all the stops and connecting the Austrian School to everything from neoliberalism to the alt-right. It is never entirely clear whether the connections he draws are causal or correlative. The reason for this lack of clarity lies in Wasserman’s reluctance to take seriously the ideas themselves. Where he hopes that his book has led us “to reconsider the interrelation of ideas, institutions, and power” (p. 292), by the end we have been enlightened on the development mainly of the second of these three points. There is nothing objectionable in and of itself in taking a greater interest in institutional networks than in ideas, but isn’t an essential part of the story of “how Austrian economists fought the war of ideas” that they dealt in ideas to begin with, ideas in which they most likely believed? And that they may have believed in such ideas because they believed them to be true?

Take the idea of democracy, for example. When it comes to Wasserman’s discussion of the Austrians’ suspicions of democracy he makes them sound as if they held to fringe views. In fact, the classical liberal tradition, including the American Founding Fathers, is replete with thinkers who looked warily at democracy and the dangers of the “tyranny of the majority”, as Alexis de Tocqueville called it. In Federalist 63, for instance, we are reminded of the importance of checks and limits on power, including that of the people, who, “stimulated by some irregular passion, or some illicit advantage, or misled by the artful misrepresentations of interested men, may call for measures which they themselves will afterwards be the most ready to lament and condemn. In these critical moments, how salutary will be the interference of some temperate and respectable body of citizens, in order to check the misguided career, and to suspend the blow meditated by the people against themselves, until reason, justice, and truth can regain their authority over the public mind? What bitter anguish would not the people of Athens have often avoided if their government had contained so provident a safeguard against the tyranny of their own passions? Popular liberty might then have escaped the indelible reproach of decreeing to the same citizens the hemlock on one day and statues on the next.” Schumpeter’s discussion of democracy, part of which is quoted in Marginal Revolutionaries (p. 178), echoes these concerns to a tee. Today we have works such as Jason Brennan’s Against Democracy which argues, well, against democracy.

In this context it is interesting to read, contra Wasserman, that in Law, Legislation and Liberty Hayek confessed he was “profoundly disturbed by the rapid decline of faith in [democracy]…[E]ven a wholly sober and unsentimental consideration which regards democracy as a mere convention making possible a peaceful change of the holders of power should make us understand that it is an ideal worth fighting for to the utmost, because it is our only protection (even if in its present form not a certain one) against tyranny. Though democracy itself is not freedom (except for that indefinite collective, the majority of ‘the people’) it is one of the most important safeguards of freedom.” (Law, Legislation and Liberty, p. 349). Similarly, Mises is quite candid about the various fallacies in the antidemocratic doctrine, arguing that a more aristocratic doctrine would run into problems of defining who the best men are who should lead. “The only consideration that can be decisive is one that bases itself on the fundamental argument in favor of democracy. If every group that believes itself capable of imposing its rule on the rest is to be entitled to undertake the attempt, we must be prepared for an uninterrupted series of civil wars.” (Liberalism, p. 23).

Wasserman’s apparent eagerness to write off Austrians and some other classical liberals as anti-democratic, and without examining their ideas more closely, not only leads him to draw the wrong conclusion, but it also causes him to miss the nuanced differences between their positions. Where the above quotes indicate a preference for democracy as a means of ensuring the peaceful handover of power, we find Hayek defending democracy in The Constitution of Liberty as “the only effective method of educating the majority…Democracy is, above all, a process of forming opinion. Its chief advantage lies not in its method of selecting those who govern but in the fact that, because a great part of the population takes an active part in the formation of opinion, a correspondingly wide range of persons is available from which to select. We may admit that democracy does not put power in the hands of the wisest and best informed and that at any given moment the decision of a government by an elite might be more beneficial to the whole; but this need not prevent us from still giving democracy the preference. It is in its dynamic, rather than in its static, aspects that the value of democracy proves itself.” (The Constitution of Liberty, p. 174). Democracy is not only a more peaceful form of government, it also contributes to the growth of knowledge and civilization, underscoring “the absolute and essential importance of human development in its richest diversity.” (The Constitution of Liberty, p. 516).

Wasserman also attributes influence where there is no evidence for its existence. For instance, he claims that “Schumpeter inspired countless scholars from Gabriel Almond to Raymond Aron in their elite theories of democracy, which verged on theories of aristocracy.” (p. 178). Where we find a political class discussed in favourable terms in The Federalist as a bulwark against the potential excesses of mass democracy, Aron did not exalt the elite as such. His discussion of the elite was informed by the neo-Machiavellians, particularly Vilfredo Pareto, and not Schumpeter. The elite for Aron are an observable fact: whether it be the political elite (due to the fact that we live in representative democracies) or the business elite or the intellectual elite. What Wasserman has interpreted as an “elite theory of democracy” is in reality Aron’s empirical observation that there is an oligarchic component to our democracies. Wasserman’s own narrative, with its emphasis on institutions and funding to and from various powerful entities, only confirms this fact.

We can expect in any case that Wasserman is on more solid ground with the Austrian School than with French intellectuals such as Aron. Nevertheless, even concerning the Austrian School Wasserman’s unwillingness to look more deeply into the ideas that appear not to interest him also leads to some erroneous statements. As an employee of the Austrian Economics Center (AEC) and the Hayek Institut, it is here that I should address a few of the comments he has made in connection to these two think tanks (pp. 287-288). We are told that these projects “receive much of their initial funding from the Koch Foundation and Atlas Network.” This is false. We have never received any funding from the Koch Foundation (although we would be happy to!); the Atlas Network donated a small amount in 2015 for an individual project. Wasserman continues by pointing out in the next couple of sentences the purpose of these think tanks and some of our activities, such as the Free Market Road Show (FMRS), an annual tour of European cities that gathers economists, politicians, business leaders, and students together to discuss the economic problems of our time. That it has grown from four cities in four countries in 2008 to over 30 countries this year is an indication of the popularity and timeliness of its message. Mentioning the FMRS was a perfect opportunity for Wasserman to dig a bit deeper into the activities of Austria-based institutes promoting the philosophy of Austrian economics. For a scholar who has spent time researching in Vienna and writes about the Austrian School, it is curious that Wasserman did not think to contact us and inquire into our activities.

Perhaps this is because he feels he has all the insights he needs. “Despite liberal protestations,” we are encouraged to believe that what is really of concern is AEC / Hayek Institut Director Barbara Kolm’s connections to the Freedom Party of Austria (FPÖ), “the populist radical Right party, whose program evinces Euro-skeptic, anti-immigrant, and ethnonationalist tendencies…a seedbed of incipient neo-Nazism.” “Ethnonationalist” and “neo-Nazism” go too far. As does Wasserman’s comment about Chancellor Sebastian Kurz being a “Richard Spencer lite”, not least because even the prejudiced article Wasserman cites making this comparison at the beginning also disavows it later on. Kurz in any case is the chairman of the Austrian People’s Party (ÖVP) (to which Wasserman has also ascribed the dubious adjective “ethnonationalist”), not the FPÖ, and so on what grounds does his leadership of the country “hardly [inspire] confidence that the rebirth of Austrianism in Austria will be felicitous”? Is it that the liberal ideas of the Austrian School – by way of the AEC and the Hayek Institut, through their director Barbara Kolm, who has connections to the FPÖ, which was in a coalition with the ÖVP from 2017 to 2019 – have compelled Chancellor Sebastian Kurz to embrace neo-Nazism? Wasserman is well aware and willing to concede that many members of the Austrian School – some of whom were of Jewish background – would be appalled at their ideas being used to defend racial discrimination.

But playing fast and loose with finding modern comparisons to the rise of Nazism harbours other dangers. The knee-jerk reaction to the rise in populism and the incessant search for parallels to the 1930s risk seriously distorting our understanding of the present situation, not to mention our understanding of what real Nazism looks like. There is no indication that Austria is on its way to a violent takeover of Europe coupled with the extermination of a group of people. Or are some commentators happy just to point out waypoints on the road to Nazism, making the same slippery slope argument that they would not be willing to accept in Hayek’s Road to Serfdom?

Wasserman’s occasional tendency to halt his research the moment he has glimpsed a right-wing relation leads him to exclude information that would paint a more complete picture of his subject. Because he is committed to exploring the “Libertarian-to-Alt-Right Pipeline”, he concludes that a union of libertarianism and progressivism remains fanciful, all the while ignoring that the Bleeding Heart Libertarians include several thinkers who are trying to effect just such a union. He connects right-wing populism to the Austrian School, but does not bother to mention the German Wirtschaftswunder under Ludwig Erhard, a member of the MPS. Margaret Thatcher is brought up in connection to Hayek, although Wasserman is less concerned with her Hayek-related economic successes than with the Austrian economist’s comments in favour of Augusto Pinochet’s dictatorship in Chile.

He is right to call members of the Austrian tradition to reckon with the uncomfortable, unintended consequences of their ideas. His work, however, would have been more satisfying had he opted not to privilege a right-wing reading of the Austrian School and instead focused more on the tension, for example, between Hayek’s support of Pinochet and the remarks quoted above regarding democracy as “one of the most important safeguards of freedom.” It would have been interesting to see how Ron Paul could reconcile his libertarianism with the various controversial statements in his 1980s and 1990s newsletters. This would have required taking the ideas more seriously, to the point that we could evaluate the nature of the connection between the content of the Austrian ideas and the controversial views some of these individuals have held.

To evaluate the ideas on their own merit may have needlessly expanded Wasserman’s work beyond the scope he desired, but it would seem that his analysis of the “interrelation of ideas, institutions, and power” suffers as a result of this omission. Is it enough to know that funds from certain donors were given to certain institutions or thinkers in order to have exhausted the entire conversation on power relations? Is it enough to know that an individual espousing libertarian ideas also happens to have said racist things? If, for example, the free market ideas of the AEC and Hayek Institut are to be disqualified due to their director having served as an independent expert for the FPÖ, should we also disparage the push for international peace and cooperation because such ideas were born in the mind of the racist and “fascist” (as Jonah Goldberg argues in Liberal Fascism) Woodrow Wilson? Intellectually lazy arguments of this sort – guilty by association – shed little light and generate all too much heat.

This mode of arguing is particularly unfortunate in that Wasserman has some insights that are worth exploring. By the end of Marginal Revolutionaries he has connected both neoliberalism and the right-wing populist movements to the Austrian School. Given that the conflict between these two movements is one of the defining features of our time, one yearns to read more about how the content of Austrian ideas could be used to such contradictory ends. But this is not explored, which could indicate either that the ends are not contradictory, or that the ideas are being (partially) used or abused, or that the ideas as such do not even matter, and only the institutions do. Perhaps such points take too seriously the role of ideas, that the real issue is and always has been power, and that ideas are a currency like any other, where their appeal to truth is irrelevant. And yet, such a currency has value only to the extent that it aims at truth; in order to devalue it, it must be demonstrated either that it is untrue or that it does not pretend to be true. It is to be hoped that Wasserman expands on these points in future, adding to the framework he has already constructed in Marginal Revolutionaries. Despite its faults, his book reminds us that an integral part of the Austrian School tradition is the repeated attempts to account for what exactly constitutes that very tradition. It is useful for Austrian School adherents particularly as it comes from an outsider’s perspective, and with all of the concerns with the School that an outsider might have. It brings to light the richness of the tradition with some of its lesser known thinkers, the connection between institutions and the Austrians, and the “ironical barbs and clever repartee” (p. 79) that characterize the School. In its own way, it is also a message to both supporters and detractors of the Austrian School – that “only ideas worth defending [merit] serious consideration.” (p. 77).