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The Fortunes of Liberalism
Essays on Austrian Economics and the Ideal of Freedom
By F. A. Hayek, Peter G. Klein
The University of Chicago PressCopyright © 1992 F. A. Hayek
All rights reserved.
THE AUSTRIAN SCHOOL OF ECONOMICS
Value Theory before 1871
The 'marginal[ist] revolution' of the 1870s is generally recognised as a major step in the advance of economic theory. Those who have been able to start with its established results often find it difficult to comprehend why an obvious and simple idea, which had occurred to many earlier thinkers, should have exercised such a great effect when W. S. Jevons, Carl Menger, and Léon Walras independently rediscovered it at about the same time and, particularly, why the tradition founded by Menger should so profoundly have affected economic theory for two generations. To account for this it is necessary to elaborate on the distinction that is commonly but inadequately expressed as a contrast between 'objective' and 'subjective' theories of value.
Since value is evidently an attribute possessed by certain things or services, it was natural to seek its determinants in some property or properties of the particular objects that possess it. This procedure had proved successful in the physical sciences, and the expectation that objects having the same value should have also other 'intrinsic' properties in common therefore seemed reasonable. Of course it had often been seen that the decisive factor might be something discoverable not in the object itself but rather in the relations of men to the object. Ever since the medieval scholastic philosophers (and even Aristotle), it had been pointed out again and again that to possess value an object must be useful and scarce. But this idea was rarely followed through systematically (though an exception must be made for the greatest of the early anticipators of modern theory, Ferdinando Galiani in his Della moneta of 1750) and never to the point of realising that what was relevant was not merely man's relation to a particular thing or a class of things but the position of the thing in the whole means-end structure—the whole scheme by which men decide how to allocate the resources at their disposal among their different endeavours.
It was largely from approaching the problem of value through patient analysis of the character of economic choice in the various types of possible relations between different means and different ends that there ultimately emerged the explanation of value that made the work of Menger and his pupils so immediately effective. Although the answers supplied by Jevons and Walras to the old value paradox were no less correct, they were concealed from most contemporary economists by the mathematical notation employed. Moreover, these authors treated the solution of the utility paradox as merely a preliminary step to be gotten quickly out of the way in order to get on with the main business, the explanation of value in exchange. The Austrians, on the other hand, made the full analysis of the conditions of valuation, independent of the possibility of exchange, so much their central task that later they had to defend themselves against the misunderstanding that they believed marginal utility provided a direct explanation of price. Of course, the subjective value that it explains is merely a first step to the second stage, the theory of price.
On the Continent the utility-cum-scarcity approach had, since Galiani, remained an important tradition and considerable insight had been achieved in such works as E. B. de Condillac's Le commerce et le gouvernement, 1776, Louis Say's Considérations sur l'industrie, 1822, Auguste Walras's De la nature de la richesse, 1831, Jules Dupuit's De la mesure de l'utilité des travaux publics, 1844, and finally in the remarkable but at the time completely overlooked work of H. H. Gossen, Entwicklung der Gesetze des menschlichen Verkehrs, 1854. In England, on the other hand, the generally much more highly developed classical political economy had become wedded to an 'objective' labour theory of value, and the utility tradition persisted only as a sort of undercurrent of protest, which reached a high point in 1834 with W. F. Lloyd's The Notion of Value. It was fully swamped when as late as 1848 J. S. Mill in his Principles of Political Economy not only re-expounded the classical position but calmly asserted, "Happily, there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete".
Menger and the Origins of the School
While W. S. Jevons (who with his preliminary sketch of a theory of value based on "final utility" had anticipated Menger by nine years) was writing in direct opposition to dominant doctrine and had little more than Benthamite utilitarianism to draw upon, both Menger and Walras were able to build on a rich literary tradition favorable to the utility approach. But in Vienna, where Menger worked, there was little interest in economic theory. At that time economics was taught at the University of Vienna by Germans of chiefly sociological interests. The rapid rise of a distinct Austrian school of economic theory was thus entirely owing to Menger's work—though it did coincide with the university's rise to great eminence in a number of other fields, which for some fifty or sixty years made it an intellectual centre of great influence.
Carl Menger was a civil servant in the prime minister's office at Vienna when at the age of thirty-one he published his first and decisive work, Principles of Economics. It was the first part of an intended treatise, the rest of which never appeared. It dealt with the general conditions that create economic activity, value, exchange, price, and money. What made it so effective was that the explanation of value it offered arose from an analysis of the conditions determining the distribution of scarce goods among competing uses and of the way in which different goods competed or cooperated for the satisfaction of different needs—in short, what has been called above the 'means-ends structure'. It is this analysis that precedes the theory of value proper. Friedrich von Wieser was to develop this systematically into a vorwerttheoretische part of economic theory that made the Austrian form of marginal utility analysis so suitable as a basis of further development. From this analysis springs most of what is known today as the logic of choice, or the 'economic calculus'.
Menger's exposition is generally characterised more by painstaking detail and relentless pursuit of the important points than by elegance or the use of graphic terms to express his conclusions. Though always clear, it is laboured, and it is doubtful whether his doctrines would ever have had wide appeal in the form in which he stated them. However, he had the good fortune of finding at once avid and gifted readers in two young men who had left the University of Vienna some time before Menger became a professor there. They decided to make the fulfillment of his teaching their lifework. It was mainly through the work of Eugen von Böhm-Bawerk and Friedrich von Wieser, classmates and later brothers-in-law, that Menger's ideas were developed and spread. Gradually during the 1880s, when their most influential works appeared, they were joined by others working in the universities or elsewhere in Austria. Of these, Emil Sax (1845–1927), Robert Zuckerkandl (1856–1926), Johann von Komorzynski (1843–1912), Viktor Mataja (1857–1933), and Robert Meyer (1855–1914) particularly deserve mention. Somewhat later came Hermann von Schullern zu Schrattenhofen (1861–1931) and Richard Schüller (1871–1972).
The year 1889, in which the greatest number of important publications of the group were concentrated, also saw the appearance of an important theoretical treatise by two Viennese businessmen, Rudolf Auspitz and Richard Lieben, Untersuchungen über die Theorie des Preises. This can, however, only with qualifications be included in the works of the Austrian school. It moved on parallel but wholly independent lines and with its highly mathematical exposition was too difficult for most contemporary economists, so that its importance was recognised only much later.
Of great importance for spreading the teachings of the school, especially in Germany, was the fact that another Viennese professor, Eugen von Philippovich von Philippsberg (1858–1917), though not himself an active theoretician, incorporated the marginal utility doctrine into a very successful textbook, Grundriß der politischen Okonomie. For some twenty years after publication this remained the most widely used textbook in Germany and almost the only channel through which the marginal utility doctrine became known there. In other foreign countries, especially England, the United States, Italy, the Netherlands, and the Scandinavian countries, the basic economic publications of the Austrians became known sooner, partly in English translations. Probably the most important foreign adherent was an exact contemporary of Böhm-Bawerk and Wieser, the Swede Knut Wicksell. Although he was also greatly indebted to Walras, Wicksell could write in 1921 that "since Ricardo's Principles there has been no other book—not even excepting Jevons's brilliant but somewhat aphoristic and Walras's unfortunately difficult work—which has had such a great influence on the development of economics as Menger's Grundsätze".
Development by Böhm-Bawerk and Wieser
In the theoretical development of Menger's ideas the most important steps were Wieser's interpretation of costs as sacrificed utility (or 'opportunity costs', as the concept later came to be called) and the theory of the determination of the value of the factors of production by 'imputation' (Zurechnung). (This later term and the term Grenznutzen—'marginal utility'—were introduced by Wieser.) In the field of value theory proper Böhm-Bawerk contributed mainly by the lucidity of his exposition and the great skill of his polemics. His most important original contribution was his theory of capital and interest, which was by no means accepted by all members of the school. In general it may be said that the school never developed a strict orthodoxy but that the development of Menger's idea by its different members shows distinct differences. This applies particularly to Böhm-Bawerk and Wieser, who in many respects represented very different intellectual types and whose endeavours marked the starting points of two distinguishable traditions within the school. Böhm-Bawerk was a particularly consistent logical reasoner, a masterly debater, and at the same time, a man of great practical experience (he was three times Austrian minister of finance). He was able to ground his work on a thorough command of the whole of economic literature, and he was always ready to take issue with other views. He therefore kept closer in many ways to Menger's foundation than Wieser, who after the initial stimulus received from Menger, very much pursued his own ways. Wieser's work in consequence has a highly personal character, and though in some respects (e.g., in the analysis of the role of different degrees of monopoly) he anticipated later development, in others, such as his insistence on the calculability and interpersonal comparability of utility, he developed in directions that had later to be abandoned. His Social Economics, which constitutes the only complete systematisation of the economic theory of the earlier Menger school, therefore cannot be regarded as representative but nonetheless constitutes a distinctly personal achievement.
Controversy with the Historical School
Carl Menger was a very effective teacher, and through his numerous pupils and his participation in the contemporary discussion of economic and financial policy he exercised considerable influence on Austrian public life. If after his first work, his literary contributions to pure theory, except in the field of money, are few, this is to be ascribed mainly to his involvement in the Methodenstreit, his dispute about method with the leader of the younger German historical school, Gustav Schmoller. That Menger's book had remained practically unnoticed in Germany was chiefly owing to the fact that the dominance of the historical school had almost eliminated the teaching of economic theory from German universities. In these circumstances it was natural that it should seem urgent to Menger to vindicate the importance of theoretical research. This he undertook in his Problems of Economics and Sociology, which in several respects became as important for the development of the Austrian school as his earlier Grundsätze, although in detail his methodological views were not fully accepted even within his own school. But the systematic justification of what Schumpeter was later to call "methodological individualism" and the analysis of the evolution of social institutions (in which he revived ideas originally conceived by Bernard Mandeville and David Hume) had a profound influence on all members of the school and, later, far beyond the limits of economics. Compared with this, the points immediately at issue with Schmoller are of lesser significance, although at the time they led to a passionate exchange of opinions to which several disciples on each side contributed. This exchange caused such a rift between the two groups that the German universities came to be filled more and more exclusively by members of the historical school and the Austrian universities by members of Menger's school.
The Third and Fourth Generations
In 1903 Menger retired prematurely from teaching and in consequence exercised little direct influence on the formation of the third generation of the Austrian school, which grew up during the decade preceding [the First] World War. These years, during which Böhm-Bawerk, Wieser, and Philippovich were teaching at Vienna, were the period of the school's greatest fame. It was particularly Böhm-Bawerk's seminar that provided the centre of theoretical discussion and produced the leading members of the third generation. Among them, particular mention must be made of Ludwig von Mises (1881–1973), who continued the tradition of Böhm-Bawerk, and Hans Mayer (1879–1955), who continued that of Wieser. (Franz X. Weiss (1885–?) belonged to the stricter Böhm-Bawerk tradition.) Joseph Schumpeter (1883–1950),32 although much indebted to Böhm-Bawerk, absorbed so many other influences (particularly that of the Lausanne school33) that he cannot be wholly regarded as a member of this group. The same might be said of Alfred Amonn (1883–1962), who stood close to the English classical tradition. Somewhat younger but still wholly active at Vienna were Richard von Strigl (1891–1942), Ewald Schams (1889–1955), and Leo Illy (1888–1952), whose name was originally Leo Schönfeld.
The Vienna school showed its fruitfulness once again in the 1920s, when Hans Mayer and Ludwig von Mises (and for a time also still Friedrich von Wieser) were teaching in Vienna. At that time a fourth generation appeared, including an unusually large number of younger theoreticians who were to become widely known. These included Gottfried Haberler (1900–), Fritz Machlup (1902–1983), Alexander Mahr (1896–?), Oskar Morgenstern (1902–1977), Paul N. Rosenstein-Rodan (1902–1985), and the author of this article. Most of these were later most active in the United States.
But if this fourth generation in style of thinking and in interests still shows the Vienna tradition clearly, nonetheless it can hardly any longer be seen as a separate school in the sense of representing particular doctrines. A school has its greatest success when it ceases as such to exist because its leading ideals have become a part of the general dominant teaching. The Vienna school has to a great extent come to enjoy such a success. Its development has indeed led to a fusion of the thought stemming from Menger with that of W. S. Jevons (by way of Philip H. Wicksteed), of Léon Walras (by way of Vilfredo Pareto), and, especially, of the leading ideas of Alfred Marshall. But if the total structure of modern theory, as taught today in most centres of the western world, is most strongly determined by the tradition flowing from Marshall, and even its cornerstone, value and price theory, has in recent decades undergone developments that have strongly altered its form, the latter represents a consistent continuation of the fundamental principles handed down by the Vienna school.
Addendum: In Britain and the United States
Of the fourth generation developing in Mises's Privatseminar, which played for it a similar role to that which Böhm-Bawerk had played for the third generation, only the oldest member, the writer of this article, had still been a proper pupil and member of Wieser's last seminar. Only slightly younger and in close contact with the writer, because they had been working for years in the same building, were Gottfried von Haberler, Fritz Machlup, Oskar Morgenstern, and Paul N. Rosenstein-Rodan. Under the influence of Mises and in constant association with philosophers, sociologists and political scientists of about their own age, such as Alfred Schutz, Felix Kaufmann, and Erik Vögelin, discussions centred mainly on problems of the method and philosophical character of the social sciences.
Excerpted from The Fortunes of Liberalism by F. A. Hayek, Peter G. Klein. Copyright © 1992 F. A. Hayek. Excerpted by permission of The University of Chicago Press.
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