The Mundane Economics of the Austrian School
The Austrian School of economics—the causal-realist, marginalist, subjectivist tradition established by Carl Menger in 1871—has experienced a remarkable renaissance over the last five decades. It is not always clear, however, exactly what distinguishes the Austrian School from other traditions, schools of thought, approaches, or movements within economics and its sister disciplines. This paper argues that Austrian economics, while part of a broader tradition emphasizing the coordination of the market order, is nonetheless a distinct kind of economic analysis, and that its essence is not subjectivism, the market process, or spontaneous order, but what I call “mundane economics”—price theory, capital theory, monetary theory, business-cycle theory, and the theory of interventionism. Call this the “hard core” of Austrian economics. I argue that this hard core is (1) distinct, and not merely a verbal rendition of mid-twentieth-century neoclassical economics; (2) the unique foundation for applied Austrian analysis (political economy, social theory, business administration, and the like); and (3) a living, evolving body of knowledge, rooted in classic contributions of the past but not bound by them. Most Austrian economists from Menger to Rothbard devoted their energies to developing and communicating the principles of mundane economics, not because they failed to grasp the importance of time, uncertainty, knowledge, expectations, institutions, and market processes, but because they regarded these issues as subordinate to the main task of economic science, namely the construction of a more satisfactory theory of value, production, exchange, price, money, capital, and intervention.
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Notes
Admittedly, Hayek’s 1968 assessment of the Austrian School’s influence is harder to reconcile with his own insistence (Hayek 1937, 1945, 1946) that neoclassical economists had failed to appreciate the role of knowledge and expectations. Hayek remained ambivalent on this point; in an unfinished draft for the New Palgrave Dictionary, written around 1982 (and reprinted in Hayek, 1992, pp. 53–56), Hayek describes indifference-curve analysis as “the ultimate statement of more than half a century’s discussion in the tradition of the Austrian School,” adding that “by the third quarter of the twentieth century the Austrian School’s approach had become the leading form of microeconomic theory.” But he goes on to identify the school’s “main achievement” as clarifying the differences between “disciplines that deal with relatively simple phenomena, like mechanics, . . . and the sciences of highly complex phenomena.”
Koppl urges Austrian economists to join what he calls the “heterodox mainstream,” a body of literature embracing bounded rationality, rule following, institutions, cognition, and evolution, or BRICE. Austrians have “an opportunity to contribute to the heterodox mainstream of today and join, thereby, the emerging new orthodoxy of tomorrow” (Koppl, 2006, pp. 237–38).
My focus here is economic theory, not methodology, so my point is different from Rothbard’s (1995) argument that Misesian praxeology, not the alternative Popperian, evolutionary epistemology of the later Hayek or the “radical subjectivism” of Lachmann, is the proper starting point for Austrian economics.
Interestingly, the third- and fourth-generation Austrians were thoroughly steeped not only in the writings of their Viennese predecessors, but also those of the Anglo-American Mengerian price theorists. Hayek (1963, p. 32) notes that “in the early post-war period the work of the American theorists John Bates Clark, Thomas Nixon Carver, Irving Fisher, Frank Fetter, and Herbert Joseph Davenport was more familiar to us in Vienna than that of any other foreign economists except perhaps the Swedes.” Hayek quotes a letter from Clark to Robert Zuckerkandl in which Clark praises Zuckerkandl’s Theory of Price (1899), saying “[n]othing gives me greater pleasure than to render full honor to the eminent thinkers, mainly Austrians, who were earlier in this field than myself, and who have carried their analysis to greater lengths” (Hayek 1939, p. 39) Hayek adds that “at least some of the members of the second or third generation of the Austrian School owed nearly as much to the teaching of J. B. Clark as to their immediate teachers.” Salerno (2006) discusses Clark’s influence on Mises.
Lachmann cites Hicks (1939), Lindahl (1939), and Lundberg (1937) as the main exponents of process analysis, though these theorists are not usually included in the contemporary “market process” tradition.
Morgenstern (1935) also dealt with expectations and their role in the formation of economic equilibria.
By the 1950s, Hayek tells us,
I had . . . become somewhat stale as an economist and felt much out of sympathy with the direction in which economics was developing. Though I had still regarded the work I had done during the 1940s on scientific method, the history of ideas, and political theory as temporary excursions into another field, I found it difficult to return to systematic teaching of economic theory and felt it rather as a release that I was not forced to do so by my teaching duties. (1994, p. 126)
Throughout his career at the London School of Economics from 1932 to 1949, Hayek’s main teaching obligation had been the required graduate course in economic theory. Of course, he did produce his first important work in classical-liberal political economy, The Road to Serfdom, in 1944.
See Klein (1997) and Klein and Orsborn (2008) on the differences between Menger’s account of institutions and Hayek’s understanding of spontaneous order. Klein (1997) argues that Menger’s notion of coordination is closer to Schelling’s (1978) than Hayek’s.
See also Klein and Selgin (2000).
Machlup seems to have the FSR in mind when he writes:
To characterize a concrete situation “observed” in reality as one of “equilibrium” is to commit the fallacy of misplaced concreteness. At best, the observer may mean to assert that in his opinion the observed and duly identified situation corresponds to a model in his mind in which a set of selected variables determine a certain outcome, and that he finds no inherent cause of change—that is, that he believes only an outside disturbance, not in evidence at the moment, could produce a change in these variables. This, of course, is a personal judgment, meaningful only if the variables are fully enumerated and the assumptions about their interrelations are clearly stated. (1958, p. 57)
Though specific Austrian writings are not identified, a footnote refers to “relevant sections” of Mises (1949), Rothbard (1962), Kirzner (1973, 1979, 1985) and High (1980, 1982, 1986) as “neoclassical Austrianism.”
See also Marget (1938-42, vol. 2), Kirzner (1963, pp. 105–35) and Salerno (1994a, pp. 97–106).
For additional discussion see Cowen and Fink (1985), Gunning (1989), and MacKenzie (2008).
Just as Mises’s (hypothetical) FSR results from a sequence of PSRs, Marshall’s “normal equilibrium” is brought about by a series of market-day equilibria (De Vroey 2002).
Inexplicably, she accuses Rothbard (1962) of confusing the FSR and ERE, though without providing any specific page reference (Vaughn 1994, p. 82n35). She also says Mises “seemed to confuse his two [sic] distinct notions of equilibrium.”
Kirzner (2000) argues for a more nuanced appreciation of Hayek’s commitment to “plan coordination,” arguing (against O’Driscoll 1977) that Hayek was ambivalent on the proper notion of coordination in economics. For more on concepts of coordination see Klein (1997) and Klein and Orsborn (2008).
De Vroey argues that Marshall, too, regarded his market-day equilibrium construct as both realistic and practical, i.e., not requiring an underlying adjustment process:
Two adjustment processes are present [in Marshall]: the adjustment toward market-day equilibrium and the adjustment toward normal equilibrium. In my view . . . the former should be interpreted as proceeding instantaneously, whereas the latter (to be called intertemporal adjustment) arises across several trading rounds. . . . The stationary equilibrium concept of equilibrium is in accord with the common-sense understanding of equilibrium—i.e., it is a point of rest. It is implied that this point does not need to be effectively reached; it suffices that reacting forces are triggered whenever it is not reached. Equilibrium is thus viewed as an attractor. . . . Note also that in this line of thought, assessing the existence of equilibrium or disequilibrium amounts to making a statement about reality. (2002, pp. 406–07)
Note that Clark (1907, p. 96) describes simple FSR analysis or comparative statics—e.g., if the supply increases, the price will fall, ceteris paribus—as obvious, as what he calls a “commercial fact.”
And these FSR prices are only “efficient” in perfectly competitive markets; any degree of asymmetric information renders economic outcomes inefficient (Grossman and Stiglitz 1980).
Adds Boettke (2005):
Why is all this important? Well as Franklin Fischer pointed out in his very important book The Disequilibrium Foundations of Equilibrium Economics (1983) that unless we have good reasons to believe in the systemic tendency toward equilibrium we have no justification at all in upholding the welfare properties of equilibrium economics. In other words, without the sort of explanation that Kirzner provides the entire enterprise of neoclassical equilibrium is little more than a leap of faith.
If one rejects the neoclassical equilibrium concept as a welfare benchmark, though, this justification is unnecessary.
Caldwell (2004, pp. 333) argues that Austrians accept “the simple (although unrealistic) models used for basic economic reasoning,” such as supply-and-demand analysis, at least for market-level predictions. But Menger’s analysis, while abstract, is not unrealistic in the sense of Walras’s or Marshall’s models of market exchange. In Long’s (2006) terminology, Austrians reject “precisive abstraction,” in which false assumptions are deliberately included to simplify the analysis, while embracing “non-precisive abstraction,” in which certain characteristics of the situation are simply not specified. In other words, the “basic economic reasoning” of the Austrians is different from the basic economic reasoning of neoclassical economics.
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Acknowledgement
I thank Per Bylund, Nicolai Foss, David Gordon, Jeff Herbener, Dan Klein, Fabio Rojas, Joseph Salerno, and participants at the 2007 Grove City College Conference in Honor of Ludwig von Mises and the 2007 Austrian Scholars Conference for helpful comments and conversations on this material. The usual caveat applies.