The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas: Janek Wasserman (Yale University Press; 2019)

Asymmetric Information, Issue No. 70 / April 2021 p.7-8.

Mentioning to colleagues that I was reading a book on Austrian economists almost invariably led to strong responses – sometimes positive, more often negative. But, typically, their responses were to a caricature of what I was reading. As Janek Wasserman shows in his The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas the contributions of Austrians to economics have been diverse and significant.

I am going to be a little perverse and refer to these economists as the ‘Viennese School’ reserving, as I shall explain, the term ‘Austrian School’ to one of its later developments.

Over a century ago, Vienna was the capital of a large, ethnically diverse Central European empire. In 1900 it contained 1.7 million people, four times Wellington today and was relatively wealthy. (The Austro-Hungarian Empire’s population was then 47 million.) It was an exciting and stimulating city; Sigmund Freud, Gustav Klimt and Gustav Mahler come readily to mind. A little later some of the most important philosophers of the twentieth century lived there.

Economics was exciting and stimulating too. The Viennese School of Economics began with Carl Menger (1840-1921) who in 1871 published Principles of Economics, which argued that unlike the Classical economists’ belief that value inherently resides in a commodity, it resided in human wants. With Stanley Jevons, who published along similar lines in the same year, and Leon Walras, Menger inaugurated the neoclassical economics era. (A minor grumble is that the book hardly connects the Austrians with English economists. Alfred Marshall is insufficiently mentioned to appear in the index; Lionel Robins’ importing of Austrian ideas is given due weight.) Eugene von Bohm-Bawerk (1851-1914), best known for his work on capital theory, and Friedrich von Wieser (1851-1926), who made a number of innovations picked up later, were the other leaders of the first generation of the Vienna School.

The school was characterised by methodological individualism and was strongly anti-Marxist, partly because of its political stance – virtually all the school came from the elite bourgeoise –but also because Marx was a classical economist and his critics had moved past his theory of value. (Ironically, Vienna was also the home of Austro-Marxism, about which my sociology teacher, the eminent scholar Tom Bottomore, wrote that they revealed ‘the possibilities that are still to be found in a Marxist social science as an instrument of human liberation and a rational organising of human life’. Another significant Vienna economist who does not come under either rubric is Karl Polanyi (1886-1964). Many consider his The Great Transformation seminal; it obviously influences my Not in Narrow Seas.)

The second generation of the Vienna School was an astonishing constellation including Ludwig von Mises (1881-1973), Joseph Schumpeter (1883-1950), Fritz Machlup (1892-1983), Friedrich Hayek (1899-1992), Gottfried Haberler (1900-1995), Oskar Morgenstein (1902-1977), Paul Rosenstein-Rodan (1902–1985) and John von Neumann (1903-1954). Max Weber (1864 – 1920) was also involved.Their contributions were so diverse that they cannot be concisely summarised. Suffice to say that there was a commonmethodology underpinning their work and that despite the reputation of the first generation there was an empirical stream and not all eschewed mathematics (Menger was far less quantitative than either Jevons or Walras).

The school functioned around regular – apparently vigorous – seminars followed by a retreat to coffee shops – an integral part of Viennese culture – which, from the evidence of their drinking songs, could be quite jolly. While there were theoretical differences and personality clashes, the economists supported one another (including helping find one another jobs and funding – a practice which continued when they left Austria and the coffee shop culture ended).

For the Viennese School ended. In part it was because Vienna lost its empire in 1919 and hence the great affluence which came with it. This was compounded by an increasingly illiberal regime (including anti-Semitism) and by 1940 all had left Austria for America. The exception was Hayek who, despite some time at the University of Chicago, spent most of the latter part of his life in Europe, including at the University of Salzburg (which he described as a mistake because its economics department was small and its library facilities were inadequate) as well as LSE.

Generally, the Austrians integrated well into the American economic culture and it is their work there by which we know of them best. However, von Mises and Hayek abandoned analytic economics when they crossed the Atlantic and it is for them, particularly von Mises, that the term ‘Austrian School’ becomes useful. Hayek, in particular, had made sterling contributions to economics in Vienna, but the two became more interested in political philosophy and ideology. Hayek wrote The Road to Serfdom, published in 1944 and subsequently selling more than two million copies, established the right-wing Mount Pelerin Society and his intellectual impact on Thatcherism is well known.

The von Mises story is more complicated and more important. His arrival in America was not initially a great success but he steadily built up a following which led to the establishment of the Mises Institute in Alabama, while his thinking is very influential at the George Mason University in Virginia. It is such institutions and their followers who comprise the Austrian School with its ideology of a (capitalist) liberalism which does not see a significant role for government activity; a common diagnosis of perceived economic failure was ‘interventionism’. Ironically, today there are few Austrians, if any, who are members of the Austrian School.

The term ‘Austrian economics’ is often associated with Austerianism, the strategy of imposing austerity when facing economic and financial difficulties and thereby reducing the scale and scope of the state. Consider ‘wages and taxes should be lowered to spur recovery … Removing price and wages controls, stripping power from the unions, and reducing state expenditures would restore stability and encourage growth’.(p.133-4) It may sound like contemporary Austerianism, but it is from von Mises during the Great Depression. (The policy did not work that time either.)

Austrian School economics is considered ‘heterodox’ – although that does not mean it is wrong. However, in my judgement, its economics is dominated by its ideological underpinnings. That was not true for Viennese School economics, much of which has been incorporated into orthodox economics to the extent that today it is hardly recognised. As the book demonstrates, it is worth tracing its origins as a part of understanding where modern economics has come from.

As I read the book, my mind wandered to whether there could ever be a significant Wellington School of Economics (most New Zealand economists live there). The city is only a quarter of the size of fin de siècle Vienna. Two world class economists – the relevant proportion – if they stayed, would be below the critical mass. In any case, while Austrians are multilingual, their School’s natural competitors were German whose economic thinking at the time was overwhelmed by the German Historical School which was becoming sclerotic. On the other hand, English-speaking New Zealand economists tend to imitate their US brethren, even where US economic circumstances are very different: the New Zealand dollar is not the international currency; competition policy ought to be different for a smaller market.

I am also struck how we fail to seize opportunities. World leaders in the areas said a couple of research programs were innovative, but we dropped the ball. For instance, in the early 1980s they told me that Brian Philpott’s CGE modelling was pioneering. But he was never given the resources to sustain it, while his university chose not to appoint staff to support him and continue his work. It is true that the models were antipathetic to Rogernomics and, even more unforgivably, they predicted correctly it would fail. The dominant ideology was conservative and intolerant of innovation. In contrast the Vienna School did not challenge the Hapsburg order. A crucial factor to its success, reinforcing this conservative bias, was that the school was generously funded by the Rockefeller Foundation; the Austrian School in the US has been sustained by private donations from the right wing. So, no, there is not going to be a Wellington School of Economics, just a colonial outpost of the US. One can only dream.