Friedrich von Wieser on Progressive Taxation

It is not often you find an Austrian economist justifying progressive taxation, but here is the early Austrian Friedrich von Wieser using the subjective marginal utility theory of value to do just that, albeit in a very conservative manner:

“The ultimate basis for any progressive rate of taxation is to be found in the general scale of desires. According to this basis the personal value of the money unit is appreciably higher for the first thousand than for the second and is hardly to be compared with the appraisal in the case of the 99th or 100th thousand. Furthermore, the difference between the first and second thousand is appreciably greater than that between the 99th and 100th. Thus, all tendencies of the modern policy of taxation find a firm theoretical basis in the concept and laws of economic value.

It is not the function of the state in any of its administrative branches to interfere with the private constitution of the economy. This is an historically tested social institution which the state is bound to accept. This holds also in the administration of taxes. The state should never so use its prerogative of taxation as to eliminate existing inequalities of income and property; but in determining the contributions to be demanded of its citizens it should take into consideration the gradations of personal value that are the expression of the inequalities of income and property. The plan of the state’s management would offend economic principle were the private economies which are being assessed to be treated as units of equal wealth.

A consideration of personal valuation in the assessment of taxes and progressive taxation in particular has its prototype in a phenomenon of commercial exchange that was discussed in the case of a monopoly of supply in connection with the doctrine of joint costs. It was seen that a monopolistic classification of the demand, popularly felt as exploitation, may at times be the only available method of sufficiently increasing the yield of a socially required enterprise to ensure its continued operation. Special reference was made to experiences in connection with the operation of railroads and canals. Had it not been for the rule to charge what the traffic will bear, many extensive enterprises could not have been carried through. A progressive tax is the application of the principle to the whole administration of the state. Precisely as the railroad tariff classifies both travellers and merchandise in order to realize the large revenues that are required for the financial obligations of the road, just so a progressive rate classifies tax payers in order to assess each according to his tax-paying ability. It has become recognized that each must pay taxes according to the margin allowed by his circumstances, if the public economic process is to be maintained. A progressive tax-rate and a consideration of personal wealth in a system of taxation are therefore logical applications to public economy of experiences practically tested in private economies. The heavy burdens falling upon financially weaker households, owing to the increased demands of modern public economy, can only be relieved by a policy that continuously undertakes so to assess the compulsory contributions of citizens that the more wealthy are taxed correspondingly higher. By such a distribution of taxes a public economy may obtain the widest possible extension of its boundaries without violating in any particular the limits drawn for private economy.

Up to a certain point the modern state thus approaches the socially equalizing use-value computation of the simple economy. But it does this without offence to the spirit of the private constitution of the economy itself, for it refrains from interfering with private property as such and the historically transmitted inequality of its distribution. Modern policies of taxation do not seek to rectify the existing distribution of wealth. They are intended to do no more than adjust the incidence of the burden of taxation in accord with the distribution of wealth, so that the margin of use by the state economy may be extended through the larger contributions of those citizens whose incomes allow them a broader margin of use in their private economies.” (Wieser 1927: 433–434).

Of course, by modern standards, this is a very conservative justification of a limited progressive tax system, not concerned with abolishing or seriously diminishing historical inequality of wealth.

But, by the standards of his day, Wieser was regarded as a type of progressive liberal, as Hayek noted:

“I was personally a pupil of [sc. Eugen von Böhm-Bawerk’s] … contemporary, friend and brother-in-law, Friedrich von Wieser. I was attracted by him, I admit, because unlike most of the other members of the Austrian school, he had a good deal of sympathy with a mild Fabian socialism to which I was inclined as a young man. He in fact prided himself that his theory of marginal utility had provided the basis of progressive taxation, which then seemed to me one of the ideals of social justice.”
F. A. Hayek, “Coping With Ignorance,” July 1978
http://www.hillsdale.edu/news/imprimis/archive/issue.asp?year=1978&month=07

It is often forgotten that there was a liberal and interventionist wing of the early Austrian school.

But, to return to the main point, Wieser’s defence of the “historically transmitted inequality” of wealth on economic grounds is not convincing. Once the theoretical economic justification for vast or significant inequality of wealth falls apart (as it did indeed after Keynes’s revolution in economics), then the same idea from marginal utility theory can also be used to support some degree of wealth redistribution. (I am not thinking of total wealth equality, however, but simply a reduction of gross inequality to eliminate poverty).

If indeed there is good theoretical reason to think that the value of an additional unit of income to a person who is already very rich is considerably less than the value of an additional unit to someone who is poor, then redistribution of income to increase happiness and reduce hardship has sound justification.

And indeed empirical evidence seems to show that as wealth rises, the happiness that one derives from additional income falls or levels off after about $70,000 (US).

This is a fascinating discussion of this topic here, in the context of a debate about secular ethical theory and the scientific basis of ethics.


BIBLIOGRAPHY
Wieser, F. von. 1927. Social Economics (trans. A. Ford Hinrichs), Adelphi Company, New York.

Wieser Advocated Fiat Money

That is, Friedrich von Wieser – the early Austrian economist who succeeded Menger at the University of Vienna from 1903 and who was the teacher of Friedrich August von Hayek – according to Jörg Guido Hülsmann:

“It is not surprising that Böhm-Bawerk and Mises came to radically different policy conclusions from Wieser and Schumpeter [sc. about the role of money]. Whereas Mises held that the stock of money was ultimately irrelevant, Wieser stressed that money’s function as a measuring rod must not be interfered with. Its value should be as stable as possible, and all destabilizing influences should be eliminated. Wieser suggested that one could optimize the national currency by abolishing commodity money and putting a pure paper money in its place. In fact, paper would be more stable because its value is not subject to the influence of the non-monetary demand for the monetary commodity.” (Hülsmann 2007: 235–236).

How times have changed.

But this confirms that there was a forgotten wing of the early Austrian school, whose views were different from modern Austrians, and Wieser was an important member of that wing.

BIBLIOGRAPHY
Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism. Ludwig von Mises Institute, Auburn, Ala.

The Neoclassical Wing of the Austrian School

J. G. Hülsmann describes role of Friedrich von Wieser, the first generation Austrian after Menger:

“It is in this light that one has to see Wieser’s personal impact on the education of the rising generations of Austrian economists. [sc. Wieser] … held Menger’s former position from 1903 to 1920 and continued to teach as an emeritus until his death in 1926. During this entire period, it was Wieser who taught the introductory courses in economic science at the University of Vienna. Until 1914, Böhm-Bawerk’s presence provided some counterbalance, but after his death, Wieser’s position was that of an unquestioned authority in all matters of general economic theory, a position reinforced by the publication that same year of his general treatise, Theorie der gesellschaftlichen Wirtschaft.

The entire fourth generation of Austrian economists—brilliant young men like Hayek, Machlup, Haberler, Morgenstern, and Rosenstein-Rodan—were thus shaped by the Wieserian mold before they set off on their own intellectual paths. Largely ignorant of Menger’s Principles (out of print since the 1880s), they were trained in the spirit of the neoclassical synthesis. As a result of these circumstances, there was strictly speaking no fourth generation of “Austrian” economists in the Mengerian sense. All the young men who are commonly held to be fourth-generation members were in fact lost to the neoclassical school—with the possible exception of Hayek, who decades later rediscovered some Mengerian themes in his work on the Counterrevolution of Science (1954)” (Hülsmann 2007: 160–161).

Hülsmann is making quite a claim here. I suppose these would be his “fourth generation of Austrian economists”:

Fourth Generation of the Austrian School
Friedrich August von Hayek 1889–1992
Oskar Morgenstern 1902–1976
Gottfried von Haberler 1900–1995
Fritz Machlup 1902–1983
Ewald Schams 1899–1955
Paul N. Rosenstein-Rodan 1902–1985.

This generation of Austrians were “lost to the neoclassical school.” So the question arises: were they even Austrians at all then?

This also raises the question of why Hayek’s business cycle theory work in the 1930s, which is obviously macroeconomic theorizing requiring neoclassical notions of general equilibrium, remains such an important part of Austrian theory:

“Previous to [sc. 1937] ... Hayek’s own thought was dominated by General Equilibrium theory. This comes out repeatedly in Monetary Theory and the Trade Cycle (1929; English edition 1933), where he talks of ‘the unquestionable methods of equilibrium’ (p. 57), and also in Prices and Production. He says, ‘it is my conviction that if one wants to explain economic phenomena at all we have no means available but to build on the foundations given by the concept of a tendency toward equilibrium’ ... . Hayek points out in a footnote that by equilibrium he means the Lausanne formulation of General Equilibrium” (McCloughry 1984: viii).

And, as Lachmann argued:

“Professor Hayek and Mises both espouse the market process, but do not ignore equilibrium as its final stage. The former, whose early work was clearly under the influence of the general equilibrium model, at one time appeared to regard a strong tendency towards general equilibrium as a real phenomenon of the market economy. Mises, calling the Austrians ‘logical’ and neoclassicals ‘mathematical’ economists, wrote: ‘Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease’ … . It is this view of the market process as at least potentially terminating in a state of long-run general equilibrium that now appears to require revision” (Lachmann 1976: 60–61).

The influence of general equilibrium theory on both Wieser and Hayek is also supported by Salerno (2002).

To the extent that Hayek relies on Walrasian general equilibrium theory, he is subject to the critique of that theory in Post Keynesian economics. Hayek also used Wicksellian ideas on monetary equilibrium and the natural rate of interest, concepts that are also invalid (for a statement of how Wicksellian monetary theory can be overthrown by issues related to the Cambridge capital controversies, see Rogers 1989: 21–44).

I just starting to read Robert L. Vienneau, “Some Fallacies of Austrian Economics” (September 2006), and he provides a critique of Austrian business cycle theory from the perspective of Post Keynesian theory as well, particularly the Cambridge capital controversies.


BIBLIOGRAPHY

Butos, W. N. 1985. “Hayek and General Equilibrium Analysis,” Southern Economic Journal 52.2: 332–343.

Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism, Ludwig von Mises Institute, Auburn, Ala.

Lachmann, L. M. 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: 54-62.

McCloughry, R. 1984. “Editor’s Introduction,” in F. A. von Hayek, Money, Capital & Fluctuations: Early Essays (ed. by R. McCloughry), Routledge & Kegan Paul, London. vii–x.

Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory, Cambridge University Press, Cambridge.

Salerno, J. T. 2002. “Friedrich von Wieser and Friedrich A. Hayek: The General Equilibrium Tradition in Austrian Economics,” Journal des Economistes et des Etudes Humaines 12.2: 357–377.

Vienneau, R. L. 2006. “Some Fallacies of Austrian Economics,” September
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=921183

Vienneau, R. L. 2010. “Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory,” September 4
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1671886

Friedrich von Wieser and Eugen von Philippovich von Philippsberg: Austrian Economists and Fabian Socialists

Unlike the title of my earlier post on Mises (see “Was Mises a Socialist?: Why Mises Refutes Himself on Government Intervention”), the title of this post is not in jest.

The Austrian school of economics traces its origins back to the Austrian founder Karl Menger (1840–1921), and the first generation of Austrian economists were Friedrich von Wieser, Eugen von Böhm-Bawerk, and Eugen von Philippovich von Philippsberg (see the “Austrian School,” for a short history). In the 1940s a branch of the Austrian school sprung up in America under the influence of Ludwig von Mises (a second generation Austrian), whose student Murray Rothbard was the developer of anarcho-capitalism. Yet another tradition is derived from the work of Friedrich August von Hayek, a third generation Austrian.

And now for what might be a bombshell for some people. Two of the first generation of Austrian economists were clearly supporters of Fabian socialism. Yes, you heard me right: they were advocates of early 20th century Fabian socialism.

First, let’s start with Eugen von Philippovich von Philippsberg (1858–1917). Eugen von Philippovich studied under Karl Menger, taught at the University of Freiburg im Breisgau, and returned to the University of Vienna in 1893 as a professor of economics (Hülsmann 2007: 83). Philippovich was already in favour of state intervention before he taught at Vienna. On his return as a Professor in 1893,

“he immediately joined the Vienna Fabians. The group organized public conferences and discussions to promote the idea of government intervention in the service of a “social” agenda, which primarily concerned the support of the working-class poor. Philippovich’s personal and intellectual qualities made him the center of the Vienna Fabians and helped spread their influence among academics and businessmen. These activities were so successful that Fabian ideas eventually were incorporated into the programs of all Austrian political parties” (Hülsmann 2007: 83).

Eugen von Philippovich was not alone in such views.

Baron Friedrich von Wieser (1851–1926), another first generation Austrian economist, was sympathetic to Fabian socialism as well and not hostile to government intervention per se.

Friedrich von Wieser was born in 1851, and took a degree from the University of Vienna in 1872. After historical interests, he came to study economics after reading Karl Menger’s Grundsatze (for Wieser’s life, see Schumpeter 1997: 298ff; Schumpeter and Achille Loria 1927). From 1903 he succeeded Menger at the University of Vienna where he taught economics along with his brother-in-law Eugen von Böhm-Bawerk. Friedrich von Wieser was the teacher of Friedrich August von Hayek.

A. O. Ebenstein, in his Friedrich Hayek: A Biography (Chicago, 2003), provides a good summary of von Wieser’s economics:

“Wieser was more corporatist and intervention-minded than Böhm-Bawerk and Menger. Hayek recalled that when he was a student, he was ‘very much aware that there were two traditions’ in the Austrian school — the ‘Böhm-Bawerk tradition and the Wieser tradition. Wieser was slightly tainted with Fabian socialist sympathies. Hayek observed of his later relationship with Mises, who ‘represented the Böhm-Bawerk tradition,’ that ‘I perhaps most profited from his teaching because I came to him as a trained economist, trained in a parallel branch of Austrian economics from which he gradually, but never completely, won me over” (Ebenstein 2003: 26).

Friedrich August von Hayek was a direct student of Friedrich von Wieser. And what’s more Hayek in his youth shared von Wieser’s Fabian socialist leanings: A. O. Ebenstein notes that Hayek had a“mild, Fabian socialist phase … from about the ages of seventeen to twenty-five” (that is, from about 1916 to 1924), though Hayek never accepted Marxist socialism (Ebenstein 2003: 23).

Why did Hayek become a student of von Wieser? We can go straight to the horse’s mouth. Hayek himself explained why he chose to study economics under von Wieser:

“I was personally a pupil of [sc. Eugen von Böhm-Bawerk’s] … contemporary, friend and brother-in-law, Friedrich von Wieser. I was attracted by him, I admit, because unlike most of the other members of the Austrian school, he had a good deal of sympathy with a mild Fabian socialism to which I was inclined as a young man. He in fact prided himself that his theory of marginal utility had provided the basis of progressive taxation, which then seemed to me one of the ideals of social justice” (F. A. Hayek, “Coping With Ignorance,” July 1978; see also Hayek 1983: 17).

When Hayek studied under Friedrich von Wieser shortly before 1921, the latter was known to have “a good deal of sympathy with … [the] mild Fabian socialism” of Hayek’s youth.

These details are confirmed in the series of interviews with Hayek published in 1983 (see Nobel Prize-Winning Economist: Friedrich A. von Hayek, Regents of the University of California, 1983).

Hayek was asked about his student days:

BUCHANAN: Well, to go back to the Austrians again, were you actually a student of Bohm-Bawerk and Wieser?

HAYEK: No. Böhm-Bawerk, no. Böhm-Bawerk died in 1915, when I was sixteen. I happened to know him as a friend of my grandfather and a former colleague at [the University] of Innsbruck, and as a mountaineering companion of my grandfather’s. But when I saw him, I had no idea what economics was, because I was too young. I was a direct student of Wieser, and he originally had the greatest influence on me. I only met Mises really after I had taken my degree (Nobel Prize-Winning Economist: Friedrich A. von Hayek, p. 249).

When Hayek was asked about the history of the Austrian school in the 1920s, he gave this account:

LEIJONHUFVUD: In economics, let me come back to a question we have touched upon before. In the twenties in Vienna, was there such a thing as an Austrian school in economics? Did you and your contemporaries perceive an identification with a school?

HAYEK: Yes, yes. Although at the same time [we were] very much aware of the division between not only Meyer and Mises but already [Friedrich von] Wieser and Mises. You see, we were very much aware that there were two traditions—the [Eugen von] Böhm-Bawerk tradition and the Wieser tradition—and Mises was representing the Böhm-Bawerk tradition, and Meyer was representing the Wieser tradition.

LEIJONHUFVUD: And where did the line between the two go? Was there a political or politically ideological line involved?

HAYEK: Very little. Böhm-Bawerk had already been an outright liberal, and Mises even more, while Wieser was slightly tainted with Fabian socialist sympathies. In fact, it was his great pride to have given the scientific foundation for progressive taxation. But otherwise there wasn’t really—I mean, Wieser, of course, would have claimed to be liberal, but he was using it much more in a later sense, not a classical liberal (Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 49–50).

In other words, there was a split in the Austrian school in the 1920s between (1) the classical liberal wing of Eugen von Böhm-Bawerk/Mises (which evolved into modern American libertarianism), and (2) the wing of von Wieser, whose members (or at least some of them) were leaning towards Fabian socialism, and was clearly becoming more like modern progressive liberalism or social democracy (see also Shearmur 1996: 29). According to Hayek, Friedrich von Wieser was proud of his work justifying progressive taxation – a viewpoint far indeed from modern American Austrians.

Hayek also confirms that socialist ideas were by no means confined to von Wieser in the 1920s/1930s Austrian school: another member who was apparently sympathetic to socialism was Richard von Strigl (1891–1942). Nor was classical liberalism/libertarianism the major or defining ideology in the discussion group called the “Geistkreis” that Hayek and J. Herbert Fürth founded in 1921:

LEIJONHUFVUD: Now, in the twenties, were most of the economists in Vienna at that time liberals in the traditional sense?

HAYEK: No, no. Very few. Strigl was not; he was, if anything, a socialist. Shams was not. Morgenstern—was not. I think it reduces to Haberler, Machlup, and myself.

LEIJONHUFVUD: So my previous question was: Was there an Austrian school? and you said yes, definitely.

HAYEK: Theoretically, yes.

LEIJONHUFVUD: In theory.

HAYEK: In that sense, the term, the meaning of the term, has changed. At that time, we would use the term Austrian school quite irrespective of the political consequences which grew from it. It was the marginal utility analysis which to us was the Austrian school.

LEIJONHUFVUD: Deriving from Menger, via either Wieser or Bohm-Bawerk?

HAYEK: Yes, yes.

LEIJONHUFVUD: The association with liberal ideological beliefs was not yet there?

HAYEK: Well, the Menger/Bohm-Bawerk/Mises tradition had always been liberal, but that was not regarded as the essential attribute of the Austrian school. It was that wing which was the liberal wing of the school.

LEIJONHUFVUD: And the Geistkreis was not predominately liberal?

HAYEK: No, far from it.

LEIJONHUFVUD: And what about Mises’s seminar?

HAYEK: Again, not. I mean you had [Ewald] Schams and Strigl there; and Engel-Janoschi, the historian; and Kaufmann, who certainly was not in any sense a liberal; Schutz, who hardly was—he was perhaps closer to us; Voegelin, who was not ….

LEIJONHUFVUD: So in the revival of interest in the Austrian school that has taken place in recent years in the United States …

HAYEK: It means the Mises school (Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 54–56).

Hayek gradually abandoned his earlier sympathy to Fabianism under the influence of Mises in the 1920s (Ebenstein 2003: 40–41), and the classical liberal strand of Austrian economics hostile to government intervention has become the only real modern form of the Austrian school. This classical liberal strand spread to America when Mises moved to New York in 1940, and as noted above it was this type that transmuted into American libertarianism.

But hostility to government was not the original essence of Austrian economics at all, and the school was divided on the issue of government intervention.

Here’s my advice for the next time you debate a libertarian who quotes Mises and Hayek: remind them that two of the first-generation founders of Austrian economics were Fabian socialists.

APPENDIX 1: HAYEK ON RICHARD HENRY TAWNEY

Richard Henry Tawney (1880–1962) was an English economic historian and Christian socialist, and famous for his book The Acquisitive Society (1920). He was professor of economic history at the London School of Economics (LSE) from 1931–1949, in much the same period as Hayek’s time at the LSE.

Tawney was an inspiration to many people who advocate social democracy or democratic socialism in the non-Marxist Western tradition.

Hayek was asked his opinion of Tawney and this is worth quoting:

ROSTEN: What about the others at the London School, such as Harold Laski, who were very much in the Fabian tradition, out of which you came, in one way or another?

HAYEK: Harold Laski, of course, at that time had become a propagandist, very unstable in his opinions. There were many other people whom I greatly respected, like old [Richard Henry] Tawney. I differed from him, but he was a sort of socialist saint, what you Americans call a dogooder, in a slightly ironic sense. But he was a man who really was only concerned with doing good—my Fabian socialist prototype—and a very wise man.
(Nobel Prize-Winning Economist: Friedrich A. von Hayek, p. 113).

Despite his condescending reference to Tawney as a “do-gooder,” Hayek was willing to refer to Tawney as a man who “was only concerned with doing good—my Fabian socialist prototype—and a very wise man.”

I can only say: how far has modern Austrian economics diverged even from Hayek. I cannot imagine a modern Austrian ever writing words like this.

BIBLIOGRAPHY

Ebenstein, A. O. 2003. Friedrich Hayek: A Biography, University of Chicago Press, Chicago.

Ebenstein, A. O. 2005. Hayek’s Journey: The Mind of Friedrich Hayek, Palgrave Macmillan, New York.

Hayek, F. A. von, 1983. Knowledge, Evolution, and Society, Adam Smith Institute, London

Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism, Ludwig von Mises Institute, Auburn, Ala.

Nobel Prize-Winning Economist: Friedrich A. von Hayek. Interviewed by Earlene Graver, Axel Leijonhufvud, Leo Rosten, Jack High, James Buchanan, Robert Bork, Thomas Hazlett, Armen A. Alchian, Robert Chitester, Regents of the University of California, 1983

Schumpeter, J. and J. B. Achille Loria, 1927. “Obituary: Friedrich von Wieser,” Economic Journal 37.146: 328–335.

Schumpeter, J. A. 1997. Ten Great Economists (rev. edn), Routledge, London.

Shearmur, J. 1996. Hayek and After: Hayekian Liberalism as a Research Programme, Routledge, London.