“We Are All Austrians Now” and the Recent Debate about Austrian Economics

Ron Paul hopes for the day when Republicans can say that they are all Austrians (with respect to economics, that is), as you can see in this video.



This has led to a surge of interest in Austrian economics and Austrian-inspired libertarianism in the blogosphere:

Matthew Yglesias, “What is ‘Austrian Economics’?”, Slate.com, January 6, 2012.

Sheldon Richman, “Austrian Economics Hits the Headlines: Critics ought to understand it first,” Freeman Online, January 13, 2012.

Sophie Roell, “Peter Boettke on Austrian Economics,” FiveBooks Interviews, January 12, 2012.

Matthew Yglesias’s “What is ‘Austrian Economics’?” provoked a response from Sheldon Richman (“Austrian Economics Hits the Headlines”).

Although I don’t disagree in principle with Yglesias’s critical post on Austrian economics, there are some other points to be made:

(1) A distinction should be made between (1) Mises’s economic and political version of Austrianism and (2) that of Murray Rothbard. Rothbard was an anarcho-capitalist who wanted the abolition of the state; Mises was a Classical liberal who believed in an important role for government as a minimal state. Ron Paul, although he supports a radical reduction in government, seems to be more like a Misesian Classical liberal than a Rothbardian anarcho-capitalist, as Paul accepts the idea of a minimal state.

An important point is that there is considerable diversity within the Austrian school on both political and economic issues. Important divisions can be made, as follows:

(1) The Anarcho-capitalists
E.g., Murray Rothbard, Hans-Hermann Hoppe and Jörg Guido Hülsmann;
The Anarcho-capitalists support praxeology, and usually natural rights or Hoppe’s argumentation ethic.

(2) The minimal state/classical liberal Austrians in the tradition of Mises
This variety supports praxeology too, but often utilitarianism as an ethical theory;

(3) Hayek’s economics, with a minimal state;
Hayek rejected Mises’s apriorism and strict Misesian praxeology for a more empirical Popperian method for economics.

(4) Moderate subjectivist Austrians
E.g., Israel Kirzner and Roger Garrison;

(5) Radical subjectivists like Ludwig M. Lachmann (1906-1990), and Austrians influenced by him.

See “The Different Types of Austrian Economics,” December 5, 2010.

In fact, on policy and political issues, there was also a clear split in the early Austrian school. Some were Classical liberals; others were what we would now call progressive liberals or even sympathetic to Fabian socialism, including the following:

(1) Eugen von Philippovich, a leader of Austrian social liberalism and Fabian socialist;
(2) Friedrich von Wieser, sympathetic to Fabian socialism;
(3) the early Hayek, sympathetic to Wieser's mild Fabian socialism, and
(4) Richard von Strigl, who was, according to Hayek, “if anything, a socialist” (Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 54–56).

See “Friedrich von Wieser and Eugen von Philippovich von Philippsberg: Austrian Economists and Fabian Socialists,” October 21, 2010.

“Why are there no Austrian Socialists?,” June 3, 2011.

The connection with Fabian socialism that some of the early Austrians had is not something much discussed by their modern descendants, the worst of whom – the anarcho-capitalists – are little better than a cult.

(2) Yglesias states that “Austrians reject the idea that there is anything at all the government can do to stabilize macroeconomic fluctuations.” This is indeed the view of the most extreme Austrians, yet there were Austrians who supported government interventions in the depression: Hayek was the most notable example. Hayek allowed for monetary and fiscal stabilization during depressions, and, by the late 1930s, gave (qualified) support for government public works in a depression and monetary stabilization:

“Did Hayek Advocate Public Works in a Depression?,” September 25, 2011.

The Austrian radical subjectivist Ludwig Lachmann allowed an important role for government “interventions for stability,” and accepted that Keynesian macroeconomic expansion would have ended the Great Depression (hear Lachmann say so here):

“A Startling Admission from Ludwig Lachmann,” July 11, 2011.

“Ludwig Lachmann on Government Intervention,” July 9, 2011.

(3) Yglesias could have looked at other critiques of the Austrian business cycle theory (ABCT); in particular the damaging attack of Piero Sraffa (Sraffa 1932a and 1932b) of the Hayekian theory, and the collapse of the Hayekian version of the ABCT once it is seen to be an equilibrium theory requiring Walrasian fantasy notions of stationary equilibrium and the failure to consider uncertainty and subjective expectations:

“Hayek’s Trade Cycle Theory, Equilibrium, Knowledge and Expectations,” January 4, 2012.

“Austrian Business Cycle Theory: The Various Versions and a Critique,” June 21, 2011.

Secondly, Sraffa destroyed Hayek’s flawed concept of the unique natural rate of interest:

“Robert P. Murphy on the Sraffa-Hayek Debate,” July 19, 2011.

“Hayek’s Natural Rate on Capital Goods, Sraffa and ABCT,” December 27, 2011.

“Austrian Business Cycle Theory (ABCT) and the Natural Rate of Interest,” June 18, 2011.

Eventually even Hayek himself came to see his original ABCT was increasingly irrelevant to the modern world where credit flows to consumers were important:

“Hayek on the Flaws and Irrelevance of his Trade Cycle Theory,” June 29, 2011.

Furthermore, even prominent Austrians like Kirzner and Lachmann never thought the ABCT was a universal theory of cycles:

“Lachmann on Trade Cycle Models,” August 27, 2011.

(4) Yglesias notes that “developed countries that have done best in the recession—places like Israel and Sweden—are the ones that have pursued the least ‘Austrian’ courses of action.” That is correct.

One could add that in the 1930s those nations that pursued the course of fiscal contraction had the worst depressions. Weimar Germany engaged in a highly deflationary policy of budget cuts, as did a number of other countries. Yet such policies did not lead to recovery. By contrast, the nations in the 1930s that used large-scale monetary and, above all, fiscal expansion got out of the depression quickly:

“Keynesian Stimulus in New Zealand: 1936–1938,” September 23, 2011.

“Fiscal Stimulus in Germany 1933–1936,” September 3, 2011.

“Takahashi Korekiyo and Fiscal Stimulus in Japan in the 1930s,” August 27, 2011.

BIBLIOGRAPHY

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.

Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

Sraffa, P. 1932b. “A Rejoinder,” Economic Journal 42 (June): 249–251.