Austrian Economics in Transition

Was Carl Menger a radical supporter of economic liberalism like the later members of the Austrian School of Economics? This is still an open question, even among scholars deeply involved with the study of the Austrian School in general and Menger in particular. There are good reasons for this: Menger’s main works were in the fields of economic theory and methodology, published in 1871 and 1883 respectively. Although we have some other small pamphlets and papers dealing with specific topics, Menger did not have many opportunities to publish his works on economic policy while he was alive. Historians of economic thought are compelled to garner assorted comments that are scattered throughout the various papers and books that Menger did publish during his lifetime.

After nearly 20 years of retirement, Carl Menger died on 26 February 1921, leaving behind a considerable number of notes and manuscripts as well as over 20,000 books. In the turbulent and inflationary days after the war, the bereaved sold the main part of the library — one of the best collections of economic literature in the world — to a university in Japan. Some parts of Menger’s manuscripts were edited by his son for inclusion in the second edition of the Grundsätze der Volkswirtschaftslehre (Principles of Political Economy) which was published two years later in 1923. Between two publications nearly half a century passed, during which period the author devoted time to reflecting on the nature of economic theory, to whose renovation he had contributed with the first edition of the Grundsätze.

The new Historical School of German economics was created to find a new style of research to solve the social question. Pioneers began to revise academic practices through social research, statistics, the investigation of legislation and administration, and a ‘Seminar -system (Grimmer-Solem, 2003: 43–67). The old Historical School, which criticized the universal validity of economic theories, had interests in real society, and these interests were received by their successors as useful legacy. In the ‘Methodenstreit’ Carl Menger stresses the significance of theory in the academic episteme concerning economic phenomena, and insists on improving the status of theory. To Schmoller, the Austrian School was nothing but a new trend within the narrow theoretical interest and had nothing to do with resolving the social question. Schmoller could not accept their pretension. The two schools began a battle to seize a majority of professorships in German speaking areas.

So wrote Ernst Troeltsch to Heinrich Dietzel on 22 October 1917, responding to a request that he assess the relative merits of Max and Alfred Weber regarding appointment to a University of Bonn chair in economics. His offhand remark noting a redirection of Weber s interests some years before serves to underline the fact that well into the new century Max Weber was indeed primarily thought of as an economist. His first permanent university appointment had been at Freiburg, as Professor of Economics and Financial Science;² he had then succeeded Karl Knies under the same title at Heidelberg in 1897, suffering a breakdown the following year and eventually resigning from the post in 1903.³ When he formally resumed teaching in Vienna in 1918,⁴ and when in 1919 he succeeded Brentano in Munich, the posts he occupied were also in economics. And as we shall see below, Weber would in fact return to his earlier work on economic theory in the second chapter of Wirtschaft und Gesellschaft, a dazzling achievement completed in the months before his death in June 1920.

In a former essay dedicated to a part of Wieser s contribution to economics and economic sociology (Arena, 2003), we noted that, within the triumvirate of the founders of the Austrian School, Friedrich von Wieser is certainly not the one who is the most esteemed by modern historians of economic thought. On the one hand, he is frequently considered as a mere and faithful follower of Carl Menger; and his theoretical originality is supposed to be much weaker than that of Böhm-Bawerk. On the other hand, his observations on human races and his inclination in favour of authoritarian political regimes did not contribute to making him very likeable. These circumstances led certainly to an undervaluation of his economic works. Wieser s economic theory, however, offers a very interesting mixture of economic analysis and economic sociology and its insights strongly contributed to the development of the intellectual achievements of the second generation of the Austrian School (see Streissler, 1986: 85, 91–3, 1988: 195). Moreover, if a part of Wieser s work contributed to the formation of what was later called the ‘Marginal Revolution’ (see for instance Wieser, 1889/1893), another part certainly participated in the process of transition which favoured the emergence of an original Austrian approach. In this contribution we would like to focus mainly on this second part of Wieser s social and economic theory, also because it is too often ignored.

The crisis of the institutions of liberal capitalism dates back to the last decades of the nineteenth century. Economics was thenceforth forced to radically reconsider its achievements and even its basic presuppositions, to the extent that they were linked to a free-market and perfect-competition model.

Philosophical interpretations of Menger’s approach to economics can be divided into two groups: one considering his approach from a more ‘technical’ point of view; and one considering possible philosophical influences on his position. Authors belonging to the first group consider questions such as whether Menger regards inductivist or deductivist techniques as primarily appropriate for economics (Schmoller, 1883; Keynes, 1891; Kerschagl, 1925). Authors belonging to the second group try to establish the influence of specific philosophical theories upon Menger’s economic theories and methodological positions. They suggest that Menger’s economic theories and methodological positions reflect influences of the philosophy of Kant (Dobretsberger, 1949) or opine that they reflect principles of rationalism and intellectualism, such as represented by the philosophy of Wolf (Boos, 1986). But the most prominent group among those interpretations asserts that Menger defends an Aristotelian essentialist position. It also seems that this interpretation has become a kind of standard interpretation of his economic, philosophical and epistemological positions (Kauder, 1958, 1962; Hutchison, 1973; Alter, 1990; Smith, 1990; Campagnolo, 2008).

The dismissal of academics from German universities under the Restoration of Civil Service Act from 7 April 1933, which enabled the Nazis to fire scientists because of racial and/or political reasons, and the expulsion of academics from Germany, and after the ‘Anschluss’ in March 1938 also from Austria, interrupted or destroyed promising developments in economics as well as in physics and other fields. This caused a negative turning-point for the long-term development of sciences at German-speaking universities. German and Austrian economics fell behind internationally and had to undergo a laborious catching-up process after 1945 without being able to fully compensate the loss of qualified personnel in the following decades. In contrast, the economists who had been driven out of Germany and Austria not only enriched the development of their specialized areas in their host countries, but also made decisive contributions to the international standard of research. This holds in particular for the United States, which was the direct or indirect destination for some two-thirds of German-speaking émigré economists, and which also became the new home for ‘Austrian economics’.

On 11 December 1926, Friedrich August Hayek wrote to Oskar Morgenstern, then at Harvard on a Rockefeller Research grant:

You will wonder that it is just Professor Mises and me, having always been rather sceptical of such research methods based on statistical inquiries, who are responsible for creating this thing.¹

In the interwar period, the Austrian School of economics neither did nor could stay in Austria; hence, most of its members emigrated, mainly to the United States. A precursory work on this emigration points out the economic and political reasons.

On 3 July 1866 the Prussian army won a decisive victory over the Austrians at the battle of Königgrätz. Ill-equipped with outdated muzzle-loading rifles and under the blundering leadership of Ludwig von Benedek, the Austrian army suffered a crushing and devastating defeat (see among others Craig, 1964 or Herre, 1978). Not even the brilliant and much celebrated military victories at Custozza by Archduke Albrecht and at Lissa by Admiral Wilhelm von Tegettoff could offset this lasting humiliation. This stigma conspicuously contributed to the fact that the label ‘Austrian’ had acquired a somewhat condescending implication in the German Reich. Especially the academic community in the Austro-Hungarian Empire¹ was frequently looked down upon and most of their publications were often ranked inferior.²

The Sensory Order published in 1952 is unique among Hayek’ s works. Although many economists and political scientists acknowledge its significance, they have seldom studied it because it requires the reader to have some knowledge of cognitive psychology.¹ Despite this, many researchers have regarded it as the beginning of Hayek s knowledge theory and have suggested the necessity of a detailed investigation. Kurt Leube, the author of Chapter 13 of this volume worked as Hayek’s assistant for many years and pointed out the significance of The Sensory Order. This chapter is supplementary to Leube s chapter.

It is often admitted that great philosophers and economists tend to show very drastic turns in the evolution of their ideas or theories. For example, we may quote, on the one hand, Kant and Wittgenstein for such philosophers, and on the other, Keynes and Marx for such economists. Hayek will certainly be included in this list.

Would it be a normative imperative that the methodology of social science should be neutral in respect to any ideological value? Or would it be an illusion that the methodology is exclusively useful for scientific procedures?