The Long FAQ on Liberalism
A Critique of the Austrian School of Economics:

INTRODUCTION


The Austrian School of Economics is an anarchist branch of economics that has attracted a wide libertarian following. Founded in 1871, it is named after four turn-of-the-century Austrian economists who developed its theories: Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises and Friedrich von Hayek. Later, as the school migrated to America, non-Austrians like Murray Rothbard and Henry Hazlitt also helped develop and popularize its teachings.

Perhaps the first thing to stand out about Austrian economics is its relationship to mainstream economics. The two completely reject each other, and proudly so. Their differences extend even deeper than their diametrically opposite interpretations of the economy; they even use different philosophical approaches. The two could almost be called separate disciplines, if they were not attempting to describe the same phenomena. So, then, how do they view each other?

Mainstream economists dismiss the Austrians as cranks. Nobel economist Paul Samuelson wrote that "I tremble for the reputation of my subject" after reading the "exaggerated claims that used to be made in economics for the power of deduction and a priori reasoning [the Austrian methods]." (1) Noted economist Mark Blaug has called Austrian methodologies "so cranky and idiosyncratic that we can only wonder that they have been taken seriously by anyone." (2)

Austrians, on the other hand, have their own spin on their differences. Here's Llewellyn Rockwell, Jr., president of the Ludwig von Mises Institute, after listing several different economic schools of thought: "Also part of this mix, but in many ways apart from and above it, is the Austrian School. It is not a field within economics, but an alternative way of looking at the entire science." (3) As we shall see, that the Austrians are "apart" is clear -- "above" is mere bluster.

For most of the Austrian School's history, mainstream academia has simply ignored it. Even today, none of its works are on the required reading list at Harvard. Most introductory economics texts don't even mention the school, and its economists are absent from many encyclopedias or indexes of the century's great economists. Several of its founding figures struggled to make ends meet, rejected by universities which did not view their work as sound. Even today, the movement's faculty boasts no more than 75 scholars worldwide. (4) By comparison, there are over 20,000 economists in the American Economics Association alone. Their failure to rise in academia has not been for want of publicity -- on the contrary, their leaders have been publishing books for over 120 years, all the while bumping elbows with famous economists like John Maynard Keynes. And after Hayek shared a Nobel Prize in 1974 for a contribution to monetary theory, the school received a huge burst of academic attention. But it was just as quickly rejected. Their dismal showing in academia stems from the fact that they have simply failed to make their case.

In classic crank tradition, Austrians have a conspiracy theory to explain this failure. In an essay subtitled "Ignorance and the Universities," Austrian professor Patrick Gunning writes:

"The aim of this essay is to try to explain why positivism [the mainstream approach] has succeeded in professional economics, while subjectivist economics [the Austrian approach] has failed. It… identifies two main reasons for this phenomenon. The first is that ordinary people cannot tell the difference between good and bad economics. The second is that the training ground for professional economics is the university. In modern times, the university is more likely than not to be funded by the government. In a democracy, government funding implies (1) a competition for funds and (2) bureaucracy. Both of these characteristics favor positivism." (5)

Today the Austrian tradition is kept alive by the Ludwig von Mises Institute, a think tank financed entirely by wealthy business donors. It is part of a broader phenomenon, the explosion of far-right think tanks in the last 20 years, funded by such conservative and libertarian donors as the Bradley, Coors and Koch family foundations. These foundations have poured hundreds of millions of dollars into the creation of an "alternate academia" of right-wing think tanks, after the failure of mainstream academia to support right-wing dogma. This alternate academia comes complete with extensive media ties to publicize their research, which is why Austrians are so frequently found on conservative talk radio. Austrian economist Israel Kirzner describes the critical role that their primary backer, the Foundation for Economic Education (FEE), has played in the "revival" of Austrian economics:

"It was their vision which brought Ludwig von Mises to FEE at a time when he was, to put it mildly, all but ignored on the academic scene. It was through the resources of FEE, its skilled use of the tools of communication and public education, which ensured that Mises' message would survive." (6)

This movement has not been completely unsuccessful in making inroads into "liberal" academia. Austrians have self-described "intellectual communities" at three universities, most notably Auburn, where the von Mises Institute is affiliated. The Institute publishes only one journal and one newsletter in English, and holds only one major seminar a year. However, thanks to its well-funded publicity, the movement is starting to generate more academic discussion.

The differences between Austrian and mainstream economics

The Austrian School is not a monolithic ideology. One of their top professors, Peter Boettke, writes: "…It must be admitted that Austrian economics is plagued with many thorny issues of an epistemological, theoretical, empirical, and political nature. Disagreement within the ranks of Austrian economists still persists over [many] issues…" (7) Perhaps the largest split is between the "narrow church" of Mises and the "broad church" of Hayek. The Miseans do not consider Hayek a "true" Austrian, and even refer to him privately as a "social democrat," because he did not subscribe to all the tenets of hard-core Austrianism.

Factions aside, the general differences between Austrian and mainstream economics can be summarized as follows:

• Mainstream economists use the scientific method; Austrians reject it, at least for the study of the economy. Instead, they use a pre-scientific method which deduces truths from a priori knowledge.


• Mainstream economists make heavy use of statistics; Austrians claim statistics have very little value, because of their extreme limitations.


• Mainstream scientists believe in both objective and subjective truth (that is, absolute truth and personal truth); Austrians believe only in subjective.


• Mainstream scientists seek to explain human behavior on many different levels: the gene, the individual, the group and the specie. Austrians believe that all explanations of human behavior can be traced back to the individual.


• Mainstream economists often use models that use perfect starting assumptions; Austrians claim not to.


• Mainstream economists believe that monopolies can arise from a number of causes; Austrians believe that only government causes monopolies.


• Mainstream economists believe in fiat money; Austrians believe in the gold standard.


• Mainstream economists assert that the mystery of the business cycle is deep and poorly understood; Austrians claim the government causes it.

Next Section: The Scientific Method
Return to Main Page

Endnotes:

1. Paul Samuelson, Economics, 6th ed. (New York: McGraw-Hill, 1964), p. 736.

2. Mark Blaug, The Methodology of Economics (New York: Cambridge, 1980), p. 93

3. Llewellyn H. Rockwell, Jr. (president and founder of the Ludwig von Mises Institute), "Why Austrian Economics Matters," http://www.mises.org/why_ae.html.

4. "About the Ludwig von Mises Institute," http://www.mises.org/book_catalog/about.html.

5. J. Patrick Gunning, "Subjectivist Economics vs. Positivism: Ignorance and the Universities," http://stsvr.showtower.com.tw/~gunning/subjecti/mean_sub/subvspos.

6. Israel M. Kirzner, "Fifty Years of FEE--Fifty Years of Progress in Austrian Economics," The Freeman, May 1996.

7. Peter J. Boettke, "What is Wrong With Neoclassical Economics (And What is Still Wrong With Austrian Economics)" in Fred Foldvary, ed., Beyond Neoclassical Economics (Edward Elgar Publishing, 1996).