THE HISTORY OF AUSTRIAN SCHOOL OF ECONOMICS

1936-2001

Alexandre Padilla

University of Law, Economics and Science of Aix-Marseille (FRANCE) and

George Mason University

alexpadilla@mises.org

http://www.alexpadilla.org

ORGANIZATION:

(1) The Interwar Period

(2) Mises' Human Action and Hayek's Individualism and Economic Order
(3) The Austrian Revival
(4) The Present State of Austrian School of Economics

1. The Interwar Period

• As we have seen previously by the mid-30's, there was virtually no Austrian School of
Economics. Mainstream economics has absorbed more or less the important points the
Austrians made.

• Its members were dispersed around the world:

ƒ Hayek was at LSE (1931), which became the new intellectual center of the
universe. He moved to US at the Chicago University (1950).
ƒ Mises' students moved to U.S.: Haberler, Machlup, Morgenstern,
Schumpeter had prestigious position in U.S. universities.
ƒ Mises moved to Switzerland in 1934 because of Nazi's takeover threat of
over Austria. Mises stayed in Switzerland (Geneva) until 1940 and after
moved to US in 1940 to New York. His chair as a professor of International
Economic Relations at the Graduate Institute of International Studies at the
University of Geneva was his first and last paid academic post. Actually, he
turned down a position at UCLA.

• Keynesian avalanche buried Austrian School.

• True, Hayek and Mises published many works and were involved in many debates:

ƒ Mises (1920, 1922) and Hayek (1935) were involved in Socialist Calculation
Debate against Socialist economists such as Taylor, Lerner, Roper,
Dickinson, and Oskar Lange who was the most prominent figure.

ƒ Hayek has been involved with a debate with Keynes on the Treatise on
Money (1930) but unfortunately did not write A General Theory of
Employment, Interest and Money (1936).

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 ƒ Hayek has been involved in a debate with Piero Sraffa and Frank Knight over
Theory of Capital in the 30's.

• Mises published in 1940 in Nationalökonomie while he was teaching in Switzerland. This book
represents the crowning point of his scientific research in the fields of monetary theory and the
trade cycle, the comparative analysis of economic systems, and the methodology of social
sciences. Unfortunately, Nationalökonomie proved a total flop because of the war and therefore
people did not read it. Only Knight (another occasion for Knight to attack Austrian theory of
capital) and Hayek reviewed it.

• Hayek published several papers (1937, 1945, 1948), which later will be considered as his most
important contributions, in particular, among Hayekians. These papers mark the beginning of
Hayek's dissatisfaction with general equilibrium economics and the change of his views on
economics (focus on knowledge problems).

2. The Post-WWII: Mises' Human Action (1949) and Hayek's Individualism and Economic Order
(1948) – The Rebirth of Austrian School

• The late 40's mark the beginning of the revival of Austrian Economics with two important books.

• In 1948, Hayek published a collection of lectures and papers that he has previously given or
published.

• In 1949, Mises published Human Action: A Treatise on Economics at Yale University Press. This
book did not share the same fate of its German language predecessor and has been in print since
1949 and continues to be sold (1996: 4th Edition published by the FEE; 1998: Scholar's Edition
celebrates the 50th birthday of Human Action). This book was originally considered as the English
version of its German predecessor and has the same overall structure of seven parts. However,
there are significant differences. First, it is longer and has numerous additions. Second, some
passages, sections, and chapters previously in Nationalökonomie have been omitted, shortened or
modified. One important addition is the chapter on Uncertainty.

• Human Action is important in two respects:

ƒ First, it is an attempt to revive the Mengerian tradition.

ƒ Second, this work tries to correct the flaws existing in the Mengerian system;
elaboration into a complete and unified system of economic theory.

• Reference on the role of Human Action in the revival of the Austrian School, see Joseph T. Salerno,
"The Place of Human Action in the Development of Modern Economic Thought," Quarterly Journal of
Austrian Economics, Spring 1999, Volume 2, No. 1.

• See also Herbener, Hoppe, and Salerno (1998), "Introduction to the Scholar's Edition".

• See also Peter J. Boettke (2001), "The Place of Nationalökonomie: Theorie des Handelns und
Wirtschaftens in Modern Political Economy."

• For fun – You can download mp3 on www.mises.org and I encourage to listen the following files:

ƒ Rothbard, "Mises in One lesson"

ƒ Joseph T. Salerno, "Human Action in the History of Economic Thought," Mises
University 2001.

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3. Rothbard, Kirzner, and Lachmann: 1956-1974

• Three major economists contributed to the Austrian revival: Rothbard (1926 -1995), Kirzner (1930 -
), and Ludwig M. Lachmann (1906-1990).

• Two of them, Rothbard and Kirzner, were Mises' students at New York University when he was
teaching, every Thursday evening, seminar on economic theory as permanent "visiting Professor" at
the Graduate School of Business.

• Rothbard attended at Mises' seminars when he was graduate student at Columbia University and
was Joseph Dorfman's student. Already a great defender of free-market, Rothbard had been
introduced to Mises while he was "hanging out" at the Foundation for Economic Education (FEE).

• Kirzner attended at Mises' seminars when he was completing a MBA with a major in accounting.
After meeting Mises and attending his seminars, he "saw the light" and decided to pursue a Ph.D.
under Mises.

• (Little story, when Kirzner came to give a talk in Aix-en-Provence – where I am from -, he told us,
that when he was planning to do a Ph.D., he received an offer from Machlup, who was also a Mises'
student, to come to pursue his Ph.D. at Princeton. He went to see Mises for advice and Mises kindly
advised him to accept the offer. Mises considered that working under the direction of Machlup was a
great opportunity for Kirzner. Kirzner turned down Princeton's offer.)

• The third contributor to the Austrian revival was a Hayek's student, Ludwig Lachmann, at LSE.
Nevertheless, there is no doubt that Mises had a strong impact on Lachmann.

• We can list Rothbard and Kirzner's works which have contributed to the revival of Austrian
Economics in 1974. Lachmann's contributions, while important, have more contributed to the
development of Austrian School from inside; that is to say, Lachmann's work has played a role of
agitator by raising questions.

• Rothbard' works are Misesian in the strict sense of the term. Follower of Mises, he belongs to the
"rationalist" branch of Austrian Economics (See Hoppe (1999), "Murray Rothbard: Economics,
Science and Liberty"). Between 1956 and 1974, Rothbard has already published that we would
called today classics in Austrian Economics:

ƒ 1956: "Toward a Reconstruction of Utility and Welfare Economics" – In this

masterpiece, he develops his concept of demonstrated utility.
ƒ 1960: "The Mantle of Science" – In this paper, Rothbard develops a defense of
Misesian/Austrian methodology.
ƒ 1963: Man, Economy, and State – Treatise on Economics. He wrote this treatise
at the age of 36! It is a "simplified" version of Mises' Human Action that was
intended to economists not familiar with Austrian Economics. However, this
book contains to elaboration of Mises' work: A Theory of Monopoly and a
typology of Government Interventions.
ƒ 1963: What has Government Done to Our Money? – This booklet is an
introduction to monetary theory and America's Great Depression – Application
of Austrian Business Cycle to the Great Depression; the cause of Great
Depression originates in FED's inflationary monetary policy in the 20's.
ƒ 1970: Power and Market – Elaboration and Extension of Man, Economy, and
State's Chapter XII on Government Intervention.
ƒ 1973: "Praxeology as the Method of Economics," "Praxeology as the Method of
Social Sciences," Value Implications of Economic Theory."

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• Kirzner was Mises' student too. Nevertheless, his own work represents more a synthesis between
Mises and Hayek's works. Even if we cannot deny the importance of his work, his contribution is
milder in comparison to Rothbard's. First, Kirzner's contribution does apply to a limited number of
issues; the most important one being Entrepreneurship and the Market Process. At this point, it is
necessary to emphasize that the idea of process is the central and distinctive feature of Austrian
Economics in comparison with Mainstream economics. Second, as Karen Vaughn (1994: 101)
emphasizes, Kirzner's works attempt to carry Misesian ideas in the context of mainstream academic
community and it is why "Kirzner focused his attention on specific Austrian themes that seemed
most congenial to opening up a dialogue with mainstream economists." Of course, the question is
whether Kirzner succeeded or not. By 1974, Kirzner has already published important works:

ƒ 1960: The Economic Point of View – Work on History of Economic Thought

ƒ 1963: Market Theory and the Price System – In this work, Kirzner attempts to
introduce Misesian concepts and language and explanations of economic
processes into standard theory.
ƒ 1966: An Essay on Capital
ƒ 1967: "Methodological Individualism, Market Equilibrium and Market Process."
(Il Politico)
ƒ 1973: Competition and Entrepreneurship – His major work. Actually, his
additional works, which will come later, are elaboration of this work. In this work,
Kirzner attempts to elaborate an entrepreneurship-based theory of market
process.

4. The Austrian Revival: South Royalton and Nobel Prize – 1974

• Two important events in 1974 mark the "official" Austrian Revival:

ƒ Friedrich A. Hayek wins the Nobel Prize for his work on "Money and Economic
Fluctuations."
ƒ South Royalton Conference in Vermont. One week conference sponsored by
the Institute for Human Studies (IHS).

• At the conference, were participating Rothbard, Kirzner, and Lachmann. Lachmann was practically
unknown for most of the participants.

• Papers presented at the conference dealt with different issues: Methodology, History of Economic
Thought, Economic Policy, and Ethical implications of Austrian Economics. The papers were later
published in a collecting papers book edited by Edwin Dolan in 1976 under the title The Foundations
of Modern Austrian Economics.

• Anecdote: Milton Friedman came to the conference and asked basically what was it about?
According to Friedman, "there is no such thing as Austrian Economics – only good economics, and
bad economics."

• This conference is important because many young graduate students attended to it; the same
graduate students that will later become the 6th Generation of the Austrian School.

• Lachmann presence at this conference is very important because he can be considered as the
founding father of a third branch in the Austrian School: the radical subjectivist. Lachmann argued in
favor of pushing subjectivism at his extreme by including in the analysis the subjectivism of
expectations. Moreover, he argued against Kirzner that Entrepreneurship was not necessarily
equilibrating. Lachmann was strongly influenced by G.L.S. Shackle, also a student of Hayek.

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5. The Sons of the Revival: The 6th Generation

• As we have previously said, many young graduate students attended to the South Royalton
Conference, among these students were present Walter Block, Mario Rizzo, Lawrence White,
Joseph Salerno, and Don Lavoie.

• These young students who will make up the 6th generation have been influenced differently during
this conference and have focused their research on different themes.

• Walter Block focuses his research on law and economics topics, public choice (constitutional political
economy), History of Economic Thought. He is very prolific. Probably is most famous book is
Defending the Undefendable which is a book more focused in political philosophy. He is also famous
for his debate with Harold Demsetz on Efficiency concept. His main influences are Mises and
Rothbard.

• Joseph Salerno focuses his research on monetary and banking theory and history of economic
thought. His main influences are Mises and Rothbard. As Rothbard, he is in favor of 100% gold
reserve and on this issue he is opposed to the Free-Banking School of which one of the leaders is
Lawrence White.

• Lawrence White focuses his research on monetary and banking theory. His main influences are
Kirzner and Hayek.

• Mario Rizzo was a student of Gary Becker. His main interests are law and economics and theory of
market process. He also worked on methodology and epistemology. His main influences are clearly
Hayek, Lachmann and Shackle. He attacks Landes and Posner's argument in favor of efficiency as
decision criterion for judges. He wrote several papers from an Austrian Perspective on liability and
tort law.

• Don Lavoie was a student of Israel Kirzner and Kirznerian influence is clearly in his first works.
Nevertheless, his opinion has changed through time to reach a relativist/nihilist position clearly
influenced by Lachmann and Shackle. Following Lachmann, he is at the origin of the hermeneutic
movement within the Austrian School.

• Roger Garrison focuses his research on Macroeconomics and Theory of Business Cycle. His most
important work is his recent book Time and Money. His main influence is Hayek.

• Hans-Hermann Hoppe focuses his research on political philosophy, methodology and epistemology.
He was Rothbard's colleague both at Brooklyn Polytechnic Institute and after at University of Las
Vegas.

• Peter Lewin is a Lachmann's student. He did his Ph.D. under Becker. His main contributions are in
capital theory, market-process theory, and theory of the firm.

• These Rothbard, Kirzner, and Lachmann's students opened a third branch in the Austrian School:
the Radical Subjectivism and have engaged several debates within the Austrian School on the
legacy of Hayek, Mises, their difference, the problem of economic calculation, the nature of
entrepreneurship (equilibrating or not?), the methodology of Austrian Economics, etc.

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6. The Present State of Austrian Economics: The 7th Generation

• The same students who attended to the South Royalton Conference have their own students.

• They organized conferences, seminars, meetings to which young undergraduate or graduate

students attended. Then, they earned their Ph.D. and started publishing in their own reviews (e.g.,
Review of Austrian Economics, Market Process) or edited collected-papers books.

• Among these members of the new generation, we find:

ƒ Peter Boettke, Steven Horwitz, and David Prychitko who are Don Lavoie's
students.

ƒ George Selgin who is White's student.

ƒ Peter Klein, Tom DiLorenzo, and Jeffrey Herbener who were not students of
Austrians professors but discovered Austrian Economics by themselves.

• These scholars focus also on different issues and fields in Austrian Economics. In the recent years,
several debates have taken place between these scholars but unfortunately nothing really new
emerged from these debates, mostly these debates are rehash.

• These scholars have like their predecessors organized seminars, conferences, meetings outside
and inside universities in which they teach Austrian (e.g., The Ludwig von Mises Institute organized
The Mises University, The Rothbard Graduate Seminar, the Mises Seminar, the Austrian Scholar
Conference, they have their own workshop in Austrian Economics and Political Theory; The Society
for the Development of Austrian Economics has his own sessions in the Southern Economic
Association meetings; Mario Rizzo is the director of the Austrian Colloquium at NYU; Peter Boettke
is the director of the J.M. Kaplan Workshop in Political Economy at George Mason University; some
universities such as GMU has courses in Austrian Economics at the Undergraduate and Graduate
Levels).