Critique of Austrian Economics
|[Mises] attracted a number of mainly younger economists who almost formed a church in his honor. They tended to misunderstand his main message and greatly exaggerated those minor parts of his work that were wrong.
- Gordon Tullock (1999, p. 229)
|Treating Mises' writings critically and professionally has been difficult in the past. Austrian economists too often and too uncharitably have bristled at any criticism that their mentor, Mises, could have been less than omniscient.
- Richard Timberlake (1999, p. 273)
The year 1930 was a turning point for everyone, that being the year when so many were financially ruined. The University of London invited Dr. Hayek of Vienna to deliver during the session 1930-31 four lectures which were published (Hayek 1967) under the title Prices and Production. Thus, the year became a turning point in economics as well: before 1930 “Austrian” denoted only nationality. After 1930, in the context of economic theory, it denoted a coherent belief system. Specifically, Hayek coined a phrase, “structure of production,” and drew a graph to illustrate it, the Hayekian triangle. Half a century later, Garrison would assert that “one of the most distinctive features of Austrian macroeconomic theory is its use of the concept of a ‘structure of production’” (1978, p. 169).
This was another difficult time for everybody. (Though not, of course, as difficult as 1930.) Interest in theoretical economics being anticyclical, there were many people turning to the Austrians for answers that mainstream economists seemed unable to provide. The two most popular books of the time were by Sennholz (1979) and Skousen (1977), but neither of these were treatises. The most current Austrian treatise was by Rothbard, written well before the stagflation of the 1970s. Rothbard noted that “one of the unhappy casualties of World War I, it seems, was the old-fashioned treatise on economic principles” (1970, p. vii). The overwhelming response to Friedman’s 1980 Free to Choose TV series should have dispelled any doubts that there was a demand for a treatise which “the intelligent layman, with little or no previous acquaintance with economics, could read” (p. vii). Yet almost twenty years had passed since Rothbard’s challenge and economists seemed content to concede that they had no alternative treatises.
Friedman was the wrong person to look to for a free-market-oriented treatise, however, since his “assumptions do not matter” methodology (1953) really precluded such an endeavor.1 Inspired by Rothbard’s words, I determined to write a treatise on economic principles. It would be a long time in coming (Aguilar 1999) and, when it did, it was not Austrian. The Austrians had to wait only ten years for a treatise (Skousen 1990). Thus, 1990 was another turning point. They had gotten their long awaited treatise.
This is the story of the evolution of Austrian economics from 1930 to 1990. It is divided into two parts: The legacies of Hayek and Mises.
1 It is significant that Friedman’s “Methodology of Positive Economics” was the first chapter of a book titled Essays in Positive Economics (1953) and that his classic statement of economic philosophy (1982) was also a collection of essays. His was a methodology for an essayist, not an economist. Before Friedman the most popular economics writer was Hazlitt and after him it was Krugman. Hazlitt was a journalist and could only be expected to write essays, but that cannot be said of either of his successors. It is to their shame that neither man ever wrote a treatise. For all of his weaknesses, at least Rothbard had the courage to “carve out of economic theory an architectonic... an edifice for beginners to see, for colleagues to adopt or criticize” (1970, p. vii). Only by criticism does science advance. The first step towards winning that race is to enter a horse. Essayists are not in the race because, without common assumptions, debunking one of their papers still leaves the others intact.