The Social Philosophy of the Austrian Economists

[A selection from "Austrian Economics and Classical Liberalism." See source for full list of citations and notes.]

Erich Streissler (1987, p. 1) has maintained that what united the Austrian economists into a "school" was never any theoretical concept, such as marginal utility, but simply their liberal political ideas. While this may be an exaggerated, even eccentric, judgment, the political views of the leaders of the school have certainly played a part in identifying it with liberalism.

Of the founders of the school — Menger, Böhm-Bawerk, and Wieser — it is Wieser's views that are least problematical. There seems little reason to dissent from Streissler's characterization (1987):

On a Catholic-conservative foundation, he was an interventionist liberal of a strongly nationalist variety, with a considerable admixture of racist feelings, who, moreover, could still admire Marx and play around with social-revolutionary rhetoric. Above all, however, he was a statist, who believed in the wisdom of the state machinery guided by a wise bureaucracy (coming from his own caste). (pp. 14–15)

According to Streissler, Wieser's favorite word was "führer," and, in 1926, he even welcomed the appearance of Adolf Hitler (1987, p. 15; see also Streissler 1986, pp. 86–91).

Menger's political orientation, on the other hand, has been the most studied and is the most disputed. Mises, for instance, (1969, p. 18) gave the impression that Menger was more or less a classical liberal, asserting that he "heartily disapproved of the interventionist policies that the Austrian government — like almost all governments of the epoch — had adopted." Streissler also accents Menger's liberalism, seeing him as the source of the school's commitment to the free market. Emil Kauder, on the other hand, claimed that Menger was a sympathizer with Sozialpolitik (social reform) and a critic of laissez-faire (1965, pp. 62–64).

Until recently, the chief source for Menger's policy ideas has been a piece he published in the leading Viennese newspaper in 1891, titled, "The Social Theories of Classical Economics and Modern Economic Policy" (Menger 1935b). Here Menger, on the hundredth anniversary of the death of Adam Smith, attempts to rescue Smith's doctrine from grave misunderstandings. The major misinterpretation, he finds (in the manner of the later Lionel Robbins 1953), is that Smith has been wrongly accused of supporting laissez-faire and his doctrine unjustly amalgamated to that of the Manchester School. (Starting with the socialist Ferdinand Lassalle, Manchestertum — Manchesterism — became in German-speaking countries the general term of abuse for the laissez-faire position.) It would be difficult for anyone reading Menger's piece to avoid the conclusion that he was more of a social than a classical liberal.

Streissler, however, believes (1987, pp. 20–24) that a totally new light has been cast on Menger's outlook by the researches of the Austrian scholar Brigitte Hamann. Hamann discovered the notebooks of Crown Prince Rudolf, who was tutored by Menger in 1876–1878. Streissler maintains (1990b, p. 110) that "the notebooks of the crown prince show Menger to have been a classical liberal of the purest water with a much smaller agenda for the state than even Adam Smith." It would seem, however, that Streissler exaggerates the probative value of these notebooks (see note on Carl Menger's social philosophy, below). Bruce J. Caldwell (1990b, p. 7) is probably correct when he writes, "One suspects that the final chapter on Menger's policy views remains to be written."

Böhm-Bawerk himself conceded (1891, p. 378) that the early Austrian School had not devoted much effort to practical questions of political economy, adducing as an excuse that "we must build the house before we can set it in order." He added, however, that "we have our opinions upon them, we teach them from our chairs, but our literary activities have thus far been bestowed almost exclusively upon theoretical problems." But what those opinions were that he taught from his chair remain somewhat obscure.

Kauder (1957) maintained that the founders of the school, including Böhm-Bawerk, displayed an "uneasy swinging back and forth between freedom and authority in their economic policy," the result of contradictory forces working on their thought. On the one hand, they were "social ontologists. They believe that a general plan of reality exists. All social phenomena are conceived in relation to this master plan.… The ontological structure does not only indicate what is, but also what ought to be" (1957, p. 417).

Kauder takes as an example Böhm-Bawerk's Positive Theory of Capital, which demonstrates "the natural order under the laissez-faire mechanism. In 'beautiful harmony' the economic fabric is fitted together by marginal utility, discount theory of interest, and roundabout production, if the long run price (Dauerpreis) of free competition is reached" (1957, p. 417). This "social ontology" — an earlier version of Rothbard's conception of the market economy, cited earlier — is deeply congruent with the liberal vision.

According to Kauder, however, the Austrian tradition had been one of state paternalism; even the expression of the concept of a spontaneous economic order had been actively suppressed. The founders "tried to compromise between British [i.e., Smithian] and Austrian tradition." Thus, Böhm-Bawerk wrote that the economist had to stand above both free competition and state intervention.

In the end, Kauder claimed, Böhm-Bawerk held that social stability was more important than progress, preaching a "social quietism akin to the ideals of the Austrian past"(1957, pp. 421–422). To make matters worse, Stephan Boehm (1985, p. 256) points out that "Böhm-Bawerk's outstanding achievement as Minister of Finance was the introduction of the progressive income tax on the total income of individuals" (see also Weber 1949, p. 667).

Erich Streissler (1987, p. 10), on the other hand, refers to Böhm-Bawerk as "quite an extreme liberal … [with] a very extensive skepticism towards the state." Of the three founders — Menger, Wieser, and Böhm-Bawerk — only the latter shared Adam Smith's view of the state as both "bad" and "stupid." It was Böhm-Bawerk's experiences as Austrian Finance Minister, it appears, that turned him into a caustic skeptic of government leaders and the governmental process itself.

Streissler cites two newspaper articles published in 1914, the last year of Böhm-Bawerk's life, criticizing both the idea that coercive intervention (by labor unions) can circumvent economic law, and the tendency of politicians to buy support and temporary social peace through massive expenditure of public monies (1987, pp. 11–14). The question of Böhm-Bawerk's later views is of particular interest, as Streissler indicates: Mises attended Böhm-Bawerk's seminar in 1905–1906, after the latter's last stint in government.

However, in the 1930s, two economists who were themselves sympathetic to the Austrian School attempted to dissociate the Austrian founders from the principled economic liberalism of a (then) rising star of the school, Ludwig von Mises.

In an article in Schmollers Jahrbuch, Wilhelm Vleugels (1935) defended the scientific usefulness of Austrian subjective value theory, while at the same time asserting its compatibility with the older German tradition that placed the needs of the national community above individual needs. "If at the start a certain tendency reveals itself in [the writings of the Austrians] to consider the individually most important needs simultaneously as the socially most important, that was forthwith surmounted" (1935, p. 550). Vleugels's major piece of evidence (besides statements by Wieser) is an essay by Böhm-Bawerk dating from 1886 (Böhm-Bawerk 1924), to which the title, "Disadvantageous Effects of Free Competition," had been given.

In this essay, Böhm-Bawerk considers the claim that under conditions of free competition supply and demand are brought into the "most useful" and "socially most fruitful" equilibrium, creating "the socially greatest possible quantity of absolute [rein] utility." Surprisingly, the expositor of this viewpoint was Albert Schaffle, known for his social-reformist attitudes, and it is Böhm-Bawerk who holds it up to criticism. Böhm-Bawerk characterizes it as "deceptive," in that it rests upon a "confusion of high relative with high absolute gains from exchange" (1924, pp. 476–477). Hypothesizing an "ideal standard of measurement," Böhm-Bawerk maintains that a rich consumer who outbids a poor consumer for a given good may well gain less in utility than the poor consumer would have gained.

While "cases of this kind occur, unfortunately, countless times in actual economic life" (1924, p. 479), Böhm-Bawerk takes as his example Ireland in the 1840s. The indigenous population could not afford the market price of grain, which instead was exported. The result was that the Irish starved and died, while the grain went, at least in part, to meet the demand of the rich for spirits and fine baked goods. Böhm-Bawerk concludes,

every unprejudiced person will recognize at once that here egoistic competition in exchange has certainly not led to the socially most fruitful distribution of the commodities wheat and corn, the distribution attaching to the greatest absolute [rein] utility for the vital preservation and development of the people [volk]. (1924, p. 480)

A few years before Vleugels's article was published, Franz X. Weiss, who had edited the collection of the smaller works of Böhm-Bawerk in which this essay appeared, argued the same position as Vleugels — against Mises himself. At a meeting of the Verein für Sozialpolitik, held in Dresden in 1932, and attended by Mises, Hayek, and other members of the Austrian School, Weiss, too, attempted to distance Austrian economics from Mises's liberalism, citing various published statements from the older generations of Austrians (Mises and Spiethoff 1933, pp. 51–53).

Among these were Menger's statement that it was frivolous to accuse him of being a supporter of Manchesterism; Böhm-Bawerk's assertion that, in the face of "many lamentable conditions in present-day society that require reform," "an indifferent policy of laissez-faire, laissez passer is totally inappropriate"; and Wieser's view that the concept of immutable natural laws of the economy whose course cannot be affected by state action "can hardly be taken seriously anymore."

Weiss declared that his purpose was "to establish that a number of notable representatives [of the Austrian doctrine], among them its founders, did not draw from it the conclusions for economic policy that [Mises] believes he must draw" (1933, p. 131). Mises's brief response to Weiss's critique is highly significant: "I am not so pious towards authority [autoritätsglaubig] and quotation-minded [zitatenfreudig], and I base my argumentation on logic and not on exegesis" (1933, p. 118). The interesting implication is that the political significance of Austrian economics is to be gathered not from the particular views of its major adherents but from the inner logic of the system.

It seems clear that what writers like Weiss and Vleugels found unbearable about Mises is that he was, in Vleugels's words (1935, p. 538), "a scholar who is endeavoring to reanimate decisive errors of Manchesterism in a refined form, to be sure, but still in all its extremism." These fundamental "errors" of the laissez-faire doctrine had, so it was thought, been safely buried once and for all in central Europe, if not indeed throughout the civilized world. That Mises should presume to reopen the argument over the "discredited" ideas of laissez-faire was something his opponents, then and throughout his life, could never forgive him.

It was Mises, as Kirzner has indicated, who revealed the intimate connections between Austrian economics and authentic liberalism.