Have we lost the real Austrian economics?

Janek Wasserman argues that what we know as modern Austrian economics is just politics, hand-waving, and name-dropping. Also, it began less than a century ago. In the United States.

Austrian Economics, as it is commonly understood today, was born seventy years ago this month.

Wasserman is referring to Hayek’s Road to Serfdom, which many contemporary Austrians would credit as consequential and/or popular, but not foundational. Most would point to Carl Menger’s 1871 Principles of Economics as the first treatise in the line of scholarship known as Austrian economics. Well-read Austrians could also point to earlier “proto-Austrians” like Bastiat and Cantillon as Steven Horowitz explains in his take-down of Wasserman’s piece.

Horowitz’s treatment of Wasserman is good. He shows that Wasserman has somehow overlooked the broad, vibrant scholarly work in the Austrian tradition despite citing and linking to some organizations dedicated to such work at the start.

I’d like to point out another error in Wasserman’s piece, though. He says that Austrian economics became politicized and therefore lost its claim as a legitimate, scientific area of study.

Furth, Hayek’s lifelong friend and an adviser to the Federal Reserve, felt that Austrian Economics had to be rescued from its American acolytes. There was nothing inherently libertarian or even liberal in Austrian economic theory, Furth reasoned. It was a school of economics not politics. Machlup argued that he had to bow to contemporary usage. Since the mid-1940s, a new libertarian stream had come to dominate American discussions of Austrian thought. He could not change that reality; he could only maintain a distance from the most egregious ideologues.

Karl Marx famously said about orthodox Marxism, “If that is Marxism, I am not a Marxist.” Similarly, native-born Austrians ceased to be “Austrian” when Mises and a simplified Hayek captured the imagination of a small group of businessmen and radicals in the US. Consequently, our understanding of a broader Austrian Economics, which made seminal contributions to several social scientific disciplines, has suffered—as has our comprehension of a more complex and less radical Hayek.

Rothbard is left unmentioned, but he is probably one of the “radicals” referred to in the last paragraph. Mises and Rothbard would completely agree that politics and economics are two separate sets of claims–politics is made up of normative claims, while economics is made up of positive claims.

Rothbard knew this:

If ethics is a normative discipline that identifies and classifies certain sets of actions as good or evil, right or wrong, then tort or criminal law is a subset of ethics identifying certain actions as appropriate for using violence against them. The law says that action X should be illegal, and therefore should be combated by the violence of the law. The law is a set of “ought” or normative propositions.

…and even criticized other economists for annexing, whether intentional or not, normative goals and claims in their theorizing.

Another serious problem with the Coase-Demsetz approach is that pretending to be value-free, they in reality import the ethical norm of “efficiency,” and assert that property rights should be assigned on the basis of such efficiency. But even if the concept of social efficiency were meaningful, they don’t answer the questions of why efficiency should be the overriding consideration in establishing legal principles or why externalities should be internalized above all other considerations. We are now out of Wertfreiheit and back to unexamined ethical questions.

Now, Rothbard’s particular view was that value judgments were inherent in “doing” economics and that the proper recourse for economists is to make such values known at the start. I don’t agree that economists have to do this to be economists, but you can see him wrestle with Mises’ view here:

Mises offered two separate and very different solutions to this problem. The first is a variant of the Unanimity Principle. Essentially this variant affirms that an economist per se cannot say that a given governmental policy is “good” or “bad.” However, if a given policy will lead to consequences, as explained by praxeology, which every one of the supporters of the policy will agree is bad, then the value-free economist is justified in calling the policy a “bad” one.

[…]

Now this is surely an ingenious attempt to allow pronouncements of “good” or “bad” by the economist without making a value judgment; for the economist is supposed to be only a praxeologist, a technician, pointing out to his readers or listeners that they will all consider a policy “bad” once he reveals its full consequences.

But ingenious as it is, the attempt completely fails. For how does Mises know what the advocates of the particular policy consider desirable? How does he know what their value scales are now or what they will be when the consequences of the measure appear? One of the great contributions of praxeologic economics is that the economist realizes that he doesn’t know what anyone’s value scales are except as those value preferences are demonstrated by a person’s concrete action.

I don’t agree with Rothbard’s criticism of Mises here. I think that the economist, as policy advisor, can just ask, “What sort of consequences do you want?” and, in practice, trust the policy maker is being honest about his or her own values.

When I order a hamburger at a restaurant, I expect the waiter and cook to believe me. When a policy maker asks a policy advisor for a specific effect, the policy maker expects the advisor to believe him. This way, an economist can legitimately give policy advice and explain the cause and effect involved in various economic theory without sacrificing the value-free nature of economics.

Rothbard covered Mises’ other solution later on:

There is another and very different way, however, that Mises attempts to reconcile his passionate advocacy of laissez faire with the absolute value freedom of the scientist. This is to take a position much more compatible with praxeology: by recognizing that the economist qua economist can only trace chains of cause and effect and may not engage in value judgments or advocate public policy.

This route of Mises concedes that the economic scientist cannot advocate laissez faire, but then adds that he as a citizen can do so. Mises, as a citizen, then proposes a value system but it is a curiously scanty one. For he is here caught in a dilemma. As a praxeologist he knows that he cannot (as an economic scientist) pronounce value judgments or advocate policy; yet he cannot bring himself simply to assert and inject arbitrary value judgments. And so, as a utilitarian (for Mises, along with most economists, is indeed a utilitarian in ethics, although a Kantian in epistemology), what he does is to make only one narrow value judgment: that he desires to fulfill the goals of the majority of the public (happily, in this formulation, Mises does not presume to know the goals of everyone).

An economist can make positive claims all day but as soon as he or she stumbles into normative claims, they are no longer speaking as an economist but as a real human being with a heart and values. I’m on board with both of Mises’ solutions for an economist to approach policy and therefore value judgments.

Rothbard had some remarks on this as well, but the point is that Rothbard knew and carefully laid out the distinction between economics and politics and between positive and normative claims.

Mises knew it, too:

Praxeology and economics do not say that men should peacefully cooperate within the frame of societal bonds; they merely say that men must act this way if they want to make their actions more successful than otherwise.

In fact, the whole normative vs. positive distinction is very important to modern Austrians, as it is still stressed in plenary lectures and writings all the way up to advanced seminars and papers. See David GordonRoderick LongDan SanchezJörg Guido Hülsmann, and countless others.

So, to answer the question in the title, no, we haven’t lost the real Austrian economics. You just have to look past Twitter and other popular media to find the positive economics disentangled from politics. This is true for any school of economic thought, though.

You may be wondering, however, why are there so many Austrian economists who are also libertarians? What is the relationship between the two if there is no overlap in the types of claims economics can make and the claims of political ideologies? Well, I have an answer for you.

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