Part 1: A Legacy outside the institution
Part 2: Currents in Austrian School; fundamentalism, scholarship, media, etc..
part 3: Financial economics: The Efficient Market Hypothesis
Part 4: Classsical economics and Market Socialism; Updating classical
Part 5: Hayek vs. Central Planning; Hayek Vs. Rational Expectations
Part 6: The Cycle and Rational Expectations; island Parables
Part 7: The Cycle as a Prisoner's Dilemma -- in "Anarcho Capitalism"?
Part 8: 2008 Crisis and Market Efficiency; Keynes vs. Chicago vs. Hayek vs. Warren Buffett
A few months ago Droopy introduced me to the "Austrian School" of economics, the Ludwig Von Mises Institute, and the book Human Action by Ludwig Von Mises, Mises's crowning work on libertarian economics. Other than perhaps a vague mention of "Austrian economics" I'd heard somewhere, I'd never known of a "school" of an "Austrian" flavor -- an extant school -- let alone of the LvMI. I quickly recommended the 900+ page tomb penned by Von Mises be relegated to flames, and I think in retrospect that this was good advice, but I grew curious about the strange school of economics I'd never heard of. Was there really such a school? Was Droopy just making it up? If real, was it academic, a cult, a hybrid?
It turns out that Droopy was right. There was and is an "Austrian School". Like "Christians" or "Mormons", the Austrian School is named by it's critics, the name a pejorative from the mainstream contemporaries of Ludwig Von Mises and Friedrick August Hayek. The founders of the school secured an obscure movement, but not one entirely of insignificance given Von Mises is today an important footnote in introductory economics texts for his concept of price signals, and Hayek won a noble prize for his work on the business cycle; work that he subsequently abandoned, interestingly enough.
The fledgling movement according to LvMI authorities would have perished if it were not for the late eccentric, Murray Rothbard. If Von Mises stood in relation to Hayek as John the Baptist to Jesus, then Murray Rothbard would be Saint Constantine, though, this analogy might break down if we expect to find the Rome of the modern economic world in Illinois or Massachusetts rather than Auburn Alabama. How did Milton Friedman, perhaps the most famous libertarian economist of all time regard the work of the Austrian libertarians?
Milton Friedman wrote: There is no figure who had more of an influence, no person had more of an influence on the intellectuals behind the Iron Curtain than Friedrich Hayek. His books were translated and published by the underground and black market editions, read widely, and undoubtedly influenced the climate of opinion that ultimately brought about the collapse of the Soviet Union.
Milton Friedman wrote:an enormous admirer of Hayek, but not for his economics. I think Prices and Production is a very flawed book. I think his [Pure Theory of Capital] is unreadable. On the other hand, The Road to Serfdom is one of the great books of our time.
http://en.wikipedia.org/wiki/Friedrich_Hayek
If there was ever a mixed review! The politics good but the economics bad, is that what he's saying?
I wouldn't want to merely take Friedman's word for it, so after the discussions with Droopy a few months ago, I put in a number of hours over the course of a few weeks trying to understand Austrian economics. I read several papers published in The Review of Austrian Economics and many blog entries written by LvMI bloggers. I read sections of a few books published by LvMI scholars available from Google books, a couple critical pieces, a number of news articles, two chapters of Human Action online -- digital backup is handy if you burn the hard copy -- and I had email exchanges with a couple noteworthy Austrian scholars. The verdict?
There are several currents in the movement, and right now the school's growing popularity is due to a multifaceted media presence that includes plugs from Ron Paul to Alan Greenspan, along with a rising generation of LvMI scholars blogging and experimenting with multimedia campaigns. This is the populist current within the school and I think it will win out. But there are a small number of legitimate economists who are raising the bar, and with a lot of hard work and luck, it's possible that someday, Austrian ideas might reform (substantially!) enough to find a real academic niche.
I have to say this. The email exchanges I had with legitimate forces within the Austrian School influenced my perception of the LvMI positively and delayed my plans for writing these posts. I expected responses to my challenges to be dismissive and sarcastic, to parallel the kind of defensive polemics senior Mopologists engage in with critics and questioning members. Instead, the responses I received were sincere, coherent, and by the time the exchanges lost momentum, I was having difficulty figuring out exactly what it was we disagreed on. As a critic, I'd be uneasy living amongst senior-tier Mopologists, but I'd feel right at home in a neighborhood of the senior LvMI scholars I corresponded with. The problem though, was that I couldn't put the fine point to the ultimate failure of their paradigm that I wanted to, so I delayed, and now I realize resolving the loose ends will have to be a future project. So I'll just post what I have for now in somewhat incomplete form.
Another problem with posting my findings is how to organize them. I could write about three long essays and cover it all, but they'd be real sleepers. Economics is a horrifically boring subject, and even though this post may lead one to believe my report might avoid economics and focus on behind-the-scenes issues that are mildly entertaining, I really want to keep the fluff -- and I do have some good fluff -- the side issue, and make the central issue the economics. But economics is boring, and I can't in good conscious recommend anyone to read my summaries but I'll give it a go anyway. I have no planned structure from here, I don't know how many parts I'll post, I'm going to leave the format open so that it might be like filling in a puzzle rather than writing a book.
I will conclude this post by citing some material on the founding of the Austrian School and the LvMI from a couple different perspectives. Concerning the work of Rothbard that salvaged the legacy of Mises and Hayek, here's a good article, an interview with the heir to the editorship of the Austrian Review from Rothbard himself, Joseph Salerno:
http://mises.org/journals/aen/aen16_3_1.asp
Dr. Salerno wrote:Mises's Theory and History appeared in 1957. It was to be his last major work, and meanwhile Hayek had moved on to spending full time with his social evolution theory. The Austrian School would have died over the next ten years if no new theoretical work had appeared. In retrospect, Rothbard's 1956 article "Toward a Reconstruction of Utility and Welfare Economics" was a sign that great days were ahead.
In 1962 and 1963, in amazingly rapid succession, Rothbard published his seminal works, Man, Economy, and State, Americas Great Depression, and What Has Government Done to Our Money?...Rothbard has placed the Austrian School in the center of the history of economic thought...[The Austrian School] has displaced the waning Chicago School in terms of representing the free-market plumbline. That's more than progress. That's a revolution[7]
The Chicago School is likely unaware they've been displaced and appear to have little interest in discussing the matter -- perhaps peer-reviewed publishing takes up too much of their time? At any rate, I found a book about the Austrian School written by a Chicago Scholar, sympathetically, whose interest is to educate his peers on their legacy.
Hayek's Challenge, http://www.press.uchicago.edu/Misc/Chicago/091910.html
Hayek was a fringe figure:
Bruce Caldwell wrote:It is not enough to say that some of his [Hayekk's] views were unpopular. For most of his life his economic and political positions were completely out of sync with those of the rest of the intelligentsia. He attacked socialism when it was considered "the middle way," when seemingly all people of good conscience had socialist sympathies. He disavowed the Keynesian revolution—even before it had properly taken place. In the latter half of the twentieth century, when some form of welfare state existed within virtually all the Western democracies, he criticized the concept of social justice that provided its philosophical foundations. Although a small group of libertarians and conservatives always read him with enthusiasm, for much of the century Hayek was a subject of ridicule, contempt, or, even worse for a man of ideas, indifference.
Where do the fundamentalist tendencies of Austrianism come from?
Bruce Caldwell wrote:First, there is the simple fact that Hayek's writings lie within the Austrian tradition. Now, to be sure, in the 1930s that tradition was part of the then-developing mainstream in economics. In the postwar era, however, economics changed. One way to characterize the changes is to say that the discipline moved from interwar pluralism to postwar neoclassicism (Morgan and Rutherford 1998). Another is to point out that the mainstream experienced a number of "revolutions": the Keynesian revolution, the econometrics revolution, the general equilibrium or formalistic revolution, and so on. However one might choose to characterize the changes, it is clear that the Austrians did not participate in them. More strongly, people like Hayek and Mises actively opposed them. It may, therefore, be difficult for modern-day economists (who I hope make up at least a portion of my audience) to make much sense of the Austrians.