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The Present State of Austrian Economics By Murray N. Rothbard 1 [This paper was delivered at the Tenth Anniversary Scholars Conference of the Ludwig von Mises Institute, October 9, Working Paper
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The Present State of Austrian Economics By Murray N. Rothbard 1 [This paper was delivered at the Tenth Anniversary Scholars Conference of the Ludwig von Mises Institute, October 9, Working Paper from the Ludwig von Mises Institute, November Reprinted in The Logic of Action One: Method, Money, and the Austrian School. Glos, UK: Edward Elgar Publishing Ltd., 1997, pp Reprinted in Journal des Economistes et des Etudes Humaines, Vol. 6 No. 1 (March 1995), pp ] In the past two decades, there has been a seeming growth of methodological sophistication in the world of economics. Until the early 1970s, a blind Walrasian formalism held total sway in microeconomics, while a triumphant Keynesianism dominated macro, all held together by an unthinking and arrogant empiricist epistemology of logical positivism. The micro and macro synthesis of the neoclassical paradigm were both embodied and symbolized in the work of Paul Samuelson, while the positivist methodology was enshrined in the famed 1953 article of Milton Friedman and the later work of Mark Blaug. 1 Since that point, however, the dominant positivist paradigm has been effectively overthrown, to be replaced by a bracing and near-chaotic Kuhnian crisis situation in the methodology of economics. For the last two decades, a dozen, if not a hundred, schools of economic thought have been allowed to bloom. Unfortunately, however, the orthodox paradigms in macro and especially microeconomics are still dominant, although less aggressively held than before; the crisis situation in methodology has not yet been allowed to trickle down fully to the substantive bread-and-butter areas where economists, after all, earn their livelihood. If methodology is in ferment, however, the rest of the substantive fortress may soon follow. The deterioration of the dominant neoclassical paradigm starting in the early 1970s has numerous causes. I would contend that the main cause was the abject collapse of the Keynesian System upon the emergence of the first major inflationary recession in , an anomalous situation that has marked every recession since. The inflationary recession of the early 1970s 2 was a shock for two reasons: (1) in the Keynesian model, 1 For my purposes, I am ignoring the allegedly wide gulf between the earlier positivists with their verifiability criterion and the Popperites and their emphasis on falsifiability. For those far outside the logical empiricist camp, this dispute has more of the appearance of a family feud than of a fundamental split in epistemology. The only point of interest here is that the Popperites are more nihilistic and therefore even less satisfactory than the original positivists, who at least are allowed to verify rather than merely not falsify. For a brilliant and incisive discussion and demolition of the logical empiricist contention on many levels, see David Gordon, The Philosophical Origins of Austrian Economics (Auburn, Ala.: Ludwig von Mises Institute, 1993). 2 Actually, inflationary recession had first emerged during the inflationary boom, which took place within a deep depression. But since the origins of that depression, in , were seemingly not inflationary, this episode was considered anomalous, and irrelevant to future cycles. In addition, prices first began to creep upward, but only slightly, during the recession, an overlooked but important harbinger of things to come. During 1966, there was a recession again without the usual price fall, but this 2 recessions are supposed to be due to underspending, and inflation to overspending; how then could both occur at the same time? And what can fiscal (or even monetary) policy do about it? and (2) intervention and statist planning of fiscal policy and growth economics in the 1960s was supposed to have eliminated business cycles forevermore, to bring us, in the naive jargon of the economic Establishment of that day: full employment without inflation. Business cycle courses were purged from graduate curricula; for if business cycles had been rendered obsolete, such courses would only be antiquarian studies of economic history. The severe inflationary recession of , followed by a similar and even more severe recession of , ended the myth of the disappearance of business cycles. 3 And if planning for growth was seen to be flawed and even counter-productive, then perhaps government planning in general had severe problems; it was no coincidence, then, that the 1970s saw the resurgence of free-market economies and of free-market thinking among economists. I contend, too, that the renaissance of Austrian economics beginning at about the same time was part and parcel of this general disillusion with both Keynesian economics and with government intervention, and part of a resurgence of free-market thinking. The Nobel Prize in economics granted to F.A. Hayek in 1974 has generally been credited with setting the spark for the Austrian revival, and there is much to be said for this thesis, especially considering the superstitious awe and veneration with which the Nobel Prize is regarded by the economics profession. But unless we really believe that the Swedish economists who award the Nobel annually are guided solely by divine inspiration, we must recognize that these gentlemen, too, reflect ideas current in the economics profession in Sweden and in Europe as a whole. After World War II, the Swedish profession, even more than their colleagues of other countries, was notoriously the home of Keynesianism and of econometrics; and the first Nobels, from 1969 through 1973, reflect that bias. It is no accident, then, that Hayek s Nobel prize in 1974, shared ironically with the leftist maverick Gunnar Myrdal, was the first one to be granted to a free-market economist. 4 It is also significant that the first free-market Nobel went to Hayek, not for his later vaporings in spontaneous order, knowledge, evolution, and so on, for which he is unfortunately revered by most current Austrians, but instead for his elaboration of the Misesian business cycle theory which had been prominent in Britain in the 1930s, only to be swept away, in the late 1930s, by its great enemy, the Keynesian Revolution. To grant the first free-market Nobel to the antipode of Keynesian macrowas disregarded because the 1966 episode was not quite deep enough to meet the overly venerated National Bureau criteria for a recession. So the shock came like a bolt from the blue to the profession. 3 We might even say of the business cycle as the great Etienne Gilson said about natural law: the natural law always buries its undertakers. 4 Previous Nobels had been granted to: Keynesian econometricians Ragnar Frisch and Jan Tinbergen, Paul Samuelson,, national income statistician Simon Kuznets, Kenneth Arrow and John R. Hicks, and input output planner Wassily W. Leontief. 3 theory cannot be considered a coincidence: it symbolized the end of the unquestioned dominance of the Keynesian-statist paradigm in economics. 5 The Austrian revival starting in 1974 has now lasted long enough and taken hold firmly enough to enjoy the luxury of its first published historian, who places central emphasis on the week-long South Royalton, Vermont, Austrian conference in the summer of Professor Karen Vaughn was a youthful participant, now turned participant-observer, at this conference, but unfortunately her account of that conference and of the revival generally is both biased and totally unsatisfactory. One of the minor purposes of this paper, in the course of a critique of that revival and of the current state of Austrian economics, is to analyze and correct the Vaughn record. 6 Paradigms and the Whig Theory of the History of Science One of the most welcome aspects of the methodological ferment of the past twenty years has been the overthrow of the once-dominant Whig notion of the history of a scientific discipline: that it proceeds, onward and upward in linear fashion, testing hypotheses, accumulating knowledge, and discarding the dross, so that scientific knowledge embodied in the latest textbooks and journal articles at point t is always and necessarily greater than at point t 1. This means that since the scientific discipline always knows more, say in 1983 than in 1971 or 1962, that there is no point in reading any part of the discipline except the latest textbooks and journal articles. Oh, there could be an antiquarian point, in 1992, to reading 1956 physics or chemistry, to find out about the history of the earlier period, or to examine how a science grew, or how scientists influenced each other, but there is nothing to learn substantively about the discipline from reading older chemistry or physics. But this sort of naively optimistic view has been rendered obsolete by the brilliant paradigm analysis of Thomas Kuhn, who shows that this fanciful tale is far from the truth, even in the physical sciences. Even if we are less relativist than Kuhn, and believe that later paradigms are usually superior to closer to the truth than earlier ones, there still can be a severe loss of knowledge in discarding earlier paradigms. At the very least, 5 Some of us harbor the suspicion that it is no coincidence that Hayek received the prize precisely in 1974, the year after the death of his great mentor, the founder of Austrian business cycle theory, Ludwig von Mises. The Swedish economics profession might have become partially liberated by 1974, but surely not liberated enough to grant the prize to as consistent and uncompromising an ideological and methodological extremist as Ludwig von Mises. The next free-market economist to receive the Nobel was Friedman in 1976, to be followed by fellow Chicago school members Theodore Schultz in 1979 and George Stigler in Karen L. Vaughn, The Mengerian Roots of the Austrian Revival, in Carl Menger and his Legacy in Economics, Bruce J. Caldwell, ed., Annual Supplement to Vol. 22 of History of Political Economy (Durham, N.C.: Duke University Press, 1990): then, there can well be substantive knowledge gained by exploring earlier paradigms. If this is true even in the physical sciences, a fortiori it is even more true in the nonexperimental disciplines such as philosophy and economics, where because of gross error, accident, or ideological or political bias, a later paradigm may well be inferior to earlier ones. There should not even be a presumption, much less a guarantee, of the later the better in the history of economic thought. And yet, observers of the current Austrian school, as well as participants in it, have unwittingly and unthinkingly returned to Whig habits of thought when discussing or evaluating contributions of the Austrian school. They have unthinkingly assumed that the later the better, that is, that simply because, for example, the works of Don Lavoie or Ludwig M. Lachmann came later in time than those of Ludwig von Mises, that they must be better, or to put it differently, that these later contributions must constitute development and growth in the field. And yet, if later is not necessarily better, then the new may not at all constitute growth ; newer may, in fact, constitute error and degeneration from an originally correct paradigm. But if the newer is not necessarily better, it follows that it might even be worse. And if a newer contribution is worse, and there is degeneration, then there must be some criterion or standard of truth with which to compare these temporally different contributions. On the other hand, if we take the fashionably nihilist view and claim that there is no truth, that anything, any methodology, goes, then it follows that contribution A can never be better or worse than contribution B, and then there can be no judgments of merit at all, regardless of the date of the contribution. Indeed, the entire scholarly enterprise may as well be abandoned. To show how this inconsistency works: Professor Vaughn is horrified because a new work, in 1985, purportedly in Austrian economics, by O Driscoll and Rizzo was severely criticized by other Austrians. She writes: By the time of its completion, the book [by O Driscoll and Rizzo] broke new ground in developing a coherent Austrian paradigm, and adds: and consequently was criticized by many Austrians who knew it wasn t faithful to Austrian principles. But does this mean that Vaughn s conception of the scholarly dialogue is that every new book, because new, must be above criticism, and that any criticism is somehow illegitimate? Is that the way she conceives of the search for truth? And what if the book is actually (a) fallacious to the core, and (b) totally violates Austrian principles? Are critics supposed to fall silent, because Austrian principles are to enjoy a definition so elastic that anyone should be allowed to call himself an Austrian without being subject to criticism or challenge? 7 7 Vaughn, Mengerian Roots, p. 401n. Also see ibid., p. 397n. Amusingly enough, Vaughn talks repeatedly of the O Driscoll-Rizzo volume garnering so much criticism from Austrians without citing the major, indeed the only, place such criticism appeared: the devastating review by Professor Charles W. Baird, The Economics of Time and Ignorance: A Review, Review of Austrian Economics 1 (1987): The Economics of Time and Ignorance was a fortunately short-lived attempt to replace the Misesian paradigm with Bergsonian irrationalism; its rapid demise was assured by its demolition by Professor Baird. In the course of writing that work, Professor Rizzo, the philosophical leader of the duo, was moving visibly away from the Misesian paradigm. In a Mises centennial volume edited by Israel Kirzner, Rizzo first flirted with the then-fashionable philosophy of science of Imre Lakatos as a replacement for praxeology; in a 5 It is the contention of this paper, indeed, that several different and clashing paradigms have been allowed to develop and fester, all in the name of Austrian economics ; that a great deal of confusion and incoherence have resulted; and that this coexistence of contradictory doctrine and proliferation of clutter should be brought to an end. In short, the rubble of Austrian economics must be cleared at last, the turgid undergrowth hacked away, Austrian doctrine re-clarified and truth enshrined, and the proliferation of error and fallacy swept away. The New Methodology and the Burgeoning of Austrian Fallacies Part of what has happened to Austrian economics since 1974 was inevitable. Along with growth and flourishing, in numbers of economists, students, and contributions, there is bound to be a proliferation of error and of false leads and byways. That, in a sense, is a healthy development in the history of a science, but only if there are corrective forces who will periodically clear the underbrush and sweep away the rubble. That task has unfortunately not yet been done, although part of this necessary process has already begun. 8 The idea of correction and demolition of error does not sit well with the now reigning paradigm in the epistemology of economics. The Old Methodology, dominant until the 1970s was frankly prescriptive, setting up criteria for valid and invalid theory. The problem with the Old Methodology was not that it presumed to methodological truth and validity, nor that it passed judgment on various methods and theories in economics, but that its criteria were systematically wrong: it was trapped by what Professor Mirowski calls physics envy to ape the assumed methodology of physics in the disciplines of human action. The problem with the Old Methodology (dominant until the 1970s) was not that it was prescriptive, but that its prescriptions were dead wrong. Unfortunately, in overturning the tyranny of the Old Methodology, the successful rebels focused not on the invalidity of the prescription but on the fact that any prescriptions were set forth at all. And so the prescriptive baby was thrown out with the positivist bathwater to be replaced by the New Methodology of anything goes, of allowing all flowers, including noxious weeds, to bloom. The New Methodologists habitually deny that for them anything goes, but that is precisely what their proclaimed mission to understand and postscript written a mere six months after the text, Rizzo announced another radical change of mind even further away from Mises. The final result in 1985 was the Bergsonian dead-end. See Mario J. Rizzo, Mises and Lakatos: A Reformulation of Austrian Methodology, in Method, Process, and Austrian Economics, Israel M. Kirzner, ed. (Lexington, Mass.: Lexington Books, 1982), pp See, for example, the demolitions of the fortunately short-lived hermeneutical tendency in Austrian economics, by David Gordon, Hermeneutics vs. Austrian Economics (Auburn, Ala.: Ludwig von Mises Institute, 1986); Hans-Hermann Hoppe, In Defense of Extreme Rationalism: Thoughts on Donald McCloskey s The Rhetoric of Economics, Review of Austrian Economics 3 (1989): ; and Murray N. Rothbard, The Hermeneutical Invasion of Philosophy and Economics, Review of Austrian Economics 3 (1989): clarify all theories, but never to judge or denounce them amounts to. Clearly, the New Methodology is all too congruent with our New Age. 9 There are two grievous and unwitting contradictions involved in this argument by our New anti-prescriptive Methodologists. In the first place, as we have pointed out in the case of Professor Vaughn, there is a glaring though unacknowledged bit of prescription: the Whig view that newer is necessarily better, a view that sits peculiarly in a system that offers no criteria for validity and no suggestion that there is any process or mechanism for learning about or adopting such criteria if they did exist. But there is also a deeper contradiction. For the New Methodologists are saying that it is wrong for economic methodology to be prescriptive, that it is only right for methodology to describe or clarify within each paradigm. But in that case, the New Methodologists are being very prescriptive indeed: they are saying that it is wrong or bad to say that any methodology is wrong or bad; but what argument, then, do they offer for their prescriptiveness? Various Old methodological schools, be they positivists, Austrians, or institutionalists, have offered various concrete arguments for their particular prescriptions: for their view that their particular methodologies are right or correct, and the others wrong. But the New Methodologists offer no argument whatsoever for their own, sweeping, hidden prescriptiveness: that all prescriptions (except their own) are necessarily bad or incorrect. In short, the New Methodologists offer no argument for their anything-goes prescription all they have to offer is the mood of the moment, of the contemporary culture: the absurd, self-contradictory mood of our therapeutic, psycho-babbling, anti- judgmentalist culture. To state this fact is to reveal the absurd, counter-intuitive, antirational, fashionable mood of the New Methodologists a mood that offers no, and is subject to no, argument, and is therefore simply not to be taken seriously. My contentions are: that the correct Austrian paradigm is and can only be the Misesian, that is, the paradigm of Misesian praxeology; that the competing Austrian paradigms, in particular the fundamentally irrational evolved rules, knowledge, plans, and spontaneous order paradigm of Hayek and the more extreme ultra-subjectivist or nihilist paradigm of Lachmann, have both been fallacious and pernicious; that, as we shall see below in discussing the history of the modern Austrian revival as a movement, for various reasons the Misesian paradigm was almost totally cast aside and forgotten; but that now it is resurgent and rapidly becoming dominant and even triumphant within Austrian economics. And in the nick of time. The strong implication of Vaughn and of other anti-misesian critics is that Misesians simply want Austrian economics to be static, to repeat endlessl
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