This blog post is from March 13, 2012. It’s significant because I began as a political blogger on myspace and encountered numerous Ron Paul supporters, “libertarians”. At that time, I was not familiar with the Austrian school of free market economics. Usually these libertarians would quote Mises and Hayek, 20th century philosophers, but the Austrian school of free market economics began in the 1800’s.
Lest there be any confusion, I write this as a “left-winger” who believes in “social democracy”, that is, a strong role of the government in striving for an economy maximizing the growth and freedom potential of ALL citizens regardless of the hierachical forces of wealth, status, position, ethnicity, gender, etc. that synergize to promote advancement of some select few people to the detriment of the majority of the people. The fundamental economic talking points of conservatives pertaining to economics were originated in what is commonly called the “Austrian” school of economics. These talking points include the condemnation of the government’s involvement in the economy and center upon the idealization of “the market”, namely that system of allocating resources based on fundamental economic factors, such as supply, demand, and price, without government influence or regulations or other external sources of interference. These factors, so it turns out, serve to create a falsified idealized self-regulating society of individuals where the facts of the powerful unconscious, irrational, and exploitative forces dictate outcomes such as depressions, genocidal wars, massive oil spills, famines, pandemics, and other disasters dismissed within a social darwinistic framework and ethics of the “law of the jungle”. In lay terms, we are accustomed to hearing in the speeches of republican politicians the evils of “big government”, “getting the government off our backs”, etc. This populism has been very successful in evading the crucial and essential questions as to the ultimate source of tyranny, the transnational corporate behemoths wielding irresistible influence, if not coercion, behind in the scenes where the de facto deciders write our laws and dictate the actions and policies of our elected officials. This anti-government populism emanates from and legitimizes itself via “Austrian economics” and, therefore, I find it essential to initiate an exploration as to what this type of economics entails.
The term, “Austrian economist” usually refers to either Ludwig von Mises or Friedrich Hayek, those revered by Ron Paul and many other followers of the libertarian school of thought. But my essay here is on the original “Austrians”, the men whose intellectual contributions were essential to the idealization of the “free market” and the denigration of the government in terms of maximizing human freedom and potential for wealth and material success.
Of course Adam Smith is the father of “free market” or classical economics, even though he had a place for government participation in the market while extolling the basic mechanisms of the market in his 1776 magnum opus, The Wealth of Nations. And David Ricardo followed in 1817 with his On the Principles of Political Economy and Taxation in which he explained free trade, diminishing marginal returns, and how printing excess money caused inflation, a crucial justification or rationale for the gold standard still bellowed forth today by Ron Paul and his supporters in condemnation of the fiat-currency-producing Federal Reserve.
THE FIRST THREE “LIBERTARIAN” ECONOMISTS: CARL MENGER, WILLIAM STANLEY JEVONS, AND LEON WALRAS
Now only one of the three men I’ll be discussing, Carl Menger (1840-1921), was an Austrian, because he studied and published in Vienna, though he was born in Poland. William Stanley Jevons (1835-1882) was English and (Marie-Esprit-) Leon Walras (1834-1910) was Swiss. These three men are accredited with what is called The Marginal Revolution whereby the labor theory of value was rendered obsolete by the newly proclaimed law of diminishing marginal utility, also referred to as the marginal or neoclassical theory of value. In plain English this means both the utility and value of each additional unit of a commodity, that is, the marginal utility, possesses less value to the consumer. The Concise Encyclopedia of
Economics http://www.econlib.org/library/Enc/bios/Jevons.html explains: ” When you are thirsty, for example, you get great utility from a glass of water. Once your thirst is quenched, the second and third glasses are less and less appealing. Feeling waterlogged, you will eventually refuse water altogether. “Value,” said Jevons, “depends entirely upon utility.” Further details of this are laid forth here:
http://en.wikipedia.org/wiki/Marginal_utility#The_Marginal_Revolution
Wikipedia gives us synopses of these 3 “Marginal Revolutionaries”:
William Stanley Jevons first proposed the theory in “A General Mathematical Theory of Political Economy” (PDF), a paper presented in 1862 and published in 1863, followed by a series of works culminating in his book The Theory of Political Economy in 1871 that established his reputation as a leading political economist and logician of the time. Jevons’ conception of utility was in the utilitarian tradition of Jeremy Bentham and of John Stuart Mill, but he differed from his classical predecessors in emphasizing that “value depends entirely upon utility”, in particular, on “final utility upon which the theory of Economics will be found to turn.”He later qualified this in deriving the result that in a model of exchange equilibrium, price ratios would be proportional to not only to ratios of “final degrees of utility” but costs of production.
Carl Menger presented the theory in Grundsätze der Volkswirtschaftslehre (translated as Principles of Economics) in 1871. Menger’s presentation is peculiarly notable on two points. First, he took special pains to explain why individuals should be expected to rank possible uses and then to use marginal utility to decide amongst trade-offs. (For this reason, Menger and his followers are sometimes called “the Psychological School”, though they are more frequently known as “the Austrian School” or as “the Vienna School”.) Second, while his illustrative examples present utility as quantified, his essential assumptions do not.(Menger in fact crossed-out the numerical tables in his own copy of the published Grundsätze.) Menger also developed the law of diminishing marginal utility. Menger’s work found a significant and appreciative audience.
Marie-Esprit-Léon Walras introduced the theory in Éléments d’économie politique pure, the first part of which was published in 1874 in a relatively mathematical exposition. Walras’s work found relatively few readers at the time but was recognized and incorporated two decades later in the work of Pareto and Barone.
Of the 3 Marginal Revolutionaries, Menger comes off as the best as per the Concise Encyclopedia of Economics assessment of him:
“Unlike Jevons, Menger did not believe that goods provide “utils,” or units of utility. Rather, he wrote, goods are valuable because they serve various uses whose importance differs. For example, the first pails of water are used to satisfy the most important uses, and successive pails are used for less and less important purposes.
Menger used this insight to resolve the diamond-water paradox that had baffled Adam Smith (see marginalism). He also used it to refute the labor theory of value. Goods acquire their value, he showed, not because of the amount of labor used in producing them, but because of their ability to satisfy people’s wants. Indeed, Menger turned the labor theory of value on its head. If the value of goods is determined by the importance of the wants they satisfy, then the value of labor and other inputs of production (he called them “goods of a higher order”) derive from their ability to produce these goods. Mainstream economists still accept this theory, which they call the theory of “derived demand.””
On the other hand, Carl Menger, has some fascinating quirks, like pioneering an “empirical” theory that was not really empirical, though well-intended, I am sure. The source for this is a libertarian one, http://mises.org/daily/2799
” He (Menger) tried to trace the causes of the properties and laws under scrutiny back to the simplest facts. His purpose was to demonstrate that the properties and laws of economic phenomena result from these empirically ascertainable “elements of the human economy” such as individual human needs, individual human knowledge, ownership and acquisition of individual quantities of goods, time, and individual error.[11] Menger’s great achievement in Principles of Economics consisted in identifying these elements for analysis and explaining how they cause more-complex market phenomena such as prices. He called this the “empirical method,” emphasizing that it was the same method that worked so well in the natural sciences.[12]”
“To the present reader, this label might be confusing, since it is not at all the experimental method of the modern empirical sciences. Menger did not use abstract models to posit falsifiable hypotheses that are then tested by experience. Instead, Menger’s was an analytical method that began with the smallest empirical phenomena and proceeded logically from there.”
A nice little bio on Menger: http://www.econlib.org/library/Enc/bios/Menger.html
Now the key selling point for Leon Walras seems to be his devising the General Equilibrium Theory essential for purporting the harmony of markets in being able to balance or regulate themselves. In contrast to other neoclassical (Austrian) economists, Walras was heavily into math to support his ideas. The Concise Encyclopedia of Economics notes:
http://www.econlib.org/library/Enc/bios/Walras.html
“Before Walras, economists had made little attempt to show how a whole economy with many goods fits together and reaches an equilibrium. Walras’s goal was to do this. He did not succeed, but he took some major first steps. First, he built a system of simultaneous equations to describe his hypothetical economy, a tremendous task, and then showed that because the number of equations equaled the number of unknowns, the system could be solved to give the equilibrium prices and quantities of commodities. The demonstration that price and quantity were uniquely determined for each commodity is considered one of Walras’s greatest contributions to economic science.
But Walras was aware that the mere fact that such a system of equations could be solved mathematically for an equilibrium did not mean that in the real world it would ever reach that equilibrium. So Walras’s second major step was to simulate an artificial market process that would get the system to equilibrium, a process he called “tâtonnement” (French for “groping”). Tâtonnement was a trial-and-error process in which a price was called out and people in the market said how much they were willing to demand or supply at that price. If there was an excess of supply over demand, then the price would be lowered so that less would be supplied and more would be demanded. Thus would the prices “grope” toward equilibrium. To keep constant the equilibrium toward which prices were groping, Walras assumed—highly unrealistically—that no actual exchanges were made until equilibrium was reached. If, for example, people who wanted to buy ketchup wanted more than sellers were willing to sell, then they would buy none at all. This assumption limits the usefulness of Walras’s simulated process as an aid to understanding how real markets work.”
The oddity for the second great marginalist thinker, Leon Walras, was that AT ONE TIME HE SEEMS TO BE A COMMUNIST!!! I kid you not! “Walras also inherited his father’s interest in social reform. Much like the Fabians, Walras called for the nationalization of land, believing that land’s value would always increase and that rents from that land would be sufficient to support the nation without taxes.” source: http://en.wikipedia.org/wiki/L%C3%A9on_Walras If by “nationalize” we mean that the state assumes ownership of the land then Walras did in fact espouse, at least one time in his life, communist propensities.
As for William Stanley Jevons, he is noteworthy for his Jevons Paradox. It started with his book The Coal Question which “covered a breadth of concepts on energy depletion that have recently been revisited by writers covering the subject of peak oil. For example, Jevons explained that improving energy efficiency
typically reduced energy costs and thereby increased rather than decreased energy use, an effect now known as the Jevons paradox. The Coal Question remains a paradigmatic study of resource depletion theory. Jevons’s son, H. Stanley Jevons, published an 800-page follow-up study in 1915 in which the difficulties of estimating recoverable reserves of a theoretically finite resource are discussed in detail.[8]“
http://en.wikipedia.org/wiki/William_Stanley_Jevons
The Concise Encyclopedia of Economics notes ” he wrote that Britain’s industrial vitality depended on coal and, therefore, would decline as that resource was exhausted. As coal reserves ran out, he wrote, the price of coal would rise. This would make it feasible for producers to extract coal from poorer or deeper seams. He also argued that America would rise to become an industrial superpower. Although his forecast was right for both Britain and America, and he was right about the incentive to mine more costly seams, he was almost surely wrong that the main factor was the cost of coal. Jevons failed to appreciate the fact that as the price of an energy source rises, entrepreneurs have a strong incentive to invent, develop, and produce alternate sources. In particular, he did not anticipate oil or natural gas. Also, he did not take account of the incentive, as the price of coal rose, to use it more efficiently or to develop technology that brought down the cost of discovering and mining (see natural resources).”
As I wind this essay up, it is important to note that other important “Austrians” or neoclassical economists have not been mentioned yet. Not just Ludwig von Mises or Friedrich Hayek, but others like Friedrich von Wieser (1851-1926), who notably was born in Vienna, or the British Alfred Marshall (1842-1924), and Eugen Böhm-Bawerk (1851-1914).
This essay is to be taken merely as a point of entry into deeper study or at least a means of clarifying some basic points about what “Austrian Economics” means both conceptually and historically.
