Skousen, M.: Vienna & Chicago: Friends or Foes? A Tale of Two Schools of Free-Market Economics

By Schenone, Osvaldo; Ravier, Adrian | History of Economics Review, Summer 2007 | Go to article overview

Skousen, M.: Vienna & Chicago: Friends or Foes? A Tale of Two Schools of Free-Market Economics


Schenone, Osvaldo, Ravier, Adrian, History of Economics Review


Skousen, M. Vienna & Chicago: Friends or Foes? A Tale of Two Schools of Free-Market Economics. Washington DC, USA: Regnery Publishing Inc. 2005. Pp. 318. ISBN 0-8952-6029-8. US$18.45 (pb).

This fascinating book starts out by telling us that Friedrich A. von Hayek, alarmed by the rapid advance of socialism and the horrors of the war, summoned the main liberal thinkers of the world to a meeting that was carried out in the small town of Mont Pelerin, Switzerland, in 1947. This encounter extended for ten days at the beginning of April of that year, with the attendance of 38 intellectuals. These individuals were predominantly economists, historians and philosophers. Prominent members of both the Chicago and the Austrian Schools attended the meeting to establish a society that would have the goals of preserving a free civilisation and opposing all forms of totalitarianism. Some of the most prominent intellectuals of the twentieth century subsequently became presidents of this society, including Hayek, Wilhelm Ropke, Bruno Leoni, Milton Friedman, George Stigler, James Buchanan, Gary Becker and Pascal Salin.

Of course, not everyone at the first meeting at Mont Pelerin had identical ideas with respect to every detail that was discussed. However, there was a consensus that they were, essentially, pursuing a common objective. Mark Skousen's book is a successful attempt to review this intellectual friendship between both schools of thought, pointing out the main issues that unite or divide them.

Chapters 2 and 3 describe the intellectual environment in which each school was born and raised. Skousen points out that both were born out of crisis: the Austrian School emerged as a response to the intellectual crisis of late nineteenth century that was resolved with the marginalist revolution that rescued classical economics from an incipient but increasing socialist/Marxist influence, while the Chicago School emerged as an opponent to the Keynesian proposal to resolve the Great Depression of 1930. As Israel Kirzner explains:

It is important not to exaggerate the differences between the two streams ... there is an almost surprising coincidence between their views on most important policy questions ... both have basically the same sound understanding of how a market operates, and this is responsible for the healthy respect which both approaches share in common for its achievement. (Kirzner 1967, p. 102)

Skousen devotes chapters 4 to 7 of the book to explore the four main disagreements: 1) methodology; 2) limitations to the role of government; 3) the monetary system; and 4) macroeconomics and the business cycle.

Skousen offers his opinion as to which school has the most convincing argument for each of the disagreements, concluding each of these chapters with either 'Advantage: Vienna' or 'Advantage: Chicago'.

The agreements, disagreements and Skousen's verdicts are summarised in the table below.

Skousen characterises the Chicago and Austrian Schools as the pragmatist vs the idealist: "The Chicago and Austrian schools differ markedly in their strategy and influence. They are like two fighting brothers who really have the same goals in mind, but who don't get along because of major differences in personality and approach. The typical Austrian brother is an uncompromising idealist and a recluse, and the Chicago brother a pragmatic activist and extrovert" (page 267).

The typical Austrian brother would oppose, for instance, the progressive income tax to achieve income redistribution because it is detrimental to individual freedom and property rights. The Chicago brother would quickly agree and put aside, temporarily, these considerations to move on and prove (using both theoretical and empirical considerations) that the progressive income tax fails to redistribute income effectively.

Instead of arguing that the progressive income tax is bad because it serves an evil purpose, the Chicago brother would agree that it is bad for the same reason, and, moreover, does not even yield the effect for which it was intended.

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