Austrian Economics and the Political Economy of Freedom
Ebeling, Richard M., Freeman
The revival of the modern Austrian school of economics may be said to have begun 30 years ago, during the week of june 15-22, 1974, when the Institute for Humane Studies sponsored a conference on Austrian economics for about 40 participants in the small town of South Royalton, Vermont.
In 1974 the Austrian school had been in hiatus for almost a quarter of a century. For more than 60 years before the 1940s, the Austrian economists had been considered some of the most original contributors to economic theory and policy. They were among the leading developers of the theories of marginal utility, opportunity cost, value and price, capital and interest, markets and competition, money and the business cycle, and comparative economic systems-capitalism versus socialism versus the interventionist welfare state.
But the rise and triumph, in the late 1930s and 1940s, of the Keynesian explanation of and prescription for the Great Depression eclipsed all competing approaches to the problems of economic depression and high unemployment. This included the Austrian theory of the business cycle, which in the early 1930s had been a leading alternative to the emerging Keynesian macroeconomics.1
At the same time, there developed what came to be called the neoclassical approach in microeconomics. The study of the logic of individual decision-making, the allocation of scarce resources among competing uses, and the distribution of income among the factors of production-land, labor, and capital-became increasingly an exercise in mathematical optimization under conditions of various quantitative constraints. The focus of attention was on the specification and determination of the narrow and often highly artificial conditions under which a market economy would be in general equilibrium.
This, too, was in stark contrast to the approach of almost all Austrian economists, who attempted to explain the logic and processes of market competition in a world of constant change. The Austrians, unlike their neoclassical rivals, emphasized imperfect knowledge, the pervasive role of time in all market decision-making, and the nature of market coordination through continual adaptation to changing circumstances.2
Eight months before that conference in South Royalton, in October 1973, the most important contributor to Austrian economics in the twentieth century, Ludwig von Mises, had died at the age of 92.3 The second most prominent member of the Austrian school at that time, Friedrich A. Hayek, had been invited to attend the conference, but had declined due to health problems that made it impossible for him to travel to America from Europe. No one at the conference anticipated that only four months later, in October 1974, Hayek would be awarded the Nobel Prize in economics.4
The speakers at the conference were three other leading figures in Austrian economics: Ludwig M. Lachmann, who had studied with Hayek at the London School of Economics in the 1930s; Israel M. Kirzner, who had studied with and written his dissertation under Mises at New York University in the late 1950s;5 and Murray N. Rothbard, who had attended Mises's NYU seminar for many years beginning in the late 1940s and had received his doctoral degree in economics from Columbia University.
One evening during the conference, Milton Friedman came from his summer home in Vermont to join us for dinner and make a few remarks after the meal. Friedman commented that he was delighted to be with us and recalled he had long known both Mises and Hayek, having been a founding member of the Mont Pelerin Society and present at its first meeting in Switzerland in April 1947.6 But what stood out in his remarks for many of us there was his statement that there are no different schools of thought in economics; there is only good economics and bad economics. Clearly, therefore, in Friedman's mind, we were on a fool's errand attending a conference on something called "Austrian" economics. …