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Book Review: Austrian Economics

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Austrian Economics: An Anthology
edited by Bettina Bien Greaves (Irvington-on-Hudson, N.Y.: The Foundation for Economic Education 1996); 166 pages; $14.95.

Just a little over one hundred years ago, in 1896, the Austrian economist Eugen von Böhm-Bawerk published a 120-page monograph entitled “Karl Marx and the Close of His System.” It offered, up to that time, the most detailed critical evaluation of Marx’s labor theory of value and his accompanying theory of the exploitation of workers by the capitalist class.

Böhm-Bawerk showed that the value of goods is not derived from the quantity of labor devoted to their production. Rather it is because goods have value to potential users that it is worth applying labor for their manufacture. A pencil has value to a writer so he can scribble words on a page, and thus labor is valued if it can be utilized to make the pencil he desires. Hence, the value assigned to the laborer used in a production process is a reflection of the value of the final, finished good his work can help create. Value, ultimately, arises from the demand-side, not the supply-side, of the market. Böhm-Bawerk then reminded his readers that every production process takes time. If the period of production is of any significant length, then those who are undertaking the manufacture of the product must somehow be able to sustain themselves until the commodity is ready for sale and, they hope, earn a purchase from members of the buying public.

If those employed in making the good are unwilling or unable to sustain themselves until the product can be sold, then someone must advance them the wages that will enable them to buy various goods and services they may need or desire. This, Böhm-Bawerk explained, is the role of the capitalist. By saving, the capitalist forgoes consumption or other uses for which he could have applied his own wealth in the present and over the period of production. His savings represent the source of the workers’ wages during the production process. What Marx called the capitalists’ “exploitive profits,” Böhm-Bawerk demonstrated to be, in fact, the implicit interest payment for performing an extremely valuable function: providing the needed savings to pay workers during time-consuming, “round-about” processes of production.

With the demise of communism during the last decade, it is worth remembering that it was Böhm-Bawerk who, a hundred years ago, hammered a critical nail into the coffin of Marxism and its theory of the capitalist process.

Eugen von Böhm-Bawerk was one of the leading figures of the Austrian school of economic thought. Founded in 1871 by Carl Menger, the Austrian school has developed many of the most insightful analyses of the workings of the market economy. It has also been at the forefront of defending the market order against advocates of socialist central planning, interventionist regulatory policies, and the welfare state.

Bettina Bien Greaves, of The Foundation for Economic Education, has recently edited an extremely useful book entitled Austrian Economics: An Anthology . The first half of the volume presents an insightful history of the Austrian school. James Bonar’s “The Austrian Economists and Their Theory of Value” was originally published in 1888 and represented the first detailed exposition in English of the ideas of the Austrians. It is still a very clear and readable account of the Austrian version of marginal utility theory, with its commonsensical formulation of how individuals allocate their scarce resources among competing uses so as to attain as many of their ends as their means will permit.

Henry Seager’s 1893 article, “Economics in Berlin and Vienna,” contrasted the “anti-economic theory” ideas of the German Historical School with those of the Austrians. Seager spent a winter semester studying at the University of Berlin with two of the German Historical School’s leading figures, Gustav von Schmoller and Adolph Wagner. He then spent the summer semester at the University of Vienna with Carl Menger and Böhm-Bawerk. The detailed descriptions of Menger’s course in political economy and Böhm-Bawerk’s seminar in economy theory, as well as the personal descriptions of the two of them as teachers, are alone worth the price of the book.

Following these are three pieces by Ludwig von Mises explaining the ideas of the Austrians, including his 1969 monograph, “The Historical Setting of the Austrian School of Economics,” and a previously unpublished 1962 lecture on the “Austrian School of Economics.”

The second half of the anthology is devoted to “Epistemology.” The Austrians have differed considerably from much of 20th-century mainstream economics in their view of how one studies social and economic processes. Under the influence of the philosophy of positivism, much of the economics profession has taken the view that for any social discipline to be really “scientific,” it must reduce all elements of its subject matter to the measurable and the quantifiable. Mathematical formalization and statistical modeling have been considered the basic tools for doing “serious” theoretical or applied economics.

The Austrians have always taken a fundamentally different view. Rather than assuming that a particular tool or method was the “correct” one and then making the subject matter conform to it, the Austrians take the view that one should first try to understand the nature of the subject matter and then devise tools or methods consistent with it.

In the case of economics and the social sciences in general, the Austrians argue that the essential qualities of man as chooser, doer, actor, and creator cannot not be fully captured by looking merely at the quantitative results and residues of human activity. Instead, the Austrians emphasize the purposeful, or intentionalist, element behind all economic happenings. If the economic theorist or practitioner is to really get at what is going on in the social world — and why — he has to get behind the merely visible quantitative aspects of market phenomena. He has to comprehend and understand the subjective meanings of the human actors, because it is these subjective meanings that determine what ends men choose to pursue, which of the various things of the world are selected as means of various types for attaining those ends, and which then shape the individual plans of action that come together in the market and generate the competitive process.

It is this theme, in its various aspects, that makes up the articles in the second part of the book. They include Böhm-Bawerk’s essay, “The Austrian Economists,” and three pieces by Ludwig von Mises on the Austrian theory of subjective value and the subjective nature and implications of human action.

Together, the essays in this volume offer a handy and extremely useful introduction to the history, ideas, and contributors of the Austrian school of economics. Bettina Bien Greaves has done her editing job well, and she is to be commended for providing such a convenient guide to the essential contributions by one of the most original groups of economists of the last 125 years.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).