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Book Review: Classics in Austrian Economics

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Classics in Austrian Economics: A Sampling in the History of a Tradition
edited by Israel M. Kirzner (London: William Pickering, 1994); three volumes; $300.

The Austrian school of economics began in 1871 with the publication of Principles of Economics by Carl Menger. In the 1860s, while working in the Austrian ministry of prices, Menger came to realize that the actual way prices were formed on competitive markets had nothing to do with the labor theory of value of the classical economists. Instead, he began formulating an alternative theory showing that market prices arise from the subjective valuations of individuals who weigh in their minds the importance to them of buying or selling various relative quantities of goods. The value of things on the market, therefore, is derived from their utility or usefulness to individual users and not, as the classical economics had argued, from the quantity of labor devoted to their manufacture.

This idea was to have radical implications. For example, one of Menger’s most important followers, Eugen von Böhm-Bawerk, applied his ideas to the problems of capital, interest, and wages. Böhm-Bawerk was able to demonstrate that Karl Marx’s theory of workers’ exploitation by private owners of the means of production was fundamentally wrong. In the 1920s and 1930s, two other leading members of the Austrian School — Ludwig von Mises and Friedrich A. Hayek — demonstrated conclusively that a centrally planned economy was inherently unworkable and that a regulated economy created market distortions that generated dangerous imbalances between supply and demand. They further explained that if governments try to overcome the imbalances their own interventions have created in the market through an inflationary monetary expansion, all that would be produced would be an unsustainable boom eventually followed by an economic depression.

Unfortunately, the Austrian economists and their ideas were long out of favor in the post–World War II period because of the ascendancy of socialism and Keynesian economics. But during the last 20 years, with the failures of both socialism and Keynesianism, the Austrian school has experienced a dramatic revival. With the growing interest in the Austrian approach, there has been a need for easily accessible summaries of their fundamental ideas about economic theory and policy.

One such invaluable source has recently been published in three volumes under the title Classics of Austrian Economics: A Sampling in the History of a Tradition. The editor is Israel M. Kirzner, himself the leading figure among the modern Austrian economists. Professor Kirzner has selected articles and excerpts from books that represent the most important of the Austrian works. Volume one, devoted to “The Founding Era,” offers selections from the writings of Carl Menger, Böhm-Bawerk, Friedrich von Wieser, and Franz Cuhel. In these writings, the Austrian theory of value and price, capital and interest, money and production are presented. Included is Menger’s famous essay, “On the Origin of Money,” in which he showed that money is not the creation of the state but rather emerges naturally out of the market process as individuals search for more successful ways to take advantage of mutual gains from trade. Translated for the first time into English is Cuhel’s insightful analysis that the utility or satisfaction that individuals receive from the consumption of goods is not open to either measurement or interpersonal comparison. Why is this important? Because if the utility or the amount of satisfaction that individuals receive from the consumption of goods is not open to quantitative measurement, then egalitarians and welfare-statist redistributors have no “objective” or scientific leg to stand on when they try to claim that a dollar transferred to a poor man will give him more satisfaction than the satisfaction that is lost by the rich man from whom that dollar is taken via taxation.

Volume two focuses on many of the Austrian contributions during “The Interwar Period.” The writings selected are by Richard von Strigl, Hans Mayer, Paul Rosenstein-Rodan, Gottfried Haberler, Leo Schonfeld, Fritz Machlup, and Oskar Morgenstern. Most of the essays included in this volume have never before been in English. The most important of these writings is certainly the one-hundred-twenty-page monograph by Hans Mayer on “The Cognitive Value of Functional Theories of Price.” Originally published in 1932, Mayer critically evaluated five of the leading mathematical economists up to his own time: Antoine Cournot, William Stanley Jevons, Leon Walras, Vilfredo Pareto, and Gustav Cassel. Here, in detailed and brilliant fashion, Mayer dissects many of the assumptions and techniques of the mathematical economics that still dominate mainstream economic theory today. He clearly shows (1) that the assumptions of the mathematical method are unrealistic in that they do not capture the real nature of the human choice-making process; and (2) that the mathematical approach has inherent limitations that prevent a successful analysis of the actual market processes by which prices are formed, as well as how the competitive forces of the market tend to bring supplies into balance with consumer demands.

Volume three is devoted to “The Age of Mises and Hayek.” Professor Kirzner has chosen some of the best writings by these two giants of the Austrian School. Included is Mises’s original essay of 1920, “Economic Calculation in the Socialist Commonwealth,” in which Mises proved that the abolition of private property and market prices destroyed any ability for the socialist central planner to be able to rationally allocate the resources of the society under his control. Hayek’s essays demonstrate that any attempt by a socialist economy to “play at markets” will still result in inefficiencies and misuse of the society’s resources. The means of production must be privately owned and controlled, and the value of those resources must be reflected in competitively determined market prices if the society is to be both free and prosperous.

The volume also includes writings by Mises on why it is that the human sciences are inherently different from the natural sciences and why attempts to socially engineer human relationships will always lead to disaster. And Mises’s “Monetary Stabilization and Cyclical Policy” and Hayek’s “Intertemporal Price Equilibrium and Movements in the Value of Money” argue conclusively that manipulation of the money supply in the name of “price level stability” and production and employment stability in fact ends up destabilizing the normal relationships of the market.

These three volumes include many of the best writings in the Austrian tradition. Indeed, the inclusion of first-time translations of several important classics of the Austrian School makes this collection an essential addition to anyone interested in this, the most theoretically original and consistently free market-oriented group of economists in the 20th century. Any reader who pays the price of admission will not be disappointed with the knowledge and understanding he will acquire.

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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).