Book Review: The Austrian Case for the Free Market Process

The Austrian Case for the Free Market Process is a short book that summarizes, with extensive quoting, the life work of Ludwig von Mises and Friedrich Hayek, the leading lights, in the 20th century, of the "Austrian school" of economics.  The Austrian school is regarded as out of the mainstream today, and its giants are rarely summarized in textbooks or cited in journal articles.  At the same time, they seem to be vaguely regarded as far greater thinkers than their influence would justify even by some economists who are not professed Austrians.  We would be a better discipline if we paid more attention to Hayek, seems to be a common feeling.  Meanwhile there's a school of "Austrian economics" which has the feeling rather of a sect than a sub-field: "Austrians" tend to assume that Mises and Hayek are the greatest economists of the 20th century and said almost everything worth saying, though indeed that isn't saying so much since they have a low opinion of economists generally.  Austrian economics is thought to be ultra-libertarian.  Libertarians sometimes treat it as if the Austrians had produced some scientific proof, which the discipline has cravenly ignored, that libertarianism is The Truth.  And it is worth noting that while Milton Friedman was a good libertarian, he was not part of the Austrian school.  An Austrian-school libertarian's attitude to Milton Friedman is that his positions were generally right and his influence to be praised to the skies, but his methodology drunk deeply of the despised heresies of the "neoclassical" or "Walrasian" mainstream.

Do the Austrians (the school is so named because its early leaders, Menger, Bohm-Bauwerk, Hayek, Mises, Schumpeter, etc., were mostly from Austria) really have a secret proof of the libertarian Truth?  Is their philosophy really so libertarian as it is reputed to be?  What is so distinctive about their methods and insights?  Do they really discredit mainstream economics?  I had a vague idea about the answers to these questions before reading The Austrian Case for the Free Market Process, and don't understand it too well afterwards, but I wouldn't blame the book too much for that.  First, a 3-hour audiobook has to devote itself to several aspects of its subjects' lives and work.  Mises and Hayek were exiles from the Nazis and prominent public intellectuals, so the merely biographical material was interesting, and much of their work was devoted to refuting socialism.

Much of Mises' case against socialism was incongruously ordinary.  That is not necessarily any discredit to him: if he originated arguments which have since come to be commonsense, that is a tribute to his influence, and even if he voiced well-known arguments which many others have made, that is not at all discreditable when one is locked in ideological struggle with a looming, monstrous evil.  It is incongruous because it doesn't fit his reputation as a genius in the intellectual wilderness.  The most famous critique of socialism originated by Mises is "the calculation problem," namely that it is prices which allow us to put a numeric value on things and then engage in the calculations necessary to economic rationality; this breaks down when social resources are controlled by the state.  This is the kind of subtle point, with a whiff of epistemology, that most of today's number-crunching and equation-scribbling economists probably couldn't articulate very well.  But it wouldn't be news to them, and if they don't teach it, it's because refuting socialism is no longer especially urgent.  I think just about any mainstream economist would agree that full-fledged socialism, with state ownership of the means of production etc., is a bad idea.

Mises distinguishes between "socialism" and "interventionism," the halfway house between socialism and capitalism, where the state interferes extensively in the economy, providing social safety nets, subsidies, sometimes perhaps regulating prices, etc., ostensibly in the public interest.  But Mises seems too think interventionism collapses, theoretically and/or practically, into socialism, and that more or less the same case suffices against both.  A devotee of the Austrian school would probably deny this, but it was the impression I got.  Mises' arguments for this are not just unpersuasive: more to the point, they just don't make the grade in today's economics discussion.  They tend to sound, to a modern economist like (at least prospectively) me, "not even wrong."  My response is "interesting... can you put it into a model?"  Or sometimes, "I can vaguely imagine how you'd try to model that and why it wouldn't work..."  I also don't understand why the Austrians were so anti-inflation.  Mises' reason for the believing in the gold standard was a public-choice reason: he thought the gold standard wasn't perfect but that fiat money, putting too much money into the hands of the government, was worse.  This might be true in a particular time or place, but how the claim be maintained in the face of the success with which governments throughout the West and even in much of the developing world have maintained pure fiat currencies with low inflation for the past two and a half decades?

Hayek could be a windbag, but I think his reputation for genius is deserved.  He has brilliant insights about information, which rise above the run-of-the-mill economic ideas.  Nobody has the information needed to run society: it is dispersed.  There is a ghost of Hayek, perhaps, in the habit of mainstream economists of calling the Walrasian market-clearing equilibrium "decentralized."  The term seems an inapt description of an economy that can be reduced to a few equations which can be solved with an economist's pen, but it shows a lingering aspiration to the kind of dispersed-information world Hayek was talking about.  Hayek, though, rejected the reduction of the economy to Walrasian models.  I have mixed feelings towards this rejection.  On the one hand, it is true that a certain falsification occurs in such modeling.  Over time, there is a sort of survival-of-the-fittest whereby insights that lend themselves to mathematical modeling are emphasized while those that do not are forgotten, but ability-to-be-modeled is imperfectly correlated with importance or truth.  On the other hand, the alternative to mathematical economics is to write long books and rely on rhetoric and philosophy as the Austrians did, but verbal methods of exposition are inefficient and indeterminate.  An equation or a graph can summarize in four square inches of space on a page what Adam Smith spent hundreds of pages trying to show.  The reason Hayek is much respected but little studied is that it's too much work to try to understand him, whereas key contributions of Robert Lucas and Paul Romer can be read and mostly understood (if you have the training) in an afternoon.  And the requirement that you show it in a model is a useful intellectual discipline.  The lack of such discipline has left almost every other social science discipline vulnerable to being taken over by Marxist and other psychobabble, while economics has preserved a staid sanity.

With the rise of computing power, however, the modeling toolkit is different.  A redefinition of rigor is possible, and insights which have been preserved in the verbal tradition of the Austrians, in a sort of intellectual exile, may now be able to be modeled/simulated in computers and displayed in flashy colors in seminars in an hour and a half.

Comments

[Christian Prophet]

Sounds fun. Meanwhile Obama wants to hugely increase the capital gains tax. Candidates seem to understand nothing about economics.

Libertarians might be interested in getting themselves elected:
http://spirituallibertarian.blogspot.com/

[Nato]

"The lack of such discipline has left almost every other social science discipline vulnerable to being taken over by Marxist and other psychobabble, while economics has preserved a staid sanity."

Well, I think there's also the argument that economics has a quantifiable, (largely) fungible basic particle: money. In most of the rest of the social sciences, the standards of success don't condense, and telling good answers from bad ones is very difficult. Models, graphs and other mathematical paraphernalia are part of that, of course, but more a symptom than a cause.

Of course, sometimes the apparently uncomplicated relationship between money and (the broad sense of) "goods" obscures rather than simplifies problems, but it's rational (necessary?) to address the tractable now and try to find ways to elaborate to cover more phenomena later.

Incidentally, while I think capital gains taxes should stay low relative to, for example, dividend and other income taxes, there's lots of smart folks out there (e.g. Warren Buffet) who don't seem to think raising them into the 20, 25% range for top earners would be very distortionary. Of course, my exposure to a new capital gains tax top rate is essentially nil, so it's easy for me to prefer this to the renewed higher top rate schedules dipping low enough to affect me, which is a much more plausible threat.

I also suspect the relatively low capital gains top rate was a nontrivial influence on the real-estate bubble. Of course, it wasn't necessary for the internet bubble, so I don't insist on it.

[James]

I'd say that economics has been taken over by different variants of insanity, including Randism and the peculiar, quasi-mystical ideas of Julian Simon.

[Nathan Smith]

"Taken over?" Ayn Rand isn't particularly influential in economics, except in the small libertarian corner of it. Julian Simon is well-known for making some accurate predictions, but this is the first I've heard of his quasi-mysticism.

[Nato]

I wish popular Libertarianism was as, well, popular as James seems to think it is. Of course, economists tend to be more libertarian than the public at large, but interventionism (e.g. Keynes) remains still alive and well.