From Free Life No. 22, April 1995.

Libertarians are strongly attracted to the Austrian school of economics: due to its enthusiastic, vigorous and unapologetic advocacy of free markets, and its hostility to mathematical formalism, now so prevalent amongst economists and so off-putting to everyone else. Unfortunately these two attributes have reduced its attractiveness to other economists, who tend to treat it as exotic and old fashioned. In turn this has led to a sometimes aggressive and dismissive stance towards those economists who "refuse to see the light", which has further undermined its reputation. The history of Austrian economics in the USA is the topic of this excellent and readable study by Karen Vaughn, an economics professor at one of its citadels, George Mason University in Virginia.

One problem is to how to define Austrian economics. I have identified elsewhere its three main principles as : social science is the study of purposeful human action; individuals are the appropriate unit of analysis (methodological individualism); and "value is in the eye of the beholder" (the subjective theory of value). Dr Vaughn's three principles [p.4] agrees with mine except that she substitutes "time and ignorance" for purposeful human action. This difference reflects my concern with its contribution to the social sciences in general and her more narrower focus on economics. These principles lead Austrians to conclude that socialism and interventionism is undesirable and impossible (in the sense of achieving its declared goals). Thus Hayek and Mises became two of the inspirations for the revival of free market thinking in the late twentieth century.

The primary theme of Dr Vaughn's book is the extent to which Austrian thought should be viewed as an essential complement to neo-classical (or mainstream) economics, or whether it provides a fundamental and irreconcilable rejection of it. The first chapter identifies this issue and somewhat biases the conclusion towards the latter by identifying time and ignorance as one of the school's defining features. The history begins in Vienna with the founding father, Carl Menger. Traditional economic history has identified him as one of the founders of neo-classical economics due to his work on marginal utility theory. Dr Vaughn sees in his work much more radical themes that l doubt he would have recognised himself.

The Austrians are most famous amongst historians for the Economic Calculation debate of the 1920s when Mises and Hayek explained why socialism could not function without prices. Market socialists such as Oskar Lange recognised this problem and claimed to have solved it. This claim was widely accepted until the collapse of communist economies revived interest in the Austrians' neglected insights.

The main contributor to that debate was Ludwig von Mises who was forced to emigrate by Nazism to the US in 1940 and never succeeded in obtaining university tenure even while teaching at New York University for 24 years, financed by the Volker Fund. Some Austrians attribute this to prejudice against free market thinking, and others to his imperious style. I attribute it mostly to his age, as he was almost 60 when he emigrated. The Mises seminar became the primary means for the survival of these ideas. Dr Vaughn dates the revival of Austrian ideas to 1974, and mainly to the very different styles of Murray Rothbard and Israel Kirzner. Kirzner sought to interest the economics profession by demonstrating Austrian insights into competition and entrepreneurship, while, Dr Vaughn suggests, "Rothbard apparently saw little to be gained by debating with those in the economics profession who were prone to disagree with him". [p.112]

Chapter Six describes the subsequent explosion of publications by Austrians, and two resulting controversies: the linkage by Lavoie with the continental philosophy of hermeneutics, which some (including myself) view as leading to a rejection of science and reason, and to moral relativism; and the work by O'Driscoll and Rizzo which sought to place time and ignorance at the centre of Austrian thought , which Dr Vaughn accepts and I do not. The debate about the relationship with neo-classical economics is personified by Kirzner, who advocates dialogue within the mainstream, and Lachmann, who repudiates it. Dr Vaughn's conclusion supports Austrian economics as an alternative to the mainstream and not a supplement. This is somewhat surprising when she herself seems unwilling to identify herself as an Austrian, and shares with this reviewer some of the reasons for his distance from it: its dismissal of other approaches, its frequently self-indulgent criticism of the neo-classical paradigm, and its tendency towards hubris.

Anyone interested in Austrian economics should read this book. The author demonstrates an imposing command of the literature; usefully summarises the major works; provides some incisive criticisms; writes in a clear and attractive manner (an attribute not always associated with this field); and integrates the material with the theme of its relationship with mainstream economics. However, it may not be the best introduction to these ideas for libertarians.

The source of my dissatisfaction is probably that I am British, a comparativist, and a political scientist. Dr Vaughn deals with the issue of why Austrians were, and still are, of marginal influence exclusively in terms of the strengths and weaknesses of the ideas themselves and their relationship (or lack) to the issues of concern to the US economics profession. As someone who profoundly believes in the significance of ideas, I certainly would not wish to dismiss this. However the influence of ideas is also determined by other factors, which Dr Vaughn either ignores or mentions in passing.

In the USA I have been struck by the status of Mises and the neglect of Hayek, together with the complete reverse in the UK and Europe. Dr Vaughn notes that Mises is "synonymous with Austrian economics in the US". [p.37] Mises receives a whole chapter to himself and more, while Hayek is mentioned frequently but briefly. This illustrates the lack of any comparative element in the book. One factor to explain this difference is that the a priori approach of Mises is alien to the deeply empirical orientation of the UK, while Hayek's ideas follows the tradition of the Scottish enlightenment. Americans are more open to the statement of unquestioned principles, going back to the Declaration of Independence: "We hold these truths to be self-evident, that all men are created equal, that they are endowed... with certain inalienable rights, that among these are life, liberty and the pursuit of happiness". Another factor is that many Miseians follow their master in his later years in displaying some of the unattractive features noted above. This has been displayed to those libertarians who have dealt with Rothbard and the Ludwig von Mises Institute, who dismiss other libertarians, including other Austrians, as "libertines".

Crucial to the promulgation of libertarian ideas is the existence of institutional support. Dr Vaughn notes the role of the Volker Fund in sponsoring Mises, and the Institute of Humane Studies in organising a series of conferences on Austrian economics in the 1970s. The Institute of Economic Affairs (IEA) played a central role in introducing Hayek to a wide audience in the UK with their pamphlets. The IEA has never published similar pamphlets by Mises. The Adam Smith Institute has been deeply influenced by Hayek, who was its honorary chairman, but gives little attention to Mises. The result of this is that British and American Austrians are very different.

As an historical discussion of the economic ideas of the Austrian school, this book can be highly recommended. However it fails to place them in a broader political, institutional and international context, and thus to explain both their eclipse and their revival.

Nigel Ashford