The Long FAQ on Liberalism
A Critique of the Austrian School of Economics:
HISTORY OF THE AUSTRIAN SCHOOL
A frequent Austrian boast is that Hayek accurately predicted
the Great Depression. Given the Austrian's usual disdain for empirical
verification, however, it is difficult to know what to make of
Actually, this prediction was a no-brainer, since the U.S. had
experienced at least five depressions before the Great One, and
the recurring pattern of the business cycle had long ago been
recognized. It therefore took no acumen whatsoever to predict
an economic downturn. What is more striking is what Hayek didn't
predict: that depressions would disappear worldwide in all countries
that adopted Keynesian monetary policies. Now that might have
been slightly more impressive.
Another Austrian boast is that in the 1920s, their economists
were involved in some famous debates with the world's top economists,
during which they tore down the intellectual pillars of both socialism
and Keynesianism. Of course, this boast is always accompanied
by the rueful admission that Mises and Hayek didn't convince anybody
in academia, and, in fact, were subject to widespread ridicule.
Mises couldn't even find a university job afterwards, and Hayek
abandoned his work in technical economics, turning his attention
to other political and philosophical pursuits instead.
These debates began in 1920, when Mises published a ground-breaking
article called "Economic Calculation in the Socialist Commonwealth,"
followed by his book, Socialism. In these works, Mises
argued that socialism had to fail, because it had no way of knowing
whether it was allocating resources efficiently or not. In market
economies, prices help people make economic calculations; profits
and losses allow them to know whether they are pursuing the right
economic plan. In a centrally planned economy, there is no way
for the planners to know. And if they attempted to know, they
would become overwhelmed by all the prices, profits and loss statements
required to know. Mises and Hayek also argued that any central
planning committees entrusted to run the economy would become
This is the economic version of an old argument, that dictatorships
deal in corruption and insufficient information. This argument,
without doubt, is true. That the Soviet Union was a dictatorship
is also true. What is false is the assertion (made by the Soviet
Union itself) that the country was socialist. Socialism means
that workers own the means of production, not private individuals or
an elite group.
Socialism has been proposed in many forms, ranging from social
democracy to anarcho-socialism. In the latter, workers would own
companies that would compete on the free market, absent any government
at all. As you can see, socialism is hardly synonymous with a
central planning committee. But one thing socialism cannot be
is a dictatorship -- worker's do not own anything if a totalitarian
government tells them what to do. Mises and Hayek may have refuted
the principle of economic totalitarianism, but they didn't come
close to refuting socialism. This is one reason why academia didn't
view their arguments against socialism as conclusive.
About the same time, Hayek became involved in a famous dispute
with John Maynard Keynes. Austrian economist Peter Boettke provides
the following account:
"The Hayek-Keynes debate was perhaps the most fundamental
debate in monetary economics in the 20th century. Beginning with
his essay, "The End of Laissez Faire" (1926), Keynes
presented his interventionist pleas in the language of pragmatic
classical liberalism. As a result, Keynes was heralded as the
"savior of capitalism," rather than being recognized
as the advocate of inflation and government intervention that
This rather accurate account bears only a few additional comments.
Blaming the failure of Hayek's book on the fact that it was his
"most technical" doesn't wash in economics, where technicality
is seen as a strength, not a weakness. One could hardly imagine
a more technical and confusing book than Keynes' General Theory.
Nobel economist Paul Samuelson would describe Keynes' book thus:
"Hayek pinpointed the fundamental problem with Keynes's economics
-- his failure to understand the role that interest rates and
capital structure play in a market economy. Because of Keynes's
unfortunate habit of using aggregate (collective) concepts, he
failed to address these issues adequately in A Treatise on
Money (1930). Hayek pointed out that Keynes's aggregation
tended to redirect the analytical focus of the economist away
from examining how the industrial structure of the economy emerged
from the economic choices of individuals.
"Keynes did not take kindly to Hayek's criticism. He responded
at first by attacking Hayek's Prices and Production. Then
Keynes claimed that he no longer believed what he had written
in A Treatise on Money, and turned his attention to writing
another book, The General Theory of Employment, Interest, and
Money (1936), which in time became the most influential book
on economic policy in the 20th century.
"Rather than attempting to criticize directly what Keynes
presented in his General Theory, Hayek turned his considerable
talents to refining capital theory. Hayek was convinced that the
essential point to convey to Keynes and the rest of the economics
profession concerning monetary policy lay in capital theory. Thus
Hayek proceeded to set forth his thesis in The Pure Theory
of Capital (1941). However correct his assessment may have
been, this book, Hayek's most technical, was his least influential.
By the end of the 1930s, Keynes's brand of economics was on the
rise. In the eyes of the public Keynes had defeated Hayek. Hayek
lost standing in the profession and with students." (1)
"It is a badly written book, poorly organized
arrogant, bad-tempered, polemical
it abounds in mare's nests
and confusions: involuntary unemployment, wage units, the equality
of savings and investments, the timing of the multiplier, interactions
of marginal efficiency upon the rate of interest and many others
flashes of insight and intuition intersperse tedious algebra.
An awkward definition suddenly gives way to unforgettable cadenza.
When it is finally mastered, we find its analysis to be obvious
and at the same time new. In short, it is a work of genius."
No, economists the world over assessed Keynes' and Hayek's books
for their ideas, and the fact that they found Keynes' work to
be far and away the most convincing has left Austrians groping
for scapegoats like "technicality" ever since. Rockwell
even seems to go so far as to suggest academic corruption:
"The Mises-Hayek theory was dominant in Europe until Keynes
won the day by arguing that the market itself is responsible for
the business cycle. It didn't hurt that Keynes's theory advocating
more spending, inflation, and deficits was already being practiced
by governments around the world." (3)
Yet another boast of the Austrian School is that Hayek was awarded
the Nobel Prize in economics. This is indeed an honor, but one
should keep in mind the purpose of the Nobel. It is intended to
reward individuals for specific contributions, not their entire
lifetime of work or the school of thought from which they hail.
This policy has led to many ironic awards, such as the Nobel peace prize
to PLO terrorist Yasser Arafat. In Hayek's case, the award was
shared by Gunnar Myrdal, "for their pioneering work in the
theory of money and economic fluctuations and for their penetrating
analysis of the interdependence of economic, social and institutional
phenomena." Myrdal was a Swedish economist on the far left,
whose Keynesian-like policies brought Sweden out of the Great
Depression in 1932, the first nation to do so. In honoring both
economists, the Nobel committee could have hardly been validating
their very different schools of thought simultaneously.
Furthermore, the Nobel committee has established a well-known
reputation for unorthodoxy: it has awarded the prize to such fringe
economists as James Buchanan, Herbert Simon, Ronald Coase, Douglass
North, and both Hayek and Myrdal themselves. In his acceptance
speech, Hayek expressed surprise that the committee would
honor someone whose ideas were "as unpopular as mine are."
Furthermore, the committee has sometimes honored economists whose
theories once dominated academia but have since fallen out of
favor, such as Robert Lucas' Rational Expections. (Amusingly,
the committee admitted that Lucas' Nobel would be controversial
and was defending it even as they awarded it to him.) The selection
of so many prize-winners on the far right appears to be the result of
Assar Lindbeck, the right-wing Swedish economist who heads the
six-man economics prize committee.
Finally, Austrians claim that "The Nobel Prize that Hayek
received in 1974
caused an explosion of academic interest
in the Austrian School and free-market economics in general."
(4) A more careful reading of Austrian propaganda tracts
reveals that this "explosion" is the result of wealthy
business donors buying the movement's way into academia and the
media. It does not exist on its own scholarly merits. After Hayek
won the Nobel, academia reviewed Austrian theory and promptly
rejected it. Even with far-right businessmen pumping millions
of dollars into the movement, it has grown to no more than 75
professional faculty members worldwide. (5) One might presume
that if the Austrians were to actually capture an Ivy League department,
their "explosion of interest" would be upgraded to "Christ's
Next Section: The Politics of the Austrian School
Return to Main Page
1. Peter J. Boettke, "Friedrich A. Hayek (1899-1992),"
2. Quoted in Peter Pugh and Chris Garratt, Introducing Keynes
(Cambridge, England: Totem Books, 1994), p. 64.
3. Llewellyn H. Rockwell, Jr. (president and founder of the Ludwig
von Mises Institute), "Why Austrian Economics Matters,"
5. "About the Ludwig von Mises Institute,"