Carl Menger

Anyone who has spent a decent amount of time browsing overviews of Austrian School economics has no doubt come across the fact that Carl Menger was the Father of Austrian Economics. Mises once wrote that “until the end of the [eighteen] seventies there was no ‘Austrian School.’ There was only Carl Menger.”

From this fact some simply assume that the path from Menger to Rothbard was straightforward and without blemish, as one single lineage from teacher to pupil. But this is not so. The Austrian School has had its own schisms, its own battles for intellectual purity, and its own renegade economists who deviated, in one way or another, from the Mengerian tradition.

Carl Menger, of course, was Austrian; and published in 1871 the book that would ignite the whole of the Austrian tradition by attracting fellow Austrians Eugen von Bohm-Bawerk and Friedrich von Wieser into study of the Mengerian method. The book was Grundsätze der Volkswirtschaftslehre (translated into English: The Principles of Economics) and it was the key that drove Mises himself into lifelong study of economic problems.

Among Menger’s accomplishments were the following:

  1. First, he independently developed the theory of economic subjectivism; the idea that value was determined not by the nature of the economic good itself, but by the mind of the individual human being who imputes value, based on how well he determines it will fulfill his needs, into the good. Value then is imputed, and subjective to the mind of the individual human actor.
  2. Second, and this is important for the present tale of two traditions within the Austrian School, Menger established what eventually came to be called the “causal-realist” tradition of economics. There are two parts to this. On one hand, Menger defended the idea that there was a “cause-and-effect” aspect to the development of market prices; that is, the prices of goods on the market were a response to (caused by) the complex desires and actions of individual human agents. On the other hand, in order to discover economic laws relating to price theory, Menger taught that the economist must emphasize the realism of his assumptions. That is, in reflecting on price theory, we mustn’t create models and assumptions that don’t actually exist in the minds of human actors on the market.

Friedrich von Wieser

Both of these must be contrasted with the French NeoClassical economist Leon Walras. In the history of economics, Walras was one of the three discoverers of the concept of subjective value theory (Carl Menger and William Jevons being the others). Walras, however, did not at all subscribe to Menger’s causal-realist approach to economics. Instead, Walras was a key developer of what is known as a “General Equilibrium” framework. He approached price theory through a nonexistent construct of a mechanistic market that was not subject to the changing desires and values of individual actors— it was an entity in and of itself. It was by analyzing this economy in perpetual equilibrium that the economist could discover truths about the nature of prices. In sum, he ignored Menger’s cause-and-effect approach and at the same time dismissed the need for realistic components (after all, this “equilibrium” could not actually be found in the economy).

While price theory touches so many aspects of economic theory in general, the Walrasian framework was explicitly non-causal-realist. While Menger and Walras were both co-discoverers (along with Jevons) of subjective value, they represent two entirely different traditions of economic thought.

Eugen von Bohm-Bawerk

Now then, Menger’s Principles of Economics and other efforts caught the attention of two individuals, brothers-in-law, who would essentially be Menger’s proteges and representatives of what might be referred to as the “second generation of Austrian School economics.” These two, Eugen von Bohm-Bawerk and Friedrich von Wieser, represented the first schism in the Austrian School tradition.

Bohm-Bawerk latched on closely to Menger’s causal-realist approach while Wieser merely adopted Menger’s subjectivist position. Instead, Wieser completely dismissed the Mengerian price theory, preferring instead to focus on an anti-realist construct which was closer to the Walrasian equilibrium model. Bohm-Bawerk, however, not only embraced Menger’s causal-realist principles, he also sought to expand and develop it further. Bohm-Bawerk eventually made tremendous (though not entirely perfect) contributions to capital theory, not only in a positive construction of an Austrian capital theory, but also in a negative attack against all other major capital theories of competing schools of economic thought.

The problem with the uniform phrase “The Austrian School,” then, begins immediately. The German Historicist anti-economists (anti-economists because they rejected the very possibility of economic laws) in the 1880s dismissed Menger and his followers as the “Austrian School of Economics;” they were the first to designate the Mengerians with an official title. One ramification of this was that it glossed over the diversity within the price theory of the Austrians themselves. The Austrians were actually made up of Mengerians and neo-Walrasians, that latter, of course, having more in common with the neo-classicals than the Mengerians in terms of price theory.

Bohm-Bawerk and Wieser, naturally, passed on their own price theories to their students, Bohm-Bawerk as a Mengerian and Wieser a Walrasian. Their students represent the third generation of Austrian Economics.

Joseph Schumpeter

Wieser’s most important student, who was also well-read in, and heavily influenced by, the Walrasian framework, was Joseph Schumpeter. Schumpeter’s role in the advancement of Walrasian economics is often under-appreciated, but it is nevertheless key because later Austrians would latch on to Schumpeter’s commitment to the General Equilibrium approach. Fascinatingly, for all Bohm-Bawerk’s heavy criticism toward Schumpeter’s Walrasian price theory, the former saw the latter as the most brilliant and promising of third generation of Austrian Theorists. As Schumpeter was busy impressing the academicians at the University of Vienna, Menger had since retired and Bohm-Bawerk had take a position elsewhere. Unfortunately for the Mengerian tradition, this meant that, at least for now, the Walrasian General Equilibrium approach was on the rise and Menger’s causal-realism was left by the wayside.

The fourth generation at the University of Vienna, then, would be almost entirely made up of proponents of Schumpeter and Wieser’s Walrasian approach. At this point, in the words of Robert Allen, Menger was “more a myth than a reality particularly since his book had become a great rarity which was practically unobtainable as the copies had even disappeared from the libraries.”  Mengerianism was on life support.

At this time, the issue of price theory was all the rage in the world of Austrian Economics. Thus the success of price theorists such as Schumpeter. But under the radar was the brilliant Viennese student of Bohm-Bawerk, Ludwig von Mises. As the heavyweights in the Austrian School focused on the price theory debate, the young Mises wrote his timeless Theory of Money and Credit. That is, Mises’ focus was on monetary matters at that time and therefore he was not seen, yet, as a vital defender of the Mengerian tradition.

It was only later (late 1920s) that Mises would come back around to address the issues of pure theory and economic methodology, the first being Epistemological Problems of Economics. For the first time since the rise of Schumpeter and the quiet exit of Menger, did the causal-realist approach have a worthy voice. While this book caused some attention to the old Mengerian framework, it wasn’t until 1940 and the publication of the German edition of what would eventually be Human Action that it was realized that Mises had in his mind a holistic system of economics that was built on causal-realism. Mengerianism was back!— if only in writing, not yet in popularity.

Ludwig von Mises

Meanwhile, across the Atlantic, there were proponents of Bohm-Bawerk’s own causal-realism in the first generation of American “Austrians,” most important among them Frank Fetter. Fetter is important because he corrected key mistakes in Bohm-Bawerk’s theory of interest— helping to construct, along Mengerian lines, what is now known as the “pure time-preference” theory of interest, which was later adopted by Mises, Rothbard, Hoppe, Salerno, and Herbener.

As World War II caused the spread of the German government, academic, and military influence into Austria, the Austrian economists, bitter opponents of German central planning and totalitarianism, fled into the west. Among these was the most popular of the Austrians, FA Hayek. Hayek viewed general equilibrium as the centerpiece of his economic theory. While he was no doubt influenced in many ways by the teachings of Mises, in the end, Hayek never broke out of the shell of his Walrasian training. In fact, in his essay Coping with Ignorance, Hayek clearly points to two traditions within the Austrian School and admits being an adherent of the Wieserian, rather than the Bohm-Bawerkian/Mengerian, tradition.

As the Austrian School began its western migration in the face of an invading German presence which caused the the sad fall of the Austrian monarchy and way of life, Hayek brought his “Walrasian contagion” with him to the London School of Economics. Walras and his General Equilibrium approach then, had made their way into the English speaking world and spread like wildfire, eventually reaching the Bohm-Bawerkians hiding away in America. Fetter and his causal-realist allies were replaced by proponents of Wieser and the influential Schumpeter.

It was at this point that Mises’ massive economic treatise was published in German— the timing was crucial. Mengerian causal-realism was barely a memory. While it was an important moment for the Mengarian tradition that the book was published, it got exactly nowhere. After all, Mises, an Austrian traditionalists stubbornly refused to leave his Fatherland until the very end. But publishing his book there in Austria meant that he was immediately overrun by the Nazis and the book barely saw the light of day. Mises was devastated and sought refuge in New York, helped along by Austrian colleagues who had fled earlier.

It is a testament to Mises’ heartfelt dedication to the truth and sound economics that, rather than give up, he once again wrote an economic treatise, this time more expansive and updated. The book, Human Action, would reignite Austrian economics and Mengerianism and lead to the rise of the Misesians, led by the ever-youthful and energetic genius Murray Rothbard.

Murray Rothbard

It is important to note, however, that without Rothbard, Human Action and the return of causal-realism wouldn’t have been as widespread as it eventually was. After all, Mises was not associated with any specific academic institution and therefore had almost no support in the academic world. Compare this to the influence and prestige of FA Hayek at London School of Economics, who would later receive a Nobel Prize in economics. But more importantly than this, Mises had written a world class and exceptionally in depth treatise on a subject that was hardly understood by the general audience, educated as they were by the Keynesian framework that by this time was considered economic Orthodoxy. In short, few understood the full weight of the contribution offered by Mises.

What the Misesian revolution needed was a revolutionary; a torch bearer who would bring the insights and contributions of Human Action to the general audience. It needed an interpreter, a fiery disciple who would at the same time uphold its weight but also communicate it to those ready and willing to listen.

This disciple came in the form of Murray Rothbard, whose own Man, Economy, State, which was originally meant as a summary of Human Action, wound up being its own original contribution to the Austrian edifice. With striking, even legendary, energy and devotion to the cause of liberty, Rothbard brought forth the Misesian system into the modern world and made it popular (to the extent that these things can be popular). By the mid-seventies, there was a collection of Rothbardian-Misesians that held a conference, the first of its kind in America, in South Royalton, a tiny town in Vermont. It was here that the modern Austrian movement found its beginnings.

Of course, the modern movement had its own splits, many of the key areas of difference being reminiscent of the Mengerian/Walrasian schism of old: the endorsement or rejection of causal-realism. At first, it was between Rothbard and Ludwig Lachmann, with the latter making the Old mistake of relying on, consciously and purposefully, unrealistic assumptions about economic theory. Once again, there was a camp within the greater Austrian tent that rejected Menger’s causal-realism.

The key group that helped to fund the South Royalton conference, Institute for Humane Studies, began to de-emphasize the work and thought of Mises, much to the disapproval and objection of Rothbard. Instead, IHS worked with the recently formed Cato Institute to promote the Lachmannite theories. Thus, the funding for the Misesian/Rothbardian Austrian school began to dry up. For more on the political battle between Rothbard and Cato, read my article here.

In the post-Rothbard age, there are still two schools of thought: the followers of the Mengerian, causal-realist, Misesian tradition, and the proponents of the non-causal-realist, Hayekian tradition. The Misesians include folks like Hans Hoppe, Joe Salerno, Huerta de Soto, Jeff Herbener, and are mostly centered around the Ludwig von Mises Institute in Auburn, Alabama. The modern Hayekians (some of whom, though not all, try to differentiate themselves from the Misesians by dropping the Austrian label and instead calling themselves members of the Virginia School of Political Economy), include economists such as Peter Boettke, Lawrence White, George Selgin, Steve Horowitz and are often centered around Cato Institute and the George Mason University Economics Department (Mercatus Center).

As for me, I am strictly in the Misesian/causal-realist school.