Explorations in Austrian Economics: Volume 11

The chapters collected in this volume were originally given at a memorable 2005 conference in Edmonton, Canada. Our host was the Wirth Institute for Austrian and Central European Studies. The conference organizer, Professor Vivek H. Dehejia of Carleton University assembled an impressive and amiable group of scholars, each of whom has a serious interest in the Austrian school of economics. The Wirth Institute took its current name in recognition of the generous endowment of Dr. Manfred Wirth and his son Dr. Alfred Wirth. Their generosity to the institute reflects a commitment to their Austrian heritage that extends beyond present-day Austria to encompass the broad cosmopolitan legacy of central Europe as a whole. Conference participants could not fail to notice the dedication of Wirth Institute staff including its Director, Dr. Franz A. J. Szabo, to the common cultural legacy of central Europe.

First, let me express my sincere welcome to all of you for what I expect will be two days filled with the pleasures of exploration, learning, and respectful disagreement. I very much appreciate your attendance at what I hope will become a recurring event. Second, I would like to thank Franz Szabo, and all the others who have worked so hard to organize this symposium.

Austrian economics today is a living research program, pursued by scholars around the globe, associated with an intellectual lineage that began in Vienna with Carl Menger's 1871 Grundsätze der Volkswirtschaftslehre (Principles of Economics).¹ Menger's ideas were soon advanced by his followers Eugen von Böhm-Bawerk and Friedrich von Wieser. In the mid-20th century Ludwig von Mises and Friedrich Hayek did the most to extend economic research along Mengerian lines. Some of the Mengerian innovations (marginalism, opportunity cost) have been incorporated into mainstream neoclassical economics, and Mises and Hayek viewed their own research program merely as modern economics.² But as Israel Kirzner (1994, p. xii) has noted, those involved in “the contemporary post-Misesian revival of Austrian Economics” now appreciate “the distinctiveness of the Austrian tradition” stemming from Menger.³

In Austria the 1930s constituted the final period of success and failure of the Austrian school, ending with its emigration to the United States. This chapter focuses on this period, when the Austrian economy was hardest hit by the Great Depression, and it examines the ways and means by which the Austrian economists attempted to influence economic policy. In particular, from 1932 to 1934 in a concerted effort Austrian economists like Ludwig Mises, Fritz Machlup, and especially Oskar Morgenstern tried to “educate” the Austrian public and policy-makers in the benefits of a liberal approach towards the crisis. This effort included the advocacy of the policies typically associated with the gold standard, that is, stable money, balanced budgets, the absence of exchange restrictions, and free trade. In the actual situation the outcome of these endeavors was futile, if not harmful, insofar as indeed Austrian economic policy slowly converted to the implied deflationary stance of monetary and fiscal policy. Yet, under the regime of the so-called corporate state the necessary complement of such policies, namely the flexibility of prices and the furthering of competition, could not be accomplished. This eventual failure of the liberal cause may be ascribed to the fact that it had to rely on shifting coalitions and fragile personal relations, which in the end turned out too weak for sustaining the policies envisioned by the Austrian economists.

In the fields of social choice, public choice, and political economics, the key difference between private and political decision-making is whether preferences have to be aggregated to make a decision. A related, yet much less studied difference is whether also beliefs have to be aggregated. In this chapter, we argue that belief aggregation creates different incentives for individual belief updates in private and political choice. We review contemporary theories of biased beliefs in politics: Bayesian misperceptions, behavioral anomalies, and rational irrationality. We examine assumptions and consequences of all the approaches vis-à-vis issues of common knowledge, stability, symmetry, and multiplicity of stable states. As a route for further analysis, we construct an evolutionary model including a coordination failure. Differences in learning dynamics make the political play of this baseline game Pareto-inferior to the private play.

This chapter explores the political economy of F.A. Hayek with emphasis on the continued relevance of his work for contemporary scholars. We focus on the theme of coordination throughout Hayek's research program. This general theme can be traced from Hayek's technical economics up through his later writings in political philosophy. After considering Hayek's major works in political and legal theory, we conclude by discussing the contemporary implications of Hayek's political economy. Specifically, we discuss eight areas where modern economists should pay close attention to the main lessons and themes in Hayek's writings.

Hayek favored both classical hermeneutics and science. His scientific reasoning shows the logical necessity of methodological dualism. Bruce Caldwell and Viktor Vanberg oppose hermeneutics and methodological dualism in favor of science. Their arguments depend on inappropriate interpretations of the doctrine of methodological dualism and an impoverished understanding of hermeneutics that fails to distinguish classical hermeneutics from universal hermeneutics. Hayek showed that “scientific” and “humanistic” approaches to social science can and should be compatible and complementary. Opposing (classical) hermeneutics in favor of science may cause a loss of knowledge by tending to deprive “scientific” social science of insights arising from more “humanistic” traditions.

According to Friedrich A. von Hayek, trade unions are the primary problem of our times. They coerce employers into raising the wages, and they seek privileges in the political sphere. This harsh judgement is, however, not fully justified by Hayek's own theory of action and order. In addition to some terminological difficulties, he undervalues his insights – developed and applied elsewhere – of competition as a discovery process and of locally available knowledge when it comes to unions. Following this lead, further functions of trade unions apart from their monopoly face appear: trade unions channel information and develop rules for conflict resolution; they are part of a process of preference formulation and opinion formation.

By the 1950s, F. A. Hayek's contributions to a variety of disciplines seemed to be more clearly center around the concept of spontaneous order, or in more contemporary and more general language, “adaptive classifying systems.” In this chapter, I compare two such systems present in Hayek's thought: his contributions to the Austrian theory of capital and his work on the theory of cognition. This comparison reveals a number of very strong analogies between the two theories, which is not surprising as Hayek himself acknowledged that his work on capital influenced his thinking when he returned to theoretical psychology after completing The Pure Theory of Capital. Specifically, I argue that both capital and the mind are adaptive classifying systems characterized by: multiple classification/specificity, the centrality of structure, and a relational concept of order. The chapter concludes with some brief thoughts on the implications of the argument for the theory of the firm and for the place of methodological dualism in Hayek's thinking more generally.

When understood as an inevitable inconsistency of individual plans, disequilibrium is not only a necessary condition for the existence, and hence understanding, of the market process as we know it, it is also the glue connecting three other “Austrian” themes. In equilibrium heterogeneity of resources would have no strategic significance, specific and private knowledge would be much less problematic, and no profits net of contractual rent payments would be earned. In the real world of disequilibrium firm differences are not a mystery, rent is not an indication of inefficiency or monopoly power, and there is room to analyze, admire, reward, and consult about successful business strategy. Rent appropriation comes from ownership of valuable resources. And a successful strategy, one that earns enhanced rents, is one that acquires ownership of valuable and value-creating resources. Such a strategy is dependent for its success on superior vision (or luck), something which cannot exist in equilibrium.