ECONOMICS: the AUSTRIAN SCHOOL and KEYNES

Economics: the Austrian School and Keynes

Carl Menger. He introduced into pricing theory the public
acting other than with logic. (Wikipedia Commons)

Austrian School of Economics

Carl Menger (1840-1921) addressed the diamond-water paradox that had been puzzling classical economists: the fact that mankind finds diamonds to be far more valuable than water although water is far more important. Like Schopenhauer, Menger concluded that people followed impulses more than reason. Menger focused on the uncertainties in human behavior. He asserted that complete knowledge of what is going to happen economically does not exist and that decisions based on expectations of what will happen involve risk. Producers take a risk because they cannot predict with certainty that what they receive in sales will be greater than their production costs. As obvious as this is to people today, it was not the economic model that was standard before Menger. It would be considered the beginning of the Austrian School of Economics. It was for entrepreneurs, believed Menger, to collect and evaluate information as best they could and to take calculated risks.

A fellow Austrian, Eugen von Böhm-Bawerk (1851-1914), read Carl Menger's "Principles of Economics" and became an adherent of his theories. He wrote criticisms of Marx's economics, describing capitalists as helping rather than exploiting their employees, to which Marxists took umbrage.

Nikolai Bukharin, a prominent Russian Marxist and Soviet politburo member, was to argue in his work Economic Theory of the Leisure Class, published in 1927, that Böhm-Bawerk was subjectivist and atomistic in his theories. Bukharin contrasted Böhm-Bawerk with Marx. He described Marx's theory as sociologically based, objective and deterministic -- very Hegelian. Bukharin wrote, quoting Marx:

As a matter of fact, while Marx considers “the social movement as a process of natural history governed by laws not only independent of the human will, consciousness and intelligence, but rather, on the contrary, determining that will, consciousness, and intelligence.”

Böhm-Bawerk taught courses at the University of Vienna and among his students were those who would become well-known as associates of the Austrian School of Economics: Joseph Schumpeter, Ludwig von Mises and Henryk Grossman.

Schumpeter taught at Harvard beginning in 1932 and was most influential. He described capitalism as destroying itself by its successes rather than its failures as Marx had described. Socialistic creations would create the destruction, hampering the beneficence of the individualist entrepreneur hero. Among his students was Alan Greenspan.

Ludwig von Mises and Friedrich von Hayek also left Europe, running from Hitler, von Mises to New York, Hayek to London. They believed that a few bureaucrats -- no matter how bright -- trying to constrict economic development into a plan of their making were not superior to a society-wide freedom to innovate, to allocate resources and consumers to spend their money as they pleased. Hayek won a Nobel prize in 1974.

Bukharin was less successful. He was the Soviet Union's leading intellectual, but his views on collectivization were rejected by Joseph Stalin -- another who believed in objective historical processes of a Hegelian sort. In 1938, Stalin had Bukharin tortured and forced to confess that he was a "degenerate fascist" working for the "restoration of capitalism." He was executed, and his wife, Anna Larina, was sent to a labor camp.

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