Edited and written by David Gordon, senior fellow of the Mises Institute and author of four books and thousands of essays.

Lost In The Move?

Fall 1995

AUSTRIAN ECONOMICS IN AMERICA: THE MIGRATION OF A TRADITION
Karen I. Vaughn
Cambridge University Press, 1994. xiv + 198 pgs.

I closed Karen Vaughn's Austrian Economics in America with a sense of disappointment. In several ways, as it seems to me, it fundamentally misconceives its topic.

Vaughn has revisited a common query: what is the task and scope of Austrian theory and what direction should it take in the future? Unfortunately, Vaughn's response to the latter part of the question biases her entire presentation. To her, a group of friends and colleagues she knows by virtue of professional proximity lies at the center of the contemporary Austrian School. She reads the history of the School backwards: whatever leads to the distinctive concerns of her group is stressed; whatever does not is slighted or downplayed.

She sets the stage with a chapter on Carl Menger, the founder of the Austrian School. She maintains that Menger did not primarily concern himself with equilibrium prices, in the style of the neoclassical school. "His theory of value . . . was embedded in a larger attempt to answer what was basically Adam Smith's question: what are the causes of the progress of the wealth of nations? He identified the source of progress as man's increasing knowledge of the causal connection between goods and human needs and showed how it was brought about by the active efforts human beings take to satisfy their requirements" (p. 33).

Here the danger of a false step arises. She emphasizes, following Erich Streissler, that Menger thought the process of adjustment to "real needs" long and drawn out; and, in this sense, she quite correctly says that he did not believe the economy was likely to be in equilibrium. But the notion of equilibrium she here uses, adjustment of prices and quantities of goods to the "real needs" of consumers, differs fundamentally from a more common use of the concept.

In that use, the economist is concerned with actually existing consumer preferences. Are these preferences, to a large degree, satisfied on the market; or, on the contrary, are there substantial maladjustments that cannot be readily rectified? From the fact that preferences change, we cannot say that the market fails to satisfy whatever preferences at a given moment obtain.

Here, I am using equilibrium in a common-sense way rather than to designate Walrasian general equilibrium, the "final state of rest" or the "Evenly Rotating Economy." Very roughly, I mean that markets tend to clear and that the market economy is not seriously out of kilter.

Anyone not foolish enough to believe that consumers' real needs have been fully met counts as a non-equilibrium theorist in the sense that Vaughn attributes to Menger. However, she never shows that Menger rejected equilibrium in the plainer sense that the market fails accurately to reflect consumer tastes. Indeed, Vaughn fails to distinguish these two senses at all.

This failure leads to what is in fact the chief strategy of the book. She claims, in effect, that since Menger rejected equilibrium (sense one), and since he founded Austrian economics, true Austrian economics is by definition a non-equilibrium theory, stressing the importance of knowledge, time, and process (p. 36). Thus, economists who accept equilibrium (sense two) such as Mises and Rothbard, are less truly Mengerian, hence Austrian, than Ludwig Lachmann, Menger's rightful heir, who rejects it. And readers should have no trouble guessing Lachmann's heirs and assigns.

Further, she fails to distinguish "common-sense" equilibrium (sense two) from Walrasian general equilibrium (sense three). Those who accept the former (again Mises and Rothbard) are covertly neoclassicals, since the study of general equilibrium (sense three) is the fons et origo of neoclassical economics.

Before she comes to that neoclassical backslider, Ludwig von Mises, Vaughn looks briefly at Eugen von Böhm-Bawerk. She rightly notes that Böhm-Bawerk "showed that there was a fatal contradiction in Marx's critique of capitalism." But her account of that contradiction is surprising. She states the problem this way: "it could not be the case both that goods would exchange at labor values in the long run and that the returns from capital in all occupations would be equalized at the same time. . . . Since Marxian theoretical proposition was at odds with fact, his system had to be incorrect" (p. 39).

This totally misses the point. Marx knew full well, and agreed with Böhm-Bawerk, that goods did not exchange at their labor values in the long run. So too, as a Ricardian, Marx agreed that there were equal returns to capital across industries. Marx took upon himself the task of explaining how this apparent contradiction of the labor theory of value could be made consistent with it. Böhm-Bawerk's deadly blow was to show that Marx's attempted reconciliation utterly failed.

In Vaughn's superficial version, the agreed-upon problem has itself become the Böhm-Bawerkian critique. Böhm-Bawerk is of little account, though; he cannot be readily portrayed as a proto-hermeneutician who leads to her chosen project.

Vaughn rightly stresses that Mises's seminar at New York University was at the center of Austrian economics in America and pays tribute to "the creativity of his mind and the breadth of insight he brought to economics" (p. 65). But it is difficult to avoid the feeling that Mises does not rank among her favorites: too much of his work, in her view, merely rang the changes on familiar neoclassical themes.

In her discussion of Mises, she makes a number of dubious assertions. She gives this account of Mises's method: "Praxeology is an axiomatic system that has as its ultimate given that human beings act . . . from this axiom all of economic theory can be deduced" (p. 65). Not at all! Mises admitted in economics subsidiary postulates that are not a priori. Obviously, the theorems of economics that use these subsidiary postulates are not themselves a priori.

Vaughn knows this but, oddly, treats the use of non a priori statements as a difficulty for Mises. "However, Mises does not deduce all of praxeology from the action axiom. He slips in subsidiary statements that can only be viewed as hypotheses and not certain truth" (p. 77). But Mises does not slip these in they are explicit parts of his system. Vaughn first misstates Mises's position and then triumphantly finds a contradiction in it. And why does Vaughn believe that the subsidiary statements cannot be certain? Are a priori truths the only certain ones? So that, for example, "there is a variety of goods and services" is a mere conjecture?

Further, Vaughn displays an unsure hand in this: "If he [Mises] could establish that praxeology follows inexorably from the action axiom and if he could convince us that there is no other possible starting point for understanding human action then we would have to grant the certainty of praxeological laws and their ability to give us knowledge of real things" (p. 77, emphasis added).

Mises did indeed believe that the action axiom is the only possible starting point for economics. But why must he prove this in order to make valid deductions? If praxeology starts from correct postulates and draws from them valid conclusions, surely that suffices. Why must one have some sort of meta-proof that one's axiom is the sole possible point of origin?

Mises's sins, in Vaughn's view, were not confined to methodology. He wrongly claimed "that monopolists will only restrict supply and charge a monopoly price if the elasticity of demand is less than one. . . . It is a matter of simple analysis that no producer facing a downward- sloping demand curve will charge a price in the inelastic region of the demand curve" (p. 85, emphasis added).

Elsewhere, though, she says: "Rather than presuming that Mises was incorrect in his analysis of monopoly, however, Rothbard shows a case in which Mises's analytics make sense. Rothbard began by assuming a fixed supply of some commodity and then showed how a monopolist would only raise prices if the competitive price fell in the inelastic region of the demand curve" (p. 96). Vaughn's two statements cannot both be true.

Murray Rothbard is yet another eminent Austrian who failed to carry out adequately Menger's revolution. His great treatise Man, Economy, and State will seem to "a typical reader . . . more or less familiar economics presented almost exclusively in words. The familiarity is undoubtedly the consequence of Rothbard's underlying assumption about the organizing principle for understanding market interaction, his concept of equilibrium "(pp. 96 97).

Here we have a prime instance of the confusion to which I earlier drew attention. Because Rothbard thought that markets in the usual case adjust to consumer preferences quite readily, Vaughn thinks of him as virtually a neoclassical equilibrium theorist. "Just as in conventional neoclassical economics, general equilibrium, . . . was the direction in which the economy was headed" (p. 97).

Vaughn has not understood the counterfactual conditional at issue: the final state of rest is the direction the economy would be heading if, as they never do, the data remained constant. It is not just for Rothbard "unlikely that an economy would ever achieve the ERE" (p. 97); "no such position is ever reached in practice" (Man, Economy, and State, Auburn: Ludwig von Mises Institute, p. 275, emphasis added).

Vaughn's assault on Rothbard extends beyond his economics. He was a dogmatist, who at the famous South Royalton conference of 1974 would brook no dissent from Mises. Here I cannot but wonder whether Vaughn's remarks are colored by resentment at some imagined slight (p. 108, esp. n. 20). She pictures Rothbard as going to inordinate lengths to avoid the admission that Mises erred in his discussion of monopoly price. Yet Rothbard's treatment culminates in a rejection of the entire concept of monopoly price on the free market as illusory, in complete contrast with Mises (Man, Economy, and State, pp. 604 ff). And has Vaughn ever examined Rothbard's sharp criticism in Ethics of Liberty of Mises's utilitarianism?

Vaughn does not reject "neoclassical" tendencies in Austrian economics as without value. Quite the contrary, she thinks they serve a very useful function in criticism of mainstream assumptions. In this regard, she singles out Kirzner's theory of the entrepreneur for high praise. But if we aim at a greater role for Austrianism than a mere supplement, she says, we must go elsewhere.

Vaughn regards Ludwig Lachmann as Menger's rightful successor. Lachmann realized that "one can never see into the future; one can only imagine and conjecture, interpret the present, and form expectations about the future" (p. 152). Accordingly, he cast out equilibrium from economics. How could we know that the market will successfully adjust to the changing preferences of consumers? These lie in the future, which, as Lachmann has repeatedly said, is unknowable.

But why is future choice unknowable? "The reason . . . Lachmann would argue, is that no two minds are alike; neither in the bits of knowledge they contain or in their method of interpreting the information they receive" (p. 153). Here I confess to complete bafflement. Suppose that no two minds are completely alike: how does this have any bearing on whether the future is predictable? Presumably the problem of dissimilarity does not arise if I confine myself to my own mind: can I then predict my own future choices? The argument attributed to Lachmann is worthless.

In spite of her praise of Lachmann, Vaughn acknowledges that "one cannot help but feel that he has taken a tour of individual trees and missed the forest" (p. 160). He failed to arrive at a theory of market process and left the role of institutions not fully clear.

But all is not lost. Building on Lachmann's insight that we cannot know the future, a younger group of economists again, professionally associated with her aims to elucidate what Lachmann was able to see only imperfectly.

Vaughn cannot specify the group's theories in detail. After all, these lie largely in the future, and the future cannot be known. Will some yet-to-be-conceived-of evolutionary economics offer the key to the mystery? A "progressing healthy Austrian research program," she offers, will involve "a total rethinking of economic policy from the perspective of pattern coordination" (p. 176).

Vaughn's discussion makes apparent that Lachmann had no sound basis for his signature tune, the "radical" uncertainty of the future; and his successors in the Kingdom of Darkness, as Hobbes would call it, have done no better.

It does not of course follow that one can foresee the future; but I venture one prediction of my own. Progress in Austrian theory will come not from our self-styled radical subjectivists but from theorists who know that human action consists of more than chaos, and economics more than the words "uncertainty," "subjectivism" " evolution," etc. to be repeated in endless litany, like a Tibetan lama spinning his prayer wheel.

Vaughn's criticism of Austrian economics leaves pure theory, and its foremost practitioners Mises and Rothbard, untouched. When you strike at a king, you must kill him.


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