The Foundations of Modern Austrian Economics
In June 1974 the Institute for Humane Studies sponsored the first of a series of conferences on Austrian economics. This conference was held at Royalton College in South Royalton, Vermont, and attracted some fifty participants from all regions of the United States and three continents abroad. The conferees came to hear Israel M. Kirzner, Ludwig M. Lachmann, and Murray N. Rothbard survey the fundamentals of modern Austrian economics and thereby challenge the Keynesian-neoclassical orthodoxy, which has dominated economic science since World War II.
Each lecturer addressed himself to two general questions: What is the distinctive Austrian contribution to economic theory? And what are the important problems and new directions for Austrian economics today? By answering these questions, the papers collected in this volume become more than just a set of conference proceedings—they take on the character of a manifesto and provisional textbook as well.
The enthusiastic response to the South Royalton conference suggests that the century-old Austrian tradition is now entering a new era of increasing influence. Both the Austrian school and its orthodox competitor trace their origins to the restructuring of economic science that took place in the 1870s. The marginalist revolution of that period, which marked the breakdown of the classical economics established by Adam Smith, David Ricardo, and John Stuart Mill, was followed by the appearance of a number of new schools of economics in England and on the Continent. The greatest of the English economists of this period was Alfred Marshall. The so-called neoclassical school of Marshall and his followers soon became the new orthodoxy. In the process it absorbed the contributions of two other major schools that had arisen independently—one associated with William Stanley Jevons in England and the other with Léon Walras in Switzerland.
Meanwhile in Vienna the marginalist revolution was proceeding on another front. In 1871 Carl Menger published his Grundsätze der Volkswirtschaftslehre and, soon joined by Friederich von Wieser and Eugen von Böhm-Bawerk, established the Austrian school. The Austrian school, although failing to achieve dominance in the international profession, retained its own identity and did not become wholly absorbed into neoclassicism. Throughout the remainder of the nineteenth century and into the twentieth, it continued to attract a small but vigorous stream of adherents, among whom the most distinguished were Ludwig von Mises and Friedrich A. Hayek.
During the Great Depression neoclassical economics was deeply shaken. The depth and duration of the economic crisis exceeded the expectations of orthodox theorists. Government policymakers were unable to find adequate guidance in the textbooks of the day, and members of the economics profession cast about for a new theoretical insight. The two major candidates for the leadership role were Hayek, the Austrian theoretician, and John Maynard Keynes, the most prominent of Marshall's pupils. By the end of the decade of the thirties, the Keynesian system had attracted the greatest number of adherents, and the Austrian school, after a brief period of prominence, was left to pursue an independent course in relative obscurity.
In the early postwar period neoclassicism proved its resilience and adaptability by gradually coalescing with the Keynesian school. The work of Keynes, which at the time seemed so radical, was modified until today economists like Paul Samuelson and Milton Friedman, once thought leaders of irreconcilable camps, share a common theoretical basis for their research.
The Kennedy-Johnson years were the heyday of the Keynesian-neoclassical synthesis in the United States. Keynesian and leading neoclassical economists were installed to head advisory posts in Washington, D.C., and were confident of their ability to "fine tune" the economy and render it free of depres- sion forevermore. Now, in the inflationary recession of the seventies, new doubts are raised, and new questions are being asked. The papers in this volume are addressed to these doubts and questions, and economists of all academic persuasions will profit from their reading.
A number of institutions and individuals have contributed to the success of the conference and the publication of the proceedings. First, thanks must go to the Institute for Humane Studies for providing the necessary funding for both the conference and the preparation of this volume. George Pearson and Kenneth Templeton of the Institute for Humane Studies were the prime movers of the conference from start to finish, and I am grateful to them for naming me conference director and editor of the proceedings.
Much of the credit for the success of the week-long conference must go to Royalton College, which as conference host bore the burden of all local arrangements. College president Anthony N. Doria together with Kilby Dewitt and Athena Jacobi of the college staff worked tirelessly to put the facilities of the college at the disposal of the conferees. Neighboring Dartmouth College also merits thanks for making auxiliary local arrangements.
I would also like to acknowledge the gracious cooperation of the conference contributors for preparing their manuscripts according to schedule and granting me permission to include them in this volume. Gerald P. O'Driscoll, Jr., and Sudha R. Shenoy attended the conference and participated in the discussions at the end of each session. I am grateful to them for agreeing to prepare a special paper for inclusion in this volume on the Austrian theory of the business cycle and its application to the modern-day problem of stagflation. Finally, I am indebted to Laurence S. Moss, editor of the series Studies in Economic Theory, of which this volume is a part, for his support and assistance in the preparation of the manuscript.
Edwin G. Dolan
South Royalton, Vermont
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