The Foundations of Modern Austrian Economics
By Edwin G. Dolan
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…. [From the Preface by Edwin G. Dolan]
First Pub. Date
Kansas City: Sheed and Ward, Inc.
Collected essays, various authors. 1976 conference proceedings. Includes essays by Gerald P. O'Driscoll, Israel M. Kirzner, Murray N. Rothbard, Ludwig M. Lachmann, and more.
The text of this edition is copyright ©1976, The Institute for Humane Studies.
The title of this paper contains an apparent paradox: it assumes that Austrian economic theory
can have philosophical and ethical implications, while the tradition within Austrian economics has been strongly in support of
Wertfreiheit as a cardinal precept of scientific propriety. A good deal of what I have to say in this paper relates to the resolution of this paradox. Let us first rapidly review the history of the doctrine of value-freedom in economics.
In his 1884
Untersuchungen Carl Menger included an appendix that briefly but very clearly criticized the tendency of the German “historical” economists to confuse ethical positions with the conclusions of economics.
*96 At that time holders of chairs of economics at the German universities considered themselves social reformers. They fused their economics with their personal views on social justice and morality. In their lectures they reportedly permitted their emotions free rein. Adolf Wagner, for example, would shake his fist at imaginary opponents of his proposals. Other professors would lecture as if addressing preelection meetings, to the cheers of their students.
*97 It was with this style of economic discussion that Menger was expressing his disenchantment.
In subsequent decades the figure to mount a vigorous campaign for
Wertfreiheit in the social sciences was, of course, Max Weber. He described the fusion of ethical and scientific statements as “the work of the devil.”
*98 The issue was heatedly debated at the 1909 meeting of the
Verein für Sozialpolitik in what Schumpeter described as almost amounting to a row.
*99 In Weber’s opinion, when a scientist combines his scientific conclusions with his ethical views, he may mislead the layman into supposing that these views carry with them the authority of science. For science to be interpersonally valid, it must not depend on the personal views of any one scholar. Any departure from an austere neutrality on the part of the scientist qua scientist with respect to judgments of value must be denounced. Weber not only stated value-freedom to be a canon of scientific procedure to be jealously guarded but also defended the possibility of pursuing this procedure in economics. Others argued that since economics and social science in general deal with material permeated with ethical content—values, interests, and motives—it is impossible to engage in value-free research in these areas. Weber’s contribution was to point out that the investigator’s own value judgments need not (and also should not) color the conclusions that he reaches concerning the admittedly value-laden activities and phenomena with which his research deals.
Writing in the early 1930s, Lionel Robbins pursued the Weber doctrine still further. Under the influence of Austrian thought, Robbins offered a definition of economics with the incidental property of establishing that the economist’s value judgments have nothing at all to do with his concerns as a scientific investigator.
*100 Robbins defined economics as the science concerned with the implications of the insight that men are economizing individuals who seek to allocate given scarce resources among given competing ends. Because both the ends and the means are given, what is being investigated is strictly the patterns of behavior generated by the particular configuration of ends and means that happen to be given. The concrete content of the ends does not determine these patterns of behavior. An ends-means configuration applicable to a specific factual situation may also
be applicable to an entirely different situation in which the concrete content of both ends and means is entirely different. Economic science, therefore, is value-free in the sense that the
particular ends being pursued are not essential to the economic analysis of a given situation. The purposes being aimed at in the economizing aspects of men’s activities may be lofty or mundane. The generalizations economic science develops concerning economizing behavior are equally valid in both situations. Thus Robbins was able to show that
Wertfreiheit emerges as an implication of this definition of economics.
In the writings of Ludwig von Mises the
Wertfreiheit tradition was vigorously upheld. Mises was deeply concerned with insuring that the scientific truths embodied in economics be perceived as such, that they should not be disparaged as partisan propaganda. Accordingly, it was essential to guard jealously against any lapses from
Wertfreiheit—lapses that might lay economics open to the charge of being the expression of someone’s vested interests. As is well known, Mises firmly rejected all suggestions (such as those contained in Marxist literature and in the literature on the sociology of knowledge) that science is subject to a relativism in logic, that its conclusions must inevitably reflect the class consciousness or interests of the scientists.
*101 Logic, Mises insisted, is universally and interpersonally valid; so is economic science. To surrender
Wertfreiheit will unnecessarily and tragically jeopardize the acceptance of scientific conclusions by those not sharing the values revealed by the non-
Wertfreiheit doctrine had come under attack in a number of different ways. One episode of particular interest involves the evolution of Gunnar Myrdal’s attitude toward the doctrine. In
The Political Element in the Development of Economic Theory, published in 1929 when he was still a young man and not translated into English until 1954, he charged that economists have consistently violated the
Wertfreiheit ideal. From the beginning of
economic science until our own times, economists have consciously or unconsciously—possibly quite innocently—permitted their value judgments and ethical positions to color their analyses and help determine their normative conclusions. He saw his task as being to complete Weber’s work by criticizing, from the perspective of the
Wertfreiheit doctrine, “the political speculation in classical and neoclassical economic theory.”
*102 This task required him to expose the errors introduced into economic doctrines by “the insertion of valuations.”
*103 Both from his 1929 preface and from the 1953 preface to the English translation, it is clear that what stimulated his research was his wish to protest the “uncompromising laissez-faire doctrine” that “dominated the teaching of economics in Sweden” in the late 1920s. By exposing the valuations that must be smuggled into economic analysis before such a normative doctrine as laissez-faire can be extracted, he hoped to discredit the dominant “economic liberalism” of his time.
Thus, in this early work, Myrdal had no quarrel with Weberian
Wertfreiheit as a scientific ideal. He was merely pointing out how seriously, in his view, this ideal has been trampled on in the course of the history of economics. But in his later writings he drastically shifted his point of view. As he himself put it, “Throughout [this early work] there lurks the idea that when all metaphysical elements are radically cut away, a healthy body of positive economic theory will remain, which is altogether independent of valuations.”
*105 This idea he later emphatically rejected. Such an idea, as a
belief in the existence of a body of scientific knowledge acquired independently of all valuations is…naive empiricism. Facts do not organize themselves into concepts and theories just by being looked at; indeed, except within the framework of concepts and theories, there are no scientific facts but only chaos…. Questions must be asked before answers can be given. The questions are an expression of our interest in the world, they are at bottom valuations.
Nor does Myrdal shy away from the rejection of the
Wertfreiheit doctrine that his later views entail. “I have therefore arrived at
the belief in the necessity of working always, from the beginning to the end, with explicit value premises.”
*107 This position—emphasizing the
wertfrei social science—Myrdal vigorously pursued in a series of writings, the most important of which have been collected under the title
Value in Social Theory (London: Routledge and Kegan Paul, 1958).
Myrdal was not, of course, alone in this rejection of
Wertfreiheit. It will perhaps suffice, for my purpose in this article, merely to refer to the excellent history of the debate concerning
Wertfreiheit contained in T.W. Hutchison’s ”
Positive” Economics and Policy Objectives (Cambridge: Harvard University Press, 1964). We should, however, also note that after the publication of Hutchison’s book Myrdal’s skepticism concerning the possibility of
Wertfreiheit in the social sciences came to characterize the position often taken by scholars on the New Left. Throughout the various branches of the social sciences, these writers denounced all claims of
Wertfreiheit to be either examples of downright fraud or else evidence of naiveté.
It is against this Myrdal tradition, which denies the possibility and/or desirability of
Wertfreiheit in economics, that we must contrast the mainstream perspective of Austrian economics from Menger down to Mises as outlined earlier. Furthermore, this Austrian perspective forces us to confront certain apparent inconsistencies in the Austrian (and particularly the Misesian) position.
In his 1929 book Myrdal gave Austrian economics relatively good marks for disinterested objectivity:
In Austria, economics has never had direct political aims in spite of the close connection of the Austrian marginal utility theory with utilitarian philosophy. The Austrians were preoccupied with value theory and never elaborated a detailed theory of welfare economics.
It is interesting to note that Fritz Machlup, in his review of the
English translation of Myrdal’s book, asked with amazement whether Myrdal was not familiar with Mises’s strongly anti-interventionist writings.
*109 Misesian economics, it is implied in Machlup’s question, can hardly qualify as being free of “direct political aims.” Again, we find Hutchison in a footnote rather clearly implying that Mises was guilty of this inconsistency.
*110 He juxtaposed two positions taken by Mises, which, it appears, Hutchison considered to be mutually incompatible. On the one hand, Mises vigorously defended the
Wertfreiheit doctrine; on the other hand, he made strong normative statements concerning the desirability of the free market. Here then is the apparent difficulty that we must confront: can we reconcile Mises’s strong normative position in economics with his declared insistence on
Wertfreiheit? I believe that we can. I believe moreover that such a reconciliation bears a definite relationship to the specifically Austrian character of Misesian economics.
In arguing that a reconciliation is possible in this way, it is necessary for me to modify to some extent a position I defended a short while ago. In an eloquent article in
Intercollegiate Review, John Davenport advocated a closer relationship between economics and philosophy.
*111 Davenport deplored the gap in communication between the economists, concerned only with pure (i.e., abstract) efficiency, and those scholars in philosophy and ethics, concerned with the concrete nature of the goals and ends of efficient action. If we are to achieve a good society, Davenport argued, discussions of efficiency cannot remain divorced from philosophical concepts of the good and the bad, the beautiful and the ugly, the true and the untrue. In pursuing his critique of economics from this point of view, Davenport referred approvingly to Robbins and to Mises as having to some extent “humanized” economics. The emphasis that both Robbins and Mises placed on human choice and purpose made it inevitable, Davenport explained, that attention be paid to the
nature of choice and purpose. To this extent, therefore, Davenport credited Robbins and Mises with having “made a beginning at least of rebuilding the bridge that connects [economics] with philosophy.”
Commenting recently on Davenport’s paper, I took issue with this last point and argued that the subjectivism of Robbins and Mises in no way requires or implies the possibility of a synthesis between ethical values and the value-free propositions of economic science.
*113 The tradition of
Wertfreiheit, so stoutly upheld by both Robbins and Mises, was not at all inconsistent—even by implication—with their emphasis on purposeful decision making. It would, it seemed to me, be a distortion of both the Robbinsian and the Misesian points of view to perceive either of them as uniquely capable of initiating the kind of bridge building between economics and ethics that Davenport advocated.
It now appears necessary for me to modify this position. While I would still insist that Misesian purposefulness in no way implies the need to surrender the ideal of
Wertfreiheit, Davenport’s observation regarding Mises may embody an insight I previously missed. Furthermore, it is by means of this insight that I hope to reconcile the apparent inconsistency between Mises’s pronouncements concerning the economic advantages of the free market and his insistence on
Wertfreiheit in economics.
The Misesian emphasis on purposeful choice enables us to avoid discussions of efficiency that depend on such notions as utility and welfare. Efficiency, in the Misesian framework, does not mean welfare maximization (not individual welfare maximization nor social welfare); it means instead the fulfillment of the purposes deemed most important rather than the fulfillment of less important purposes. It is impossible therefore to speak of efficiency in terms other than those of the purposes of specific individuals under discussion. Nothing in the concept of Misesian efficiency is consistent with the belief that an economist’s approval of, say, a specific policy reflects his own approval of the ends of that policy, or even his belief that the ends will command general approval. For Mises, professional approval by an economist of a specific policy proposal merely means that the economist believes the policy will enhance the fulfillment of the purposes of those interested in the economist’s professional opinion. (By contrast, other approaches to economic welfare that do not place this emphasis on individual purposes—even
though it is acknowledged that welfare depends on individual tastes—tend to jeopardize their
Wertfreiheit when making policy pronouncements. It is now a well-established conclusion of welfare economics that such policy pronouncements, insofar as they imply a maximization of social welfare, cannot escape arbitrary, and thus value-laden, assignments of weights to individuals.)
And, indeed, when one examines Mises’s many statements about economic policy, whether they be about price controls, tariffs, antitrust policy, or anything else, one invariably discovers that his conclusions do not at all reflect his own personal valuations. They reflect only his opinions concerning the degree of success with which others are pursuing
their purposes. Sometimes Mises made clear whose purposes he had in mind. Sometimes it is taken for granted that the reader will be aware of whose purposes are being used as a frame of reference, and that the general nature of the preferences expressed in these purposes is also well known. One may on occasion question such an assumption; one may on occasion find language superficially implying that a certain policy is simply wrong or bad. But a careful reading of Mises will support the interpretation we are placing here on his policy pronouncements. This was made very clear indeed in Mises’s oral presentations. He would emphasize again and again that interventionist policies are “wrong,” not from the point of view of the economist himself, but from the point of view of those initiating these policies (or at least from the point of view of those whose well-being the policies are supposed to enhance).
In discussions concerning
Wertfreiheit in economics, analogies have often been drawn with medical research. Almost a century and a half ago Archbishop Whately used such an analogy in responding to criticism directed against the study of economics. The critics felt that the “science of wealth” was too mundane a discipline, concerned with too sinful a subject matter, to be the
proper concern of moral persons. Whately’s defense was to point to medical research as a model. The critics, identifying wealth as sinful, saw the economist as promoting sin. Not so, argued Whately. The researcher investigating the causes of disease surely cannot be accused of promoting disease. If wealth be sinful, then it behooves us to encourage the study of political economy in order most effectively to eliminate the offensive immoral affluence.
To put Whately’s defense in other words, we may say that pure research itself is
wertfrei. If a scientist searches for and identifies the factors that foster a specific phenomenon, we are unable without additional information to determine whether his motivation has been fueled by pure curiosity, by a desire to promote the phenomenon in question, or by a desire to eliminate it. In Misesian context the phenomenon in question turns out to be the fulfillment of individual purposes. Economic analysis is able to provide insight into the circumstances and policies that foster or frustrate the fulfillment of individual purposes. Without further information one is unable to identify any specific valuations as being implied in an economist’s policy conclusions; he may be in favor of these purposes, he may abhor them, or he may be in different about them. Value judgments are simply not prerequisites for policy conclusions.
It has sometimes been argued that, in providing a client with policy advice, the economist is after all making a moral judgment to the effect that the client’s purposes are worthy of support. Surely, it is pointed out, an economist should not as a moral being offer a prospective mass murderer
wertfrei advice on how to achieve his purposes most effectively.
*116 Apparently, economic policy advice turns out inevitably to reflect and endorse the values of those to whom advice is being proffered. This reasoning does not, it should be clear, invalidate our claim that the policy conclusions of economics can be entirely consistent with the ideals of
wertfrei science. Here again Whately’s analogy is helpful.
Research into the causes of a dread disease can, we have seen, be entirely
wertfrei. Nonetheless, we recognize that what motivates
a scientist to dedicate his life to such research may be his wish to free mankind from the scourge. Or, again, a malevolent individual intent on harming his enemies may be interested in the results of this research for sinister reasons. The
Wertfreiheit of the research itself and the objectivity of its conclusions are not affected in the least by our recognition that the researcher should not as a moral being divulge these conclusions to the man of malevolence. The choice of his clients must indeed be governed by the scientist’s moral values; policy advice can indeed be given only to those whose purposes are not repugnant to the professional; but the objectivity and
Wertfreiheit of the analysis that led to these policy conclusions are not one whit compromised by these considerations.
To pursue this argument one step further, in many cases the economist discovers policy conclusions that are applicable to situations in which a wide variety of quite different purposes may be involved. A policy statement pointing out that voluntary exchange benefits both participants (in their own prospective estimation) may after all be made without regard to what is being exchanged or the purposes to which the exchanged items will be put. In publishing such a general policy conclusion the economist can, therefore, hardly be accused of seeking personally out of his own sense of moral worth to promote any
specific purposes that may in fact turn out to be served by free exchange.
Implicit in our discussion of Mises’s
wertfrei approach to economic policy and in our argument that it is the peculiarly Austrian aspect of the Misesian approach that makes it possible is an insight to which we have briefly referred. This insight is important and deserves to be spelled out more fully.
Statements by non-Austrian economists on economic policy are made against the background of the theory of welfare economics. Crucial to this theory is the attempt to aggregate, in
some sense, the tastes, the purposes, or the satisfactions of individuals into an entity that it is the ideal of economic policy to maximize. The principal conceptual difficulties involved in this procedure are two. The first is well known: the problem of interpersonal comparisons of welfare inevitably stands in the way of any kind of aggregation. The second difficulty, less well known but no less serious, was pointed out by Hayek many years ago: welfare economics, in discussing efficiency at the aggregate level, is compelled to make the illegitimate assumption that the bits of information scattered throughout society concerning individual tastes (and everything else) can somehow be spontaneously integrated and fed into a single mind in order for the notion of aggregate welfare maximization to be meaningful.
*117 These difficulties make it clear that, for policy statements to be made without these embarrassments, an analytical framework is needed
that preserves the individuality of individual purposes. If policies or institutions can be judged on the extent to which they permit individual purposes—seen simply as the unaggregated preference structures of individuals—to be fulfilled, then both of the aforementioned difficulties can be avoided. Such an approach has been found, on Austrian lines, in the notion of
In the coordination approach to normative economics it is made clear that the ideal is not the maximization of aggregate social welfare or any such entity. Instead, the far more modest, but meaningful, criterion of success in social economic arrangements is the degree to which the purposes of separate individuals can be harmonized through coordination of decision making and action. The obvious example of coordinated action is voluntary interpersonal exchange in which each participant acts to improve his position, with such improvement possible only because each participant’s action is coordinated precisely with that of his trading partner. In using the coordination criterion as the theoretical basis for evaluating social efficiency, the individuality of purposes is not lost sight of; on the contrary, the very notion of coordination prohibits submersion of these purposes into any social aggregate.
The thesis advanced in this paper, that Misesian policy pronouncements are entirely consistent with
Wertfreiheit, depends crucially on the nonaggregation of individual purposes. What we have been at pains to emphasize is that this Austrian feature of Misesian economics may be exploited—through the cognate notion of coordination—to escape those pitfalls that other approaches have characteristically been unable to avoid.
Mises the defender of the free market and Mises the economic scientist were indeed one and the same individual. It was not necessary for Mises, in order to extol the market and condemn intervention, to remove his value-free scientist’s cap and don a political one. To extol and to condemn were for Mises so circumscribed as to be strictly within the limits of
Wertfreiheit. It remains for his followers to subject themselves to similar self-imposed restraints, not only because of Weberian ideals of scientific propriety, but also because explicitly value-laden perspectives are frequently found consorting with Austrian economics.
There is, of course, nothing improper about the proponent of a value-laden political position seeking support in the
wertfrei conclusions of science. One who values the preservation of life and crusades against cigarette smoking is acting quite properly in citing the conclusions of medical research to the effect that smoking is dangerous to health. Similarly, one who wishes to promote a free society with unhampered markets may legitimately cite the conclusions of economic science with respect to the coordinative-allocative properties of competitive markets. What is essential, however, if such scientific support is to be persuasive, is that the scientific research not only be conducted with strict objectivity but also be widely recognized as having been so conducted. Any suspicion that the conclusions of the economic theorist depend upon the perception of particular goals as being more valid than others will only jeopardize the acceptance of those conclusions as objectively determined
truths. At every stage of the process of economic reasoning,
Wertfreiheit thus becomes a crucially important element in scientific procedure. Until the stage where scientific conclusions come to be marshalled as fuel for explicitly political-persuasive positions, any surrender of
Wertfreiheit carries with it, therefore and in fact, the altogether unwholesome prospect that such positions will necessarily be taken without the benefit of scientific information at all. Surely, if one is imbued with the value judgment that scientific truth is worth pursuing and disseminating, one can be expected to be prepared to exercise the restraint necessary to prevent that truth from being dismissed in the eyes of the public as mere propaganda.
Problems of Economics and Sociology, trans. F. J. Nock, ed. L. Schneider (Urbana: University of Illinois Press, 1963), pp. 235-37; see above p. 51, note 5.
History of Economic Analysis (New York: Oxford University Press, 1954), p. 802.
“Positive” Economics and Policy Objectives (Cambridge: Harvard University Press, 1964), p. 43.
History, p. 805.
An Essay on the Nature and Significance of Economic Science, 2d ed. (London: Macmillan & Co., 1935), pp. xv-xvi.
Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949), pp. 72-91.
The Political Element in the Development of Economic Theory (Cambridge: Harvard University Press, 1954), p. 12.
The Political Element in the Development of Economic Theory,” American Economic Review 45(December 1955):950.
“Positive” Economics, p. 42.
Intercollegiate Review 8(Spring 1973):147-58.
Intercollegiate Review 9(Winter 1973-74): pp. 59-60.
wertfrei professionals but also as concerned citizens. Professionals must be concerned with moral as well as scientific truth.
Introductory Lectures on Political Economy,Delivered at Oxford in Easter Term, 1831,4th ed.(London:John W. Parker, 1855), p. 25.
American Economist 17(Spring 1973):35-39; see also Clarence E. Philbrook, ” ‘Realism’ in Policy Espousal,”
American Economic Review 43(December 1953):379-82.
Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973), pp. 213-22. Hayek’s critique of welfare economics was presented in “The Use of Knowledge in Society,”
American Economic Review 35(September 1945):519-30.
Competition and Entrepreneurship, pp. 212-42.
Part 2, Essay 5, Praxeology, Value Judgments, and Public Policy