Wieser's Long Shadow

The seminars Mises held in Vienna in the 1920s, especially the private seminar that he held in his Kammer office, have become legendary due to the prominent role that some of its members played in the social sciences after World War II. The sessions were formative for these young men, even though Mises's personal impact was not as considerable as one might expect, especially in the case of Hayek, Haberler, Strigl, and Machlup, who worked with him, albeit with interruptions, for more than ten years.

For these men, Mises was more role model than teacher. In the discussions of the private seminar, he displayed his ability to dissect all kinds of problems in social analysis, just as he had learned from Böhm-Bawerk. Yet he did not raise a “school” of disciples advocating his doctrines. It is of course the hope of every scholar that others will find his approach interesting and important enough to continue the work where he has left off. But Mises made no efforts to stimulate discipleship, and in fact had no disciples during his Vienna years.

To no small extent this was due to the ideal of individualism. Steeped in the idealism of Schiller, Herder, W.V. Humboldt, and other classical German authors, Mises considered the free development of the individual to be the supreme goal of human achievement. It was more important than any particular creed in religion, politics, or aesthetics. He certainly did not lack firm convictions in politics and science, but in his interactions with students and other people these convictions took only second place to the reverence he paid to the ideal of individualism. After 1926, when he succeeded Wieser as the main contact of the Rockefeller Foundation in Vienna, Mises had the opportunity to provide or withhold material benefits, but he did not use this power to raise epigones. Noble as this attitude was, it gave a competitive edge to some of his rivals who did not have the same scruples.

But the most important factor responsible for the virtual absence of a school of Misesians in the 1920s was that Mises's professional standing was not paramount. When Hayek, Haberler, Machlup, and Schütz first took part in one of his seminars, Mises was a respected expert on monetary economics and the author of a controversial book on contemporary political problems (Socialism). Although he was one of the best-known theorists in the German-speaking world, to his students he lacked the fame and brilliance of three other professors of the department of law and government science: Hans Kelsen, Carl Grünberg, and Othmar Spann.³¹ Kelsen was the celebrated creator of the Austrian republican constitution and pioneer of the pure theory of law, Grünberg a chief Vienna intellectual of the social-democratic movement, and Spann the author of the most successful social-science textbook ever published in the German language.

In 1919, Spann had obtained Philippovich's position, which had been vacant for two years. Among the professors of economics, he attracted by far the greatest number of students. His theory of “universalism” was a sophisticated development of the older “organic” theories of society, which were widespread and deep-rooted in Catholic countries such as Austria. In the crisistorn years after the war, universalism was not only more accessible for most people, it also accommodated a deep longing for security and authority. Whereas Wieser and Mises dealt with relatively narrow economic subjects and the technicalities of the Austrian School's marginal-value analysis, Spann confronted the students with a broad picture of social life. His lectures and seminars attracted students whose emotional life was steeped in Catholicism, romanticism, idealism, and nationalism. Spann's best-known student was the later Austrian Chancellor Engelbert Dollfuss, but he also impressed young scholars of the Austrian School such as Hayek and Morgenstern.

He had far less success with his colleagues at the University of Vienna. Initially, he was invited to the sessions of the Nationalökonomische Gesellschaft, but it soon became obvious that a productive debate with members of the Austrian School (Wieser, Mises, Mayer, Weiss, and Strigl) was impossible. This was not primarily a question of different political orientations.³² The problem was that Spann's intuitive approach was diametrically opposed to the analytical approach of the other members. He believed the task of social theory was to grasp the meaning of totalities, whereas the others thought that such undertakings were unscientific. Mises later made it clear that this rejection of Spann's approach had nothing to do with a dogmatic insistence on the virtues of methodological individualism. The point was, rather, that it was the very nature of science to deal with parts rather than wholes. The economic theorist had to identify the relevant parts of social reality and study their interrelations.³³

The students who did not share Spann's aesthetic, epistemological, and political orientations—a minority—found a ready alternative in the courses of Friedrich von Wieser. In the years after World War I and up to his death in 1926, he was the unquestioned authority in general economic theory in Vienna. With the winter semester of 1922, Wieser's devout disciple Hans Mayer succeeded his master, while Wieser himself continued to lecture as honorary professor on the sociology of power.³⁴ Because of Mayer's presence and a successful second edition of Wieser's textbook, Theorie der gesellschaftlichen Wirtschaft (Social Economics) in 1924,³⁵ the Wieserian paradigm remained dominant in Vienna long after Wieser's death.

The fact that Hans Mayer—a secondrate scholar by any standard—obtained Wieser's chair speaks volumes about the influence of his predecessor. Mises must have hoped to obtain the position himself. After all, he had already published three books, two of which were brilliant treatises, whereas Mayer had not a single book to his credit and very few papers. But Mayer had been cunning, positioning himself as the primary Wieserian disciple.³⁶

It was disheartening that a man like Mayer obtained Wieser's chair. It was not quite as disgraceful as it might seem in retrospect that Mises did not. A more likely candidate was Joseph Schumpeter, who enjoyed great prestige, especially among younger students. He had become a celebrity in the German orbit through his Wesen und Hauptinhalt der theoretischen Nationalökonomie (1908) and had found international fame with his Theory of Economic Development (1911). Both works were published before Mises's first book appeared. Two years younger than Mises, Schumpeter had become Austria's youngest economics professor in 1909 with the active support of Böhm-Bawerk and Wieser. After the war, he was considered the main representative of pure theory, second only to Wieser.

Schumpeter now held a position at the University of Bonn. He was the only major theoretician from Austria ever to obtain a chair at a university of the German Reich. His time in Bonn turned out to be very successful. Under his leadership, the department of economics became a major center of economic theory, with great emphasis on mathematical economics, and one of his students, Erich Schneider, became the leading German neoclassical economist after World War II.

But even Schumpeter was not in the eyes of the profession the number one theorist in interwar Germany. That rank belonged to Gustav Cassel (1866–1945) from Sweden, a mathematician-turned-economist. His core mission was to promote Walrasian mathematical economics. His Theoretische Sozialökonomik (Social Economics) quickly became the most widely used interwar textbook on economic theory, and its success became international through translations into virtually all languages of the civilized world.³⁷ Cassel was famous for his rejection of value theory and utility theory as a foundation of price theory.

Wieser, Schumpeter, and Cassel were “verbal Walrasians.”³⁸ Their books championed the ideas of Walrasian economics, without going into mathematical detail. Single-handedly, they not only kept the Walrasian paradigm alive at a critical juncture of its history, but also managed—in what amounted to a revolution—to make it the dominant approach in economic theory within the Reich. Within only a decade, they turned a large number of the younger German economists away from the Historical School and converted them to the Lausanne School of mathematical economics; and through translations of their major books, this influence radiated far beyond the German-speaking world.

The Austrian tradition of Menger had been kept alive through the scattered disciples of Böhm-Bawerk (most notably through Mises) but these followers lacked the paid university positions that would have enabled them to dedicate themselves full time to the development of the Austrian paradigm and to produce students and future professors. At the crucial time when the collapse of the German Reich brought widespread disillusionment with the tenets of the Historical School, Wieser's towering status as the only surviving founder of modern German economic theory provided the verbal Walrasians with a position of supreme authority. Their works introduced an entire generation to mathematical economics, and their style of exposition deluded these uninitiated readers into assuming that there were no significant differences between their works and those of the Mengerian theorists. The confusion was compounded by the fact that Wieser was an economist from Austria.

Even in the narrower fields of the theory of money, banking, and business cycles, and of the theory of socialism, Mises was not the very highest authority. The great authority in monetary theory was, again, Friedrich von Wieser, who had pioneered the Austrian theory of the value of money and would write the entry on money for the standard German-language dictionary, Handwörterbuch der Staatswissenschaften.³⁹ Wieser's endorsement of banking-school principles and of the assignment theory of money was reinforced through the writings of Schumpeter, the other surviving prewar authority on theoretical economics.⁴⁰

Although Mises's views on money and business cycles found ever more advocates in the course of the 1920s, especially among the younger economists, he lacked the power and influence of the top academic economists.⁴¹ Those who sought to make a career as professional economists were well advised to immerse themselves in the thought of Wieser and Schumpeter. This was exactly what the younger economists did. The fourth generation of the Austrian School was introduced to Austrian economics primarily through the works of Wieser, and this formative experience shaped their own approach to economic analysis long after the master's death.

Today Hayek is often considered Mises's most famous student. In fact, however, his Wieserian intellectual heritage is striking. In 1922–1923, under the direction of Hans Kelsen and Othmar Spann, Hayek had written his doctoral dissertation (in economics) on the theory of imputation. The work was based on the Wieserian approach to problems of value and price theory, which was incompatible with Mises's socialist-calculation argument.⁴² When he updated his thesis three years later for an article in Conrad's Jahrbücher, he knew the calculation thesis, but had not changed his mind on the question of imputation. This is what Hayek wrote on the topic, without mentioning Mises by name:

Of course, in so far as one believes that a completely satisfactory solution to the problem [of imputation] has not yet been found, we cannot exclude the possibility from the very outset that the determinants of the prices of the factors of production are to be found in the exchange economy alone, and therefore that an imputation of value is not applicable, a view held by several younger authors. Nevertheless, if this view were regarded as valid, the result would be that we would have no satisfactory explanation of economic processes based on the subjective theory of value, and it would also follow that these authors too would lack any basis for many of their investigations.⁴³

Hayek went on to explain and develop Wieserian imputation theory, which in his view was “still today the fundamental and most detailed treatment of the problem.”⁴⁴ He explicitly rejected Mises's argument because it contradicted the Wieserian assumption that all social phenomena are explicable on the basis of value theory alone. This fact is crucial to understanding the later stages of the debate on economic calculation under socialism. Although Hayek entered the debate ostensibly on Mises's side, there was a profound disagreement between the two allies. Mises rejected socialism because factors of production could only be appraised in a market economy. Hayek did not endorse this argument because it contradicted the fundamental framework of his economic thought.

Hayek and Mises in 1961

His own opposition to socialism was not yet formulated, but the paper on imputation theory already indicated the future course of his argument. Hayek's main criticism of Böhm-Bawerk's imputation theory was that he treated the value of future consumers' goods as ultimate givens, where in fact they depended on present choices about the use of factors of production.⁴⁵ Only a general-equilibrium model could account for these multifarious interdependencies and solve the intricacies of the imputation problem. Hayek concluded his essay mentioning that the Walrasian School of mathematical economics had already successfully tackled problems of a similar nature. But he cautioned against practical problems of applying mathematical imputation theories. Although they could possibly “demonstrate by means of a simplified case that the subjective theory of value is in principle applicable,” the complexity of the problem “may make it impossible in practice to apply imputation to any large economic system.”⁴⁶ This is exactly the line of argument that Hayek later stressed in his critique of socialism.

As a Wieserian value theorist, Hayek could not endorse Mises's argument that a rational socialist economy was impossible because there was no such thing as value imputation. What then were the real reasons for the empirically far better performance of market economies? The solution that Hayek eventually presented in the late 1930s and the 1940s was based on an argument prominent with some economists of the eighteenth and nineteenth centuries. These writers had argued that prices contain information about market conditions (shortages, surpluses) and that they steer production in a market economy.⁴⁷Hayek embedded this argument within a general theory of knowledge, explaining the role of information in human action and economic theory, and argued that market prices have crucial importance in transmitting information between the market participants. Hence, the factual superiority of market economies over centrally planned economies resulted from their communicative superiority. Market prices were a better means for the transmission of information.⁴⁸

The seeds of these later theories were sown in the early 1920s. Hayek's liberalism came from Mises, but the analytical framework of his economic thought was nurtured through the books and classes of Wieser. It was no accident that Hayek became the editor of a posthumous collection of Wieser's most important papers and that he published his first book with Hölder-Pichler-Tempsky, which had published all of Wieser's pioneering studies. All of his life, Hayek perceived himself quite consciously as a member of the Wieserian branch of the Austrian School. In 1978, a few years after Mises had died, Hayek regretted that this branch had been almost entirely displaced by what he called the Mises School:

In today's world, Mises and his disciples are with some justice regarded as representatives of the Austrian School, albeit he represents only one of the branches into which Menger's teachings had split already among his disciples: the close personal friends and relatives Eugen von Böhm-Bawerk and Friedrich von Wieser. I admit this only with some hesitation, because I expected much to come from Wieser's tradition, which his successor, Hans Mayer, tried to develop. But these expectations have so far not been fulfilled, even though [that tradition] may yet prove to be more fruitful than it has been hitherto the case. The “Austrian School” that today is active almost exclusively in the United States is basically a Mises School that goes back to Böhm-Bawerk's approach. By contrast, the man on whom Wieser put such great hopes and who had taken over his chair, has never made good on the promises.⁴⁹

Hayek receiving the Nobel Prize in economics in 1974 from the King of Sweden

But a year after Mises's death, Hayek received the Nobel Prize, attracting new interest to his work and giving the Wieserian paradigm a second lease on life.

The student on whom Mises apparently had the most profound impact in the early 1920s was Fritz Machlup-Wolf (1902–1983). Of all later star members of the private seminar, he alone had received his doctorate under Mises's direction.⁵⁰ Machlup came from a family of entrepreneurs. His father was a cardboard manufacturer and young Fritz helped him in the management of the firm while he studied economics at the University of Vienna. In 1923, he was involved in setting up a factory for the family business in Hungary even while he was working on a doctoral dissertation under Mises. At the end of the year, the factory was running and Machlup had his doctorate. He was admitted to the private seminar and his relationship with Mises became less formal. Like his mentor, Machlup was an enthusiastic skier and fencer, and they probably spent many hours together in the gym and in the mountains.

Their common Jewish heritage was certainly an important factor in their unusually cordial rapport—in the 1930s, Mises wrote to Machlup in the tone of true friendship, while in his correspondence with other intellectual associates (Hayek for example) there always remained a hint of formality. Being Jewish was also the most important factor hampering both academic careers. Starting around 1922, German-Nationalist and Catholic groups led a campaign to reduce the Jewish presence at the universities.⁵¹ Mises had been appointed adjunct professor under the Ancien Régime. In the new Republic he made no further advances. Neither did his disciple. Machlup received his doctorate and that was it.

This situation must have created a mutual sympathy between the two men. Bad as it was, it could not prevent the dynamic Machlup from a successful career outside the university system. A few years later, he became a member of the Austrian cardboard cartel and was also appointed secretary of the Verein österreichischer Volkswirte (Association of Austrian Political Economists). Machlup was a man of great ambition and talents. The drive of the successful entrepreneur never left him even in later years, when he moved to the United States and focused entirely on scholarly pursuits. A poem that Kenneth Boulding composed many years later in his honor testified to the fact:

O, happy is the man who sits
Beside or at the feet of Fritz,
Whose thoughts, as charming as profound,
Travel beyond the speeds of sound,
All passing as he speeds them up,
Mach 1, Mach 2, Mach 3, Machlup.
With what astonishment one sees
A supersonic Viennese
Whose wit and vigor, it appears,
Are undiminished by the years.⁵²

Machlup wrote his doctoral dissertation on the gold bullion standard. He published the work as a book in 1925, for the appendix of which he also translated Ricardo's Proposals for an Economical and Secure Currency (1816) into German. Six years later, he published a study on the role of bank credit and the stock market in the business cycle.⁵³ Both books demonstrated that their author had very well assimilated the Misesian approach to monetary analysis, and both of them were brilliant contributions extending the work of his teacher. Mises praised the second book with words he had never used to describe the work of any other disciple: “a masterpiece.”⁵⁴

But it was shortly after its publication that the friendship between the two men became strained. Machlup emigrated to the United States and adjusted (perhaps too readily) to his new intellectual environment. The low point was reached in the 1960s when Machlup started agitating against the gold standard. For several years, his old teacher refused to speak to him. The efforts of Mrs. Mises eventually produced a rapprochement, but the old friendship was gone.