CHAPTER 23 The Rejected Legacy: Austria and the Austrian School After 1945

The Austrian School effectively ceased to exist on Austrian soil by the end of the 1930s. Apart from a few exceptions,¹ many of its members had already left the country in the preceding years or had had to flee for racial and political reasons after the annexation of Austria by the German Reich in 1938. Academic productivity declined dramatically and almost came to a standstill at the beginning of the war. While Hans Mayer continued to produce the Zeitschrift für Nationalökonomie (“Journal of Economics”), with Alexander Mahr as editor, he had to share the role of publisher with Walter Eucken (1891–1950), Gugliemo Masci (1889–1941), a supporter of Mussolini, and Heinrich von Stackelberg (1905–1946), the leader of the Nationalsozialistische Dozentenschaft (Association of National Socialist Lecturers) of the University of Cologne. Despite this concession, the ensuing volumes appeared only at irregular intervals (1939 and 1944). Moreover, the readership had been significantly reduced due to emigration and the events of the war. (Incidentally, neither term, Viennese nor Austrian School, received any mention in these volumes.)

A fundamental, paradigmatic shift in economics had taken place in the Anglo-American sphere, even before the annexation. Following the brilliant success of The General Theory of Employment, Interest and Money (1936) by John Maynard Keynes, interest in the Austrian School declined almost overnight. Its advocates suddenly found themselves in the position of being outsiders. The Keynesian theory and its interpretations—with mathematical equilibrium analysis as one of its centerpieces—dominated modern economics for more than three decades from this point in time onward.

Against this backdrop, Hans Mayer carried on with his teaching at the University of Vienna until becoming a professor emeritus in 1950. After the war, the statue of Menger that had been removed after the annexation was unobtrusively restored to its original place in the Arkadenhof (courtyard) of the University of Vienna. Otherwise there was no way to approach proximity with anyone even remotely connected with the former greatness of the School. The number of students enrolled at the faculty of law and political science (in 1954–1955 there were 1,900) was now smaller than it had been before the war (cf. Grandner 2005, p. 295). Alexander Mahr and Ewald Schams, two teachers of the Austrian School who had worked unhindered throughout the Nazi period, were only allowed to return to teaching after some time had elapsed (cf. ibid., p. 309). There was a general shortage of young academics. Mayer’s first postdoctoral student was Karl Gruber (1909–1995), who, as the newly elected governor of the federal state of Tyrol, had his Habilitation procedure transferred from Tyrol’s capital, Innsbruck, to Vienna, and remained completely removed from the tradition of the School. After Leo Illy (Schönfeld), who was a mature student, the first young scholar to whom Hans Mayer awarded a Habilitation was Wilhelm Weber (1916–2005); this was in 1950, the year Mayer became an emeritus professor.

In 1949, after a five-year gap, a new edition of the Zeitschrift für Nationalökonomie was published in the form of a Festschrift on the occasion of Mayer’s seventieth birthday. A reviewer compared it to the opulent commemorative volume for Friedrich von Wieser (Mayer et al. 1927–1932) and lamented, on one hand, the dramatic extent of the destruction and lowering of standards in economics in German speaking countries; on the other, he complained that emigrated members of the Austrian School had not contributed to the Festschrift (cf. Brinkmann 1950–1951, p. 575).

Indeed, scholars who had remained in Austria, and public authorities and politicians as well, had done little or nothing to improve relations with the emigrants and exiles, who had been damaged for the long term by past events. Mises, whose apartment had been ransacked during his absence, wrote immediately after the war that he did not want to meet the “mob” that had “applauded the massacre of excellent men” (cf. Hülsmann 2007a, p. 834n. 100). In full accord with the prevailing sentiment, economists in Austria at that time made it all too clear that they had no serious interest in a return of the emigrants and exiles (cf. Grandner 2005, p. 312). In October of 1945, the bestowal of an honorary doctorate upon socialist Chancellor Karl Renner (1870–1950) by the faculty of law and political science at the University of Vienna became a symbol of reconciliation. In the very same academic ceremony the faculty was represented by its middle-class conservative president Ludwig Adamovich (1890–1955), the Catholic-legitimist Ferdinand Degenfeld-Schonburg, and the last tenured professor of the Austrian School in Austria, Hans Mayer. But speakers at the ceremony primarily invoked a balance between the middle-class Catholic and the social democratic camps, and in addition, paid an astounding tribute to public service employees (cf. Promotion 1945).

In this emerging, ideological-political duopoly, which would later be criticized as a “concordance democracy” (cf. Rathkolb 2005, p. 77) or as “moderated pluralism” (cf. Müller 1997a, p. 226), there was hardly room for exiles, emigrants, liberals, Jews, or dissenters of any kind. Invitations from Austrian faculty colleagues—from Hans Mayer, for example—to exiled economists to hold guest lectures and talks were often not even approved (cf. Seidel 1986, p. 227). Nevertheless, Friedrich A. von Hayek made tireless efforts to intensify contacts with Austria and took part—as did a number of other emigrants—in the academic conferences at Alpach in Tyrol, a small mountain village which served as one of the first meeting places for intellectual exchange after the war. Hayek held a higher professional opinion of students there than he did of the majority of faculty colleagues who had by this time been promoted in his former home country (cf. Hennecke 2000, p. 201).

Among the authors of the Festschrift for Hans Mayer, only two could be counted outright as followers of the Austrian School: Leo Illy (Schönfeld) and Ewald Schams. Some other authors like Hans Bayer and Alexander Mahr showed eclectic sympathies: the overwhelming number of contributions emphasized their critical distance to the Austrian Tradition—in some cases even demonstrating a lack of secure knowledge of the sources (Dobretsberger 1949 and Kerschagl 1949, for example). To what extent this first large anthology upon post-war, Viennese soil was already removed from international economic research was made clear, for example, by the fact that out of twenty-five contributions, only three were written in English, and only one discussed the ubiquitous Keynesian paradigm in any detail. The Festschrift appeared to intend to defiantly deny that the centers, the research programs, and the lingua franca of economics, had in the meantime become Anglo-American, and that Vienna would henceforth find itself on the fringes of economic research.

The first concise and objective critique in the German-speaking world of Keynes’s theories, from the viewpoint of the Austrian School, was made by Hans Mayer. Mayer criticized Keynes for his many imprecise definitions (cf. Mayer 1952b, pp. 41, 42) as well as his “completely useless all-encompassing terms,” such as “volume of labor,” “volume of employment,” and “involuntary unemployment” (ibid., p. 45). The results thus achieved were a “setback” because the mercantilists had already worked with all-encompassing terms (ibid., p. 50). Mayer considered Keynes’s psychological assumptions—a general “propensity to consume,” a “liquidity preference,” and the expectation of future earnings from capital values—to be unrealistic (ibid., p. 46). In response to the proposition of a “comprehensive socialization of investment” under “central direction,” Mayer asked whether there would still be leeway in this model for the maneuvers of private self-interest (ibid., pp. 49–50). Finally, Mayer criticized Keynes for not having “considered a purpose for the economy as a whole,” as the Austrian School had attempted to do with the “optimum of fulfillment of demand,” because “ ‘full employment’ as a goal is a misjudgment of means and ends” (ibid., p. 51).

Mayer’s critique of Keynes came much too late and was ultimately ineffective (cf. Seidel 1986, p. 227). Even his two students, Wilhelm Weber and Alexander Mahr, vouched for the Austrian School’s insights in a limited way only. On one occasion they declared themselves its supporters (cf. Weber 1966, p. 2); another time they denied even belonging to the School, although admitting being in its debt (cf. Hicks and Weber 1973, vols. 5–6). They effectively advocated, with some reservations, a neoclassical–Keynesian world view. Their healthy distrust of macroeconomic aggregates was the main reminder of their having come out of the Austrian tradition (cf. Streissler and Weber 1973, p. 232). Irrespective of these differences with the School’s tradition, Wilhelm Weber, in particular, made bona fide attempts to improve relations with the emigrants. He was able to persuade Oskar Morgenstern and Gottfried Haberler to be co-publishers of the Zeitschrift für Nationalökonomie, which after 1970 appeared as the Journal of Economics. Weber, along with Friedrich A. von Hayek, also quietly supported the ultimately unsuccessful preliminary talks between the university administration and Hayek, their purpose being to persuade him to come to Vienna. Hayek found the idea of reviving the Austrian School in Vienna very enticing. After Fritz Machlup had withdrawn his candidacy (cf. Hennecke 2000, pp. 305–306) in 1967, the Austrian government even considered Hayek for president of the Österreichische Nationalbank (the Central Bank of Austria).

Despite these gestures toward a long overdue reconciliation, post-war Austria and its duopolistic intellectual climate remained alien to many emigrants, especially to those who had retained the individualist–liberal tradition of the Austrian School. The symbolic reconciliation with Ludwig von Mises, the ancestor of the American state skeptics, amounted to nothing more than presenting him, on behalf of the socialist federal president Adolf Schärf (1890–1965), with the Ehrenkreuz für Wissenschaft und Kunst (“Medal of Honor for Science and Art”) of the Republic of Austria at the Austrian embassy in Washington in 1962 (cf. Hülsmann 2007a, p. 1034). After becoming a professor emeritus, Friedrich A. von Hayek accepted a guest professorship at the University of Salzburg in 1969. But feeling rather isolated both academically and intellectually, he returned to the University of Freiburg after only four years. It was easier for the nomenclatura of the resurrected Republic of Austria to be reconciled with those who had more or less turned their backs on the Austrian School after their emigration of expulsion. In 1965, Oskar Morgenstern was awarded an honorary doctorate by the University of Vienna and played a leading role at the Institut für Konjunkturforschung. In 1971, Fritz Machlup became an honorary senator of the University of Vienna, and Gottfried Haberler received honorary Ph.D.s from the University of Innsbruck (1970) and the Vienna University of Economics and Business (1980); Martha Stephanie Braun was awarded an honorary Ph.D. from the University of Vienna (1989).

In 1971, Hayek participated in a symposium organized by Wilhelm Weber and John Richards Hicks (1904–1989), which took place in Vienna on the occasion of the centenary of the first publication of Carl Menger’s Principles. In addition to Oskar Morgenstern, Fritz Machlup, and Gottfried Haberler, other participants included the son of the School’s founder, Karl Menger, and Kenneth J. Arrow (b. 1921) (cf. Hicks and Weber 1973, p. v). Never before had three future Economics Nobel Prize winners come together at a conference in Vienna (Kenneth J. Arrow, John R. Hicks, Friedrich A. Hayek). It was pointed out in the English language presentations, among other things, that varying strands of thought existed among the “Austrians.” Two authors even chose to speak of a “Menger Tradition” instead of a “School” (cf. Streissler and Weber 1973, pp. 228–229, 231). Indeed, more than a few theoretical achievements from Austria had found their way into the mainstream; over the entire span of its existence, the actual quintessentials of the Austrian School were no longer easy to define.

Fritz Machlup later looked back and formulated the six most important characteristics of the Austrian School, in an English article for an anthology celebrating the hundredth birthday of Ludwig von Mises (most of the emigrated Austrian economists made contributions), as follows (cf. Machlup 1981, pp. 9–10):

1. Methodological Individualism: The explanation of economic phenomena stems from the actions (or inactions) of individuals; groups or “collectives” cannot act except through the actions of individual members.

2. Methodological Subjectivism: Economic phenomena stem from individual judgments and are based on personal knowledge and subjective expectations toward the future.

3. Taste and Preferences: Subjective valuations of goods and services determine the demand for them; in turn, consumers determine types of goods, quantities, and prices.

4. Opportunity Costs: The economic actor takes into account alternative possible applications; choosing one possible use means sacrificing other possible uses.

5. Marginalism: Economically relevent valuations are determined by the significance of the last unit added to or subtracted from the total.

6. Time Structure of Production and Consumption: Production and consumption are determined by subjective time preferences. Machlup pointed out that within the Austrian school, the economic notion of time is regarded in different ways.

Finally, Machlup introduced two further characteristics that were particularly applicable to Mises and his students:

7. Consumer Sovereignty: Consumer demands are the optimal drivers of production, distribution, prices, and allocation of resources, so long as they are not hindered by the external intervention of laws, public authority measures, or cartel agreements.

8. Political Individualism: Political freedom requires economic freedom. Political and economic restrictions lead, sooner or later, to the extension of coercive measures on the part of the state and undermine individual freedom.

Machlup’s succinct and precise descriptions give us a clear indication as to why, in the political and intellectual climate of the Second Republic, it was almost inevitable that the Austrian School’s research program would be met with disapproval. In many ways, the Republic embodied the antithesis of the individualistic–liberal creed of the Austrian School. In 1978, for example, the government share of nominal capital of Austrian companies still amounted to 32.6 percent, and government-owned companies employed nineteen percent of the entire workforce (Goldmann and Beer 1991, p. 35). The two major parties, with their ambivalent attitude toward the individualistic–liberal tradition, were omnipresent: with 2.4 million voters in 1979, the Socialist Party had 721,000 members (Ukacar 1997, p. 259), and the Christian–Social People’s Party at least 560,000 members (Müller 1997b, p. 272). For a long period of time, voters were in favor of an economic policy which allowed the federal debt to be raised from ten percent of GNP (1974) to 38.5 percent (1985), and finally to 68 percent (1995). Against this background, the established view was that the Austrian School was not to be seen as anything more than an interesting but closed chapter in the history of economics.

This became particularly clear during a symposium in 1985 when Austrian organizers indeed attempted to bridge the gap with the American “Austrians” and extended an invitation to Israel M. Kirzner (b. 1930): the majority of speakers kept their distance from or even expressed antagonism toward the Austrian School (cf. Leser 1986a). In view of the crisis of Keynesianism, and aside from Kirzner (Kirzner 1986), only Hans Seidel (b. 1922) spoke, tentatively, about the present and future relevance of the Austrian School (Seidel 1986, p. 228). At the time, in fact, the principles of the Austrian School at Austrian universities were being taught systematically by Innsbruck professor Karl Socher (b. 1928) alone. For the first time in decades, the Austrian School was spotlighted as a research subject once again—this time as a noteworthy tradition of the University of Vienna. Almost all the authors of the aforementioned symposium emphasized their distance in terms of content; but at the same time, they were pleased to use the chance—with their language skills, knowledge of the intellectual environment, and the stores of historical books at their disposal—to assume an internationally recognizable, leading role in the narration and interpretation of the history of thought of the Austrian School.

In this context, Erich W. Streissler (b. 1933), the holder of Menger’s former chair at the University of Vienna for the last third of the twentieth century, published about two dozen papers on the history of ideas and science of the Austrian School. He was one of the first to include the political, sociological, and historical–intellectual aspects as well. His estimatation of the Austrian School’s relevance to modern economics in terms of decision theory was very high in the end (cf. Streissler 2000a). His assistants and faculty colleagues, Werner Neudeck, Gerhard O. Orosel, Peter Rosner, and Karl Milford, also published articles concerning the history and epistemology of the School. Hans-Jörg Klausinger, of the Vienna University of Economics and Business, published works on the interwar history of the School. At the University of Graz, it was Heinz D. Kurz, director of the Graz Schumpeter Center, along with Manfred Prisching, who published several articles on Joseph A. Schumpeter, and also Böhm-Bawerk and the Austrian School as a whole (cf. Kurz 2000).

Tracing historical roots is actively continued in the Austrian universities to this day. But attempts to revive the Austrian School’s fundamental ideas have been almost entirely limited to non-university and private initiatives. The Carl Menger Institut, founded in Vienna in 1987, had to close down after just a few years. Today, the Friedrich August v. Hayek Institut, founded in 1993, has taken on a well-known promoting role by organizing events on topics pertaining to the Austrian School, publishing books, and by financing one guest professorship in Vienna each semester. Of the more recent initiatives, the Institut für Wertewirtschaft, founded in Vienna in 2007, deserves particular mention. Of course, these activities cannot in any way compensate for the fact that Austria has rejected its great legacy.

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¹Hans Mayer, Alexander Mahr, Ewald Schams, Richard von Strigl, and Leo Illy (Schönfeld).