Fifty Years of FEE; I. Kirzner

Austrian Economics in 1946 An· observer of the intellectual scene in 1946 might have been excused for conclud ing that the distinguished tradition of Aus trian Economics, the tradition that had be gun with Carl Menger, Eugen von Bohm Bawerk, and Friedrich von Wieser, was no longer alive. The Austrian School, which a scarce fifteen years earlier had been perhaps at its peak in professional prestige and had been enjoying widespread attention in the United States and in England, was, by the end of World War II, virtually nonexistent Dr. Kirzner is a professor of economics at New York University, New York City, and has served as a FEE trustee. and was thoroughly ignored in the main stream of the economics profession. History of economic thought textbooks published soon after the war tended to refer to the Austrian School in the past tense. The reason for this is, at a superficial level, not difficult to understand (although the full explanation for the sudden demise of the School would require a detailed study that still awaits its doctoral dissertation). Con sider some of the basic facts of the situation: 1. A variety of circumstances (including especially the political unrest in Europe) had, already in the mid-thirties, physically dispersed most of the brightest minds in the interwar Viennese scene. F.A. Hayek had been brought by Lionel Robbins (later Lord Robbins) to London at the beginning of the thirties. Ludwig von Mises had fled to Geneva in 1934;Fritz Machlup, Gottfried Haberler, Oscar Morgenstern, and Paul Rosenstein-Rodan (and, of course, later Mises himself) eventually found their sepa rate ways to the United States. Richard von Strigl had died in Vienna during the war.

2. Mises, who had arrived in New York in 1940,had been cold-shouldered by the U.S. economics profession. Not until 1945 was he able to secure a visiting teaching position at New York University-one hardly com mensurate with his international stature. 283 284 THE FREEMAN • MAY 1996 His major work, Nationalokonomie, pub lished during the war in Geneva had made virtually no impression-certainly in large part as a result of the place and date of its publication. (The intensely critical tone of Knight's review article in the November 1941 issue of Economica cannot have helped, either.) A visiting professorship afforded Mises neither the stimulus nor the opportunity for intellectual influence which had been made possible by his famous Privatseminar in Vienna, nor did he have the relaxed, carefree opportunity for teach ing and for scholarly work which he had enjoyed in Geneva. 3. Hayek, who had entered the British economics scene with great success in 1931,had, by the outbreak of World War II, seen his professional eminence sharply re duced. In the public perception, at least, he had been decisively defeated by John Maynard Keynes (in regard to business cycle and monetary theory) and by Oskar Lange (inregard to the possibility ofefficient socialism). His major recent contribution, The Pure Theory ofCapital (1941)was, like Mises' 1940 book, virtually ignored by the postwar profession. (A 1948reference to the work saw it as not much more than a ,restatement of earlier positions expressed during the 1930s.1 In any event, the profes sion was clearly not now interested in those earlier discussions.) Although his 1944 The Road to Serfdom was certainly a resounding success, it was (correctly) seen as a primar ily political work rather than one in which Hayek was contributing to Austrian Eco nomics. In regard to both Mises and Hayek, the public perceived Austrian Economics in the 1940sas not much more than an unfash ionable ideological residue left over from a once vibrant but now defunct intellectual tradition.

4. The scientific methods which Austrian Economics had consistently applied since Menger, were becoming increasingly un fashionable in the profession. Keynesian economics was making its inroads, pushing methodological individualism off center stage; logical positivism in philosophy was (with the usual cultural lag) taking a firm hold in economics; advances in the sophis tication of mathematical tools used in eco nomics were beginning to threaten the lit erary tradition. Hayek's brilliant wartime Economica articles on method later to be published as The CounterRevolution of Science were early reactions to the shifting tides already being felt in economic meth ods. But his passionate appeals on behalf of subjectivism and methodological individ ualism in the social sciences were falling on deaf ears. 5. Paradoxically, a significant element supporting the common impression that the Austrian tradition was no longer alive, was the earlier success of that tradition in influ encing the British mainstream in economics.

A number of Austrians, including Hayek and Machlup (and, to a degree, Mises as we1l2), had come to believe that what was valid and important in Austrian Economics had been successfully absorbed into the mainstream. Robbins' influential 1932book, The Nature and Significance of Economic Science, which is thoroughly steeped in the Austrian perspectives of the late 1920s,was not seen as an attempt to change the sub stance of British economics. Rather the work was seen (by its author as well as by others) as an attempt to teach British econ omists that, with relatively minor adjust ments in their methodological orientation, they would see that their own economics had for a long time been entirely congruent with the Austrian variety. This view, that Austrian economics was by now thoroughly integrated into main stream thinking, undoubtedly helped the sense among younger Austrians that there was no intellectual tragedy to be seen in the physical dispersal of the Vienna group among far-flung British and American uni versities. Brilliant young Austrian econo mists, such as Machlup, Morgenstern, and Haberler, felt able to pursue economic re search alongside their newfound academic colleagues, without the need to emphasize any uniqueness derived from their Viennese training.

Yet despite all this, Austrian Economics, as we shall see, was certainly not dead in FIFTY YEARS OF PROGRESS IN AUSTRIAN ECONOMICS 285 1946. In fact, at that very moment both Mises (in New York) and Hayek (in Lon don) were deepening their own understand ings of the economic system in ways, rooted in Austrian insights, that would profoundly influence the subsequent course of the Aus trian tradition. Their work would, in the fullness of time, inspire a remarkable resur gence of interest in that very tradition. The Extension of Austrian Subjectivism What was occurring during the 1940s in the works of Mises and Hayek was, it is now apparent in the hindsight of half a century, a most significant extension of Austrian subjectivism. There is a certain drama in the circumstance that, precisely at the time when the Austrian tradition seemed most thoroughly extinct, there were emerging from the pens of Mises and Hayek papers and books that radically deepened the Aus trian insights which they had inherited from their intellectual forebears.

To be sure, these advances did not occur in a vacuum. Mises had for many years devoted much thought to the methodologi cal foundations of economics. In 1933 he had published a volume of collected papers as Grundprobleme der Nationalokonomie (later to be translated as Epistemological Problems of Economics); many of the in sights developed in those papers had been welded together to form the basis for the "praxeological" approach Mises explicitly adopted in his 1940 Nationalokonomie . Yet his work in developing the latter volume into his magnum opus, Human Action, was more than mere translation. Certainly as far as the English-speaking world was concerned, the 1949 book was a major extension of Mises' earlier work. Hayek's work during the 1940s was also, certainly, rooted in his pioneering contribu tions of the 1930s involving the role of knowledge and learning in the economic process. 3 Yet it can be argued that his 1948 collection of papers, Individualism and Economic Order, offered a fundamentally fresh, integrated approach that had not been placed before the profession until that time.

These extensions to Austrian subjectivism by both Mises and Hayek, we now recog nize, can plausibly be linked to their expe riences during the interwar debate on the possibility of socialist economic calcula tion.4 These experiences gradually taught Mises and Hayek that what separated their economics from that of the British/ Walrasian neoclassical mainstream was more than language and style. The lessons which these two Austrians respectively learned constituted separate but comple mentary extensions of the subjectivism which had, already for six decades, charac terized Austrian economics.5 Action and Knowledge Much of Mises' deepened self-awareness is captured in the title of his magisterial work, Human Action. Economics was seen and presented as the science of human action-with "action" articulated in a way which sets it decisively apart from the util ity-or profit-maximizing decision which forms the analytical building block of main stream microeconomics. Mises' analysis of action, it can be argued,6 is unique in its incorporating the entrepreneurial element in human choice. This element reflects the open-ended context in which choices are made; that is, it reflects the circumstance that the future consequences of one's ac tions are never "given" to the prospective agent, but must always be conjectured against a background of absolute uncer tainty as described by F. H. Knight. This open-endedness of Misesian economics has subtle but profoundly important implica tions for one's understanding of the market process. This process now becomes visible, not as a clockwork mechanism grinding out instantaneous solutions to systems of simul taneous equations (made up of the compli cated supply and demand functions relevant in a multi-commodity universe), but, Mises emphasized, as a process of continually changing entrepreneurial conjectures con cerning the open-ended future. In this pro cess, competition plays a role, and is ex286 THE FREEMAN • MAY 1996 pressed through innovative entrepreneurial entry (and threat of entry).

Mises' science of human action consti tutes an extension of Austrian subjectivism in that it sees human action as "choosing," as it were, the very framework within which to engage (simultaneously!) in conventional maximizing decision-making. Choices do not merely reflect and express the subjective preferences of the agent among given alter natives; choices reflect also (and, for Mises, more importantly) the agent's subjective judgment concerning the range of alterna tive courses of action in fact available, and concerning the likelihood of their alternative outcomes. It is this additional dimension for subjectivism which definitively shapes the character of the entrepreneurial market pro cess in Mises' perception. Hayek's contribution to the extension of Austrian subjectivism consisted in his focus upon knowledge and its role in the market process. In the course of a remarkable series of papers, culminating in his 1945American Economic Review paper, "The Use of Knowledge in Society," and in his 1946 paper, "The Meaning of Competition,"

Hayek saw the market process as one of mutual learning on the part of market par ticipants. Such learning is required if a disequilibrium set of decisions-i.e., a set of decisions which must to some extent eventually be frustrated because they are based on inadequate mutual awareness-is to be replaced by a better coordinated set of decisions. In focusing on knowledge and learning, Hayek was offering a radically altered view of the market process-a sub jectivist view which draws our attention not so much to changing prices or production processes, but rather to the subjective per ceptions of market participants concerning the opportunities available to be grasped in the market. No doubt there are significantdifferences between the Misesian "entrepreneurial" view of the market process, and the Hayekian focus upon processes of system atic mutual learning. But it seems reason able to recognize both views as complemen tary extensions of Austrian subjectivism as applied to the understanding of market outcomes. These views emerged, as already mentioned, as a result of painful exposure to mainstream misunderstandings concerning the differences between the socialist econ omy and the market economy. In the main stream view there was, at that time at least, virtually no room for entrepreneurial cre ativity and very little indeed for knowledge and learning. Hence, socialist economists such as Oskar Lange or Abba Lerner might be .excused for wildly underestimating the subtlety and complexity with which a mar ket economy spontaneously stimulates en trepreneurial awareness and thus sets in motion the process of systematic, mutual knowledge-enhancement. It was in the course of their being forced to grapple with these mainstream misunderstandings, that Mises and Hayek were led to articulate their respective restatements of the theory of the market process. They not only learned that Austrian Economics had not been success fully absorbed into the mainstream, they also learned to appreciate more than they themselves had been hitherto able to do, the full implications of Austrian subjectivism in market theory. This enhanced appreciation deserves to be recognized as a significant advance in Austrian Economics.

Post-1950 Developments Despite these important contributions by Mises and Hayek, the extent of research and teaching activity in Austrian Economics in the years immediately after the first half of the century was meager indeed. Mises conducted a seminar (as well as a classroom course) at New York University at which he kept the tradition alive. Although the sem inar included a number of future leaders in Austrian Economics, including especially Murray Rothbard and Hans Sennholz, it was nonetheless but a pale shadow of Mises' Vienna Privatseminar. Both within the uni versity and in the profession generally, Mises was seen as a relic of a bygone era. At best, he and his seemingly archaic views were tolerated; more often he was roughly dismissed as an obscurantist ideologue, out FIFTY YEARS OF PROGRESS IN AUSTRIAN ECONOMICS 287 of touch with modem social science tech niques and encrusted in unfashionable, rock~ribbed conservatism seen as serving the interests of big business. Although he continued to write a remarkable stream of new books (including particularly The Ulti mate Foundation of Economic Science, 1962,and Theory and History, 1957),Mises' impact upon the profession seemed to be almost invisible.

Hayek had joined the University of Chi cago in 1950,not primarily as an economist, but as a member of the interdisciplinary Committee on Social Thought. Indeed his own writing thereafter was to concentrate upon political philosophy rather than upon pure economics. In the world of academic economics, Keynesian doctrines had be come the dominant new orthodoxy, with even mainstream neoclassical microeco nomics (let alone Austrian Economics) very much on the defensive. Hayek's trade cycle theory of the 1930sseemed to be completely forgotten; his recent new work on knowl edge and the economic process was entirely ignored. This writer can (as can many oth ers) attest that Austrian Economics was not rejected or disparaged by the economics profession of the 1950s and '60s; for the profession at that time, Austrian Economics simply did not exist (except, of course, as a chapter in the history of economic thought, to be studied alongside Mercantilism, Clas sical Economics, or the German Historical School).

At the same time, developments in the mainstream of the profession were pushing and pulling economic thinking in a variety of directions. Important work by the mon etarist school was beginning to undermine Keynesian dominance, even as it strength ened the positivist trends toward an eco nomics consisting largely of econometric model building and empirical testing proce dures. Advances in mathematical econom ics were vastly increasing the sophistication of pure theory. These developments were, by the early 1970s, restoring the centrality of neoclassical microeconomic theory, but in a way which seemed, if anything, to widen the gap between that theory and the traditional Austrian approach. These events seemed, moreover, to push economics into two paths: either along a highly abstract theoretical road which appeared to be su premely unconcerned with the real world, concentrating overwhelmingly upon ele gance of mathematical technique; or along an empirical road employing powerful econometric techniques to establish func tional relationships relating to extremely narrow slices of real world economic his tory. Both these paths were not just unat tractive (to put it mildly) to appreciators of the Austrian tradition;·it seems fair now to say with the benefit of hindsight that they drained economics of excitement for sub sequent generations of graduate students.

Plausibly, all this played a role in laying the groundwork for the resurgence of interest in Austrian Economics that began to manifest itself in the mid-1970s. The Resurgence of Austrian Economics The works of Mises and Hayek, although they were indeed ignored during the 1950s and '60s, had not been written in vain. And the teaching to which Mises dedicated him selffor years at New York University, while largely absorbed by graduate business stu dents for whom the study of economic theory was of distinctly secondary impor tance, was yet destined to bear fruit. If Mises' contributions were, in those lonely decades, appreciated primarily by a handful of stalwart individuals, almost all of whom were not academicians, this was to change, if only gradually. One by one the small number of Mises' U.S. students who ob tained their doctorates under his guidance went out into the world to teach and to write.

(Some of those inspired in his seminar went on to obtain their degrees at other univer sities.) And his books, as well as those of Hayek, began to be discovered by a small but growing number of students at univer sities around the country. Farsighted net working, supported by private foundations, was able to identify a number of such individuals thirsting for a more satisfying 288 THE FREEMAN. MAY 1996 economics than they were being taught in the classrooms of their own colleges or graduate schools. A good deal of this inter est was sparked by growing interest in libertarian thought, to which it was believed Austrian Economics was somehow related. But many of those who discovered Austrian Economics in this way were to pursue it subsequently strictly for its own intellectual and scientific worthwhileness, quite apart from any ideological implications that may have been perceived. The death of Mises in 1973 brought with it a certain amount of attention to his life's work. And, in 1974, all this ferment of activity and interest culminated in a pivotal event, the now-famous South Royalton meeting, at which several lecturers , includ ing especially Ludwig Lachmann and Mur ray Rothbard, set forth (in a weeklong series of lectures and discussions) the foundations and main features of a subjectivist way of understanding economics, a way rooted in the work of Carl Menger and articulated in the mid-century contributions of Mises and Hayek.

Following the South Royalton conference (and certainly assisted by the encourage ment seen in Hayek's receipt in 1974 of the Nobel award in economics), there ensued years of vigorous growth in the number of graduate students pursuing their doctorates while they were absorbing and exploring further the subtleties of what sets Austrian Economics apart from mainstream eco nomic thinking. By the early 1980sa number of full-fledged faculty members at universi ties around the country were self-acknowl edged " Austrians. " Centers of Austrian academic teaching and research crystallized at New York University, George Mason University, Auburn University, and the University of Nevada, Las Vegas. In addi tion many individual faculty members across the country, in Europe, and around the world met at regularly held summer seminars at which they were introduced to Austrian Economics. By the mid-1990s the upsurge in interest in Austrian Economics has matured to the point where : (i) very few in the economics profession have not heard, at least, of Aus trian Economics; (ii) some of the best pub lishers of economics books are vigorously competing to publish the steady stream of new Austrian books· being written (and in deed the sum total of Austrian work pub lishedduring the past five years is most impressive in its volume, scope, and quali ty); (iii) major economics journals, long coldly uninterested in what appeared to them to be an old-fashioned approach, have begun to show a lively interest in publishing Austrian contributions; (iv) a number of professors who were graduate students in the 1980s have since won tenure at univer sities, based solidly and forthrightly on their scholarly contributions to Austrian Eco nomics. We have every reason to hope that the intellectual momentum of this growth in Austrian Economics will carry it to in creased levels of scholarly activity and pro fessional recognition.

FEE's Role in the Survival and Resurgence of Austrian Economics FEE's identification with Austrian Eco nomics has been unmistakable from its very beginning. The appreciation of how free markets contribute to societal prosperity has been taught by FEE primarily as seen through Austrian lenses. Not only Leonard Read, but in particular farsighted and deeply knowledgeable longtime FEE trustees such as Larry Fertig and Henry Hazlitt, set the intellectual tone for FEE and charted the course of its educational mission. It was their vision which brought Ludwig von Mises to FEE at a time when he was, to put it mildly, all but ignored on the academic scene. It was through the resources of FEE, its skilled·use of the tools of communication and public education, which ensured that Mises' message would survive. There must be few among today's Aus trian academicians who do not look back with profound gratitude for the moral and material support which FEE provided to them, directly or indirectly, in the lonely FIFTY YEARS OF PROGRESS IN AUSTRIAN ECONOMICS 289 years prior to the contemporary revival of Austrian Economics. This writer can attest that the very first financial foundation for the New York University doctoral program in Austrian Economics, was laid through the good offices of Leonard Read in the early 1970s.Together with other foundations who have had the vision to support the resur gence in Austrian Economics during re cent years, FEE has continued to play a central role. For the past eight years FEE co-sponsored and hosted New York Uni versity's annual weeklong summer seminar in Austrian Economics for faculty and grad uate students from around the world.

FEE's identification with Austrian Eco nomics has become even more deeply en graved in its philosophy and activities ever since its presidency has been entrusted to the steady hands of Dr. Hans Sennholz, veteran teacher of Austrian Economics to thousands upon thousands of students at Grove City College, ever since his comple tion of his doctorate under Mises in the 1950s. Iftoday Austrian Economics has returned to a substantial measure of professional recognition and respect, the Foundation for Economic Education is entitled to a major share of the credit. As we celebrate FEE's anniversary, this element in its half century of achievement, too, deserves 'our recogni tion and our appreciation. D 1. Howard S. Ellis (editor), A Survey of Contemporary Economics (Homewood, Illinois: Richard D. Irwin [1948] 1963), volume 1, p. 39. 2. See Ludwig von Mises, Epistemological Problems of Economics (Princeton: Van Nostrand, 1960 [translated from the German original, 1933]), p. 214.

3. See especially, "Price Expectations, Monetary Distur bances and Malinvestment" (1935), in F. A. Hayek, Profits, Interest and Investment (London: George Routledge, 1939); "Economics and Knowledge," Economica IV (new series, 1937), pp. 33-54 (republished in F. A. Hayek, Individualism and Economic Order (London: Routledge and Kegan Paul, 1949). For the thesis of continuity in Hayek's work on Knowledge, see Gerald P. o'Driscoll, Jr., Economics as a Coordination Problem: The Contributions of Friedrich A. Hayek (Kansas City: Sheed Andrews & McMeel, 1977). 4. See the writer's "The Economic Calculation Debate: Lessons for Austrians," Review ofAustrian Economics (1988, vol. 2), republished in Israel M. Kirzner, The Meaning of Market Process, Essays in the Development of Modern Aus trian Economics (London and New York: Routledge, 1992). 5. For development of this thesis concerning the comple mentarity between the work of Mises and Hayek, see the writer's Meaning of Market Process, op. cit., chapter 7.

6. For this thesis, see the writer's Competition and Entre preneurship (Chicago: University of Chicago Press, 1973), pp. 32-37.