G. R. Steele, Origins and contrasts of Austrian economics

The origin of Austrian economics is Vienna in the 1870s: with Carl Menger, his students Friedrich von Wieser and Eugen von Böhm-Bawerk, and their successors Ludwig von Mises and Friedrich Hayek. Its inception was as a reaction to ‘historicism’; that is, as a rejection of the notion that generalisations might be drawn directly from the events of history. Austrian economics recognises social science data as subjective phenomena: individuals’ beliefs and perceptions drive human activity. It emphasises individual choice under uncertainty as a costly experiment (an error-learning process) in which subjective valuations are identifiable only at the moment of choice.

The origin of post-Keynesian economics is Cambridge, England in the 1950s: with Joan Robinson, Richard Kahn, Nicholas Kaldor and Piero Sraffa. Its inception was as a reaction to neoclassical microeconomics and SENIE macroeconomics. Its general position is that, although ‘Keynes inaugurated a radical break in the way we ought to think about the workings of market, capitalist economy, . . . this radicalism has been sold short in the post-war development of mainstream “Keynesian economics” (Cottrell 1994: 558). Unlike the latter, post-Keynesian economics emphasises the relevance of institutions, complex human agency and uncertainty to the analysis of a modern capitalist, industrial, monetary economy. It insists that a such an economy is understood by the significance of the social class system, institutions and rules that govern production and distribution, accumulation and growth. Post-Keynesian economics views the economy as an organic whole whose functional form is shrouded in uncertainty.

The paradigm of the Austrian School contrasts with that of classical economics and its labour theory of value. The latter holds the worth of any item to be determined by its objective embodiment of productive labour. In the Austrian approach, value is determined only by the subjective preferences of an individual mind. Austrian economics also contrasts with mainstream ‘positive economics’ and the stress that is placed upon theory that leads to testable propositions for statistically quantifiable variables: ‘[t]o an economist today . . . only that is true which can be proved statistically, and everything that cannot be demonstrated by statistics can be neglected’ (Hayek 1975a: 6). In this aspect, positive economics is a continuation of the nineteenth-century attempt to raise social science to the status achieved by the natural and physical sciences. Neither Austrians nor post-Keynesians have much regard for the ‘slavish imitation of method’ that Hayek scornfully describes as ‘scientism’ (Hayek 1952a: 21). Two objections are raised. First, the ‘data’ of social science are subjective phenomena that are not susceptible to quantification; they are constituted by beliefs and perceptions which, though widely held, can only be held with a considerable degree of uncertainty. Second, social systems are too complex to permit the comprehensive appraisal of all the relevant circumstances.

Many of the concerns and presumptions of Austrian economists overlap with those of the post-Keynesians, who themselves constitute a broad doctrinal group. To the uninitiated, both schools must have the appearance of a curious motley of shared, compatible and opposing beliefs. Indeed, Robert Solow is not alone in noting that post-Keynesians are united more by their distastes than by their affinities: I don’t see an intellectual connection . . . except that they are all against the same thing, namely against the mainstream, whatever that is. . . . It seems to be mostly a community which knows what it is against but doesn’t offer anything very systematic that could be described as a positive theory. (Robert Solow; quoted in Klamer 1984: 183)

Post-Keynesians have many aversions. In their general view of the modern capitalist monetary economy, they tend to dislike much of what they see; and they are generally uncomfortable with their proximity to aspects of Austrian economics. Many find Austrians irksome for their persistent obstruction of a line of fire that is directed at the market economy. Of course, different factions exist among Austrian economists, not least in respect of methodology and the value placed upon empirical testing; and Karl Popper did persuade Hayek of the need to temper his own position. However, although Hayek accepted that ‘scientists did not really do what most of them . . . told us that they did’, he largely held to his criticism of popular methodology ‘because so many social scientists are still trying to imitate what they wrongly believe to be the methods of the natural sciences’ (Hayek 1967: viii).

While Hayek draws from post-Keynesians a certain (perhaps grudging) admiration for aspects of his work, there is a disingenuous tendency to conflate the paradigmatic basis of the Austrian School with the purely axiomatic deductive approach of neoclassical economics. A soft target is thereby created that allows purported deficiencies of the market system to be more readily demonstrated.