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HeroicLife

Austrian Economics

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What do you think of Austrian economics? In particular, do have any disagreements with it? Which ones?

I followed Miss Rand’s recommendation of Mises and so far, I have been a total convert, Mises’ philosophical errors notwithstanding.

Do you recommend reading any other economists for a solid foundation in economics? I am fairly knowledgeable in the field, so I would like something more in-depth than the introductory texts.

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This is Richard Salsman's reply to the question posed by HeroicLife.

Austrian economics offers the best economic (though not philosophic) case for free markets (notice: I did not say: for "capitalism") in modern times; but this judgment applies far LESS to the contemporary Austrian economists than to the three originators and "founders" of the school. Thus Carl Menger (writing in the 1870s), Eugene Bohm-Bawerk (writing in the 1880s and 1890s) and Friedrich Weiser (writing around the turn of the century) are the real giants of this school - by far the best of its many members. Unfortunately, the quality deteriorates thereafter - and nearly in chronological order - with such writers as Ludwig von Mises, Friedrich Hayek, Murray Rothbard, Israel Kirzner, George Reisman and today's younger ones (who I don't care to name, for fear of inadvertently promoting them. Can you spell "hermeneutical?"). For more detail on the philosophic cause of this rather sad sequence, see my six-lecture taped course, "The Philosophy of the Austrian School of Economics."

Notice that I exclude Henry Hazlitt from my list of generally-degenerative "moderns" in the Austrian School. Why? Hazlitt was not, by any means, the German-Kantian-Rationalist that Mises-Hayek-Rothbard-Kirzner-Reisman were.  Despite his utilitarian ethics, his flawed view of inflation, his neglect of marginal tax-rate theory and his focus on polemics (instead of on positive theories), Hazlitt is a delight for any beginner to read and learn from. So also, by the way, is Frederic Bastiat (mid-1800s). In other cases, where the writing is necessarily less-philosophical and focused on a specific sub-field, some modern Austrians can be quite good; see, for example, the excellence of Lawrence White on free banking and the gold standard.

My main disagreements with contemporary Austrian writings arise in a dozen or so areas. Without providing an overly-exhaustive list, let me name: 1) their "radical subjectivism," 2) their resort to inane "praxeology," 3) their (virtually non-existent) profit theory, 4) their (absurd) theory of the essentially-passive, arbitrage-chiseling entrepreneur (and "the consumer is king"), 5) their non-view of the role of the capitalist (financier-investor), 6) their disdain for math and of General Equilibrium Theory (including their claim that markets are in perpetual DIS-equilibrium and that equilibrium is incompatible with economic motion or dynamism), 7) their business cycle theory (to the extent it embodies the superstition of market "bubbles" or the alleged idiocy of easily-duped businessmen), 8) their insistence that fractional-reserve free banking and anything short of a 100%-reserve gold warehouse is "fraudulent" (the view of Rothbard-Reisman- Skousen - but rejected by White, Selgin and me), 9) their silly embrace of the neo-classical myth that economics is essentially about "scarcity" and their acceptance of the "opportunity cost" myth (but which Reisman properly refutes), 10) their neglect (or ridicule) of the marginal tax-rate theory of supply-side economists, 11) their claim about "value-free economics" and 12) their animosity (and/or indifference) towards Ayn Rand and Objectivism.

By the way, I do not fault Ayn Rand for having promoted the Austrian School in the 1960s (primarily by citing Bastiat, Bohm-Bawerk, Mises and Hazlitt in the "recommended readings" section, at the end of her book, "Capitalism: The Unknown Ideal," 1966). I suspect she was merely trying to suggest the best economics books then available, realizing they weren't perfect. Notice that she excluded Hayek from that list - as well she should have.  Notice further the important qualifier she provided at the beginning of the section. Those who remain unsure whether Miss Rand was (or wasn't) an unqualified fan of the then-modern Austrians, see also her sometimes scathing (and humorous) comments, jotted in the margins of her copies of Mises' "Human Action" (1949) and Hayek's "The Road to Serfdom" (1944); some of these comments appear in Dr. Robert Mayhew's book, "Ayn Rand's Marginalia."

I'm sometimes asked what accounts for Miss Rand's "failure" to include, in her recommended list, the two men I believe to be the real giants in pro-capitalist political economy: Jean-Baptiste Say and Carl Menger. I've been told by a reliable source that she wasn't aware of them. I also know that at the time (1960s) their books were out of print (though not absent from the libraries). Thus I'm inclined to blame to those "economists" who surrounded Miss Rand at the time - men I'll leave un-named - for neglecting to bring these giants to her attention, or to that of Objectivists generally.

By now it should be obvious - in answer to your question about whether I'd advise "reading any other [non-Austrian] economists for a solid foundation in economics" - that I highly-recommend reading everything written by Jean-Baptiste Say, plus all that's been written about him and his work (for 8-10 books of this sort, go to Amazon.com and search by Say's full name; the recent book by Steven Kates is excellent). Say's "Treatise on Political Economy" (1803) is in print (Transaction Publishers) and available at Amazon (or elsewhere on the internet in PDF form). See also Say's "Letters to Mr.  Malthus." By the way, Nassau Senior (writing in the 1830s) was also good.

If you feel compelled to read a modern, non-Austrian economics textbook which is decent, read the pro-equilibrium "Macroeconomics," by Robert Barro, professor of economics at Harvard. If you seek a still-greater level of difficulty, from a group that believes free markets actually work, read the "Rational Expectations" economists; Barro is included in this group, which includes Robert Lucas and Tom Sargent; personally I like to read their stuff, but beware that some of it can be mathematically oppressive. Decent, policy-related political economy can be found in Richard Fink, ed., "Supply-Side Economics: A Critical Appraisal." Finally, you can wait - I can't say precisely how long - for my own book on the political economy of capitalism.

Sincerely,

Richard M. Salsman, CFA

President & Chief Market Strategist

InterMarket Forecasting, Inc.

1777 Fordham Boulevard - Suite 202-4

Chapel Hill, North Carolina  27514

WEB: intermarketforecasting.com

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