As the principal tenets of neoclassical liberal economics were being consolidated during the late nineteenth century by William Stanley Jevons (1835–1882) and Alfred Marshall (1842–1924) in England, Léon Walras (1834–1910) in France, and others, a distinctive vision of political economy was being developed by a cohesive group of professors living in what was then the Austro-Hungarian Empire.
The labels “Austrian Economics” and “Austrian School” were originally applied to the group by its intellectual opponents across the border in Germany, in order to smear them as provincial and on the fringe of economic thinking. The labels were later proudly adopted by the Austrian professors themselves as their preferred designation.
Concentrated primarily in the capital city of Vienna, the Austrian authors hammered out a theoretical structure that was akin to neoclassical liberalism in espousing free trade and laissez-faire principles in general; however, the Austrians went further in several respects.
More specifically, the Austrian vision rested—and still rests to this day—on three great principles:
- The economic value of commodities under conditions of scarcity is determined autonomously by buyers’ preferences through the market mechanism (the “subjective theory of value”)
- Business cycle crashes are principally due to the misallocation of resources
- The best way to facilitate economic recovery, and so maximize general prosperity, is to permit failed enterprises to go under (“creative destruction”) and resources to be reallocated according to the normal market mechanism, without outside interference
The Austrian School can be usefully divided into a “first generation” and a “second generation” of three major figures each. Let us look at the first generation in a bit more detail.
The Austrian School’s founder is usually taken to be Carl Menger (1840–1921). A graduate of the University of Vienna, Menger became a private tutor of the Austrian crown prince, Rudolph. In 1878, he was appointed to a chair in political economy at the University of Vienna by Rudolph’s father, Emperor Franz Joseph.
In 1871 Menger brought out his textbook, Grundsätze der Volkswirtschaftslehre [Principles of Economics], which is often taken to be the founding document of Austrian economics. He followed this work up with another one in 1883, which attracted even more attention and controversy, Untersuchungen über die Methode der Socialwissenschaften und der politischen Oekonomie insbesonderen [Investigations into the Method of the Social Sciences, Especially Political Economy].
In these and other works, Menger’s most distinctive contribution to the science of economics was his development of the theory of marginal utility, from which he drew the correct conclusion that value of an item in an economic exchange is determined primarily by the subjective preference of the buyer.
Jevons and Walras came to a similar conclusion independently and published their work almost simultaneously with Menger in 1871. However, the latter’s analysis of the issues involved has traditionally been deemed the most original and insightful of the three.
The next important figure in the history of Austrian Economics, Eugen von Böhm-Bawerk (1851–1915), fell in love with the writings of Carl Menger while a student at the University of Vienna. However, he never actually studied with Menger himself. After completing his studies, he served as a professor at the University of Innsbruck and as a public with the Austrian Ministry of Finance. He rose to become the Minister of Finance in 1895.
In 1890 Böhm-Bawerk published his Geschichte und Kritik der Capitalzinstheorien [History and Critique of Theories of Interest], which made his reputation. This book eventually became the first volume of a three-part work known as Capital und Capitalzins [Capital and Interest].
Böhm-Bawerk’s fame outgrew the bounds of the professional academic economic world thanks to a pair of widely read and debated polemical books he published next: first, in 1892, Positive Theorie des Capitales [The Positive Theory of Capital], a critique of Marx’s theory of capitalist exploitation of labor; and second, in 1896, Zum Abschluss des Marxschen Systems [Karl Marx and the Close of His System; literally, Towards the Conclusion of the Marxian System], a more general refutation of socialism.
The third main member of the first generation of Austrian economists was Friedrich von Wieser (1851–1926). Böhm-Bawerk was a childhood friend of Wieser’s and, like his friend, Wieser fell under the spell of Carl Menger’s economic vision while a student at the University of Vienna. Wieser’s sister later married Böhm-Bawerk, turning the friends into brothers-in-law.
After graduation, Wieser taught briefly at Charles University in Prague, before moving back to the University of Vienna, where he spent the rest of his career. He published one of his most-influential works, Der Natürliche Werth [Natural Value], in 1889. In this book, Wieser pursued a deeper and more-comprehensive analysis of the concept of economic value, which however was still in fundamental agreement with Menger’s teachings.
While Wieser was very prolific, perhaps his next-most-influential works in the long run were his two late treatises, Theorie der gesellschaftlichen Wirtschaft [Social Economics; literally, Theory of Social Economy], published in 1914, and Das Gesetz der Macht [The Law of Power], published in 1926. In these books, which were largely sociological in nature, Wieser broke with Austrian orthodoxy, arguing that the system of social (i.e., political) order ought to take moral precedence over the system of economic order, thus justifying departures from the pure laissez-faire ideal in order to secure certain advantages for the common good unobtainable through the market mechanism alone.
Wieser was the teacher of the three main figures who made up the Austrian School’s third generation: Ludwig von Mises (1881–1973), Joseph A. Schumpeter (1883–1950), and Friedrich A. Hayek (1899–1992).