Schools of Thought in Classical Liberalism, Part 4: The Austrian School

Release Date
May 9, 2012

Topic

Economics Free Markets and Capitalism
Description

When people refer to the “Austrian School,” they are usually referring to the ideas of two prominent economists: Friedrich Hayek and Ludwig von Mises. Dr. Nigel Ashford highlights the similarities and differences of these two influential thinkers.
On the one hand, Hayek tends to recognize the limits of human knowledge and reason. He argues that much of the order in society – language, for example – comes from human action. These orders weren’t centrally planned or designed. For this reason, Hayek concludes the government lacks the knowledge or ability to centrally plan effectively.
Mises arrives at the same conclusions as Hayek, but comes about it differently. Mises believes we can identify certain truths through experience and reasoning. Using a priori deductive reasoning, he too concludes that government has limited knowledge.

Austrian School of Economics [Article]: Peter Boettke, one of the foremost experts on Austrian economics, gives a concise overview of the 10 key propositions of Austrian economics.
Israel Kirzner on Austrian Economics (Video): Kirzner, a student of Mises and an accomplished economist in his own right, provides an introduction to Austrian Economics
Ludwig von Mises and Friedrich August Hayek [Articles]: Short biographies of Ludwig von Mises and Friedrich Hayek, two of the most renowned and important thinkers of the Austrian School.
Hayek in his own words (Video): Archival footage of Hayek explaining why socialism doesn’t work. This video is short, and is a great introduction to Hayek’s central arguments, theories, and methodology.
Hayek Primer [Essay]: Jim Powell tracks Hayek’s intellectual development and impact on economic thought, from his young days as a soldier in the Austrian army to his final years in Germany.
Mises Primer [free eBook]: In this short and free eBook, Eamonn Butler “provides a comprehensive yet accessible overview of Mises’ outstanding achievements.”
Questions:
1. What is the knowledge problem?
2. What is the socialist calculation debate?
3. What is the difference in methodology between Friedrich Hayek and Ludwig von Mises?

Schools of Thought in Classical Liberalism, Part 4: The Austrian School
Let’s look at Friedrich Hayek, Ludwig von Mises, and the Austrian school. Now they have lots of similarities between Hayek and Mises, but I want to identify what I see as the significant differences between these two thinkers. And the first place, you can see this difference, I think, is in their methodology. How do you decide what the role of government should be? Hayek tends to emphasize the limits of knowledge, that there are limits of reason and understanding what we should do. He’s much more willing to give deference to tradition, to how the rules that have evolved over a period of time. So for example, he’s much more interested in the whole question of a spontaneous order, how we come to work together without any central planner that tells how we should behave. He’s interested in the common law, how traditional law has developed over the ages.
So he’s cautious about self-evident proofs that, for example, the Founders of the United States Constitution examined. He thinks that many of the order that we do see in society were the result of human action but not of human design. So for example, the English language: no group or institution decided this is what the English language is meant to be; it’s something that has naturally evolved over time. But we recognize what those rules are and we can live with those sorts of rules.
Ludwig von Mises, another Austrian, had a totally different approach. He adopts what he calls or what’s called the a priori deductive reasoning. He believes that we can identify certain truths, what he calls axioms, that we can discover these axioms through our experience and through the use of reason. So in this view, economics is more like math than it is like physics that Chicago School often talk about. So let me give you some examples. He has many axioms. Let me give you a couple examples of these axioms that Mises identifies.
Firstly, he says that human action is purposeful. That is, what humans do is they seek to achieve certain goals. Actions are neither random nor are they predetermined. We can identify what people’s goals are, what it is they’re trying to achieve through their actions. A second axiom is that the individuals are the only actors. The technical term for this is methodological individualism. In so much political debate, we tend to say, “France does this.” Of course, it’s not that all the French people do this. What it is actually is a small number of ministers at the top of the French government decide to oppose American foreign policy. So who are the specific individuals who are actually carrying out this action?
Actions are only conducted by individuals; they’re not conducted by broad groups. Another example would be Muslims. We should say that some Muslims carried out terrorist acts but that we should not say that Muslims carried out terrorist acts. That implies that all Muslims did. So whenever we try and understand any particular choice, we should try and identify who are the actual individuals who are making these specific decisions.
And the third axiom is that value is in the eye of the beholder, the so-called subjective theory of value. That is, things do not have value in themselves but only that to which people attribute to it. So for example, I think rap is crap, but some people like rap. Some people think it’s a good thing. There’s no objective value to rap. So you often hear the criticism of economists that they know the price of everything and the value of nothing, but that assumes that we can know what the value is of something. But no, the value for the same thing is different for different people. So Mises argues that simply using our reason, we can identify these axioms or these truths. Now, Mises and Hayek tend to agree about why government should be limited: because government policymakers lack the knowledge, they can’t understand what the goals are of people. Because everybody has a variety of different goals, we can’t predict you want this, you want this, you want that. Goals are so diverse. And secondly, government can’t work out what is the best means for people to achieve these goals. It can’t plan that in advance. If we do X, the results will be Y.
So they’re very skeptical about the government’s ability to identify what people’s goals are and to satisfactorily meet those goals. That’s why the Soviet Union collapsed. It wasn’t able—it suffered from the knowledge problem of knowing what people wanted, and it suffered from the knowledge problem of knowing how to achieve those goals. So it’s a consequentialist view. That consequences of government in their action is often bad or usually bad.
When it comes to the question about what is the role of the state though, Hayek and Mises again diverge. Hayek says the criteria for deciding what government should do is what he calls the rule of law, by which he means there are certain general principles that we should apply to any government action or any piece of legislation. Just like in the United States, the Supreme Court will often look at the law signed by Congress, passed by Congress, signed by the president. But the Supreme Court will sometimes say, “No, that’s illegitimate. We strike this down under the U.S. Constitution.” Well, Hayek argues that every society has these general principles that he calls the rule of law that we should apply to every government action. He has a long list of what these examples of the rule of law, just mention some of them. These are laws that should apply to everyone; there shouldn’t be particular exceptions. So for example, it’s very common for the U.S. Congress to pass a law which applies to everyone else except themselves.
So a classic example of that was the American’s for Disabilities Act. They passed a law saying that all buildings needed to adjust in a certain way to enable disabled access. But then, during the debate on the bill, they realized it would cost the U.S. Congress hundreds and hundreds of millions of dollars to adapt the Capitol Hill to meet those standards. So they excluded themselves from that bill. That’s an example of something where we’re not getting equality before for the law. They’re creating exemptions for themselves.
Another example would be earmarks, which is where they’re saying that government should spend the money with this particular company, in this particular way. He argues all those things should be considered illegitimate because they go against the rule of law. Another example would be that law should always be prospective. That is, they should be future-oriented; they shouldn’t punish something that happened in the past. So you may have done something in the past which was legal then, then they pass a law, it’s illegal. You should not be punished for something that occurs in the past. So that’s his criteria of any government action. Does it meet the rule of law? Does it meet these higher principles? And his conclusion is somewhat similar to Milton Friedman’s in terms of what government should do, although he comes from it, his approach to it is based on a different methodology.
He does believe, for example, that some form of limited welfare state can be justified by following the rule of law. Whereas Ludwig van Mises says following these axioms, it leads us to conclude that there should only be a minimal state. That is, the job of government is solely and exclusively to guarantee the protection of the life, health, liberty, and private property. There’s no role for the welfare state, only a minimal state. So here we have two Austrians broadly agreeing on many sorts of questions, but they have a different methodology. And they have a different conclusion about what the role of government should be.