The Historical Setting of the Austrian School of Economics

1. The “Austrian School” and Austria

When the German professors attached the epithet “Austrian” to the theories of Menger and his two earliest followers and continuators, they meant it in a pejorative sense. After the battle of Königgrätz, the qualification of a thing as Austrian always had such a coloration in Berlin, that “headquarters of Geist,” as Herbert Spencer sneeringly called it.1 But the intended smear boomeranged. Very soon the designation “the Austrian School” was famous all over the world.

Of course, the practice of attaching a national label to a line of thought is necessarily misleading. Only very few Austrians—and for that matter, non-Austrians—knew anything about economics, and still smaller was the number of those Austrians whom one could call economists, however generous one might be in conferring this appellation. Besides, there were among the Austrian economists some who did not work along the lines which were called the “Austrian School”; best known among them were the mathematicians Rudolf Auspitz and Richard Lieben, and later Alfred Amonn and Josef Schumpeter. On the other hand, the number of foreign economists who applied themselves to the continuation of the work inaugurated by the “Austrians” was steadily increasing. At the beginning it sometimes happened that the endeavors of these British, American, and other non-Austrian economists met with opposition in their own countries and that they were ironically called “Austrians” by their critics. But after some years all the essential ideas of the Austrian School were by and large accepted as an integral part of economic theory. About the time of Menger’s demise (1921), one no longer distinguished between an Austrian School and other economics. The appellation “Austrian School” became the name given to an important chapter of the history of economic thought; it was no longer the name of a specific sect with doctrines different from those held by other economists.

There was, of course, one exception. The interpretation of the causes and the course of the trade cycle which the present writer provided, first in his Theory of Money and Credit2 and finally in his treatise Human Action,3 under the name of the Monetary or Circulation Credit Theory of the trade cycle, was called by some authors the Austrian Theory of the trade cycle. Like all such national labels, this too is objectionable. The Circulation Credit Theory is a continuation, enlargement, and generalization of ideas first developed by the British Currency School and of some additions to them made by later economists, among them also the Swede, Knut Wicksell.

As it has been unavoidable to refer to the national label, “the Austrian School,” one may add a few words about the linguistic group to which the Austrian economists belonged. Menger, Böhm-Bawerk, and Wiser were German Austrians; their language was German and they wrote their books in German. The same is true of their most eminent students Johann von Komorzynski, Hans Mayer, Robert Meyer, Richard Schiffler, Richard von Strigl, and Robert Zuckerkandl. In this sense the work of the “Austrian School” is an accomplishment of German philosophy and science. But among the students of Menger, Böhm-Bawerk, and Wieser there were also non-German Austrians. Two of them have distinguished themselves by eminent contributions, the Czechs Franz Cuhel and Karel Englis.

2. The Historical Significance of the Methodenstreit

The peculiar state of German ideological and political conditions in the last quarter of the nineteenth century generated the conflict between two schools of thought out of which the Methodenstreit and the appellation “Austrian School” emerged. But the antagonism that manifested itself in this debate is not confined to a definite period or country. It is perennial. As human nature is, it is unavoidable in any society where the division of labor and its corollary, market exchange, have reached such an intensity that everybody’s subsistence depends on other people’s conduct. In such a society everybody is served by his fellow men, and in turn, he serves them. The services are rendered voluntarily: in order to make a fellow do something for me, I have to offer him something which he prefers to abstention from doing that something. The whole system is built upon this voluntariness of the services exchanged. Inexorable natural conditions prevent man from indulging in a carefree enjoyment of his existence. But his integration into the community of the market economy is spontaneous, the result of the insight that there is no better or, for that matter, no other method of survival open to him.

However, the meaning and bearing of this spontaneousness are only grasped by economists. All those not familiar with economics, i.e., the immense majority, do not see any reason why they should not by means of force coerce other people to do what these people are not prepared to do of their own accord. Whether the apparatus of physical compulsion resorted to in such endeavors is that of the government’s police power or an illegal “picket” force whose violence the government tolerates, does not make any difference. what matters is the substitution of compulsion for voluntary action.

Due to a definite constellation of political conditions that could be called accidental, the rejection of the philosophy of peaceful cooperation was, in modern times, first developed into a comprehensive doctrine by subjects of the Prussian State. The victories in the three Bismarck wars had intoxicated the German scholars, most of whom were servants of the government. Some people considered it a characteristic fact that the adoption of the ideas of the Schmoller school was slowest in the countries whose armies had been defeated in 1866 and 1870. It is, of course, preposterous to search for any connection between the rise of the Austrian Economic Theory and the defeats, failures, and frustrations of the Habsburg regime. Yet, the fact that the French state universities kept out of the way of historicism and Sozialpolitik longer than those of other nations was certainly, at least to some extent, caused by the Prussian label attached to these doctrines. But this delay had little practical importance. France, like all other countries, became a stronghold of interventionism and proscribed economics.

The philosophical consummation of the ideas glorifying the government’s interference, i.e., the action of the armed constables, was achieved by Nietzsche and by Georges Sorel. They coined most of the slogans that guided the butcheries of Bolshevism, Fascism, and Nazism. Intellectuals extolling the delights of murder, writers advocating censorship, philosophers judging the merits of thinkers and authors, not according to the value of their contributions but according to their achievements on battlefields,4 are the spiritual leaders of our age of perpetual strife. What a spectacle was offered by those American authors and professors who ascribed the origin of their own nation’s political independence and constitution to a clever trick of the “interests” and were casting longing glances at the Soviet paradise of Russia!

The greatness of the nineteenth century consisted in the fact that to some extent the ideas of Classical economics became the dominant philosophy of state and society. They transformed the traditional status society into nations of free citizens, royal absolutism into representative government, and above all, the poverty of the masses under the ancien regie into the well-being of the many under capitalistic laissez faire. Today the reaction of statism and socialism is sapping the foundations of Western civilization and well-being. Perhaps those are right who assert that it is too late to prevent the final triumph of barbarism and destruction. However this may be, one thing is certain. Society, i.e., peaceful cooperation of men under the principle of the division of labor, can exist and work only if it adopts policies that economic analysis declares as fit for attaining the ends sought. The worst illusion of our age is the superstitious confidence placed in panaceas which—as the economists have irrefutably demonstrated—are contrary to purpose.

Governments, political parties, pressure groups, and the bureaucrats of the educational hierarchy think they can avoid the inevitable consequences of unsuitable measures by boycotting and silencing the independent economists. But truth persists and works, even if nobody is left to utter it.

• 1Cf. Herbert Spencer, The Study of Sociology, 9th edition (London, 1880), p. 217.
• 2First German-language edition 1912, second German-language edition 1924. English-language editions 1934 and 1953.
• 3Yale University Press, 1949.
• 4Cf. the passages quoted by Julien Benda, La trahison des clercs (Paris, 1927), Note 0, pp. 192–295.