Carl Menger, Founder of the Austrian School, A Socialist!

At least according to this person after I ask if Menger advocating specific regulation makes him socialist:

Also, I will say that such policies are certainly socialist. So, if Menger did indeed make such statements, then he certainly was recommending socialist policies in such an instance. However, that would be a separate issue from Menger’s work on theory and methodology.

Seriously?! This is simply clear ignorance of an Internet Austrian. Sure the policies advocated are separate from theory, but it is clear that Menger’s theory is one that doesn’t see markets as pure spontaneous order, indeed he notes several times that as great as the automatic system is (spontaneous order), there are indeed limits, and development must be expanded via government. Most Austrians only see the spontaneous order part of Menger and completely forget to flip the other side of the coin, for it is a picture they refuse to accept. The same commenter questions a source in which provides a lot of Menger’s views on policy:

In any case, the source in question is the notes of Crown Prince Rudolf from when Menger was one of his tutors. This is pretty shoddy, because we don’t know if these are the words of Menger, or of Rudolf, nor do we know that these aren’t the words of another of Rudolf’s tutors. In fact, the entire collection is from a classical perspective, and is in fact very Smithian. Further, there is no mention of Menger’s subjectivity, monetary theory, or any of his methodological work at all. That seems a bit strange, doesn’t it? Menger could very well have been instructed to teach Rudolf from a particular perspective. Or, none of those words could be Menger’s. It could be Rudolf’s ode to Smith.

This is really a bad critique on Rudolf’s notes. As noted in these series of lectures, while Rudolf did write the majority of these lectures by memory, Menger revised and corrected the lectures, in other words, these are the final revised lectures. So misrepresentation of Menger’s views is of (very) low possibility. Actually as Oscar Jaszi notes in his The Dissolution of the Habsburg Monarchy (published in 1929 btw) , the lectures by Menger and his student were used to some extent to dismantle the aristocracy in Austria (p 152).

Thus, Menger’s appreciation for Smith, advocacy of forest regulations (p 131-3), government to improve workers’ conditions (p 127), and government to build roads, schools, railroads, canals (p 121) were Menger’s views, this is not a “shoddy” claim, unless one is going to take the position that Menger sucks at revising and correcting his student’s notes on lectures by Menger himself.

This isn’t the only source of Menger’s policy views. In his article “Geld” (the latest edition is the one of 1909), Menger makes it clear that he supports government monopoly of coinage.

In Transcript of Finanz-Wissenschaft von Prof. Carl Menger translated by Mizobata, Menger claims to advocate progressive income tax (p 52).

Why didn’t the lectures have Mengerian issues like subjectivism, I don’t know and I am not going to speculate a reason. The point though is that there is evidence to show Menger’s views and the validity of the lectures. Menger truly was an ideal figure for classical liberalism, his lectures show the importance to stress the limitations of government, while still demonstrating a role for the state, one that goes beyond providing security, courts, and laws. If others want to interpret this as socialistic, go ahead, I am not going to get myself involved into a semantics debate too heavily. I just don’t get why one advocating for an active role of government makes one a socialist, maybe I will never get it, given that I have probably been brainwashed by the socialistic public school system!

How Many Economists Can Say They Read Adam Smith?

I have always wondered about this. Adam Smith is by far one of the most popular economists in history. But who has actually read Smith?

We are told that Smith was the first, or at least the one that popularized, the view that self interest, sometimes interpreted as selfishness leads to benefiting the common good. This is shown usually by referring to this passage:

…every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

This, of course, has some truth… Entrepreneurs seeking for profit, and does this by producing goods and employment does indeed benefit society, but should we really take what Smith states about self interest as absolute? Gavin Kennedy, a person who takes great interest in understanding Smith, thinks not, and he is right to take such a claim. Smith, for example, thought that some merchants shouted for protectionist polices only to benefit themselves, this is to say, they wanted to reduce competition and also increase their prices . Kennedy goes on in another post to defend what self interest actually means to Smith. Unlike the standard interpretation that self interest = greed or selfishness, Kennedy points out that Smith’s notion of self interest has a very moral substance to it. Self interest is obviously important, and quite obvious to see in everyday life, but if we wish to cooperate in society, we must also keep in mind the interests of others. Or as Kennedy states, ” [T]he nature of each bargain is summed by the expression “Give me this that I want and you shall have that which you want”. (In modern negotiating, I express this as “IF you do this for me, THEN I shall do that for you”).” This is quite a radical view. We are given the invisible hand metaphor and self interest examples of Smith as proof that Smith was this liberal fighting for hands free government markets! Kennedy blames the standard invisible hand metaphor as something that Paul Samuelson popularized.

The blame shouldn’t all be going to Samuelson though. Carl Menger, the founder of the Austrian School, also fought in favor for Smith against the standard government free interpretation of Smith that was popular in Germany at the time. The German Historical School, with the exception of Karl Knies, did not particularly like Smith, for they held that Smith was an economist fighting for laissez faire economics, an economist fighting for the interest of the rich over the worker, etc. So the German Historical School, like Samuelson, also misinterprets Smith. Menger wrote an article with a purpose to clear up misconceptions that the historical school had about Smith*. Here is Menger:

In all cases of conflict of interest between the rich and the poor, A. Smith stands without exception on the side of the latter. I use the phrase ‘ without exception’ very carefully. There are no places in The Wealth of Nations where A. Smith represents the interest of the rich and powerful against the poor and weak. While A. Smith quite positively recognizes the free initiative of individualism in economic matters, he supports in all the cases state intervention where the matter relates to the abolition of laws, and the application thereof, that suppress the poor and weak for the sake of the rich and powerful.

It is not true, indeed it is a forgery of history, to say that A. Smith was a dogmatic advocate of the ‘ laisser faire, laisser aller’ principle and that he believed that the completely free play of individual interests would lead to the economic cure of society. In various parts of his work, he admits that the efforts and interests of individuals and entire social classes stand in direct opposition to public interests. Not only did he accept state intervention in most cases, but he believed it to be an order of humanity considering the public welfare.

One can find the similarities between Kennedy’s and Menger’s interpretation of Smith. the biggest one being that Smith’s concept of self interest is incompatible with interpretations of greed or selfishness.

This, once again, raises questions on how radical of a liberal Menger was. People that study Menger’s life realize that he sees Smith has a big influence, probably his biggest influence. His concept of spontaneous order (which is also misinterpreted by a lot of Austrians) is arguably the same as Smith’s concept of the invisible hand.

Personally, I have always been skeptical of the standard interpretation of what the invisible hand implies, especially after reading Vaughn’s book Austrian economics in America

Nevertheless, classical liberalism, at least back then, saw an active state indeed. Modern libertarians need to realize this. They seem to only be concerned about what things classical liberals criticized the State for, and yet forget to look at the other side of the coin. In other words, classical liberals went far beyond just looking at a state to provide basic public needs (roads, security, law) and advocated interventions, which modern libertarians would look at as being anti market.

* I use this paper for passages

A Passage By Carl Menger on The State

“Why Mises (and not Hayek)?” by Hoppe is probably one of the worst articles at Mises.org. The whole point of the article is to show that Mises is above Hayek because of his views on the State. Mises is seen as the ‘true’ classical liberal, while Hayek is seen as a social democrat.

First off, I really don’t get why advocating public works beyond basic defense, court systems, etc. makes one a social democrat. Keep in mind that Hoppe uses some of Hayek’s Constitution of Liberty to ‘prove’ that Hayek was a social democrat, even though Mises thought the same book was a work that resulted from Hayek’s studies in the philosophy of freedom, and said nothing negative about it. Second, Mises thought the State as a necessary institution, and one that goes beyond providing basic defense.

But I really don’t want to continue on criticizing Hoppe’s horrible article. The title of this post implies a passage by Menger on the State, one that I haven’t provided yet. So here is Menger from one of his lectures* :

Important roads, railways and canals that improve the general well-being by improving traffic and communication are special examples of this kind of enterprise and lasting evidence of the concern of the state for the well-being of its parts and thereby its own power; at the same time, they are/constitute major prerequisites for the prosperity of a modern state. The building of schools, too, is a suitable field for government to prove its concern with the success of its citizens’ economic efforts. (p 121)

Are we to assume, by using the same Hoppeian logic, that Menger, the founder of the Austrian school, is a social democrat too?

The truth of the matter is is that while classical liberalism may critique certain aspects of the State, this does not necessarily mean that all classical liberals are critical of all it’s interventions, in fact, as Menger states, some it’s interventions “constitute major prerequisites for the prosperity of a modern state.” a modern state in which Menger never wanted to see its abolition in. Keep in mind that later on in the lecture, he provides his justification for intervention to prevent deforestation (p 131-133) and also laws to improve worker conditions (in fear that if workers weren’t happy in the job they are in, that this would result into a communist type rebellion) (p 127).

So in light of the debate between Kuehn and Murphy over what a ‘free market’ label entails, was Menger a free market economist, given what he states about the State and it’s role in society?

*Carl Menger’s Lectures to Crown Prince Rudolf of Austria