Books: The Marginal Revolutionaries By Janek Wasserman

(Drivebycuriosity) - In the early 20th century some Austrian economists used to meet at Café Sacher and other famous coffee houses in Vienna and debated the trends of their genre. Albeit these economists differed in many things, they shared a common belief in the rights of the individuals and in free markets. They disputed Socialists and leftish thinkers like John Maynard Keynes and his followers who advertised that the economy should be regulated by the government.

The Austrian think school spread over to the US, Germany and England and gained a strong influence on the development of economics and politicians like Margaret Thatcher, Ronald Reagan and Argentine´s President Javier Milei. Janek Wasserman, Professor of History at University of Alabama, describes in his book "The Marginal Revolutionaries: How Austrian Economists fought the war of ideas" ( amazon). 

Friedrich Hayek (1899 -1992 ) is the most famous of the Austrian economists. He was an opponent of John Maynard Keynes and objected the Brit´s recipes of fine tuning the economy through government measures. Hayek explained that consumers & entrepreneurs know best what they need. He described that free markets are the most efficient way to satisfy the needs the consumers and to allocate scarce resources. Hayek wrote: "The spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs in which prices correspond to costs".     

In the year 1974 Hayek received the Nobel Prize for Economics for his book "Road to Serfdom", but he had to share the award with Swedish left-wing Gunnar Myrdal. Anyway, Hayek´s "Road to Serfdom", that defended the rights of individuals and sharply opposed totalitarian systems on the right (Fascism) and left (Socialism), could be seen as the "Austrian Bible". Hayek declared that "economic freedom unchained intellectual capabilities via scientific progress and lifted the standard of living for all. The retreat into socialism jeopardized ´Western Civilization`by stifling spontaneous impulses through coercive government action". Hayek warned that the "tyranny of the majority always looms as a threat to individuals and minorities".

Hayek and other "Austrians" got influenced by Ludwig von Mises (1881-1973), who was a sharp critic of governments attempts to control the economy, either from the left (Socialists, Marxists) or the right (Nationalsocialists, known as Nazis). According to Mises the economy functions best when it is left alone. He described how the unregulated decisions of consumers, inventors & entrepreneurs (capitalism) lead to the best use of scarce resources (rational allocation of resource).

Carl Menger (1840-1921), who also belonged to the godfathers of the Austrian School, focused on the individuals and their preferences. He explained how markets function and how everybody benefits from free trade: "People will give up what they value less in return for what they value more, which is why both sides can gain from an exchange". Menger was one of the first who defined the term "marginal utility": The additional satisfaction or benefit (utility) that a consumer derives from buying an additional unit of a commodity or service".

Eugen von Böhm-Bawerk (1851-1904), another early "Austrian", explained the use of interest rates. A Dollar tomorrow has less value than a Dollar today. Therefore people accept a later payment, when they receive an extra payment for this delay (the interest), the more the later the payment. VBB called entrepreneurs "as a class of individuals engaged in speculative ventures". I think that is good definition of Elon Musk. These entrepreneurs "earned their wealth not through the exploitation of labor or land (as Marx & Co. claim) but through their far-sighted commitment to the production of goods".

 

                Move Fast And Destroy Things

And there were more influential "Austrians":

Fritz Machlup (1902-1983) emphasized the importance of information for the functioning of markets and the economy and explained the relation between exchange rates and the balance of payments.

Gottfried Haberler (1900-1995) focused on  comparative advantage in international trade.

Josef Schumpeter (1883-1950 ) became famous for his stylish elegant "Capitalism, Socialism and Democracy ( a pleasure to read in German) and coined the term "constructive destruction", describing the relationship between innovation and economic development - Mark Zuckerberg`s: "Move fast and destroy things".

Oskar Morgenstern, born in Germany, but educated at University of Vienna, was a pioneer of game theory.

The philosopher Karl Popper (born 1902 in Vienna) was not an economist, but he supported the "Austrian" view with his elaborated critique on Marxism.

The (early) Austrians focused on consumption, not on production (opposite to Marx & Co), and declared that "the satisfaction of the wants of consumers matters for the economy". They  introduced the term marginal utility into economics. This term "describes the change in utility (pleasure or satisfaction resulting from the consumption) of one unit of a good or service" ( wikipedia). For instance a second class of beer could bring more satisfaction than the first, but the additional gain by a third glass maybe zero, and more glasses of beer could have negative effects (intoxication, hangover or worse ). 

The simple image on top of this post shows the curves of marginal and total utility. The maximum utility is reached when the marginal line hits zero (following Calculus). Economists also use similar curves for costs and other variables to depict maxima of profits and other indicators.

In 1947 the "Austrians" founded the Mont Pèlerin Society, named after a Swiss Alpine resort town. The members asserted a commitment to the rule of law, private property, competitive markets, international economic relations, and liberty. Since then their annual conferences attracted many classic liberal economists, including James Buchanan and the Chicago economists Gary Becker and Milton Friedman.

Milton Friedman joked: "There is no such thing as Austrian economics - only good economics, and bad economics". Anyway, today´s "Austrians" represent a complex system of conflicting ideas and schools of thought. Sadly today`s "Austrian" School drifted away from economics and gets represented by sectarians like Ron Paul, a former flight surgeon and obstetrician-gynecologist.

This blog post is just a sketch to outline the basic ideas and trends of a very complex topic. Wasserman elaborates on almost 300 pages the development of the different schools of thinking, the conflicts inside the "Austrians" school and their feuds with Keynes, Galbraith and their followers. We learn about the careers of many more economist I could mention here, describes their successes and failures, their publications & meetings and spices his report with a lot anecdotes. Highly recommend for any scholar of the history of economics.