BiTS Berlin Winter term 2017/2018 ENTREPRENEURIAL ECONOMICS Evolution of the Austrian School III: Contemporary Austrian Economists Prof. Dr. Stefan Kooths BiTS Berlin Winter term 2017/2018 www.kooths.de/bits-eas3

Contact data Prof. Dr. Stefan Kooths Head of Forecasting Center Kiel Institute for the World Economy Office Berlin In den Ministergärten 8 10117 Berlin 030/2067-9664 stefan.kooths@ue-germany.com www.kooths.de

Reading Boettke, P. Boettke, P. and P. Leeson The Story of a Movement. The Freeman, Vol. 45, Issue 5, 1995. Information and Knowledge – Austrian Economics in Search for Uniqueness. Review Of Austrian Economics, Vol. 15, No. 4, 2002. Boettke, P. and P. Leeson The Austrian School of Economics: 1950-2000. In: Jeff Biddle and Warren Samuels (Eds.), Blackwell Companion to the History of Economic Thought, Oxford: Basil Blackwell 2002. Was Mises right? Review of Social Economy, Vol. 64, No. 2, 2006. Dolan, E. G. (Ed.): The Foundations of Modern Austrian Economics. Sheed and Ward: Kansas City 1976. Gloria-Palermo, S.: The Evolution of Austrian Economics – From Menger to Lachmann. Routledge: New York 1999. Holcombe, R. G.: The Great Austrian Economists. Ludwig von Mises Institute: Auburn/Alabama 1999. Lachmann, L.: History of the Austrian School of Economics. Lecture given to the Department of Economics of the University of Colorado on October 25th, 1977. O’Neil, J.: “Radical Subjectivism”: Not Radical, Not Subjectivist. The Quarterly Journal of Austrian Economics, Vol. 3, No. 2, 2000. Salerno, J. T. The Rebirth of Austrian Economics—In Light of Austrian Economics. The Quarterly Journal of Austrian Economics 5, No. 4, 2002. Three Decades of Progress in Austrian Economics – From South Royalton to Grove City. LewRockwell.com (November 23, 2004). The Revival of the Austrian School: Mises and Rothbard. Austrian School of Economics: Revisionist History and Contemporary Theory seminar on June 7th, 2005 at the Mises Institute. Schulak, E. M. and H. Unterköfler: The Austrian School of Economics – A History of Its Ideas, Ambassadors, and Institutions. Ludwig von Mises Institute: Aubrun/Alabama 2011.

Generations Proto-Austrians Founder: Carl Menger (1840-1921) Late Scholastics/School of Salamanca, John Locke (1632-1704), Richard Cantillon (1680-1734), David Hume (1711-1776), Adam Ferguson (1723-1816) , A. R. J. Turgot (1727-1781), Jean-Baptiste Say (1767-1832), Frédéric Bastiat (1801-1850) Founder: Carl Menger (1840-1921) 2nd generation Eugen v. Böhm-Bawerk (1851-1914), Friedrich v. Wieser (1851-1926), Frank A. Fetter (1863-1949) 3rd generation Ludwig v. Mises (1881-1973), Hans Mayer (1879-1955) 4th generation Friedrich A. v. Hayek (1899-1992), Wilhelm Röpke (1899-1966), Richard Strigl (1891-1942), Henry Hazlitt (1894-1993), William H. Hutt (1899-1988), Gottfried Haberler (1900-1995), Oskar Morgenstern (1902-1977), Fritz Machlup (1902-1983) 5th generation Ludwig M. Lachmann (1906-1990), Hans F. Sennholz (1922-2007), Murray N. Rothbard (1926-1995), Israel M. Kirzner (*1930), Erich W. Streissler (* 1933), George Reisman (*1937) 6th generation Walter E. Block (1941), Roger W. Garrison (*1944), Mark A. Skousen (*1947), Hans-Herrmann Hoppe (*1949), Joseph T. Salerno (*1950) 7th+ generation Lawrence H. White (*1954), Jesús Huerta de Soto (*1956), George A. Selgin (*1957), Peter Boettke (*1960), Steven Horwitz (*1964), Jörg G. Hülsmann (*1966), Rahim Taghizadegan (1979) Viennese School Philip Wicksteed (1844-1927) Austrians

What about Joseph A. Schumpeter (1883-1950)? Academic teachers (co-student of Mises) Friedrich v. Wieser Eugen v. Böhm-Bawerk Key concepts Methodological individualism Entrepreneurship as creative destruction Major works The Nature and Essence of Economic Theory (2010|1909) The Theory of Economic Development – An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle (1934|1911) Business Cycles (1939) Capitalism, Socialism and Democracy (1942) History of Economic Analysis (1955) Strong Austrian roots, not a member of the Austrian School

Up to the 1930s: The Golden Austrian Age 1927 Austrian Institute for Business Cycle Research, Vienna Founded by Ludwig v. Mises Director: Friedrich A. v. Hayek (followed by Oskar Morgenstern) Key Austrian tenets shaping mainstream thinking Tastes are subjective Microeconomic analysis grounded in methodological individualism Intertemporal coordination of production plans with consumption demand as key economic challenge Consumer sovereignty (in the market place consumers are king) Strong self-regulatory tendencies of market processes via incentives generated by the price system (profit and loss signals) Robbins, L. (1932): The Nature and Significance of Economic Science. London: Macmillan.

Break: The Great Depression Dominance of the Keynesian paradigm The dark decades: 1930s to 1960s Break: The Great Depression Dominance of the Keynesian paradigm Thinking in aggregates Governments given the role to correct for market instability Demand-management Welfare and competition economics Focus on market failures (microeconomic inefficiencies) Imperfect/monopolistic competition (Robinson/Chamberlin) Micro-interventionism Economic order: Market socialism (Lange/Lerner)

Austrians at the sideline Emigration and expulsion from Austria (1938!) Rise of collectivist and interventionist mainstream (Keynes 1936) 1940s Completely regulated and controlled economy of total war Operations research (LP), game theory, macro management Post-war mainstream (1950s, 1960s) Samuelson: Economics (1948+), Galbraith: The Affluent Society (1958) Disintegration of economic theory and positivist research approach Important exiled Austrians merging with neoclassical mainstream (Machlup, Morgenstern, Haberler) Mises Hayek Historic relicts?

Mises on specialization in economics (Human Action) “The economist must never be a specialist. In dealing with any problem he must always fix his gaze upon the whole system (…) Economics does not allow of any breaking up into special branches. It invariably deals with the interconnectedness of all the phenomena of action.”

Events and institutions 1938 Colloque Walter Lippmann, Paris Participants: Ludwig v. Mises, Friedrich A. v. Hayek, Michael Polanyi, Wilhelm Röpke, et al. Neoliberalism (coined by Alexander Rüstow as third way beyond laissez-faire and socialism) 1946 Foundation for Economic Education Founders: Leonard E. Read, Henry Hazlitt, et al. (supported by Margit v. Mises, Hayek, Hazlitt) 1947 Mont Pèlerin Society Founders: Friedrich Hayek, Frank Knight, Karl Popper, Ludwig von Mises, George Stigler, Milton Friedman, et al. …

Fruit of the calculation debate: Austrian advances in the 1940s Uncertainty Entrepreneurship Knowledge Market processes

Reshaping the Austrian paradigm (1940s, 1950s) Mises Dynamic and competitive entrepreneurial process (Arbitrage) Hayek Informational capacity of the market economy (Knowledge) Institutional conditions Private property Freedom of contract Limited government (political individualism) Market system: Complex order to generate social intelligence Emergent knowledge (neither a parameter, nor a commodity) Exchange processes as a device for social learning Informational content of data is time/place/context dependent and requires skillful (subjective) judgment

Mises: Making Austrian Economics survive Teaching at New York University (1945-1969) Students Rothbard Kirzner Reisman Sennholz Raico P. and B. Greaves New treatise by Rothbard: Man, Economy, and State (1962) Major publications (after emigration in 1944) Omnipotent Government – The Rise of the Total State and Total War (1944) Bureaucracy (1945) Human Action – A Treatise on Economics (1949) Socialism (1951) The Theory of Money and Credit (1953) Theory and History – An Interpretation of Social and Economic Evolution (1957) Epistemological Problems of Economics (1960) Liberalism (1962) The Ultimate Foundation of Economic Science – An Essay on Method (1962)

Hayek: Broadening the Austrian School Prices and Production (1931,1935) The Pure Theory of Capital (1941) Individualism and Economic Order (1948) The Road to Serfdom (1944) To the socialists of all parties The Counter-Revolution of Science (1952) Studies on the Abuse of Reason The Constitution of Liberty (1959) Law, Legislation and Liberty (1973/1976/1977) A New Statement of the Liberal Principles of Justice and Political Economy Choice in Currency (1976), Denationalization of Money (1978) The Fatal Conceit (1988) The Errors of Socialism Studies on the institutional frameworks of a free society (scientific liberal social philosophy)

Hayek: Complexity and order Order (system, pattern, structure) Indispensable concept for the discussion of all complex phenomena “A state of affairs in which a multiplicity of elements of various kinds are so related to each other that we may learn from our acquaintance with some spatial or temporal part of the whole to form correct expectations concerning the rest, or at least expectations which have a good chance of proving correct.” (Hayek) Allows for more-or-less accurate (macro-) pattern predictions only Taxis Made, exogenous, constructed, artificial  organization Cosmos Grown, endogenous, unintended  spontaneous order Society

Hayek: Cosmos and social phenomena Features Complexity Spontaneous orders may achieve any degree of complexity. Abstractness Spontaneous orders will often consist of a system of abstract relations between elements that instantiate abstract properties. Purposiveness Although the existence of a spontaneous order may serve the individuals enveloped in it, it cannot be said to have an intended purpose. Lessons Hard to understand (unknown details) Hard to control (dispersed knowledge) Rule-governed (explicit and implicit)

Knowledge and competition in economics Hayek Economics and Knowledge (1937) Competition as a Discovery Procedure (1968) Interpretation by Boettke (2002) Knowledge that defines the equilibrium state of affairs emerges within the process leading to that equilibrium state rather than existing anterior to that process. Without the market process to generate it, the relevant knowledge would not exist. The logic of choice is a necessary component of an explanation of the market process, but it is not sufficient. The logic of choice must be complimented with empirical examination of how learning takes place within alternative institutional settings. Within a private property order, the competitive market process will direct economic actors—all pursuing their own individual logics of choice—to engage in activities that will dovetail with the actions of others to coordinate plans through time. Outside the context of the private property order the individual pursuit of their goals is not powerful enough to ensure plan coordination. What we call economic rationality emerges because of a certain institutional setting and is not a behavioral postulate of economic analysis.

Information economics and the market process Mainstream view Akerlof, Stiglitz Asymmetries cause market failures Underproduction of information Fragility as price system is informationally inefficient Austrian View Hayek, Kirzner Asymmetries drive the entrepreneurial process Profit opportunities, new knowledge Disequilibrium prices spur economic actors to adjust their behavior in a less erroneous direction than before

Events and institutions (cont.) 1938 Colloque Walter Lippmann, Paris Participants: Ludwig v. Mises, Friedrich A. v. Hayek, Michael Polanyi, Wilhelm Röpke, et al. Neoliberalism (coined by Alexander Rüstow as third way beyond laissez-faire and socialism) 1946 Foundation for Economic Education Founders: Leonard E. Read, Henry Hazlitt, et al. (supported by Margit v. Mises, Hayek, Hazlitt) 1947 Mont Pèlerin Society Founders: Friedrich Hayek, Frank Knight, Karl Popper, Ludwig von Mises, George Stigler, Milton Friedman, et al. 1974 South Royalton Conference Participants: Murray Rothbard, Israel Kirzner, Ludwig Lachmann, Henry Hazlitt, (Milton Friedman), et al. 1974 Charles Koch Foundation (since 1977: CATO Institute) Founders: Ed Crane, Murray Rothbard, Charles Koch 1982 Ludwig von Mises Institute Founders: Llewellyn H. Rockwell, Jr., Burton Blumert, Murray Rothbard 1987 Review of Austrian Economics 1998 Quarterly Journal of Austrian Economics 1993 Friedrich August v. Hayek Institut, Vienna 2007 Institut für Wertewirtschaft/Scholarium, Vienna

Revival starting in the 1970s New momentum Collapse of the Keynesian paradigm (stagflation) 1971 centenary of Menger’s Principles: Reassessment 1973  Mises 1974 Nobel Prize awarded to Hayek Common ground Methodological individualism and subjectivism Market processes (disequilibrium economics) Praxeology  methodological skepticism towards … … mathematics as primary tool for theory development … empirical inference and theory testing (statistical analysis)

Henry Hazlitt (1894-1993) Libertarian journalist, author, and networker New York Times, Wall Street Journal, Newsweek Founding vice president of the FEE (1946) Mont Pèlerin Society (1947) Editor/editor in chief of “The Freeman” (1950-52/52-53) Explained the ideas of the Austrian School to the English-speaking layman Strongly influenced by Ludwig v. Mises Support for Mises (teaching position at NYU) Promoted the publication of Hayek‘s “The Road to Serfdom” Major works Economics in One Lesson (1946) The Failure of the “New Economics” (1959) The Critics of Keynesian Economics (Ed., 1960) The Foundations of Morality (1964)

Austrian Economist (radical subjectivism) Ludwig Lachmann (1906-1990) Austrian Economist (radical subjectivism) Student of Hayek at LSE (1930s) Professor of Economics and Economic History, University of Johannesburg (1949-1972) Theory of constant change Radical subjectivism: From value to expectations Unpredictability of knowledge Challenging information character of prices Wholesale rejection of the general-equilibrium concept (ERE) Major works 1956 Capital and Its Structure 1973 Macro-economic Thinking and the Market Economy – An essay on the neglect of micro-foundations and its consequences

Murray N. Rothbard (1926-1995) 25 books and 1000+ articles 1962 Man, Economy, and State 1963 America’s Great Depression 1970 Power and Market 1995 An Austrian Perspective on the History of Economic Thought Paleolibertarianism Anarcho-capitalism: Ethics of the free market, immorality of state intervention Conservative social philosophy (cultural values) Integrated theory of production Pure time preference theory (Fetter, Mises) Time structure of capital (Böhm-Bawerk, Wicksell, Hayek) Marginal productivity theory of factor pricing (Clark) Rejection of the concept of monopoly price on the free market Definition of the money supply, case for 100-percent-gold dollar

Rothbard, the Hardcore-Austrian (1982) “we have a tough row to hoe in Austrianism in general to rescue it from: Lachmann-Shackle nihilism; Stanford probababble; (…) and fuzzy Hayekianism. All this makes a hard-core institute all the more necessary.”

Emeritus Professor at New York University Israel M. Kirzner (*1930) Emeritus Professor at New York University Leading authority on Ludwig v. Mises Bridge to neoclassical economists (middle ground) Uncertainty inherent in all economic decisions Capital structure as “unfinished entrepreneurial plans” Entrepreneurs as coordinative force in the market process Alertness for profit opportunities (= coordination deficiencies) Equilibrating via arbitrage Major works Market Theory and the Price System (1963) An Essay on Capital (1966) Competition and Entrepreneurship (1973) The Meaning of Market Process (1992)

Austrian Economics: From Machlup to Kirzner Methodological individualism Ultimately, we can trace all economic phenomena back to the actions of individuals; thus individual actions must serve as the basic building blocks of economic theory. Methodological subjectivism (tastes and preferences) Economics takes man's ultimate ends and judgements of value as given. Questions of value, expectations, intent and knowledge are created in the minds of individuals and must be considered in this light. Individuals' demands for goods and services are the result of their subjective valuations of the ability of such goods and services to satisfy their wants. Marginalism All economic decisions are made on the margin. All choices are choices regarding the last unit added or subtracted from a given stock. Opportunity costs All activities have a cost. This cost is the most highly valued alternative that is forgone because the means for its satisfaction have been devoted to some other (more highly valued) use. Time structure of consumption and production All decisions take place in time. Decisions about how to allocate resources for the purposes of consumption and production across time are determined by individuals' time preference. Consumer sovereignty In the marketplace consumers are king. Their demands drive the shape of the market and determine how resources are used. Intervention in the marketplace stifles this process. Political individualism Political freedom is impossible without economic freedom. Markets as a process The notion of markets and competition as learning and discovery processes. Radical uncertainty Uncertainty pervades all our actions and is the ubiquitous context in which all choice must be made. Machlup Kirzner

Market process: Equilibrating forces vs. disequilibrating shocks Controversy between Kirzner and Lachmann Salerno (2004): Meaninigless question! “… the real-world market economy is never in or moving toward the state of general equilibrium or what Austrians call the "evenly rotating economy," which is a fictional state imagined by the economist as an analytical convenience in solving the problem of distinguishing profit from interest. All that exists in reality is a market process unfolding in history, driven by entrepreneurs some of whom are more successful than others in anticipating and adjusting production to ceaseless changes in future market conditions. The incessant change and pervasive uncertainty that characterizes the market economy is not "disequilibrating," it is simply a brute existential fact; neither can the forecasts and price appraisements of entrepreneurs be termed "equilibrating" — they are simply right or wrong.”

Market process: Kirzner‘s view (Gloria-Palermo 1999)

Market process: Hayek‘s view (Gloria-Palermo 1999)

Market process: Lachmann‘s view (Gloria-Palermo 1999)

Radical subjectivism and market processes (Boettke 1995) Unlike many of my colleagues within the radical subjectivist wing of modern Austrian economics, however, I see within Kirzner’s refinements to his market process theory (refinements made in response to the work of Lachmann and of G.L.S. Shackle, and James Buchanan) strong possibilities of reconciliation between radical subjectivist ideas and more traditional Austrian arguments about the systematic nature of market processes. In particular, the Misesian view of the functional significance of economic calculation within capitalist processes of production, as elaborated within Kirzner’s theory of entrepreneurial discovery, offers a conception of market coordination radically different from neoclassical theory, yet provides us with a coherent notion of economic order ad an alternative standard of economic welfare from which to judge states of the world. Following Lachmann we must reconstruct economics along consistently subjectivist lines, but as Lachmann himself said, we must be thankful we have Mises’ work to aid us in this task.

“How are you doing?” (North 1999) Ask a Lachmannite. Answer: “Fine. Now, ask me again. Things may have changed.” Ask a Kirznerian. Answer: “If the ‘you’ is singular, I’m doing fine. If it’s plural, the concept is methodologically meaningless.” Ask a Rothbardian. Answer: “Not as well as I’d be doing if the monstrous state were overthrown by the voluntary actions of cooperating individuals who would then disperse and go home.” G. North (1999): Recollections of the 1974 South Royalton Conference on Austrian Economics. Biblical Economics Today, Vol. 21, No. 5, Aug/Sep 1999.

Austrians and New Institutional Economics Modern Austrians Focus on the importance of institutions in providing the incentives for the acquisition and use of information and entrepreneurial innovation New Institutional Economics/Public Choice Ronald H. Coase (1910-2013) Transaction costs, Problem of social cost James M. Buchanan (1919-2013) Politicians' and bureaucrats' self-interest, constitutional economics Douglass C. North (1920-2015) Transaction Costs, institutions, and economic Performance Gordon Tullock (1922-2014) Rent seeking, Tullock paradox Oliver E. Williamson (*1932) Transaction cost, incomplete contracts, economic governance

Modern Austrian macroeconomics Mises/Hayek: Monetary business cycle theory (1930s) Rothbard (1960s) Costs and consequences of government pursuing inflationary credit expansion Implications of the government-controlled money monopoly O‘Driscoll (1977): Economics as a Coordination Problem Systemic examination that placed Hayek’s work on monetary theory and the trade cycle within a broader unified framework of economics Garrison (2000): Time and Money Presentation of the Austrian cycle within a standard model for a comparative analysis (starting in the 1970s) Switch from a labor based macroeconomics (Keynesianism, Monetarism) to a capital-based macroeconomics (Austrian) Lewin (1998): Capital in Disequilibrium Horwitz (2000): Microfoundations and Macroeconomics

Micro-foundations for dynamic macroeconomics Understanding the sequence of events, not description of equilibria (ERE as thought experiment only) Aggregation masks the structural composition of an economy that must be scrutinized if the economist hopes to understand overall economic performance. While there may indeed be macroeconomic problems (unemployment, inflation, business cycles) there are only microeconomic explanations and solutions.

Hans-Herrmann Hoppe (*1949) Austrian economist, paleolibertarian philosopher Dissertation in philosophy under Jürgen Habermas Student of Rothbard, followed him on his chair at the University of Nevada at Las Vegas 2006 Founder of the Property and Freedom Society Economics as aprioristic science of action Refutation of empiricism and positivism in social sciences Time cannot pass without modifying knowledge: Researching causality is logically impossible, if social agents are capable of learning Role of private property in free societies Major Works Kritik der kausalwissenschaftlichen Sozialforschung (1983) A Theory of Socialism and Capitalism (1989) The Economics and Ethics of Private Property (1993) Economic Science and the Austrian Method (1995) Democracy: The God That Failed (2001)

Jesús Huerta de Soto (*1956) Universidad Rey Juan Carlos, Madrid M.Sc. in economics, law, actuarial mathematics Leading economist in the Hayekian tradition Monetary and business cycle theory Economic and legal reasons for 100-percent banking Creative, entrepreneurship-driven market processes Spanish late scholasticism as forerunner of the Austrian School Major works Money, Bank Credit, and Economic Cycles (2006|1998) The Austrian School: Market Order and Entrepreneurial Creativity (2008) The Theory of Dynamic Efficiency (2009) Socialism, Economic Calculation and Entrepreneurship (2010|1992)

In a nutshell: Modern Austrian School of Economics Knowledge Monetary Theory Entrepreneurship Market process Spontaneous order “Subjects that the older Austrian School, with remarkable foresight, had already taken up or dealt with in detail.” (Schulak and Unterköfler 2011)

What makes Austrian Economics (still) different Mainstream vs. Austrian School Homo oeconomicus (optimization behavior)  Homo agens (purposeful action) „Perfect“ or “imperfect” competition Competition as a discovery procedure General (dynamic) equilibrium Markets as feedback mechanisms (permanent adjustment process rather than sequence of equilibria) Positivist social planning (constructivist rationalism) Evolutionary institutionalism (civilization as a process) Natural sciences as benchmark („Scientism“) Economics as a social science