Abstract
Carl Menger pioneered a unique theoretical research method which served as the foundation of the early Austrian school of economics. Menger’s causal-realist analysis was revived and formalized just before and after World War 2 by Ludwig von Mises as the “praxeological method.” Murray Rothbard, a student of von Mises’, utilized the method in formulating a comprehensive system of economic theory in his treatise, Man Economy, and State published in the early 1960s. Rothbard’s treatise became the foundational work for the “Austrian revival” in the 1970s. In this paper, we address several issues related to the role of Menger’s method in modern economics. First, ample evidence is adduced that von Mises and Rothbard each expressed a surprising ambivalence with respect to his own work in relation to the early Austrian school. Second, von Mises viewed Rothbard’s treatise as beginning a new epoch in economic theory. Third, contrary to the conventional view, a careful analysis of his treatise shows that Rothbard drew heavily on the contemporary neoclassical literature in developing his theoretical system and that his intent was never to set up a heterodox movement to challenge mainstream economics. Rather, his main aim was to consistently apply the praxeological method to rescue economics from what he considered the alien methodology of positivism, which was imported into economics after World War 2. Lastly, I will tentatively suggest that the term “Austrian economics” as the designation for the intellectual movement that coalesced in the early 1970s may now have outlived its usefulness. This term, which initially served an important strategic purpose in promoting the revival of the broad Mengerian tradition, may have come to obscure the meaning and importance of the praxeological research paradigm that Menger originated.
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Notes
For an overview of Menger’s life and thought, see Salerno 1999a and the sources cited therein.
For the factors underlying the rise and decline of the early Austrian School, see Salerno 1999b.
Indeed, in his Preface to Man, Economy, and State, Rothbard (2009, p. LI) laments the demise of “the old-fashioned treatise on economic ‘principles’” after World War 1 and the ensuing progressive disintegration of economics, including economic theory, into compartmentalized subdisciplines. On the factors that exacerbated this fragmentation of economics after World War 2, see Salerno 2004.
On the reasons for this, see Salerno (1999b, pp. 59–61).
Rothbard’s central role in the modern revival of Austrian economics is detailed in Salerno (2002).
The following statement is indicative of von Mises’s attitude in this respect: “There never lived at the same time more than a score of men whose work contributed anything essential to economics” (von Mises 1998, p. 869).
Rothbard did not consider Human Action an “old-style Principles” because “it assumes considerable previous economic knowledge and includes within its spacious confines numerous philosophic and historical insights” (Rothbard 2009, p. LV).
As Rothbard (n.d.) remarked in a memo: “Mises has very little detail on production theory, and as a consequence it took me many false starts, and lots of what turned out to be wasted effort, before I arrived at what satisfied me as a good Production Theory. (It’s involved emancipation from 90 percent of current textbook material.)”
While this construct is highly unrealistic, it is not unrealizable like the evenly rotating economy (ERE, for short), which abstracts completely from change and uncertainty and is used to analytically isolate interest income and the capitalist function which earns it from entrepreneurial profit. Thus, a world in which every factor is suited for one and only one task is not inconceivable or logically contradictory. In contrast, the ERE is indeed an unrealizable and self-contradictory construct. It describes a world in which, for example, the future is known with perfect certainty but action, which is always aimed at changing the future, occurs; and agents hold money balances despite the absence of uncertainty regarding the temporal pattern of their future receipts and expenditures. This is not to imply that proximity to reality makes one imaginary construct better or more useful than another; the sole test of a construct’s usefulness is the aid it gives to thought in deducing the causal laws operating in real markets.
For the explanation of this construct and its variations and the elaboration of its implications, see Rothbard 2009, pp. 329-66.
This conclusion, of the exhaustion of the income from production among wages, rents, and interest receipts, holds true only under the assumption that future market conditions are known with certainty. Once this assumption is dropped and the possibility is admitted of overvaluation or undervaluation of the complements of specific factors by capitalist investors, entrepreneurial profits and losses enter the picture. However, in a world of purely specific factors, such profits and losses would not have an allocative function because, by definition, factors cannot shift between production processes. More importantly, it becomes clear that such incomes accrue to the capitalists alone and that, therefore, in the real world of uncertainty, the functions of capitalist and entrepreneur are integrated in the same agent.
Indeed, Rothbard (2009, p. LIV) argued it was precisely “Marshall’s distrust of ‘long chains of deduction,’” in addition to “the whole Cambridge impetus toward” making short-cut assumptions that was one of the factors that led to the gradual breakdown of the praxeological method and its replacement by positivism.
Some methodologists have argued that Friedmanite-positivist methodology shares little more than vocabulary with Popper’s philosophy of science. For example, see Boland (1982, pp. 155–96).
Actually some of the references in Rothbard (2009) are to works published after 1962 because the latest edition includes Power and Market which was originally written as the third volume of Man, Economy, and State but was published separately 8 years later.
Israel Kirzner’s brilliant book on Competition and Entrepreneurship (Kirzner 1973) was published in 1973 and was almost immediately recognized as a major contribution to the Mengerian tradition by virtually all participants at the South Royalton conference. However, it was not to have its full impact in molding the Austrian movement and attracting mainstream sympathizers until later in the 1970s.
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Salerno, J.T. Menger’s causal-realist analysis in modern economics. Rev Austrian Econ 23, 1–16 (2010). https://doi.org/10.1007/s11138-009-0096-2
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DOI: https://doi.org/10.1007/s11138-009-0096-2