*Classical Liberalism and the Austrian School* by Ralph Raico (updated)

Classical Liberalism and the Austrian School is the latest collection of essays from Ralph Raico, published by the Ludwig von Mises Institute. Ralph was kind enough to send me a print copy.

The introductory, eponymous essay concerns the relationship between Austrianism as an economic methodology and classical liberalism as a political program or ideology. Raico disputes Mises’ contention that Austrian methodology (methodological individualism) is clearly separate from the normative claims of classical liberalism (2-3). Raico builds a persuasive case that Austrianism as traditionally understood is indeed naturally related to classical liberalism; however, I would argue that this implication is not entirely to the credit of traditional Austrianism.

First, let us take methodological individualism. Modern neoclassical economics is as thoroughly methodologically individualist as Austrianism ever was. But note that both neoclassical and Austrian economists depart from methodological individualism when convenient to do so, for instance when deploying the firm as a rational actor. The firm is a collective entity. Robert Nozick in Anarchy, State, and Utopia has a brilliant insight into when methodological individualism “might go wrong” (22):

If there is a filter that filters out (destroys) all non-P Q’s, then the explanation of why all Q’s are P’s (fit the pattern P) will refer to this filter. For each particular Q, there may be an explanation for why it is P, how it came to be P, what maintains it as P. But the explanation of why all Q’s are P will not be the conjunction of these individual explanations, even though these are all the Q’s there are, for that is part of what is to be explained… The methodological individualist position requires that there be no basic (unreduced) social filtering processes.

The filtering process for the firm is profit maximization. We can know that firms try to maximize profit even if we do not have a good explanation for why each individual firm tries to maximize profit, or why individuals have chosen so to organize themselves. The answers to the latter question were developed by Coase and Williamson, by the way (Chicagoites, not Austrians, though fully taken on board by contemporary Austrians).

Second, Austrians have criticized neoclassical economists for their reductive models, in language reminiscent of historians’ criticisms of social science in general. Raico quotes Kirzner favorably:

Both the earlier Ricardian and the current neoclassical economics exhibit a “mechanical quality,” whereby “human aspirations, human errors, and human discoveries are downplayed, ignored, or simply assumed away.” Austrian economics, on the other hand, highlights the alertness, inventiveness, fallibility, and resourceful creativity of all the participants in the market process, especially in the case of the entrepreneur and the entrepreneurial function.

But the point of a model is to help us understand the world, not to replicate it. Assuming away complicating factors can be a useful way of focusing on a particular aspect of a problem. Austrians too have done this with their abstract models of human exchange (Robinson Crusoe hypotheticals and all). Of course, when we ignore the inherent limitations of our models imposed by our assumptions, we’re simply doing bad social science. Here, as in so many other cases, I agree with Milton Friedman’s quip that “there is no Austrian economics — only good economics and bad economics.” Good mainstream economists pay attention to the ways in which complex phenomena limit the applicability of models and pose challenges for public policy.

Finally, Raico addresses an area in which many Austrian economists are indeed distinct from the rest of their profession: apriorism. But here I fear Raico might be falling into a trap set by critics of Mises. I am sure that Raico knows a hundred times more about Austrian economics than I ever will, and so I hesitate to be too sure about myself here. However, what I have heard from contemporary Austrian economists such as Peter Leeson is that Mises himself was not opposed to hypothesis testing, even using statistical methods. He was merely opposed to Popper-style falsificationism (i.e., that every element of a theory must be falsifiable), which has in any case been superseded in mainstream philosophy of science. Again, it seems that to the extent that Austrians are seriously divergent from the economic mainstream (i.e., in rejecting empirical testing altogether and holding fast to pure apriorism), they are seriously mistaken, but in fact the most sophisticated Austrians are quite close to the economic mainstream.

Does a sophisticated Austrianism necessarily lead to classical liberalism? I do not believe so, any more than sophisticated neoclassicism does so. Raico is certainly correct that a proper understanding of individuality and economic complexity militates against crude social welfare analysis, but it was the socialist Arrow who provided the strongest ammunition against the latter. Would an Austrian support feudalism simply because it could be seen as the working-out of the voluntary interactions of individuals? After all, feudalism could be seen as Pareto optimal, but it quite clearly crushed innovation. Property rights were secure, but highly unequally distributed ex ante. Therefore, feudal societies found it difficult to make use of the natural talents and ambitions of the great majority of their peoples. A Rawlsian Austrian, for instance, might favor a robust redistributive state, alongside a highly competitive, vigorous, entrepreneurial market society. There may be a tension between those two objectives, but not a blank contradiction. I believe that the observed correlation between Austrianism and classical liberal beliefs today has mostly to do with the fact that libertarian economists are more likely to call themselves “Austrians” than are non-libertarian economists, even when the methodological differences between the two groups are slight.

Carl Menger

The second half of the introductory essay is an enlightening and engrossing account of the political and social views of the founders of the Austrian school (Menger, Bohm-Bawerk, and Wieser), and the ways in which Mises and Hayek decisively revived the classical liberal spirit of the approach. Raico interprets the early Austrians as being much more “conservative-paternalist” than truly liberal and provides good evidence on that score. He also sums up the evidence on Hayek’s views, who was much more inclined to state interventionism than was Mises.

The next essay, “Liberalism True and False,” attacks the problem of how to conceptualize “liberalism,” particularly for the purposes of cross-national historical analysis. Raico cogently argues that the most useful concept of liberalism is as an ideal type, in which liberalism consistently advocates voluntary society as against the state. This notion of liberalism would then have to be applied to the particular circumstances of thinkers and movements, it seems to me. Thus, John Locke was a liberal thinker for his day because the thrust of his argumentation led in the direction of greater freedom in his historical context, even though some of his opinions might considered quite illiberal today. Note that Raico’s definition would exclude, say, Rawls from being a truly liberal thinker.

The third essay, “Intellectuals and the Marketplace,” explores the perennial question of why intellectuals tend to oppose capitalism. Surveying the field of theories, Raico only occasionally gives us glimpses into his own view but does argue persuasively for the importance of ideology and therefore of the role of the intellectual in society. My own view accords with Raico’s (I’m elaborating a bit here, perhaps beyond what Raico would agree with): that people with little direct experience of the marketplace tend to rely on Stone Age psychological biases: the make-work fallacy, the fallacy that one’s gain in exchange is another’s loss, nationalistic and protectionist fallacies, and a penchant for envy and fear of envy. This hypothesis neatly explains why entrepreneurs, managers, investors, economists, and high-IQ private-sector workers tend to be free-market, while idle inheritors and aristocrats, entertainers, artists, professors, teachers, bureaucrats, journalists, charitable foundations, and people with low IQs have throughout history tended to be susceptible to socialism, fascism, and other forms of anti-capitalism.

In “Was Keynes a Liberal?,” the fourth essay, Raico presents disturbing evidence on Keynes’ illiberal inclinations. While Keynes was inconsistent throughout his career, he frequently praised “experiments” in “social engineering” and declared himself “friendly and sympathetic” to the totalitarian regimes of his day — although he also criticized Stalin’s USSR for not heeding proper advice and persecuting dissenters (165-166). Keynes even says of the Soviet Union that it has “just a chance” of success, and that “even a chance gives to what is happening in Russia more importance than what is happening (let us say) in the United States of America.” He even praised the Webbs’ disgraceful Stalinist paean, Soviet Communism: A New Civilisation. The overall impression of Keynes that one gets from this presentation is one of a flighty and fundamentally unserious thinker and quite possibly a naive dupe of some nasty dictatorships. I hasten to add that one should probably also consult other views on Keynes, as well as his original works, for the full view.

“The Conflict of Classes: Liberal vs. Marxist Theories,” the fifth essay, explores liberal theories of class conflict that predated Marx, particularly their development by French liberal thinkers. Unfortunately, many of these same theorists, some of whom were radical libertarians, were ultimately co-opted by the lavish, “liberal” empire of Louis Philippe. Consciously or not, the American individualist anarchists of the late 19th and early 20th centuries (and German sociologist Franz Oppenheimer) certainly seem to echo the class theories of these early liberals, distinguishing between those who live by the state and those who are preyed upon by the state.

The sixth essay, “The Centrality of French Liberalism,” disputes Hayek’s giving pride of place to English liberalism (“old Whiggery”) in the intellectual history of classical liberalism. French thinkers, from Constant to Bastiat to

Gustave de Molinari

Jean-Baptiste Say to Molinari, were often more rigorous and, dare I say, pur et dur in their liberalism than Adam Smith, David Ricardo, and the Manchester School. Raico’s observations about French liberalization, particularly in church-state relations and private affairs, also serve as a counterweight to oft-heard, conservative arguments (such as from Michael Oakeshott) that conservative British gradualism obviously proved a superior course to French revolutionary rationalism. Yet at the end of the day, I wonder how much influence the French liberals really had. Certainly, their homeland seems to have forgotten them. In that sense, the Anglo-American tradition of liberalism really has proved more enduring – due perhaps more to the vagaries of history than to the quality of the argumentation of their intellectual progenitors.

Chapter seven, “Ludwig von Mises’ Liberalism on Fascism, Democracy, and Imperialism,” explores Mises’ conception of liberalism, which gives pride of place to the institution of private property, and its ability to serve as a basis for critique of the dangerous ideologies of his day. Unfortunately, Mises did praise Italian fascism (in 1925) for having “saved European civilization” from Bolshevism. Raico points out that this was a view widely shared at the time, for instance by Winston Churchill, and that Mises criticized Italian fascism for its economic policy, sabre-rattling, and “complete faith in the decisive power of violence.” On balance, it is fair to say that in 1925 Mises believed early Italian fascism, the totalitarian nature of which was not yet evident, was superior to Soviet communism, but far inferior to a liberal regime. This chapter is also noteworthy for its exploration of the evolving views of Vilfredo Pareto and the other Italian liberals when faced with the growing socialist lawlessness of the turn of the century, culminating in the violence of the biennio rosso, 1919-1920.

The penultimate chapter, “Eugen Richter and the End of German Liberalism,” explores the reasons for liberalism’s ignominious demise in pre-World War I Germany. I was not previously familiar with Eugen Richter and enjoyed Raico’s exegeses of his thought and activism. Richter was the leader of the true liberals or “Left Liberals” as they were known in the late 19th century, as opposed to the regime-entrenched National Liberals, and a journalist. (Other Germanic-speaking countries have had similar terminologies; the free-marketeers of Denmark went under the “Left” party and, later, the “Radical Left.”) In the end, Richter was squeezed between the Social Democrats and Bismarck’s Conservative-led coalition, although he remained a popularizer of true liberal principles to the end. It is not hard to think of Richter as the “Dr. No” of his day, although more widely popular and – perhaps – influential.

The final chapter is a brief review of the work of Arthur Ekirch on antiwar and militarist ideologies in the United States.

In summary, this is a very enjoyable and enlightening survey of some important but underappreciated thinkers and ideas from the heyday of classical liberalism. Highly recommended.

(Updated to add a brief overview of the last chapter.)