The Revenge of the Austrians

We are the involuntary heirs to a debate with which most people are altogether unfamiliar. When asked what lies behind the new (old) economic thinking, we can reply that it was the work of Anglo-American economists associated overwhelmingly with the University of Chicago. But if we ask where the ‘Chicago boys’ got their ideas, we shall find that the greatest influence was exercised by a handful of foreigners, all of them immigrants from Central Europe: Ludwig von Mises, Friedrich Hayek, Joseph Schumpeter, Karl Popper, and Peter Drucker.

Von Mises and Hayek were outstanding ‘grandfathers’ of the Chicago school of free-market economics. Schumpeter is best known for his enthusiastic description of the "creative, destructive" power of capitalism, Popper for his defense of the "open society" and his writings on totalitarianism. As for Drucker, his publications on management exercised enormous influence over the theory and practice of business in the prosperous decades of the postwar boom. Three of these men were born in Vienna, a fourth (von Mises) in Austrian Lemberg (now Lvov), the fifth (Schumpeter) in Moravia, a few dozen miles north of the imperial capital. All five were profoundly shaken by the interwar catastrophe that struck their native Austria.

Following the cataclysm of World War I and a brief socialist municipal experiment in Vienna (where Hayek and Schumpeter joined the debates over economic socialization), the country fell to a reactionary coup in 1934 and then, four years later, to the Nazi invasion and occupation. Like so many others, the young Austrian economists were forced into exile by these events and all – Hayek in particular – were to cast their writings and teachings in the shadow of what became the central question of their lifetime: Why had liberal Austria collapsed and given way to fascism?

Their answer: The unsuccessful attempts of the (Marxist) Left to introduce into post-1918 Austria state-directed planning, municipally owned services, and collectivized economic activity had not only failed, they had led directly to a counter-reaction. Thus Popper, to take the best-known case, argued that the indecision of his socialist contemporaries – paralyzed by their faith in ‘historical laws’ – was no match for the radical energies of fascists, who acted. The problem was that socialists had too much faith in both the logic of history and the reason of men. Fascists, being uninterested in both, were supremely well placed to step in.

In the eyes of Hayek and his contemporaries, the European tragedy had thus been brought about by the shortcomings of the Left: first through its inability to achieve its objectives and then thanks to its failure to withstand the challenge from the Right. Each of them, albeit in different ways, arrived at the same conclusion: The best – indeed the only – way to defend liberalism and an open society was to keep the state out of economic life. If authority was held as a safe distance, if politicians – however well-intentioned – were barred from planning, manipulating, or directing the affairs of their fellow citizens, then extremists of Right and Left alike would be kept at bay.

The same dilemma – how to understand what had happened between the wars and prevent its recurrence – was confronted by Keynes, as we have seen. Indeed, the English economist asked essentially the same questions as Hayek and his Austrian colleagues. However, for Keynes it had become self-evident that the best defense against political extremists and economic collapse was an increased role for the state, including but nor confined to countercyclical economic intervention.

Hayek proposed the opposite. In his 1944 classic, The Road to Serfdom, he wrote:

No description in general terms can give an adequate idea of the similarity of much of current English political literature to the works which destroyed the belief in Western civilization in Germany, and created the state of mind in which naziism could become successful.

In other words, Hayek – by now living in England and teaching at the London School of Economics – was explicitly projecting (on the basis of Austrian precedent) a fascist outcome should Labour, with its loudly proclaimed welfare and social service objectives, win power in Britain. As we know, Labour did indeed win. But far from paving the way for a revival of fascism, its victory helped stabilize postwar Britain.

In the years following 1945 it seemed to most intelligent observers as though the Austrians had made a simple category error. Like so many of their fellow refugees, they had assumed that the conditions which brought about the collapse of liberal capitalism in interwar Europe were permanent and infinitely reproducible. Thus in Hayek’s eyes, Sweden was another country doomed to follow Germany’s path into the abyss thanks to the political successes of its Social Democratic governing majority and their ambitious legislative program.

Mis-learning the lessons of Nazism – or assiduously applying a highly selective handful of them – the intellectual refugees from central Europe marginalized themselves in the prosperous postwar West. In the words of Anthony Crosland, writing in 1956 at the height of postwar social democratic confidence, "no one of any standing now believes the once-popular Hayek thesis that any interference with the market mechanism must start us down the slippery slope that leads to totalitarianism."

The intellectual refugees – and especially the economists among them – lived in a condition of endemic resentment toward their uncomprehending hosts. All non-individualist social thought – any argument that rested upon collective categories, common objectives of the notion of social goods, justice, etc. – aroused in them troubling recollections of past upheavals. But even in Austria and Germany circumstances had changed radically: their memories were of little practical application. Men like Hayek and von Mises seemed doomed to professional and cultural marginality. Only when the welfare states whose failure they had so sedulously predicted began to run into difficulties, did they once again find an audience for their views: High taxation inhibits growth and efficiency; governmental regulation stifles initiative and entrepreneurship; the smaller the state the healthier the society and so forth.

Thus when we recapitulate conventional clichés about free markets and western liberties, we are in effect echoing – like light from a fading star – a debate inspired and conducted seventy years ago by men born for the most part in the late 19^th century.

To be sure, the economic terms in which we are encouraged to think today are not usually associated with these far-off political disagreements and experiences. Most students in graduate business schools have never heard of some of these exotic foreign thinkers and are not encouraged to read them. And yet without an understanding of the Austrian origins of their (and our) way of thinking, it is as though we speak a language we do not fully comprehend.

 

Excerpt from Chapter 3, The Unbearable Lightness of Politics, pages 97-103