Listen to Lawrence Reed’s interview on The Mike Slater Show.

The Austrian School has its roots in the theoretical work of three late 19^th and early 20^th century Austrian-born economists: Carl Menger, Friedrich von Wieser, and Eugen von Böhm-Bawerk.

Austrian economics is distinct from other schools of economic thought, such as the Ricardian and Keynesian Schools, and at times, the Chicago School. This is primarily because of its reliance on, and advocacy of, subjective choice within the marketplace, as well as its embrace of individualism, while rejecting the rigid formulas and unattainable equilibriums of laboratory economics.

In the words of Ludwig von Mises (perhaps the most high-profile figure within the Austrian School), “Economics is not about things and tangible material objects; it is about men, their meanings and actions.”

The Austrian School stands as a bold contrast to the more prevalent and accepted definitions of what an economy is. Whereas most economists are taught to see economies in terms of societies, Austrians understand that it is individuals with their distinct motivations that inspire, spur, and spontaneously define commerce.

Notable Contributions

It was Menger’s concept of “marginal utility” that first set the “classical” world of economic theory spinning on its head. Distinct from the widely used supply and demand model, marginal utility has more powerful implications, chiefly because of Menger’s ability to show the interdependency and subjective nature of goods. As Henry Hazlitt puts it,

Bread is valued because it meets a direct consumption need. Flour is valued because it is needed to bake bread. Wheat is valued because it is needed to produce flour. Plows, seed, land, and labor are valued because they are necessary to produce wheat, and so on.

Values are also interdependent because, for example, if one raw material necessary in combination for the production of a final product is missing, that lack reduces the usefulness and value of the other raw materials needed.

Therefore, not only the goods, but the need—the value—of goods becomes diminished. In short, it was Menger who was responsible for suggesting that economics is largely a subjective science.

Additionally, the Austrian School is notable for enunciating the concept of “opportunity” cost and “forgone opportunity” costs. For example, by accepting one particular client, a lawyer limits his ability to take on another, potentially more profitable client, or to focus on his personal life, or to expand his career beyond the walls of his firm.

Less nuanced Austrian trademarks are reliance on the gold standard (or another true currency media), low taxation, limited government and free enterprise.

Evolution & Challenges

The Austrian School began as a small, unorthodox collective of European economists, and has expanded over time to include some of the most notable economic minds of the past one hundred years. A vast network of Austrians, among them Mises and F.A. Hayek, have expanded and clarified specific Austrian tenets.

Over time, the Austrian School has withstood the challenges of progressive and neo-conservative thinkers alike. A familiar challenge to the Austrian School is that Austrians rely too heavily on observational, rather than mathematical, proofs. Unlike the other schools that place an inordinate amount of value on graphs and statistics, Austrians understand that, “mathematics is most applicable in describing situations in which all plans are coordinated and no discoveries are left to be made–that is, in an equilibrium.” Taking their cue from von Mises, Austrians instead rely on human interaction—i.e., reality—to tell them how economies work. To many, this is a highly derisible method, and makes the School academically vulnerable.

However, as economic busts have—sadly—been predicted and warned about by Austrian thinkers, a veritable revolution in economic theory has begun, with the Austrian School beginning to gain credence among the chattering and intellectual classes.

Summary

The Austrian School of economics is, by no means, an immoveable set of theories and rules. If anything, Austrian thinkers are given to inquisition and often find themselves the greatest critics of their school.  We at FEE encourage you to sign up for one of our many seminars that deal in-depth with the issues put forth in this short overview.

Articles

• Toward Radical Monetary Reform by Lawrence W. Reed
• Gold versus Fractional Reserves by Henry Hazlitt
• Central Banks, Gold, and the Decline of the Dollar by Robert Batemarco
• How Gold Was Money- How Gold Could be Money Again by Richard H. Timberlake
• Gold Standard by Ludwig von Mises
• The Gold Standard and Fractional Reserve Banking by Joe Cobb
• Back to Gold? by Henry Hazlitt
• Money and Gold in the 1920s and 1930s by Joseph T. Salerno
• No Shortage of Gold by Hans F. Sennholz
• How to Return to Gold by Henry Hazlitt
• The Solution by Murray N. Rothbard
• A Golden Comeback, Part 1 by Mark Skousen
• A Golden Comeback, Part 2 by Mark Skousen
• A Golden Comeback, Part 3 by Mark Skousen
• The Value of Money by Hans F. Sennholz
• A Closer Look at Gold by Charles E. Weber
• Hazlitt on Gold by Jude Blanchette
• How Much Money? by Percy L. Greaves Jr.
• The Future of the Dollar by Henry Hazlitt
• Gold Policy in the 1930s by Richard H. Timberlake

Audio

• Peace and Gold by Steve Horwitz
• Is the Gold Standard a Viable Policy Option? by Lawrence White

Articles on Single Payer Health Care

• Nationalized Health Care Will Cut Costs? It Just Ain’t So! by Gene Callahan and Robert Murphy
• Medical Misunderstanding by Sheldon Richman
• What NBC Didnt Tell You About Health-Care Reform by Dr. Jane Orient
• Let’s Not Throw American Medicine into Boston Harbor by Dr. Jane Orient
• Socialized Failure by John Goodman
• Health-Care Demagogues by Doug Bandow
• Free-Market Medicine by Larry Van Heerdan
• Health Care: Over the Canadian Cliff? by Doug Bandow
• Single Payer: Neither Simple Nor Smart by Dr. Michael Glueck and Dr. Robert Cihak
• Twenty Myths About National Health Insurance by Mr. John C. Goodman and Mr. Gerald L. Musgrave

Audio on Single Payer Health Care

• Healthcare Policy: The Case for Freedom, not Government by Jane Orient, M.D.

Just in case you wanted to celebrate Earth Day, here’s a collection of articles and media about environmental policy from FEE’s archive.

Articles

• “Controlling Pollution,” by Hans Sennholz
• “Saving the Environment for a Profit,” Victorian-Style, by Pierre Desrochers
• “Chemical Hysteria and Environmental Politics,” by Doug Bandow
• “Thank You, Internal-Combustion Engine, for Cleaning up the Environment,” by Dwight Lee
• “Freedom is the Environment’s Best Friend,” by John Semmens
• “The Impossibility of Harming the Environment,” by Roy E. Cordato
• “Government Versus the Environment,” by Russell Madden
• “Economic Notions: The Perverse Popularity of Command and Control,” by Dwight Lee
• “Is Greed Green?” by Pierre Desrochers

Audio

• The Fable of Environmental Apocalypse, Doug Bandow
• Global Warming and Environmental Issues, Gene Callahan

• “News Flash: FDR Didn’t Restore Prosperity,” by Sheldon Richman
• “Rome and the Great Depression,” by Lawrence W. Reed
• “The Great Depression According to Milton Friedman,” by Ivan Pongracic
• “The Great Escape from the Great Depression,” by Robert Higgs
• “Mysteries of the Great Depression Finally Solved,” by Mark Skousen
• “The Great Duration, 1929 – 1941,” by Robert Higgs
• “The Great Depression,” by Hans Sennholz
• “Myths of the New Deal,” by Burton Folsom Jr.
• “Great Depression,” by Gene Smiley (From the Concise Encyclopedia of Economics.)
• “Our Economic Past~The Great Contraction, 1929-33,” by Robert Higgs

Books About the Great Depression

Great Myths of the Great Depression By Lawrence W. Reed

“Old myths never die; they just keep showing up in economics and political science textbooks.” – Lawrence W. Reed

Read Online or purchase hard copies available in FEE’s Store

Listen to Lawrence W. Reed discuss the “Great Myths” on the Mike Rosen Show.

New Deal or Raw Deal:How FDR’s Economic Legacy Has Damaged America By Burton W. Folsom Jr.

In this shocking and groundbreaking new book, economic historian Burton W. Folsom exposes the idyllic legend of Franklin D. Roosevelt as a myth of epic proportions.

Buy from Amazon

FDR’s Folly by Jim Powell

In FDR’s Folly, historian Jim Powell argues that it was in fact the New Deal itself, with its shortsighted programs, that deepened the Great Depression, swelled the federal government, and prevented the country from turning around quickly.

Buy from Amazon

The Roosevelt Myth by John Flynn

“This book is in no sense a biography of Franklin D. Roosevelt. It is rather a critical account of that episode in American politics known as the New Deal. As to the President, it is an account of an image projected upon the popular mind which came to be known as Franklin D. Roosevelt. It is the author’s conviction that this image did not at all correspond to the man himself and that it is now time to correct the lineaments of this synthetic figure created by highly intelligent propaganda, aided by mass illusion and finally enlarged and elaborated out of all reason by the fierce moral and mental disturbances of the war. The purpose of this book, therefore, is to present the Franklin D. Roosevelt of the years 1932 to 1945 in his normal dimensions, reduced in size to agree with reality.” – John Flynn

Buy from Amazon

The Forgotten Man by Amity Shales

“Its duration and depth made the Depression “Great,” and Shlaes, a prominent conservative economics journalist, considers why a decade of government intervention ameliorated but never tamed it.” -Booklist

Buy from Amazon

America’s Great Depression By Murray Rothbard

“To portray the interventionist efforts of the Hoover administration to cure the depression we may quote Hoover’s own summary of his program, during his Presidential campaign in the fall of 1932.” -Murray Rothbard

Download PDF

FEE Analysis of Economic Stimulus Bills

• “Keynes Returns,” by Sheldon Richman
• “Smoot and Hawley Return,” by Sheldon Richman
• “What is Seen and Unseen: Government Job Creation,” by Larissa Price
• “Fallacy of the Free Lunch,” by William Anderson

Analysis of Economic Stimulus Bill from other sources

• “Spending is not stimulus,” by Daniel Mitchell, Cato Institute
• “The Troubling Return of Keynesianism,” by Ike Brannon, Former Senior Advisor, U.S. Treasury, and Chris Edwards, Cato Institute

Background on Economic Stimulus and Keynesianism

• “The Trouble with Keynes,” by Roger W. Garrison (The Freeman, October 1993)
• “John Maynard Keynes: The Damage Still Done By a Defunct Economist,” By Richard M. Ebeline (The Freeman, May 2006)
• “Keynesianism in a Nutshell,” by Henry Hazlitt (The Freeman, Novemeber 1982)
• “Inflationism,” William Peterson (The Freeman, August 1977)

Background on Economic Depression

• “The Great Depression According to Milton Friedman,” by Ivan Pongracic Jr. (The Freeman, September 2007)
• “The Mysteries of the Great Depression Finally Solved, by Mark Skousen (The Freeman, July 1997)
• “Great Myths of the Great Depression,” by Lawrence W. Reed

Mr. Stolyarov is a senior at Hillsdale College; a triple major in economics, mathematics, and German; and an immigrant to (and now citizen of) the United States from Belarus. He is well-advanced on his career path, having already passed four of nine examinations in actuarial science. He attended a FEE seminar last summer.

The globalization of culture, politics, and economics is arguably the defining characteristic of the past half century. English has become the international language of commerce. Chinese holiday toys entertain children in Nebraska and Norway. American political consultants sell their advice to candidates in Israel, and the Bollywood film industry holds its annual awards event in Bangkok. That an enormous expansion in global wealth has accompanied this increase in global interconnection is self-evident. That the former is a result of the latter is the Smithian premise.

One hundred twenty-nine authors responded to FEE’s Call for Papers in competition for the Eugene S. Thorpe Award. Their papers were judged in a blind review. With near unanimity they spoke to the benefits of globalization, the causal relationship between the expansion of markets and wealth creation, and the limited ability and frequently destructive consequences of governmental attempts to manage the process.

The choice of a “best” paper was difficult, and the selection committee wants to thank all the Award participants for their contributions. Only one paper could win, and we will let Mr. Stolyarov’s work speak for itself; but special recognition and honorable mention are in order for several of the runner-up contributors. In particular, two of them addressed the issue of “government facilitation” of globalization in a more sophisticated manner than most, recognizing that the concept of government facilitation can and should include not just the destructive mechanisms of market manipulation and management, but also the supportive and (for Smith) essential mechanisms of preserving and protecting the legal infrastructure necessary for free markets to function.

Lorenz Kraus of Albany, New York, in his paper “Liberty of Contract and the Division of Labor,” reminds us that “One of the great feats of intellectual history has been the discovery of the crucial connection between a thriving division of labor and a thriving civilization,” and that “the division of labor . . . depends on the laws and institutions a nation adopts.” Just so. Adam Smith was not an anarchist, and his vision of the optimal role of government was not that of no government at all. Two of the three legitimate functions of government he identifies are the national defense and the administration of justice. Darin Clark of Bradenton, Florida, in his paper “Cooperative Exchange, the Occurrence Necessary for the Division of Labor,” emphasizes that “voluntary exchange” can only take place when we have “a necessary framework of laws. . . . This framework of laws is the respect for contractual agreements and rights to private property.”

Government can play a positive role to “facilitate” globalization by enhancing the rule of law in those areas of the world where it is lacking and by defending property rights whether against the thuggery of high-seas piracy or the high-tech assault of electronic spam. Honorable mention to Messrs. Kraus and Clark for elaborating on this point.

And honorable mention likewise to Mark Hendrickson of New Wilmington, Pennsylvania, who offers the insight that government attempts to manage trade through bi- and multilateral trade agreements are a modern form of the mercantilism prevalent in Adam Smith’s time. “It turns out that a democracy can be as harmful as a monarchy to the economic well-being of a people, if special-interest politics force the common people to subsidize the privileged few and abrogate the right of a free person to buy from his or her seller of choice.” Mr. Hendrickson makes a powerful argument in favor of the unilateral removal of trade barriers.

The globalization of the world’s markets is almost certainly a Hayekian effect emerging from the technology of the twentieth century, but it is one that poses a direct threat to the power of governments to control individual behavior. Governments, whether democratic or autocratic, do not react well to loss of control and will act to retain their power by whatever means necessary. As the political environment in the United States shifts, and with the convenient excuse of recent disruptions in global financial markets (occasioned themselves by government interference), we can expect new efforts on the part of sovereign and meta-sovereign institutions to reimpose their control over international trade. Hayekian processes tend to persist over time-but the pace at which they proceed is more problematic.

Congratulations to Gennady on his winning article.

Each state retains its sovereignty, freedom, and independence, and every power, jurisdiction, and right, which is not by this Confederation expressly delegated to the United States, in Congress assembled.

We might think those words — or words to the same effect — are in the U.S. Constitution. But they are not. They are from Article II of the Articles of Confederation, America’s first constitution. They could have been placed in the U.S. Constitution but were deliberately left out in 1787.

Before I am accused of misleading anyone, I will quickly acknowledge that after the Constitution was ratified and the first Congress was in session, something like Article II was added to the Constitution as the Tenth Amendment. Unfortunately the Tenth Amendment is like Article II in the same sense that a whale is like a fish — superficially.

Here’s the Tenth Amendment:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

Here again is Article II

Each state retains its sovereignty, freedom, and independence, and every power, jurisdiction, and right, which is not by this Confederation expressly delegated to the United States, in Congress assembled.

The most significant difference is that Article II qualifies the word delegated with expressly. The Tenth Amendment does not. This suggests that while the Articles of Confederation was explicitly a document of express, enumerated congressional powers, the Constitution apparently was not. The difference was no oversight, but rather a choice made by the delegates to Philadelphia’s Constitutional Convention and later by the members of the Congress. As I pointed out in The Constitution Within, when the congressional committee writing the Bill of Rights debated what would become the Tenth Amendment, a House member unsuccessfully proposed adding the word expressly to the draft amendment. He was opposed by James Madison. “[I]t was impossible,” Madison said, “to confine a government to the exercise of express powers; there must necessarily be admitted powers by implication, unless the constitution descended to recount every minutiae.” (Emphasis added.)

Thus Madison endorsed the doctrine of implied unenumerated powers, contrary to what he told the public when he was selling the Constitution during the ratification process. At that time he wrote in Federalist 45, The powers delegated by the proposed Constitution to the Federal Government, are few and defined.

One might argue that the Tenth Amendment is too weak a foundation on which to build the case that the Constitution is in fact not a document that severely limits the power of the national government. Perhaps so. But we have more evidence.

Last year Professor Calvin H. Johnson of the University of Texas Law School published an illuminating paper titled The Dubious Enumerated Power Doctrine (downloadable gratis here). Johnson presents formidable evidence that the framers had no intention of limiting the national government’s powers to the 16 items listed in Article I, Section 8, of the Constitution. They were well aware that the Articles of Confederation had explicitly limited the government’s powers to those expressly spelled out and chose not to transfer this idea to the new Constitution.

“In carrying over the Articles’ wording and structure, they removed old Article II’s limitation that Congress would have only powers ‘expressly delegated’ to it,” Johnson writes. “When challenged about the removal, the Framers explained that the expressly delegated limitation had proved ‘destructive to the Union’…. Proponents of the Constitution defended the deletion of ‘expressly’ through to the passage of the Tenth Amendment. That history implies that not everything about federal power needs to be written down.”

Guiding Assumption

The Constitutional Convention operated on the assumption that more, not fewer, powers were needed for the national government than were allowed under the Articles. Johnson quotes some of the framers to indicate this attitude. “It has never been a complaint agst. Congs. that they governed overmuch. The complaint has been that they have governed too little,” James Wilson of Pennsylvania said. “The evils suffered and feared from weakness in Government have turned the attention more toward the means of strengthening the [government] than of narrowing [it],” Madison said to Thomas Jefferson.

When the convention began its work the delegates passed resolutions to guide the committees that were drafting particular sections of the document. Johnson writes that one such binding resolution specified that the new government would have every power enumerated in the Articles and an additional power (quoting the resolution): to legislate in all Cases for the general Interests of the Union.

This is contrary to the common view that Article I, Section 8, of the Constitution necessarily exhausts the national government’s powers. That view is undermined by several inconvenient facts. For example, the first clause of Article I, Section 8, states, “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States….” That’s a hefty grant of power that does not appear to be further restricted by any subsequent language. (Jefferson and Madison disagreed. See Federalist 41 by Madison, keeping in mind that the Federalist Papers were essentially ad copy for the Constitution and against the Anti-federalist opposition.) The 16 specific powers that follow are not introduced as limits on the taxation clause. They appear to be coequal provisions, not constraints on the meaning of “common Defence and general Welfare.”

But then why include a list of powers? Johnson writes: “Reading the Constitution as giving a general power to provide for the general welfare means that the enumerated powers of clauses 2 through 17 are illustrative of what Congress may do within an appropriately national sphere, but are not exhaustive…. The phrase, ‘to provide for the common Defence and general Welfare,’ in the first clause of section 8 provides the general principle that both enumerated and implied powers must satisfy.”

In other words, Congress can’t do whatever it wants. It can only act on behalf of the common defense and general welfare. Thus in the eyes of the framers, the government would be limited, but not nearly as limited as today’s constitutionalists believe. The view among the framers was that Congress’s jurisdiction covered all matters national in scope, leaving local matters to the states. But, as Johnson writes, both Madison and Hamilton argued that the division between the federal and state governments was a legislative or political question that would be set in the future by competition between those governments for the loyalty of the people.

Implied Powers

We know that the Constitution must have contained implied powers from the beginning. Article I, Section 9, expressly prohibits Congress from doing certain things, such as passing ex post facto laws and bills of attainder, granting titles of nobility, and interfering with the slave trade until 1808. Why would such prohibitions have been thought necessary if Congress could exercise only the enumerated powers? Another example: The Fifth Amendment limits the power of eminent domain, but the Constitution itself does not enumerate any power of eminent domain. It must be implied.

“The existence of specific limitations in section 9 is inconsistent with a general limitation required by the enumerated powers doctrine,” Johnson writes. He points out that it had been widely conceded, even by critics of the Constitution, that the national government under the Articles had the power to issue passports although that power was not expressly stated.

Johnson’s argument would not be news to the Anti-federalists, that group of early Americans who feared the proposed Constitution would create an imperial national government with virtually unlimited power. (It should be noted that southern Anti-federalists like Patrick Henry objected to an expanded national government in part because they feared the taxing power might be used to free their slaves. Thus was a good cause, decentralization of power, perhaps permanently stained by a link to the abomination of slavery. Samuel Johnson had it right: “How is it that we hear the loudest yelps for liberty among the drivers of negroes?” More on this issue here.)

When advocates of the proposed Constitution advertised the document as containing express, enumerated powers, the Anti-Federalists and fellow travelers such as Thomas Jefferson scoffed. For example, James Wilson said: “The congressional authority is to be collected, not from tacit implication but from the positive grant expressed in the [Constitution]. …[E]verything which is not given [to the national government], is reserved [to the states].”

To which Jefferson replied

To say, as Mr. Wilson does that . . . all is reserved in the case of the general government which is not given . . . might do for the Audience to whom it was addressed, but is surely gratis dictim, opposed by strong inferences from the body of the instrument, as well as from the omission of the clause of our present confederation [Article II], which declared that in express terms.

Arthur Lee of Virginia said: Mr. Wilson’s “sophism has no weight with me when he declares . . . that in this Constitution we retain all we do not give up, because I cannot observe on what foundation he has rested this curious observation.”

How the Constitution was intended to be interpreted and how it was in fact interpreted under the pressure of public opinion were initially two different things. As historian and economist Jeffrey Rogers Hummel explains, “To oversimplify only slightly, the Federalists got their Constitution, but the Anti-Federalists determined how it would be interpreted.” For a while anyway.

Calvin Johnson makes a strong case that the Constitution was not intended to put strict limits on the national government. He thinks that is a good thing. No libertarian would agree with him. It is important to separate two issues: what the Constitution appears to say and how we evaluate it. We must resist the temptation to let our political-moral views warp our reading of the document. The ultimate political value for libertarians is not the Constitution but liberty-and-justice. If the former fails to support the latter, we must not hesitate to say so. We gain nothing for the cause by supporting it with arguments that are easily knocked down.

If the foundation of our case for liberty is nothing more than the Constitution — rather than natural-law justice — we will continue to be trumped by our opponents. After all, the Constitution was in effect all during the time the national government expanded and liberty shrank. As Lysander Spooner wrote, ‘the Constitution has either authorized such a government as we have had, or has been powerless to prevent it.” Liberty’s champions have to come to terms with that logic.