Category Archives: Austrian School of Economics

Austrian School of Economics

Friedrich A. von Hayek

A short Appreciation by Kurt R. Leube*

It is 2017, and lest we forget one of the most seminal minds of our times, we should briefly recall the important work of Friedrich A. von Hayek who died 25 years ago, on March 23, 1992.

Born 1899 in Fin-de-Siecle Vienna, Friedrich A. von Hayek grew up in a family that could lay claim to an academic tradition of well over three generations. With mixed success in several schools, he voluntarily joined the Austro-Hungarian Army in March 1917, served as an artillery officer at the Piave front and in November 1918 returned disillusioned, exhausted, and hopeless into a collapsing Habsburg Empire. Hayek enrolled in the University of Vienna and, obtained his law degree in 1921, decided to go for a second doctoral degree in Political Science and started to work under Ludwig von Mises’ directorship in an office for the settlement of pre-war debts. As the most eminent scholar of the 3rd generation of the Austrian School of Economics, Mises (1881-1973) soon became Hayek’s mentor and in 1927 they succeeded in founding the ‘Austrian Institute for Business Cycle Research’ that soon gained high academic reputation under Hayek’s and later Oskar Morgenstern’s leadership. Not only his first book Monetary Theory and the Trade Cycle (1929) but also his second Price and Production (1931) soon set a lasting standard in modern business cycle theory. One of its most striking characteristics is Hayek’s insight that any shortage of capital immediately causes a crises. While classical economic theory never elucidated what causes such a shortage, Hayek made it clear that any overinvestment leads to scarcity of capital, unavoidably compelling a decline in investment and hence leading to the loss of a part of the real capital, produced because of the excessive investment rate.

The vibrating intellectual climate of interwar Vienna provided the stimulating background for many scholarly groups, circles and schools, among them the Vienna Circle of Philosophy, the Vienna School of Psychoanalysis, or Ludwig von Mises’ private seminar”. The famous Mises-Seminar that von Mises conducted in his Chamber of Commerce office was the nucleus of the 4th generation of the Austrian School. Far more than half of these 25 young scholars became world-famous in their respective academic fields – however only after they have left Austria. This “brain drain” had devastating consequences for the intellectual life in Austria and Germany.
Impressed by Hayek’s new business cycle theory, Lord Robbins invited him to lecture at the London School of Economics in the winter of 1931. These 3 lectures proved so successful that he was offered the position of ‘Tooke Professor of Economic Science’ shortly thereafter. At this time, when Lord Keynes’ new theories began to dominate academic and political life Hayek was immediately drawn into a fundamental debate with Keynes and his followers. Due to their inflationary tendency Hayek opposed these theories vigorously and thus became the leading intellectual force against them. However, in view of a recession with widespread unemployment and the dawn of WWII, Hayek’s approach was politically pushed to the sidelines and overshadowed by the Keynesian Revolution.

Despite the fact, that Socialism seems politically established in the form of the welfare state, Although, Hayek contributed three essays to the so-called ‘Calculation Debate’ of the 1930s which forever shattered the theoretical foundations of Socialism. For him the price system is the only mechanism that communicates information and enables us to adapt to circumstances, which neither any planning authority nor we can ever comprehend in its totality. These essays were later collected in his Individualism and Economic Order (1948).
His intensive work on the insoluble economic and moral problems of Socialism, the terror of fascism and the outbreak of World War II forced him to write The Road to Serfdom (1944). Hayek clearly showed there not only the ideological links between Socialism and Fascism. He also and clarified that no variety of socialism, no matter what its name or modified in whatever trendy way, provides any adequate provisions for the preservation of economic and political freedom. Although, Herman Finer tried hard to denounce The Road to Serfdom as ‘a piece of perverted and pompous logic’, it became a bestseller of the late 1940s and markedly influenced Winston Churchill or George Orwell.

The work on The Road to Serfdom led Hayek to concentrate on methodological problems. The ‘Counter-Revolution of Science’ (1941) and ‘Scientism and the Study of Society’ (1942/43) contain probably the most effective refutation of the false notion that the methodology of the natural sciences can be utilized to explain social phenomena and human action. These two essays and Hayek’s ‘The Use of Knowledge in Society’ (1945) are key to the understanding of his work. Especially in the latter Hayek showed how the independent interaction of millions of individuals, each possessing only bits and pieces of knowledge about the totality, creates circumstances that cannot be known by anyone or conveyed to any central authority. It is this unorganized knowledge of the ‘particular circumstances of time and place’ that will bring about a spontaneous social order. The price system is therefore the only mechanism that communicates information and enables us to adapt to circumstances of which we know nothing. Our whole modern social order and well being thus rests on the possibility of adapting to processes that we do not know.

Deeply concerned about the vanishing of individual freedom, Hayek in 1947 organized an international conference of economists, philosophers and historians to discuss and exchange ideas about the nature of a free society and the means to strengthen its principles and intellectual support. This important meeting in Switzerland turned out to be instrumental for the foundation of the ‘Mont Pelerin Society’, an international group of classical liberal scholars.

By the end of 1949 Hayek left the London School of Economics, spent the spring term of 1950 in Fayetteville (AR) and began to teach at the University of Chicago in the fall of the same year. Among his many works published during his 12 years in Chicago only two books shall be singled out. Although, the preliminary ideas for his The Sensory Order (1952) date back to the early 1920s, when Hayek, struggled whether to become a psychologist or an economist is contains his most original and important ideas. This book is a discourse in theoretical psychology and was inspired by the philosophical works of Moritz Schlick and his second-degree cousin, Ludwig Wittgenstein. The second book to be mentioned is Hayek’s classic The Constitution of Liberty (1960) – truly one of the most important books of our time. Here Hayek refines his idea of ‘spontaneous order’ and laid down the ethical, legal and economic principles of freedom and free markets. While for the majority of social philosophers the chief aim consists of setting up an ideal social order through utopian reforms, Hayek’s task is the identification and explanation of rules that enable men with different values and convictions to live together in freedom and a minimum of coercion. These general rules develop through the voluntary and spontaneous interaction of individuals thus forming a social order that permits each individual to fulfill his aims. Hayek spontaneous order is distinguished from the constructivist approach, which interprets all social orders as the product of conscious planning and design.
In 1962 Hayek joined the University of Freiburg/Breisgau and stayed there for seven years. Among his many works, only two books can be mentioned. His Studies in Philosophy, Politics and Economics (1967) contain his important essays on ‘The Results of Human Action but not of Human Design’ and ‘The Intellectuals and Socialism’. His Freiburger Studien (1968) is a collection of important German essays, including his seminal ‘Competition as a Discovery Procedure’ and ‘Kinds of Order in Society.

After becoming professor emeritus in Freiburg Hayek accepted a professorship at the University of Salzburg. In spite of his poor health and intellectual isolation, Hayek nevertheless was able to produce a number of significant works, among them his trilogy Law, Legislation, and Liberty. Here Hayek argues that a spontaneous social order and an organization are totally different and that their distinctiveness is closely related to the two different kinds of rules that prevail in them. There are rules set forth to achieve a certain goal or an end. And there are those rules, which develop spontaneously and only guide processes without aiming at a certain outcome. Hayek also proved that the misleading yet politically popular term ‘Social Justice, can have meaning only in an organization where strict distributive rules apply, but cannot be used as a measure for income distribution in the spontaneous order of free societies. In 1977 he published his truly revolutionary Denationalization of Money where he argued that inflation can be avoided only if the monopolistic power of issuing money is taken away from central banks under government control.

Condemned as theoretically outdated and politically far off base, in 1974 and much to his own surprise Hayek was awarded the Nobel Prize in Economics. Probably to act politically correct he had to share the Prize with a complete adversary, the Swedish socialist Gunnar Myrdal. In his Nobel lecture on ‘The Pretense of Knowledge’ Hayek refuted once again the erroneous assumption of the politically popular but theoretically flawed assumption of Keynesianism.

At the age of 78 he decided to leave Austria and moved back to Freiburg where he continued to lecture, write and travel extensively until the late 1980s when he became ill and never fully recovered. Thus, he could not complete his last book The Fatal Conceit (1989) in which he hoped to develop further his theory of cultural evolution and expose once more the ‘errors of constructivism’ Due to his inability to manage the enormous manuscript, regretfully this book has been edited at times with a heavy hand and thus cannot considered his best.

His work arose and developed from a comprehensive approach to various disciplines that condition and influence one another. His publication list contains well over 40 books and some 260 scholarly essays and articles. Hayek was not only awarded honorary degrees from universities all over the world; he was also the subject of many honors and prestigious orders. As a scholar, a teacher, and a fatherly friend, he came as close to the vanishing ideal of a gentleman as perhaps human frailty will ever permit. He died in Freiburg/Br. on March 23, 1992.


* Kurt R. Leube is Professor (emeritus) und Research Fellow (emeritus) at the Hoover Institution, Stanford University and Academic Director of ECAEF (European Center of Austrian Economics) in Vaduz, Principality of Liechtenstein.

Semantic Traps: Distorting Debates Through Definitions

Daniel Issing – blog author at studentsforliberty.org – reflects on the seminar ‘Semantic Traps: Politics with Loaded Terms’. It was held on June 9-11, 2016 in Vaduz (FL).

Every libertarian is well aware of the odd name defenders of individual freedom use to label their position nowadays. In fact, the word “libertarianism” is a fairly new creation, emerging in the second half of the last century. It was coined to distinguish this position from those who call themselves “liberal”, a word that once represented a commitment to laissez faire and free markets. Today, however, it means the very opposite and is more akin to the socialist position. The redefinition of terms for political purposes was a very successful marketing coup by social democrats, particularly in the United States.

Is it possible to win arguments in the political arena by simply using words that are either so vague that we cannot assign a precise meaning to them or are systematically misleading? To what extent can the parties to the debate gain an advantage by confusing their opponents through their use of words? Is the progressive corruption of our language a threat to civil liberties? These and other question formed the starting point of a seminar aptly named “Semantic Traps: Politics with Loaded Terms”, which was co-organized by ECAEF, PERC and LAF. Thanks to Kurt Leube – program’s Academic Director and a very eager and generous supporter of ESFL – I was invited to participate in what turned out to be an extremely insightful weekend. But let us start from the beginning …

Read the full article here ->
Semantic Traps

True Entrepeneurship Happens in Free Market Economies

Address by Herman Mashaba* at the Inaugural Herman Mashaba Lecture on Entrepreneurship at Central University of Technology, Bloemfontein (South Africa) in November 2014.

Just over two years ago I received a surprise call from this university with the notice to award me with an Honorary Doctorate in Business Administration by the Faculty of Management Sciences. Now two years later, another total surprise to start an annual Herman Mashaba Lecture on Entrepreneurship. I feel particularly honoured and humbled by this recognition. This annual lecture dedicated to the promotion and development of entrepreneurship could not have come at the better time in the short history of our new country. Entrepreneurship, in particular the promotion of small business development, is something I have dedicated the latter part of my life to. Something I hope my country South Africa will accept and embrace, is the fact that true entrepreneurship happens in free market economies. These true entrepreneurs are the potential engines to propel and steer our economy to arrest the three major challenges of high unemployment, poverty and inequality being faced by our country.

Entrepreneurs are innovators and they cannot function in a constricted, highly regulated environment. They need the freedom to try new things, to experiment, and to challenge entrenched methods of doing business. In order to function properly, they need a free market economy. Personal choice is one of the most important characteristics of a free market economy. To anyone living in a free economy, choice is taken for granted. Under an authoritarian regime, such as apartheid, choice is one of the main casualties. Such important matters as where to work, what school to attend, what work to do, who to socialise with, who to marry, who to employ, were all taken away! The limitations on choice were endless. The increase in choices since the transition to democracy are also endless. We must protect those choices, not only for ourselves but for all South Africans. We must not allow bureaucracy and unnecessary laws and regulations to chip away at our freedom of choice.

Voluntary exchanges with others are a vital aspect of a free market economy. Buying, selling, exchanging in many different ways. There again our exchanges were limited under apartheid. Some had more exchange rights than others but if everyone is not free to exchange, then none are really free to exchange. Our exchanges can be with local or foreign parties, in respect of goods, services, labour and an infinite variety of other interactions. In every case we must protect our rights to freely exchange with others. Freedom to enter and compete in markets is an important factor in a free market economy. When I started my business career as a door to door salesman in the 1980’s, I was restricted by apartheid legislation, in particular the pass laws and group areas acts, where I could sell. These limitations were severe. I was fortunate that I found my way around these limitations, but it taught me that such rules impact severely on the people, and are not part of a free economy. Whatever the nature of the market, whether local or foreign, there must be freedom of entry.

Protection of people and their property from aggression by others is a crucial aspect of a free market economy. This means a well-trained and dedicated police force that carries out its functions efficiently and correctly. It also means that there must be efficient and well-functioning law courts to dispense justice and adjudicate on disputes. The rule of law must be applied, which means that the law must be applied equally to everyone, including government. You will realise that what I am describing as a free market economy is a well-structured environment in which individuals can function fully and freely, enjoy maximum personal choice, without unnecessary imitations, as long as they respect the right of others to enjoy the same rights …  continue reading ->  PDF


* Herman Mashaba is Herman Samtseu Philip Mashaba is Director of Liberty Lane Trading at Assessment College of South Africa (Pty) Ltd. He also serves as Chairman, CEO and Director of several other enterprises. In 1985 he founded the Cosmetics Company “Black Like Me”.

Die Schulden im 21. Jahrhundert

Daniel Stelter, Die Staatsschulden im 21. Jahrhundert
Daniel Stelter, Die Staatsschulden im 21. Jahrhundert

ECAEF-Buchempfehlung (Austrian School of Economics applied!) – Daniel Stelter* “Die Schulden im 21. Jahrhundert – Was ist drin, was ist dran und was fehlt” feierte kürzlich Buchpremiere.  Die gute Nachricht für Befürworter der Österreichischen Schule der Ökonomie: Daniel Stelter widerlegt mit seiner Schrift Thomas Piketty. Stelters Buch von nur 160 Seiten ist ein knalliger Gegensatz zu Piketty’s 800 Seiten starkem „Das Kapital im 21. Jahrhundert“. Und um noch eins draufzusetzen, nennt Stelter sein Büchlein „Die Schulden im 21. Jahrhundert“.
Stelter zeigt eindrucksvoll, dass Piketty die Bedeutung der Schulden völlig unterschätzt. Nur wer die Dynamik von Verschuldung und Entschuldung verstehe, könne aber Vermögensverteilung und Wirtschaftskrisen verstehen und Lösungen erarbeiten. Die diesbezüglichen Argumente des Autors sind schlüssig und überzeugend.
Aber es gibt auch eine schlechte Nachricht: Selbst Stelter weiss keinen schmerzlosen Ausweg aus der expliziten und impliziten Schuldenkrise. Die Aussicht auf höheres Wirtschaftswachstum stösst schon aus Gründen der Demografie an Grenzen; — die Bevölkerung wird immer älter und schrumpft, die Gesamtproduktivität nimmt deshalb eher ab als zu. Eine moderate Inflation will und will sich nicht einstellen. Wenn das ‘Gelddrucken’ so weitergeht, sei eher eine Hyperinflation wahrscheinlich – eine Katastrophe ohnegleichen! So bleibt als einzige Lösung die Sanierung der Finanzen durch einen Schuldenschnitt. Für Piketty ist der Schuldenschnitt eine Frage der sozialen Gerechtigkeit, für Stelter ein solcher Schritt  nur ökonomische Logik.

*) Daniel Stelter ist Gründer des Forums Beyond the Obvious und davor Senior Partner und Managing Director bei The Boston Consulting Group – BCG.