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Economics

Austrians On the Socialist Front, Part One

By
Kristoffer Hansen
|
November 15, 2019
From Carl Menger to the present, the Austrian School has taken up a sustained critique of socialism as it has developed over the decades.
Economics

Austrians On the Socialist Front, Part One

By

Kristoffer Hansen

|
November 15, 2019

From Carl Menger to the present, the Austrian School has taken up a sustained critique of socialism as it has developed over the decades.

The Early Critiques

An enduring theme of Austrian economics has been a deep engagement with socialist theory in all its forms. Upon the birth of the Austrian school in the 1880s and 1890s, academic engagement with Marxist socialism was intense in Vienna. The arguments were generally about theoretical points, with the theory of marginal utility opposing the labor theory of value as subjective value theory gradually increased in popularity. But they also touched on the practical possibilities of a socialist state. Friedrich von Wieser, for instance, argued that the socialist state could not possibly be administered according to the socialist theory of value.

The Austrian economists were not blind to other forms of socialism. While Carl Menger, the founder of the Austrian school as a unique economic tradition, did not engage directly in the debates between Marxists and Austrians, part of his criticism of the German historical school was its embrace of socialism. The historical school of jurisprudence was conservative in outlook, as it opposed reforms and revolutions imposed on societies and laws that had developed organically. The German economists who took inspiration from Friedrich Carl von Savigny and the other historicist jurists, on the other hand, did not follow this basic orientation:

A historical school of economists comparable to the historical school of jurists, which would have defended existing economic schools and interests against the exaggerations of reform thought in the field of economy, but especially against socialism, would have fulfilled a certain mission even in Germany and prevented many a later setback....
Nothing was further from the thoughts of the historical school of economists in Germany than the idea of an analogous conservative orientation in the field of economy. For this the historical orientation of German economists was something much too superficial and lacking in depth. On the contrary, its proponents, in a practical respect, lined up even a short time ago almost completely with the liberal policy-makers of progress in the field of economics, until no small part of them most recently offered the rare spectacle of a historical school of economists with socialistic tendencies.

Menger also extended this criticism of socialistic tendencies to the pragmatism of the classical economists: Adam Smith and his followers had failed to understand the development of social institutions, which had led them to believe that these could always be changed and reformed for the better by express political action. They championed a pragmatic approach to economic phenomena, and had no understanding for the need to preserve the organic structures of society and economy:

What characterizes the theories of A. Smith and his followers is the one-sided rationalistic liberalism, the not infrequently impetuous effort to do away with what exists, with what is not always sufficiently understood, the just as impetuous urge to create something new in the realm of political institutions—often enough without sufficient knowledge and experience ...
Against these efforts of the Smithian school there was revealed to our science a vast realm of fruitful activity in the sense of the orientation of Burke-Savignynot in the sense of simply maintaining what had organically developed as unassailable, as if it were the higher wisdom in human affairs as opposed to the intended ordering of social conditions.
The aim of the efforts under discussion here had to be, on the contrary, the full understanding of existing social institutions in general and of organically created institutions in particular, the retention of what had proved its worth against the one-sidedly rationalistic mania for innovation in the field of economy. The object was to prevent the dissolution of the organically developed economy by means of a partially superficial pragmatism, a pragmatism that contrary to the intention of its representatives inexorably leads to socialism.

We see here, in embryo, engagement with both a revolutionary socialism that advocates the nationalization of the means of production, on the one hand, and on the other a criticism of doctrines and policies that will lead, eventually, to state control of the whole economy, to socialism with the outward appearance of capitalism. Or, to use Mises’s later terminology, we see engagement with both socialism of the Russian pattern and socialism of the German pattern. From and after the 1880s, Austrian economists were deeply critical of both forms of socialism, and the later arguments developed by Mises and others were strongly rooted in these early controversies.

Classical economists, in sharp contrast, never engaged the socialists at the same level. J. S. Mill, 4 for instance, only brought up the problem of incentives and the distribution of tasks and left it at that: in the socialist state, who would take out the trash? There clearly are undesirable jobs that nobody wants to do. In a market society, workers are attracted to these jobs by the appeal of higher wages, and, more generally, everybody is enticed to work by the expectation of private gain. There cannot be such enticements in a socialist society where everybody shares equally in the social product, and thus the incentives encourage people to be, in the parlance of neoclassical public goods theory, free riders on the efforts of the rest of society.

The problem with these arguments is not that they are wrong, but rather that they do not touch the core of the socialist postulates. It might be true that now, under the capitalist system and the rule of selfishness, workers will only work if they can profit from it individually; they will only undertake difficult and unappealing tasks if it redounds to their own private interest. But, the socialists argue, in the socialist state things will be different: everyone will freely offer all their labor, happy and satisfied in the knowledge that labor is not oppressed and no one is expropriated. In short, selfishness will disappear from society with the advent of socialism and with it, the incentive problem. Fantastical as this theory may be, it is not answered simply by an appeal to selfishness, as this is how socialists would understand any talk of the need for incentives and appealing to the individual’s private interests—more is required to refute the socialists.

As with revolutionary socialism, neither were the classical economists and their neoclassical epigones systematic in their analyses of creeping economic interventionism. The famed neoclassical economist Alfred Marshall was explicitly favorable toward the system of free enterprise, but he was also unequivocal about the possibilities of pragmatic government actions to improve social welfare:

We are told sometimes that everyone who strenuously endeavours to promote the social amelioration of the people is a Socialist—at all events, if he believes that much of this work can be better performed by the State than by individual effort. In this sense nearly every economist of the present generation is a Socialist. In this sense I was a Socialist before I knew anything of economics; and, indeed, it was my desire to know what was practicable in social reform by State and other agencies which led me to read Adam Smith and Mill, Marx and Lassalle, forty years ago.

A desire to use the state to improve the conditions of the general public is a popular tendency in the modern era, but the kind of pragmatism Marshall advocated lacks awareness of the dangers posed by piecemeal socialistic legislation.

Böhm-Bawerk’s Seminar

Battleground of Ideas No fact attests more eloquently to the Austrian engagement with socialism than the attention Eugen von Böhm-Bawerk devoted to Marxism and Marxists. His criticisms of Marxism are contained principally in his History and Critique of Interest Theories from 1884, in which he engages critically with Marx’s exploitation theory of interest, as well as his Karl Marx and the Close of His System, published in 1896. In the latter work, Böhm-Bawerk critically undermines Marxism based on a central contradiction in Marx’s system that springs from his value theory: surplus value (the excess value created by the laborers over the wages they are actually paid) can only be created from capital invested in labor power, what Marx calls variable capital, while capital invested in the means of production (factories, equipment, resources, etc.), what Marx calls constant capital, merely maintains its own value. Under Marxist theory, it is clear that the rate of profit must be greater the greater the proportion of variable capital is to constant capital.

Surplus value, it will be recalled, is the foundation for the capitalist’s profit in Marx’s system, so we should expect the rate of profit to differ accordingly as there was a greater or smaller proportion of variable capital employed in a given industry or enterprise. This clearly and sharply contradicts reality, as the rate of profit was calculated on total capital, and that it tended to be equal in different industries, regardless of the proportion of variable and costant capital employed in said industries. It is this contradiction that Friedrich Engels had claimed would finally be settled in the long-awaited third and final volume of Marx’s Capital. And yet, as Böhm-Bawerk demonstrates in his exposition, Marx failed to save his system from his own contradiction:

To the question of the problem of value the followers of Marx reply first with their law of value, that commodities exchange in proportion to the working time incorporated in them. Then they—covertly or openly—revoke this answer in its relation to the domain of the exchange of separate commodities, the one domain in which the problem has any meaning, and maintain it in full force only for the whole aggregate national produce, for a domain therefore in which the problem, being without object, could not have been put at all....
It is quite true that the total price paid for the entire national produce coincides exactly with the total amount of value or labor incorporated in it. But this tautological declaration denotes no increase of true knowledge, neither does it serve as a special test of the correctness of the alleged law that commodities exchange in proportion to the labor embodied in them. For in this manner one might as well, or rather as unjustly, verify any other law one pleased—the law, for instance, that commodities exchange according to the measure of their specific gravity.
For if certainly as a ‘separate ware’ one pound of gold does not exchange with one pound of iron, but with 40,000 pounds of iron; still, the total price paid for one pound of gold and 40,000 pounds of iron taken together is nothing more and nothing less than 40,000 pounds of iron and one pound of gold. The total weight, therefore, of the total price—40,001 pounds—corresponds exactly to the like total weight of 40,001 pounds incorporated in the whole of the commodities. Is weight consequently the true standard by which the exchange relation of commodities is determined?

Not only had Marx failed in his attempt, but the effort to resolve it had in fact been quietly abandoned, the resignation hidden by a sleight of hand and the long delay in publication of the final volume of Capital. Consequently, Böhm-Bawerk concludes that the Marxist system is dead: “The Marxian system has a past and a present, but no abiding future.” And yet, support for Marxism would linger on, as it speaks to the desires and wants of its proponents, not their intellects.

Böhm-Bawerk’s role in the debate with soialists was not simply as a noteworthy polemicist, however. The Marxists recognized that he was the leading opponent of their ideology and, consequently, they flocked to his seminar to engage the great old man himself. Among their number were Otto Bauer, who would be a leading Austrian socialist after the Great War, Nikolai Bukharin, a Russian economist, who would be a leading proponent of the Soviet Union’s “NEP” (New Economic Policy), Otto Neurath, who immediately after the Great War advanced the idea that calculation in kind could replace monetary calculation, and who was a high official in the short-lived Bavarian Soviet Republic, and Rudolf Hilferding, who engaged Böhm-Bawerk in polemics and would become a high-ranking official of the German Social Democratic Party.

Naturally, many (classical) liberals and other nonMarxists also attended Böhm-Bawerk’s seminar, foremost among them Ludwig von Mises. And thus, we can understand the intense scholarly and academic debates that were fueled by this collection of attendees. Unfortunately, Böhm-Bawerk’s untimely death in 1914 brought an end to the seminar, but the void left was soon filled by one man: Ludwig von Mises

About the author

Kristoffer Hansen is currently working on his PhD dissertation on monetary interventionism and agriculture at the University of Angers in France. He has thrice been a Summer Fellow at the Ludwig von Mises Institute.

from the editor's blog