Mises vs. the Austro-Marxists

[caption id=”attachment_12130” align=”alignright” width=”131”] Rudolf Hilferding[/caption] Paul Krugman isn’t the first economist to project his own faults onto opponents: adversaries of Austrian economics have been doing it since the early days. One lesser-known example is Rudolf Hilferding, a contemporary of Mises and member of the “Austro-Marxist” circle, which appeared in Vienna around the turn of the century.[1] Hilferding was a student of medicine, but regularly attended Böhm-Bawerk’s seminar along with Mises, Schumpeter, and many of the best young social scientists of pre-WWI Austria.[2] Hilferding’s first foray into economics was a response to Böhm-Bawerk’s critique of Marx; it was discussed at length in the seminar, although Mises recalls that Otto Bauer, another leading Austro-Marxist, “openly admitted to me that Hilferding did not grasp the problems at hand” (Memoirs, 2009, p. 31). In any case, in 1910 Hilferding published Finance Capital, an influential discussion of the decline and fall of capitalism. The book was intended to flesh out Marx’s thought on the subject, which had remained somewhat sketchy; however, Austrians will find a lot to chew on in Finance Capital, which offers an odd mixture of intriguing and flawed ideas (see here and here). In particular, Hilferding argued that in the last stage of capitalism, financial interests would grow to dominate the economy, and, facing economic crises of their own making, would rely on imperialism to maintain their eroding power base. However, despite suggesting some important ideas, Hilferding was a vocal critic of Austrian economics. In 1912, in a review of Mises’ The Theory of Money and Credit, he attacked the Austrians and accused them of unrealistic and unproductive theorizing:

The leaders of the marginal utility theory have a very lofty opinion of their doctrine. In spite of the fact that this arrogance involves a psychological process which actually works in opposition to the methodology the school professes, they transmit it to their followers. It is inspired by a truly religious faith, which even an almost 40 year voyage through the wilderness of fruitless speculation has done nothing to diminish. This doctrine actually appears to be undying, to enjoy a kind of super-immortality. The school lives, so to speak, by suicide. Every marginal utility theoretician inevitably begins by referring resolutely to the very serious errors perpetrated by his predecessors… But this positive exposition is followed by a negative portion. This second part furnishes material to be similarly demolished in tum by successors of the cheerful executioner… In pious Austria, monuments are erected in memory of every such intellectual disaster… Among the school’s unsolved problems—and all its problems are unsolved—the monetary problem naturally occupies a place of prime importance. It is the real cross its theoreticians bear. (“Theorie des Geldes und der Umlaufsmittel,” 1993 [1912], p. 179)

Furthermore, the problem of applying subjective value theory to money indicates “[t]he bankruptcy of the subjective theory of value, [and] its inability to explain the basic problem of economics” (p. 180). Or to take another example, in Mises’ explanation of the regression theorem, “The wealth of metaphors only betrays the vagueness of the ideas” (p. 180). These criticisms involve some serious projection on Hilferding’s part. In fact, it was Marx’s system that was flawed from the beginning. He failed to move beyond the errors of the classical economists, building his system on the spurious labor theory of value. When his theory failed to explain real-world problems of value and price, he buried them in vague and obscure rhetoric. It was Marx then whose problems were unsolved after decades of “voyage through the wilderness of fruitless speculation”—unsolved both conceptually and in the literal sense that he died before finishing the last two volumes of Das Kapital. And it was Marx whose disciples in economic theory had begun to give up the fight, turning their attention increasingly to philosophy and socialist politics, where Marxism enjoyed its most profound impact. Even at the time, Hilferding’s claim that Austrian economics was simply a mess of unsolved problems was clearly false—in expounding the subjective theory of value, Menger had actually shown just the opposite. The subjective theory works because it explains value and prices in the real world, and thus solves the problems that plagued classical economics (and even anticipates problems in contemporary economics). Likewise, the regression theorem is a logical conclusion of subjectivism that resolves a serious dilemma in value theory. Hilferding can’t help but acknowledge Mises’ insight: at the end of his extremely negative review, he actually concedes that Mises’ reasoning is consistent, but falls back on the claim that his whole project is flawed because it rests on the subjective theory of value. The fact that this dispute turns largely on fundamental questions of value only highlights how important it is to understand the distinctly Mengerian, Austrian view of economics, the misunderstanding of which is the cause of much controversy with other schools of thought. [1] The Austro-Marxists built on Marx’s foundation using, among other things, ideas taken from Neo-Kantianism and early logical positivism. One of their defining characteristics though was a connection to Austrian economics, especially Böhm-Bawerk, whose seminar at the University of Vienna provided a kind of proving ground for their ideas. [2] Hilferding went on to hold several important positions, including Finance Minister of Germany during the hyperinflation of 1923. Like Mises though, Hilferding’s Jewish ancestry (along with his political beliefs) made him a target of the Nazis. However, he was not as fortunate as Mises in escaping his pursuers: he was eventually turned over to the Gestapo by the Vichy government, tortured, and committed suicide in prison.