The Next Generation of Austrian Economics: Essays in Honor of Joseph T. Salerno

Austrian economists are justifiably proud of the rich heritage handed down by Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, Murray Rothbard, and their contemporaries, and Austrians are keenly interested in the origin and development of their ideas. An appreciation for history has led some modern economists, mistakenly, to see the Austrian tradition as static, rigid, and backward-looking, focused on the achievements of the past rather than discoveries and new developments.

As the contributions to this volume attest, nothing could be further from the truth. Austrian economics is a vibrant, healthy, growing tradition, confident in its core propositions while filled with lively debates and exciting new advances. These authors of the essays collected here build upon, refine, extend, and challenge the contributions of their teachers, just as previous generations have done, all the way back to Menger.

Joseph Salerno’s own work is a vibrant illustration of this pattern. Salerno has made seminal contributions to the development and application of Austrian economics, while remaining within the broad, causal-realist tradition pioneered by Menger and refined by Böhm-Bawerk, Mises, and Rothbard. Salerno’s early work was in monetary economics and the history of economic thought. His doctoral dissertation (Salerno 1980) offered a novel interpretation of the “bullionist controversy” and subsequent developments in British monetary theory and policy. He also published a number of important papers on the largely-neglected French liberal school of Say, Destutt de Tracy, Dunoyer, Bastiat, and Molinari, among others, and their important predecessor (and proto-Austrian) Cantillon (Salerno 1978; 1983; 1988). Along with Rothbard he developed a distinctly Austrian approach to measuring the money supply (Rothbard 1978; Salerno 1987), one consistent with Austrian concepts of the nature and role of money.

It was his work on money that led Salerno to a significant breakthrough in the interpretation of Mises’s economics. It had long been recognized, inside and outside the Austrian school, that Mises’s great accomplishment in his Theory of Money and Credit (1912) was an integration of monetary theory into the general, subjectivist, marginalist understanding of value, prices, and markets shared by the Austrian, Walrasian, and Marshallian schools. Prior to Mises, prices were typically analyzed as exchange ratios between goods, not ratios between goods and a monetary unit. Money was a “veil,” overlaying (or obscuring) underlying economic relationships. Mises showed that economic actors evaluate units of money the same way they evaluate discrete units of other goods and services, namely in terms of marginal utility, and that the general theory of economic value also explains the value of money. In a perceptive Postscript to a reprint of Mises’s 1920 essay on socialist calculation, Salerno (1990a) highlighted the degree to which Mises’s analysis of socialism flowed from his analysis of money. As Salerno (1990a, p. 35) put it:

Mises’s pathbreaking and central insight is that monetary calculation is the indispensable mental tool for choosing the optimum among the vast array of intricately-related production plans that are available for employing the factors of production within the framework of the social division of labor. Without recourse to calculating and comparing the benefits and costs of production using the structure of monetary prices determined at each moment on the market, the human mind is only capable of surveying, evaluating, and directing production processes whose scope is drastically restricted to the compass of the primitive household economy.

In other words, what Mises means by “economic calculation” is monetary calculation. The core problem facing the government planner is not that he lacks the “knowledge of particular circumstances of time and place,” as Hayek (1945) famously put it, but that he lacks the real-world monetary prices needed to weigh alternative benefits and costs, to estimate rates of return on investment, and hence to allocate resources rationally in a complex world.

This insight led to a profound revaluation of Mises’s contributions and the role of Mises’s work in the history of economic thought. By the 1980s Hayek’s profound and influential social theory, which emphasized the challenges of economic organization under dispersed knowledge and limited understanding, and was deeply wary of attempts to reconstruct society according to some “rational” plan, was embraced by most Austrian economists. Even today, Hayek’s pithy line from The Fatal Conceit (1988, p. 76) — “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design” — adorns many an email signature line and blog masthead. But, as Salerno carefully demonstrated, this anti-rationalist, incrementalist, evolutionary, “English” approach to economics, law, and social theory was particular to Hayek, and not at all shared by Mises.

In “Ludwig von Mises as Social Rationalist” (1990b) and “Mises and Hayek De-Homogenized,” (1993), Salerno offered a different interpretation of Mises and Mises’s place within the Austrian tradition. Salerno argued that Menger’s younger colleagues Böhm-Bawerk and Weiser extended Menger’s approach along distinct, sometimes contradictory, paths. What we might call a Wieser-Hayek-Kirzner strand of Austrian economics emphasizes disequilibrium, the informational role of prices, and profit-seeking behavior as an equilibrating force. In contrast, the Böhm-Bawerk-Mises–Rothbard strand emphasizes monetary calculation and the entrepreneur as a purposeful, forward-looking agent. In my own work on the entrepreneur (Klein 2008a; Foss and Klein 2012; Klein and Bylund 2014) I have highlighted two distinct Austrian interpretations of the entrepreneurial role. In Kirzner’s (1973) influential formulation, the entrepreneur is a largely passive “discoverer” of profit opportunities created by disequilibrium “gaps” in the current structure of market prices. As I read Mises — largely influenced by Salerno’s interpretation — the entrepreneur plays a different role in Mises’s system, namely deliberate, active, purposeful action in the face of uncertainty in pursuit of economic gain. In the former approach, the market does the work, and the entrepreneur need not be “rational,” only alert to preexisting opportunities. In the latter, the entrepreneur makes use of monetary calculation to plan and act to bring about an improvement in market conditions. I view my own work here as largely an extension of Salerno’s interpretation of Mises.

While some of Salerno’s contemporaries such as Israel Kirzner and Leland Yeager challenged Salerno’s “two Austrian traditions” thesis (Yeager 1994; Kirzner 1999), Salerno’s intellectual mentor, Murray Rothbard, embraced it. Indeed, Rothbard hailed Salerno’s work on calculation and knowledge as a major advance in the Austrian tradition, and an improvement on his own understanding. Rothbard (1989) described Salerno’s “Social Rationalist” paper as “a wonderful, superb advance and breakthrough, not only in the history of economic thought, but also in economic theory itself. ... In a sense, this sort of breakthrough experience is something like the joy of an intellectual conversion.” Rothbard went on to note that while he had harbored reservations about Hayek’s emphasis on the division of knowledge and coordination of plans, he had never quite been able to articulate why he felt uncomfortable about Hayek’s approach to the calculation problem. “Even though steeped in Mises, I had never really paid enough attention to his society-as-division-of-labor theme, and the crucial rationalism there.” Rothbard also described Salerno’s “Mises and Hayek De-Homogenized” as “a magnificent achievement.”

Most important, Rothbard (1989) saw Salerno’s contributions as exemplifying the general pattern of advance and development within the Austrian school:

Your article also points up an important point for the history of thought generally and for Austrian economics in particular. People have bitterly accused me of resisting all change in Austrian economics and of denouncing any differing opinions. Not true: I welcome change and advances in Austrian theory provided that they are true, i.e., that they work from within the basic Misesian paradigm. So just as I think I have advanced beyond Mises in developing the Misesian paradigm, people like Hans Hoppe and yourself have advanced the paradigm still further, and great!

Like the contributors to the present volume, I hope to make my own incremental advances to the Austrian tradition by building on Salerno’s work, just as Salerno built on Rothbard, Rothbard built on Mises, and so on.

Another of Salerno’s important contributions is his reinterpretation of the rise, decline, and rebirth of the Austrian tradition itself. Most accounts of the Austrian school trace its demise to the 1930s and 1940s, as Austrian capital theory was attacked by Knight and Sraffa and Austrian monetary and business-cycle theory was attacked by Keynes and his followers. The rise of positivism and mathematical formalism rendered the Austrians’ causal, verbal style obsolete anyway. Then — according to the typical account (e.g., Vaughn 1994) — the Austrian school experienced a dramatic revival following the South Royalton conference and Hayek’s Nobel Prize, both of which occurred in 1974.

Salerno offers two important corrections to this story. First, he argues that the core of the Austrian system as it developed in the late nineteenth and early twentieth centuries was not its distinct approach to money and the business cycle, but Menger’s causal, realistic account of price formation (Salerno, 1999). Austrian economics was not — as even some contemporary Austrian economists seem to believe — verbal Walrasian or Marshallian microeconomics plus capital-based macroeconomics (and spontaneous order and plan coordination and the knowledge problem as additional glosses). Instead, Austrian economics was a different kind of microeconomics. As Salerno demonstrated, Mengerian price theory peaked before 1920 following the contributions of Böhm-Bawerk and a few European Mengerians, and the particularly important work of the English economist Philip Wicksteed and the Americans John Bates Clark, Frank Fetter, and Herbert Davenport. Unfortunately, during this time most younger European, British, and American economists were adopting Marshall’s eclectic, mechanistic approach, and interest in Menger faded. More important, the “fourth” generation of the Austrian school, led by Hayek and including Morgenstern, Haberler, and Machlup, were heavily influenced by Schumpeter, who had introduced Walrasian price theory to the German-speaking world. In other words, by 1920 most economists, including the younger Austrian economists, had abandoned the causal, realistic approach to value, prices, and markets offered by Menger and Böhm-Bawerk.

The importance of Mises’s Human Action (1949) is not, in this interpretation, simply that it provided an overview of Mises’s mature thinking on a variety of economic topics — a sort of advanced Austrian textbook. As Salerno (1994; 1999) argues, Mises’s treatise offered no less than a rehabilitation and restatement of Mengerian price theory, one further developed by Rothbard in his Man, Economy, and State (also widely mistaken for a textbook). Salerno is himself a major contributor to this revival of Austrian price theory, in particular by highlighting and developing the various equilibrium constructs used by Mises and Rothbard (e.g., the “plain state of rest,” the “final state of rest,” and the “evenly rotating economy,” and what Salerno (1994, p. 99) calls the “Wicksteedian state of rest,” a concept implicitly, but not explicitly, analyzed by Mises and Rothbard).

Second, Salerno (2002) argues that the Austrian revival should be dated not from 1974, starting with the South Royalton Conference, but from 1962–63, when Rothbard published Man, Economy, and State (1962), America’s Great Depression (1963), and What Has Government Done to Our Money? (1963), the works that sparked the younger South Royalton participants’ interest in Austrian economics. Interestingly, these works all deal with what I have called “mundane Austrian economics” (Klein 2008b) — the analysis of value, prices, markets, money, capital, and government intervention — and not the more esoteric philosophical, methodological, and political topics that interest so many Austrians today. Salerno’s introduction to the 2009 edition of Man, Economy, and State is a major contribution to doctrinal history in its own right, pointing out Rothbard’s many advances beyond Mises, particularly in the areas of capital theory and monopoly theory.

In all these revisionist essays, Salerno demonstrates a keen grasp of the underlying theoretical and doctrinal issues, bringing out nuances and subtleties overlooked by other writers. Indeed, many Austrian writings on the Austrian school paint a somewhat tedious and even maudlin picture in which the major thinkers and writers agree on fundamental issues and are united in a desperate battle against socialists, Keynesians, and interventionists. As Salerno points out, the truth is far more interesting. While the early and later Austrians shared many core constructs, theories, and doctrines, there was a tremendous variety of ideas and approaches within the Austrian school, as there continues to be today. The Austrian tradition from its inception was a living, breathing, and lively intellectual movement, filled with internal as well as external controversy. This variety continues to the present, and it is important to review, analyze, sometimes synthesize, and other times disentangle the different theories and methods. Far from indicating weaknesses within Austrian economics, these controversies demonstrate its strength. Vive les différences!

To summarize, Salerno’s contributions range across a variety of subjects (money, price theory, comparative economic systems, doctrinal history, and more) and employ a variety of methods, while remaining squarely in the causal-realist tradition established by Menger, Böhm-Bawerk, the Anglo-American Austrians, Mises, and Rothbard. He is an exceptionally clear thinker and an excellent writer, witty and erudite as well as thoughtful and informative.

I met Joe Salerno in 1989 at an early edition of the Mises Institute summer instructional conference (later expanded into today’s “Mises University”). He was already a rising star in the Austrian movement, but came across then — as he does now — as a regular guy, a wisecracking, sharp-tongued, unpretentious, rough-hewn fellow from New Jersey. He remains one of the funniest people I’ve ever met, and I can’t recall how many hours I’ve spent laughing with him (and his charming wife Helen). I’ve lectured, along with Joe, at the Mises University for the last twenty years, and he is enormously popular with students, for his humor as well as his knowledge.

Joe took over for Guido Hülsmann as director of the Mises Summer Fellows Program in 2004, and it has been a joy to watch him embrace the role of mentor for dozens of younger scholars, many of whom have contributed to the present volume. Besides having a huge influence on his contemporaries, Joe has become the leader of the Austrian movement to its younger practitioners. Speaking for my fellow Austrians, I can say, with pleasure, that we are all Salernians now.

References

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——. 1988. The Fatal Conceit: The Errors of Socialism. In W. W. Bartley III, ed., The Collected Works of F. A. Hayek. Chicago: University of Chicago Press.

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——. 1999. “Mises and His Understanding of the Capitalist System.” Cato Journal 19: 215–32.

Klein, Peter G. 2008a. “Opportunity Discovery, Entrepreneurial Action, and Economic Organization.” Strategic Entrepreneurship Journal 2: 175–90.

——. 2008b. “The Mundane Economics of the Austrian School.” Quarterly Journal of Austrian Economics 11: 165–87.

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——. 1989. Letter to Joseph T. Salerno, March 28.

Salerno, Joseph T. 1978. “Comment on the French Liberal School.” Journal of Libertarian Studies 2: 65–68.

——. 1980. “The Doctrinal Antecedents of the Monetary Approach to the Balance of Payments.” PhD Dissertation, Department of Economics, Rutgers University.

——. 1983. “The Influence of Cantillon’s Essai on the Methodology of J.B. Say: A Comment on Liggio.” Journal of Libertarian Studies 7: 305–16.

——. 1987. “The ‘True’ Money Supply: A Measure of the Supply of the Medium of Exchange in the US Economy.” Austrian Economics Newsletter 6: 1–6.

——. 1988. “The Neglect of the French Liberal School in Anglo-Saxon Economics: A Critique of Received Explanations.” Review of Austrian Economics 2: 113–56.

——. 1990a. “Postscript: Why a Socialist Economy is ‘Impossible.’” In Ludwig von Mises, Economic Calculation in the Socialist Commonwealth. Auburn, Ala.: Mises Institute, 1990, pp. 34–46.

——. 1990b. “Ludwig von Mises as Social Rationalist.” Review of Austrian Economics 4: 26–54.

——. 1993. “Mises and Hayek Dehomogenized.” Review of Austrian Economics 6: 113–46.

——. 1994. “Ludwig von Mises’s Monetary Theory in the Light of Modern Monetary Thought.” Review of Austrian Economics 8: 71–115.

——. 1999. “The Place of Mises’s Human Action in the Development of Modern Economic Thought.” Quarterly Journal of Austrian Economics 2: 35–65.

——. 2002. “The Rebirth of Austrian Economics — in Light of Austrian Economics.” Quarterly Journal of Austrian Economics 5: 111–28.

——. 2009. “The Ambition of Rothbard’s Treatise.” In Murray N. Rothbard, Man, Economy, and State with Power and Market, Scholar’s Edition. pp. xix–l. Auburn, Ala.: Mises Institute.

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