Great Austrians


Juan de Mariana
(1536 - 1624)

Mariana was a Spanish Jesuit priest who taught at the University of Salamanca. In many respects the scholastic tradition centered at Salamanca was a proto-Austrian synthesis of subjectivist economics and political liberty. In 1598 Mariana wrote De rege et regis institutione (“On the king and the royal institution”), defending tyrannicide under certain conditions. His most important book, De monetae mutatione (“On the alteration of money”), appeared in 1605. Mariana observed that inflation “taxes those who had money before and, as a consequence thereof, are forced to buy things more dearly.”


Richard Cantillon

Cantillon is regarded by many historians of economic thought as the first great economic theorist. His legacy consists of one remarkable treatise, Essai Sur la Nature du Commerce en Général, which William Stanley Jevons dubbed the “Cradle of Political Economy.” Murray Rothbard considered Cantillon—and not Adam Smith—as the “founding father of modern economics.”

Cantillon anticipated many features of the Austrian School. He was the first economic theorist to explore the role of the entrepreneur. His method of analysis proceeded deductively to uncover the “natural” relations of cause and effect in the economy.

His most famous result is the realization that injections of money do not cause all prices to rise proportionately in one fell swoop, but instead ripple throughout the economy. These “Cantillon effects” redistribute wealth into the hands of those who receive the new money early in the game. Cantillon’s analysis of the “real” disturbances caused by monetary inflation was a necessary component in the Austrian theory of the business cycle.


Anne Robert Jacques Turgot

Turgort was arguably the leading economist of 18th century France. His great work, “Reflections on the Formation and Distribution of Wealth” (1766) was a mere fifty-three pages, and yet it was dense with profound analysis far ahead of its time.

Turgot anticipated the Hayekian insight that knowledge is dispersed throughout the economy, and that only if people are free can they deploy their specialized knowledge in mutually advantageous transactions.  Turgot was skeptical of paternalistic government regulations to protect the consumer, because he knew that an open market had natural checks on rapacious businessmen. Turgot went further to say that such regulations could be counterproductive: “To suppose all consumers to be dupes, and all merchants and manufacturers to be cheats, has the effect of authorizing them to be so, and of degrading all the working members of the community.”

One of Turgot’s most significant achievements was his discussion of savings and capital accumulation, which was remarkably similar to the polished theory of Eugen von Böhm-Bawerk that would come only a century later. Turgot understood that capitalist-entrepreneurs needed to restrict consumption to accumulate savings in the form of money, which could then be invested into specific capital goods. The capitalists “advanced” food and other necessities to the workers, who needed to be fed immediately and could not wait for their products to ripen into final output. It was thus thrift and farsighted investment of the few capitalists that allowed society to grow in material abundance.


Jean-Baptiste Say

Say was a French economist and businessman. He was the epitome of a classical liberal who favored open competition and free trade.

Nowadays economists speak of “Say’s Law,” which they crudely render as “supply creates its own demand.” Keynesian economists ridicule this supposedly naïve faith in the ability of markets to bounce quickly out of slumps.

However, in reality Say’s “Law of Markets” was a sophisticated understanding of the underlying “real” forces underlying market exchanges. In Say’s language, “products are paid for with products.” For example, if the baker wants to obtain food from the butcher, he must offer enough money to purchase the meat. But where does the baker get the money? By selling his own products to others. In the grand scheme, Say argued, the baker ultimately “demanded” the butcher’s meat by supplying his own bread to the community. There is obviously a great deal of truth to Say’s analysis, which is hardly done justice by the short phrase, “supply creates its own demand.”

Pushing his insight further, Say observed that “a glut can take place only when there are too many means of production applied to one kind of product and not enough to another.” In contrast to those who blamed business slumps as due to a dearness of money—or inadequate consumer demand, in our modern terminology—Say understood that the economy couldn’t be plagued by a lack of money per se. It also couldn’t be plagued by “overproduction,” since the very mark of economic progress was the steady growth in output among various sectors. As his quotation indicates, Say realized that the problem of a business slump is due to a sectoral imbalance. This anticipates the modern Austrian description of the unsustainable boom and then necessary bust.


Claude Frédéric Bastiat

Bastiat was arguably the greatest polemicist of free market economics who has ever lived. His essays in support of free trade in particular remain models to this day. Bastiat viewed the free market as a naturally harmonious institution in which everyone’s properly understood interests were aligned.

Bastiat’s most famous essay, “The Petition of the Candlemakers,” is a satirical open letter written by French manufacturers pleading with their government to bar the unfair competition of light offered by the sun. If only the French government would require that businesses and homes close their shutters during daylight hours, this would boost the demand for domestic candles, spurring employment and showering the community with untold blessings. Bastiat’s point, of course, was to explode the common protectionist arguments to impose tariffs and other trade restrictions in order to shield domestic manufacturers from the “unfair” competition of foreign producers.

Bastiat’s essay “The Law” was a classic exposition of the proper role of government in protecting natural rights. If the government ceased performing this legitimate function and began taking from one group and giving handouts to another, then the government was engaged in “legalized plunder.” According to Bastiat, “The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.”


Carl Menger

Menger was the founder of the Austrian School proper; the earlier thinkers were mere forerunners. Although no scholar writes in a complete vacuum, Joseph Schumpeter declared, “Menger was nobody’s pupil.” By this Schumpeter meant that what we now know as Austrian economics can be traced almost exclusively to Menger’s Principles of Economics (1871).

Virtually every trait of “Austrian economics” was present in Menger’s pioneering book. Its single most important achievement was to overturn the classical economists’ cost or labor theory of value. Rather than explain market prices by the cost of the resources going into them, Menger reversed the causal flow. He argued that market prices were determined by the subjective preferences of consumers, and that these prices in turn gave entrepreneurs the ability to bid up the prices of inputs. For example, engagement rings aren’t expensive because uncut diamonds are expensive. Rather, engagement rings are expensive because women find them beautiful—and then because of this fact, jewelers are willing to spend a great deal of money acquiring uncut diamonds.


Philip Wicksteed

Wicksteed was a contemporary of Menger. He was British by origin and could not even be classified as “Austrian” in terms of his economics. Even so, in many respects his work bore a greater similarity to the developing Austrian tradition than to the British Neo-Classical School spawned by Alfred Marshall. Whereas Marshall sought to refine the work of the classical economists (such as Adam Smith), Wicksteed wanted to revolutionize economics with the new approach of subjectivism. Wicksteed was one of the pioneers of the modern concept of “opportunity cost,” which views costs not as technical facts but rather as subjective evaluations of forfeited opportunities.

Anticipating the work of Mises and Hayek, Wicksteed viewed the market economy as a process in which mistakes are made, but soon corrected.

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Eugen von Böhm-Bawerk

Böhm-Bawerk was a member of the second-generation of the Austrian School proper, whose work was heavily influenced by Menger’s Principles. In addition to his devastating critiques of Marxist economics, Böhm-Bawerk’s most distinguishing contribution was his theory of capital and interest.

Böhm-Bawerk explained that when people in a community lived below their means—meaning they consumed less than their income—this allowed them to channel raw materials and labor hours into the production of capital goods. The extra machines, tools, and semi-finished goods would then augment the productivity of labor in the future. Thus, by investing natural resources and labor into more “roundabout” processes, society would eventually enjoy a permanently higher standard of living, as the products of the new equipment emerged out of the “pipeline.”

Böhm-Bawerk explained interest by the higher subjective valuation of present goods versus future goods. In essence, Böhm-Bawerk took Menger’s discovery of subjective value theory and applied it to goods available in different time periods. Because people generally would be willing to pay more for, say, a house available right now rather than a mere claim on a house that would only be delivered in 12 months, Böhm-Bawerk showed that a capitalist could buy the materials necessary to construct a house and earn a return on his investment when he sold the finished house in one year’s time. Thus Böhm-Bawerk showed the deep connection between interest rates and the community’s willingness to defer consumption.

Frank Fetter

Frank Albert Fetter

Fetter was a member of the American “Psychological School” of economics, meaning that he—like the Austrians—viewed economics as a study in subjectivism, because all economic phenomena must ultimately work through individuals’ mental operations. Physical facts as such could only affect supply, for example, to the extent that producers believed in these physical facts and adjusted their decisions to buy and sell accordingly.

Of particular interest to Austrians is Fetter’s capitalization theory of interest and rent, which was heavily based on Böhm-Bawerk’s own work. Fetter explained the pricing of a capital good in the following way: Its rental price in any given period would be determined by the productivity of its services. For example, if a farmer could harvest $1,000 more in crops per week with a tractor than without it, then the farmer would be willing to pay up to $1,000 a week to rent the tractor.

However, to calculate the purchase price of the tractor, Fetter invoked the notion of time preference, which was the subjective premium people placed on consuming sooner rather than later. Because of time preference, future dollars were less important—from our vantage point today—than present dollars. When deciding how much to spend today on a tractor, then, capitalists would discount the future cash flows the tractor would yield from rental payments.

Because the capitalist could purchase the tractor for a lower price than the sum of rental payments it would yield over its lifetime, the capitalist would earn a positive yield on his investment. Thus interest income, in Fetter’s view, had absolutely nothing to do with the productivity of capital goods—this just explained their rental prices. Interest, said Fetter, was due to time preference, the fact that people will pay a smaller amount of money today, for an expected stream of future monetary earnings.


Ludwig von Mises

Mises was the greatest member of the next generation of Austrian economists, who built on the work of Böhm-Bawerk. More than any other economist, Mises is responsible for the resurgence of Austrian economics in the latter half of the 20th century, which was largely due to his 1949 magnum opus Human Action.

Mises was a creative genius who made important contributions in many areas of economics. He is arguably one of the most important economists in history. For example, in 1920 Mises fired the opening salvo in the “socialist calculation debate” by arguing that socialist planners, lacking market prices for capital goods, could not efficiently allocate society’s resources. Although mainstream economists concluded that the mathematical models of the socialist theorists had won the day, many changed their tune decades later when the Soviet Union collapsed. In retrospect, they conceded that perhaps Mises (and his follower Hayek) had been on to something in their critique of socialist efficiency.

In his 1912 The Theory of Money and Credit, Mises integrated “micro” and “macro” economics into a unified body, by using subjectivist price theory to explain the purchasing power of money. (This had eluded other economists until Mises showed the solution.) More important, in this book Mises developed his business cycle theory. Drawing on insights from various predecessors, Mises blamed the boom-bust cycle on the artificial expansion of bank credit which pushed interest rates below their proper level.

Beyond his technical work, Mises was also a great contributor to economic methodology. He conceived of economics itself as a branch of praxeology, which was the science of human action. In Mises’ understanding, economists did not develop and “test” economic laws in the same way that physicists or chemists tested their hypotheses. On the contrary, Mises argued that economic principles could be deduced logically from the insight (or “axiom”) that people have conscious goals and act to achieve them.


Henry Hazlitt

Hazlitt was the greatest popularizer of free market economics in the 20th century.  His classic work, Economics in One Lesson, draws on the insight of Bastiat and declares: “The art of economics consists of looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” Heavily influenced by Ludwig von Mises, Hazlitt’s book remains the single best introduction to basic economics.

Modern readers may be surprised to learn that despite his strong commitment to free markets, Hazlitt wrote editorials for the New York Times and Newsweek during his illustrious career as a journalist.


Friedrich August von Hayek

Hayek is the most widely known of the modern Austrians, having won the Nobel Prize in 1974 for his elaboration of Mises’ theory of the business cycle. Hayek also took up the Misesian banner during the celebrated socialist calculation debate.

Partially as a result of his sparring with socialist economists, in the 1930s and 1940s Hayek wrote a series of seminal papers on the connection between economics and knowledge. In contrast to most of his colleagues who modeled economies as if all information were publicly available, Hayek understood that knowledge is “dispersed” and that one of the primary functions of the price system is to communicate information between individuals who can each directly observe only a tiny fraction of the economy.

A major theme in Hayek’s work is that of spontaneous order, specifically of social institutions that are “the result of human action, but not of human design.” Hayek warned socialist reformers against the “fatal conceit”; just because particular institutions, such as private property rights, were not consciously designed by any one person or group of experts, did not mean that the reformers could easily come up with a better replacement.

Hayek’s most popular work was his 1944 The Road to Serfdom, in which he warned that democratically elected socialist governments would eventually succumb to the inner logic of totalitarianism. He pointed out that many of the idealists in the Western democracies embraced the same principles of central planning and collectivism adopted by their Nazi foes.


Israel M. Kirzner
(1930- )

Kirzner is one of the few Austrian economists who was an actual student of Mises during his time at New York University. Kirzner himself went on to teach at NYU, keeping the Austrian tradition alive. A well-respected historian of economic thought even in mainstream circles, Kirzner is best known for his elaboration of Mises’ theory of entrepreneurship.

In Kirzner’s approach, the entrepreneur possesses a special skill of alertness to profit opportunities that others have missed. By buying underpriced resources, and transforming them into a product or service that can be sold for a profit, the entrepreneur steers output toward the pattern most pleasing to consumers.


Murray N. Rothbard

Rothbard was an incredibly productive economist who quite consciously worked in the tradition of his mentor, Ludwig von Mises. In his great treatise Man, Economy, and State (1962) Rothbard took Mises’ intimidating Human Action and rendered it in prose that any intelligent layperson could understand. But Rothbard was no mere second-hander, for he also developed several original lines of argument.

For example, Rothbard completely threw out the mainstream theory of monopoly price, arguing that the only benchmark by which to judge an economy was the outcome occurring on a free market with open competition. Rothbard also drew on Böhm-Bawerkian capital theory—something that Mises had relatively neglected—and integrated it into the Misesian framework.

Beyond his great theoretical contributions, Rothbard wrote voluminously on economic history. His doctoral dissertation on the Panic of 1819 remains a standard work on the topic. In America’s Great Depression, Rothbard used the Misesian theory of the boom-bust cycle to explain the 1929 stock market crash.

Rothbard was a great opponent of fractional reserve banking, and a champion of sound money. His 1994 The Case Against the Fed remains the most succinct attack on central banking.

This entire appendix relies very heavily on the short biographical essays in Randall Holcombe (ed.), 15 Great Austrian Economists (Auburn, AL: The Ludwig von Mises Institute, 1999).
We will omit specific citations to avoid tedium.