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The New York Times Gets Neoclassicals, Austrians, and Schumpter Wrong, all in One Article

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Clarity is a virtue, and if overlooking critical nuances can mean readers end up more confused after reading one’s work, that’s not very useful, to put things mildly.

Earlier this month, Justin Fox at The New York Times made a splendid illustration of this blunder; his piece amounted to saying mostly unsubstantiated things about “the” state of economics while renouncing clarity in favor of confused concepts and histories. Fox reviews two books: NYT writer Binyamin Appelbaum ’s The Economist’s Hour and The Marginal Revolutionaries by long-term student of fin de siècle Vienna and University of Alabama historian Janek Wasserman. Having not yet finished Wasserman’s biography of the Austrian school and its early economists, I don’t know if the below inaccuracies stem from his misinterpretations of these authors or from errors in the discussed works themselves.

Consider the following illustrative paragraph. Fox writes that the 1871 marginal revolution

made Vienna a leading Continental outpost of the market-oriented ‘neoclassical’ economics that also became dominant in Britain and eventually the United States. But the Austrian school also had some unique properties. One was a fascination with entrepreneurs, expressed most famously in Joseph Schumpeter’s 1942 account of the ‘creative destruction’ of business failure and creation. Another was a skepticism of the mathematical tools used by neoclassical economists elsewhere. Most pronounced of all was a disdain for government management of the economy.

Fox is right that late-19th century Vienna was a thriving hub of intellectual achievements in arts, culture, philosophy, legal theory as well as economic thought. Describing it as an “outpost of the market-oriented ‘neoclassical’ economics,” or believing that the neglected brands of emerging so-called Austrian Economists were calling the shots is quite a stretch.

Let’s unpack this a bit.

Strike 1: The Austrian School as “Neoclassical”

First, the vacuous and perilous term “neoclassical” economics is misused here — as in modern times when employed as a slur for any economic thinking that displeases the author. Thorstein Veblen is usually credited with having invented the term in 1899/1900, a pesky three decades after the marginal revolution. He specifically considered — and attacked — the economics of Alfred Marshall, professor of political economy in Cambridge between 1885 and 1908, whose textbook Principles of Economics was widely used in England. Tony Aspromourgos, the historian of economic thought, biographer of Adam Smith, and — full disclosure — my former professor at the University of Sydney, writes that early users of the term “all place[d] Marshall at the centre of a neoclassical economics.” If the term ever referred to anything concrete and specific, it was the economics of Marshall.

Jaffé’s oft-cited article further separated Menger, Jevons and Walras from one another and clearly illustrated the modern mistake of lumping them together as co-originators of the Marginal Revolution: Menger refrained from using mathematical expositions; Menger’s conception of marginal unit is vastly different from Jevons and even moreso from Walras; Schumpeter singled out Walras as user of general equilibrium, in stark contrast to Jevons or Menger.

Strike 2: Vienna as an Outpost of Market-Oriented, Anti-Government Ideas

Any sweeping statement of the complicated and diverse intellectual environment of pre-WWI Vienna is going to miss its mark. Implying that it was somehow dominated by “market-oriented” economists is entirely incorrect. We can point to many distinguished intellectuals whose persuasions were rather the opposite: Otto Neurath, a frequent sparring partner to the actual-Austrian economist Eugen von Böhm-Bawerk in the halls of University of Vienna, whose ideas for socialized economies were shared widely among intellectuals. Indeed, Neurath was in charge of centrally planning the Bavarian socialist economy during its brief socialist rule in 1918-19; Hans Kelsen, the founder of legal positivism, the legal doctrine that traces validity of laws to correct governmental procedures regardless of content; Otto Bauer, the Austro-Marxist and socialist party secretary in the 1900s and 1910s whose bolshevist persuasions all but ensured an Austrian union with Moscow.

For decades, the nickname for Austria’s finest city was “Red Vienna,” suggesting that perhaps the intellectual environment of these early Austrian economists was something other than “a disdain for government management.”

Strike 3: Entrepreneurship and Schumpeter

This association of entrepreneurs with Schumpeter is particularly dreadful. Fascination with entrepreneurs as drivers of economic change is indeed a signum of Austrian economics — a line of thinking that harks back through early generations of Austrians and even to Richard Cantillon. It preceded Schumpeter by decades, and continues today largely independent of Schumpeter’s concept of “creative destruction.”

Schumpeter’s economics, whose national origin was Austria, is thoroughly Walrasian – following Walras’ general equilibrium methods, rather than Menger’s subjectivism. His entrepreneurship theories are not Austrian.

Be Nuanced, Stop Fudging

Piece by piece, Fox’s confusing paragraph has unraveled. Scrutinized properly, it makes very little sense. Throwing words together in an under-analyzed mish-mash don’t make them informative, let alone true.

The final objection that might be laid against Fox’s version of market-loving economists’ dominance is precisely its pretend dominance. Pre-Keynesian Marshallian economics was briefly popular in England, and some select market practices that twentieth-century economists advanced have filtered through to policy-makers. But by and large, this threat of Rule-By-Economist seems largely imaginary.

On political discussions ranging from rent control or tariffs and free trade to raising top marginal tax rates, economists of all political persuasions overwhelmingly line up on one side — with politicians, the intellectuals and actual real-world policies on the other. Meanwhile, several countries in the OECD are on the wrong side of the Laffer Curve (stifling activity while raising less taxes than they could have). The distinguished Swedish economist Assar Lindbeck, an 89-year-old economist who was put in charge of a committee in the 1990s to update and liberalize Sweden’s bloated public sector – and so has actually had some political influence – has campaigned for abolished rent control for over half a century. Without any success whatsoever.

To pretend, against that background, that economists rule the political roost seems incredible. Fox should take note.

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