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The Austrian School of Economics: A view from London

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Abstract

This paper explores the intellectual context of the Department of Economics at the London School of Economics and Political Science (LSE) during the 1930s. We will be focusing on the contributions of F.A. Hayek, along with Lionel Robbins, in fostering an intellectual environment for the transmission and incorporation of Austrian economics, particularly the works of Ludwig von Mises. In doing so we illustrate that Hayek and Robbins were attempting to craft a unified tradition of economic theory that consisted of various strands of economic thought that had either contributed to, or were consistent with, the Austrian tradition. The work done by Hayek, as well as Robbins, at the LSE not only consolidated the ideas of the Austrian tradition that had developed from Vienna. In doing so, they also rearticulated the broader theoretical contributions of classical political economy as a counterweight against an emerging neoclassical and Keynesian paradigm.

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Notes

  1. In Epistemological Problems of Economics, Mises remarked the following: “Within modern subjectivist economics it has become customary to distinguish several schools. We usually speak of the Austrian and the Anglo-American Schools and the School of Lausanne. . . . [The fact is] that these three schools of thought differ only in their mode of expressing the same fundamental idea and that they are divided more by their terminology and by peculiarities of presentation than by the substance of their teachings” (1933 [2013]: 194). Interestingly enough, Chicago economist Jacob Viner, who also had a profound influence on Robbins (see O’Brien 1988: 12, 45) stated the same thing: “Neoclassical economics is a sympathetic evolution of the English Classical School. Included under neoclassical economics is the English-American version in Taussig and Marshall and also the Austrian school, whose differences are not as important as the resemblances to the Anglo-American type. Included also is the Continental Equilibrium School or the Mathematical School, such as Walras, Pareto, and their followers. They have much more in common with the neoclassicists than in dispute” (Viner 2013: 19; see also Boettke and Candela 2017).

  2. It is worth noting here that Ludwig Lachmann’s work on capital theory can also be traced to his years as a student of Hayek at the LSE (1933–1940).

  3. This is not to imply that Marshall was purely a deductive economist. As Marshall himself explains in Principles of Economics: “Some parts of economics are relative abstract or pure, because they are concerned mainly with broad general propositions: for, in order that a proposition may be of broad application it must necessarily contain a few details: it cannot adapt itself to particular cases; and if it points to any prediction, that must be governed by a strong conditioning clause in which a very large meaning is given to the phrase ‘other things being equal.’ Other parts are relatively applied, because they deal with narrower questions more in detail; they take more account of local and temporary elements; and they consider economic conditions in fuller and closer relation to other conditions of life” (italics original, 1920 [2013]: 31, fn.1).

    Therefore, Marshall did not reject economic history or the inductive approach completely. He was arguing that while applied economics had to be contingent and applicable to a particular time and place and must therefore be largely inductive, economic theory itself should remain largely deductive. Similar to the early Austrians, Marshall’s use of historical data was largely designed to illustrate economic theories, rather than being an essential and primary element in his work.

  4. We should not neglect to mention another prominent student of Cannan, W.H. Hutt.

  5. As Robbins explains in An Essay on the Nature and Significance of Economic Science, “it is clear that the phenomena of the exchange economy itself can only be explained by going behind such relationships and invoking the operation of those laws of choice which are best seen when contemplating the behavior of the isolated individual” (emphasis original 1932 [1952]: 20).

  6. Curiously enough, Ronald Coase, in his own recollection of the LSE of the 1930s, also alludes to this claim made by Hayek that it “seems to have been Robbins’s intention to publish these lectures but unfortunately this was never done. Of their contents and character, Robbins says next to nothing in his autobiography” (Coase 1982: 33).

  7. Interestingly, Hayek remarked to James Buchanan at an interview at UCLA: “I had a curious influence on Hicks. You won’t believe it, but I told him about indifference curves (Hayek 1978 [1983]: 247–248). Remarking to Armen Alchian during those interviews at UCLA, who asked where Hayek had learned indifference curve analysis, Hayek responded in the following way:

    I had of course spent all my early years on utility analysis and all these forms, and we had in Vienna-- [Paul] Rosenstein [−Rodan] wrote that great article on marginal utility, and with him we waded through the whole literature on the subject of marginal utility, including-- I was very attracted, in a way, by the indifference-curve analysis. I thought it was really the most satisfactory form, particularly when it became clear that it unified the theory of production and the theory of utility with a similar apparatus. So by the time I came to London, although I had never been thinking of it in algebraic terms, the geometry of it was very familiar to me. (Hayek 1978 [1983]: 365–366).

  8. Kaldor started out as a Hayekian, translating with H.M. Croome Hayek’s Monetary Theory of the Trade Cycle, and wrote his first published paper on an “Austrian” interpretation of the trade cycle (1932),

  9. The year “1949” is a typo, since Mises had already left Geneva in 1940 for the United States, where Hurwicz had also fled.

  10. Oskar Lange had also been a visitor the Hayek and Robbins seminar (see Hayek 1978 [1983]: 371).

  11. Elsewhere in his autobiography, Robbins wrote the following regarding Hayek: “it is my belief that his Constitution of Liberty is one of the most important and thought-provoking works in this field that has appeared in our time” (1971: 128).

  12. It is important to be clear that Robbins did not reject the Austrian theory of the trade cycle in terms of its logical validity, but only in terms of its applicability to the circumstances of the 1930s. As he wrote in his autobiography, “I had become the slave of theoretical constructions which, if not intrinsically invalid as regards logical consistency, were inappropriate to the total situation which had then developed and which therefore misled my judgment” (emphasis added, 1971: 153)

  13. See also the Robbins Papers, LSE Archives, 3/2/13, for correspondence between Hayek and Robbins relating to Hayek’s divorce and relocation to the U.S. (1950–1951) as well as Ebenstein (2018).

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Acknowledgements

This paper was presented on October 12, 2018 at the 7th Biennial Workshop on Austrian Economics sponsored by the Wirth Institute for Austrian and Central European Studies at the University of Alberta in Edmonton, Canada. We thank Alfred Wirth for sponsoring this workshop, and the participants of the workshop for their valuable feedback and comments. We also thank Professor Tim Besley for an invitation to present this paper at a seminar hosted by the Spinoza Foundation, the Department of Economics of the London School of Economics and Political Science (LSE), and the Suntory and Toyota Internationale Centres for Economics and Related Disciplines (STICERD) Institutions, Organizations and Growth Programme on February 18, 2019. In addition, we thank the archivists of the LSE library for granting us access to the special collection of the papers of Lionel Robbins in preparation of this article. In addition, we gratefully acknowledge Marcus Shera for his helpful feedback and comments. Any remaining errors are entirely our own.

We also acknowledge the financial support of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University.

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Correspondence to Rosolino A. Candela.

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Boettke, P.J., Candela, R.A. The Austrian School of Economics: A view from London. Rev Austrian Econ 33, 69–85 (2020). https://doi.org/10.1007/s11138-019-00440-5

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