The Long FAQ on Liberalism
A Critique of the Austrian School of Economics:


A frequent Austrian boast is that Hayek accurately predicted the Great Depression. Given the Austrian's usual disdain for empirical verification, however, it is difficult to know what to make of this claim.

Actually, this prediction was a no-brainer, since the U.S. had experienced at least five depressions before the Great One, and the recurring pattern of the business cycle had long ago been recognized. It therefore took no acumen whatsoever to predict an economic downturn. What is more striking is what Hayek didn't predict: that depressions would disappear worldwide in all countries that adopted Keynesian monetary policies. Now that might have been slightly more impressive.

Another Austrian boast is that in the 1920s, their economists were involved in some famous debates with the world's top economists, during which they tore down the intellectual pillars of both socialism and Keynesianism. Of course, this boast is always accompanied by the rueful admission that Mises and Hayek didn't convince anybody in academia, and, in fact, were subject to widespread ridicule. Mises couldn't even find a university job afterwards, and Hayek abandoned his work in technical economics, turning his attention to other political and philosophical pursuits instead.

These debates began in 1920, when Mises published a ground-breaking article called "Economic Calculation in the Socialist Commonwealth," followed by his book, Socialism. In these works, Mises argued that socialism had to fail, because it had no way of knowing whether it was allocating resources efficiently or not. In market economies, prices help people make economic calculations; profits and losses allow them to know whether they are pursuing the right economic plan. In a centrally planned economy, there is no way for the planners to know. And if they attempted to know, they would become overwhelmed by all the prices, profits and loss statements required to know. Mises and Hayek also argued that any central planning committees entrusted to run the economy would become corrupt.

This is the economic version of an old argument, that dictatorships deal in corruption and insufficient information. This argument, without doubt, is true. That the Soviet Union was a dictatorship is also true. What is false is the assertion (made by the Soviet Union itself) that the country was socialist. Socialism means that workers own the means of production, not private individuals or an elite group. Socialism has been proposed in many forms, ranging from social democracy to anarcho-socialism. In the latter, workers would own companies that would compete on the free market, absent any government at all. As you can see, socialism is hardly synonymous with a central planning committee. But one thing socialism cannot be is a dictatorship -- worker's do not own anything if a totalitarian government tells them what to do. Mises and Hayek may have refuted the principle of economic totalitarianism, but they didn't come close to refuting socialism. This is one reason why academia didn't view their arguments against socialism as conclusive.

About the same time, Hayek became involved in a famous dispute with John Maynard Keynes. Austrian economist Peter Boettke provides the following account: This rather accurate account bears only a few additional comments. Blaming the failure of Hayek's book on the fact that it was his "most technical" doesn't wash in economics, where technicality is seen as a strength, not a weakness. One could hardly imagine a more technical and confusing book than Keynes' General Theory. Nobel economist Paul Samuelson would describe Keynes' book thus: No, economists the world over assessed Keynes' and Hayek's books for their ideas, and the fact that they found Keynes' work to be far and away the most convincing has left Austrians groping for scapegoats like "technicality" ever since. Rockwell even seems to go so far as to suggest academic corruption: Yet another boast of the Austrian School is that Hayek was awarded the Nobel Prize in economics. This is indeed an honor, but one should keep in mind the purpose of the Nobel. It is intended to reward individuals for specific contributions, not their entire lifetime of work or the school of thought from which they hail. This policy has led to many ironic awards, such as the Nobel peace prize to PLO terrorist Yasser Arafat. In Hayek's case, the award was shared by Gunnar Myrdal, "for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena." Myrdal was a Swedish economist on the far left, whose Keynesian-like policies brought Sweden out of the Great Depression in 1932, the first nation to do so. In honoring both economists, the Nobel committee could have hardly been validating their very different schools of thought simultaneously.

Furthermore, the Nobel committee has established a well-known reputation for unorthodoxy: it has awarded the prize to such fringe economists as James Buchanan, Herbert Simon, Ronald Coase, Douglass North, and both Hayek and Myrdal themselves. In his acceptance speech, Hayek expressed surprise that the committee would honor someone whose ideas were "as unpopular as mine are." Furthermore, the committee has sometimes honored economists whose theories once dominated academia but have since fallen out of favor, such as Robert Lucas' Rational Expections. (Amusingly, the committee admitted that Lucas' Nobel would be controversial and was defending it even as they awarded it to him.) The selection of so many prize-winners on the far right appears to be the result of Assar Lindbeck, the right-wing Swedish economist who heads the six-man economics prize committee.

Finally, Austrians claim that "The Nobel Prize that Hayek received in 1974… caused an explosion of academic interest in the Austrian School and free-market economics in general." (4) A more careful reading of Austrian propaganda tracts reveals that this "explosion" is the result of wealthy business donors buying the movement's way into academia and the media. It does not exist on its own scholarly merits. After Hayek won the Nobel, academia reviewed Austrian theory and promptly rejected it. Even with far-right businessmen pumping millions of dollars into the movement, it has grown to no more than 75 professional faculty members worldwide. (5) One might presume that if the Austrians were to actually capture an Ivy League department, their "explosion of interest" would be upgraded to "Christ's Second Coming."

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1. Peter J. Boettke, "Friedrich A. Hayek (1899-1992),"

2. Quoted in Peter Pugh and Chris Garratt, Introducing Keynes (Cambridge, England: Totem Books, 1994), p. 64.

3. Llewellyn H. Rockwell, Jr. (president and founder of the Ludwig von Mises Institute), "Why Austrian Economics Matters,"

4. Rockwell.

5. "About the Ludwig von Mises Institute,"