Critique of Austrian Economics: A Critique [Part 9]

This is part 9 of my critique of the Critique of Austrian Economics by AustrianCritique.

History

You can go and read what AC says and see where we disagree. I won't concentrate on AC's claims, I'll simply write the real history here. Until the 1990s there was an orthodox history of the Austrian school(that was largely believed by Austrians themselves) that was revealed to be factually inaccurate and illogical(see Joseph T. Salerno's talks and Jörg Guido Hülsmann[1]). In its short form the story goes like this:

ASE(Austrian School of Economics) was mainstream and doing well after its birth in 1871, until the Keynesian revolution came and replaced it in 1936. ASE was almost dead, until the Royalton Conference and Hayek's Nobel Prize of 1974, after which ASE was revived. This is the simplified version anyway.

Most of the information in this post will be from Salerno's talks on the history of thought.

These are the important historical figures in what became the current Austrian School of Economics:
1st generation: Carl Menger (1840-1921)
2nd generation: Eugene von Böhm-Bawerk (1851-1914)
3rd generation: Ludwig von Mises (1881-1973)
5th generation: Murray N. Rothbard (1926-1995)

Almost from the very start ASE had two branches. The first branch presented above is the Mengerian branch and it is the foundation of the current school of thought.

The "general equilibrium branch" is presented here:
2nd generation: Friedrich von Wieser (1851-1926)
3rd generation: Joseph A. Schumpeter (1883-1950)
4th generation: Friedrich A. von Hayek (1899-1992)

I'm obviously simplifying here. The 4th generation for example had a lot of people in it(Machlup, Haberler, Morgenstern etc...). They were all mainly influenced by Wieser and Schumpeter.

Carl Menger was the founder of the Austrian School and one of the three discoverers of marginal utility[2]. Ludwig von Mises has said that Menger's Principles of Economics(1871) is what made an economist out of Mises. Böhm-Bawerk's phenomenal work on capital theory laid the foundation for Mises' business cycle theory and in the late 19th and very early 20th century ASE was indeed recognized worldwide as a serious school of thought.

There were still serious problems with ASE. Many thought ASE could be represented through general equilibrium and that there was no reason to not simply use math. Early Austrians also couldn't incorporate money into their system(until 1912 came along[3]). Some other problems persisted, but they were dealt with in Human Action(1949).

Böhm-Bawerk left academia in 1889 after writing his 3 volume treatise on capital and interest and didn't return until 1905, at which point he was physically in such bad shape that he would no longer contribute to economics. Menger stopped contributing to economics in the 1890s and he refused to have Principles of Economics reprinted(the book would start disappearing from libraries and commanded a high price because it was in such high demand). Menger's chair at the University of Vienna was given to Wieser(since Böhm-Bawerk was in government service at the time, not in academia), which further promoted the general equilibrium approach instead of the Menger/Böhm-Bawerk line of thought.

Schumpeter, who was Wieser's student but was heavily influenced by Léon Walras, published two books at a young age and became to be seen as the star of the 3rd generation. So before Mises' first book, The Theory of Money and Credit, Schumpeter had already published The Nature and Essence of Theoretical Economics(1908) and The Theory of Economic Development: An inquiry into profits, capital, credit, interest and the business cycle (1911) and thus Schumpeter came to be seen as a system-builder, while Mises was seen as perhaps a brilliant economist, but also as someone who had a narrower scope.

In the US the American Psychological School(actually a praxeological or Mengerian school would be a more appropriate name) failed to make an impact, as Herbert J. Davenport and Frank Fetter spent more time on personal disputes than teaching students. They did contribute to interest theory by correcting some of Böhm-Bawerk's mistakes, but they failed to leave any disciples.

As the 4th generation became influencial during the 1920s, the Mengerian tradition was essentially dead. By the early 1930s ASE no longer existed, with The London School of Economics being the only exception and even there general equilibrium dominated. Mises had influenced them with his two books(the second being Socialism(1922)). Most Austrians became much more liberal(in the classical sense) as a direct result of that book. But Mises' books weren't on general economic theory, they were on specialized subjects(money and economic calculation).

[1] Jörg Guido Hülsmann Mises: The Last Knight of Liberalism
[2] Wikipedia Marginal Revolution
[3] Ludwig von Mises The Theory of Money and Credit