History of ASE [Continued]

Lionel Robbins(1898-1984), the head of the economics department at LSE knew german and had read the works of Böhm-Bawerk, Mises and others. He was probably one of the main reasons for LSE's Austrianism. In 1931 he invites Hayek to LSE and the intensity of Hayek's intellectual battle with Cambridge and other schools reaches its height.

For some reason Hayek encourages John Hicks to read Vilfredo Pareto(Hicks eventually becomes one of the fathers of modern neoclassical economics). Robbins is influenced by those around him and he starts forgetting his Mengerian microeconomics, which can be easily seen by the changes in the reading list for the general economic theory course at LSE. Robbins' macroeconomics remains Hayekian until he becomes Keynesian when everyone else seems to do the same.

In the US the hole in economic theory is filled by the works of Alfred Marshall, who was one of the most influential economists of all time.

In the summer of 1929 Mises was offered a job at Kreditanstalt Bank, but he refused it. His fiancé asked why he'd refuse such an important job, and Mises answered:

A great crash is coming, and I don't want my name in any way connected with it[1].

That bank was one of the first to collapse.

Hayek on the other hand in February of the same year wrote:

...the boom will collapse within the next few months[1].

In the mid-1920s Felix Somary, a Swiss banker, wouldn't give John M. Keynes stock recommendations, because Somary believed that a speculative bubble was emerging. Keynes replied:

There will be no more crashes in our lifetime[1].

Irving Fisher, the "the greatest economist the United States has ever produced" (according to Milton Friedman) a few days before the crash:

Stock prices have reached what looks like a permanently high plateau[2].

Mises moves to Switzerland in 1934 to work at the Graduate Institute of International Studies(the Nazi threat made the move that much easier). He had a full-time job and a private seminar, he taught courses and wrote books and articles when he was in Vienna, but while in Switzerland he does very little. He realizes that the Mengerian branch is dead. Hayek on the other hand thinks that ASE has been a success, as it's been incorporated to the general field of economics with Marshall, Walras and others. In Switzerland Mises in fact started reconstructing economic theory from the ground up along the Mengerian line and he writes a general treatise.

Nationalökonomie comes out in 1940. It's in german, Mises is Jewish and the book makes a case for laissez-faire. Not exactly great selling points with the Nazis in power.

WW II prevents the distribution of the book. The Swiss publisher goes bankrupt and the book practically disappears. Mises moves to the US in 1940 because of the Nazi threat. The man is in his late 50s and hardly speaks english. He then rewrites the book in english and Human Action comes out in 1949.

By then it was too late, however. Marshallian and Walrasian economics had already become dominant and no one really cared about Mises' price theory.

ASE in the 1950s is dead in all of its forms. After The Pure Theory of Capital (1941) Hayek stops contributing to economics as it became clear that even the business cycle theory had shifted in favor of Keynes. Both branches of ASE were essentially gone. Keynesianism only replaced one aspect of Austrian Economics, the reasons for the overall decline are what I've discussed so far.

Then Rothbard happened. Man, Economy, and State (1962), America's Great Depression (1963), What Has Government Done To Our Money (1963), Economic Depressions: Causes and Cures (1969) and Power and Market (1970) were what revived ASE. Why did those people show up for the Royalton Conference in 1974? Because they had read Rothbard.

Hayek's Nobel Prize certainly surprised many and it did help, but it wasn't behind the revival.

[1] Gerard Jackson Safehaven Article January 6 2008
[2] Wikipedia Irving Fisher