The Latest Austrian School Revival

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By Joseph T. Salerno and Jeffrey A. Tucker prepared for the Austrian Scholars Conference:

When the first Austrian Scholars Conference was held in 1992, we were at the very beginning of the Great Bubble Economy, brought to you by Alan Greenspan and Ben Bernanke and their associates at the Fed. This shiny, bubbly “new economy” has finally gone the way of all bubble economies in history, deflating into stale dishwater and swirling slowly but surely down the recessionary drain. But it has left in its wake something truly amazing, something that never could have been foreseen: a second Austrian revival.

The first Austrian revival blossomed in 1974 as a result of the conjunction of two unique events. In June, a group of 50 Austrian economists and graduate students met in the tiny hamlet of South Royalton, Vermont. (Some participants still swear that the place was haunted, but that is a story for another day.) In October, Friedrich A. Hayek, a protégé of Ludwig von Mises and an eminent economist in his own right, was awarded the Nobel Prize in economics for his pathbreaking theoretical work on money, capital, and business cycles. But despite these events, Austrian economic theory did not leave much of an impression on mainstream economics. Nor did it make inroads into the economic journalism and financial commentary of the day.

Hayek and Murray N. Rothbard, Mises’s preeminent American follower, were relegated to the “soft” areas of economics, like methodology, political economy, and social philosophy. True, some mainstream economists did admit that the Austrians had insightful criticisms of positivist methodology and that they made a provocative, albeit extreme, case against socialism and for the free-market economy. But Austrian economic theory itself was either completely ignored or dismissed out of hand as backward and outmoded. Thus many young Austrians soon abandoned research in technical economic theory altogether and drifted off into methodology and comparative economic systems, where they could at least get a hearing for their views. Unfortunately, the lofty theorists of the mainstream considered these areas the intellectual backwaters of economics, whose inhabitants were mere essayists.

All that has now changed with the sudden implosion of the false prosperity that was built upon more than a decade of low interest rates and fiat-money inflation. Without a landmark conference or the fanfare of another Nobel Prize winner, a second Austrian revival has grown spontaneously out of the failure of mainstream macroeconomists to adequately explain the inflation and bursting of the high-tech and real-estate bubbles. The subsequent collapse and the Fed bailout and virtual nationalization of the entire financial sector also caught the macroeconomists completely unawares, overturning their theory of central banking and monetary-stabilization policy that had been so carefully developed in countless journal articles since the 1980s.

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