The “Ron Paul Revolution” amazes me.
How in the heck did the guy manage to make the Austrian school of economics something that could rile up emotions?
We’ll try to get to the bottom of that in the fourth in our series of posts on theories of judges and law.
Carl Menger (1840-1921) founded the so-called Austrian school of economics. His work was a response to classical economics, the German Historical School of economics, and the German Historical School of law. A classic in this field was Menger’s 1883 “Investigations into the Method of the Social Sciences with Special Reference to Economics.”
Contra classical thought, Menger wrote that Smith was insufficiently individualist in his orientation. Rather than examine social classes or the “wealth of nations,” Menger proposed that a more “exact science” would be to reduce “complicated phenomena to their elements” and see the nation as “the results of all the innumerable individual economic efforts in the nation.” He called this a “genetic” orientation to knowledge (Menger, 1986, at 93-94)
The German Historical School of economics had also criticized Smith, saying that history and empirical research had to inform economic understanding, since the Smithian self-interest or invisible hand were not universal or generalizable. Menger sarcastically noted that Smith did not assume self-interest was the only human motivation,[i] but went ahead in a memorable passage to say that history and complex motivations had no role in economic (i.e. “exact”) science:
“the difficulties resulting from the atypical character of phenomena for the realistic orientation of theoretical research do not exist for its exact orientation, as a result of the peculiar conception of theoretical problems that prevail in the latter. Exact research reduces real phenomena to their simplest elements, thought of as strictly typical, and attempts to determine their strictly typical relationships, their ‘laws of nature.’ The empirical forms with which it operates are nonetheless thought of as strictly typical not only in respect to spatial conditions, but also to temporal ones. The development of real phenomena, accordingly, exerts no influence on the way in which exact research undertakes to solve the theoretical problem.” (Menger, 1986, at 112)
Empiricism and historical methods would lead to “just as many economic theories as there are developmental stages of economic phenomena or as there are different spatial relationships of nations at the same developmental stage.” Moreover, there would be no a priori way of limiting what phenomena to consider when examining the economy. (Menger, 1986, at 107, 111)[ii]
Despite his skepticism of relying exclusively on empiricism, Menger felt that it played a complementary role and that “exact” and “empirical” methods each had their own domain. (Menger, 1986, at 140, 145)
Menger on state and law
The German Historical School of law, for its part, also attacked atomism, but arrived at the conclusion that the state and law were organic entities existing above the individual that should not be changed. (Menger, 1986, at 91)
In contrast, Menger began all accounts with the individual, and built out from there.
Unlike social contractarian accounts, however, he distinguished between institutions and conventions that emerged from purposive versus non-purposive action. In the latter type of action, individuals did not need to know why they did what they did, only that it seemed to be useful in meeting certain needs. For Menger, money is a classic example of organic emergence of an institution. In this case, a commodity (say cattle) becomes a medium of exchange in a barter economy because individuals observe it to be highly valued. They don’t need a law to tell them cattle are valuable, and they don’t need to understand the notion of money, or comprehend another person’s interest or the public interest – all they need is their own partial observations, shaped in part by custom.[iii]
Unlike later Austrian libertarians, Menger sees even the state as organically emerging:
“Family heads joined by no political bond and living side by side came to have a state community and organization even if it was undeveloped at first. They did this without special agreement, merely because they progressively recognized their individual interests and endeavored to pursue them (by voluntary subjection of the weaker to the protection of the stronger, by the effective aid which neighbor gave to neighbor in those cases in which the latter was to be coerced under circumstances under which the remaining inhabitants of a territory also felt threatened in their welfare, etc.). Conscious agreement and power relationships of different kinds directed toward the goal of strengthening communities as such may actually have aided this process of state formation in particular cases. The correct recognition and the activation of the individual interests on the part of individual family heads living side by side have certainly in other cases led to state formation even without the above influences, indeed even without any consideration of the common interest by individuals. That social structure, too, which we call the state, has been the unintended result of efforts serving individual interests, at least in its most original forms.” (Menger, 1986, at 156-157, see also 220)
Menger planted the seeds that would be taken up more thoroughly by Hayek in questioning whether it was possible to understand social reality by reference to empirically observed phenomena. In his discussion of law (an organic phenomena which precedes the state), this takes on an almost mystical quality:
“Law came into being in periods of human development which are far before those of documented history. What the historians can report about this process is based therefore only on inferences, not on attested empirical knowledge…. There can be only one way to reach the theoretical understanding of that ‘organic’ process to which law owes its first origin. That is to examine what tendencies of general human nature and what external conditions are apt to lead to the phenomenon common to all nations which we call law.” (Menger, 1986, at 224)
He goes on to state that wise people, and then weak people, and then everyone, all motivated by fear of violence, became aware in their own minds of the necessity of “rules for action.” These are conceived of “without contract or particular agreement” and initially without enforcement capacity. Laws are essentially morals that are not up to individual discretion. While “without doubt the genesis of a coercive power is a natural consequence of” these conditions, “law obviously remains law even if it is not enforced (e.g. against the cleverer or stronger, or even as a result of injustice), or if the violated law cannot be expiated. Indeed, this is true even if a relevant coercive power is not present at all (e.g. in many cases of international intercourse).” (Menger, 1986, at 225-226)
Certain laws are universal due to human nature, others vary by time and place due to “tribal differences and variety of external conditions and mental spheres.” Less developed nations have law, but often not purposive collective enforcement. In these cases, people rely upon self-help, “national justice” and the “custom of even-handed dealing.” Law is “affirmed by custom.” The process of development towards an enforced collective will only occurs through “increased intercourse” and greater individual perception of “like external destinies, through the community of history, of kinship, of language, of religious feelings, and to no very small extent also by means of community of convictions pertaining to law (and of rules of law) and of the action directed toward realizing them.” (Menger, 1986, at 227-229)
As state organization continues to develop, however, leaders imbue law with religious significance – the first step towards law becoming something objective and non-organic. This, coupled with leaders’ tendency to set purposive rules, leads to “law” being produced also by authority or statute. As law grows in complexity, the “necessity for the division of labor led to … the class of jurists.” When statute leaves gaps, original law can continue to shine through. But in general, law becomes the province of the specialized class, who create administrative law and technical perfections of the common law. Indeed, the very process of learning about other nations’ laws emboldens jurists to go against the “intuitive wisdom” of national or organic law, and enter into an alliance with “rulers” to replace the older law. (Menger, 1986, at 229-232)
Menger here gives an answer to a problem that would later befuddle neoclassical economists: why do workers with incomplete contracts not shirk? This could be because gaps in statute are filled by “law” in the Mengerian sense of morals that are not left up to individual discretion. At the same time, he worries that the division of civic labor leads to a form of legal alienation – where the people no longer see their individual views represented in statute.
While Menger believes that empirical tools are needed to understand statutes or positive law, he would not go as far as his followers would go in believing that purposive law was somehow inferior. He likened statesmen influenced by the German Historical School of law to farmers that “would avoid any interference in the course of natural organic processes out of veneration for the high wisdom which is manifest in nature. And are there not even absolutely noxious organisms?” He added that never “may science dispense with testing for their suitability those institutions which have come about ‘organically.’ It must, when careful investigation so requires, change and better them according to the measure of scientific insight and practical experience at hand. No era may renounce this ‘calling.’” (Menger, 1986, at 233-234)
[i]Menger wrote that “the great founder of our science also wrote his work on the wealth of nations, but along with it a theory of moral sentiments, in which he made public spirit as well as self-interest a pivotal point in his work, which was so epoch-making for political economy… Helvetius, Mandeville, and A. Smith knew just as well- as any adherent of the historical school of German economics that self-interest does not exclusively influence the phenomena of human life. If the last of these had only written his own theory of public spirit! What distinguishes him and his school from our historians is the fact that he neither confused the history of economy with its theory nor even followed one-sidedly that orientation of research which I designated above with the expression empirical-realistic. Nor, finally, did he become a victim of the misunderstanding of seeing in theoretical investigations conducted from the point of view of the free play of human self-interest uninfluenced by other powers the acknowledgement of the “dogma” of human self-interest as the only actual mainspring of human actions. And I do not doubt that German economics also, as soon as its representatives become fully aware of the misunderstanding I am dealing with, will again assume the orientation of research discussed here, “only written his own theory of public spirit!” (Menger, 1986, at 8)
[ii] Because practical knowledge is relative, it is always shaped in relation to the specific time and place of the observer. A specifically “historical” method was not needed to know that different institutions and laws would be needed “not only for different nations, but for the same nations at different stages of economic development.” (Menger, 1986, at 124)
[iii] Property also organically emerges, as farmers simply take over land they wish to use.