Monday, April 03, 2006

Austrian Economics

A student in ec 10 emails me to ask:

I just started reading "Human Action" by Ludwig Von Mises and I was wondering what you think of either the book or of the author. Have his theories been proven or disproven since the publication of the book? Has he been very influential in economics circles?
The truthful, if slightly embarrassing, answer is that I have not read the book. Explaining why may be somewhat edifying, however, so let me reflect on the reasons (not excuses) for my ignorance.

First, most economists at research universities focus their attention on recent work. Things written more than twenty or thirty years ago are usually assumed to be irrelevant, out-dated, or incorporated into more recent work. We rarely focus on something like the Mises book (written in 1949) for the same reason that physicists don't read Newton in the original.

Second, at the mainstream schools where I have spent my education and career (Princeton, MIT, and Harvard), the economists of the Austrian school like Mises are often viewed as fringe figures. Rightly or wrongly, they rarely show up on reading lists. I am confident that while I was a student at Princeton and MIT, I was assigned not a single article by an economist in the Austrian tradition.

That judgment might well be unfair. Another prominent Austrian economist is Friedrich Hayek, who won the Nobel prize in economics. Cognizant of my ignorance of his work, a few years ago I read (and assigned in a Harvard freshman seminar) his classic book The Road to Serfdom. I thought it was terrific.

In the new 4th edition of my Principles text, I include a new box in the chapter on monopolistic competition that contrasts Hayek's and Galbriath's view of advertising. I did this in part bacause I thought students should know who these two intellectual giants were. In case you are curious, here is the new box:

Galbraith versus Hayek

Two of the great economists of the 20th century were John Kenneth Galbraith and Friedrich Hayek. They held very different views about advertising, which to a large extent reflected their views about the capitalist system more broadly.

John Kenneth Galbraith’s most famous book was The Affluent Society, which was published in 1958. In it, he argued that corporations use advertising to create demand for products that people otherwise do not want or need. The market system should not be applauded, he believed, for satisfying desires that it has itself created. Galbraith was skeptical that economic growth was leading to higher levels of well-being, because people’s aspirations were being made to keep pace with their increased material prosperity. He worried that as advertising and salesmanship artificially enhanced the desire for private goods, public spending on such items as better schools and better parks suffered. The end result, according to Galbraith, was “private opulence and public squalor.” Galbraith policy recommendation was clear: Increase the size of government.

Friedrich Hayek’s most famous book was The Road to Serfdom, published in 1944. It argued that an extensive government role in the economy inevitably means a sacrifice of personal freedoms. Hayek also wrote a well-known critique of Galbraith in 1961, addressing in particular Galbraith’s view of advertising. Hayek observed that advertising was merely one example of a broader phenomenon: Many preferences are created by the social environment. Literature, art, and music are all acquired tastes. A person’s demand for hearing a Mozart concerto may have been created in a music appreciation class, but this fact does not make the desire less legitimate or the music professor a sinister influence. Hayek concluded, “It is because each individual producer thinks that the consumers can be persuaded to like his products that he endeavors to influence them. But though this effort is part of the influences which shape consumers’ taste, no producer can in any real sense ‘determine’ them.”

Although these two economists disagreed about the roles of advertising, markets, and government, they did have one thing in common: great acclaim. In 1974, Hayek won the Nobel prize in economics. In 2000, President Clinton awarded Galbraith the National Medal of Freedom. And even though their most famous works were written many decades ago, they are still well worth reading today.