Michael Hudson on the Austrian School of Economics

hudson-200x300Another extract, in this occasional series, from Michael Hudson’s iconoclastic dictionary of economics, J is for Junk Economics. Last week’s posted video featured a short lecture by institutional economist Geoffrey Hodgson, in which he quoted selectively from Austrian School economist Friedrich Hayek, and appeared to show Hayek’s one-time support for social democratic policies. Hudson’s brief account below is critical of the School:

“Austrian School of Economics: Emerged in Vienna toward the late 19th century as a reaction against socialist reforms. Opposing public regulation and ownership, the Austrian School created a parallel universe in which governments did not appear except as a burden, not as playing a key role in industrial development as historically has been the case, above all in Germany, the United States and Japan.

Carl Menger developed an anachronistic fable that individuals developed money as an outgrowth of barter, seeking a convenient store of value and means of exchange. The reality is that money was developed by cost accountants in Bronze Age Mesopotamian temples and palaces, mainly as a means of denominating debts. Few transactions during the crop season were paid in money, but took the form of personal debts mounting up to fall due on the threshing floor when the harvest was in. Mercantile trade debts typically doubled the advance of merchandise or money after five years.

Most of these advances were initially made by temple or palace handicraft workshops, or collectors in the palace bureaucracy. Menger’s Austrian theory ignored the fact that weights and measures were developed in the temples and palaces, and that throughout antiquity silver and other metals were produced in standardized purity by temple mints to avoid private-sector fraud. This history has been expurgated, as if enterprise only occurs in the private sector, needing no public role or regulation.

Also not appearing is the exploitation of labor by industrial capitalists. Austrians developed the idea of “time preference.” Profits were attributed to the fact that capital-intensive (“roundabout”) production took time, so profits were simply a form of interest built into nature.”

4 thoughts on “Michael Hudson on the Austrian School of Economics

  1. Nick, being used to the thoroughness and comprehensiveness of your nonetheless incisive and relatively short posts, Hudson’s entry appears rather truncated.

    I agree with what he says, including his final remark about exploitation. Austrians basically argue that in a free market where transactions occur on a voluntary basis, there is no exploitation. By participating in an exchange, A is giving up x because it is worth to him less than y which B gives up to get x for the same reason.

    Austrians are rather rash in concluding that voluntary exchange is without deeper conflicts and constraints, but Marxian exploitation, which Hudson surely has in mind, is also unconvincing.

  2. As for Austrian voluntary exchange, I may decide to work in my preferred profession voluntarily accepting the going wage, yet the overall situation may be unsatisfactory when labour is not receiving an adequate portion of productivity gains in the form of higher wages to fuel aggregate demand.

    As for Marx’s exploitation, similar to the Austrians, Marx concocts a story that rules out exploitation by definition: when workers assume power there can be no exploitation. It turns out there can be exploitation under the dictatorship of the proletariat — and how! In fact, when Marx’s definition of exploitation was soon no longer fulfilled by capitalism (which supported mind-boggling increases in labour wages and living standards), socialist countries continued to perpetuate or restore Marxian exploitation, i.e. offering wages/living standards just sufficient to ensure survival and human reproduction — and often not even that.

    • Marx’s theory of exploitation is about capital extracting surplus labour and surplus value from the proletariat, and this could apply at any level of wealth and income. But I see what you mean. Capitalism has done a much better job than attempts at socialism to raise living standards for the majority.

      Marx claimed that he was being scientific, but of course his theory is fueled by a sense of injustice at the observed poverty of the masses. And I am not convinced by the argument that labour is the only source of value. As Geoff Hodgson has put it, the labour theory of value is tautological. Also, while one can say that positive profits require surplus labour, or labour working beyond the requirements for his reproduction, I would say that, apart from the benefits from reinvesting the surplus which makes possible rising living standards, it is impossible to measure labour’s contribution to the total value of the product separately from that of the means of production. For me, it is not so scientific.

      • Thanks, Nick, for your helpful thoughts. I have two ideas to add.

        1) There are innumerable circumstances where the question of exploitation or acceptable remuneration is subject to the distribution of power and subjective assessment (think of communists using Marxian arguments to enforce compliance with exploitative working and living conditions). The range of scenarios that may incite us to judge — and disagree on — matters in terms of exploitation or non- exploitation is too large and complex to allow for a single objective theory of exploitation.

        As I’ve pointed out in earlier comments: Marx is wrong to assume that relationships of power between human beings end with the defeat of capitalism by socialism or communism — if anything the management of power relationships becomes cruder and crueller.

        2) One needs to distinguish between raw materials and useful raw materials. Practically every useful raw material (say oil) becomes useful only thanks to human ingenuity and skills.

        Oil used to be a nuisance at best, until human ingenuity and skills turned it into the mainspring of a civilisation of unheard-of prosperity. The productive power of human ingenuity and skills cannot be ascribed to the members (of a hard to define) class. These forces of progress are due to humans in the most divergent capacities and the complex interactions of all members of a civilisation.

        Either human ingenuity and skills (vastly distributed among the entire population, striding class lines) are considered means of production or — if not — the term “means of production” is not particularly useful.

        If they are considered part of the means of production 1) above is reaffirmed a fortiori.

        3) To my knowledge, Marx was clear on what exploitation means, and only subsequent goal shifting by ad-hoc revisions by his adepts changed the “Marxian” idea of exploitation (such that a car and a holiday in Egypt became subsistence requirements). For Marx exploitation meant remunerating workers to the point where they were barely able to survive and reproduce the proletariat.

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