Classical Liberalism and the Austrian School

The Economics of Liberty

by Anthony Gregory

The Great Liberal Heritage

If any one word is responsible for more confusion in the United States than “liberalism,” I’d surely like to know what it is. To the average American, a liberal is someone who votes Democratic, favors redistribution of wealth from rich to poor, wants more government regulation of the market, probably champions gun regulations, loves public education, and generally stands on the opposite side of the spectrum, such as it is, from what passes as “conservative” these days.

Yet outside the United States, and for more than a century, “liberalism” has carried a different meaning, something quite distinct from, if not diametrically opposed to, the modern American definition. Liberalism is the tradition of Adam Smith and John Locke and the more radical of the Founding Fathers – the tradition of the British opponents of the Corn Laws, of French economists and legal theorists such as Frédéric Bastiat, and of Americans who questioned the very necessity of the state in the late 19th century. Liberalism is, in other words, the political creed of those who favored liberty above the state, believed peace was preferable to war, and saw free trade and free association as the very foundations of a just and equitable society; who saw the moral status of wealth accumulation as being determined not by how much was accumulated, but rather by how it was accumulated – whether by the peaceful and productive means of voluntary free exchange or the political means of plunder and government privilege.

Liberalism, in short, is the philosophical antecedent to modern libertarianism. And though many of today’s liberals claim the legacy of old liberalism for themselves, saying that economic realities and refinement of theory forced them into their more collectivist mold, it becomes clear from studying the liberal tradition that its core values of individual liberty, belief in the self-organizing effectiveness of society, and distrust in government have much more in common with today’s consistent opponents of tax-and-spend liberalism than with its proponents.

We libertarians are lucky to have a great historian in Ralph Raico, whose Classical Liberalism and the Austrian School contains nine fantastic essays that shed much needed light on these profound philosophical issues. Raico, our premier historian of classical liberalism, is fluent in the intellectual foundations of those ideals as well as in economics, particularly Austrian economics, rendering him uniquely qualified to discuss the intimate relationship between the most radical of free-market schools and the struggle for individual liberty.

Defining liberalism

Raico laments that “no serious effort has been made to provide an overall account of the history of liberalism” outside of the work of Guido de Ruggiero, which he considers “deeply flawed” and notes “was limited to … Britain, France, Germany, and Italy.” Another problem arises with the very definition of liberalism: “[A] survey of the literature on liberalism reveals a conceptual mayhem. One root cause of this is the frequent attempt to accommodate all important political groupings that have called themselves ‘liberal.’” That approach does not impress Raico, who points out the absurdity of defining liberalism so broadly:

If one holds that the meaning of liberal must be modified because of ideological shifts within the British Liberal Party (or the Democratic Party in the United States), then due consideration must also be given to the National Liberals of Imperial Germany. They – as well as David Lloyd George and John Maynard Keynes – would have a claim to be situated in the same ideological category as, say, Richard Cobden, John Bright, and Herbert Spencer. Yet the National Liberals supported, among other measures: the Kulturkampf against the Catholic Church and the anti-socialist laws; Bismarck’s abandonment of free trade and his introduction of the welfare state; the forcible Germanization of the Poles; colonial expansion and Weltpolitik; and the military and especially naval buildup under Wilhelm II.

“It is evident,” Raico argues, “that mere self-description by politicians or political intellectuals cannot be decisive on this issue.” Even libertarians will sometimes include Keynes and other collectivists on the list of true liberals, but for Raico that will not do. “Canvassing the views of, say, Kant, Spencer, Popper, and Rawls yields no consensus on crucial issues.”

The “chief bone of contention in the debate,” as Raico sees it, is private property, which modern liberals and some presumed older liberals have viewed with hostility, seeing it as a “conservative” institution. Raico takes on one thinker, Michael Freeden, who “seeks to exclude belief in private property altogether from the contemporary meaning of liberalism.” But to welcome welfare state liberals, especially for the sake of continuity of language, results in some perverse implications. “Liberalizing the economy” would no longer mean “dismantling of government controls, but instead, something like extending welfare benefits.”

Raico traces a lot of the problem to the “vastly inflated position in the conception of liberalism” held by John Stuart Mill, the 19th-century thinker with genuinely liberal views on free speech, but who “rejected the liberal notion of the long-run harmony of interests of all social classes,” who “repudiated the liberal principle of non-intervention in foreign wars,” and who redefined “liberty itself” so as to find as much fault in “institutions whose authority over them [people] freely accept” as in state-inflicted physical aggression.

More of the confusion comes in the reluctance of British and American collectivists, in particular, to be honest with their language:

In Anglophone countries, those who anywhere else would be straightforwardly identified as social democrats or democratic socialists shy away from acknowledging their proper name. It is hard to avoid the conclusion that this is essentially a matter of political expediency. For some reason, labels suggestive of socialism have not been popular in countries of English heritage.

Raico seeks to trace the origins of liberalism back far enough to establish a distinct and long-standing trend of thought that held political power in suspicion. Those origins pre-date the Enlightenment and are found in the medieval era. Raico credits the Catholic Church for its role in modernizing law, desacralizing the state, and promoting decentralized authority. He then discusses the mid-17th-century English Levellers, who opposed radical egalitarianism, violations of freedom of conscience, and state monopoly.

French liberals and class struggle

Raico devotes an entire chapter to the French liberals, who have often been neglected in the English-speaking world. “Benjamin Constant is,” according to Raico, “the representative figure not only of French but of European liberalism in the nineteenth century.” Constant had found the flaw in the French Revolution and its terror in “the idea of Ancient Liberty misapplied to the modern age.”

The classical republics of Greece and Rome, as well as writers such as Rousseau and Abbé de Mably, saw freedom consisting “in the citizens’ exercise of political power. It is a collective notion of freedom, and it is compatible with – even demands – the total subordination of the individual to the community.” Modern liberty, in Constant’s view, was different: it was “one based on free labor and peaceful commerce.” Constant, like today’s libertarians, contended with opponents on both the left and right: “His enemies were the Jacobin and socialist descendants (for the most part) of Jean-Jacques Rousseau on the one side, and, on the other, the theocratic conservatives such as de Maistre and de Bonald.” Constant’s vision of peaceful diversity and social pluralism continues to be relevant in today’s culture wars, as “conflicting groups wish to make use of the state power to realize their own cultural – religious, moral ethical, even aesthetic – values.”

The French liberals identified many problems of the modern state in very sophisticated terms. They saw “the danger of centralized powers.” Raico identifies French Catholic liberals for their major contributions to religious liberty. He finds much to credit in Alexis de Tocqueville’s views on “the danger of centralized power,” the anti-statism advocated by Count de Montalembert, and the anarchism of Gustave de Molinari, who opposed the nation-state but also found revolutionary movements threatening to liberty.

Of the French contributions to liberal thought that continue to be neglected even by many libertarians, the theory of class conflict is a major one. The cause of this neglect may be that “few ideas are as closely associated with Marxism as the concepts of class and conflict.” Marx saw the inevitable tension between the workers and the state-privileged capitalists as the great hinge on which history would unstoppably turn.

Yet as Marx himself noted in 1852, “No credit is due to me for discovering the existence of classes.” Instead, he credited “bourgeois historians” and “bourgeois economists.” In particular, he named the French historians François Guizot and Augustin Thierry.

Raico traces class-conflict theory to the heritage of classical liberalism, finding that a liberal class-conflict theory emerged in a polished form in France, in the period of the Bourbon Restoration, following the defeat and final exile of Napoleon.

From 1817 to 1819, two young liberals, Charles Comte and Charles Dunoyer, edited the journal Le Censuer Européen. Along with Thierry, they began to formulate a theory, later expounded on by Constant and Jean-Baptise Say, of class conflict. According to Say, the market economy provided for a harmony of interests. Conflict arose when a state drew parasitically from some to benefit others. Thus we have the two adversarial classes: the rulers and the ruled.

According to Comte,

What must never be lost sight of is that a public functionary, in his capacity as functionary, produces absolutely nothing; that, on the contrary, he exists only on the products of the industrious class; and that he can consume nothing that has not been taken from the producers.

At times, Marx’s class theory closely resembled that of the liberals. Marxism contains two rather different views of the state: most conspicuously, it views it as the instrument of domination by exploiting classes that are defined by their position within the process of social production, e.g., the capitalists. Sometimes, however, Marx characterized the state itself as the independently exploiting agent.

The difference in economic and social theory goes a long way in explaining the distinction between Marxist and liberal class analysis, despite the many similarities. It also hints at the difference between the way left-liberals and classical liberals look at the economy and wealth distribution. If one believes that the state is merely doing the bidding of the capitalists, then the latter become the principal enemy, and the state can presumably be taken over for the purpose of proletarian liberation – an endeavor that, whenever it is attempted in real life, results in mass suffering and totalitarianism. If, on the other hand, the state itself is the exploiter and parasite, and the politically connected capitalists are merely beneficiaries of its intrinsically exploitative nature, then taking over and enlarging the state cannot be seen as the proper course of action – rather, shrinking the state as much as possible would be the solution to inequitable privilege.

Economic science has long been fundamental to classical liberalism. As Raico explains, Austrian economics has emerged as the school most conducive to championing free markets and individual liberty. In its origins, its historical dialectical relationship with socialist economics, its emphasis on subjective value and methodological individualism, and its many theories that undermine the case for state intervention, today’s libertarians have every reason to study this field closely. Seeing that economics as much as anything divides modern liberalism from its more libertarian counterpart, precision in economic education takes on great importance.

The Economics of Liberty

The passionate interest in economics among libertarians is not immediately understood by all students of liberty. Even those generally in favor of economic freedom for ethical reasons may wonder why so many libertarians adhere specifically to the Austrian school. Complicating the matter even further, libertarianism is a political philosophy – and liberalism a political orientation – that concerns ethical principles of what the government ought and ought not to do. Economics, in stark contrast, is often described as a science, and in particular a value-free science, that can teach us a lot about the material world of scarcity, but does not in itself tell us what the state ought to do. So why are so many libertarians not just free-marketers, but also inclined toward the most a priori of economic schools – that of the Austrians? Ralph Raico makes sense of it all in Classical Liberalism and the Austrian School.

Austrian economics and individual liberty

I wish that I had read Ralph Raico when I first became a libertarian, for his explanation of liberalism’s relationship to Austrian economics is the best that I know of, bringing great clarity to the question. He sums up the distinctive elements perfectly: “According to [Ludwig von Mises], economics teaches the means necessary for the promotion of the values most people endorse. Those means comprise, basically, the maintenance of the free market, private property economy. Thus the economist qua economist passes no value judgments, including political value judgments. He only proposes hypothetical imperatives: if you wish to achieve A, then do B.”

As an example we might consider the minimum wage. Economics informs us that raising the minimum wage will, other things being equal, increase unemployment by pricing low-skilled workers out of the labor market. This is a scientific insight. The libertarian is against minimum-wage laws primarily because they are a violation of the rights of both employer and employee to freely make an agreeable deal. But to reinforce this point, the libertarian, steeped in economics, can explain that the results likely to be produced by the minimum wage are not what most people want. Economics is value-free in that it doesn’t tell us whether we should want to increase unemployment, only that raising the minimum wage will tend toward that consequence. But since most decent people do not want to increase unemployment, the science of economics is nicely complementary to the libertarian ethical principle.

Because economics reinforces the case for liberty, “there is a sense in which economic theory per se, any analytical approach to economic questions, can be said to favor the market economy…. But Austrian economics has been so often and so closely tied to liberalism that it is plausible to seek the connection also in its distinctive economic theories.”

Liberalism is concerned with ethical individualism. Methodological individualism – the analytical reduction of all human activity down to the individual actors – is central to Austrian economics and has been from the start. Carl Menger, founder of the Austrian school, explained a nation’s economy in terms of the results of all the innumerable individual economic efforts in the nation…. Whoever wants to understand theoretically the phenomena of ‘national economy’ [must] attempt to go back to their true elements, to the singular economies in the nation.” (Emphasis in original.)

Also quite conducive to liberal individualism is the Austrian emphasis on subjectivism – the principle that persons make economic choices that are based on their subjective preferences. Classical liberals, Raico writes, “focused on the individual human being per se … as the fountainhead of creative response to an ever-changing world.” Economic schools of thought more in line with central planning, such as mainstream macroeconomics, tend to assume “that various global magnitudes act upon one another,” an assumption that liberals as well as Austrians would question. Moreover, “Individuality bears an intimate, perhaps even logical connection, to diversity, and Austrianism, in contrast to neoclassical economics, likewise accentuates the role of diversity in economic life.”

Austrians tend toward many general themes in liberalism, such as “the recognition of the self-regulating capacity of civil society” – or what Austrians call spontaneous-order theory. Yet unique and much more specific Austrian insights go even further in undermining the case for government intervention. They include the impossibility of states’ engaging in economic calculation without prices as “the fatal flaw of central planning”; the Austrian theory of the business cycle, which demonstrates the inability of central banks to manipulate market interest rates without distorting the economy and thereby causing booms and busts; “the analysis of the market as a process” – an approach that stifles socialist pretensions; and Mises’s explanation of why government interventionism is unstable, since one intervention leads to another and society eventually descends toward totalitarianism. Most important in Raico’s assessment is the approach of Austrian economics toward the free market not simply as “producing the greatest possible amount of material goods,” as it is seen by neoclassical defenders of the market, but rather as, in Menger’s words, “a pattern of economic governance exercised by consumer preferences.”

Moreover, the Austrian school itself emerged in an ideological context. Many of the first Austrians in the late 19th century were intimately involved in debates with the Marxists on key questions of economic theory, particularly the theory of value. The Austrians played a major role in the marginal revolution, overthrowing centuries of understanding economic exchange value (price) in terms of labor. The labor theory of value was generally taken for granted by Adam Smith and the classical school of economics. The Austrians, however, believed that economic value, including exchange value, originated in the subjective valuation of individual economic actors who – and this is most important – value units of goods on the margin; that is, that they assess the next unit of a commodity in relation to the next-most-valued thing they would forgo to obtain it.

This revolution in value theory finally answered mysteries that had nagged economists for many years, such as the diamond/water paradox. Why is a diamond worth so much more than a cup of water in most circumstances, but not if you are dying of thirst in the desert? Why would an additional cup of water be worth less once you’ve had one cup? Marxism’s whole conception of exploitation was wrapped up in basing the objective value of a commodity on the labor it “contains.” Because Marxism was one of the economic schools most conducive to the creation of a totalitarian state and so was at war with the Austrians over basic theory of value, Austrian economics was distinguished early on as the camp of individual liberty.

Yet the historical context of the Austrian school’s emergence might explain why not all early Austrians embraced liberalism consistently. Raico explains that “the underlying tradition in Austria was one of state paternalism, to the point where even the expression of the concept of a spontaneous economic order had been actively suppressed.” Such considerations among others meant that early luminaries of the school, such as Friedrich von Wieser and Eugen von Bo?hm-Bawerk, did not always adhere to classical-liberal ideas.

Two 20th-century Austrian economists, for their part, were far more distinct in their classical liberalism and have become universally recognized as significant figures in the birth of modern libertarianism: Ludwig von Mises and F.A. Hayek. Beginning with them, “the links between liberalism and the Austrian School become intense and pervasive.” Mises was decisively a liberal, having “highlighted the possibilities of meeting the needs of the deserving poor through private charity and assailed Bismarckian schemes of social insurance.”

Hayek, on the other hand, at times took positions that few libertarians today would endorse. Seeing the state as “a service agency,” he believed that (in his words) “there is little reason why the government should not … play some role, or even take the initiative, in such areas as social insurance and education, and temporarily subsidize certain experimental developments.” Yet it would be an understatement to say that Hayek was a brilliant thinker and economist whose many insights have helped develop libertarian theory.

Illiberal economists and scholars

That the economic divide is as prevalent as any divide between modern and classical liberals should be obvious. It is important to ask, therefore, about the major economic influences on modern liberalism and their relationship to original liberalism. We focus on John Maynard Keynes, whose brand of economic theory is the most dominant strain of economics in the modern world, enjoying a virtual monopoly on the economic thinking of modern liberalism.

Raico asks whether Keynes was a liberal. Since modern liberals claim the legacy of classical liberalism, this is a most important question indeed. Raico writes, “It is now common practice to rank John Maynard Keynes as one of modern history’s outstanding liberals, the most recent ‘great’ in the tradition of John Locke, Adam Smith, and Thomas Jefferson…. If he is different from the ‘classical’ liberals in a few obvious and important ways, it was simply because he tried to update the essential liberal idea to suit the economic conditions of a new age.” ”

In fairness, Keynes did embrace values “such as tolerance and rationality” and “always called himself a liberal…. But none of this carries great weight when it comes to classifying Keynes’s political thought.”

The general idea espoused by those who call Keynes a great liberal is that his “turn to neo-mercantilism was necessitated by his discovery of fundamental flaws in classical economics,” especially in light of Britain’s unemployment problems of the 1920s and the Great Depression. According to Raico, however, those crises “were themselves produced by misguided government policies.”

There are other problems with inducting Keynes into the Liberal Hall of Fame: “Liberalism is characterized by its insistence on rules, in political as in economic life.” The rule of law and laissez faire are conspicuous examples. But “it is no exaggeration to say that [Keynes] was constitutionally averse to rules, or ‘dogmas,’ as he often called them.”

Moreover, “authentic liberalism has traditionally harbored a deep distrust for agents of the state,” whereas Keynes’s “airy reliance on economic experts whose sage advice would be put into effect by self-denying politicians flies in the face of this wholly warranted suspicion and all of the historical and theoretical evidence supporting it.” Keynes went so far as to believe that the state should “even decide the optimal level of population” and, at times, that the state should be active in eugenics-based social engineering. He also spoke highly of the Soviet system and, in the preface to the German edition of his General Theory, remarked that the Nazi “totalitarian state” was more compatible with his economic prescriptions, owing to “the theory of output as a whole” than were “the Anglo-Saxon countries.”

Yet many if not most intellectuals remain devoted followers of Keynes – which raises a question: why do intellectuals oppose economic liberty? “The continued flourishing of [anti-market] intellectuals remains an enduring puzzle and problem for classical liberals,” Raico writes. His treatment of that question wonderfully explores the relevance of intellectuals and their ideas in shaping society and the role of historical myth in perpetuating statist thought.

Raico sees the problem as multidisciplinary: “In literature, economics, philosophy, sociology, and other subjects, the student is continually subjected to data and interpretations that converge on a single point: the viciousness of private enterprise and the virtuousness of state intervention and state-supported labor unionism.”

For Hayek the problem is principally one of poor understanding: “Hayek’s view of the intellectuals,” Raico writes, “is flatteringly benign: their ideas are determined by and large by ‘honest convictions and good intentions.’” Raico is unconvinced by Hayek’s attempt to explain this poor understanding. As one example, Hayek “appears to be saying that because the natural sciences have made great advances and because innumerable particular engineering projects have succeeded, it is quite understandable that many intellectuals should conclude that ‘the direction of all forms of human activity according to a single coherent plan’ will be similarly successful.” But Raico challenges the entire premise, pointing out that “the advances of the natural sciences were not brought about in accordance with any overall central plan; rather, they were the product of many separate decentralized but coordinated researchers.”

Raico finds more value in Mises’s explanation: “Often Mises emphasizes invidious personal motivation – resentment and bitter envy – as the source of this attitude.” He is even more moved by Mises’s other insight – that “the contempt of money-making [is] deeply ingrained in western culture,” leading to “hostility towards capitalists, trade, and speculation.”

Revitalizing a grand tradition

Raico is a great historian but also a player in the history of libertarian ideas. At one time or another, he was associated with the three men regarded by many as the 20th century’s greatest Austrians and libertarian scholars: Mises, Hayek, and Murray Rothbard.

To the extent our tradition of liberalism has faded, Raico serves as an eloquent bearer of bad news. In an essay on Eugen Richter, he gives his eulogy for German liberalism. In America the decline of liberalism has in large part been due to militarism, which Raico addresses in his discussion of Arthur Ekirch’s book The Civilian and the Military.

If liberalism has failed to challenge the modern state, perhaps part of the reason is that it has not been radical enough. Reviewing Mises’s great work Liberalism, Raico takes issue with his mentor’s failure to be more hard-line in opposing colonialism and imperialism. If ever there was a great mind to whom every libertarian owes an intellectual debt, it is certainly Mises. Yet even he went astray at times. Raico finds the problem in Mises’s antiseptic conception of the state. For him, the state is simply “the apparatus of compulsion and coercion.” He contemptuously rejects Nietzsche’s dictum that “the state is the coldest of all cold monsters.”

Yet being radical is not enough. We must understand our role in the history of ideas, including what came before us!