Thread by @buchmanster

Allow me to attempt a more nuanced story of where the Austrians actually did go "wrong" and how they wound up so vilified. I'm still learning the history and formulating my thoughts, but here's a humble attempt 👇

https://twitter.com/petermiyoung/status/1441341640082214912

1/ A good deal of original Austrian thought was incorporated into the mainstream. Though it had Austrian origins, it became no longer "Austrian" in spirit. The ideas were so good, they had to be appropriated.

2/ This included, of course, marginal utility theory itself (from Menger) as well as ideas like opportunity cost. And Bohm-Bawerk's capital theory of interest rates (inter-temporal coordination) was taken up by Wicksell who in turn had a heavy influence on Keynes

3/ Mises and Hayek were also heavily influenced by Wicksell, expounding what would become known as the Austrian Business Cycle Theory (ABCT), the foundation for their opposition to govt monopoly on money

4/ Roughly speaking, this is where the Austrians went astray - in obsessing over money as a neutral, non-political veil over real exchange and production, they were largely in denial of actual history, important parts of theory, and even the real world itself!

5/ Neglect of history is partially due to the earlier war with the German Historical School, the so-called Methodenstreit. The Austrians were hell bent on a Praxeology/"Methodological Individualism" which afforded little role for historical circumstance in economic analysis

6/ This is probably the largest error they made. I'm sure the Methodenstreit was a good time, but the inability to incorporate the historical/anthropological record greatly weakened their ability to theorize. They began from an assumption that prior man was similar to modern man

7/ But this is manifestly not true. Cognition and social structures change markedly over time, and this has significant impact on economic reality and coordination. Two very interesting related points here:

8/ First, Weber, who was actually a member of the Historical School, had a major impact on defining Methodological Individualism, and had a huge influence on Mises!

9/ Second, Schumpeter, who would perhaps be the greatest economist produced out of the Austrian tradition (him and Mises were students together of Bohm-Bawerk) actually defected towards the Historical School. Arguably this enabled him to break free from ...

10/ Austrian constraints and develop a more complete theory and history of economics. Notably, his student Hyman Minsky, would get all the credit post 2008 for theories about the inherent instability of credit money, to the chagrin of Austrians everywhere.

11/ But Minsky's Financial Instability Hypothesis wasn't the ABCT. It was grounded in analysis of the actual web of liabilities produced by a financial system. While the Austrians wrote it all off as "bad", Minsky sat down to analyze it and provide some constructive policy!

12/ Part of the failure of the Austrian imagination was to provide some meaningful alternative to abolishing fractional reserve banking in favour of pure commodity money. There are some inklings of the power of trade credit clearing in Mises' TOMC, but it seemed to stop there

13/ Of course Hayek would eventually propose denationalized fiat, and a later tradition of Austrian inspired economists like @GeorgeSelgin and @lawrencehwhite1 would bring this home through a theory and history of free banking - a stable fractional reserve based system

14/ Not to say Austrians were "wrong", but there was an inherent sort of "arrested development" in their ideas. To continue the history, despite their brilliance, the Austrians took a beating in the 30s when Hayek tragically "lost" the debate to Keynes:

https://twitter.com/buchmanster/status/1435725362298818566

15/ After the second war, they turned their attention more to politics. Hayek of course founded an information theoretic approach to econ (prices as decentralized network of computation) which would have enormous influence. But increasingly "Austrian" would be less associated

16/ with the brilliant economic work of earlier years (so much of which was appropriated in the mainstream) and increasingly associated with a kind of "reactionary" and seemingly "far right" political philosophy

17/ In my own estimation this is at least a mischaracterization of Hayek's agenda, though I can't help but agree that his work suffered from a kind of arrested development. And the founding of the Mont Pelerin Society did not help much.

18/ The Austrian tradition had something of a boom in the 80s when it was vehemently taken up by Reagan and Thatcher, but in a way that was highly discretionary/selective. The existence of their large governments and their alliance with the banker class betrayed the essence of

19/ the Austrian teachings! It's no wonder this would give rise to an abominable neoliberalism which I can only imagine caused more than a few of the Austrian greats to roll in their grave. Personally, I can't help but feel there was a certain naiveté

20/ in their political philosophy, perhaps a result of their dismissal of the historical school and denial of the role of State, which ultimately led to their philosophy becoming a weapon of what were perhaps some of the most destructive "peacetime" regimes the West has seen

21/ Of course the Rothbardians would take the political philosophy much farther, and would lead to something of a "split" within the Austrians, seeing Hayek as somehow lesser for affording a greater role for the state and realizing that money need not be based on real commodities

22/ But obviously Hayek was on the right track, distracted though he may have been by the political climate. Arguably, his line of thought matured quite substantially in both the Free Banking school and in the Bloomington School of the Ostroms.

23/ And this is where many of us (in crypto, say) are picking up today. Recognizing the foundational brilliance of the Austrians but seeking to not make the same neoliberal mistakes by instead following the Austrians to their conclusion in the work of the Ostroms: local commons!