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The Decline

The Rise, Decline, and Reemergence of Classical Liberalism
by Amy H. Sturgis

© The LockeSmith Institute, 1994

No part of this article may be reproduced in any manner without the written permission of THE LOCKESMITH INSTITUTE, except for brief quotations used in reviews or critical essays/articles.

The Decline

In retrospect, we may see the rise of classical liberalism as a thread of individuals and movements revealing both a continuity of ideas and a continual growth, as thinkers refined and added to the basic principles of the thought. The individuals and movements manifested themselves in two major ways. They asserted ideas, as with Locke's defense of property and de Tocqueville's analysis of democracy. Also, they reacted to policies, as with the Scottish Enlightenment and French Physiocratic responses to mercantilism. In both manners of expression, classical liberalism met with some measure of acceptance. Either it was widely read, like Emerson's prose, granted legitimacy through positions of prominence, like Jefferson and Madison's rise to the Presidency, or capable of directing change, like the Manchester School's defeat of the Corn Laws.

Why did classical liberalism achieve this rise? First, the overriding European culture provided those with assertions the opportunity to travel, test their theses against observations, and communicate effectively. Second, the increasingly interdependent nations of Europe could no longer contain their people either economically (protectionism) or politically (absolutism), as the citizens could travel and exchange information concerning conditions elsewhere. For example, England's lead in constitutionalism influenced the classical liberals of the other nations, as did the United States' egalitarianism. Third, some policies such as mercantilism were not successful and thus there was an audience for any alternative, particularly one that worked. A number of combined conditions put Europe in need of economic, political, and philosophical answers, and classical liberalism responded.

By the late 19th century, individuals and movements still asserted classical liberal ideas and reacted to alternative policies. The measure of acceptance was gone, however, although some thinkers were tolerated as dissenters. The West's rapid move toward industrialization created enormous short-term problems of working conditions, poverty or stratification, and displacement. Technological advances raced past the nations' ability to adapt. The people turned to the government, often more democratic in nature than before, to regulate and legislate these transitional hardships away, thus substituting the long-term problem of unprecedented governmental growth for the temporary problems faced until the market adjusted to the new industrial economies.

The experiences of rising hostilities in Europe after the turn of the century replaced the uniting European culture with extreme nationalism and ethnic pride. Not only did World War I destroy international trade, every government expanded to meet military needs. World War II compounded this problem; the United States' government, for example, was now engaged in everything from wage and price controls to rationing, censorship, and propaganda. Once the wars were over, the governments never decreased to their previous sizes. The Soviet embrace of communism, the response of a nation freed from feudalism in the midst of the industrial era without benefit of the European philosophical heritage, kept the nations at a heightened military position while spawning an international flirtation with collectivism. The cultures now accepting of government's ever-broadening role, people expected economic and social needs to be met by legislation. The United States' New Deal and Great Society are indicative of this trend. The states' social involvement and centralized planning made the late 19th and early to mid-20th centuries a regression from freedom, an instance of Spencer's "re-barbarization." I explore those who preserved the message of classical liberalism during this time in the following chronology.

The Austrian School (1871-present)

The movement of longest duration in the classical liberal tradition, the Austrian School, began with the 1871 publication of Principles of Economics by German Austrian Carl Menger (1840-1921). His contributions to classical economics did not arise from historical influences. Alone, Menger developed the concepts of marginalism and subjectivism. Subjectivism suggests that, in a world of uncertainty, infinitely variable human factors render statistical links and formulas incapable of accurately predicting economic activity. Marginalism explains that goods derive value from the worth of an additional unit; for example, given usual scarcity, one more diamond is far more valuable than an additional gallon of water, thus its value is greater. He later remarked to a young Ludwig von Mises: "When I was your age, nobody cared about these things" (Mises 10).

Others soon cared, however. Menger's first two intellectual heirs had left the University of Vienna before he became Professor of Political Economy in 1873, but they studied Principles and began writing themselves. Friedrich von Wiser (1851-1926) elaborated upon Menger's theory of value and first termed it marginality. He also contributed the theories of cost as sacrificed utility and imputation (or market shares) and published Origin of Economic Value in 1884. Wieser's friend and brother-in-law Eugen Bohm-Bawerk (1851-1914) wrote Capital and Interest (two volumes, 1884 and 1889), couching a theory of interest in terms of the previously-developed concept of marginalism. He also gained attention for identifying Karl Marx's fundamental error as using a labor theory of value in his works rather than subjectivist utility theory (Shand 224).

Menger's tenure at the University inspired many students to add to the tradition; the freedom provided from 1867 through 1918 by the Liberal Austrian Constitution allowed Vienna to become an intellectual magnet. The Austrian embrace of Smith and Ricardo's classical economics soon met resistance from a rising tide of German nationalism, however (Mises 20). The German Historical School rejected any universal economic axiom. It dismissed Austrianism in particular for three reasons: it maintained that Austrian theory was not vindicated by historical experience, ignoring the multitude of factors Mises explains renders history incapable of proving or disproving any assertion; any study of "wealth" seemed too base for the Romantics in the Historical School; and it suspected John Stuart Mill of contaminating classical liberalism with utilitarianism (Mises 23). Thus the Methodenstreit, or clash over methods, or Menger-Schmoller Debate, began.

Menger questioned the epistemology of the Historical School, Gustav von Schmoller replied, and a series of publications and pamphlets ensued. Mises noted in retrospect that the debate never was truly concerned with conflicting methodologies, but rather over the question of whether there could ever be a science beyond history to treat human action (Mises 26, 28). Mises himself would provide an answer.

Ludwig von Mises (1881-1973) was first introduced to the Austrian School through Menger's Principles and the University of Vienna lectures of his teacher, Bohm-Bawerk. While working for the Austrian Chamber of Commerce he wrote his work The Theory of Money and Credit (1912). After World War I he followed with Socialism (1922) which contained one of his greatest contributions, his criticism of economic calculation under socialism. He argues that calculation requires a responsive system of value like prices, not static like labor hours. The price system emerges from the market process; without a market, it follows that there can be no calculation. This assertion sparked the second great controversy involving Austrianism. The Calculation Debate involved such economists as H.D. Dickinson, who continued the reasoning from Barone's 1908 treatment of production in the collectivist state, and Oskar Lange and Fred Taylor, who both argued from the "trial and error" method for discovering equilibrium (Hall 4). Although popular thought for part of the century accepted that central planning was theoretically possible, recent economists such as Don Lavoie have realized that Mises' criticisms were never answered by his opponents (Hall 12).

During the 1920s, Mises organized a biweekly privat-seminar for scholars to discuss classical liberal issues which continued until he left Austria for Geneva in 1934. He fled Hitler's menace in 1940 and came to the United States. After working at the National Bureau of Economic Research for four years, he accepted a Visiting Professorship at the Graduate School of Business Administration at New York University, a position he held until 1969. Some of his other works include Nation, State and Economy (1919), Liberalism (1927), Omnipotent Government (1944), and his magnum opus Human Action (1949).

Dr. Eamonn Butler, the Director of London's Adam Smith Institution, distinguishes five key contributions made by Mises to the classical liberal tradition along with a sixth, the aforementioned critique of socialism's economic calculation. Those five are developing a systematized methodology for Menger's subjectivist theory; adding to monetary theory by demonstrating that there are different forms of "money" with different characteristics and showing that money may be subjected to utility analysis; explaining trade cycles by linking troughs and peaks to the politically-motivated governmental manipulation of interest rates and money supply (he also established the Austrian Institution for Trade Cycle Research, later the Austrian Institute for Economic research); deriving a theory of interests from individuals' subjectivist views of the future; and teaching students who would later become greats in the tradition. His students in Vienna include Nobel Laureate F.A. Hayek and Harvard's Gottfried Harberler, and the Neo-Austrian School he spawned in the United States includes Ludwig Lachmann, Israel Kirzner, and Murray Rothbard among many younger scholars.

Another overarching contribution, however, lies in Mises' answer to the Methodenstreit query, praxeology. He asserts that humanity possesses certain a priori traits. It follows that through the study of individual action we may deductively understand civilizations. This science of human action called praxeology unites history, sociology, philosophy, philology, and psychology in a unique Misesian methodology.

If Menger, Bohm-Bawerk, and Wieser represent the first tier of Austrianism and Mises the second, the third generation arrived via native Austrian Frederick A. Hayek (1899-1992). The student of Wiser who termed himself "an unrepentant old Whig" worked in Mises' office for five years; it was there that Mises weaned him from moderate Fabian socialism (Butler 3). Hayek then served as the Vice President of the Austrian Institute for Economic Research.

From 1931 through 1950, Hayek was the Took Professor of Economic Science and Statistics at the University of London. In 1947 he organized the Mont Pelerin Society, an international meeting to discuss the principles of classical liberalism and their preservation. The Society continues to meet over 45 years later. In 1950, Hayek became a Professor of Social and Moral Science at the University of Chicago. His last move relocated him to the University of Freiburg, where he taught from 1962 until 1967. He received the Nobel Prize in Economics in 1974.

Hayek published many books and articles, beginning with Monetary Theory and the Trade Cycle (1929) and The Pure Theory of Capital (1941). In 1944 he produced the ground-breaking work The Road to Serfdom; admittedly a political work, it nonetheless supports its thesis that socialism inevitably leads to totalitarianism (Butler, Hayek 10). His Counter-Revolution of Science (1952) asserts that physical science's methodology cannot be applied to social studies due to human unpredictability (an answer to Herbert Spencer and others' attempts to do just that). Hayek does disagree with Mises' dismissal of the use of historical patterns, however. He feels certain patterns based on experience can be valuable, whereas Mises trusted deduction from a priori truths more exclusively (Hayek 42). Among his other works The Constitution of Liberty (1960) and Law, Legislation and Liberty (three volumes in 1973, 1976, and 1979) discuss the legal framework needed to maintain a free society. He argues that the spontaneous order, or cosmos , requires common playing rules but not common ends. His last publication, The Fatal Conceit, appeared in 1988.

A decades-long written and verbal rivalry also characterized Hayek's career involving his personal friend and public opponent John Maynard Keynes. His widely accepted brand of economics eclipsed Hayek's in popular thought only to be later discredited by a significant portion of the academic community. In contrast with Keynesianism's centralized planning, Hayek's fundamental message throughout his life depicted the market as the most efficient information system. State intervention only creates misleading signals leading to misallocation. The only way for efficient allocation is maximum freedom for individuals to receive and respond to market signals, utilizing a division of knowledge like Smith's division of labor. In a sense he took Mises' view of exchange in the market process, or catallactic, and expanded it. His intellectual ancestry reaches before the Austrian tradition, however, as Merquior notes: "Like Adam Ferguson and Adam Smith, he [Hayek] thinks that progress derives from man's actions but not by man's design" (126).

The next tier in the tradition, the Neo-Austrians, starts with a student of Hayek's at the London School of Economics. Ludwig Lachmann (1906-1992) established the Austrian Graduate Program at New York University and wrote 1977's Capitalism, Expectations and the Market Process, using subjectivism and Austrian methodology to critique the common mathematical models of popular economics (Shand 226). Mises' student Israel Kirzner (1930-present) applies Austrian approaches to the study of entrepreneurship through such works as The Economic Point of View (1960), Competition and Entrepreneurship (1973), and Perception, Opportunity and Profit (1980) and serves as a Professor of Economics at New York University.

Murray Rothbard (1926-1995) presents a highly visible example of radical Austrianism. Also a student of Mises, Rothbard drew his a priori beliefs to more extreme conclusions and became prominent in the American Libertarian Movement. Believing all state intervention is not only disastrous but based on unconscionable force, he has authored such works as Man, Economy and State (1962), Power and the Market (1970), For A New Liberty (1973), and Ethics of Liberty (1982). Not only has Austrianism endured, it has seen recent revival as the Neo-Austrians have published and received teaching positions of their own.

The Chicago School (1927-present)

The University of Chicago has drawn a number of classical liberal faculty members from across the country, creating a school of thought that bears its name. The movement began with the 1927 addition of Professors Henry C. Simons and Frank H. Knight.

Henry C. Simons (1899-1946) influenced the Chicago School more as a teacher than a writer. His combined published works comprise one volume; a 1934 essay "A Positive Program for Laissez-Faire," for example, details his reform proposal to protect the competitive private enterprise system he saw overshadowed by centralization in the 1930s. Among his suggestions is an overhaul of the monetary system and an abolition of all tariffs.

His colleague Frank H. Knight (1885-1972) balanced Simon's policy emphasis with a specialty in theory. He answered the trendy 1930s attacks on classical economics through analysis and precise term definition. His theory of the free market recognized the individual as the key economic actor, and society as merely a collection of individuals. Although he recognized his methodology was not all-inclusive he counted it as "useful," displaying the pragmatism characteristic of the entire school (Fusfeld 149).

The Chicago School has produced a number of economists and theorists, including Nobel Laureate George Stigler. Perhaps the best known of these is Nobel Laureate Milton Friedman (1912-present), originally a student of Simons. He focuses on proving that the market is a more efficient allocator of society's resources than a command economy. Unlike other classical liberals, he accepts that the government may have a role in creating a stable framework for the market. This would include, for example, limiting the money supply. Not only would the Austrians disagree with such state action, they would use the term money as an adjective rather than a noun since Mises asserted that many things can take on the characteristics of money (Sampson 166).

An example of Friedman's pragmatism is offered by journalist Geoffrey Sampson: "...if a belief in the desirability of an economic safety-net is widely shared (as it currently is) then it is reasonable for Milton Friedman to incorporate it into his model society" (183). Instead of maintaining the current system of benefits, however, Friedman proposes an extension of the income tax system where those beneath a certain level would receive cash rather than pay. The state would therefore be providing the poor the ability to buy from the private sector rather than forcing them to patronize less efficient state hospitals, schools, etc.

His works include Capitalism and Freedom (1962), Free To Choose (with his wife Rose Friedman, 1979), and the television series Free To Choose aired for 10 weeks on the Public Broadcasting Service in 1980. Interestingly, his son David Friedman is a leading anarcho-capitalist thinker and author of the influential The Machinery of Freedom (1973). Milton Friedman and others continue to lecture and teach the next generations of Chicago-minded economists in this pragmatic form of classical liberalism.

Ayn Rand (1905-1982) and Objectivism (1943-1976)

Born in St. Petersburg, Ayn Rand emigrated from the USSR to the United States after the Bolshevik Revolution. Her unique form of individualism was shaped by her personal experience with communist totalitarianism and her frustration with the West's drift towards socialism. Her first novel, We The Living, appeared in 1936. It was not until the vital year of 1943 in which Rose Wilder Lane's The Discovery of Freedom and Isabel Paterson's The God of the Machine were published that Rand drew wide attention with The Fountainhead. She followed that success with non-fiction ( Capitalism: The Unknown Ideal, 1946, The Virtue of Selfishness, 1964, etc.) and more fiction ( Anthem, 1953, Atlas Shrugged, 1957, etc.).

As she continued to publish and gain a following, Ayn Rand chose the name Objectivism for her philosophy. She notes in For The New Intellectual:

Capitalism demands the best of every man - his rationality - and rewards him accordingly. It leaves every man free to choose the work he likes, to specialize in it, to trade his product for the product of others... His success depends on the objective [Rand's emphasis] value of his work and the rationality of those who recognize that value (25-26).
Rand surrounded herself with a carefully chosen collection of thinkers to train to communicate her message. She argued that no person should live for another, that all persons' highest moral ends was their own happiness, and that any notion of a group instead of the individual threatened every person. The foremost of these followers was Nathaniel Branden, who taught Objectivism on the national lecture circuit and at the Nathaniel Branden Institute until its demise in 1968. He continues to write today. Others include David Kelley and Leonard Peikoff.

Her fierce defense of the individual as his own ends spawned a publication known as The Objectivist Newsletter and later as The Objectivist from 1961 to 1971, replaced by The Ayn Rand Letter from 1971 through 1976. An active Center for Objectivist Studies still exists. Although her personal circle was small, her interest in other classical liberals was wide; a suggested reading list in Capitalism includes works by Bastiat, Bohm-Bawerk, and Mises. Many students in the 20th century in fact first met classical liberalism through Rand. In 1991, nine years after her death and fifteen years after her letter ended publication, a Gallop Survey concerning influential authors in America named her second in importance, surpassed only by The Bible (Boaz 62).