The Austrian Approach to Economic History

The Austrian Approach to Economic History
Dr Matteo Salonia, Associated Scholar of Mises UK at King’s College London

matteoIt is safe to assume that most of the readers of Mises UK are not admirers of the Marxist historiographical school, and the defects and inadequacies of Marxian reconstructions of the past are by now well-known, even though a large percentage of academics in the Humanities insists in perpetuating Marxian myths and in using a Marxist vocabulary in textbooks and lectures. Yet, for all the shortcomings of the Marxist school, it is important to recognize that the narrative that it proposes has a strong relationship with economic theory. It is perhaps not by chance that after the crisis of Marxism the relation between economic theory and economic history has become quite tormented. The problem today is not simply that the two disciplines of history and economics do not speak to each other. Rather, it seems that many economic historians, in principle, do not accept the necessity of theoretical analysis when looking at the past. Some of them actually seem to believe that distancing themselves from any economic theory is the appropriate thing to do. The trouble comes when, in order to say anything meaningful, eventually they must say something about the causes of economic development or the economic structure of a certain society. But, as Sudha Shenoy has warned, “Those actions that historians actually find in the contexts they study, can be fitted together into ‘social complexes’ only if historians make use of the ‘schemes of structural relationships’ that theory provides ready-made. Without such developed theories, historians may implicitly use contradictory or unsustainable reasoning in their accounts.” This is why, for instance, in a recent book on the history of Japan, one reads that the growth of certain local industries and the beginnings of specialization in the Tokugawa period supposedly happened thanks to the intervention of regional political powers. But correlation is not causation, and the author does not even try to explain to the reader (let alone convince him) that, having shown the presence of government intervention, it is indeed theoretically safe to assume that this alone accounts for specialization in production – or even that specialization in production would not have happened without some sort of coercive action favoring it from above. Economic history textbooks and monographs are sprinkled with such problematic statements, and I want to stress once more that the issue here is not holding a wrong economic theory, but rather not holding a theory at all: in fact, it has become not unusual to find in the same article or volume scattered assumptions that seem taken from many different (and irreconcilable) economic theories.

Obviously, I am not arguing here for a return to rigid Marxist categories and stages of history into which to desperately try to fit a rebellious array of historical data and human interactions. Nor am I advocating a return to the Marxist model of unbalanced relationship between theory and history. On the contrary, I am suggesting that the Austrian School offers a balanced approach and a useful method for the study of the production and exchange of goods and services in the past – intending it as a specific field under the broader study of human action and society.

The Austrian School of economics has advanced our understanding of the behavioral patterns that break the cycle of poverty and make prosperity possible. The genius and usefulness of Austrian original reflections like marginal utility are now recognized by many intellectuals and students of economic theory and praxis, and even by non-Austrian economists. Other contributions, such as the business cycle theory, have convinced less people without libertarian circles and remain controversial, but they do contribute to a relatively (and increasingly) well-known cohesive body of knowledge, a systematic approach to the production of goods and services and the link between human action, markets, government interventions, and crises. The Austrian contribution to the field of history has been, in contrast, quite lacking, not in terms of theoretical cohesiveness, but in terms of output and popularity. There have certainly been works produced by Austrian scholars that have shown extraordinary wit, and the epistemology of history explained so brilliantly by Austrians like David Gordon is surely not to be overlooked. I do not need to expand this caveat any further or to list a complete bibliography: suffice it to recall Murray Rothbard’s ground-breaking book America’s Great Depression, which uses economic theory to make sense of causes and motivations behind actions and events in the past. However, even in the minds of many who hold a sympathetic view towards the Austrian School when it comes to economics, the Austrian idea of history remains vague. Joseph Salerno, in his unmissable introduction to Rothbard’s History of Money and Banking in the United States, has already noted that “Mises’s writings on the proper method of historical research have inexplicably been almost completely ignored up to the present, even by those who have adopted Mises’s praxeological approach in economics.”

This situation is unfortunate precisely because the idea of economics as developed by Menger, Mises and Hayek is profoundly ‘historical.’ By this I mean that, according to these writers, economic institutions and entrepreneurial habits cannot be understood as the result of an arbitrary, deliberate plan. As a consequence, the economy of any society, either present or in the past, can never be studied in chronological isolation, so much so that Menger and Mises explicitly likened the market to language and the common law. Just like language and law, the exchange of goods and services in a given society follows patterns and takes advantage of skills and norms that have slowly emerged in the past and that need to be studied organically, paying particular attention to the ways in which different actors throughout different generations have created what Hayek would call a spontaneous order. It is not difficult to see how the Austrian position that I very briefly sketched here favors a beneficial collaboration between the fields of economics and economic history – even regardless of the specific economic theory one may choose.

This mutual contribution between disciplines is based, on the one hand, on the historical character of markets, economic institutions and habits, which I have just mentioned, and on the other hand, on the fact that history needs abstract categories. For the Austrian scholar, the abstract categories to be used when we try to make sense of events from the past are those of praxeology, that is the study of purposeful behavior. For non-Austrians, other categories, sustaining alternative economic theories, are available, and they are legitimate tools of a meaningful debate. What renders debates sterile is the current, widespread rejection of economic theory among historians, which leads to baffling inconsistencies when they deal with subjects like, for instance, the role of the state, or the importance of entrepreneurial culture. Instead, economic historians should employ economic theory (or why not, theories) in order to render past economic institutions and developments intelligible and in order to propose useful frameworks and coherent arguments.

David Gordon has shown repeatedly how praxeology can be used by historians to help explain historical processes. But from an epistemological point of view, the Austrian tradition has something more basic and fundamental to say, as it recasts economics as a kind of knowledge that is unavoidably (and fascinatingly) ‘historical’ by its very nature – just like linguistics and law – yet without descending into historicism, but on the contrary offering a defense of theories of human action. These general theories do not depend on the historical context, as they help explain processes like exchange, monetization and price formation in all historical contexts. Thereby, the Austrian school establishes a balanced and fruitful relationship between theory and history. Contra neoclassical and positivist methods, Austrians reaffirm the auxiliary role played by apodictic economic theory (as well as by unquantifiable mental and cultural phenomena, but this could be in itself the subject of another article); and contra neo-Marxist temptations, Austrians avoid the fiction of a linear and teleological philosophy of history, thus preventing theory from overtaking historical data or denying the complexity of specific instances of historical change.

Economic historians should reconcile with economics as a science that is not inimical to the study of the past but rather auxiliary to the analysis, categorization and explanation of past phenomena. We cannot write history without using those abstract terminologies and analytical tools (‘town,’ ‘country,’ ‘state,’ ‘commerce’) that make history communicable. To shape and propose a meaningful narrative, these terminologies and tools must be clearly adopted as part of a theory (or of compatible theories) that a historian should consistently hold – at least within the same lecture or piece of research.

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