In the first chapter of Classical Liberalism and the Austrian School, Ralph Raico considers the connection between Austrian economics and laissez-faire. For the most part, the early Austrian economists Menger and Bohm-Bawerk, stuck to pure theory, and did not venture much into advocacy. Just how liberal they were is a fascinating question that Raico probes thoroughly. But what is certain is that they were not nearly as overt in their support for the free market as their followers Mises and Rothbard were.
So why, even from the earliest days, were socialists and interventionists so terrified by Austrian insights? Why, with or without a theory of objective ethics like Rothbard’s, does Austrian economics so naturally lend itself toward laissez-faire positions? According to Raico, it is its consumer-oriented view of the market process.
But probably the clearest and most convincing grounds for associating Austrian economics with the free market has to do with the general conception of economic life propounded by the Austrians, beginning with Menger. In Hayek’s view:
It was this extension, of the derivation of the value of a good from its utility, from the case of given quantities of consumers’ goods to the general case of all goods, including the factors of production, that was Menger’s main achievement. (1973: 7)
This was the perspective that became standard with all of the founders. Kauder (1958: 418) notes that: “For Wieser, Menger, and especially for Böhm-Bawerk, the wants of the consumer are the beginning and end of the causal nexus. The purpose and cause of economic action are identical.” Kirzner argues that it was this central vision that explains why, despite the particular and varying policy views of its founders (see below), Austrianism was perceived to be the economics of the free market. The founders’ works
expressed an understanding of markets which, taken by itself, strongly suggested a more radical appreciation for free markets than the early Austrians themselves displayed. It is this latter circumstance, we surmise, which explains how, when later Austrians arrived at even more consistently laissez-faire positions, they were seen by historians of thought as somehow simply pursuing an Austrian tradition that can be traced back to its founders. (1990: 93, emphasis in original)
Thus, Kirzner implicitly endorses the position Mises upheld in his reply to F.X. Weiss (see below). What is crucial is not the historically and personally conditioned policy views of the first Austrians, but the “overall vision of the economy” that was novel in Menger and shared by his successors. They saw the market economy as
a system driven entirely and independently by the choices and valuations of consumers—with these valuations transmitted “upwards” through the system to “goods of higher order,” determining how these scarce higher-order goods are allocated among industries and how they are valued and remunerated as part of a single consumer-driven process. (Kirzner 1990: 99)
In contrast to the classical economists, who perceived the capitalist system as producing the greatest possible amount of material goods, Menger’s view was that it was “a pattern of economic governance exercised by consumer preferences.” (Later, W.H. Hutt coined the term “consumer sovereignty” for this state of affairs.) As Kirzner points out, “it was this thoroughly Mengerian insight which nourished Mises’s lifelong polemic against socialist and interventionist misunderstandings of the market economy” (Kirzner 1990: 99–100). And, it may be added, it was this fundamental insight into the nature of the private property system that discomfited and incensed Marxists and other socialists even to the present day.
I completely agree with this line of thinking. When Menger brought the consumer back into the picture, and placed him in the captain’s chair of the market process, he humanized the market, and paved the way for Mises’ utilitarian case for the laissez-faire.
The singular tendency of the market economy, as it is seen in the Austrian perspective, is to provide for individuals the satisfaction of their wants according to the extent of their contribution to the satisfaction of the wants of others. Through the market process, the consumers tend to reward each producer according to his contribution to consumer satisfaction. Thus in the market economy, individuals are encouraged to, in their own interest, ever adjust their choices of roles and actions so as to ever improve their contribution to the satisfaction of human wants.
The relative importance of some consumers’ wants are greater than that of others in this process. But, as Mises stresses, the relative importance of any given consumer’s wants, insofar as that relative importance has been determined on the market, is a function of how much he contributed to satisfying the wants of other consumers in his role as a producer.
Thus, under capitalism, human choices, through their interplay, coordinate each other so as to provide for human welfare as fully as possible.
Every state intervention into the market nexus — every tax, regulation, redistribution, or expansion of bureaucracy — only slackens the ties linking contribution and income, thereby hampering the instrumentality of the market by making producers less responsive to consumers, and thus leading to reduced consumer satisfaction. And because, with regard to economic provision, we are all consumers first and foremost and producers only subordinately, reduced consumer satisfaction means reduced public welfare.
This is the picture of the market economy, characterized by what might be called consumer primacy, that Menger made possible when he wrote the book (Principles of Economics) that “made an economist out of” Mises. And with this picture in mind, it is awfully hard not to be a laissez-faire liberal.