When the Austrian School of Economics Supported a Progressive State
Friedrich Hayek’s Road to Serfdom is inarguably the most famous book associated with the Austrian School of Economics. The basic premises of Hayek’s argument are well known: “socialist” trends in German thought now threatened Western democracies; fascism and Nazism were the necessary outcome of those trends; government planning undermined liberal individualism and paved the path to totalitarianism; only economic liberty and free markets could forestall such eventualities. A bestseller in 1945 (and again in 2010), the book helped launch Hayek’s post-WWII career and established Hayek as a pillar of postwar US conservatism. Even today, prominent politicians like Paul Ryan, Rand Paul, Ted Cruz, and Jeff Flake routinely namecheck Hayek and Road.
If these radical free marketers delved a little deeper into Road and the Austrian School tradition they claim to revere, they would likely be surprised. Road is not fundamentally an anti-statist or laissez-faire tract. Hayek recognized that “limited” security—defined as “security against severe physical privation, the certainty of a given minimum of sustenance for all”—in no way compromised a liberal order. Hayek consequently accepted many provisions of contemporary welfare states—environmental and labor regulations, public education, universal health and old age insurance—and even registered provisional support for a universal basic income and universal access to food and shelter. Hayek’s position chagrined his erstwhile Austrian School mentor Ludwig von Mises and the latter’s libertarian supporters, yet Hayek’s argument in Road reflected well the Austrian School’s historical commitment to progressive policy measures in the name of liberty.
Conventional histories of the Austrian School trace the origins of the movement to the publication of Carl Menger’s Principles of Economics in 1871, but a recognizable and coherent group of scholars did not emerge until the mid-1880s, led by the brothers-in-law Eugen von Böhm-Bawerk and Friedrich von Wieser. They were joined by a cohort that operated across the Habsburg Empire: Emil Sax, Gustav Gross, Emil Fürth, Viktor Mataja, and several others. School members initially emphasized theoretical considerations, becoming famous for their conceptualization of value based on subjective preferences, yet they never saw themselves as mere theoreticians.
Empirical work and policy recommendations always factored into their activities. One of the first applied works was Sax’s Foundation of Theoretical State Economics in which he argued that Austrian subjectivist theory could be applied to state policy questions as well as to microeconomic ones. He argued that states should intervene in the economy where the private economy did not meet collective needs, e.g. in defense, transport, public utilities, and market regulation. Böhm and Wieser picked up on these concerns. The former founded The Journal for Economics, Social Policy and Administration and a related professional association. One of the journal’s stated missions was to use economic theory and government policy to address problems of poverty and social unrest. In one of the earliest programmatic statements of the School, Wieser advocated state regulation of the market economy and progressive taxation. Since the wealthy received more benefits from state expenditures for each dollar they contributed, Wieser reasoned, they should pay more proportionately than the poor.
In the early 1890s, Austrian School members put these ideas into action, working through the Habsburg bureaucracy to promulgate the first personal income tax in the Empire’s history. Böhm oversaw the government’s tax commission, and Fürth, Wieser, Sax, and others published defenses. Carl Menger’s brother, Max, chaired the commission’s hearings. Menger’s student, Robert Meyer, wrote the final legislation; Böhm composed the preamble. The next generation of Austrian School members picked up the torch of the founding generation. In “The Crisis of the Tax State” (1918), Joseph Schumpeter argued that a reformed Austrian state modeled on a liberal English example could succeed. He recognized that taxation of all kinds—excluding taxes on business profits—was compatible with economic liberty. Finally, even Ludwig von Mises in Nation, State, and Economy (1917) conceded that progressive taxation was permissible at times and was not a violation of liberal precepts: “The idea of subjecting additional income and the growth of property obtained during the war to special progressive taxation need not, fundamentally, be socialistic. In and of itself the principle of taxation according to ability to pay is not socialistic.” Mises objected to the “socialistic” tendencies of officials that treated wartime profits as “profiteering,” not the state’s right to tax those with more assets progressively.
Hayek and his post-WWI colleagues took a step back from the liberal paternalism of their Austrian School forerunners, partly in response to Mises’s increasingly anti-interventionist teachings. They nonetheless underscored the vital role of the state in regulating the economy, maintaining social stability, and thwarting socialism’s advance. Hayek defined the rule of law in Road: “government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.” He fully accepted that a state was permitted to coerce its citizens according to agreed-upon formal rules. As long as policies like progressive taxation, universal healthcare, or universal basic income were implemented through a legal framework, they were legitimate. Especially in affluent countries, these policies were commonsensical: “There is no reason why in a society which has reached the general level of wealth which ours has attained the first kind of security should not be guaranteed to all without endangering general freedom.” In making this claim, Hayek expanded upon the liberal policies associated with the Austrian School of Economics since its inception. Like his predecessors, Hayek hoped to chart a via media between socialism and laissez-faire, both of which he viewed as untenable. Contemporary self-professed acolytes of Hayek and the Austrian School would be well advised to take these prescriptions to heart.
Janek Wasserman is associate professor at the University of Alabama. He is the author of Black Vienna: The Radical Right in the Red City, 1918–1938.