Tony Judt on the Origins of Our Economic Theories

A little over a year ago, not too long before he passed away, Tony Judt contributed an article to The New Yorker titled What is Living and What is Dead in Social Democracy. This article is crammed with interesting insights into the critical issues that the Western nations are going to have to face. There will be more about this in the future. Here we will only take note of Judt’s thoughts on what drove the theories of our economic icons.

“....we live in the long shadow of a debate with which most people are altogether unfamiliar. If we ask who exercised the greatest influence over contemporary Anglophone economic thought, five foreign-born thinkers spring to mind: Ludwig von Mises, Friedrich Hayek, Joseph Schumpeter, Karl Popper, and Peter Drucker. The first two were the outstanding “grandfathers” of the Chicago School of free-market macroeconomics. Schumpeter is best known for his enthusiastic description of the “creative, destructive” powers of capitalism, Popper for his defense of the “open society” and his theory of totalitarianism. As for Drucker, his writings on management exercised enormous influence over the theory and practice of business in the prosperous decades of the postwar boom.”

“Three of these men were born in Vienna, a fourth (von Mises) in Austrian Lemberg (now Lvov), the fifth (Schumpeter) in Moravia, a few dozen miles north of the imperial capital. All were profoundly shaken by the interwar catastrophe that struck their native Austria. Following the cataclysm of World War I and a brief socialist municipal experiment in Vienna, the country fell to a reactionary coup in 1934 and then, four years later, to the Nazi invasion and occupation.”

“All were forced into exile by these events and all—Hayek in particular—were to cast their writings and teachings in the shadow of the central question of their lifetime: Why had liberal society collapsed and given way—at least in the Austrian case—to fascism? Their answer: the unsuccessful attempts of the (Marxist) left to introduce into post-1918 Austria state-directed planning, municipally owned services, and collectivized economic activity had not only proven delusionary, but had led directly to a counterreaction.”

“The European tragedy had thus been brought about by the failure of the left: first to achieve its objectives and then to defend itself and its liberal heritage. Each, albeit in contrasting keys, drew the same conclusion: the best way to defend liberalism, the best defense of an open society and its attendant freedoms, was to keep government far away from economic life. If the state was held at a safe distance, if politicians—however well-intentioned—were barred from planning, manipulating, or directing the affairs of their fellow citizens, then extremists of right and left alike would be kept at bay.”

The other icon was John Maynard Keynes. He had a different historical perspective and came to a different conclusion.

“The same challenge—how to understand what had happened between the wars and prevent its recurrence—was confronted by John Maynard Keynes. The great English economist, born in 1883 (the same year as Schumpeter), grew up in a stable, confident, prosperous, and powerful Britain. And then, from his privileged perch at the Treasury and as a participant in the Versailles peace negotiations, he watched his world collapse, taking with it all the reassuring certainties of his culture and class. Keynes, too, would ask himself the question that Hayek and his Austrian colleagues had posed. But he offered a very different answer.”

“Yes, Keynes acknowledged, the disintegration of late Victorian Europe was the defining experience of his lifetime. Indeed, the essence of his contributions to economic theory was his insistence upon uncertainty: in contrast to the confident nostrums of classical and neoclassical economics, Keynes would insist upon the essential unpredictability of human affairs. If there was a lesson to be drawn from depression, fascism, and war, it was this: uncertainty—elevated to the level of insecurity and collective fear—was the corrosive force that had threatened and might again threaten the liberal world.”

“Thus Keynes sought an increased role for the social security state, including but not confined to countercyclical economic intervention. Hayek proposed the opposite.”

Judt tells us that we need to understand the origins of these economic outlooks because the contention between the two camps continues today.

“....we are today living out the dim echo—like light from a fading star—of a debate conducted seventy years ago by men born for the most part in the late nineteenth century. To be sure, the economic terms in which we are encouraged to think are not conventionally associated with these far-off political disagreements. And yet without an understanding of the latter, it is as though we speak a language we do not fully comprehend.”

Beginning of personal venting....


People occasionally place the words economics and science in the same sentence, and occasionally one word is even used as a modifier of the other, but here we have a very learned and wise man suggesting that the views of these lofty economists were determined by the neighborhood in which they grew up. If things had turned out differently, Hayek’s economic theories might have tended towards socialism.


Economics is not a science. Economists are observers. They can collect data and make assumptions which will allow them to draw conclusions, but one should not deceive oneself into thinking that these conclusions aren’t biased by personal opinions. Economists have become almost as predictable as Supreme Court Justices. They cling to their theories with the same tenacity as we exhibit in clinging to our political parties. They use their irrational brains to try and understand the individual and collective actions of many millions of irrational brains.


....end of venting.