Wiener Moderne and Austrian Economics – A product of times of turmoil

There are some certain incredibly rare constellations of time and space which result in one of a kind decades. The peak of Greek civilization from 5th to 4th century BC, the Californian Gold Rush from 1848–1855 and the Fin de Siecle from 1890-1920. The latter one is of specific interest to me for a long time. Some of the most worlds most famous painters (Gustav Klimt, Oskar Kokoschka), philosophers (Ludwig Wittgenstein, Karl Popper, Edmund Husserl) or authors (Georg Trakl, Hugo von Hofmannsthal, Arthur Schnitzler) coined the decade. Even more intriguing for me is that the Viennese intellectual live happened in very close circles. All intellectuals being witnesses of the downfall of one of the greatest empires of the 19th century, each discipline coped with this fate in their very own way. Especially if one compares the movements of that time in literature and economics, it becomes clear that the self-imposed demands of the authors and scientists on their science differ considerably.

The Wiener Moderne:  Flight into the irrational

Driven by the predictable crumbling of the Austro-Hungarian empire, the anticipated increasing tensions in the multi-ethnic empire and the threating of financial recession, the civil society was teetering on an abyssal edge. Furthermore, the Halleyscher comet was predicted to “destroy” the world in 1910, the titanic sunk in 1912, a European war was lingering just around the corner. Concerning the breakdown of stable order, people sought a way out of ruins of what once has been a stable authoritarian order. When existential threats become more and more realistic, one would expect cultural life to totally drain or at least decrease sufficiently. However, the complete opposite was the case.

At first, art merely revolted against the prevailing naturalism. Why would anybody need a detailed, accurate depiction of reality if reality itself is flawed with incomprehension, irrationality and impenetrability? Missing a stable external framework, many writers turned the back against their environment and focused on the Ego. To express the inner tensions of most contemporary people, many authors sought to dive deep into the human consciousness. Inspired by the psychoanalytical insights provided by Sigmund Freund, who had vivid relationships with many important authors such as Arthur Schnitzler, human behaviour and especially human decision making became a topic of increasing interest. Therefore, news ways of narrating such as interior monologue were founded.

Many writers such as Albert Schnitzler, Hugo von Hofmannsthal and Georg Trakl found in transcendence a necessary counterbalance to supra-rational society. Reality and dream blurred into a foggy haze; rational preferences gave way to impulsive needs; time horizons shortened, emotions overcame facts. The individual was portrayed without any responsibility towards society, their family or other institutions. In the Dream Story (By far my favourite book) by Arthur Schnitzler, the successful doctor Ferdinand risks his marriage and his family to pursue subconscious, mysterious sexual needs. If you have the time, check out the movie based on the novel “Eyes Wide Shut” by Stanley Kubrick, truly a cinematic masterpiece.

Karl Kraus, on the other hand, founded the satirical newspaper “The Torch” in 1899 and offered often frequented point of contact for aspiring young talented writers. The content was mostly dominated by craggy, harsh satirical observations of the everyday life which sought to convince the public of the predictable mayhem caused by currents politics. Franz Wedekind, Adolf Loos and Else Lasker-Schüler could use the torch as a stepping stone for their further careers.

What they have in common is their understanding of their craftmanship: It is not of the concern of art to save civilization or to convince us to be better humans, but to describe, document and in a way aestheticize human behaviour. This does by no way means that the Viennese authors of the early 20th century were not politically or socially involved: Antisemitism (Karl Kraus & Arthur Schnitzler), Free Press (Karl Kraus), Sexuality (Franz Wedekind and Arthur Schnitzler) were, for example, reoccurring themes. However, in most works, the protagonist struggles with these problems on an individual level, without addressing the problem as a social problem. Also, the authors seemed to lack the entire puzzle picture: Although many individual pieces were criticized, the obvious final picture was rarely recognized (Especially Schnitzler).

Economics – Role of the scientist in society

Meanwhile in economics another exciting clash of ideas took place: The second wave of the Historical School economist, mainly Gustav Schmoller, Karl Büchner and Adolph Wagner, were waging a war against Austrian School of Economics, mainly Carl Menger. The Historical School sought to identify the patterns in history through which one could deduce certain principles of economics. Individual preferences are not the result of personal desires, but rather the sum of social forces acting on the individual depending on space and time, they asserted. Thus, instead of methodological individualism, methodological collectivism must be used to conduct economic research. To determine the historical-temporal circumstances, one must first collect an enormous amount of empirical material, based on which one could formulate a theory. Austrian Economists, in turn, claim that individual preferences stem from personal desires. Although the Austrian emphasize the constraints emerging from interpersonal interactions, they rejected the idea, that free individuals are confined in their will through culture and norms. Thus, economics is a science of aggregated individual preferences and must be studied through the lens of methodological individualism.

As Erwin Dekker (Dekker 2016) has argued, the works of Austrian Economists must be seen as an endeavour to understand society and civilization in the first place. One must carefully study human interaction and acknowledge the ridiculously small amount of knowledge we actually possess about the mechanism of a complex society before one can “cure” the many ills of humankind. With the socialist calculation debate, Austrian Economist tried to convince other academics of the impossibility of economic calculation in the absence of prices.

Apart from their academic debates, they were very much concerned with the development of common society: Authoritarian proposal, the constant erosion of norms as a foundation for civil society, the increasing overall hostility lead them to the decision to leave the ivory tower of economics and argue for their ideas in public discourse. “The road to serfdom” is THE peak of this development. Hayek impressively explains to the general public the fragility of liberal democratic order and how far-reaching even well-intended governmental interferences can eventually be. Joined by Karl Popper’s masterpiece “The open society and its enemies”, Austrian Economist were now defending the achievements of liberal democracy more vigorously than ever.

Conclusion

It would be exaggerated to claim that the literary-historical “flight into the irrational” had excessive influence on the economic debate between the historical school and the Austrian school. Nevertheless, it has already been proven that intellectual Viennese life took place in a few closely networked interdisciplinary circles. There is no direct connection between the Viennese literary circles and famous contemporary economic circles such as the Mises-Kreis. However, the intellectual breadth of contributions and the interwoven relationships of many contributors became an important point of study in recent years (See: Dekker 2014). Especially Sigmund Freud could have been a “middle man” between Austrians (especially Hayek) and the authors of the Wiener Moderne (especially Schnitzler).

What definitely is remarkable is how different the various scientists and artist reacted to the existential threats of the early 20th century.
Resignation? Internal Exile? Counterattack? There were many options on the table.

The “flight into the irrational” pursued by many, by far not all, authors of Wiener Moderne was a return to surreality, irrationality and individualism. Austrian Economist, however, went from individualism to social responsibility. According to them, scientists had an obligation to preserve that kind of liberal democratic system, which fosters peaceful human cooperation. To achieve this shared goal, many Austrian Economists left the ivory tower of academic debates, where they also fought for the same purpose, and temporarily became public intellectuals; starting a much more active defence of liberal democracy.

The long-run risks of Trump’s racism

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This week, the United States and much of the world has been reeling from Trump’s xenophobic statements aimed at four of his Democratic opponents in Congress. But the U.S. economy continues to perform remarkably well for the time being and despite his protectionist spasms, Trump is widely considered a pro-growth, pro-business President.

This has led some classical liberals to consider Trump’s populist rhetoric and flirtations with the far right to be a price worth paying for what they see as the safest path to keeping the administrative state at bay. Many classical liberals believe the greater risk to liberty in the U.S. is inevitably on the left with its commitment to expanding welfare-state entitlements in ways that will shrink the economy and politicize commercial businesses.

In ‘Hayek vs Trump: The Radical Right’s Road to Serfdom’, Aris Trantidis and I dispute this complacency about authoritarianism on the right. In the article, now forthcoming in Polity, we re-interpret Hayek’s famous The Road to Serfdom in light of his later work on coercion in The Constitution of Liberty.

We find that only certain forms of state intervention, those that diminish the rule of law and allow for arbitrary and discriminatory administrative oversight and sanction, pose a credible risk of turning a democratic polity authoritarian. A bigger state, without more discretionary power, does not threaten political liberty. Although leftwing radicals have in the past shown disdain for the rule of law, today in the U.S. and Europe it is the ideology of economic nationalism (not socialism) that presently ignores democratic norms. While growth continues, this ideology may appear to be compatible with support for business. But whenever the music stops, the logic of the rhetoric will lead to a search for scapegoats with individual businesses in the firing line.

Several countries in Europe are much further down the 21st road to serfdom than the U.S., and America still has an expansive civil society and federal structures that we expect to resist the authoritarian trend. Nevertheless, as it stands, the greatest threat to the free society right now does not carry a red flag but wears a red cap.

Here is an extract from the penultimate section:

The economic agenda of the Radical Right is an extension of political nationalism in the sphere of economic policy. While most Radical Right parties rhetorically acknowledge what can be broadly described as a “neoliberal” ethos – supporting fiscal stability, currency stability, and a reduction of government regulation – they put forward a prominent agenda for economic protectionism. This is again justified as a question of serving the “national interest” which takes precedence over any other set of values and considerations that may equally drive economic policy in other political parties, such as individual freedom, social justice, gender equality, class solidarity, or environmental protection. Rather than a principled stance on government intervention along the traditional left-right spectrum, the Radical Right’s economic agenda can be described as mixing nativist, populist and authoritarian features. It seemingly respects property and professes a commitment to economic liberty, but it subordinates economic policy to the ideal of national sovereignty.

In the United States, President Trump has emerged to lead a radical faction from inside the traditional right-wing Republican Party on a strident platform opposing immigration, global institutions, and current international trade arrangements that he portrayed as antagonistic to American economic interests. Is economic nationalism likely to include the type of command-and-control economic policies that we fear as coercive? Economic nationalism can be applied through a series of policies such as tariffs and import quotas, as well as immigration quotas with an appeal to the “national interest.”

This approach to economic management allows authorities to treat property as an object of administration in a way similar to the directions of private activity which Hayek feared can take place in the pursuit of “social justice.” It can take the form of discriminatory decisions and commands with a coercive capacity even though their authorization may come from generally worded rules. Protectionism can be effectuated by expedient decisions and flexible discretion in the selection of beneficiaries and the exclusion of others (and thereby entails strong potential for discrimination). The government will enjoy wide discretion in identifying the sectors of the economy or even particular companies that enjoy such a protection, often national champions that need to be strengthened and weaker industries that need to be protected. The Radical Right can exploit protectionism’s highest capacity for partial discriminatory applications.

The Radical Right has employed tactics of attacking, scapegoating, and ostracizing opponents as unpatriotic. This attitude suggests that its policy preference for economic nationalism and protectionism can have a higher propensity to be arbitrary, ad hoc and applied to manipulate economic and political behavior. This is perhaps most tragically demonstrated in the case of immigration restrictions and deportation practices. These may appear to coerce exclusively foreign residents but ultimately harm citizens who are unable to prove their status, and citizens who choose to associate with foreign nationals.

Nightcap

  1. Enchiladas, a culinary monument to colonialism Alexander Lee, History Today
  2. The Marginal Revolutionaries of Austria-Hungary Tyler Cowen, MR
  3. The other side of British India Soni Wadhwa, Asian Review of Books
  4. Old Tokyo, time telling, and the Chinese zodiac Claire Kohda Hazelton, Spectator

How the populists came to power

Jair Bolsonaro was elected president in Brazil. Donald Trump in the US. In other countries, similar politicians are gaining popular support. Some are calling these politicians “populists”. I don’t really know what they mean by this term. The populists that I know better are Getúlio Vargas, Brazil’s president for almost 20 years in the mid-20th century and Juan Peron, a leading political figure in Argentina in the same time period. What they had in common? Both fought the communist influence in Latin America, favored the labor movement and were anti-liberal. They were also extremely personalist, leading to something that could be understood as a cult of personality. I completely fail to see important similarities between Trump and Bolsonaro on the one hand and Vargas and Peron on the other. But I can see some similarities between Trump and Bolsonaro. The latter two both came to power against what the left became in the last few decades.

Once upon a time, there was a young German philosopher called Karl Marx. He was very well read but wasn’t very bright on economics. Anyway, he decided that he would correct the classical liberal economic theory of Adam Smith. The result was that Marx concluded that in the center of the economy, and actually in the center of history itself, was the class struggle between the workforce and the bourgeoisie. Of course, although appealing on the surface, Marx’s economic theory is pure nonsense. Maybe Marx himself knew it, for at the end of his life he was more interested in living a peaceful life in London than in leading a revolution. But this didn’t stop Marxists from starting Revolutions throughout the world, beginning in Russia.

Ludwig Von Mises brilliant pointed out that Marxism would never work as the economic foundation of a country, for it ignored private property. Without private property, there is no price formation and without prices economic calculation is impossible. In doing so, Mises founded the Austrian School of Economics. The economic debate between Austrians and Marxists ensued, but arguing with a Marxist is like playing chess with a pigeon. He will climb on the board, knock down the pieces and believe that he won. Regardless, facts don’t care about your feelings, and reality proved again and again that Mises was right.

However, at the same time, something else was happening. In Italy, a Marxist named Antonio Gramsci concluded that armed revolution was not the best way to power. He believed that a cultural approach would be better. Some German scholars in Frankfurt concluded pretty much the same. Their question was “why the proletariat will not follow us?”. The answer was that they were too alienated by capitalist culture.

Following Gramsci and the Frankfurt School, Marxists all over the world gave up studying economics and decided to study culture. They concluded that everyone can feel oppressed. The class struggle seized to be between factory workers and factory owners and turned into a fight between man and woman, black and white, gay and straight. Identity politics was born.

And that’s how the “populists” came to power. It is not so much that the common people (and especially conservatives and libertarians) are crazily in love with Bolsonaro or Trump. It is just that people eventually get tired of being called oppressors. The left, once legitimately concerned with the conditions of the poor, ignored that the best solution for poverty is the free market. Instead, they decided they would crush the common people they swore to protect, calling them homophobic, misogynists and so on. Common people answered by voting for whoever was on the other side of the political spectrum.

Battling Time and Ignorance: Mario Rizzo at 70

Last week my friend and colleague Mario Rizzo, a scholar central to the revival of  contemporary Austrian economics, turned 70. This occasion prompted a spontaneous outpouring of praise for his work, as well as messages of gratitude for his support of students and fellow academics over his decades as an intrepid professor with his home firmly at NYU. They are collected over at ThinkMarkets. Jeffrey Tucker has written an excellent summary of Mario’s intellectual contributions at the American Institute for Economic Research. Below is a segment of my birthday message:

In my home, the United Kingdom, classical liberal thought has until recently been virtually unheard within much of academia. As a student and think-tank researcher ravenous for liberal approaches to public policy, I gorged on Mario’s blog posts from ThinkMarkets. Together with Marginal Revolution and Cafe Hayek, ThinkMarkets was a critical lifeline for me facing an intellectual world dominated by various visions of authoritarianism and only slightly more benign variants of paternalism.

Thanks to Mario’s selfless contributions to the revival of Austrian economics, that intellectual world is changing, even in the UK. His co-founding of the Society for the Development of Austrian Economics and hosting the Program on the Foundations of the Market Economy at NYU has provided support and inspiration for countless young scholars.

I am very fortunate to be among that multitude.

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What makes robust political economy different?

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I encountered what would later become important elements of Mark Pennington’s book Robust Political Economy in two articles that he wrote on the limits of deliberative democracy, and the relative merits of market processes, for social and ethical discovery, as well as a short book Mark wrote with John Meadowcroft, Rescuing Social Capital from Social Democracy. This research program inspired me to start my doctorate and pursue an academic career.  Why did I find robust political economy so compelling? I think it is because it chimed with my experience of encountering the limits of neo-classical formal models that I recount in my chapter, ‘Why be robust?’, of a new book, Interdisciplinary Studies of the Market Order.

While doing my master’s degree in 2009, I took a methodology course in rational choice theory at Nuffield College’s Center for Experimental Social Science. As part of our first class we were taken to a brand new, gleaming behavioural economics laboratory to play a repeated prisoners’ dilemma game. The system randomly paired anonymous members of the class to play against each other. We were told the objective of the game was to maximise our individual scores.

Thinking that there were clear gains to make from co-operation and plenty of opportunities to punish a defector over the course of repeated interactions, I attempted to co-operate on the first round. My partner defected. I defected a couple of times subsequently to show I was not a sucker. Then I tried co-operating once more. My partner defected every single time in the repeated series.

At the end of the game, we were de-anonymised and it turned out, unsurprisingly, that I had the lowest score in the class. My partner had the second lowest. I asked her why she engaged in an evidently sub-optimal strategy. She explained: ‘I didn’t think we were playing to get the most points. I was just trying to beat you!’

The lesson I took away from this was not that formal models were wrong. Game theoretic models, like the prisoners’ dilemma, are compelling and productive analytical tools in social science, clarifying the core of many challenges to collective action. The prisoners’ dilemma illustrates how given certain situations, or rules of the game, self-interested agents will be stymied from reaching optimal or mutually beneficial outcomes. But this experience suggested something more complex and embedded was going on even in relatively simple social interactions.

The laboratory situation replicated the formal prisoners’ dilemma model as closely as possible with explicit rules, quantified ‘objective’ (though admittedly, in this case, low-value) payoffs, and a situation designed to isolate players as if they were prisoners in different cells. Yet even in these carefully controlled circumstances, it turns out that the situation is subject to multiple interpretations and understandings.

Whatever the textual explanation accompanying the game, the score on the screen could mean something different to the various players. The payoffs for the representative agents in the game were not the same as the payoffs in the minds of the human players. In a sense, my partner and I were unwittingly playing different games (although I lost within either rules of the game!).

When we engage with the social world, it is not only the case that our interests may not align with other people. Social interaction is open-ended. We do not know all the possible moves in the game, and we do not know much about the preference set of everyone else who is playing. Indeed, neither they nor we know what a ‘complete’ set of preferences and payoffs would look like, even of our own. We can map out a few options and likely outcomes through reflection and experience but even then we may face outcomes we do not anticipate. As Peter Boettke explains: ‘we strive not only to pursue our ends with a judicious selection of the means, but also to discover what ends that we hope to pursue.’

In addition, the rules of the game themselves are not merely exogenous impositions on us as agents. They are constituted inter-subjectively by the practices, beliefs and values of the actors that are also participants in the social game. As agents, we do not merely participate in the social world. We also engage in its creation through personal lifestyle experimentation, cultural innovation, and establishing shared rules and structures. The social world thus presents inherent uncertainty and change that cannot be captured in a formal model that assumes fixed rules of the game and the given knowledge of the players.

It is these two ideas, both borrowed from the Austrian notion of catallaxy, that makes robust political economy distinct. First, neither our individual ends, nor means of attaining them, are given prior to participation in a collective process of trial and error. Second, the rules that structure how we interact are themselves not given but subject to a spontaneous, evolutionary process of trial and error.

I try to set out these ideas in a recent symposium in Critical Review on Mark Pennington’s book, and in ‘Why be robust?’ in Interdisciplinary Studies of the Market Order edited by Peter Boettke, Chris Coyne and Virgil Storr. The symposium article is available on open access and there is a working paper version of my chapter is available at the Classical Liberal Institute website.

AEM Europe and PCPE in Prague, April 21-24 2016

I have recently returned home from 4 days of Prague, Czech Republic, where I attended two conferences: Austrian Economics Meeting Europe and the Prague Conference on Political Economy. After having been secluded from Austrian economists and Libertarians for almost 2 years, it felt like a homecoming to be surrounded again by people who share similar thoughts. This was after all the only place in the last two years where I was able to fully express my (´controversial´) ideas about society. Being surrounded by tremendously smart people – you have to be rather smart and geeky to give up part of your free time or professional work in order to visit conferences and discuss philosophy, politics and economics – within the beautiful city of Prague made it a wonderful experience.

The AEME came about after the summer of 2014 when those from Europe who visited Mises University that year decided to come together again to discuss classical liberal ideas in the spirit of Carl Menger, Ludwig von Mises, Friedrich von Hayek and Murray Rothbard. The first AEME event took place in 2015 in Vienna, Austria, the city where the Austrian School of economic thought emerged from the works of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others. The Austrian School is famous for its methodological struggle against the Prussian Historical School and their idea that economics is culture- and time-specific and therefore does not contain universal validity. The Austrian School is also famous for such theoretical contributions as the subjective theory of value (as opposed to Marx’ labour theory of value), theory of marginal utility, opportunity cost doctrine, Austrian business cycle theory, the time structure of production and consumption, methodological individualism and the economic calculation problem that was first formulated by Ludwig von Mises in 1920 and later expanded upon by Friedrich von Hayek to show that pricing systems in socialist economies were necessarily deficient. From a socio-political perspective, the School argues for limited government and some even for libertarian anarchism.

AEME pub
AEME participants sharing their last evening in Prague in a local pub

What was great about the second AEME is that it took place right before the PCPE conference at the CEVRO Institute. Most of us who attended AEME have stayed two extra days to attend the PCPE conference as well. The CEVRO Institute is a private university founded in 2005 that is located in the very centre of the city of Prague. The university prides itself in its emphasis on freedom, markets, and its innovative character that is for example manifested in its PPE (Philosophy, Politics, Economics) programme taught by such international illustrious professors as Michael Munger who is also director of Duke University’s PPE programme, Peter Boettke who is the director of the F.A. Hayek Program at George Mason University, David Schmidt who is director of the Center for the Philosophy of Freedom at the University of Arizona, Boudewijn Bouckaert who was the former dean of the Faculty of Law at the University of Ghent, and Josef Sima who is the president of the CEVRO Institute. The institute has invited several prominent speakers for its conference. Prof. Mark Pennington (London School of Economics) was for example invited to present “Why most things should probably be for sale”. Prof. Benjamin Powell who is the director of the Free Market Institute at Texas Tech University, the University to which I almost applied to to pursue my PhD in the academic year of 2015 but eventually decided to work as a software engineer, was there as well to speak about “Migration, Economic Calculation, and the European Situation.” Prof. Mario Rizzo (New York University) had the honour to be the keynote speaker and spoke about “The four pillars of new paternalism” which was followed by commentaries from Prof. Pascal Salin, former president of the Mont Pelerin Society.

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Mario Rizzo’s welcome speech to PCPE

The second day of the PCPE conference, there were 27 speakers spread over 9 sessions on such topics as economic theory, anarcho-capitalism, the Austrian School, entrepreneurship, cryptocurrencies, the role of family and more. I was one of the speakers and spoke on the “Philosophical investigation of seasteading as the means to discover better forms of social organization”. The thesis of my talk was that one core focus of political philosophy is to deal with the realities of value pluralism and political disagreements. I contended that the most common form of social organization, representative democracy, does not satisfactorily deal with these realities. Therefore, we should look for political possibilities beyond representative democracies and that in order to discover these possibilities, we should experiment with new forms of social organizations. By approaching the issue from a meta-system level perspective and realizing that governments are resistant to structural societal changes we should then introduce competition into the industry of governments. Seasteading, the creation of habitable dwellings on the oceans, could serve as a means to introduce more competition in the industry and lessen political tensions between citizens who hold different comprehensive doctrines.

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Me speaking at PCPE about Seasteading as the means to deal with such political realities as value pluralism and political disagreements

If I could mention one thing that has made the most remarkable impression on me, it would be the warning issued by Prof. Stephen Baskerville (Patrick Henry College, USA) that the most immediate threat to our liberties is feminism and the social justice movement. He maintained in his talk that there is an ensuing crisis of the family which is perpetuated by the state. According to Prof. Baskerville, family courts can enter homes uninvited, take away people’s children, confiscate their property, and incarcerate them without trial, charge or counsel. With over 50% of all first marriages ending in divorce and more than half of all these divorces involving children, the greatest threat to our liberties is the colluding social work state bureaucracies with radical feminism. These groups have colluded to suppress information on such injustices. Listening to Baskerville’s talk, I felt the great urgency to engage in an intellectual battle against feminism and the social justice movement.

Other than the many intellectually invigorating moments, the city itself provided many magnificent sites. To mention several sights: we visited a beer garden, experienced a classical music concert at the Mirror Chapel, walked over the Charles Bridge, and visited the Prague Castle.

Prague Charles Bridge
The beautiful Charles Bridge crossing the river Vltava

All in all, the city of Prague, AEME and PCPE were an unforgettable experience! It has already been decided that next year’s AEME conference will take place in Krakow, Poland. The conference will be open for anyone who is interested in Austrian economics and libertarianism. For more information on AEME and the papers that were presented in the previous editions, you can find our website here. In case you are interested in studying at the CEVRO Institute and its MA PPE programme with specializations in “Austrian Economics”, “Studies of Transition”, and “International Politics”, you can visit their website here.