Ironically, the most sophisticated theory of the type of economy described above emanated from a country in continental Europe which, superficially, doesn't have those British traditions which seem more appropriate for capitalism; the common law, reverence for limited government, respect for property and contract and a Humean, anti-rationalist approach to social affairs. I mean Austria.  But the phrase 'Austrian political economy' has now no geographical significance: rather it suggests a distinctive attitude of mind and a distinct methodological orientation towards familiar social and economic problems. Most Austrians today are American.

The school of Austrian economics emerged from the subjectivist-marginalist revolution in economic theory in the 1870s. The main figures in this were Leon Walras, Stanley Jevons and the Austrian, Carl Menger. [4] It was primarily a theory of economic value which identified it in terms of choice at the margin. This replaced the prevailing objective theory of value, which measured it in terms of labour inputs (costs of production); that reached its apogee with David Ricardo (and, of course, Marx). The new approach was a much better explanation of value in a capitalist economy. It resolved the old 'diamonds and water' paradox - diamonds are useless but very expensive while water is valuable for human life but costs virtually nothing. Of course, as marginalism clearly explains, in the desert the situation is reversed. But this theory does not justify capitalism. It did, of course, establish methodological individualism, economic processes were reducible to individual choice at the margin, but there was no explanation of that moral individualism which lies at the heart of the ethical case for capitalism. Neither was there any explanation and justification for the typical capitalist institutions, such as the firm or the stock market.

Neither at this stage was there any account of entrepreneurship and profit which, although necessary, were to become very controversial. Indeed, the perfect equilibrium of the efficient market became in the 1930s the model for market socialism. [5] In this model every factor is paid its marginal product, entry into the market is costless, there is no 'profit' and, logically, no need for entrepreneurship. Capital would be allocated by the state somehow mimicking a market characterised by private ownership. [6]

After Menger, Austrian economists made important contributions to economic theory involving the extension of the principles of subjectivism and marginalism to all aspects of economic life. Eugen Bohm Bawerk was instrumental in the development of capital theory as well as providing a devastating critique of Marxism and Friedrich von Wieser discovered the theory of opportunity cost. However, all these contributions, important though they were, could be seen as part of positive economics, that is, concerned with the understanding of economic phenomena rather than with recommending any particular form. Of course, the early Austrians themselves believed in capitalism but rarely ventured into normative economics; indeed one, von Wieser, held what we would today call social democratic opinions. [7]

The open association of Austrian economics with capitalism was first espoused in the work of Ludwig von Mises. [8] He did make substantial contributions to pure theory, especially his theory of money [9] and the theory of the trade cycle, but he is remembered today for his rigorous defence of capitalism and searching critique of government and bureaucracy. His first venture was a demolition of market socialism [10] based on subjectivism and the state's inability to calculate without private property and capital markets. But perhaps his most enduring innovation was his invention of entrepreneurship because this made his theory very different from orthodox equilibrium economics. He argued that the market could not be co-ordinated by the state and that individuals require the lure of profit to draw them into productive activities.

But it is important to note here that Mises was not directly concerned with ethics nor was he that interested in defending the morality of profit. In fact, Mises's ethics were little more than an unsophisticated utilitarianism; even slavery appeared to be wrong merely because it was inefficient. [11] But what is interesting here is that Mises was uninfluenced by Kant's ethics (which were based on reason) yet his philosophy of science was distinctly Kantian. It was decisive in his economics.

For Mises, the truths of economics were known in advance of all experience: they  were a priori or apodictic. He starts from the fundamental proposition that man acts and his actions are designed to remove some present state of uneasiness, whatever that might be. All action is therefore rational, in contrast to some physiological movement such as a knee jerk or similar response to some abrupt change in the environment. With the action proposition and of a handful of subsidiary assumptions, such as the ordering of preferences and time preference, the whole of economic theory can be deduced without the need for any empiricism. Economic theory is not capable of verification or even falsification. In contrast, physical science deals with the causal relationships between measurable objects. But social science is not about anything observable, its concern is with the logical reconstruction of events. And it is to do with actions limited by the 'laws of necessity'. For example, the law of demand would not be refuted if a fall in price led to an increase in consumption. It might be peculiar but it is still a product of human action. Modern, orthodox economics shows some recognition of this whenever an economic proposition is preceded by the ceteris paribus clause.

But when it come to ethics, whereas Kant tried to demonstrate the grounding of moral principles in reason and the universalisability rule, for Mises they are a matter of taste, like the preference for a particular wine. The idea that nature can bestow 'rights' on man is treated with particular scorn: the worst of these delusions, he said, is that "nature" has bestowed on every man certain rights'. [12]   This goes beyond even Hume, who, although denying the ultimate rationality of ethics, still believed that a proper understanding of nature was the key to a plausible, even universal ethics. And Hume was a crucial influence on Hayek's rationale of capitalism.

What then are the ethics of capitalism for Mises? They are utilitarian and, using the universally true principles of economics, one can show that human well-being is satisfied by the free market, private property and strictly limited government. Again, this does not require any empirical demonstration. He says that 'anything that preserves the social order is moral'. [13] And capitalism preserves the social better than any known alternative. To the obvious objection, that since choices are necessarily subjective 'anything goes', Mises admits a mild empirical observation. In his  Theory and History, he claims that there is a '.a far reaching unanimity among people with regard to the choice of ultimate human ends.' [14] Egoism is the basic law of society and man is a restless utility maximiser; but unrestrained capitalism directs that irresistible human motivation towards harmony and prosperity. It should be noted here that Mises's utilitarianism owes nothing to the once fashionable doctrine that utility could be measured cardinally, that individual utilities could be compared and that redistribution was sanctioned because it maximised total social utility.

But of the necessary institutions of capitalist society, Mises says very little. What about the firm? Does that not depend on the coercive law of the state or does a spontaneous order, like the common law, generate, by voluntary contract, those features of the firm which we now associate with free market capitalism? There is no doubt that Mises would be contemptuous of contemporary fads like the 'social responsibility of business' but if such essential things as the limited liability of commercial enterprises are a product of positive or statutory law, then does he have any defence against the claim that these 'privileges' have to be earned by firms through their good works and relaxation of the pure profit motive?

It has to be said that despite his spirited defence of capitalism there is little in Mises that is germane to contemporary business ethics. He was too interested in the grand issues like capitalism versus socialism, the explanation of depressions, the opposition to Keynesianism and the errors of Marxism to be concerned with the nuances of capitalist society. His defence of capitalism was also a variety of rationalism, which has provoked criticism from that other Austrian advocate of private property and the market, Friedrich von Hayek. In his work, capitalism is derived from experience and tradition, its morality is a continuation of Hume's indirect utilitarianism and owes little to the a priori reasoning we associate with Mises.

Hayek first made his reputation as a professional economist, in the Austrian tradition, working on monetary theory and the trade cycle in the 1930s. He was known originally for his long-running dispute with Keynes; a battle that predated the General Theory, but he found notoriety with the publication of The Road to Serfdom, in 1944. [15] Although in the West Marxism was not an immediate threat, outright capitalism had few defenders and most people expected the coming post-war era to be characterised by considerable state welfare and extensive government intervention in the market. The Road to Serfdom upset this burgeoning consensus with its warning that even minor interference with market capitalism would result in a dire threat to the liberal order. After this, Hayek virtually abandoned pure economics and spent the rest of his life elaborating in law and political philosophy the central themes of The Road to Serfdom through books such as The Constitution of Liberty [16] and the three volume, Law, Legislation and Liberty. [17]

Although Hayek would not depart significantly from Mises's description of capitalism his intellectual foundations are different. There is little of the a priori approach and a much greater reliance on tradition and experience and, although he was a utilitarian, there is much less of the abstract reasoning that underlies Mises's version of that doctrine. He does not demonstrate the superiority of the market, private property order by theorising in advance of experience but shows how it emerges from the spontaneous development of a variety of social institutions, the common law being the most important, along with the market. In this approach, the tradition established by David Hume and the eighteenth century Scottish Enlightenment proved to be decisive.

Perhaps a convenient starting point is Hayek's theory of knowledge, [18] for it is the conceit of economic planners that they can have the economic knowledge, that is, of consumer tastes and productive possibilities,  that would be required for the planned organisation of a modern economy. But that knowledge is dispersed across a wide range of actors and has to be co-ordinated and it is here that Hayek makes use of the entrepreneur. The entrepreneur relies on 'tacit knowledge', that economic information that cannot be formulated in a precise form as the socialist planners presupposed; and here Hayek makes use of the philosopher's distinction between knowing that and knowing how. Ethics can be said to emerge in this way: it is not designed but consists of spontaneously developing conventions that have utilitarian value.

He used economic theory to refute egalitarianism: the attempt to equalise wages will be disruptive of the labour market and that factor will have to be allocated by force. It is certainly not consistent with liberty. But in a later work [19] Hayek specifically attacks the twentieth century obsession with 'social justice' and departed a little from the purely economic or allocational critique. He labelled it a 'mirage' which had no real meaning. It simply referred to am emotional response to the verdict of market in the distribution of income. It is a rationalist fallacy to suppose that a pattern of rewards could accord to some preconceived ideal, based on morality, without doing irreparable damage to efficiency, freedom and the rule of law. He makes no comment on the initial distribution of property rights from which exchange begins and this could not have been determined by the market. Of course, a Pareto- efficient allocation can result from any original distribution and Hayek says nothing about what should be.           

A more useful aid to the defence of capitalism is Hayek's account of the spontaneous development of law. He sees the emergence of a coherent legal system as exhibiting the same properties as the market, although in his early work he showed some appreciation for the code law system (especially German civil law). Hayek later became almost obsessed with the common law. [20] In contrast with its natural growth, the rational design of a legal code is subject to the same knowledge problem as a socialist economic plan. Important here is the fact  that since common law judges have a little more discretion than their counterparts in civil law, they can 'discover' rules that are appropriate to the preservation of a free order. It is also the case, as we shall see, that the flexibility of the common law allowed for the development of the 'company', which is crucial for the prosperity of capitalism, without the need for statute. Indeed, all of the features of the company can be derived the individualistic law of contract . And it is here that the doctrine of the rule of law becomes important, for Hayek's criteria for state action is not derived from  public good theory, least of all from some contestable moral licence for public over private action, but from a consideration of whether the proposed action can be made consistent with his, non-positivist, criteria of lawfulness. Laws must be perfectly general, name no one and be non-retrospective. To be consistent with his ideal of liberty, they must not be formulated as commands but as guidelines for individual activity. While it would not be logically impossible to frame the laws of a socialist society in this manner it is undoubtedly the case that the collectivism we are familiar with has proceeded through arbitrary and unpredictable command. Indeed, a capitalist market economy, open to all and operating according to known rules, is the only economic system that can meet fully with these criteria. It also preserves the moral value of liberty, although Hayek was more concerned with its value in the acquisition of knowledge than its role in 'self-development'. 

But there are still some important questions to be dealt with concerning law and capitalism. One problem concerns America, for although this is basically a common law country it has a kind of a code imposed on it. I mean, of course, the Constitution which does to an extent protect property and contract. In one controversial interpretation of the 14th Amendment, the 1905 case of Lochner v. New York, the Supreme Court struck down a New York statute which would have strictly limited the number of hours per week bakers could work. It was thought to be in breach of the 14th Amendment which was said to grant more or less unlimited freedom of contract. In those days, the Court would strictly scrutinise acts of legislatures which might abridge economic liberty and capitalism [21] but in the 1930s Lochner was overturned and in a 1938 case (Carolene Products v. United States ) it was ruled that there was a distinction between civil and economic liberties and that the Court would subject the former to much stricter tests of legality. The latter depend on the goodwill of the legislatures and their knowledge of economics: both have been shown to be in short supply. Since contrasting decisions can be shown to be consistent with Hayek's concept of the rule of law the connection between capitalism and legal processes is by no means as close as Hayek suggested. Indeed, the implication is that capitalism might require a more overtly moral, even rationalistic, defence.      

Another Austrian economist, Israel Kirzner, has taken the theory of entrepreneurship into the moral field. After distinguishing its role in markets from orthodox neoclassical equilibrium economics in a more or less positivist way, [22]   Kirzner later related it to a moral theory of justice. [23] He is concerned to stress that capitalism is a discovery procedure whereby individuals hit upon resources or innovative methods from which profit can be earned. This applies to all aspects of economic life. The entrepreneur is not the same as the capitalist, the former captures a profit while the latter merely earns interest; although both capacities may be embodied in the same person they are conceptually different. It is the entrepreneur's insight into the way natural resources might be used that creates economic value. For example, oil is merely a physical substance of no economic value until an alert person correctly anticipates its future uses.  The earnings of the entrepreneur are not required just for efficiency reasons, he is morally entitled to the whole of the value he creates according to the 'finders keepers' principle of conventional ethics. Even if one accepts Kirzner's reasoning that does not settle all arguments, for there is considerable doubt about the meaning of discovery. Kirzner himself give a controversial example. Somebody notices a valuable animal and shoots it. A passer by notices and appropriates it. Who is the legitimate owner? In this and similar cases Kirzner seems to imply that the person who physically posses it owns it. But is this genuinely the same as discovery? We shall look at the problems that may arise in the takeover process where doubts about the discovery of profitable opportunities often occur.

Kirzner has a radical conception of monopoly. Although Austrian free market economists have a very different idea of this from the neoclassical orthodoxy, they tend to regard most monopolies as being created by the state, they do concede the possibility of natural monopoly which might requite regulation. The limited state philosopher Robert Nozick [24] produces the example of the monopoly supplier of water in the desert and says that one person should not be in sole possession of something essential for life. Against this, Kirzner argues that even in the most unfavourable circumstances, it is always possible to establish legitimate ownership that is morally immune from the state. Somebody might have noticed the water hole and gone ahead of the others, so being entitled to sole possession. Whatever other moral objections one might have to this, the person still has the right to all the returns from this 'ownership'. It is achieved by discovery. In arguments familiar to those of the seventeenth century philosopher, John Locke, Kirzner suggests that because the water was originally unowned the discoverer has the right to full possession. However, one wonders whether anything so vital as water is truly unowned. It is most likely that there will be tribal rules and customs that allocate rights to use a scarce resource and these hold independently of a market allocation determined by entrepreneurship. Still, Kirzner is surely correct to highlight the fact that there are very few cases where ownership of a scarce resource cannot be established by market methods and the moral principle of finders keepers.

It might be thought that the morality contained within Austrian economics is rather meagre and that the problems that arise in contemporary business ethics require a more substantial body of social theory. However, it could also be the case that most of the issues that have been recently raised can be handled by normal political economy and by the moral conventions described by Hayek. I believe this to be the case and that much of the morality that business ethicists would like to impose on commerce is supererogatory, i.e. possibly desirable but not compelling. It may also distract attention from those conventional moral duties which are required by the market process and are compelling. I shall look at this problem through three controversial areas: the social responsibility of the corporation, insider dealing in the stock market and takeovers.