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Austrian School

The Austrian School is a school of economic thought which rejects mainstream economists' reliance on methods used in natural science for the study of human action and relationships through logic (or praxeology).

History

The school was founded with the publication of Carl Menger's Principles of Economics in 1871. This book helped start the Neoclassical Revolution in economics in the late nineteenth century. Austrian economics is currently closely associated with advocacy of radical laissez faire views. However, earlier Austrian economists were more cautious compared to later economists such as Ludwig von Mises, with Eugen von Böhm-Bawerk saying that he feared that unbridled free competition would lead to "anarchism in production and consumption." However the Austrian School, especially through the works of Friedrich Hayek, would be influential in the revival of free market thought in the 1980s.

The school originated in Vienna and owes its name to members of the Historical School of economics who during the Methodenstreit, where the Austrians defended the reliance that classical economists placed on logic over observation. Their Prussian opponents derisively named them the "Austrian School" to emphasize a departure from mainstream German thought and to suggest a provincial approach.

Menger's contributions were closely followed by Eugen von Böhm-Bawerk and Friedrich von Wieser. Austrian economists developed a sense of themselves as a school distinct from neoclassical economics during the economic calculation debate, with Ludwig von Mises and Friedrich von Hayek representing the Austrian position, where they contended that without monetary prices or private property meaningful economic calculation was impossible.

The Austrian economists were the first liberal economists to systematically challenge the Marxist school. This was partly a reaction to the Methodenstreit when they attacked the Hegelian doctrines of the Historical School. Though many Marxist authors have attempted to portray the Austrian school as a bourgeois reaction to Marx, such an interpretation is untenable: Menger wrote his Principles of Economics at almost the same time as Marx was completing Das Kapital. The Austrian economists were, however, the first to clash directly with Marxism, since both dealt with such subjects as money, capital, business cycles, and economic processes. Boehm-Bawerk wrote extensive critiques of Marx in the 1880s and 1890s, and several prominent Marxists--including Rudolf Hilferding--attended his seminar in 1905-06. In contrast, the classical economists had shown little interest in such topics, and many of them did not even gain familiarity with Marx's ideas until well into the twentieth century.

The school was no longer centered in Austria after Hitler came to power. Austrian economics was ill-thought of by most economists after World War II due to its rejection of observational methods. Its reputation has lately risen with work by students of Israel Kirzner and Ludwig Lachmann, as well as an interest in Hayek after he won the Nobel Prize for Economics.

Probably the most consistent and influential Austrian School body is the Ludwig von Mises Institute.

Analytical Framework

Austrian economists reject observation as a tool applicable to economics, saying that while it is appropriate in the natural sciences where factors can be isolated in laboratory conditions, acting human beings are too complex for this treatment. Instesd one should isolate the logical processes of human action - a discipline named praxeology by Ludwig von Mises.

Austrians view entrepreneurship as the driving force in economic development, see private property as essential to the efficient use of resources, and often see government interference in market processes as counterproductive.

As with Neoclassical economists, Austrians reject classical cost of production theories, most famously the labor theory of value. Instead they explain value by reference to the subjective preferences of individuals. This psychological aspect to Menger's economics has been attributed to the schools birth in turn of the century Vienna. Supply and demand are explained by aggregating over the decisions of individuals, following the precepts of methodological individualism, which asserts that only individuals and not collectives make decisions, and marginalist arguments, which compare the costs and benefits for incremental changes.

Contemporary neo-Austrian economists claim to adopt Economic subjectivism more consistently than any other school of economics and reject many neoclassical formalisms. For example, while neoclassical economics formalizes the economy as an equilibrium system with supply and demand in balance, Austrian economists emphasize its dynamic, perpetually dis-equilibrated nature.

Contributions

Some contributions of Austrian economists:

  • A theory of distribution in which factor prices result from the imputation of prices of consumer goods to goods of "higher order", that is goods used in the production of consumer goods (goods of the first order).

  • An emphasis on opportunity cost and reservation demand in defining value, and a refusal to consider supply as an otherwise independent cause of value. (The British economist Philip Wicksteed adopted this perspective.)

  • An emphasis on the forward-looking nature of choice, seeing time as the root of uncertainty within economics (see also time preference).

  • A fundamental rejection of mathematical methods in economics seeing the function of economics as investigating the essences rather than the specific quantities of economic phenomena. This was seen as an evolutionary, or "genetic-causal", approach against the stresses of equilibrium and perfect competition found in mainstream Neoclassical economics (see also praxeology).

  • Eugen von Böhm-Bawerk's critique of Marx centered around the untenability of the labor theory of value in the light of the transformation problem. There was also the connected argument that capitalists do not exploit workers; they accommodate workers by providing them with income well in advance of the revenue from the output they helped to produce.

  • Eugen von Böhm-Bawerk's capital theory which equates capital intensity with the degree of roundaboutness of production processes.

  • The Mises-Hayek business cycle theory which explains depression as a reaction to an intertemporal production structure fostered by monetary policy setting interest rates inconsistent with individual time preferences.

  • Hayek's concept of intertemporal equilibrium. (J. R. Hicks took over this theory in his discussion of temporary equilibrium in Value and Capital, a book very influential on the development of neoclassical economics after World War II.)

  • Mises and Hayek's view of prices as permitting agents to make use of dispersed tacit knowledge.

  • The time preference theory of interest which explains interest rates through intertemporal choice - the different time preferences of the borrower or lender - rather than as a price paid for a factor of production.

  • Stressing uncertainty in the making of economic decisions, rather than relying on "homo oeconomicus" or the rational man who was fully informed of all circumstances impinging on his decisions. The fact that perfect knowledge never exists, means that all economic activity implies risk.

  • Seeing the entrepreneurs' role as collecting and evaluating information and acting on risks.

  • The economic calculation debate between Austrian and Marxist economists, with the Austrians claiming that Marxism was doomed to fail because prices could not be set to recognise opportunity costs of factors of production, and so socialism could not calculate best uses in the same way capitalism does.

Major Austrian Economists

Other related economists

Contemporary Austrian Economists

Seminal Works

See also

External Links




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