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The 'Austrian School', also known as the “'Vienna School'” or the “'Psychological School'”, is a
heterodox school of
economic thought that advocates adherence to strict
methodological individualism. As a result Austrians hold that the only valid economic theory is logically derived from basic principles of human action. Alongside the formal approach to theory, often called
praxeology, the school has traditionally advocated an interpretive approach to history. The praxeological method allows for the discovery of economic laws valid for all human action, while the interpretive approach addresses specific historical events.
This
Aristotelian/
rationalist approach differs both from the currently dominant
Platonic/
positivist approach of contemporary
neo-classical economics and the once dominant
historical approach of the German
historical school and the American
institutionalists. Regardless, Austrian economics has made significant contributions to modern mainstream neo-classical economics. Additionally, the Austrian school is quite heterogeneous, with various branches of the school at various times throughout its history taking a range of positions from presenting a radical alternative to mainstream economics to contributing directly to mainstream neoclassical economics, though even in that case often through techniques that remained distinctly Austrian.
[1]
While the praxeological method differs from the current method advocated by the majority of contemporary economists, the Austrian method derives from a long line of deductive economic thought stretching from the 15th century to the modern era and including such major economists as
Richard Cantillon,
David Hume,
A.R.J. Turgot,
Adam Smith,
Jean-Baptiste Say,
David Ricardo,
Nassau Senior,
John Elliott Cairnes, and
Claude Frédéric Bastiat.
The most famous Austrian adherents are
Carl Menger,
Eugen von Böhm-Bawerk,
Friedrich von Wieser,
Ludwig von Mises,
Friedrich Hayek,
Gottfried von Haberler,
Murray Rothbard,
Israel Kirzner,
George Reisman,
Henry Hazlitt, and
Hans-Hermann Hoppe. While often controversial, and standing to some extent outside of the mainstream of neoclassical theory—as well as being staunchly opposed to much of
Keynes'
theory and its results—the Austrian School has been widely influential because of its emphasis on the creative phase (i.e. the time element) of economic productivity and its questioning of the basis of the behavioral theory underlying
neoclassical economics.
Because many of the policy recommendations of Austrian theorists call for
small government, strict protection of private property, and support for
individualism in general, they are often cited by
conservatives,
laissez-faire liberal,
libertarian, and
Objectivist groups for support, although Austrian School economists, like Ludwig von Mises, insist that ''praxeology'' must be
value-free. They do not answer the question "should this policy be implemented?", but rather "if this policy is implemented, will it have
the effects you intend?".
History
Classical economics focused on the exchange theory of value. In the late 19th century, however, attention was focused on the concepts of “marginal” cost and value (see
Marginalism). Carl Menger's 1871 book, ''
Principles of Economics'', is considered one of the crucial works that began the period known as
neoclassical economics. While marginalism was generally influential, there was also a more specific school that grew up around Menger, which came to be known as the “Psychological School,” “Vienna School,” or “Austrian School,”
[2]
Austrian economics is currently closely associated with the advocacy of ''
laissez-faire'' views. Earlier Austrian economists were more skeptical compared to later economists such as
Ludwig von Mises and
Karel Engliš, with
Eugen von Böhm-Bawerk saying that he feared unbridled 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 ''laissez-faire'' thought in the 1980s.
The school originated in
Vienna. However, later adherents of the school like
Murray Rothbard and others have derived the roots of the thought of the Austrian School from the Spanish
Scholastics teaching at the
University of Salamanca of the
15th century and the
French Physiocrats of the
18th century.
[3] It owes its name to members of the
German Historical School of
economics, who argued against the Austrians during the ''
Methodenstreit'', in which the Austrians defended the reliance that
classical economists placed upon deductive logic. Their Prussian opponents derisively named them the “Austrian School” to emphasize a departure from mainstream German thought and to suggest a provincial,
Aristotelian approach. (The name “Psychological School” derived from the effort to found marginalism upon prior considerations, largely psychological.)
Menger was 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 and private property, meaningful economic calculation is 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 implausible: Menger wrote his ''
Principles of Economics'' at almost the same time as
Marx was working upon ''
Das Kapital'', whose second and third volumes were published more than ten and twenty years, respectively, after ''Principles''. (However, this does not refute the weaker claim that marginalism received the attention it did in the
1880s, and not earlier, in part because it was seen as an answer to Marx.) The Austrian economists were, nonetheless, amongst the first to clash directly with Marxism, since both dealt with such subjects as money,
capital,
business cycles, and economic processes. Böhm-Bawerk wrote extensive critiques of Marx in the 1880s and 1890s, and several prominent Marxists — including
Rudolf Hilferding — attended his seminar in 1905–6. 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 because it rejected observational methods. Its reputation has lately risen with work by students of
Israel Kirzner and
Ludwig Lachmann, as well as a renewed interest in Hayek after he won the
Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. However, it remains a distinctly minority position, even in such areas as capital value.
Austrian economics can be broken into two general trends. One, exemplified by Hayek, while distrusting most neoclassical concepts (like the entire corpus of macroeconomics), generally accepts a large part of the neoclassical methodology; the other, exemplified by the
Ludwig von Mises Institute, seeks a different formalism for
economics. The main area of contention between the mainstream and the Austrian school is on their view of the market system as a process, not only to be studied using equilibrium models, but to be viewed as an incessant process that only tends toward a constantly changing equilibrium, this difference is the root of the Austrian business cycles theory, the economic calculation debate and their different views of monopoly and competition. The second primary area of contention between neoclassical theory and the Austrian school is over the possibility of consumer indifference — neoclassical theory says it is possible, whereas Mises rejected it as being “impossible to observe in practice”. The third major dispute arose when Mises and his students argued that utility functions are
ordinal, and not
cardinal; that is, the Austrians contend that one can only rank preferences and cannot measure their intensity, in direct opposition to the neoclassical view at the time. Finally there are a host of questions about uncertainty raised by Mises and other Austrians, who argue for a different means of
risk assessment.
The influence that Austrian school ideas have had on Keynesian
macroeconomics is often overlooked. Keynes himself acknowledged being exposed to the Misesian notion that “nominal” values could have “real” effects. A further source of this influence is the period of time when the
London School of Economics brought in Hayek and other “continental” economists. While their students, though initially receptive, ultimately were drawn to the new Keynesian doctrines, many of the Hayekian concepts, particularly those relating time to the value of capital and its importance, would find their way into the work of Keynesians, especially by way of
John Hicks (who, while distancing himself from Keynesianism, nonetheless made the most influential attempt to formalize it).
Alan Greenspan, speaking of the originators of the School, said in 2000, “the Austrian school have reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country.” The long-time
U.S. Federal Reserve Chairman said he attended a seminar hosted by Ludwig von Mises.
[4]
Analytical framework
Austrian economists reject statistical methods and artificially constructed experiments as tools 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. Instead one should isolate the logical processes of human action - a discipline named "
praxeology" by
Alfred Espinas.
Austrians view
entrepreneurship as the driving force in
economic development, see
private property as essential to the efficient use of resources, and usually (if not always) 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 school's 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.
The core of the Austrian framework can be summarized as taking a subjectivist approach to marginal economics, and a focus on the idea that logical consistency of a theory is more important than any interpretation of empirical observations. Austrians focus completely on the
opportunity cost of goods, as opposed to balancing downside or disutility costs. It is an Austrian assertion that everyone is ''better'' off in a mutually voluntary exchange, or they would not have carried it out.
[5].
This focus on opportunity cost alone means that their interpretation of the
time value of a good has a strict relationship: since goods will be as restricted by scarcity at a later point in time as they are now, the strict relationship between investment and time must also hold. A factory making goods next year is worth as much less as the goods it is making next year are worth. This means that the business cycle is driven by miscoordination between sectors of the same economy, caused by money not carrying incentive information correct about present choices, rather than within a single economy where money causes people to make bad decisions about how to spend their time.
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 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.
★
Eugen von Böhm-Bawerk's demonstration that the law of marginal utility, as formulated by
Menger necessarily implies the classical law of costs and hence the vast majority of the conclusions of the British
classical economists. This discovery was later fully developed and its implications traced by a student of
von Mises,
George Reisman, in his book, ''Capitalism''.
★ 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.)
★ 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. (
John 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 economicus" 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 is flawed because prices could not be set to recognize opportunity costs of factors of production, and so
socialism could not make rational decisions.
Criticism
One criticism of the Austrian school is its rejection of the
scientific method and
empirical testing in favor of supposedly self-evident
axioms and logical reasoning.
[6] Bryan Caplan has criticized the school for rejecting on principle the use of
mathematics or
econometrics which "more than anything else, what prevents Austrian economists from getting more publications in mainstream journals"
[7] There are also criticisms of more specific theories.
[8]
Economists affiliated with the Austrian School
Note that the economists aligned with the Austrian School are sometimes colloquially called "the Austrians" even though not all held Austrian citizenship, and not all economists from Austria subscribe to the ideas of the Austrian School.
Other related economists
★
Richard Cantillon
★
Frédéric Bastiat (precursor)
★
Henry Hazlitt (introduced the Austrian School to the USA)
★
School of Salamanca (Renaissance precursors)
★
Étienne Bonnot de Condillac
★
Louis Say
★
Jean-Baptiste Say
★
Léon Walras
★
Jules Dupuit
★
Lionel Robbins
★
Wilhelm Röpke
★
Joseph Schumpeter
★
A.R.J. Turgot
★
Knut Wicksell
Critics
★
Bryan Caplan
★
David D. Friedman
★
Tyler Cowen
Seminal works
★ ''
Principles of Economics'' by
Carl Menger
★ ''
Capital and Interest'' by
Eugen von Böhm-Bawerk
★ ''
Human Action'' by
Ludwig von Mises
★ ''
Individualism and Economic Order'' by
Friedrich Hayek
★ ''
Man, Economy, and State'' by
Murray N. Rothbard
★ ''
Competition and Entrepreneurship'' by
Israel M. Kirzner
References
1. Boettke, Peter J. 1998. The Elgar Companion to Austrian Economics. Edgard Elgar Publishing. p. 1
2. Israel M. Kirzner (1987). "Austrian School of Economics," '', v. 1, pp. 145-51.
3. What is Austrian economics?
4. The Greenspan-Paul Congressional Exchanges
5. The Opportunity Cost Doctrine
6. Joe D., Why We Can't Associate Too Closely with the Austrians
7. Caplan, Bryan, Why I Am Not an Austrian Economist
8. For example, see Critics of Austrian Economics, Austrian Economics, part of the "Critiques of Libertarianism" site
9. Chase Distinguished Professor of International Business and Professor of Economics
10. George Mason University site
11. George Mason University site
12. Karel Englis, Economist, politician
See also
★
Anarcho-capitalism
★ ''
An Austrian Perspective on the History of Economic Thought'' by
Murray Rothbard
★
Consumarchy
★
Consumer sovereignty
★
Chicago school (economics)
★
Classical liberalism
★
Free Market
★
Keynesian school
★
Libertarianism
★
Neoclassical school
★
Newtonian time
★
Quarterly Journal of Austrian Economics
★
Socialist school
★
Supply-side economics
★
School of Salamanca (Renaissance pre-Austrians)
External links
★
What is Austrian Economics? Austrian School as defined by the
Ludwig von Mises Institute.
★
The Mises Institute - A large selection of online books, video/audio, journal archives, and research on Austrian economics
★
Society for the Development of Austrian Economics Largest professional organization of Austrian economists
★
Austrian Economics ''
Concise encyclopedia of economics'' on
Econlib
★
Austrian School on newschool.edu – compare Austrian versus other Schools
★
The Austrian Economists by Eugen von Böhm-Bawerk 1891
★
A Great Revolution in Economics - Vienna 1871 and after by Houmanidis and Leen
★
The Mont Pelerin Society
★
Austrian School Economists from Mark Valenti's Liberty Page
★
The Origins of the Austrian School of Economics by John Moser
★
★
Austrian Economics Forum Discussion message board concerning Austrian economic theory
★
The Free Marketeers Network The networking site for Free Marketeers around the world
★
The Austrian Economists
★
Austrian Addiction
★
Lew Rockwell
★
The Pure Logic of Choice
Critical
★
A list of academic critiques of Austrian economics
★
Why I Am Not An Austrian Economist
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