TheAustrian school is aheterodox[1][2][3]school of economic thought that advocates strict adherence tomethodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals along with theirself-interest. Austrian-school theorists hold that economic theory should be exclusively derived from basic principles of human action.[4][5][6]
The Austrian school owes its name to members of the Germanhistorical school of economics, who argued against the Austrians during the late 19th-centuryMethodenstreit ("methodology struggle"), in which the Austrians defended the role of theory in economics as distinct from the study or compilation of historical circumstance. In 1883, Menger publishedInvestigations into the Method of the Social Sciences with Special Reference to Economics, which attacked the methods of the historical school.Gustav von Schmoller, a leader of the historical school, responded with an unfavorable review, coining the term "Austrian school" in an attempt to characterize the school as outcast and provincial.[11] The label endured and was adopted by the adherents themselves.[12]
TheSalamanca School of economic thought, emerging in 16th-century Spain and theFrench School of economic thought, emerging in 19th-century France are often regarded as an early precursor to the Austrian School of Economics due to its development of the subjective theory of value and its advocacy forfree-market principles. Scholars from theUniversity of Salamanca, such asFrancisco de Vitoria andLuis de Molina, argued that the value of goods was determined by individual preferences rather than intrinsic factors, foreshadowing later Austrian ideas. They also emphasized the importance ofsupply and demand in setting prices and maintainingsound money, laying the groundwork for modern economic concepts that the Austrian School would later refine and expand upon.[13][14]
The school originated inVienna inAustria-Hungary.Carl Menger's 1871 bookPrinciples of Economics is generally considered the founding of the Austrian school. The book was one of the first modern treatises to advance the theory ofmarginal utility. The Austrian school was one of three founding currents of the marginalist revolution of the 1870s, with its major contribution being the introduction of the subjectivist approach in economics.[15]
Despite such claim,John Stuart Mill had usedvalue in use in this sense in 1848 inPrinciples of Political Economy,[16] where he wrote: "Value in use, or asMr. De Quincey calls it,teleologic value, is the extreme limit of value in exchange. The exchange value of a thing may fall short, to any amount, of its value in use; but that it can ever exceed the value in use, implies a contradiction; it supposes that persons will give, to possess a thing, more than the utmost value which they themselves put upon it as a means of gratifying their inclinations."[17]
While marginalism was generally influential, there was also a more specific school that began to coalesce around Menger's work, which came to be known as the "psychological school", "Vienna school", or "Austrian school".[18] Menger's contributions to economic theory were closely followed by those ofEugen von Böhm-Bawerk andFriedrich von Wieser. These three economists became what is known as the "first wave" of the Austrian school. Böhm-Bawerk wrote extensive critiques ofKarl Marx in the 1880s and 1890s and was part of the Austrians' participation in the late 19th-centuryMethodenstreit, during which they attacked theHegelian doctrines of thehistorical school.
By the mid-1930s, most economists had embraced what they considered the important contributions of the early Austrians.[1] Fritz Machlup quoted Hayek's statement that "the greatest success of a school is that it stops existing because its fundamental teachings have become parts of the general body of commonly accepted thought".[27] Sometime during the middle of the 20th century, Austrian economics became disregarded or derided by mainstream economists because it rejectedmodel building and mathematical and statistical methods in the study of economics.[28] Mises' studentIsrael Kirzner recalled that in 1954, when Kirzner was pursuing his PhD, there was no separate Austrian school as such. When Kirzner was deciding which graduate school to attend, Mises had advised him to accept an offer of admission at Johns Hopkins because it was a prestigious university andFritz Machlup taught there.[29]
After the 1940s, Austrian economics can be divided into two schools of economic thought and the school split to some degree in the late 20th century. One camp of Austrians, exemplified by Mises, regardsneoclassical methodology to be irredeemably flawed; the other camp, exemplified byFriedrich Hayek, accepts a large part of neoclassical methodology and is more accepting of government intervention in the economy.[30]Henry Hazlitt wrote economics columns and editorials for a number of publications and wrote many books on the topic of Austrian economics from the 1930s to the 1980s. Hazlitt's thinking was influenced by Mises.[31] His bookEconomics in One Lesson (1946) sold over a million copies and he is also known forThe Failure of the "New Economics" (1959), a line-by-line critique ofJohn Maynard Keynes'sGeneral Theory.[32]
The reputation of the Austrian school rose in the late 20th century due in part to the work of Israel Kirzner andLudwig Lachmann atNew York University and to renewed public awareness of the work of Hayek after he won the 1974 Nobel Memorial Prize in Economic Sciences.[33] Hayek's work was influential in the revival oflaissez-faire thought in the 20th century.[34][35]
EconomistLeland Yeager discussed the late 20th-century rift and referred to a discussion written byMurray Rothbard,Hans-Hermann Hoppe,Joseph Salerno and others in which they attack and disparage Hayek. Yeager stated: "To try to drive a wedge between Mises and Hayek on [the role of knowledge in economic calculation], especially to the disparagement of Hayek, is unfair to these two great men, unfaithful to the history of economic thought". He went on to call the rift subversive to economic analysis and the historical understanding of thefall of Eastern European communism.[36]
In a 1999 book published by theLudwig von Mises Institute,[37] Hoppe asserted that Rothbard was the leader of the "mainstream within Austrian Economics" and contrasted Rothbard with Nobel Laureate Friedrich Hayek, whom he identified as aBritish empiricist and an opponent of the thought of Mises and Rothbard. Hoppe acknowledged that Hayek was the most prominent Austrian economist within academia, but stated that Hayek was an opponent of the Austrian tradition which led from Carl Menger and Böhm-Bawerk through Mises to Rothbard. Austrian economistWalter Block says that the Austrian school can be distinguished from other schools of economic thought through two categories—economic theory and political theory. According to Block, while Hayek can be considered an Austrian economist, his views on political theory clash with thelibertarian political theory which Block sees as an integral part of the Austrian school.[38]
Both criticism from Hoppe and Block to Hayek apply to Carl Menger, the founder of the Austrian school. Hoppe emphasizes that Hayek, which for him is from the English empirical tradition, is an opponent of the supposed rationalist tradition of the Austrian school; Menger made strong critiques to rationalism in his works in similar vein as Hayek's.[39] He emphasized the idea that there are several institutions which were not deliberately created, have a kind of "superior wisdom" and serve important functions to society.[40][39][41] He also talked aboutEdmund Burke and the English tradition to sustain these positions.[39]
When saying that the libertarian political theory is an integral part of the Austrian school and supposing Hayek is not a libertarian, Block excludes Menger from the Austrian school, too, since Menger seems to defend broader state activity than Hayek—for example, progressive taxation and extensive labour legislation.[42]
Many theories developed by "first wave" Austrian economists have long been absorbed intomainstream economics.[46] These include Carl Menger's theories on marginal utility, Friedrich von Wieser's theories onopportunity cost and Eugen von Böhm-Bawerk's theories on time preference, as well as Menger and Böhm-Bawerk's criticisms ofMarxian economics.[47]
FormerAmerican Federal Reserve ChairmanAlan Greenspan said that the founders of the Austrian school "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".[48] In 1987, Nobel LaureateJames M. Buchanan told an interviewer: "I have no objections to being called an Austrian. Hayek and Mises might consider me an Austrian but, surely some of the others would not".[49]
The Austrian school theorizes that the subjective choices of individuals including individual knowledge, time, expectation and other subjective factors cause all economic phenomena. Austrians seek to understand the economy by examining the social ramifications of individual choice, an approach calledmethodological individualism. It differs from other schools of economic thought, which have focused on aggregate variables, equilibrium analysis, and societal groups rather than individuals.[56]
In the 20th and 21st centuries, economists with a methodological lineage to the early Austrian school developed many diverse approaches and theoretical orientations.Ludwig von Mises organized his version of the subjectivist approach, which he called "praxeology", in a book published in English asHuman Action in 1949.[57]: 3 In it, Mises stated that praxeology could be used to deducea priori theoretical economic truths and that deductive economicthought experiments could yield conclusions which follow irrefutably from the underlying assumptions. He wrote that conclusions could not be inferred from empirical observation or statistical analysis and argued against the use of probabilities in economic models.[58]
Since Mises' time, some Austrian thinkers have accepted his praxeological approach while others have adopted alternative methodologies.[59] For example,Fritz Machlup,Friedrich Hayek and others did not take Mises' stronga priori approach to economics.[60]Ludwig Lachmann, a radical subjectivist, also largely rejected Mises' formulation of Praxeology in favor of theverstehende Methode ("interpretive method") articulated byMax Weber.[56][61]
In the 20th century, various Austrians incorporated models and mathematics into their analysis. Austrian economistSteven Horwitz argued in 2000 that Austrian methodology is consistent withmacroeconomics and that Austrian macroeconomics can be expressed in terms ofmicroeconomic foundations.[62] Austrian economist Roger Garrison writes that Austrian macroeconomic theory can be correctly expressed in terms ofdiagrammatic models.[63] In 1944, Austrian economist Oskar Morgenstern presented a rigorous schematization of an ordinal utility function (theVon Neumann–Morgenstern utility theorem) inTheory of Games and Economic Behavior.[64]
in the explanation of economic phenomena, we have to go back to the actions (or inaction) of individuals; groups or "collectives" cannot act except through the actions of individual members. Groups do not think; people think.
Methodological subjectivism
the judgments and choices made by individuals on the basis of whatever knowledge they have or believe to have, and whatever expectations they have regarding external developments and the consequences of their actions.
Tastes and preferences
subjective valuations of goods and services determine the demand for them so that their prices are influenced by consumers.
the costs of the alternative opportunities that must be foregone; as productive services are employed for one purpose, all alternative uses have to be sacrificed.
in all economic designs, the values, costs, revenues, productivity and so on are determined by the significance of the last unit added to or subtracted from the total.
Time structure of production and consumption
decisions to save reflect "time preferences" regarding consumption in the immediate, distant, or indefinite future and investments are made in view of larger outputs expected to be obtained if more time-taking production processes are undertaken.
He included two additional tenets held by the Mises branch of Austrian economics:
the influence consumers have on the effective demand for goods and services and through the prices which result in free competitive markets, on the production plans of producers and investors, is not merely a hard fact but also an important objective, attainable only by complete avoidance of governmental interference with the markets and of restrictions on the freedom of sellers and buyers to follow their own judgment regarding quantities, qualities and prices of products and services.
only when individuals are given full economic freedom will it be possible to secure political and moral freedom. Restrictions on economic freedom lead, sooner or later, to an extension of the coercive activities of the state into the political domain, undermining and eventually destroying the essential individual liberties which the capitalistic societies were able to attain in the 19th century.
The opportunity cost doctrine was first explicitly formulated by the Austrian economistFriedrich von Wieser in the late 19th century.[66] Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative foregone (that is not chosen). It is the sacrifice related to the second best choice available to someone, or group, who has picked among severalmutually exclusive choices.[67] Although a more ephemeral scarcity, expectations of the future must also be considered. Quantified astime preference, opportunity cost must also be valued with respect to one's preference for present versus future investments.[68]
Opportunity cost is a key concept in mainstreameconomics and has been described as expressing "the basic relationship betweenscarcity andchoice".[69] The notion of opportunity cost plays a crucial part in ensuring that resources are used efficiently.[70]
The Austrian theory of capital and interest was first developed byEugen von Böhm-Bawerk. He stated that interest rates and profits are determined by two factors, namelysupply and demand in the market for final goods and time preference.[71]
Böhm-Bawerk's theory equatescapital intensity with the degree ofroundaboutness of production processes. Böhm-Bawerk also argued that the law ofmarginal utility necessarily implies the classical law of costs. However, many Austrian economists such asLudwig von Mises,[72]Israel Kirzner,[73]Ludwig Lachmann,[74] andJesús Huerta de Soto[75] entirely reject a productivity explanation for interest rates, viewing the average period of production as an unfortunate remnant of damaged classical economic thought on Böhm-Bawerk.
In Mises's definition, inflation is an increase in the supply of money:[76]
In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.[77]
Hayek claimed that inflationary stimulation exploits the lag between an increase in money supply and the consequent increase in the prices of goods and services:
And since any inflation, however modest at first, can help employment only so long as it accelerates, adopted as a means of reducing unemployment, it will do so for any length of time only while it accelerates. "Mild" steady inflation cannot help—it can lead only to outright inflation. That inflation at a constant rate soon ceases to have any stimulating effect, and in the end merely leaves us with a backlog of delayed adaptations, is the conclusive argument against the "mild" inflation represented as beneficial even in standard economics textbooks.[78]
Even prominent Austrian economists have been confused since Austrians define inflation as 'increase in money supply' while most people including most economists define inflation as 'rising prices'.[79]
The economic calculation problem refers to a criticism ofplanned economies which was first developed byLudwig von Mises with his essay "economic calculation in the socialist commonwealth" in the spring of 1920. Mises subsequently discussed his idea with his student Friedrich Hayek, who expanded it in various works includingThe Road to Serfdom.[80][81] What the calculation problem essentially states is that without price signals, thefactors of production cannot be allocated in the most efficient way possible, rendering planned economies inefficacious.
Max Weber reached a similar conclusion as Mises in his magnum opus "Wirtschaft und Gesellschaft", posthumously published in 1921, discussing the impossibility of centralized planning of a complex economic system.[81]
Austrian theory emphasizes theorganizing power of markets. Hayek stated that market prices reflect information, the totality of which is not known to any single individual, which determines the allocation of resources in an economy. Because socialist systems lack the individual incentives andprice discovery processes by which individuals act on their personal information, Hayek argued that socialist economic planners lack all of the knowledge required to make optimal decisions. Those who agree with this criticism view it as a refutation of socialism, showing that socialism is not a viable or sustainable form of economic organization. The debate rose to prominence in the 1920s and 1930s and that specific period of the debate has come to be known by historians of economic thought as thesocialist calculation debate.[82]
Mises argued in a 1920 essay "Economic Calculation in the Socialist Commonwealth" that the pricing systems in socialist economies were necessarily deficient because if the government owned themeans of production, then no prices could be obtained forcapital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange", unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.[82] This led him to write "that rational economic activity is impossible in a socialist commonwealth".[83]
The Austrian theory of thebusiness cycle (ABCT) focuses on banks' issuance of credit as the cause of economic fluctuations.[84] Although later elaborated by Hayek and others, the theory was first set forth by Mises, who posited that fractional reserve banks extend credit at artificially low interest rates, causing businesses to invest in relativelyroundabout production processes which leads to an artificial "boom". Mises stated that this artificial "boom" then led to a misallocation of resources which he called "malinvestment" – which eventually must end in a "bust".[84]
Mises surmised that government manipulation of money and credit in the banking system throws savings and investment out of balance, resulting in misdirected investment projects that are eventually found to be unsustainable, at which point the economy has to rebalance itself through a period of corrective recession.[85] Austrian economist Fritz Machlup summarized the Austrian view by stating, "monetary factors cause the cycle but real phenomena constitute it."[86] This may be unrealistic since successful entrepreneurs will realise that interest rates are artificially low and will adjust their investment decisions based on projected long term interest rates.[87] For Austrians, the only prudent strategy for government is to leave money and the financial system to the free market's competitive forces to eradicate the business cycle's inflationary booms and recessionary busts, allowing markets to keep people's saving and investment decisions in place for well-coordinated economic stability and growth.[85]
AKeynesian would suggest government intervention during a recession to inject spending into the economy when people will not. However, the heart of Austrian macroeconomic theory assumes the government "fine tuning" through expansions and contractions in the money supply orchestrated by the government are actually the cause of business cycles because of the differing impact of the resulting interest rate changes on different stages in the structure of production.[86] Austrian economist Thomas Woods further supports this view by arguing it is not consumption, but rather production that should be emphasized. A country cannot become rich by consuming, and therefore, by using up all their resources. Instead, production is what enables consumption as a possibility in the first place, since a producer would be working for nothing, if not for the desire to consume.[88]
According toLudwig von Mises,central banks enable thecommercial banks to fund loans at artificially low interest rates, thereby inducing an unsustainable expansion of bank credit and impeding any subsequent contraction and argued for agold standard as amonetary reform to constrain growth in fiduciary media.[84]Friedrich Hayek took a different perspective not focusing on gold but focusing on regulation of the banking sector via strongcentral banking.[89]
Some economists argue money isendogenous, and argue that this refutes theAustrian Business Cycle Theory. However, this would simply shift the brunt of the blame from central banks to private banks when it comes to credit expansion; the fundamental underlying issue would be the same, and a free-market full-reserve system would still be the fix.
Some economists assert thatBitcoin's theoretical foundations can be traced back to the Austrian school of economics through its embrace of core Austrian principles such asdecentralization,individual sovereignty,sound money, and resistance tofiat money.[90][91] In the 21st century, some libertarian political scientists argue that Friedrich Hayek would have supported Bitcoin andcryptocurrencies due to their resistance to political pressure and their alignment with Hayek's emphasis on sound money and competition in currencies.[92] They also argue that cryptocurrency and Bitcoin serve as a "Hayekian escape", a method that people can use to escape the government's currency monopoly, particularly during periods ofhyperinflation.[93] In some ways, Bitcoin is at odds with certain Austrian principles such as Mises'regression theorem, which holds that money must originate from a commodity with prior use value. Bitcoin demonstrates that it is possible for digital scarcity and market trust alone to create a functioning medium of exchange.[94]
^Menger, Carl (2007) [1871].Principles of Economics(PDF). Translated by Dingwall, James; Hoselitz, Bert F. Auburn, Alabama: Ludwig von Mises Institute.
^Heath, Joseph (1 May 2018). Zalta, Edward N. (ed.).The Stanford Encyclopedia of Philosophy. Metaphysics Research Lab, Stanford University. Retrieved1 May 2018 – via Stanford Encyclopedia of Philosophy.
^Ludwig von Mises.Human Action, p. 11, "Purposeful Action and Animal Reaction". Referenced 2011-11-23.
^Meijer, G. (1995).New Perspectives on Austrian Economics. New York: Routledge.ISBN978-0-415-12283-2.
^"Menger's approach – haughtily dismissed by the leader of the German Historical School, Gustav Schmoller, as merely 'Austrian', the origin of that label – led to a renaissance of theoretical economics in Europe and, later, in the United States."Peter G. Klein, in "Forward" toMenger, Carl (2007) [1871].Principles of Economics(PDF). Translated by Dingwall, James; Hoselitz, Bert F. Auburn, Alabama: Ludwig von Mises Institute.ISBN978-1-933550-12-1.
^Raico, Ralph (2011)."Austrian Economics and Classical Liberalism".mises.org. Ludwig von Mises Institute.Archived from the original on 19 May 2011. Retrieved27 July 2011.despite the particular policy views of its founders ... Austrianism was perceived as the economics of the free market
^Kasper, Sherryl Davis (2002).The Revival of Laissez-faire in American Macroeconomic Theory. Edward Elgar Publishing. p. 66.ISBN978-1-84064-606-1.
^Yeager, Leland (2011).Is the Market a Test of Truth and Beauty?: Essays in Political Economy. Ludwig von Mises Institute. pp. 93 ff.
^It has also influenced related disciplines such as Law and Economics, see. K. Grechenig, M. Litschka, "Law by Human Intent or Evolution? Some Remarks on the Austrian School of Economics' Role in the Development of Law and Economics",European Journal of Law and Economics 2010, vol. 29, no. 1, pp. 57–79.
^Greenspan, Alan. "Hearings before the U.S. House of Representatives' Committee on Financial Services". U.S. House of Representatives' Committee on Financial Services. Washington, D.C.. 25 July 2000.
^Kirzner, Israel M.; Lachman, Ludwig M. (1986).Subjectivism, intelligibility and economic understanding: essays in honor of Ludwig M. Lachmann on his eightieth birthday (Illustrated ed.). Macmillan.ISBN978-0-333-41788-1.
^"Opportunity Cost".Economics A–Z. The Economist.Archived from the original on 9 October 2010. Retrieved2010-09-18.
^Böhm-Bawerk, Eugen Ritter von;Kapital Und Kapitalizns. Zweite Abteilung: Positive Theorie des Kapitales (1889). Translated asCapital and Interest. II: Positive Theory of Capital with appendices rendered asFurther Essays on Capital and Interest.
^von Mises, Ludwig (1980)."Economic Freedom and Interventionism". In Greaves, Bettina B. (ed.).Economics of Mobilization. Sulphur Springs, West Virginia: The Commercial and Financial Chronicle.Archived from the original on 2014-09-14.Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term "inflation" to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation [...] As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.
^The Theory of Money and Credit, Mises (1912, [1981], p. 272)
^abF. A. Hayek (1935), "The Nature and History of the Problem" and "The Present State of the Debate," om in F. A. Hayek, ed.Collectivist Economic Planning, pp. 1–40, 201–243.
^abEbeling, Richard (2016).Austrian Economics and Public Policy: Restoring Freedom and Prosperity. Fairfax, Virginia: The Future of Freedom Foundation. p. 217.
Hagemann, Harald; Nishizawa, Tamotsu; Ikeda, Yukihiro, eds. (2010).Austrian Economics in Transition: From Carl Menger to Friedrich Hayek. Palgrave Macmillan.
Holcombe, Randall (1999).The Great Austrian Economists. Ludwig von Mises Institute.ISBN0945466048.
Littlechild, Stephen, ed. (1990).Austrian economics. Edward Elgar.ISBN978-1-85278-120-0.
Papaioannou, Theo (2012).Reading Hayek in the 21st Century: a critical inquiry into his political thought. Springer.
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