Austrian School

The Austrian School is a school of Economic Thought that rejects economists' overreliance on methods used in Natural Science for the study of human action, and instead bases its formalism on a logic of action known as " Praxeology ". Alongside this formalism, the school has traditionally advocated an interpretive approach. The praxeological method provides broad categories that apply to all human action, while the interpretive approach addresses specific historical events.

Its most famous adherents are Carl Menger , Eugen Von Böhm-Bawerk , Friedrich Von Wieser , Ludwig Von Mises , Friedrich Hayek , Murray Rothbard , Israel Kirzner and Hans-Hermann Hoppe . While often controversial, and standing to some extent outside of the mainstream of neoclassical theory — as well as being staunchly against much of Keynes' theory and its results — the Austrian School has been widely influential because of its emphasis on the creative phase of economic productivity and questioning of the basis of the behavioral theory underlying Neoclassical Economics .

The Austrian School is generally associated with groups that label themselves Classical Liberals or Libertarian in their ideas of social, political and economic organization.

HISTORY

Classical Economics focused on the exchange theory of value. In late 19th Century , however, there was a focus on the concept of the "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 "Vienna School" or "Austrian School". 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 laissez-faire 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 '' 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 Cycle s, 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 1905–06. 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 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 of many neoclassical concepts, generally accepts their formulations, the other exemplified by the Ludwig Von Mises Institute , seeks a different formalism for Economics . The primary areas of contention between neoclassical theory and the Austrian school are on the possibility of consumer indifference — neoclassical theory says it is possible, where as Mises rejected it as being "impossible to observe in practice" — and when Mises and his students argued that utility functions are Ordinal , and not Cardinal ; that is, one can only rank preferences and not measure their intensity. Finally there are a host of questions about uncertainty raised by Mises and other Austrians, who argue for a different means of Risk Assessment .

An area that is often neglected is the influence that Austrian school ideas have had on Keynesian Macroeconomics . The source of this influence is the period of time where the London School Of Economics brought in Hayek and other "continental" economists. While their students "flew the coop", refusing to join the Austrian school, many of the concepts, particularly relating time to the value of capital and its importance, would find their way into the work of Keynesians such as John Hicks . 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. {Link without Title}

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. Instead 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 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 theory should absolutely overrule observation. 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. A fuller explanation of this in more exact terms is available at the New School's economic pages .

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. This means, in the Austrian context, the correct way to prevent imbalances in the economy is to make people want to buy the correct goods, rather than controlling when people buy goods.

CONTRIBUTIONS

Some contributions of Austrian economists:

A theory of distribution in which factor Price s 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 Rate s 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 calculate best uses in the same way Capitalism does.