See
also: List of Economic Topics 
Austrian
School
The
Austrian School is a school of economic thought which rejects opposing economists'
reliance on methods used in natural science for the study of human action, and
instead bases its formalism of economics on relationships through logic or introspection
called praxeology. Its most famous adherents are Friedrich Hayek, Ludwig von Mises,
Murray Rothbard and Carl Menger. 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 their questioning of the basis of the behavioral theory underlying
neo-classical economics. The Austrian School is generally associated with groups
that label themselves classical liberals or libertarian in their ideas 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 neo-classical economics.
While marginalism was generally influential, there was also a more specific school
which 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 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. 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 neo-classical theory and
the Austrian school are on the possibility of consumer indifference - neo-classical
theory says it is possible, where as Mises rejected it as being "impossible
to observe in practice" - 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 which argue for a different means of risk
assessment.
While
the Austrian school itself is radically conservative many of their specific problems
with the neo-classical formulation have analogs in other parts of economics. Game
theory is used to challenge probability, volatility argued for as a better measure
of preference and risk assessment than price, and chaos theory argues for highly
discrete rather than very smooth functions of utility and value. Neo-classical
economists have replies to each of the Austrian objections, which is why, while
specific results of Austrian economics have been adopted by mainstream theory,
as a whole, the paradigmatic assumption that economics should rest on deduction
from principles rather than induction from observation has been largely rejected.
An
area which is often overlooked is the influence that Austrian school ideas have
had on Keynesian macro-economics. 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.
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 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.
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 term is available at the New
School's economic pages (http://cepa.newschool.edu/het/essays/margrev/oppcost.htm).
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:
Economics,
Banking & Finance
