Austrian School

The Austrian School is a school of economic thought founded in 1871 with the publication of Carl Menger's Principles of Economics, which 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. This was not always the case as the earlier Austrian economists were more cautious compared to later economists such as Ludwig von Mises and Murray Rothbard. The early Austrian economist Eugen von Böhm-Bawerk said 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 free market revival of the 1980s.

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. 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 derisively called it the "Austrian School" to emphasize its departure from mainstream German thought and to suggest a provincial approach.

Menger was closely followed by contributions from 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. 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. 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.

Carl Menger was one of a group of economists founding neoclassical economics in the 1870s. Neoclassical economists reject classical cost of production theories, most famously the labor theory of value. Instead they explain value by subjective preferences of individuals. This psychological aspect to Menger's economics may be partly explained by 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 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, Austrian economists emphasize its dynamic, perpetually dis-equilibrated nature.

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.

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

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 used in the production of those producers goods, etc.

• 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.

• 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 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.

• 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.

Table of contents 1 Major Austrian Economists 2 Other related economists 3 Contemporary Austrian Economists 4 Seminal Works 5 See also 6 External Links

Major Austrian Economists

• Carl Menger
• Eugen von Böhm-Bawerk
• Friedrich von Wieser
• Ludwig von Mises
• F. A. Hayek
• Ludwig Lachmann

Other related economists

• Frederic Bastiat (precursor)
• Henry Hazlitt (introduced the Austrian School to the USA)
• Salamanca school (medieval precursors)
• Etienne Bonnot de Condillac
• Louis Say
• Leon Walras
• Jules Dupuit
• Joseph Schumpeter

Contemporary Austrian Economists

• Murray N. Rothbard
• Israel Kirzner
• Hans Hermann Hoppe
• Llewelyn Rockwell
• Walter Block

Seminal Works

• Principles of Economics by Carl Menger
• Capital and Interest by Eugen von Böhm-Bawerk
• Human Action by Ludwig von Mises

See also

• classical liberalism

External Links

• The Austrian Economists by Eugen von Böhm-Bawerk 1891 (http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/bawerk/austrian)
• The Mises Institute - A large selection of material on Austrian economics (http://www.mises.org)
• The Origins of the Austrian School of Economics by John Moser (http://www.gmu.edu/departments/ihs/hsr/s97hsr.html#austrian)