Austrian Economics: Do Conservatives Fit The Framework?

The Austrian School of Economics, founded by Carl Menger in 1871, is a heterodox school of economic thought that advocates strict adherence to methodological individualism, believing that social phenomena result from the motivations and actions of individuals. It is often regarded as accessible and accurate in its explanation of economic relations and their social and political implications. However, it has also been criticised as fringe and ultra-right-wing, with some of its proponents expressing neo-confederate and racist views. While the school has evolved and incorporated knowledge from outside sources, its core principles remain the same.

Conservatives and the Austrian School's view of government intervention

The Austrian School of Economics is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals along with their self-interest. Austrian-school theorists hold that economic theory should be exclusively derived from basic principles of human action.

The Austrian School is not based on a fictitious homo oeconomicus but on people as they are and as they behave. It takes into account the economically relevant aspects of the real world and is consistent with the nature and psychology of human action. It focuses on autonomous entrepreneurial action and the free interaction of individuals in the marketplace.

The Austrian School promotes an economic and social way of thinking that is not trapped in unrealistic, mostly mathematical models. It does not see the economy as an object of state political regulation and central, almost engineering-like control. Its analysis focuses on autonomous entrepreneurial action and the free interaction of individuals in the marketplace, which eludes both the logic of differential equations and centrally planned political control.

The Austrian School's basic, generally understandable insights provide citizens with the necessary knowledge to recognize the political seductions that threaten freedom and prosperity, and motivate them to develop independent entrepreneurial initiative in all areas of society. If citizens lack basic economic literacy, they easily become the playthings of irresponsible politicians, passive recipients of state benefits, and helpless victims of bureaucratic procedures.

The Austrian School views the market mechanism as a process and not an outcome of a design. People create markets with their intention to better their lives, not by any conscious decision.

The Austrian School uses the logic of a priori thinking to discover economic laws of universal application, whereas other mainstream schools of economics make use of data and mathematical models. The Austrian School holds that prices are determined by subjective factors like an individual's preference to buy or not to buy a particular good, whereas the classical school of economics holds that objective costs of production determine the price and the neoclassical school holds that prices are determined by the equilibrium of demand and supply.

The Austrian School rejects both the classical and neoclassical views, saying that costs of production are also determined by subjective factors based on the value of alternative uses of scarce resources, and the equilibrium of demand and supply is also determined by subjective individual preferences.

The Austrian School believes that any increase in the money supply not supported by an increase in the production of goods and services leads to an increase in prices, but the prices of all goods do not increase simultaneously. Prices of some goods may increase faster than others, leading to a greater disparity in the relative prices of goods.

The Austrian School holds that business cycles are caused by distortion in interest rates due to the government's attempt to control money. Misallocation of capital takes place if the interest rates are kept artificially low or high by the intervention of the government. Ultimately, the economy goes through a recession.

The Austrian School believes that the government or central bank might attempt to circumvent the recession by lowering interest rates or propping up the failed industry. Austrian theorists believe that this would only cause further misallocation and make the recession that much worse when it actually strikes.

The Austrian School's view on government intervention is that it should be minimal. They believe that the only prudent strategy for the 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.

The Austrian School's influence on conservative economic theory

The Austrian School of Economics, founded by Carl Menger in 1871, has had a significant influence on conservative economic theory. Menger's seminal work, "Principles of Economics", laid the foundation for the school's core principles, which have remained largely unchanged despite the evolution of its ideas over the years.

One of the key contributions of the Austrian School is its emphasis on methodological individualism, which asserts that social phenomena primarily result from the actions and motivations of individuals, including their self-interest. This approach, often referred to as "praxeology", seeks to derive economic theory from basic principles of human action. Menger's work also introduced the concept of marginal utility, which states that the economic value of goods and services is subjective and diminishes as the number of goods increases. This idea has had a profound impact on understanding supply and demand and has been incorporated into mainstream economics.

Another important aspect of Austrian economic thought is its rejection of mathematical and statistical models in favour of logical deduction and "thought experiments". They believe that economic laws can be discovered through a priori thinking, independent of external data. This sets them apart from mainstream schools like neoclassical economics, which rely heavily on data and mathematical modelling. The Austrian School argues that prices are determined by subjective factors, such as individual preferences, rather than objective costs of production or equilibrium between supply and demand.

The Austrian School also promotes a free-market approach, emphasising the importance of autonomous entrepreneurial action and the free interaction of individuals in the marketplace. They oppose government intervention and believe in the ability of markets to self-regulate. This perspective aligns with conservative economic theory, which typically favours limited government involvement in the economy.

Additionally, the Austrian School has influenced the understanding of inflation and business cycles. They argue that any increase in the money supply without a corresponding increase in the production of goods and services leads to rising prices. They also attribute economic fluctuations to distortions in interest rates caused by government attempts to control money supply.

While the Austrian School has had a significant influence on conservative economic theory, it is important to note that it has also attracted criticism and is considered fringe by some. The school's association with libertarian and anarchist political ideologies, as well as controversial figures such as Hans-Hermann Hoppe and Murray Rothbard, has led to perceptions of right-wing extremism. However, defenders of the school argue that these associations are unfair and that the core principles of the Austrian School remain focused on economic theory and individual freedom.

The Austrian School's view of the free market

The Austrian School of Economics, founded by Carl Menger in 1871 with the publication of his book "Principles of Economics", is a heterodox school of economic thought that emphasises methodological individualism. This means that Austrian theorists believe social phenomena are primarily caused by the motivations, actions, and self-interest of individuals. They argue that economic theory should be derived exclusively from basic principles of human action.

The Austrian School's view of the market mechanism is that it is a process, not an outcome of a design. They believe that people create markets with the intention to improve their lives, not through any conscious decision-making. Austrians emphasise the importance of autonomous entrepreneurial action and the free interaction of individuals in the marketplace, free from state political regulation and central control.

The Austrian School's view of inflation is that any increase in the money supply not supported by a corresponding increase in the production of goods and services will lead to rising prices. They argue that the government's attempt to control money and artificially lower or raise interest rates leads to distortion in interest rates, causing business cycles of boom and bust. Austrians believe that the only prudent strategy for the government is to leave money and the financial system to the free market's competitive forces to eradicate these cycles.

The Austrian School also has a unique perspective on capital goods, arguing that they are heterogeneous and cannot be substituted for one another perfectly. This has implications for aggregated economic models, as capital is treated as heterogeneous rather than homogeneous.

Overall, the Austrian School's view of the free market is one that emphasises individual freedom, entrepreneurial initiative, and a market mechanism free from state intervention. They believe that economic laws can be discovered through a priori thinking and that the market naturally tends towards efficiency when left to its own devices.

The Austrian School's view of the role of the individual

The Austrian School of Economics is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals along with their self-interest. Austrian economists emphasise the role of the individual in their belief that the workings of the broad economy are the sum of smaller individual decisions and actions. They focus on the implications of time and uncertainty, the role of the entrepreneur, and the use of prices and information to coordinate economic activity.

The Austrian School uses logic and a priori thinking to discover economic laws of universal application, rather than relying on data and mathematical models. They believe that economic theory should be exclusively derived from basic principles of human action. Austrian economists emphasise the role of the individual in their belief that the workings of the broad economy are the sum of smaller individual decisions and actions. They view the market mechanism as a process and not an outcome of a design.

The Austrian School's view of the individual can be further understood through their economic theories. For example, they believe that interest rates are determined by the subjective decision of individuals to spend money now or in the future, reflecting their time preference. They also believe that prices are determined by subjective factors like an individual's preference to buy or not to buy a particular good.

The Austrian School's approach to economics is based on people as they are and as they behave, taking into account the economically relevant aspects of the real world, human nature, and psychology. They emphasise the role of the individual in understanding economic phenomena and believe that economic relations and their social and political implications can be explained extremely accurately and accessibly through this lens.

The Austrian School's view of economic laws

The Austrian School of Economics is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals along with their self-interest. Austrian-school theorists hold that economic theory should be exclusively derived from basic principles of human action.

The Austrian School uses the logic of a priori thinking to discover economic laws of universal application, whereas other mainstream schools of economics make use of data and mathematical models. The Austrian School holds that prices are determined by subjective factors like an individual's preference to buy or not to buy a particular good, whereas the classical school of economics holds that objective costs of production determine the price and the neoclassical school holds that prices are determined by the equilibrium of demand and supply.

The Austrian School rejects both the classical and neoclassical views by saying that costs of production are also determined by subjective factors based on the value of alternative uses of scarce resources, and the equilibrium of demand and supply is also determined by subjective individual preferences.

• Only individuals choose: Man, with his purposes and plans, is the beginning of all economic analysis. Only individuals make choices; collective entities do not choose. The primary task of economic analysis is to make economic phenomena intelligible by basing them on individual purposes and plans.
• The study of the market order: The study of the market order is fundamentally about exchange behaviour and the institutions within which exchanges take place. The price system and the market economy are best understood as a "catallaxy," and thus the science that studies the market order falls under the domain of "catallactics."
• The "facts" of the social sciences: Unlike the physical sciences, the human sciences begin with the purposes and plans of individuals. The "facts" of the world are what the actors think and believe. The meaning that individuals place on things, practices, places, and people determines how they will orient themselves in making decisions.
• Utility and costs are subjective: All economic phenomena are filtered through the human mind. Since the 1870s, economists have agreed that value is subjective, but many argued that the cost side of the equation is determined by objective conditions. However, costs are also subjective because they are determined by the value of alternative uses of scarce resources.
• The price system economizes information: Prices summarise the terms of exchange on the market and signal relevant information to market participants, helping them realise mutual gains from exchange.
• Private property is necessary for rational economic calculation: Private ownership provides powerful incentives for the efficient allocation of scarce resources. Ludwig von Mises demonstrated that even if human nature changed, socialism would fail due to economic planners' inability to rationally calculate the alternative use of resources.
• The competitive market is a process of entrepreneurial discovery: Competition is an activity, not a state of affairs. The entrepreneur has a significant role as the agent of change, prodding and pulling markets in new directions by recognising opportunities for mutual gain.
• Money is non-neutral: Government policy that distorts the monetary unit also distorts exchange. Any increase in the money supply not offset by a corresponding increase in money demand will lead to an increase in prices, with some prices adjusting faster than others, leading to relative price changes.
• Capital structure consists of heterogeneous goods: Capital goods are not homogeneous and cannot be substituted for one another perfectly. This has real implications in aggregated economic models, as capital is heterogeneous.
• Social institutions are often the result of human action: Many important institutions and practices are not the result of direct design but are the byproduct of actions taken to achieve other goals. People do not intend to create the complex array of exchanges and price signals that constitute a market economy; their intention is simply to improve their own lot in life.

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