Austrian Economics: Legit Theory Or Just Hot Air?

Austrian 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. It originated in 1871 in Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others. Austrian economics is generally not viewed positively by economists, however, it has made several important contributions to the field.

Austrian economics is unique in that it uses 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. It emphasizes the role of capital and entrepreneurship and starts with the individual as the causal force of economic phenomena. It also highlights the subjective nature of valuation, where individuals make decisions based on personal preferences, needs, and circumstances.

Austrian economics has provided valuable insights into economic issues like the laws of supply and demand, inflation, money creation, and foreign exchange rates. However, it has also been criticized for its rejection of empiricism, mathematization, and testable ideas, leading to a lot of theory without supporting data.

Despite the criticisms, Austrian economics has had a profound influence on mainstream economics, and many of its theories have been absorbed into mainstream thinking.

Austrian economics is based on a priori thinking, not data and mathematical models

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. A priori thinking is something a person can think on their own without relying on the outside world. The Austrian school believes it is possible to discover the truth simply by thinking aloud.

The Austrian school was founded by Carl Menger, an Austrian economist who wrote "Principles of Economics" in 1871. Other notable Austrian economists include Ludwig von Mises, Eugen von Bohm-Bawerk, Friedrich Hayek, and many others. The Austrian school has provided unique insights into some of the most important and complex economic issues of our time, such as the laws of supply and demand, the cause of inflation, the theory of money creation, and the operation of foreign exchange rates.

However, Austrian economics has been criticised for its rejection of empirical data, mathematisation, and other testable ideas. It has been described as a lot of theory without data. Austrian economics is generally not viewed positively by economists and has been called a stale conservative approach.

Despite the criticism, Austrian economics has had a profound effect on mainstream economics. Many theories developed by early Austrian economists have been absorbed into mainstream economics, including Carl Menger's theories on marginal utility, Friedrich von Wieser's theories on opportunity cost, and Eugen Bohm-Bawerk's theories on time preference.

Overall, while Austrian economics offers unique insights and contributions to economic thought, it has also faced criticism for its rejection of empirical data and mathematical models.

Austrian economics is heterodox, meaning it goes against the grain of mainstream economic thought

The Austrian school originated in 1871 in Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others. It was methodologically opposed to the Historical school, in a dispute known as the methodology quarrel. The Austrian school, in the true sense of the word, originated in the late 19th century and got its name from the fact that the founding fathers of the school—Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, and Friedrich von Hayek—all came from the Austrian Empire.

The Austrian school uses logic of a priori thinking—something a person can think on their own without relying on the outside world—to discover economic laws of universal application. Other mainstream schools of economics, like the neoclassical school, the new Keynesians, and others, make use of data and mathematical models to prove their point objectively. In this respect, the Austrian school can be more specifically contrasted with the German historical school that rejects the universal application of any economic theorem.

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.

Another main difference between Austrian Economics and the so-called mainstream is that the explanatory model of the Austrian school starts with the individual. It is not statistically constructed aggregates (such as the volume of savings and investment, for example) that are the causal forces, but the individual economic actor. This so-called “methodological individualism” states that social phenomena must be explained in terms of the actions and decisions of individuals and not in abstract collective categories such as “society” or “state.” In other words, the Austrian school emphasizes that the individual—as a human being with all their unique preferences, constraints, and information—drives economic activity.

For the followers of the Austrian school, economic analysis is based on the assumption that people act purposefully. This approach is known as praxeology, the study of human action. Praxeology assumes that people are decision-makers, not passive objects or automatons that merely react to stimuli. Human action is goal-oriented and the actor chooses those means that seem the best to him to achieve this aim. Choice of goal and means is the core of every human action, not stimulus and response, as behaviorism claims.

The Austrian school emphasizes that valuation is subjective and personal. Individuals make their decisions based on personal preferences, needs, and circumstances. Since every person has different preferences, goals, and desires, they attach different values to the goods and the range of possible actions. It is precisely from this circumstance that the act of economic exchange arises. In the exchange of goods and services, “unequal” values are exchanged, but the motive of exchange is the difference in valuation. In an economic exchange, one gives up the good that one values less to get the good to which one values more. Exchange is voluntary human action, as each participant in a voluntary exchange wins.

Austrian economics is one of the most distinguished and intellectually rigorous schools of economic thought. It has a long history, even with ideas dating back to at least the 16th century and the 17th century, experiencing an impressive renaissance. However, it is largely rejected by most mainstream economists.

Austrian economics is based on methodological individualism, which says that social phenomena are caused by individuals' motivations and actions

Methodological individualism is the concept that social phenomena result primarily from the motivations and actions of individuals along with their self-interest. According to this view, economic theory should be derived exclusively from basic principles of human action. Austrian economists hold that economic analysis should be based on the assumption that people act purposefully and make decisions based on their personal preferences, needs, and circumstances. This approach is known as praxeology, which assumes that people are decision-makers rather than passive objects that merely react to stimuli.

The Austrian school's emphasis on methodological individualism and its belief in the importance of individual freedom sets it apart from mainstream economic thinking. While mainstream economics tends to focus on aggregate data and mathematical models, Austrian economics uses a priori thinking to discover economic laws of universal application. This means that Austrian economists believe it is possible to discover economic truths simply by thinking aloud, rather than relying solely on empirical data and complex formulas.

The Austrian school's focus on the individual also extends to its view of the market. Austrians believe that markets arise spontaneously from the actions of individuals pursuing their interests, without the need for central planning or direction. Prices, according to Austrians, serve as signals that help individuals coordinate their actions in a decentralized manner, leading to an efficient allocation of resources.

Overall, the Austrian school's adherence to methodological individualism is a fundamental aspect of its economic theory and sets it apart from other schools of economic thought.

Austrian economics is associated with libertarian political theory

Austrian economics is underpinned by the concept of methodological individualism, which holds that social phenomena result primarily from the motivations, actions, and self-interest of individuals. Austrian-school theorists believe that economic theory should be exclusively derived from basic principles of human action. This is in contrast to other schools of economic thought, which have focused on aggregate variables, equilibrium analysis, and societal groups rather than individuals.

Austrian economics also emphasizes the importance of subjective factors in economic decision-making. According to this school of thought, the subjective choices of individuals, including individual knowledge, time, expectation, and other factors, cause all economic phenomena. Austrians seek to understand the economy by examining the social ramifications of individual choice, an approach called methodological individualism.

The Austrian school uses logic a priori thinking to discover economic laws of universal application, while other mainstream schools of economics make use of data and mathematical models. A priori thinking refers to something a person can think on their own without relying on the outside world. This approach is often contrasted with the German Historical School, which rejects the universal application of any economic theorem.

The Austrian school originated in 1871 in Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others. It was methodologically opposed to the Historical School, a dispute known as the "Methodenstreit" or "methodology quarrel". The term "Austrian school" was actually coined by Gustav von Schmoller, a leader of the Historical School, in an attempt to characterize the school as outcast and provincial. However, the label was eventually adopted by its adherents.

While Austrian economics is associated with libertarian political theory, it is important to note that there are differing views within this school of thought. For example, economists of the Hayekian view are generally more accepting of government intervention in the economy, while those of the Mises-Rothbard view regard neoclassical methodology as irredeemably flawed.

Austrian economics is not widely accepted by mainstream economists

Austrian economics is often criticised for its lack of empirical validity. It is accused of being overly theoretical and not based on data. One source states that Austrian economics is "a lot of theory without data". Another source claims that Austrian economics is "bullshit wrapped in lies".

Austrian economics is also criticised for its rejection of impericism, mathematisation, and other testable ideas. It is seen as incompatible with modern economics, which is considered to be a "mashed-up new-neoclassical-new-Keynesian synthesis".

However, Austrian economics has made some important contributions to economics, and some of its theories have been absorbed into mainstream economics. These include theories on marginal utility, opportunity cost, and time preference. Additionally, Austrian economists such as Eugen von Böhm-Bawerk made extensive critiques of Karl Marx in the 1880s and 1890s.

Despite these contributions, Austrian economics remains disregarded or derided by many mainstream economists. This is partly due to its rejection of model-building and mathematical and statistical methods in the study of economics. Austrian economics is also associated with libertarian political theory, which further distances it from the mainstream.

Overall, while Austrian economics has made some valuable contributions to economic thought, it is not widely accepted by mainstream economists due to its methodological differences and political associations.

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