Austrian Economics Vs Classical Economics: What's The Difference?

Austrian economics and classical economics are two distinct schools of economic thought with key differences in their methodologies and approaches to economic analysis. Austrian economics, founded by Carl Menger in 1871 with the publication of Principles of Economics, emphasises subjective economic values, individual choices, and the use of thought experiments to derive economic truths. On the other hand, classical economics, represented by economists like Adam Smith and David Hume, takes a more objective approach, believing in universal economic laws that transcend time and national boundaries. While Austrian economists favour logic, reasoning, and verbal logic, classical economists utilise data, mathematical models, and empirical evidence to support their theories.

Austrian economics is heterodox, or not mainstream

Austrian economics is considered heterodox, or not mainstream. It is viewed as a fringe economic theory, with many modern economists dismissing it as illegitimate. Austrian economics is defined by its focus on individual people making choices based on their preferences, or human behaviour, otherwise known as praxeology. This is in contrast to mainstream economics, which tends to rely on empirical evidence and quantitative skills to support or discredit economic theories and models.

Austrian economists believe that economic truths can be learned by conducting "thought experiments", which don't rely on data. They favour logic and reasoning to postulate their theories, and tend to reject the role of econometrics and data in economics. They believe that human behaviour cannot be modelled effectively in mathematics as conveniently as many orthodox economic theories attempt to.

Austrian economics is also considered heterodox because it has rejected some economic theories and concepts that are widely accepted by those in the mainstream. For example, many Austrian thinkers would reject the idea that the free market can be inefficient, while the majority of mainstream economists would agree that externalities, asymmetric information, and more can make markets inefficient.

The Austrian school of economics was founded in 1871 with the publication of Carl Menger's Principles of Economics. It emerged as an offshoot of marginalism and neoclassicism, and was originally barely distinguishable from marginalism. However, post-1920s, Austrian economics went its own way, largely due to its insistence on methodological individualism, and rejection of mathematical modelling and econometrics. This led to it becoming a heterodox school of economic thought.

Austrian economics is also set apart from other schools of thought by its stance on government intervention. Austrian economists make the libertarian argument that government intervention in the economy typically does more harm than good. They believe that economic recessions are caused by credit cycles triggered when central banks keep interest rates too low for too long in an attempt to stimulate economic growth. They also believe in "sound money", or currency that is backed by gold or other hard assets, rather than fiat currencies.

Austrian economics is based on individual choices and preferences

Austrian economics is based on the belief that individuals make choices and that these choices are determined by their subjective preferences. This is encapsulated in the proposition that "only individuals choose".

Austrian economics holds that the purpose of economic analysis is to make sense of economic phenomena by basing it on individual purposes and plans. A secondary task of this analysis is to trace the unintended consequences of these choices.

The Austrian school of economics was founded in 1871 with the publication of Carl Menger's "Principles of Economics". Menger argued that economic analysis is universally applicable and that the appropriate unit of analysis is man and his choices. Menger further explained that the economic values of goods and services are subjective in nature, so what is valuable to one person may not be valuable to another. This idea later became known as diminishing marginal utility.

Austrian economics is considered heterodox, or not mainstream. Austrian economists tend to believe that government activity is usually harmful as economic systems result from the self-interested actions of individuals. They disagree with classical economists on several key ideas, including the role of money in the economy. Classical economists believe that money is neutral, while Austrian economists assert that money is not neutral.

Austrian economists believe that economic truths can be learned by conducting "thought experiments" that don't rely on data. They tend to downplay or reject the role of econometrics and data in economics, believing that human behaviour cannot be effectively modelled mathematically. Instead, they emphasise logic and reasoning to postulate their theories.

Austrian economics is critical of econometrics and data

Austrian economists tend to downplay or reject the role of econometrics and data in economics. They emphasise the use of logic and critical thinking over complex statistical models and formulas. They believe that maintaining free markets and protecting the money supply are keys to ensuring social progress and civil liberty.

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, such as an individual's preference to buy or not to buy a particular good.

The Austrian school's criticism of econometrics and data stems from its belief that economic analysis should be universally applicable and based on individual choices and subjective preferences. They argue that economic laws can be discovered through logical reasoning alone, without the need for empirical evidence or quantitative analysis.

This sets Austrian economics apart from mainstream, orthodox economics, where empirical evidence and quantitative skills are considered critical. Modern academic research prizes falsifiable hypotheses and quantitative analysis to support theories, making these skills crucial for economists hoping to publish in top journals.

However, it is worth noting that Austrian economics is not entirely opposed to the use of data and quantitative methods. Some Austrian economists may use empirical methods and argue for the inclusion of economic data in their theories. Nonetheless, the school overall remains less committed to empirical evidence than many modern economists are comfortable with.

Austrian economics is against government intervention

Austrian economics is a school of thought that places great emphasis on free markets, private property, and the absence of government intervention. The Austrian School of Economics was founded in 1871 with the publication of Carl Menger's "Principles of Economics", which is considered the founding text of the Austrian school. Menger's book was one of the first modern treatises to advance the theory of marginal utility, arguing that economic values of goods and services are subjective in nature.

Secondly, Austrian economists argue that government intervention usually creates more problems than it solves. They believe that central banks encourage excessive growth of credit by keeping interest rates too low for too long, leading to economic fluctuations and eventually a recession. They also criticise Keynesian fiscal policy, arguing that government intervention to stimulate demand leads to wasted resources, greater inefficiency, and more problems in the long run.

Thirdly, Austrian economics emphasizes the importance of free markets and private property rights. They believe that private ownership provides powerful incentives for the efficient allocation of scarce resources, while government intervention can lead to misallocation of resources and distortion in interest rates. Austrians support the gold standard as a way to constrain growth in fiduciary media and prevent governments from devaluing exchange rates and destroying savings through inflation.

Finally, Austrian economics views the market mechanism as a process that emerges naturally from individuals' intentions to better their lives, rather than as an outcome of a design. They believe that markets are self-regulating and that any attempt by the government to intervene, such as through price controls or minimum wage laws, will only disrupt the natural functioning of the market and lead to negative consequences.

Austrian economics is against fiat currency

Fiat money, on the other hand, is any money declared to be legal tender by law. It is an intrinsically useless good used as a means of payment and a storable object. All modern paper currencies are fiat money.

Austrian economics argues that fiat money has many advantages over commodity-based money, such as much lower costs of production, and the ability to easily modify the quantity to suit the needs of trade and stabilize the value of the money unit. However, the main risk of fiat money is the possibility of a complete loss of value.

Austrian economics also argues that fiat money can lead to legalized counterfeiting, where the promises of banks are allowed to be more elastic, and monopoly, where only some monetary products may be produced by law, limiting the freedom of choice of money users.

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