Austrian School Economics: Heterodox Or Orthodox?

The Austrian School of Economics is considered heterodox by mainstream economists, who have been critical of the school since the 1950s. This is due to its rejection of mathematical modelling, econometrics, and macroeconomic analysis. However, Austrian economics is considered part of the mainline of economic thinking, tracing back to Adam Smith and David Hume.

Austrian economics emphasises the role of the entrepreneur, the use of prices and information to coordinate economic activity, and the implications of time and uncertainty. It describes the economy as a complex network of cause-and-effect relationships driven by human action and interaction.

Austrian economics is heterodox sociologically, but not historically or intellectually

Austrian economics is heterodox in a sociological sense, but not in historical or intellectual terms.

Sociological Heterodoxy

Austrian economics is considered heterodox in a sociological sense, as it is largely outside the mainstream of economic thought. It is not part of the mainstream of economics, but many of its main themes are consistent with arguments presented by classical and neoclassical writers from Adam Smith to Milton Friedman. Austrian economics is part of the mainline of economic thinking, but not currently part of the mainstream.

Historical and Intellectual Non-Heterodoxy

Austrian economics is not historically or intellectually heterodox. It is a branch of neoclassicism and can be traced back to Adam Smith and David Hume.

Austrian economics is part of the mainline of economic thinking

Austrian economics traces its roots to 19th-century Austria and the works of Carl Menger. Menger, along with British economist William Stanley Jevons and French economist Leon Walras, ushered in the Marginalist Revolution in economics. This revolution emphasised that economic decision-making is performed over specific quantities of goods, the units of which provide some additional benefit (or cost) and that economic analysis should focus on these additional units and their associated costs and benefits. Menger's contribution to the theory of marginal utility focused on the subjective use-value of economic goods and the hierarchical or ordinal nature of how people assign value to different goods.

Following Menger, Eugen von Bohm-Bawerk furthered Austrian economic theory by emphasising the element of time in economic activity—that all economic activity occurs over specific periods of time. Bohm-Bawerk's writing developed theories of production, capital, and interest. He developed these theories in part to support his wide-ranging critiques of Marxist economic theories.

Bohm-Bawerk's student, Ludwig von Mises, would later go on to combine the economic theories of Menger and Bohm-Bawerk with the ideas of Swedish economist Knut Wicksell on money, credit, and interest rates to create Austrian Business Cycle Theory (ABCT). Mises is also known for his role, along with colleague Friedrich von Hayek, in disputing the possibility of rational economic planning by socialist governments.

Hayek's work in Austrian economics emphasised the role of information in the economy and the use of prices as a means to communicate information and coordinate economic activity. Hayek applied these insights to both the advancement of Mises' theory of business cycles and the debate over the economic calculation under central planning. Hayek was awarded the Nobel Prize in 1974 for his work in monetary and business cycle theory.

Despite its contributions, the Austrian School was largely eclipsed by Keynesian and neoclassical economics theories in both academia and government economic policy during the mid-20th century. However, by the end of the 20th and into the early 21st centuries, Austrian economics began to see a revival of interest with a handful of academic research institutes currently active in the U.S. and other countries.

Austrian economics has also received favourable attention from a few politicians and prominent financiers for the apparent confirmation of Austrian ideas by historical trends. Notably, the Austrian school of economics is cited for having predicted the eventual collapse of the Soviet Union and the abandonment of communism in other countries, and for its explanatory power regarding recurring economic cycles and recessions in the economy.

Austrian economics is not part of the mainstream of economic thinking

Austrian economics is a branch of economic thought that first originated in Austria but has adherents around the world and no particular attachment to Austria. Austrian economists emphasize processes of cause-and-effect in real-world economics, the implications of time and uncertainty, the role of the entrepreneur, and the use of prices and information to coordinate economic activity.

Austrian economics describes the economy as a vast and complex network of cause-and-effect relationships driven by purposeful human action and interaction, which occur in real-time and space and involve specific, real economic goods in discrete quantities as the objects of action. Austrian economics does not approach the economy as a mathematically solvable problem of optimization or a collection of statistical aggregates that can be reliably modelled econometrically. Austrian theory applies verbal logic, introspection, and deduction to derive useful insights regarding individual and social behaviour that can be applied to real-world phenomena.

Austrian economics is set apart by its belief that the workings of the broad economy are the sum of smaller individual decisions and actions; unlike the Chicago school and other theories that look to surmise the future from historical abstracts, often using broad statistical aggregates.

Austrian economics is also a temporally relative term because what is considered heterodox at one point in time may have previously been the mainstream view in the past, or may become adopted and accepted as part of the mainstream orthodoxy in the future.

Austrian economics has faced a lot of hostility on the academic side, but it has actually shifted mainstream economics toward a more integrated approach as some heterodox ideas are eventually adopted into the mainstream.

Austrian economics can still indirectly improve and extend mainstream economic thinking by challenging it, even when the heterodox ideas themselves fail to become accepted. Having a range of heterodox frameworks with plausible solutions to economic contradictions forces all economists to question the starting assumptions when approaching these questions. Austrian economics continually challenges the orthodox school to prove that it really is better in practice, not just by tradition.

Austrian economics is neoclassical

Austrian economics is considered heterodox by mainstream economists. However, it is a branch of neoclassical economics. Austrian economics traces its roots to 19th-century Austria and the works of Carl Menger, who, along with British economist William Stanley Jevons and French economist Leon Walras, ushered in the Marginalist Revolution in economics. This revolution emphasised that economic decision-making is performed over specific quantities of goods, the units of which provide some additional benefit (or cost) and that economic analysis should focus on these additional units and their associated costs and benefits.

Austrian economics is set apart by its belief that the workings of the broad economy are the sum of smaller individual decisions and actions. It emphasises the implications of time and uncertainty, the role of the entrepreneur, and the use of prices and information to coordinate economic activity.

Austrian economics is also considered heterodox because it rejects mathematical modelling, econometrics, and macroeconomic analysis. Instead, Austrian theory applies verbal logic, introspection, and deduction to derive useful insights regarding individual and social behaviour that can be applied to real-world phenomena.

Austrian economics is a heterodox school of thought that includes theories that are associated with radical free-market economics. However, it is also considered a branch of neoclassical economics.

Austrian economics is radical free-market economics

Austrian economics is set apart by its belief that the workings of the broad economy are the sum of smaller individual decisions and actions. Economists who follow and develop the ideas of the Austrian school today hail from around the world, and there is no particular attachment of these ideas to the country of Austria beyond the historical origin of their creators.

Austrian economics traces its roots to 19th-century Austria and the works of Carl Menger. Menger, along with British economist William Stanley Jevons and French economist Leon Walras, ushered in the Marginalist Revolution in economics, which emphasized that economic decision-making is performed over specific quantities of goods, the units of which provide some additional benefit (or cost) and that economic analysis should focus on these additional units and their associated costs and benefits.

Menger's contribution to the theory of marginal utility focused on the subjective use-value of economic goods and the hierarchical or ordinal nature of how people assign value to different goods. Menger also developed a market-based theory of the function and origin of money as a medium of exchange to facilitate trade.

Following Menger, Eugen von Bohm-Bawerk furthered Austrian economic theory by emphasizing the element of time in economic activity—that all economic activity occurs over specific periods of time. Bohm-Bawerk’s writing developed theories of production, capital, and interest. He developed these theories in part to support his wide-ranging critiques of Marxist economic theories.

Bohm-Bawerk’s student, Ludwig von Mises, would later go on to combine the economic theories of Menger and Bohm-Bawerk with the ideas of Swedish economist Knut Wicksell on money, credit, and interest rates to create Austrian Business Cycle Theory (ABCT). Mises is also known for his role, along with colleague Friedrich von Hayek, in disputing the possibility of rational economic planning by socialist governments.

Hayek’s work in Austrian economics emphasized the role of information in the economy and the use of prices as a means to communicate information and coordinate economic activity. Hayek applied these insights to both the advancement of Mises' theory of business cycles and the debate over the economic calculation under central planning. Hayek was awarded the Nobel Prize in 1974 for his work in monetary and business cycle theory.

Despite its contributions, the Austrian School was largely eclipsed by Keynesian and neoclassical economics theories in both academia and government economic policy during the mid-20th century. However, by the end of the 20th and into the early 21st centuries, Austrian economics began to see a revival of interest with a handful of academic research institutes currently active in the U.S. and other countries.

Austrian economics is considered heterodox. Heterodox economics refers to economic theories that diverge from mainstream or neoclassical principles. While most economists accept mainstream economic theories, they tend to rely on neoclassical theories of market equilibriums and rationality.

In contrast, heterodox economics includes more fringe ideologies that go against fundamental neoclassical beliefs. Due to the diverse nature of heterodox economics, many schools of economic thought are heterodox, including institutional, feminist, revolutionary, socialist, Marxian, or ecological theories.

Austrian economics is considered heterodox because it rejects the neoclassical approach that has become the foundation for mainstream economics. One common critique shared by heterodox theories is the rejection of rationality in economic thought. In mainstream economics, it is assumed that individuals are rational and make economic decisions to maximize their utility. However, heterodox theories reject this idea of rationality and argue that individuals may not always act to maximize utility. Instead, individuals can be influenced by other factors such as coercion, social constraints, or incomplete information.

Another foundation of mainstream economics is the principle of market equilibrium. For economists, it is generally accepted that the forces of supply and demand move prices toward equilibrium, resulting in a market that is Pareto efficient. However, heterodox economic theories reject this idea, arguing that models involving market equilibriums are inaccurate and do not reflect real-world conditions.

Frequently asked questions