Austrian School Economics: Right Or Wrong?

is the austrian school correct

The Austrian School of Economics is a heterodox school of economic thought that originated in 1871 in Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others. It is characterised by its 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 has made significant contributions to economic thought, including the subjective theory of value, marginalism in price theory, and the formulation of the economic calculation problem. However, it has also faced criticism, particularly for its rejection of mathematical and statistical methods in the study of economics.

Despite this, the Austrian School continues to attract interest and has a significant presence in universities worldwide. Its influence can be seen in the work of modern economists such as Frank Albert Fetter, Ludwig von Mises, Friedrich Hayek, and others.

Characteristics Values
Methodology Individualism
Theory Subjectivism
Economic laws Universal application
Economic phenomena Individual choices
Economic theory A priori thinking
Economic calculation Non-neutral money
Market Process
Competition Activity
Private property Necessary condition for rational economic calculation

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The Austrian School's Methodology

The Austrian School of Economics was founded in 1871 with the publication of Carl Menger's 'Principles of Economics'. The Austrian School 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 rejects the use of aggregate variables, equilibrium analysis, and a focus on societal groups favoured by other schools of economic thought. Instead, they emphasise the role of individual choice and subjective factors in shaping economic phenomena.

Additionally, the Austrian School emphasises the role of private property and the market mechanism in their economic theory. They believe that private ownership provides incentives for efficient resource allocation and that markets are a process of entrepreneurial discovery, with competition viewed as an activity rather than a static state.

Overall, the Austrian School's methodology is characterised by its focus on individual choice, subjective factors, verbal logic, and the role of private property and market mechanisms in shaping economic outcomes.

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The Austrian School's View of the Market

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—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 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 by saying 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 also 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 views business cycles as 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.

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The Austrian School's View 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-school theorists hold that economic theory should be exclusively derived from basic principles of human action.

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. Austrian theorists believe that it is possible to discover the truth simply by thinking aloud and conducting "thought experiments".

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.

The Austrian School also theorises that capital goods are not homogeneous. In other words, hammers, nails, lumber, bricks and machines are all different and cannot be substituted for one another perfectly. This has real implications in aggregated economic models, as capital is heterogeneous.

The Austrian School rejects the classical view of capital, which says interest rates are determined by the supply and demand of capital. Instead, it holds that interest rates are determined by the subjective decision of individuals to spend money now or in the future. In other words, interest rates are determined by the time preference of borrowers and lenders.

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.

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The Austrian School's View of the State

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 theorists believe that economic theory should be exclusively derived from basic principles of human action.

Austrian economists such as Ludwig von Mises and Friedrich Hayek have influenced the revival of laissez-faire thought, emphasizing the importance of free markets and limited government involvement. They argue that the state should not interfere with the market mechanism, which is seen as a natural process arising from individuals' interactions and intentions to better their lives.

However, there are differing opinions within the Austrian School regarding the role of the state. While some, like Mises, advocate for minimal government intervention, others, like Hayek, are more accepting of government intervention and embrace a significant portion of neoclassical methodology.

Overall, the Austrian School's view of the state is characterized by a strong commitment to individualism, free markets, and limited government intervention to promote economic freedom and protect individual liberties.

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The Austrian School's View of Money

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. This means that they believe social phenomena are primarily the result of individual motivations, actions, and self-interest.

Mises used the Wicksteedian concept, which states that supply is the total stock of a commodity at a given time, and demand is the total market demand for that commodity. He argued that money is unique because it is acquired to be held for future exchange, not for consumption. Therefore, the demand to hold money is influenced by each individual's relative utilities and purchasing power.

Mises also introduced the concept of a falling demand curve for money, where the purchasing power of the money unit is determined by the intersection of the money stock and the demand for cash balance. He pointed out that the total supply of money at any given time is equal to the sum of individual cash balances.

Furthermore, Mises addressed the issue of different prices for the same good in different locations, such as the price of wheat in Kansas vs New York. He attributed this to the fact that goods are defined by their usefulness to the consumer rather than their technological properties. The purchasing power of a good is influenced by its location and the range of goods and services available in that area.

Mises also discussed the regression theorem, which explains the origin of money as a medium of exchange. He argued that money must have originated on the market, with individuals gradually using a valuable commodity as a medium of exchange. This could not have been established by social compact or governmental fiat because the money commodity would not have had a previous purchasing power.

In conclusion, the Austrian School's view of money emphasizes the subjective nature of value and purchasing power, the role of individual demand and preferences, and the origin of money as a medium of exchange in a market economy.

Frequently asked questions

The Austrian School of Economics is a body of economic theory that emphasises the importance of a product's utility to the consumer in determining its value.

The Austrian School of Economics was founded by Carl Menger in 1871 with the publication of his book 'Principles of Economics'.

The Austrian School of Economics uses logic and a priori thinking to discover economic laws of universal application. They believe that economic values are subjective in nature and that the value of a product is found in its ability to satisfy human wants.

The Austrian School of Economics differs from other schools of economics, such as the neoclassical school and the new Keynesians, in that they do not rely on data and mathematical models to prove their point. Instead, they focus on individual choices and subjective factors that influence economic decisions.

The Austrian School of Economics has provided unique insights into some of the most important economic issues, such as the laws of supply and demand, the cause of inflation, and the theory of money creation. Their ideas have influenced modern economists and continue to be studied and expanded upon today.

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