Austrian Economics: Principles, Not Dogma

Austrian Economics, also known as 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 was founded in 1871 in Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others. It is not based on a fictitious homo oeconomicus but on people as they really are and as they behave. It focuses on autonomous entrepreneurial action and the free interaction of individuals in the marketplace.

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. It holds that prices are determined by subjective factors like an individual's preference to buy or not to buy a particular good, as opposed to the classical school of economics, which holds that objective costs of production determine the price.

Austrian Economics is not to be confused with the German Historical School, which dominated economic thinking in German-language countries and which the Austrian School was methodologically opposed to.

Austrian economics is about understanding the economy by examining the social ramifications of individual choice

Austrian economics emphasizes subjectivism, utility, and marginalism. It argues that the value of goods and services is subjective and based on individual preferences. This leads to the theory of diminishing marginal utility, which suggests that the value of additional goods decreases as the number of goods increases. Austrian economics also introduces the concept of opportunity cost, which is the cost of forgoing the next best alternative.

The Austrian school has a strong focus on the role of the entrepreneur in the market economy. Entrepreneurs are seen as crucial for detecting unexplored demand and creating profitable ways to bring a disrupted market back to equilibrium. This view of entrepreneurship is central to the Austrian perspective on welfare, as they believe that welfare is continually increased through entrepreneurial activity and innovation.

Another key aspect of Austrian economics is its emphasis on dynamics and time in economic processes. They argue that coordination of individual plans for supply and demand is never perfect due to fundamental uncertainty about the future. This leads to a view of the market as a dynamic and evolving process rather than a static equilibrium state.

The Austrian school also advocates for a laissez-faire policy, arguing that market economies are the best coordination mechanism for individuals to make use of information and plan their economic activity. They are sceptical of government intervention, believing that it disrupts the market process and leads to inefficiencies.

Overall, Austrian economics seeks to understand the economy by examining the social ramifications of individual choice, with a focus on methodological individualism, subjectivism, and the role of entrepreneurs in market dynamics.

It uses logic of a priori thinking to discover economic laws of universal application

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. A priori knowledge is knowledge that is acquired through deductive reasoning, rather than empirical observation. In other words, it is knowledge that can be arrived at independently of, and prior to, any experience. This is in contrast to other mainstream schools of economics, which rely on empirical data and mathematical models.

The Austrian school believes that it is possible to discover economic truths simply by thinking aloud and conducting "thought experiments". This sets it apart from other schools of economics, which may view this approach as unscientific or unreliable. However, the Austrian school has provided unique insights into some of the most important economic issues of our time.

The Austrian school's use of a priori thinking can be traced back to its founder, Carl Menger, who wrote "Principles of Economics" in 1871. Menger's book contributed significantly to the theory of diminishing marginal utility, which states that the economic value of goods and services is subjective and that as the number of goods increases, their subjective value for an individual diminishes.

Later, Ludwig von Mises, another prominent thinker of the Austrian school, applied the theory of marginal utility to money in his book, "The Theory of Money and Credit" (1912). He argued that the theory of diminishing marginal utility of money could help answer one of the most basic questions in economics: How much money is too much? Again, the answer would be subjective, as one extra dollar in the hands of a billionaire would not make a difference, while that same dollar would be invaluable to a poor person.

The Austrian school's use of a priori thinking has also been applied to other economic concepts, such as the laws of supply and demand, the cause of inflation, the theory of money creation, and the operation of foreign exchange rates. On these issues, the views of the Austrian school often differ from those of other schools of economics.

One example of this divergence is in the determination of prices. The Austrian school holds that prices are determined by subjective factors, such as an individual's preference to buy or not buy a particular good. In contrast, the classical school of economics argues that objective costs of production determine the price, while the neoclassical school asserts that prices are determined by the equilibrium of demand and supply. The Austrian school rejects both of these views, claiming that costs of production and the equilibrium of demand and supply are also influenced by subjective factors.

In summary, the Austrian school's use of a priori thinking allows it to discover economic laws and theories that may be overlooked or contradicted by empirical data and mathematical models. While this approach has its critics, it has nonetheless contributed significantly to the field of economics and continues to offer unique insights into complex economic issues.

It is not concerned with mathematical models or data

Austrian economics is not concerned with mathematical models or data. Instead, it relies on ["literary economics" and verbal descriptions to communicate its arguments. This is because Austrians believe that economic laws of universal application can be discovered through a priori thinking—a form of reasoning that does not rely on empirical evidence or observations from the outside world. They believe that economic truths can be deduced from basic principles of human action, individualism, and subjectivism.

Austrian economics, therefore, takes a different approach from mainstream schools of economics, which make use of data, mathematical models, and statistical methods to prove their points objectively. The Austrian school's aversion to mathematical and statistical methods stems from their belief in the ontological complexity of the economy. They argue that such methods are only suitable for studying static, non-thinking entities, not human beings, who are dynamic, thinking, and intentional actors.

The Austrian school's focus on a priori thinking and its rejection of mathematical models and data can be traced back to its founder, Carl Menger, who defended deductive theory against the empirical methods favoured by the German Historical School in the late 19th century. Menger's work emphasised subjectivism, utility, and marginalism, and he is known for his theory of diminishing marginal utility.

While some Austrian economists, like Ludwig von Mises, strictly adhere to a priori thinking and reject empirical observations, others, like Friedrich Hayek, take a more moderate approach and are more open to incorporating mathematical models and data into their analyses. However, even Hayek's work, which incorporates elements of neoclassical methodology, is considered by some to be a blend of Austrian economics with the Chicago School, rather than pure Austrian economics.

Overall, the Austrian school's stance on mathematical models and data sets it apart from mainstream economics and contributes to its classification as a heterodox school of economic thought.

It is a heterodox school of economic thought

Austrian economics is a heterodox school of economic thought, meaning it deviates from the economic mainstream. It is characterised by strict adherence to methodological individualism, the concept that social phenomena result from the motivations and actions of individuals, along with their self-interest. Austrian theorists believe that economic theory should be derived exclusively from basic principles of human action. This is in contrast to other schools of economic thought, which focus on aggregate variables, equilibrium analysis, and societal groups rather than individuals.

Austrian economics 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, which was dominant at the time, in a dispute known as the Methodenstreit, or methodology quarrel. The Austrian School's name was coined by Gustav von Schmoller, a leader of the Historical School, in an attempt to characterise the school as outcast and provincial.

Austrian economics is based on the logic of a priori thinking, which means that economic laws of universal application can be discovered through individual thought, without relying on the outside world. This is in contrast to other mainstream schools of economics, which make use of data and mathematical models to prove their points objectively. 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, rather than objective costs of production.

The Austrian School has made several important contributions to economics, including the subjective theory of value, marginalism in price theory, and the formulation of the economic calculation problem. However, it has also been criticised for its rejection of empiricism, mathematisation, and other testable ideas. It is often seen as a lot of theory without much data to support it.

Despite this 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 von Böhm-Bawerk's theories on time preference.

It is associated with liberalism and libertarianism

Austrian economics is often associated with liberalism and libertarianism. This is because Austrian economics is underpinned by the belief in methodological individualism, which holds that social phenomena result primarily from the motivations and actions of individuals along with their self-interest. Austrian economics also emphasises the importance of laissez-faire policy, which is a key tenet of liberalism.

The Austrian school of economics originated in 1871 in Vienna with the work of Carl Menger, who is considered the founder of the Austrian school. Menger's work emphasised subjectivism, utility and marginalism. Menger's theories on marginal utility hold that the economic values of goods and services are subjective in nature, meaning that what is valuable to one person may not be valuable to another. This theory contributed significantly to the theory of diminishing marginal utility.

The Austrian school also includes other notable economists such as Ludwig von Mises, Eugen von Böhm-Bawerk, Friedrich Hayek, and Henry Hazlitt. These economists have made significant contributions to economic thought, including the subjective theory of value, marginalism in price theory, and the formulation of the economic calculation problem.

The Austrian school is characterised by its rejection of positivism, mathematisation, and other testable ideas. Instead, it relies heavily on theory and verbal logic. This has led to criticism from mainstream economists, who argue that Austrian economics lacks empirical evidence and is not grounded in reality.

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

The contemporary Austrian school, also known as the "Rothbardian" or "Praxeological" School, is considered more stagnant and dogmatic in its adherence to a rigidly informal methodology. It focuses more on law and libertarian political theory than purely economic theory.

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