Austrian Economics: Global Adoption And Influence

Austrian economics is a heterodox school of economic thought that originated in Vienna, Austria-Hungary (now Austria) in 1871 with the publication of Carl Menger's Principles of Economics. This school of thought is based on the concept that social phenomena and economic theory are derived from the motivations, actions, and self-interest of individuals. While Austrian economics was influential in the late 19th and early 20th centuries, it is no longer considered orthodox, and most professional economists today do not identify as Austrian economists. However, Austrian economics has had a lasting impact on the field, contributing to theories such as marginal utility, opportunity cost, and the subjective theory of value.

The Austrian School's origins

The Austrian School of Economics, also known as the Vienna School, Psychological School, or Causal Realist Economics, is a heterodox school of economic thought that advocates strict adherence to methodological individualism. This means that Austrian theorists believe that economic theory should be exclusively derived from basic principles of human action. The Austrian School originated in Vienna in 1871 with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others.

Menger's 1871 book, 'Principles of Economics', is generally considered the founding of the Austrian School. The book advanced the theory of marginal utility and introduced the subjectivist approach in economics. Menger's contributions to economic theory were closely followed by those of Eugen von Böhm-Bawerk and Friedrich von Wieser, who together are considered the "first wave" of the Austrian School.

The Austrian School was methodologically opposed to the Historical School, a dispute known as the Methodenstreit or methodology quarrel. The Austrians defended the role of theory in economics as distinct from the study or compilation of historical circumstances. This dispute gave rise to the name "Austrian School", which was initially used by a leader of the Historical School, Gustav von Schmoller, in an attempt to characterise the Austrians as outcast and provincial. However, the label was eventually adopted by the Austrian School adherents themselves.

The Austrian School 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, with a focus on the additional units and their associated costs and benefits. 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 Böhm-Bawerk furthered Austrian economic theory by emphasising the element of time in economic activity. He developed theories of production, capital, and interest, in part to critique Marxist economic theories. Böhm-Bawerk's student, Ludwig von Mises, combined the theories of Menger and Böhm-Bawerk with the ideas of Swedish economist Knut Wicksell, creating the Austrian Business Cycle Theory (ABCT).

The Austrian School has adherents around the world and is not limited to the country of Austria, despite its historical origins there.

The Austrian School's key figures

The Austrian School of Economics, founded in 1871, is associated with several key figures who have contributed significantly to the development and evolution of its ideas over time. Here is an overview of some of the notable figures within the Austrian School:

Carl Menger (1840-1921): Menger is often regarded as the founder of the Austrian School. His book "Principles of Economics" (1871) is considered a foundational text, introducing the theory of marginal utility and advocating for methodological individualism. Menger's work was central to the "first wave" of the school, and he is known for his disagreements with the German Historical School during the Methodenstreit ("methodology struggle").

Eugen von Böhm-Bawerk (1851-1914): A contemporary of Menger, Böhm-Bawerk was part of the "first wave" of Austrian economists. He is known for his extensive critiques of Karl Marx and his contributions to the development of marginalism and the subjective theory of value. He also elaborated on the Austrian theory of capital and interest, arguing that interest rates are determined by supply and demand and time preference.

Friedrich von Wieser (1851-1926): Along with Menger and Böhm-Bawerk, Wieser was part of the initial group of Austrian economists. He made significant contributions to the subjective theory of value and marginalism. Additionally, he formulated the opportunity cost doctrine, which plays a crucial role in mainstream economics.

Frank Albert Fetter (1863-1949): Fetter was a prominent leader of Austrian thought in the United States. He obtained his PhD from the University of Halle and became a Professor of Political Economy and Finance at Cornell University. He influenced several important Austrian economists who attended his seminars at the University of Vienna in the 1920s.

Ludwig von Mises (1881-1973): Mises is a significant figure in the Austrian School, particularly in the 20th century. He developed his version of the subjectivist approach, "praxeology," arguing for a priori theoretical economic truths. Mises also contributed to the Austrian theory of the business cycle, asserting that fractional reserve banks cause economic fluctuations through artificial credit issuance.

Friedrich August von Hayek (1899-1992): Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences, bringing renewed interest to the Austrian School. He is known for his work on methodological individualism, the subjective theory of value, and his critique of socialism in "The Road to Serfdom." Hayek's ideas influenced the revival of laissez-faire thought in the 20th century.

Israel Kirzner: A student of Mises, Kirzner played a role in the revival of the Austrian School's reputation in the late 20th century. He is known for his work at New York University and his contributions to the understanding of entrepreneurial discovery within competitive markets.

Murray Rothbard (1926-1995): Rothbard was a prominent economist and thinker within the Austrian School. He is known for his leadership in the "mainstream" of Austrian Economics and his disagreements with Hayek. Rothbard's work focused on economic theory, political theory, and his critique of Keynesian economics.

Walter Block: Block is an Austrian economist who emphasizes the integral connection between libertarian political theory and the Austrian School. He has critiqued Hayek and Menger for their views on state activity, arguing that they clash with the libertarian ideals he sees as fundamental to the school.

These individuals represent some of the key figures in the Austrian School of Economics, each contributing unique insights and advancements to the school's economic thought. Their work has influenced economic theory and continues to shape economic discussions today.

The Austrian School's critics

The Austrian School of Economics, which emerged in 1871 in Vienna, 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 economics places great stress on free markets and argues that government efforts to control the economic cycle invariably make it worse.

However, Austrian economics has faced several criticisms over the years. Here are some of the key criticisms:

Market Efficiency

The belief in the efficiency of free markets is countered by many examples of market failures, such as the growth of subprime mortgages and securitization leading up to the 2008 credit crisis. This criticism highlights that markets can be inefficient and prone to failures, which may require government intervention for correction.

High Tax and Spending

The Austrian School's criticism of high tax and high-spending regimes impinging on social freedoms is countered by examples of Western European economies with high taxes and government spending, which provide their citizens with a comprehensive welfare state, education, and healthcare. This criticism argues that high taxes and spending can actually improve social freedoms and well-being.

Money Supply Control

Controlling the money supply is much more difficult in practice than Austrian economic theory suggests. Critics argue that attempts to control the money supply can lead to severe economic problems, such as the deflation and high unemployment suffered by the UK in the 1920s under the Gold Standard.

Model Vagueness

Critics argue that Austrian economic models are too subjective and vague to be effectively applied in the real world. They claim that the models exaggerate the differences with other economic schools of thought and are prone to shaping political beliefs into economic policy.

Government Intervention

Keynesian economists critique the Austrian School's belief that economies will recover without government intervention. They argue that leaving it to market forces alone may take a very long time for the economy to recover to full capacity. During a recession, a Keynesian would suggest government intervention to inject spending into the economy when people are not consuming. This criticism highlights the potential role of government in stabilizing the economy during downturns.

Inflation and Interest Rate Misunderstanding

Austrian economists have been criticized for misunderstanding inflation and interest rate dynamics. They define inflation as a rise in the amount of money, contrary to the standard economic concept of a rise in the price level. Additionally, they argue that interest rate intervention by the central bank leads to a misallocation of capital, which is contradicted by the fact that banks are not reserve-constrained but capital-constrained. This misunderstanding led to inaccurate predictions about the impact of Quantitative Easing in 2008.

The Austrian School's influence

The Austrian School of Economics, founded in 1871 with the publication of Carl Menger's 'Principles of Economics', is a heterodox school of economic thought. It 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 believe that economic theory should be derived exclusively from basic principles of human action.

The school originated in Vienna, Austria-Hungary, 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 'Methodenstreit' or 'methodology quarrel'. The Austrian School owes its name to members of the German Historical School, who argued against the Austrians during the late 19th-century 'Methodenstreit'. The adherents of the Austrian School later adopted the label themselves.

The Austrian School is considered heterodox or not mainstream. It may not be considered legitimate economics by some modern economists. Austrian economists are often concerned with the unintended consequences of individual choices, which have lasting effects on economic activity. They tend to believe that economic institutions form unintentionally and inefficiently as a result of individual agents' decisions and actions. Because these systems are not purposefully designed, and because it is impossible to know the preferences and utilities of every individual, Austrian economists tend to believe that government activity is usually harmful. They agree with classical economists that government intervention is neutral at best, but disagree that money is neutral, instead asserting that money is not neutral at all.

In the present day, there are two major camps of Austrian thinkers. One camp is staunchly against government intervention and rejects much of neoclassical economic theory, following the philosophies of Ludwig von Mises and Murray Rothbard. The other camp is more accepting of intervention and more accepting of neoclassical economics, following the thinking of Friedrich Hayek, who won the 1974 Nobel Prize in Economic Sciences.

Austrian economists believe that economic truths can be learned by conducting 'thought experiments' that don't rely on data, using logic and reasoning to postulate theories. They tend to downplay or reject the role of econometrics and data in economics, believing that human behaviour cannot be effectively modelled mathematically. This stands in contrast to mainstream, orthodox economics, where empirical evidence and quantitative skills are considered critical.

Austrian economics has contributed to theories that are considered orthodox today. For example, Austrian ideas are credited with influencing the Marginal Revolution in economics, which introduced the idea of 'thinking on the margin' or marginal analysis. Opportunity cost is another example of an economic theory first introduced by an Austrian economist, Friedrich von Wieser.

Despite its heterodox status, Austrian economics remains influential. Currently, universities with a significant Austrian presence include George Mason University, New York University, Grove City College, Loyola University New Orleans, Monmouth College, and Auburn University in the United States; King Juan Carlos University in Spain; and Universidad Francisco Marroquín in Guatemala. Austrian economic ideas are also promoted by privately funded organisations such as the Mises Institute and the Cato Institute.

The Austrian School's modern relevance

The Austrian School of Economics is a heterodox school of economic thought that was founded in 1871 with the publication of Carl Menger's 'Principles of Economics'. It is based on the idea that economics is about individual people making choices based on their preferences, or human behaviour, otherwise known as 'praxeology'. Austrian economists believe that economic theory should be exclusively derived from basic principles of human action and that social phenomena result primarily from the motivations and actions of individuals along with their self-interest.

The Austrian School is particularly relevant today as it offers an alternative perspective to mainstream economic thinking. While it is considered heterodox, or not mainstream, by modern economists, it nonetheless provides a different approach to understanding economic phenomena. Austrian economics emphasises the role of individual choice and the unintended consequences of these choices, which can have lasting effects on economic activity. This focus on methodological individualism sets it apart from other schools of economic thought, which often focus on aggregate variables, equilibrium analysis, and societal groups rather than individuals.

Another aspect of the Austrian School's modern relevance is its influence on other economic theories and schools of thought. Many theories developed by the first wave of Austrian economists, including Carl Menger's theories on marginal utility and Friedrich von Wieser's theories on opportunity cost, have been absorbed into mainstream economics. Additionally, Austrian economics has contributed to the development of important economic concepts such as marginal analysis and opportunity cost.

Furthermore, the Austrian School's emphasis on methodological individualism and its scepticism towards government intervention resonate with certain political ideologies, particularly libertarian and anarchist movements. The school's ideas about free markets and opposition to government intervention attract individuals who hold similar political beliefs. However, it is important to note that the Austrian School has also been criticised for its lack of empirical rigor and rejection of quantitative methods in economics.

Lastly, the Austrian School's modern relevance can be seen in the ongoing debates and discussions it generates. For example, Austrian economics is often compared and contrasted with Keynesian economics, with some countries and policymakers favouring one approach over the other in their policy decisions. Additionally, the Austrian Business Cycle Theory (ABCT) is a topic of ongoing discussion and critique, with some economists finding it impractical and unrealistic.

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