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The Austrian School of Economics THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION By Thorsten Polleit THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION Preface The purpose of this handout is to provide an elementary introduction to the essential ide- as of the Austrian School of Economics. The theoretical issues and their practical applications presented therein draw heavily on the work of many brilliant scholars of the Austrian School of Economics. I hope the booklet makes for rewarding and eye-opening reading, especially so at a time when mainstream economics has become (again) dominated by anti-free-market– and anti-freedom minded methodologies and teachings. Thorsten Polleit Frankfurt, June 2013 VERSION JUNE 2013 ▪ 2 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION “Economics must not be relegated to classrooms and statis- tical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns every- body and everything. It is the pith of civilization and of man’s human existence.” ––Mises, L. v. (1996), Human Action, 4th ed., Fox & Wilkes, San Francisco, p. 878. Ludwig von Mises 1881 – 1973 VERSION JUNE 2013 ▪ 3 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION Differences between the Austrian School and the Neoclassical Schools (1) Source: de Soto, H. (1998), The ongoing Methodenstreit of the Austrian School, p. 78. VERSION JUNE 2013 ▪ 4 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION Differences between the Austrian School and the Neoclassical Schools (2) Source: de Soto, H. (1998), The ongoing Methodenstreit of the Austrian School, p. 79. VERSION JUNE 2013 ▪ 5 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION “[S]ince the early origins of the State, its rulers have always turned, as a neces- sary bolster to their rule, to an alliance with society’s class of intellectuals. The masses do not create their own abstract ideas, or indeed think through these ideas independently; they follow passively the ideas adopted and promulgated by the body of intellectuals, who become the effective “opinion moulders” in society. And since it is precisely a moulding of opinion on behalf of the rulers that the State almost desperately needs, this forms a firm basis for the age-old alliance of the intellectuals and the ruling classes of the State. The alliance is based on a quid pro quo: on the one hand, the intellectuals spread among the masses the idea that the State and its rulers are wise, good, sometimes divine, and at the very least inevitable and better than any conceivable alternatives. In return for this panoply of ideology, the State incorporates the intellectuals as part of the ruling Murray N. Rothbard elite, granting them power, status, prestige, and material security. Furthermore, 1926 – 1995 intellectuals are needed to staff the bureaucracy and to “plan” the economy and society.” ––Rothbard, M. N. (2002 [1973]), For a New Liberty, The Libertarian Manifesto, Collier Books, p. 55. VERSION JUNE 2013 ▪ 6 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION Content 1. Vienna at the end of the 19th/start of the 20th century 2. Leading scholars of the Austrian School of Economics Session 1 3. The origin of the Austrian School of Economics: The Spanish Scholastics 4. The defining dispute: Methodenstreit 5. Epistemology: rationalism versus empiricism 6. Refuting the claims of positivism, empiricism and historicism Session 2 7. A note on Karl R. Popper’s critical rationalism 8. A priori true statements – Immanuel Kant’s Critique of Pure Reason 9. Digression: Some key aspects of formal logic 10. On the importance of theory 11. Ludwig von Mises’s praxeology – the axiom of human action Session 3 12. Logically-deducted inferences from the axiom of action 13. The law of diminishing marginal utility 14. The valuation paradox 15. Digression: The Keynesian world of no scarcity Session 4 16. Mises’s methodological dualism 17. Rejecting the mathematical method in economics VERSION JUNE 2013 ▪ 7 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION 18. Class probability versus case probability 19. Digression: Critique of the rational expectation theory 20. On the relation between economics and history Session 5 21. Private property 22. The debate about private versus public goods 23. The free market: direct and indirect exchange Session 6 24. Production, entrepreneur, profit and loss 25. The Austrian critique of the Coase Theorem 26. Savings, investment and economic growth 27. The Keynesian’s savings fallacy Session 7 28. Prices, taxation and price controls 29. Imputing value to goods in an evenly rotating economy 30. Murray N. Rothbard’s The Ethic of Liberty 31. Libertarian property rights theory Session 8 32. The Ethic of Liberty and the government 33. Mises on the impossibility of socialism 34. Capitalism and (the forms of) socialism 35. A critique of interventionism Session 9 36. On anti-capitalistic mentality VERSION JUNE 2013 ▪ 8 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION 37. Friedrich August von Hayek’s The Road to Serfdom 38. Democracy, liberalism, and property rights 39. The economics of government debt Session 10 40. The theory of social evolution 41. Societal order, property rights and time preference 42. Digression: Time preference, civilization and decivilization 43. The rejection of the Marxists’ expropriation claim under capitalism Session 11 44. Function(s) of money 45. Carl Menger’s theory of the origin of money 46. Mises’s regression theorem 47. The gold standard Session 12 48. Gresham’s law 49. The origin of central banks: the Bank of England 50. The origin of central banks: the US Federal Reserve 51. On the ethics of money production Session 13 52. Rothbard’s theory of the establishment of fiat money 53. Digression: Gold confiscation in the US 54. The purchasing power of money 55. The optimal stock of money Session 14 VERSION JUNE 2013 ▪ 9 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION 56. Money does not measure value; there is no such thing as stable money 57. The Austrians’ view on inflation and deflation 58. An Austrian critique of the quantity theory 59. The costs of inflation Session 15 60. The fallacy of the hypothesis of the (super)neutrality of money 61. Digression: The German Hyperinflation 1920 – 1923 62. The money irregular-deposit contract 63. Money and credit in a money warehousing regime 64. Types of money and credit Session 16 65. Key elements of government controlled fiat money regimes 66. The workings of a fiat money regime 67. Removing the checks to inflation under central banking Session 18 68. The time market and the Austrian theory of the interest rate 69. Roundabout production – the Hayekian triangle 70. The business cycle 71. Commodity credit versus circulation credit 72. Knut Wicksell’s business cycle theory Session 19 73. The Austrian Monetary Theory of the Trade Cycle (MTTC) 74. Mises’s sound money principle VERSION JUNE 2013 ▪ 10 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION 1. Vienna at the end of the 19th/start of the 20th century SUGGESTED READINGS: Hoppe, H.-H. (2006), Democracy, The God That Failed, The Economics and Politics of Monarchy, Democracy, and Natural Order, Transaction Publisher, New Brunswick, Ney Jersey, pp. ix – xxiv, esp. footnote 5. The list of great names associated with the late 19th/early 20th century in Vienna of the Habsburg monarchy – that is the pre- democratic Austro-Hungarian Empire – is seemingly endless: Philosophers: Ludwig Boltzmann, Franz Brentano, Rudolph Carnap, Edmund Husserl, Ernst Mach, Alexius Meinong, Karl R. Popper, Moritz Schlick, Ludwig Wittgenstein. Vienna End of the 19th century Mathematicians: Kurt Gödel, Hans Hahn, Karl Menger, Richard von Mises. Economists: Eugen von Böhm-Bawerk, Gottfried von Haberler, Friedrich August von Hayek, Carl Menger, Fritz Machlup, Ludwig von Mises, Oskar Morgenstern, Joseph VERSION JUNE 2013 ▪ 11 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION Schumpeter, Friedrich von Wieser. Psychologists: Alfred Adler, Joseph Breuer, Karl Bühler, Siegmund Freud. Historians and sociologists: Max Adler, Otto Bauer, Egon Friedell, Heinrich Fried- jung, Paul Lazarfeld, Gustav Ratzendorfer, Alfred Schütz. Writers and literary critics: Hermann Broch, Franz Grillpar- zer, Hugo von Hofmannsthal, Karl Kraus, Fritz Mauthner, Ro- bert Musil, Arthur Schnitzler, Georg Trakl, Otto Weininger, Ste- fan Zweig. Artists and architects: Gustav Klimt, Oskar Kokoschka, Adolf Loos Egon Schiele. Composers: Alban Berg, Johannes Brahms, Anton Bruckner, Franz Lehar, Gustav Mahler, Arnold Schönberg, Johann Strauss, Anton von Webern, Hugo Wolf. VERSION JUNE 2013 ▪ 12 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION 2. Leading scholars of the Austrian School of Economics Carl Menger (February 28, 1840 – February 26, 1921) . Carl Menger is actually the founder of the Austrian School of Economics. Together with the Léon Walras (1834 – 1919) and William Stanley Jevons (1835 – 1882), Menger spelled out the subjective basis of economic value and fully explained, for the first time, the theory of marginal utility. He also showed how money originates in a free market when the most marketable commodity is desired, not for consumption, but for use in trad- ing for other goods. With his Investigations (1883) Menger battled the German Historical School, which rejected theory and saw economics as the accumulation of data in the service of the state. As professor of economics at the University of Vienna, and then tutor to Crown Prince Rudolf of the House of Habsburg, Menger restored econom- ics as the science of human action based on deductive logic, and prepared the way for later theorists to counter the influence of socialist thought. IMPORTANT WORKS: Principles of Eco- nomics (1871), Investigations into the Method of the Social Sciences with Spe- cial Reference to Economics (1883), The Errors of Historicism in German Econom- ics (1884). VERSION JUNE 2013 ▪ 13 THE AUSTRIAN SCHOOL OF ECONOMICS – AN INTRODUCTION Eugen von Böhm-Bawerk (February 12, 1851 – August 27, 1914) . In his History and Critique of Interest Theories (1884), Eugen von Böhm- Bawerk revealed the fallacies in the history of thought and gave a firm defense of the idea that the interest rate is not an artificial construct but an inherent part of the market.
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