The Austrian School of Economics The Austrian School of Economics was founded in 1871 with the publication of Carl Menger’s Principles of Economics. Menger, one of the three co-developers of the marginalist revolution in economic analysis, dedicated his book to his German colleague William Roscher. The German Historical School dominated economic thinking in German language countries and Roscher was the leading figure. Menger’s book argued that economic analysis was universally applicable and that the appropriate unit of analysis was man and his choices. These choices are determined by individual subjective preferences and the margin on which decisions are made. The logic of choice was the essential building block to the development of universally valid economic theory. The Historical School, on the other hand, had argued that economic science was incapable of generating universal principles and that scientific research should be instead focused on detailed historical examination. The English classical economists were in error to believe that they had found economic laws that transcended time and national boundaries. Menger’s Principles of Economics restated the classical political economy project of universal laws by way of marginal analysis. Roscher’s students, especially Gustav Schmoller, took great exception to Menger’s defense of “theory” and labeled the work of Menger, and his followers Eugen Bohm-Bawerk and Friedrich Wieser, the ‘Austrian School’ because of their faculty positions at the University of Vienna. As with most labels in economics, the Austrian School was a derogatory term that stuck even though the geographic identity of the school of thought was inaccurate. 1 Since the 1930s, no economists from the University of Vienna or any other Austrian university have become a leading figure in the so-called Austrian School of Economics.1 In the 1930s and 1940s, the Austrian School moved to Britain and the United States and scholars associated with this approach to economic science were located primarily at the London School of Economics (1931-1950), New York University (1944-), Auburn University (1983-), and George Mason University (1981-). Moreover, many of the ideas of the leading mid-20th century Austrian economists, such as Ludwig Mises and F. A. Hayek, can find their intellectual roots in classical figures like Adam Smith and David Hume or early 20th century figures like Knut Wicksell, as well as Menger, Bohm-Bawerk and Wieser. This diverse mix of intellectual traditions in economic science is even more obvious for contemporary Austrian school economists who have been influenced by modern figures in economics like Armen Alchian, James Buchanan, Ronald Coase, Harold Demsetz, Axel Leijonhufvud, Douglass North, Mancur Olson, Vernon Smith, Gordon Tullock, Leland Yeager and Oliver Williamson as well as Israel Kirzner and Murray Rothbard. While one could argue that a unique Austrian school of economics operates within the economic profession today, one could sensibly argue that the label “Austrian” no longer possesses any substantive meaning. Discussions of the Austrian School usually take one of two forms: a discussion of the leading individuals (Menger, Bohm-Bawerk, Wieser, Schumpeter, Mises, Hayek, Machlup, Kirzner, and Rothbard) or the unique methodological position of Austrian economics (methodological individualism vs. methodological holism; subjectivism versus objective theories of values, costs and expectations; apriorism versus positivism, etc.). In 1 Though Eric Streissler at the University of Vienna has made several contributions to the history of the economic thought of the Austrian School, and Stephan Boehm of the University of Graaz has made significant contributions to the history of thought and methodology of the Austrian school. 2 this essay I would like to minimize the discussion of individuals and methodology and instead present a list of the main propositions about economics, and the workings of an economy, that Austrians have argued over the years. My hope in doing this is that the reader will see the insights of the Austrians and why the modern reader can benefit from revisiting the old texts and the debates of the late 19th to middle 20th century. I will divide my list into three sections: propositions about the science of economics, propositions about microeconomics, and propositions about macroeconomics. I will limit my list to ten propositions that I consider the most important and well-established positions within the Austrian camp. I. The Science of Economics Proposition 1: Only Individuals Choose Man, with his purposes and plans, is the beginning of all economic analysis. Only individuals make choice, collective entities do not choose. There are no economic phenomena unconnected to the choices of individuals. The primary task of economic analysis is to render intelligible economic phenomena in terms of individual purposes and plans, while the secondary task of economic analysis is to trace out the unintended consequences of individual choices. Proposition 2: The study of the market order is fundamentally about exchange behavior and the institutions within which exchanges take place The price system and the market economy are best understood as a catallaxy, and thus the science which studies the market order falls under the domain of catallactics. These terms derive from the original Greek meanings of the word -- Katallaxy – exchange, and bringing a 3 stranger into friendship through exchange. Contrary to the widely held view that the study of the market order focuses on the allocation of scarce resources amongst competing ends, catallactics focuses our analytical attention on the exchange relationships that emerge on the market, the bargaining that characterize the exchange process, and the institutions within which the human activity of exchange takes place. Proposition 3: The ‘facts’ of the social sciences are what people believe and think Unlike the physical sciences, the human sciences begin with the purposes and plans of individuals. Where the purging of purposes and plans in the physical sciences led to advances by overcoming the problem of ‘anthropomorphism’, in the human sciences the elimination of purposes and plans results in the purging of the subject matter of the sciences of human action, and lead to a lack of progress through ‘mechanomorphism’. In the human sciences the “facts” of the world are what the actors think and believe. The meaning that individuals place on things, practices, places and people determines how they will orient themselves in making decisions. The goal of the sciences of human action is intelligibility, not prediction. The human sciences can achieve this goal because we are what we study, or because we possess knowledge from within, whereas the natural sciences cannot pursue a goal of intelligibility because they rely on knowledge from without. We can understand purposes and plans of other human actors because we ourselves are human actors, but we cannot assign purposes and plans to planetary movement. The classic thought experiment Austrians have invoked to convey this essential difference between the sciences of human action and the physical sciences is a Martian observing the ‘data’ at Grand Central Station in New York. Our Martian could observe that when the little hand on the clock points to 8 there is a bustle of movement as bodies leave 4 these boxes, and he can observe that when the little hand hits 5 there is a bustle of movement as bodies reenter the boxes and leave. Our Martian may even develop a prediction about the little hand and the movement of bodies and boxes. But unless our Martian comes to understand the purposes and plans (the commuting to and from work) his ‘scientific’ understanding of the data from Grand Central Station would be limited. The sciences of human action are different than the natural sciences and we impoverish the human sciences when we try to force fit them into a philosophical/scientific mold in which they do not belong. II. Microeconomics Proposition 4: Utility and Costs are Subjective All economic phenomena are filtered through the human mind. Objective realities of the world matter, but as far as in the realms of value and price they only matter in relation to individual perception of them. Since the 1870s economists have agreed that value is subjective, but following Marshall many argued that the cost side of the equation is determined by objective conditions. As Marshall insisted, both blades of a scissor cut a piece of paper just as subjective value and objective costs determine price. But Marshall failed to appreciate that costs are also subjective being determined by the alternative demands for scarce resources. Both blades of the scissors do indeed cut the paper, but the scissors of economic analysis (supply and demand) are made up of the subjective valuations of individuals. Scarcity is a condition of human existence that follows from the logic that we cannot do two things at once. In deciding courses of action one must choose --- pursue one path and set aside an alternative path. The focus on alternative in choices lead to one of the 5 defining concepts of the economic way of thinking --- opportunity costs. The costs of any action are the alternatives foregone in making that choice. Since the forgone alternative is never realized, at the time of decision we weight the expected benefits of an activity against the expected benefits of the alternative activity. The forgone expected benefits represent the costs to the decision maker at the moment of decision. Proposition 5: The price system economizes on the information that economic actors have to process in making their own decisions Prices summarize the terms of exchange on the market. In summarizing the terms of exchange, prices translate the subjective trade-offs of market participants into objective data that others can utilize in assessing their own subjective trade-offs. The price system signals to market participants the relevant information so they may act in manner that enables individuals to realize the mutual gains from exchange.
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