Austrian School

The Austrian School is a school of economic thought founded in 1871 with the
publication of Carl Menger's Principles of Economics, which helped start the
Neoclassical Revolution in economics in the late nineteenth century.
Austrian economics is currently closely associated with advocacy of radical
laissez faire views. This was not always the case as the earlier Austrian
economists were more cautious compared to later economists such as Ludwig
von Mises and Murray Rothbard. The early Austrian economist Eugen von
Bšhm-Bawerk said that he feared that unbridled free competition would lead
to "anarchism in production and consumption." However the Austrian School,
especially through the works of Friedrich Hayek would be influential in the
free market revival of the 1980s.

Austrians view entrepreneurship as the driving force in economic
development, see private property as essential to the efficient use of
resources, and often see government interference in market processes as
counterproductive. The school originated in Vienna and owes its name to
members of the Historical School of economics who during the Methodenstreit,
where the Austrians defended the reliance that classical economists
derisively called it the "Austrian School" to emphasize its departure from
mainstream German thought and to suggest a provincial approach.

Menger was closely followed by contributions from Eugen von Bšhm-Bawerk and
Friedrich von Wieser. Austrian economists developed a sense of themselves as
a school distinct from neoclassical economics during the economic
calculation debate, with Ludwig von Mises and Friedrich von Hayek
representing the Austrian position. The school was no longer centered in
Austria after Hitler came to power. Austrian economics was ill-thought of by
most economists after World War II. Its reputation has lately risen with
work by students of Israel Kirzner and Ludwig Lachmann, as well as an
interest in Hayek after he won the Nobel Prize for Economics.

Carl Menger was one of a group of economists founding neoclassical economics
in the 1870s. Neoclassical economists reject classical cost of production
theories, most famously the labor theory of value. Instead they explain
value by subjective preferences of individuals. This psychological aspect to
Menger's economics may be partly explained by the schools birth in turn of
the century Vienna. Supply and demand are explained by aggregating over the
decisions of individuals, following the precepts of methodological
individualism and marginalist arguments, which compare the costs and
benefits for incremental changes.

Contemporary neo-Austrian economists claim to adopt Economic subjectivism
more consistently than any other school of economics and reject many
neoclassical formalisms. For example, while neoclassical economics
formalizes the economy as an equilibrium system, Austrian economists
emphasize its dynamic, perpetually dis-equilibrated nature.

The Austrian economists were the first liberal economists to systematically
challenge the Marxist school. This was partly a reaction to the
Methodenstreit when they attacked the Hegelian doctrines of the Historical
School. Though many Marxist authors have attempted to portray the Austrian
school as a bourgeois reaction to Marx, such an interpretation is untenable:
Menger wrote his Principles of Economics at almost the same time as Marx was
completing Das Kapital. The Austrian economists were, however, the first to
clash directly with Marxism, since both dealt with such subjects as money,
capital, business cycles, and economic processes. Boehm-Bawerk wrote
extensive critiques of Marx in the 1880s and 1890s, and several prominent
Marxists--including Rudolf Hilferding--attended his seminar in 1905-06. In
contrast, the classical economists had shown little interest in such topics,
and many of them did not even gain familiarity with Marx's ideas until well
into the twentieth century.

Probably the most consistent and influential Austrian School body is the
Ludwig von Mises Institute.

Some contributions of Austrian economists:

   * A theory of distribution in which factor prices result from the
     imputation of prices of consumer goods to goods of "higher order", that
     is goods used in the production of consumer goods, goods used in the
     production of those producers goods, etc.

   * An emphasis on opportunity cost and reservation demand in defining
     value, and a refusal to consider supply as an otherwise independent
     cause of value. (The British economist Philip Wicksteed adopted this
     perspective.)

   * An emphasis on the forward-looking nature of choice, seeing time as the
     root of uncertainty within economics (see also time preference).

   * A fundamental rejection of mathematical methods in economics seeing the
     function of economics as investigating the essences rather than the
     specific quantities of economic phenomena. This was seen as an
     evolutionary, or "genetic-causal", approach against the stresses of
     equilibrium and perfect competition found in mainstream Neoclassical
     economics.

   * Eugen von Bšhm-Bawerk's critique of Marx centered around the
     untenability of the labor theory of value in the light of the
     transformation problem. There was also the connected argument that that
     capitalists do not exploit workers; they accommodate workers-by
     providing them with income well in advance of the revenue from the
     output they helped to produce.

   * Eugen von Bšhm-Bawerk's capital theory which equates capital intensity
     with the degree of roundaboutness of production processes.

   * The Mises-Hayek business cycle theory which explains depression as a
     reaction to an intertemporal production structure fostered by monetary
     policy setting interest rates inconsistent with individual time
     preferences.

   * Hayek's concept of intertemporal equilibrium. (J. R. Hicks took over
     this theory in his discussion of temporary equilibrium in Value and
     Capital, a book very influential on the development of neoclassical
     economics after World War II.)

   * Mises and Hayek's view of prices as permitting agents to make use of
     dispersed tacit knowledge.

   * The time preference theory of interest which explains interest rates
     through intertemporal choice.

   * Stressing uncertainty in the making of economic decisions, rather than
     relying on "homo oeconomicus" or the rational man who was fully
     informed of all circumstances impinging on his decisions. The fact that
     perfect knowledge never exists, means that all economic activity
     implies risk.

   * Seeing the entrepreneurs' role as collecting and evaluating information
     and acting on risks.

   * The economic calculation debate between Austrian and Marxist
     economists, with the Austrians claiming that Marxism was doomed to fail
     because prices could not be set to recognise opportunity costs of
     factors of production, and so socialism could not calculate best uses
     in the same way capitalism does.

Major Austrian Economists

   * Carl Menger
   * Eugen von Bšhm-Bawerk
   * Friedrich von Wieser
   * Ludwig von Mises
   * F. A. Hayek
   * Ludwig Lachmann

Other related economists

   * Frederic Bastiat (precursor)
   * Henry Hazlitt (introduced the Austrian School to the USA)
   * Salamanca school (medieval precursors)
   * Etienne Bonnot de Condillac
   * Louis Say
   * Leon Walras
   * Jules Dupuit
   * Joseph Schumpeter

Contemporary Austrian Economists

   * Murray N. Rothbard
   * Israel Kirzner
   * Hans Hermann Hoppe
   * Llewelyn Rockwell
   * Walter Block

Seminal Works

   * Principles of Economics by Carl Menger
   * Capital and Interest by Eugen von Bšhm-Bawerk
   * Human Action by Ludwig von Mises

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