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Austrian School
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{{distinguish|Education in Austria|Austerian economics}}{{Austrian School sidebar|expanded=all}}{{Neoliberalism sidebar|expanded=Economics}}{{Anarcho-capitalism sidebar|expanded=Core tenets}}The Austrian School is a heterodoxWEB,weblink Is Austrian Economics Heterodox Economics?, Boettke, Peter, The Austrian Economists, 2009-02-13,weblink" title="web.archive.org/web/20090328232903weblink">weblink 28 March 2009, no, BOOK, Boettke, Peter J., Peter T. Leeson, A Companion to the History of Economic Thought, Warren Samuels, Jeff E. Biddle, John B. Davis, 446–52, 28A: The Austrian School of Economics 1950–2000,weblink Blackwell Publishing, 2003, 978-0-631-22573-7, NEWS,weblink Heterodox economics: Marginal revolutionaries, The Economist, December 31, 2011, February 22, 2012, no,weblink" title="web.archive.org/web/20120222004727weblink">weblink February 22, 2012, school of economic thought that is based on methodological individualism—the concept that social phenomena result exclusively from the motivations and actions of individuals.Carl Menger, Principles of Economics, online at WEB,weblink Archived copy, 2014-09-13, no,weblink 2014-09-14, BOOK,weblink The Stanford Encyclopedia of Philosophy, Joseph, Heath, Edward N., Zalta, 1 May 2018, Metaphysics Research Lab, Stanford University, 1 May 2018, Stanford Encyclopedia of Philosophy, Ludwig von Mises. Human Action, p. 11, "Purposeful Action and Animal Reaction". Referenced 2011-11-23.The Austrian School originated in late-19th and early-20th century Vienna with the work of Carl Menger, Eugen Böhm von Bawerk, Friedrich von Wieser and others.Joseph A. Schumpeter, History of economic analysis, Oxford University Press 1996, {{ISBN|978-0195105599}}. It was methodologically opposed to the Prussian Historical School (in a dispute known as Methodenstreit). Current-day economists working in this tradition are located in many different countries, but their work is still referred to as Austrian economics. Among the theoretical contributions of the early years of the Austrian School are the subjective theory of value, marginalism in price theory and the formulation of the economic calculation problem, each of which has become an accepted part of mainstream economics.BOOK, Birner, Jack, Rudy, van Zijp, Hayek, Co-ordination and Evolution: His Legacy in Philosophy, Politics, Economics and the History of Ideas, London, New York, Routledge, 1994, 94, 978-0-415-09397-2, Since the mid-20th century, mainstream economists have been critical of the modern day Austrian School and consider its rejection of mathematical modelling, econometrics and macroeconomic analysis to be outside mainstream economics, or "heterodox". Although the Austrian School has been considered heterodox since the late 1930s, it attracted renewed interest in the 1970s after Friedrich Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences.BOOK, Meijer, G., New Perspectives on Austrian Economics, Routledge, New York, 1995, 978-0-415-12283-2,

History

File:Jean-baptiste Say.jpg|thumb|130px|Jean-Baptiste SayJean-Baptiste Say

Etymology

The Austrian School owes its name to members of the German historical school of economics, who argued against the Austrians during the late-19th century Methodenstreit ("methodology struggle"), in which the Austrians defended the role of theory in economics as distinct from the study or compilation of historical circumstance. In 1883, Menger published Investigations into the Method of the Social Sciences with Special Reference to Economics, which attacked the methods of the historical school. Gustav von Schmoller, a leader of the historical school, responded with an unfavorable review, coining the term "Austrian School" in an attempt to characterize the school as outcast and provincial."Menger's approach – haughtily dismissed by the leader of the German Historical School, Gustav Schmoller, as merely "Austrian," the origin of that label – led to a renaissance of theoretical economics in Europe and, later, in the United States." Peter G. Klein, 2007; in the Foreword to Principles of Economics, Carl Menger; trns. James Dingwall and Bert F. Hoselitz, 1976; Ludwig von Mises Institute, Alabama; 2007; {{ISBN|978-1-933550-12-1}} The label endured and was adopted by the adherents themselves.BOOK, von Mises, Ludwig, The Historical Setting of the Austrian School of Economics, 1984, 1969, Ludwig von Mises Institute.,weblink no,weblink" title="web.archive.org/web/20140624182138weblink">weblink 2014-06-24,

First wave

File:CarlMenger.png|right|thumb|130px|Carl MengerCarl MengerThe school originated in Vienna in the Austrian Empire. Carl Menger's 1871 book Principles of Economics is generally considered the founding of the Austrian School. The book was one of the first modern treatises to advance the theory of marginal utility. The Austrian School was one of three founding currents of the marginalist revolution of the 1870s, with its major contribution being the introduction of the subjectivist approach in economics.BOOK, Keizer, Willem, Austrian Economics in Debate, Routledge, New York, 1997, 978-0-415-14054-6, {{Page needed|date=August 2011}} While marginalism was generally influential, there was also a more specific school that began to coalesce around Menger's work, which came to be known as the "Psychological School", "Vienna School", or "Austrian School".JOURNAL, Kirzner, Israel M., 1987, Austrian School of Economics, (The New Palgrave: A Dictionary of Economics), 1, 145–51, Menger's contributions to economic theory were closely followed by those of Eugen Böhm von Bawerk and Friedrich von Wieser. These three economists became what is known as the "first wave" of the Austrian School. Böhm-Bawerk wrote extensive critiques of Karl Marx in the 1880s and 1890s as was part of the Austrians' participation in the late 19th-century Methodenstreit, during which they attacked the Hegelian doctrines of the historical school.

Early 20th century

Frank Albert Fetter (1863–1949) was a leader in the United States of Austrian thought. He obtained his PhD in 1894 from the University of Halle and then was made Professor of Political Economy and Finance at Cornell in 1901. Several important Austrian economists trained at the University of Vienna in the 1920s and later participated in private seminars held by Ludwig von Mises. These included Gottfried Haberler,WEB,weblink Biography of Gottfried Haberler (1901-1995), no,weblink 2014-09-14, Mises Institute, Salerno, Joseph T., 1 August 2007, Friedrich Hayek, Fritz Machlup,WEB, Biography of Fritz Machlup,weblink 16 June 2013, no,weblink" title="web.archive.org/web/20130705121450weblink">weblink 5 July 2013, Karl Menger (son of Carl Menger),WEB,weblink About Karl Menger - Department of Applied Mathematics - IIT College of Science - Illinois Institute of Technology, www.iit.edu, 1 May 2018, no,weblink" title="web.archive.org/web/20131029202644weblink">weblink 29 October 2013, Oskar Morgenstern,WEB,weblink Guide to the Oskar Morgenstern Papers, 1866-1992 and undated, no,weblink" title="web.archive.org/web/20121017075648weblink">weblink 2012-10-17, Rubenstein Library, Duke University, Paul Rosenstein-RodanWEB,weblink Rodan; Paul Rosenstein (1902-1985); political economist, Archive at London School of Economics, , Abraham WaldJOURNAL, Abraham Wald, 1902–1950, Oskar Morgenstern, Econometrica, 19, 4, Oct 1951, 361–67, The Econometric Society, 1907462, 10.2307/1907462, , and Michael A. Heilperiweblink among others.

Later 20th century

File:Israel Kirzner.jpg|right|thumb|130px|Israel KirznerIsrael KirznerBy the mid-1930s, most economists had embraced what they considered the important contributions of the early Austrians. Fritz Machlup quoted Hayek's statement that "the greatest success of a school is that it stops existing because its fundamental teachings have become parts of the general body of commonly accepted thought".WEB,weblink Archived copy, 2014-09-13, no,weblink 2014-09-14, Homage to Mises by Fritz Machlup 1981 Sometime during the middle of the 20th century, Austrian economics became disregarded or derided by mainstream economists because it rejected model building and mathematical and statistical methods in the study of economics.JOURNAL, Backhouse, Roger E, Austrian economics and the mainstream: View from the boundary, The Quarterly Journal of Austrian Economics, 3, 2, 31–43,weblink January 2000, 2017-01-24, "Hayek did not fall out of favor because he was not Keynesian (neither are Friedman or Lucas) but because he was perceived to be doing neither rigorous theory nor empirical work", 10.1007/s12113-000-1002-8, no,weblink 2017-02-10, Mises' student Israel Kirzner recalled that in 1954, when Kirzner was pursuing his PhD, there was no separate Austrian School as such. When Kirzner was deciding which graduate school to attend, Mises had advised him to accept an offer of admission at Johns Hopkins because it was a prestigious university and Fritz Machlup taught there.WEB, Kirzner, Israel, Interview of Israel Kirzner,weblink Ludwig von Mises Institute, 17 June 2013, no,weblink" title="web.archive.org/web/20130909160322weblink">weblink 9 September 2013, After the 1940s, Austrian economics can be divided into two schools of economic thought and the school "split" to some degree in the late 20th century. One camp of Austrians, exemplified by Mises, regards neoclassical methodology to be irredeemably flawed; the other camp, exemplified by Friedrich Hayek, accepts a large part of neoclassical methodology and is more accepting of government intervention in the economy.WEB,weblink The Hayek and Mises Controversy: Bridging Differences - Odd J. Stalebrink, kanopiadmin, 30 July 2014, mises.org, 1 May 2018, no,weblink" title="web.archive.org/web/20121114044020weblink">weblink 14 November 2012, Henry Hazlitt wrote economics columns and editorials for a number of publications and wrote many books on the topic of Austrian economics from the 1930s to the 1980s. Hazlitt's thinking was influenced by Mises.WEB,weblink Remembering Henry Hazlitt, The Freeman, 2013-03-11, no,weblink" title="archive.is/20130113132434weblink">weblink 2013-01-13, His book Economics in One Lesson (1946) sold over a million copies and he is also known for The Failure of the "New Economics" (1959), a line-by-line critique of John Maynard Keynes's General Theory.WEB,weblink Biography of Henry Hazlitt, Ludwig von Mises Institute, 2013-03-11, no,weblink 2012-01-28, The reputation of the Austrian School rose in the late 20th century due in part to the work of Israel Kirzner and Ludwig Lachmann at New York University and to renewed public awareness of the work of Hayek after he won the 1974 Nobel Memorial Prize in Economic Sciences.BOOK, Meijer, Gerrit, New Perspectives on Austrian Economics, Routledge, New York, 1995, 978-0-415-12283-2, 70769328, Hayek's work was influential in the revival of laissez-faire thought in the 20th century.WEB,weblink Austrian Economics and Classical Liberalism, Ralph, Raico, mises.org, Ludwig von Mises Institute, 2011, despite the particular policy views of its founders ... Austrianism was perceived as the economics of the free market, 27 July 2011, no,weblink" title="web.archive.org/web/20110519183648weblink">weblink 19 May 2011, BOOK, Kasper, Sherryl Davis, The Revival of Laissez-faire in American Macroeconomic Theory, Edward Elgar Publishing, 2002, 978-1-84064-606-1, 66,

Split among contemporary Austrians

Economist Leland Yeager discussed the late 20th century rift and referred to a discussion written by Murray Rothbard, Hans-Hermann Hoppe, Joseph Salerno and others in which they attack and disparage Hayek. Yeager stated: "To try to drive a wedge between Mises and Hayek on [the role of knowledge in economic calculation], especially to the disparagement of Hayek, is unfair to these two great men, unfaithful to the history of economic thought". He went on to call the rift subversive to economic analysis and the historical understanding of the fall of Eastern European communism.BOOK, Yaeger, Leland, Is the Market a Test of Truth and Beauty?: Essays in Political Economy, 93 ff, 2011, Ludwig von Mises Institute, In a 1999 book published by the Ludwig von Mises Institute (Mises Institute),BOOK, Hoppe, Hans-Hermann, 15 Great Austrian Economists – Murray Rothbard, 1999, Ludwig von Mises Institute, Alabama, 223 ff.,weblink no,weblink" title="web.archive.org/web/20141007115806weblink">weblink 2014-10-07, Hoppe asserted that Rothbard was the leader of the "mainstream within Austrian Economics" and contrasted Rothbard with Nobel Laureate Friedrich Hayek, whom he identified as a British empiricist and an opponent of the thought of Mises and Rothbard. Hoppe acknowledged that Hayek was the most prominent Austrian economist within academia, but stated that Hayek was an opponent of the Austrian tradition which led from Carl Menger and Böhm-Bawerk through Mises to Rothbard. Austrian economist Walter Block says that the Austrian School can be distinguished from other schools of economic thought through two categories—economic theory and political theory. According to Block, while Hayek can be considered an Austrian economist, his views on political theory clash with the libertarian political theory which Block sees as an integral part of the Austrian School.WEB, Dr. Walter Block: Austrian vs Chicago Schools,weblink Mises Canada : Rothbard School 2014, 3 December 2014, no,weblink 18 May 2015, However, both criticisms from Hoppe and Block to Hayek seem to also apply to the founder of the Austrian School Carl Menger. Hoppe emphasizes that Hayek, which for him is from the English empirical tradition, is an opponent of the supposed rationalist tradition of the Austrian School, but Menger made strong critiques to rationalism in his works in similar vein as Hayek's.BOOK,weblink Investigations into the Methods of the Social Sciences, Menger, Carl, 173–175, no,weblink 2017-02-11, He emphasized the idea that there are several institutions which were not deliberately created, have a kind of "superior wisdom" and serve important functions to society.BOOK,weblink Investigations into the Methods of the Social Sciences, Menger, Carl, 146–147, no,weblink 2017-02-11, BOOK,weblink Investigations into the Methods of the Social Sciences, Menger, Carl, 91, no,weblink 2017-02-11, He also talked about Burke and the English tradition to sustain these positions.When saying that the libertarian political theory is an integral part of the Austrian School and supposing Hayek is not a libertarian, Block excludes Menger from the Austrian School too once Menger seems to defend broader state activity than Hayek—for example, progressive taxation and extensive labour legislation.BOOK,weblink's%20Liberalism%20Revisited.pdf, Carl Menger's Liberalism Revisited, Ikeda, Yukihiro, no,weblink" title="web.archive.org/web/20170216010338weblink">weblink's%20Liberalism%20Revisited.pdf, 2017-02-16, Economists of the Hayekian view are affiliated with the Cato Institute, George Mason University (GMU) and New York University, among other institutions. They include Peter Boettke, Roger Garrison, Steven Horwitz, Peter Leeson and George Reisman. Economists of the Mises–Rothbard view include Walter Block, Hans-Hermann Hoppe, Jesús Huerta de Soto and Robert P. Murphy, each of whom is associated with the Mises InstituteWEB,weblink Senior Fellows, Faculty Members, and Staff, Mises.org, July 21, 2013, no,weblink" title="web.archive.org/web/20130728094916weblink">weblink July 28, 2013, and some of them also with academic institutions. According to Murphy, a "truce between (for lack of better terms) the GMU Austro-libertarians and the Auburn Austro-libertarians" was signed around 2011.WEB,weblink In Defense of the Mises Institute, consultingbyrpm.com, 1 May 2018, no,weblink" title="web.archive.org/web/20170826112157weblink">weblink 26 August 2017, BOOK, Yeager, Leland, Is the Market a Test of Truth and Beauty?, 2011, Ludwig von Mises Institute, 103,weblink

Influence

file:Austrian-Economists-IM21.png|thumb|360px|Some representative Austrian School theoricians: Carl Menger, Ludwig von Mises, Friedrich Hayek, Murray Rothbard, Hans-Hermann HoppeHans-Hermann HoppeMany theories developed by "first wave" Austrian economists have long been absorbed into mainstream economics.It has also influenced related disciplines such as Law and Economics, see. K. Grechenig, M. Litschka, Law by Human Intent or Evolution? Some Remarks on the Austrian School of Economics' Role in the Development of Law and Economics, European Journal of Law and Economics (EJLE) 2010, vol. 29 (1), pp. 57–79. These include Carl Menger's theories on marginal utility, Friedrich von Wieser's theories on opportunity cost and Eugen Böhm von Bawerk's theories on time preference, as well as Menger and Böhm-Bawerk's criticisms of Marxian economics.WEB,weblink The Austrian School's Critique of Marxism, kanopiadmin, 2011-03-14, Mises Institute, en, 2019-02-02, Former American Federal Reserve Chairman Alan Greenspan said that the founders of the Austrian School "reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country".Greenspan, Alan. "Hearings before the U.S. House of Representatives' Committee on Financial Services". U.S. House of Representatives' Committee on Financial Services. Washington D.C.. 25 July 2000. In 1987, Nobel Laureate James M. Buchanan told an interviewer: "I have no objections to being called an Austrian. Hayek and Mises might consider me an Austrian but, surely some of the others would not".An Interview with Laureate James Buchanan {{webarchive|url=https://web.archive.org/web/20140914022018weblink |date=2014-09-14 }} Austrian Economics Newsletter: Volume 9, Number 1; Fall 1987 Chinese economist Zhang Weiying supports some Austrian theories such as the Austrian theory of the business cycle.Weiyin, Zhang, "Completely bury Keynesianism", WEB,weblink Archived copy, 2010-07-20, no,weblink" title="web.archive.org/web/20110511044923weblink">weblink 2011-05-11, (February 17, 2009)Currently, universities with a significant Austrian presence are George Mason University,BOOK,weblink The Oxford handbook of Austrian economics, Boettke, Peter J., Coyne, Christopher J., 9780199811762, Oxford, 500, 905518129, New York University, Loyola University New Orleans and Auburn University in the United States; King Juan Carlos University in Spain; and Universidad Francisco Marroquín in Guatemala.{{citation needed|date=January 2016}} Austrian economic ideas are also promoted by privately funded organizations such as the Mises InstituteWEB,weblink About the Mises Institute, Mises.org, July 21, 2013, no,weblink" title="web.archive.org/web/20130728042035weblink">weblink July 28, 2013, and the Cato Institute{{citation needed|date=April 2019}}.

Methodology

The Austrian School theorizes that the subjective choices of individuals including individual knowledge, time, expectation and other subjective factors cause all economic phenomena. Austrians seek to understand the economy by examining the social ramifications of individual choice, an approach called methodological individualism. It differs from other schools of economic thought, which have focused on aggregate variables, equilibrium analysis and societal groups rather than individuals.BOOK, White, Lawrence H., The Methodology of the Austrian School Economists, 2003, revised, Ludwig von Mises Institute,weblink no,weblink 2014-02-23, File:Ludwig von Mises.jpg|thumb|130px|Ludwig von MisesLudwig von MisesIn the 20th and 21st centuries, economists with a methodological lineage to the early Austrian School developed many diverse approaches and theoretical orientations. For example, Ludwig von Mises organized his version of the subjectivist approach, which he called "praxeology", in a book published in English as Human Action in 1949.Ludwig von Mises, Nationalökonomie (Geneva: Union, 1940); Human Action (Auburn, Ala.: Ludwig von Mises Institute, [1949] 1998){{rp|3}} In it, Mises stated that praxeology could be used to deduce a priori theoretical economic truths and that deductive economic thought experiments could yield conclusions which follow irrefutably from the underlying assumptions. He wrote that conclusions could not be inferred from empirical observation or statistical analysis and argued against the use of probabilities in economic models.WEB,weblink The Ultimate Foundation of Economic Science by Ludwig von Mises, Mises.org, 2012-08-13, no,weblink" title="web.archive.org/web/20121029234432weblink">weblink 2012-10-29, Since Mises' time, some Austrian thinkers have accepted his praxeological approach while others have adopted alternative methodologies.Bruce J. Caldwell "Praxeology and its Critics: an Appraisal" History of Political Economy Fall 1984 16(3): 363–79; {{DOI|10.1215/00182702-16-3-363}} WEB,weblink Praxeology and Its Critics, no,weblink" title="web.archive.org/web/20131005000937weblink">weblink 2013-10-05, For example, Fritz Machlup, Friedrich Hayek and others did not take Mises' strong a priori approach to economics.JOURNAL, Richard N., Langlois, From the Knowledge of Economics to the Economics of Knowledge: Fritz Machlup on Methodology and on the "Knowledge Society", Research in the History of Economic Thought and Methodology, 3,weblink no,weblink" title="web.archive.org/web/20131005013809weblink">weblink 2013-10-05, 1985, 225–235, Ludwig Lachmann, a radical subjectivist, also largely rejected Mises' formulation of Praxeology in favor of the verstehende Methode ("interpretive method") articulated by Max Weber.BOOK, Lachmann, Ludwig, Macroeconomic Thinking and the Market Economy, 1973, Institute of Economic Affairs,weblink no,weblink" title="web.archive.org/web/20141216191641weblink">weblink 2014-12-16, In the 20th century, various Austrians incorporated models and mathematics into their analysis. Austrian economist Steven Horwitz argued in 2000 that Austrian methodology is consistent with macroeconomics and that Austrian macroeconomics can be expressed in terms of microeconomic foundations.Horwitz, Steven: Microfoundations and Macroeconomics: An Austrian Perspective (2000)|Routledge Austrian economist Roger Garrison writes that Austrian macroeconomic theory can be correctly expressed in terms of diagrammatic models.WEB,weblink Garrison, Roger, Austrian Macroeconomics: A Diagrammatical Exposition, 1978, Institute for Humane Studies, 5 October 2015, no,weblink" title="web.archive.org/web/20141216183224weblink">weblink 16 December 2014, In 1944, Austrian economist Oskar Morgenstern presented a rigorous schematization of an ordinal utility function (the Von Neumann–Morgenstern utility theorem) in Theory of Games and Economic Behavior.Von Neumann, John and Morgenstern, Oskar. Theory of Games and Economic Behavior. Princeton, New Jersey. Princeton University Press. 1944

Fundamental tenets

In 1981, Fritz Machlup listed the typical views of Austrian economic thinking as such:WEB, Machlup, Fritz, Fritz Machlup, Homage to Mises,weblink Hillsdale College, 8 August 2013, 19–27, 1981, no,weblink" title="web.archive.org/web/20131030222126weblink">weblink 30 October 2013,
  • Methodological individualism: in the explanation of economic phenomena, we have to go back to the actions (or inaction) of individuals; groups or "collectives" cannot act except through the actions of individual members. Groups don't think; people think.
  • Methodological subjectivism: in the explanation of economic phenomena, we have to go back to judgments and choices made by individuals on the basis of whatever knowledge they have or believe to have and whatever expectations they entertain regarding external developments and especially the perceived consequences of their own intended actions.
  • Tastes and preferences: subjective valuations of goods and services determine the demand for them so that their prices are influenced by (actual and potential) consumers.
  • Opportunity costs: the costs with which producers and other economic actors calculate reflect the alternative opportunities that must be foregone; as productive services are employed for one purpose, all alternative uses have to be sacrificed.
  • Marginalism: in all economic designs, the values, costs, revenues, productivity and so on are determined by the significance of the last unit added to or subtracted from the total.
  • Time structure of production and consumption: decisions to save reflect "time preferences" regarding consumption in the immediate, distant, or indefinite future and investments are made in view of larger outputs expected to be obtained if more time-taking production processes are undertaken.
He included two additional tenets held by the Mises branch of Austrian economics:
  • Consumer sovereignty: the influence consumers have on the effective demand for goods and services and through the prices which result in free competitive markets, on the production plans of producers and investors, is not merely a hard fact but also an important objective, attainable only by complete avoidance of governmental interference with the markets and of restrictions on the freedom of sellers and buyers to follow their own judgment regarding quantities, qualities and prices of products and services.
  • Political individualism: only when individuals are given full economic freedom will it be possible to secure political and moral freedom. Restrictions on economic freedom lead, sooner or later, to an extension of the coercive activities of the state into the political domain, undermining and eventually destroying the essential individual liberties which the capitalistic societies were able to attain in the 19th century.

Contributions to economic thought

Opportunity cost

File:1wieser.jpg|thumb|130px|Friedrich von WieserFriedrich von WieserThe opportunity cost doctrine was first explicitly formulated by the Austrian economist Friedrich von Wieser in the late 19th century.BOOK, Subjectivism, intelligibility and economic understanding: essays in honor of Ludwig M. Lachmann on his eightieth birthday, Kirzner, Israel M., Lachman, Ludwig M., Macmillan, 1986, Illustrated, 978-0-333-41788-1, Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative foregone (that is not chosen). It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices.WEB, Investopedia, Opportunity Cost,weblink 2010-09-18,weblink" title="web.archive.org/web/20100914214221weblink">weblink 14 September 2010, no, Opportunity cost is a key concept in mainstream economics and has been described as expressing "the basic relationship between scarcity and choice".ENCYCLOPEDIA,weblink Opportunity cost, The New Palgrave Dictionary of Economics Online, James M. Buchanan, James M. Buchanan, 2008, Second, 2010-09-18, harv, no,weblink" title="web.archive.org/web/20120118213136weblink">weblink 2012-01-18, The notion of opportunity cost plays a crucial part in ensuring that resources are used efficiently.NEWS,weblink Opportunity Cost, Economics A–Z, The Economist, 2010-09-18,weblink" title="web.archive.org/web/20101009122334weblink">weblink 9 October 2010, no,

Capital and interest

{{see also|Capital and Interest|Marginalism|Neutrality of money|Time preference}}File:1Bawerk.png|thumb|130px|Eugen Böhm von BawerkEugen Böhm von BawerkThe Austrian theory of capital and interest was first developed by Eugen Böhm von Bawerk. He stated that interest rates and profits are determined by two factors, namely supply and demand in the market for final goods and time preference.Böhm-Bawerk, Eugen Ritter von; Kapital Und Kapitalizns. Zweite Abteilung: Positive Theorie des Kapitales (1889). Translated as Capital and Interest. II: Positive Theory of Capital with appendices rendered as Further Essays on Capital and Interest.Böhm-Bawerk's theory equates capital intensity with the degree of roundaboutness of production processes. Böhm-Bawerk also argued that the law of marginal utility necessarily implies the classical law of costs. Some Austrian economists therefore entirely reject the notion that interest rates are affected by liquidity preference.{{citation needed|date=March 2013}}

Inflation

{{see also|Monetary inflation}}In Mises's definition, inflation is an increase in the supply of money:BOOK, Ludwig, von Mises, Economic Freedom and Interventionism, Bettina B., Greaves, Economics of Mobilization, The Commercial and Financial Chronicle, Sulphur Springs, West Virginia, 1980,weblink harv, "Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term "inflation" to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation [...] As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.", no,weblink 2014-09-14, Hayek pointed out that inflationary stimulation exploits the lag between an increase in money supply and the consequent increase in the prices of goods and services:

Economic calculation problem

{{refimprove section|date=May 2013}}File:Friedrich Hayek portrait.jpg|thumb|130px|Friedrich HayekFriedrich HayekThe economic calculation problem refers to a criticism of socialism which was first stated by Max Weber in 1920. Mises subsequently discussed Weber's idea with his student Friedrich Hayek, who developed it in various works including The Road to Serfdom.BOOK, Economic calculation in the Socialist Commonwealth, 2008-09-08, Von Mises, Ludwig, Ludwig von Mises, 1990, PDF, Ludwig von Mises Institute,weblink 0-945466-07-2,weblink 23 September 2008, no, F. A. Hayek, (1935), "The Nature and History of the Problem" and "The Present State of the Debate," om in F. A. Hayek, ed. Collectivist Economic Planning, pp. 1–40, 201–43. The problem concerns the means by which resources are allocated and distributed in an economy.Austrian theory emphasizes the organizing power of markets. Hayek stated that market prices reflect information, the totality of which is not known to any single individual, which determines the allocation of resources in an economy. Because socialist systems lack the individual incentives and price discovery processes by which individuals act on their personal information, Hayek argued that socialist economic planners lack all of the knowledge required to make optimal decisions. Those who agree with this criticism view it as a refutation of socialism, showing that socialism is not a viable or sustainable form of economic organization. The debate rose to prominence in the 1920s and 1930s and that specific period of the debate has come to be known by historians of economic thought as the socialist calculation debate.The socialist calculation debate {{webarchive |url=https://web.archive.org/web/20090218142504weblink |date=February 18, 2009 }}Mises argued in a 1920 essay "Economic Calculation in the Socialist Commonwealth" that the pricing systems in socialist economies were necessarily deficient because if the government owned the means of production, then no prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange", unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently. This led him to write "that rational economic activity is impossible in a socialist commonwealth".WEB,weblink Ludwig von Mises, The Principle of Methodological Individualism, Human Action, Ludwig von Mises Institute, 2009-04-24,weblink 22 April 2009, no,

Business cycles

{{refimprove section|date=May 2013}}The Austrian theory of the business cycle (ABCT) focuses on banks' issuance of credit as the cause of economic fluctuations. Although later elaborated by Hayek and others, the theory was first set forth by Mises, who believed that banks extend credit at artificially low interest rates, causing businesses to invest in relatively roundabout production processes. Mises stated that this led to a misallocation of resources which he called "malinvestment".

Role of government disputed

According to Ludwig von Mises, central banks enable the commercial banks to fund loans at artificially low interest rates, thereby inducing an unsustainable expansion of bank credit and impeding any subsequent contraction.America's Great Depression, Murray Rothbard Friedrich Hayek disagreed. Prior to the 1970s, Hayek did not favor laissez-faire in banking and said that a freely competitive banking industry tends to be endogenously destabilizing and pro-cyclical, mimicking the effects which Rothbard attributed to central bank policy. Hayek stated that the need for central banking control was inescapable.JOURNAL, White, Lawrence H., Why Didn't Hayek Favor Laissez Faire in Banking?, History of Political Economy, 1999, 31, 4,weblink 11 April 2013, 10.1215/00182702-31-4-753, 753–769, no,weblink 12 April 2013,

Criticisms

General criticisms

Mainstream economists have argued that modern-day Austrian economists are excessively averse to the use of mathematics and statistics in economics.Economist Paul Krugman has stated that because Austrians do not use "explicit models" they are unaware of holes in their own thinking.WEB,weblink The Conscience of a Liberal: Martin And The Austrians, Krugman, Paul, 7 April 2010, The New York Times, 2011-09-21, no,weblink" title="web.archive.org/web/20110923104826weblink">weblink 23 September 2011, Economist Benjamin Klein has criticized the economic methodological work of Austrian economist Israel M. Kirzner. While praising Kirzner for highlighting shortcomings in traditional methodology, Klein argued that Kirzner did not provide a viable alternative for economic methodology.Klein, Benjamin. "Book review: Competition and Entrepreneurship" (by Israel M. Kirzner, University of Chicago Press, 1973) Journal of Political Economy. Vol. 83: No. 6, 1305–06, December 1975. Economist Tyler Cowen has written that Kirzner's theory of entrepreneurship can ultimately be reduced to a neoclassical search model and is thus not in the radical subjectivist tradition of Austrian praxeology. Cowen states that Kirzner's entrepreneurs can be modeled in mainstream terms of search.JOURNAL, Cowen, Tyler, Entrepreneurship, Austrian Economics, and the Quarrel Between Philosophy and Poetry, Review of Austrian Economics, May 2003, 16, 1, 10.1023/A:1022958406273, 5–23, Economist Jeffrey Sachs argues that among developed countries those with high rates of taxation and high social welfare spending perform better on most measures of economic performance compared to countries with low rates of taxation and low social outlays. He concludes that Friedrich Hayek was wrong to argue that high levels of government spending harms an economy and "a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness".JOURNAL, The Social Welfare State, Beyond Ideology, Sachs, Jeffrey, October 2006, Scientific American,weblink 2008-06-20, harv, no,weblink" title="web.archive.org/web/20081014101425weblink">weblink 2008-10-14, Austrian economist Sudha Shenoy responded by arguing that countries with large public sectors have grown more slowly.Sudha R. Shenoy, Are High Taxes the Basis of Freedom and Prosperity?, WEB,weblink Archived copy, 2016-11-16, no,weblink 2016-11-16, Economist Bryan Caplan has noted that Mises has been criticized for overstating the strength of his case in describing socialism as "impossible" rather than as something that would need to establish non-market institutions to deal with the inefficiency.JOURNAL, Caplan, Bryan, Is socialism really "impossible"?, Critical Review, 16, 33–52, 2004, 10.1080/08913810408443598, harv,

Methodology

Critics generally argue that Austrian economics lacks scientific rigor and rejects scientific methods and the use of empirical data in modelling economic behavior.JOURNAL, The research program of Austrian economics, Emerald Group Publishing Limited, Lawrence H., White, Advances in Austrian Economics, 2008, 20, harv, "Rules for the study of natural philosophy", {{harvnb |Newton |1999 |pp=794–96 }}, from Book 3, The System of the World. Some economists describe Austrian methodology as being a priori or non-empirical.JOURNAL, The research program of Austrian economics, Emerald Group Publishing Limited, Lawrence H.
journal=Advances in Austrian Economics page=20 postscript=, PAUL A. >LAST=SAMUELSON PUBLISHER=AMERICAN ECONOMIC ASSOCIATION THE AMERICAN ECONOMIC REVIEW >DATE=SEPTEMBER 1964 QUOTE=WELL, IN CONNECTION WITH THE EXAGGERATED CLAIMS THAT USED TO BE MADE IN ECONOMICS FOR THE POWER OF DEDUCTION AND A PRIORI REASONING ... – I TREMBLE FOR THE REPUTATION OF MY SUBJECT. FORTUNATELY, WE HAVE LEFT THAT BEHIND US., harv, THOMAS >LAST=MAYER PUBLISHER=ROUTLEDGEDATE=WINTER 1998 REF=HARV, 10.1080/08913819808443491, 12, Economist Mark Blaug has criticized over-reliance on methodological individualism, arguing it would rule out all macroeconomic propositions that cannot be reduced to microeconomic ones, and hence reject almost the whole of received macroeconomics.BOOK, Blaug, Mark, The Methodology of Economics: Or, How Economists Explain, 1992, Cambridge University Press, 0-521-43678-8, 45–46, Economist Thomas Mayer has stated that Austrians advocate a rejection of the scientific method which involves the development of empirically falsifiable theories. Furthermore, many supporters of using models of market behavior to analyze and test economic theory argue that economists have developed numerous experiments that elicit useful information about individual preferences.WEB,weblink Models, Mary S., Morgan, The New Palgrave Dictionary of Economics, 2008, 22 November 2011, no,weblink" title="web.archive.org/web/20120119064818weblink">weblink 19 January 2012, WEB,weblink Causality in economics and econometrics, Kevin D., Hoover, The New Palgrave Dictionary of Economics, 2008, 22 November 2011, no,weblink" title="web.archive.org/web/20120119101125weblink">weblink 19 January 2012, Although economist Leland Yeager is sympathetic to Austrian economics, he rejects many favorite views of the Misesian group of Austrians, in particular "the specifics of their business-cycle theory, ultra-subjectivism in value theory and particularly in interest-rate theory, their insistence on unidirectional causality rather than general interdependence, and their fondness for methodological brooding, pointless profundities, and verbal gymnastics".JOURNAL, Yeager, Leland B, Austrian Economics, Neoclassicism, and the Market Test, Journal of Economic Perspectives, 1997, 11, 4, 153–65, 2138469, 10.1257/jep.11.4.153, free, Economist Paul A. Samuelson wrote in 1964 that most economists believe that economic conclusions reached by pure logical deduction are limited and weak.BOOK, Samuelson, Paul, Economics, New York: McGraw-Hill, 1964, 6th, 736, 978-0-07-074741-8, According to Samuelson and Caplan, Mises' deductive methodology also embraced by Murray Rothbard and to a lesser extent by Mises' student Israel Kirzner was not sufficient in and of itself.

Business cycle theory

Mainstream economic research regarding Austrian business cycle theory finds that it is inconsistent with empirical evidence. Economists such as Gordon Tullock,JOURNAL, Gordon Tullock, Why the Austrians are wrong about depressions, The Review of Austrian Economics, 2, 1, 1988, 73–78, PDF,weblink 2009-06-24, 10.1007/BF01539299, harv, no,weblink" title="web.archive.org/web/20090325045309weblink">weblink 2009-03-25, Milton FriedmanBOOK, Friedman, Milton, The Optimal Quantity of Money and Other Essays, Aldine, Chicago, 261–84, The Monetary Studies of the National Bureau, 44th Annual Report,weblink Google Books, JOURNAL, Friedman, Milton, The 'Plucking Model' of Business Fluctuations Revisited, Economic Inquiry, 171–77, harv, 10.1111/j.1465-7295.1993.tb00874.x, and Paul KrugmanWEB,weblink The Hangover Theory, Krugman, Paul, Paul Krugman, 1998-12-04, Slate, 2008-06-20,weblink 2010-11-07, no, have said that they regard the theory as incorrect. Austrian economist Ludwig Lachmann noted that the Austrian theory was rejected during the 1930s:

Theoretical objections

Some economists argue that Austrian business cycle theory requires bankers and investors to exhibit a kind of irrationality because the Austrian theory posits that investors will be fooled repeatedly (by temporarily low interest rates) into making unprofitable investment decisions.WEB,weblink Problems with Austrian Business Cycle Theory, reasonpapers.com, 1 May 2018, no,weblink 24 April 2018, Milton Friedman objected to the policy implications of the theory, stating the following in a 1998 interview: }}

Empirical objections

Milton Friedman after examining the history of business cycles in the United States wrote that there "appears to be no systematic connection between the size of an expansion and of the succeeding contraction", and that further analysis could cast doubt on business cycle theories which rely on this premise. Referring to Friedman's discussion of the business cycle, Austrian economist Roger Garrison argued that Friedman's empirical findings are "broadly consistent with both Monetarist and Austrian views" and goes on to argue that although Friedman's model "describes the economy's performance at the highest level of aggregation, Austrian theory offers an insightful account of the market process that might underlie those aggregates".WEB, Auburn User,weblink Plucking Model, Auburn.edu, 1982-10-25, 2012-08-13, no,weblink" title="web.archive.org/web/20120726055525weblink">weblink 2012-07-26,

See also

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Notes and references

{{reflist}}

Further reading

  • JOURNAL, Agafonow, Alejandro, 2012, The Austrian Dehomogenization Debate, or the Possibility of a Hayekian Planner,weblink Review of Political Economy, 24, 2,
  • Harald Hagemann, Tamotsu Nishizawa, and Yukihiro Ikeda, eds. Austrian Economics in Transition: From Carl Menger to Friedrich Hayek (Palgrave Macmillan; 2010) 339 pp.
  • BOOK, Holcombe, Randall, The Great Austrian Economists, Ludwig von Mises Institute, 1999, Auburn, Alabama, 273,weblink 0945466048,
  • Stephen Littlechild, ed. (1990). Austrian economics, 3 v. Edward Elgar. Description and scroll to chapter preview links for v. 1.
  • {{citation|last=Schulak|first=Eugen-Maria|last2=Unterköfler|first2=Herbert|title=The Austrian School of Economics: A History of Its Ideas, Ambassadors, and Institutions|place=Auburn, Alabama|publisher=Ludwig von Mises Institute|year=2011|pages=262|url=https://mises.org/library/austrian-school-economics-history-its-ideas-ambassadors-and-institutions|isbn=9781610161343}}

External links

{{Commons category|Austrian School}} {{Austrian School economists|state=expanded}}{{macroeconomics-footer}}{{Schools of economic thought}}{{Authority control}}


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