Austrian School

History

Classical economics focused on the exchange theory of value. In late 19th century, however, there was a focus on the concept of the "marginal" cost and value. (See Marginalism). Carl Menger's 1871 book, Principles of Economics, is considered one of the crucial works that began the period known as neo-classical economics. While marginalism was generally influential, there was also a more specific school that grew up around Menger, which came to be known as the "Vienna School" or "Austrian School". Austrian economics is currently closely associated with advocacy of radical laissez-faire views. However, earlier Austrian economists were more cautious compared to later economists such as Ludwig von Mises, with Eugen von Böhm-Bawerk saying 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 revival of laissez-faire thought in the 1980s.

Related Topics:
Classical economics - 19th century - Marginalism - 1871 - Principles of Economics - Neo-classical economics - Laissez-faire - Ludwig von Mises - Eugen von Böhm-Bawerk - Friedrich Hayek - 1980s

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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 placed on logic over observation. Their Prussian opponents derisively named them the "Austrian School" to emphasize a departure from mainstream German thought and to suggest a provincial approach.

Related Topics:
Vienna - Historical School - Economics - Methodenstreit - Classical economists

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Menger's contributions were closely followed by Eugen von Böhm-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, where they contended that without monetary prices or private property meaningful economic calculation was impossible. 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

Related Topics:
Eugen von Böhm-Bawerk - Friedrich von Wieser - Austrian - Neoclassical economics - Economic calculation debate - Ludwig von Mises - Friedrich von Hayek - Marxist - Methodenstreit - Hegelian - Historical School - Bourgeois - Principles of Economics - Marx - Das Kapital

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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. Böhm-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.

Related Topics:
Capital - Business cycles - Rudolf Hilferding

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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 due to its rejection of observational methods. 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 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. However, it remains a distinctly minority position, even in such areas as capital value.

Related Topics:
Hitler - World War II - Israel Kirzner - Ludwig Lachmann - Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel

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Austrian economics can be broken into two general trends. One, exemplified by Hayek, while distrusting of many neoclassical concepts, generally accepts their formulations, the other exemplified by the Ludwig von Mises Institute, seeks a different formalism for economics. The primary areas of contention between neo-classical theory and the Austrian school are on the possibility of consumer indifference — neo-classical theory says it is possible, where as Mises rejected it as being "impossible to observe in practice" —, and when Mises and his students argued that utility functions are ordinal, and not cardinal, that is, one can only rank preferences and not measure their intensity. Finally there are a host of questions about uncertainty raised by Mises and other Austrians, who argue for a different means of risk assessment.

Related Topics:
Ludwig von Mises Institute - Economics - Risk assessment

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While the Austrian school itself is radically conservative, many of their specific problems with the neo-classical formulation have analogs in other parts of economics. Game theory is used to challenge probability, volatility argued for as a better measure of preference and risk assessment than price, and chaos theory argues for highly discrete rather than very smooth functions of utility and value. Neo-classical economists have replies to each of the Austrian objections, which is why, while specific results of Austrian economics have been adopted by mainstream theory, as a whole, the paradigmatic assumption that economics should rest on deduction from principles rather than induction from observation has been largely rejected.

Related Topics:
Game theory - Probability - Volatility - Chaos theory - Utility

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An area that is often overlooked is the influence that Austrian school ideas have had on Keynesian macroeconomics. The source of this influence is the period of time where the London School of Economics brought in Hayek and other "continental" economists. While their students "flew the coop", refusing to join the Austrian school, many of the concepts, particularly relating time to the value of capital and its importance, would find their way into the work of Keynesians such as John Hicks.

Related Topics:
Macroeconomics - London School of Economics - John Hicks

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