A school of economic thought founded in 1871 with the publication of Carl Menger's Principles of Economics. Austrian economics is currently closely associated with advocacy of unregulated capitalism and extreme laissez faire views. Austrians view entrepreneurship as the driving force in economic development, see private property as essential to the efficient use of resources, and often think government interference in market processes to be counterproductive. The school originated in Vienna and owes its name to members of the Historical School of economics who derisively called it the "Austrian School" to emphasize its departure from mainstream German thought.
Menger was closely followed by contributions from 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. 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 Kirnzer and Ludwig Lachmann.
Carl Menger was one of a group of economists founding neoclassical economics in the 1870s. Neoclassical economists reject classical cost of production theories. Instead they explain value by subjective preferences of individuals. Supply and demand are explained by aggregating over the decisions of individuals, following the precepts of methodological individualism and marginal 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 it's dynamic, perpetually dis-equilibriated, nature.
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, reservation demand, 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.
- Eugen von Böhm-Bawerk's critique of Marx centered around the untenability of the labor theory of value in the light of the transformation problem.
- Eugen von Böhm-Bawerk's capital theory which equates capital intensity with the degree of roundaboutness of production processes and explain interest rates through intertemporal choice.
- 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.
Major Austrian Economists
Other related economists:
- Frederic Bastiat (precursor)
- Henry Hazlitt (introduced the Austrian School to the USA)
- Murray N. Rothbard (successor)
- See also: classical liberalism