Austrian school (economics)

The Austrian school was a group of like-minded economists who promoted a thoughtful, logic-based approach to economic study and a focus on the importance of individuals and subjectivity in economic transactions. Although it drew from many social, philosophical, and psychological theories dating back to the 1400s, the school itself only took shape in 1871 following the publication of a book called Principles of Economics by Austrian economist Carl Menger. Menger defied many of the dominant economic theories of the day, which held that economies ran in highly controllable, almost mechanical processes that could be objectively studied and predicted using data collection and mathematical formulas.

Menger’s ground-breaking emphasis on studying real-world individuals and their subjective desires and decisions helped start a major shift in economic thinking. Menger and his followers believed that economies could not be accurately captured by mathematical models because they were in constant change and subject to endless variation. However, Austrian school members believed this was all part of a natural social process, and the seemingly chaotic, unpredictable nature of real-world everyday economics would ultimately yield a well-balanced, prosperous economy. For that reason, the Austrian school strongly opposed government regulations on the economy, which members believed were a primary cause of economic disruptions and financial suffering.

Background

Although the Austrian school did not truly take shape until the last decades of the nineteenth century, its philosophical roots may be traced back many centuries earlier. In the fifteenth century, scholars at Spain’s University of Salamanca began developing a wider viewpoint of individual and social psychology than most other theorists had. Basing much of their work on the ideas of earlier scholars such as St. Thomas Aquinas, these theorists examined many aspects of human life, including what they felt was an inevitable draw to economic activity and economic laws.

They believed that economic laws were as ingrained in human behavior as other laws that would be considered more “natural,” and economic forces such as supply and demand and subjective valuation occurred fluently during human thinking and interaction. These scholars felt that these natural economic forces were best allowed to operate with a minimum of restriction, meaning that people should be allowed to trade and make their own economic deals without government policies that controlled prices, inhibited businesses, or demanded excessive taxes. Known today as the Late Scholastics, these scholars are widely considered to be some of the first modern-thinking economists.

Some other foundational figures leading to the development of the Austrian school were Richard Cantillon and Anne Robert Jacques Turgot. Cantillon’s writings in the 1730s further delineated economics as a separate study and posited that economic activities could be explained through “thought experiments,” or careful thinking about specific scenarios. Turgot contributed theories about the fundamental importance of subjectivity to economy, meaning that individuals’ choices were more important than any set of academic equations, and pushed for governmental non-interference in economics.

Later, scholars such as Claude-Frédéric Bastiat and Jean Baptiste Say continued to refine these kinds of economic theories. These theorists pushed for laissez-faire economics, meaning that people should be free to make economic decisions without much governmental oversight, believing that this form of exchange would naturally adjust itself and find balance and, ultimately, prosperity. Say also defended the position that economic study could best be viewed through logical explorations of universal truths rather than by collecting data or performing mathematics.

Despite the slow but steady growth of theories that contributed to the platform of the Austrian School, they were still relatively unknown by the nineteenth century. At that time, most prominent economists believed that economies were almost machine-like systems that operated predictably and consistently. These economists believed that data and equations could explain current happenings and predict future happenings, and careful monitoring of factors such as trade, investments, and consumer spending could yield the healthiest economies. These theorists felt that academic and governmental oversight was essential to economic prosperity. Consequently, they paid minimal attention to the ever-changing thoughts and desires of the regular people whose everyday decisions constituted most economic transactions. This viewpoint soon met a serious challenge in the form of the Austrian School.

Overview

Although the theories that helped set the stage for the Austrian school developed over several centuries, economic historians set the beginning of that economic movement as 1871. That year, Austrian economist Carl Menger published a ground-breaking book called Principles of Economics. Menger began gathering followers in Austria and nearby areas, leading to the term “Austrian School.” Some historians believe that the term was at first snide or even derogatory and created by economists from countries such as Germany whose ideas (which were starkly opposed to those of the new Austrians) were at the time far more widely accepted.

The ideas that Menger expressed in his works defied many economic conventions of the era. For example, he heavily emphasized the subjective nature of economics, showing that the value of goods and services are subject to sometimes significant variation depending on the unique situation and perspective of the buyers and sellers; in other words, one person may want what another person may not want. These determinations are not made, as other theorists of the era maintained, solely by formulaic means such as the balance between supply and demand.

Another related idea that Menger explored in his writings came to be known as marginal utility, which refers to how the value of items diminishes when the number of items increases. For example, a person with no food would most likely be very interested in a loaf of bread, while someone with one hundred loaves of bread might have little interest, or no interest at all, in acquiring one more. This idea, along with those of fellow economists William Stanley Jevons and Léon Walras, inspired the so-called marginalist revolution, in which economists looked more at the subjective behavior of individual consumers and the value of individual items rather than at broad, generalized trends.

Similarly, Menger posited that the costs of producing goods and services also vary due to subjectivity, such as the preferences and decisions made by the producers. Relatedly, the value of the materials needed to produce items (ranging from land to ink to bricks to gasoline to factories) also varied substantially because the availability, quality, and cost of those materials would almost certainly differ in each unique situation. Menger believed that only capital, or the money used to buy items, is of a comparable value.

Insights such as these made people seriously doubt traditional models, which assumed that goods or services with the same price tag essentially had the same overall value, regardless of other potentially extreme differences. For example, one thousand dollars worth of winter jackets would not have the same value as one thousand dollars worth of sunglasses to consumers at a tropical beach resort. Similarly, a factory producing one thousand dollars worth of lumber would have different production costs and other considerations than a factory producing one thousand dollars worth of electronics.

By focusing on the role of unique individuals and decisions in economics, the Austrian school de-emphasized the role of government or other authority figures in regulating economic systems. In many cases, Menger and his followers even pointed at government intervention as a major cause of economic disruptions. For example, Austrian school members would blame government intervention in prices or investments as a key cause of upsetting the balance of economies and creating forces such as inflation that could hurt many consumers. Similarly, governmental restrictions on the supply and use of money can cause business cycles, including harmful—sometimes devastating—recessions and depressions.

Additionally, Menger helped to popularize the idea that many economic truths may be discovered through careful thinking and logic rather than through intensive analysis of numeric data. He developed many of his ideas based on his observations of real-world situations in local marketplaces, which showed him some basic realities of individuals’ economic decisions. These observations stood in sharp contrast to the common teachings of contemporary economic schools, such as the new Keynesian and neoclassical groups, which believed that economic indicators could be determined reliably only through objective means, such as mathematical models and data collection.

Other followers of Menger and the Austrian school were Ludwig von Mises, Friedrich Hayek, and Eugen von Böhm-Bawerk. These and many other like-minded scholars helped the school of thought travel far abroad by the 1930s, where it took hold in the United States and other countries and became even more influential than it had originally been in its titular country. The international spread ideas of the Austrian school went on to form much of the modern understanding of economic topics such as inflation, monetary creation, the rates of foreign exchanges, and supply and demand.

Bibliography

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