Genesis & Emphasis
Austrian economics is distinct from other schools of economic thought, such as the Ricardian and Keynesian Schools, and at times, the Chicago School. This is primarily because of its reliance on, and advocacy of, subjective choice within the marketplace, as well as its embrace of individualism, while rejecting the rigid formulas and unattainable equilibriums of laboratory economics.
In the words of Ludwig von Mises (perhaps the most high-profile figure within the Austrian School), “Economics is not about things and tangible material objects; it is about men, their meanings and actions.”
The Austrian School stands as a bold contrast to the more prevalent and accepted definitions of what an economy is. Whereas most economists are taught to see economies in terms of societies, Austrians understand that it is individuals with their distinct motivations that inspire, spur, and spontaneously define commerce.
It was Menger’s concept of “marginal utility” that first set the “classical” world of economic theory spinning on its head. Distinct from the widely used supply and demand model, marginal utility has more powerful implications, chiefly because of Menger’s ability to show the interdependency and subjective nature of goods. As Henry Hazlitt puts it,
Bread is valued because it meets a direct consumption need. Flour is valued because it is needed to bake bread. Wheat is valued because it is needed to produce flour. Plows, seed, land, and labor are valued because they are necessary to produce wheat, and so on.
Values are also interdependent because, for example, if one raw material necessary in combination for the production of a final product is missing, that lack reduces the usefulness and value of the other raw materials needed.
Therefore, not only the goods, but the need—the value—of goods becomes diminished. In short, it was Menger who was responsible for suggesting that economics is largely a subjective science.
Additionally, the Austrian School is notable for enunciating the concept of “opportunity” cost and “forgone opportunity” costs. For example, by accepting one particular client, a lawyer limits his ability to take on another, potentially more profitable client, or to focus on his personal life, or to expand his career beyond the walls of his firm.
Less nuanced Austrian trademarks are reliance on the gold standard (or another true currency media), low taxation, limited government and free enterprise.
Evolution & Challenges
The Austrian School began as a small, unorthodox collective of European economists, and has expanded over time to include some of the most notable economic minds of the past one hundred years. A vast network of Austrians, among them Mises and F.A. Hayek, have expanded and clarified specific Austrian tenets.
Over time, the Austrian School has withstood the challenges of progressive and neo-conservative thinkers alike. A familiar challenge to the Austrian School is that Austrians rely too heavily on observational, rather than mathematical, proofs. Unlike the other schools that place an inordinate amount of value on graphs and statistics, Austrians understand that, “mathematics is most applicable in describing situations in which all plans are coordinated and no discoveries are left to be made–that is, in an equilibrium.” Taking their cue from von Mises, Austrians instead rely on human interaction—i.e., reality—to tell them how economies work. To many, this is a highly derisible method, and makes the School academically vulnerable.
However, as economic busts have—sadly—been predicted and warned about by Austrian thinkers, a veritable revolution in economic theory has begun, with the Austrian School beginning to gain credence among the chattering and intellectual classes.
The Austrian School of economics is, by no means, an immoveable set of theories and rules. If anything, Austrian thinkers are given to inquisition and often find themselves the greatest critics of their school. We at FEE encourage you to sign up for one of our many seminars that deal in-depth with the issues put forth in this short overview.