Austrian "school" Of "economics"? [Archive]

Poop

2nd October 2004, 16:57

Ah, here we are. From wikipedia:

History
Classical economics focused on the exchange theory of value. In late 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, which is now referred to as microeconomics. While marginalism was generally influential, there was also a more specific school which 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.

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.

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 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. Boehm-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.

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 Nobel Prize for Economics. However, it remains a distinctly minority position, even in such areas as capital value.

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" - 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 which argue for a different means of risk assessment.

While the Austrian school itself is radically conservative, some would even say reactionary, 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.

An area which is often overlooked is the influence that Austrian school ideas have had on Keynesian macro-economics. 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.

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Analytical framework
Austrian economists reject observation as a tool applicable to economics, saying that while it is appropriate in the natural sciences where factors can be isolated in laboratory conditions, acting human beings are too complex for this treatment. Instead one should isolate the logical processes of human action - a discipline named praxeology by Ludwig von Mises.

Austrians view entrepreneurship as the driving force in economic development, see private property as essential to the efficient use of resources, and often see government interference in market processes as counterproductive.

As with neoclassical economists, Austrians reject classical cost of production theories, most famously the labor theory of value. Instead they explain value by reference to the subjective preferences of individuals. This psychological aspect to Menger's economics has been attributed to the schools birth in turn of the century Vienna. Supply and demand are explained by aggregating over the decisions of individuals, following the precepts of methodological individualism, which asserts that only individuals and not collectives make decisions, and marginalist 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 with supply and demand in balance, Austrian economists emphasize its dynamic, perpetually dis-equilibrated nature.

The core of the Austrian framework can be summarized as taking a subjectivist approach to marginal economics, and a focus on the idea that theory should absolutely overrule observation. Austrians focus completely on the opportunity cost of goods, as opposed to balancing downside or disutility costs. It is an Austrian assertion that everyone is better off in an exchange, or they would not have carried it out. A fuller explanation of this in more exact term is available at the New School's economic pages (http://cepa.newschool.edu/het/essays/margrev/oppcost.htm).

This focus on opportunity cost alone means that their interpretation of the time value of a good has a strict relationship: since goods will be as restricted by scarcity at a later point in time as they are now, the strict relationship between investment and time must also hold. A factory making goods next year is worth as much less as the goods it is making next year are worth. This means that the business cycle is driven by miscoordination between sectors of the same economy, caused by money not carrying incentive information correct about present choices, rather than within a single economy where money causes people to make bad decisions about how to spend their time. This means, in the Austrian context, the correct way to prevent imbalances in the economy is to make people want to buy the correct goods, rather than controlling when people buy goods.

http://en.wikipedia.org/wiki/Austrian_School