Austrian school of economics
Austrian-school theorists hold that economic theory should be exclusively derived from basic principles of human action.
[9] In the 1970s, the Austrian school attracted some renewed interest after Friedrich August von Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences with Gunnar Myrdal.
They also emphasized the importance of supply and demand in setting prices and maintaining sound money, laying the groundwork for modern economic concepts that the Austrian School would later refine and expand upon.
The Austrian school was one of three founding currents of the marginalist revolution of the 1870s, with its major contribution being the introduction of the subjectivist approach in economics.
Böhm-Bawerk wrote extensive critiques of Karl Marx in the 1880s and 1890s and was part of the Austrians' participation in the late 19th-century Methodenstreit, during which they attacked the Hegelian doctrines of the historical school.
Several important Austrian economists trained at the University of Vienna in the 1920s and later participated in private seminars held by Ludwig von Mises.
[1] Fritz Machlup quoted Hayek's statement that "the greatest success of a school is that it stops existing because its fundamental teachings have become parts of the general body of commonly accepted thought".
When Kirzner was deciding which graduate school to attend, Mises had advised him to accept an offer of admission at Johns Hopkins because it was a prestigious university and Fritz Machlup taught there.
He went on to call the rift subversive to economic analysis and the historical understanding of the fall of Eastern European communism.
[39] He emphasized the idea that there are several institutions which were not deliberately created, have a kind of "superior wisdom" and serve important functions to society.
[47] Former American Federal Reserve Chairman Alan Greenspan said that the founders of the Austrian school "reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country".
It differs from other schools of economic thought, which have focused on aggregate variables, equilibrium analysis, and societal groups rather than individuals.
[56] In the 20th and 21st centuries, economists with a methodological lineage to the early Austrian school developed many diverse approaches and theoretical orientations.
Ludwig von Mises organized his version of the subjectivist approach, which he called "praxeology", in a book published in English as Human Action in 1949.
He wrote that conclusions could not be inferred from empirical observation or statistical analysis and argued against the use of probabilities in economic models.
[68] Opportunity cost is a key concept in mainstream economics and has been described as expressing "the basic relationship between scarcity and choice".
He stated that interest rates and profits are determined by two factors, namely supply and demand in the market for final goods and time preference.
However, many Austrian economists such as Ludwig von Mises,[72] Israel Kirzner,[73] Ludwig Lachmann,[74] and Jesús Huerta de Soto[75] entirely reject a productivity explanation for interest rates, viewing the average period of production as an unfortunate remnant of damaged classical economic thought on Böhm-Bawerk.
Mises subsequently discussed Weber's idea with his student Friedrich Hayek, who developed it in various works including The Road to Serfdom.
[80][81] What the calculation problem essentially states is that without price signals, the factors of production cannot be allocated in the most efficient way possible, rendering planned economies inefficacious.
Hayek stated that market prices reflect information, the totality of which is not known to any single individual, which determines the allocation of resources in an economy.
[83] Heterodox The Austrian theory of the business cycle (ABCT) focuses on banks' issuance of credit as the cause of economic fluctuations.
Mises stated that this artificial "boom" then led to a misallocation of resources which he called "malinvestment" – which eventually must end in a "bust".
[87] For Austrians, the only prudent strategy for government is to leave money and the financial system to the free market's competitive forces to eradicate the business cycle's inflationary booms and recessionary busts, allowing markets to keep people's saving and investment decisions in place for well-coordinated economic stability and growth.
