Austrian School

The Austrian School, the Vienna School or the Austrian Marginal Utility School is the name given to a group of theorists who represent a particular heterodox doctrine in economics. Central is the idea of the evolutionary creation of knowledge by the entrepreneur and the consideration of the dynamic uncertainty of economic processes. The school emphasizes the importance of individuals and their individual preferences for economic processes (subjectivism, methodological individualism). In addition, there is an aversion to the mathematical form of representation of economic relationships. This approach is opposed by the Lausanne School, which emerged at about the same time, and other theories with their mathematically formulated equilibrium models (neoclassical theory). To this day, the Austrian School holds the view that theories cannot ultimately be refuted by history or empiricism.

The founder of the Austrian School is generally considered to be Carl Menger (1840-1921), who contributed to the development of the marginal utility school with his marginal utility theory: he held that the classical value paradox, i.e. the question of the relationship between value and utility, can be solved by determining the value of a good by the contribution of another unit of a good to the satisfaction of a human need. This approach became known in the dispute over methods between national economics and the historical school, in which Menger argued that economic theory was independent of economic history. Eugen von Böhm-Bawerk (1851-1914) supplemented Menger's doctrine with a subjectivist theory of capital, according to which the interest rate on capital arises in a market process between individuals with different time preferences. The owner of capital foregoes consumption in the present in order to receive interest in return for his foregoing. Ludwig von Mises built a theory of money and business cycles on this basis. He explained business cycles in terms of the distortion of the production process by the money creation of central banks, which stimulate excessive investment by keeping interest rates too low. Friedrich von Hayek (1899-1992) refined this theory and thus sharply opposed John Maynard Keynes' theory and monetarism (Chicago School).

Change in thermodynamic processes

The term "Austrian School" is used to describe a number of very different positions. Israel Kirzner, a student of Ludwig von Mises, distinguishes between five different conceptions of the term:

1. The view of the Austrian School, widespread especially in Germany and Austria, as a purely historical epoch of economic science, whose doctrines (especially the doctrine of marginal utility and of an economic theory independent of economic history) were accepted by almost all other schools from 1930 at the latest.
2. The repeated interest in Böhm-Bawerk's theory of capital, but without Menger's strictly subjectivist theory. In this sense, the term is used above all by John Richard Hicks (Capital and Time: A Neo-Austrian Theory (1973)), Peter Bernholz and Malte Michael Faber (Introduction to Modern Austrian Capital Theory (1979)).
3. The term austrian has been used in the USA since the early 1980s to describe a generally libertarian political philosophy advocating free markets. This goes back in particular to Murray Rothbard.
4. As an interest in the historical Austrian School since about 1970 in the USA, with the ideas and methods of Carl Menger and the economic theorists hereafter referred to as the first generation, including the later concepts of von Mises and von Hayek; in some cases the term Neo-Austrians is used. In this sense the term can be found in Murray N. Rothbard (Man, Economy and the State (1962)), Israel Kirzner (Competition and Entrepreneurship (1973)). The neo-Austrians distinguish themselves primarily by their view of markets as processes in contrast to the equilibrium model prevailing in economics.
5. The name given to a generally subjectivist theory of microeconomics that emphasizes the uncertainty of all economic decisions. Kirzner assigns to this understanding the work of G. L. S. Shackle and Ludwig Lachmann.

Gauges (Overview)

In 1982 Fritz Machlup, a student of von Wieser's and von Mises', names six main doctrines of the Austrian School, which form the core of the Austrian innovations around 1930:

• Methodological individualism: Economic facts must be explained from the actions of individuals (not to be confused with ideological or political individualism, the opposite being methodological collectivism).
• Methodological subjectivism: Economic science is based on the study of the actions of real individuals, their subjective knowledge (or ignorance), their subjective needs and their subjective expectations.
• Marginal utility theory: All economic decisions are determined by marginal utility.
• Usefulness: Subjective valuations (usefulness) and diminishing marginal utility determine demand and thus the market price.
• Opportunity costs (also known as Wieser's cost law): Actions are dependent on the evaluation of alternative possible actions.
• Time structure of consumption and production: The decision to save or to consume arises from subjective time preference.

As controversial within the school, he lists the following doctrines, which spread to the United States, especially through Ludwig von Mises, beginning in the 1960s:

• Complete consumer sovereignty: Consumers express their needs through demand. Only the market, unhindered by state intervention, ensures through competition that the needs of consumers are permanently satisfied in the best possible way (via the price system as a control mechanism).
• Political individualism: Only complete economic freedom provides lasting political and moral freedom for citizens. Economic restrictions lead to the increasing spread and restriction of political and moral freedom.

Since the undisputed theses of the school were soon accepted by all economic schools, Israel Kirzner sees the list as needing to be supplemented by two items with regard to the late work of von Mises and von Hayek:

• Markets and competition as a process of learning and discovery
• Individual decisions as a choice between individually identifiable alternatives in a fundamentally unknown context.

The US-American Neo-Austrians, which are essentially influenced by von Mises and his student Murray Rothbard, define themselves primarily by distinguishing themselves from the neoclassical and (neo-)Keynesian equilibrium models, which are described as static. Jesús Huerta de Soto, a Spanish representative of the Neo-Austrians, highlights the following doctrines as characteristics of this particular direction:

• Formation of a universal theory of human action (in contrast to the purely economic theory of rational decision).
• The knowledge-creating, creative entrepreneur as economic subject (in contrast to the neoclassical homo oeconomicus).
• Possibility of entrepreneurial mistakes (in contrast to the neoclassical model of complete information).
• Strict distinction between objective (scientific) and subjective (practical) knowledge.
• Markets as a discovery process (as opposed to the neoclassical model of complete competition).
• Subjective cost theory (as opposed to neoclassical objective cost theory).
• Verbal logic (as opposed to neoclassical mathematical formalization).
• Aprioristic-deductive method (as opposed to empirical model).
• Impossibility of quantitative predictions, but limitation to pattern predictions.
• Predicting economic events through the entrepreneurial skills of each person (as opposed to the social engineer).