Home » What Is Austrian Economics? Here Are the Basics

What Is Austrian Economics? Here Are the Basics

by Eric Lumpkins

In 1871, Carl Menger published his Principles of Economics, in which he argued that economic analysis has universal principles and that the individual and the individual’s choices are the acceptable unit of social analysis. These individual choices are determined by each individual’s unique subjective preferences and the margin on which decisions are being made, argued Menger. This logic of choice is the essential foundation of a universally valid economic theory.

The German Historical School, at odds and in disagreement with Menger and with the Classical British economists, gave Menger and his supporters the disrespectful name “Austrian School” due to their employment at the University of Vienna. But the Austrians embraced the name and it stuck ever since. The Historical School did not agree that there existed economic laws that transcended time and national boundaries. They argued that economic science was incapable of generating universal principles and instead that scientific research should be focused on historical examination. So what are some of the characteristics that separate Austrian economics from other schools?

1. Only Individuals Choose

Groups and collectives do not choose. “America” does not make choices. “The government” does not make choices. Individuals within all of them make choices. All choices are ultimately made at the individual level. Unified collective entities are merely abstractions, only individuals exist and act. This is the starting point for economic analysis and for understanding economic phenomena – the choices of individuals.

2. Value is Subjective

We each have our own unique scale of preferences, and when we make choices we must give up certain courses of action in favor of others. So inherent in this decision-making process is subjectivity that is unique to us.

3. Prices Are Signals That Convey Information and Guide Human Action

The price system informs market participants of relevant information, assisting them in realizing mutual gains from trade. Prices rapidly and briefly summarize the terms of exchange on the market. When the price of milk goes up you don’t need to know why that has happened in order to take the information into account in order to make a better-informed choice of what you’re going to do. Prices rapidly change to convey the change in the underlying conditions of the market, which leads people to economize.

4. Private Property Is Necessary for Rational Economic Calculation

Private property ownership creates strong incentives for efficient allocation of scarce resources. In the economic calculation debate, Ludwig von Mises demonstrated that even if we had a benevolent socialist planner, the planner would be unable to efficiently allocate resources because he’d have no way to calculate the best use of resources. Without private property in the means of production there would be no market for the means of production, and without a market there would be no prices for the means of production. Without prices, socialist planners would be unable to rationally determine the best alternative uses of the means of production.

5. The Competitive Market Is a Continuous Process of Entrepreneurial Exploration

Much of mainstream macroeconomics speaks of perfect equilibrium and a static state of affairs, but the reality is that the market is a never-ending process that never reaches equilibrium. If it were static there would be no use for entrepreneurs. What entrepreneurs do is take economic actions in the face of uncertainty in the hopes of making a profit. The realization of a loss or of a profit pushes the market towards greater efficiency. The market and price system are tools for learning and discovery that push individuals to create value for society.

6. Money Is Non-Neutral

The commonly accepted medium of exchange is the definition of money. When government’s policy distorts the monetary unit, then exchange is distorted as well. Any increase in the money supply that is not offset by an increase in demand for money will result in a rise in prices. But prices don’t rise uniformly and instantly, some prices adjust faster than others. Each of these relative changes influences the arrangement of production and exchange. Thus, money cannot be neutral. What this leads us down is into a discussion of how government expansion of the money supply creates inflation, which devalues people’s savings, as well as distorts people’s choices and the structure of the economy.

7. Many Institutions Are a Product of Human Action, Not Human Design

Through making choices and striving to improve one’s condition, individuals create social orders and institutions, complex forms of organization and cooperation. Many of the institutions we have were not created through human design, but by human action. Language arose not through anyone’s intention, but through incidental evolutionary forces guiding humans to communicate with one another. Law, too, arose out of competitive forces striving to meet a demand for dispute resolution. Money arose through economic progress and market discovery that led to mediums of exchange. Many of our most important societal institutions were created in this unplanned, decentralized, and competitive manner. Market economies and price systems are examples of discovery-oriented and competitive orders, ones driven by human action, and they all have driven enormous human welfare.


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