This is a history of the Austrian School of economics, starting with Carl Menger and running through the non-Austrian Austrians, such as Israel Kirzner and Murray Rothbard. As such, it details the milieu of fin-de-siecle Vienna, as well as the mass emigration of economists from Austria in the 1930s, as fascism encroached. As a school, Austrian economics focuses on methodological individualism, subjective value, capital and the role of time in that process, uncertainty and the role of the entrepreneur, and, of course, marginal utility. Along with Walras and Jevons, in 1862, Menger rediscovered the marginal utility of value in contradistinction to the prevailing labor theory of value of the day. He explained, “Hence the value to this person of any portion of the whole available quantity of the good is equal to the importance to him of the satisfactions of least importance among those assured by the whole quantity and achieved with an equal portion.” His student Friedrich Wieser would simplify, “Simply put, the value of an individual unit [of a good] is determined by the least valuable of the economically permitted uses of that unit.”
Another student of Menger’s, Eugen von Bohm-Bawerk added the role of time preference, particularly in reference to capital structure and roundabout methods of production. Bohm explained, “That roundabout methods lead to greater results than direct methods is one of the most important and fundamental propositions in the whole theory of production.” In doing so, he posited a reason for a natural rate of interest and the value of present money over future claims on money. Wasserman also explains that Bohm was one of the first economists to give a prime role in the economy to the entrepreneur. “He defined the entrepreneur sociologically as the class of individuals engaged in speculative ventures. They earned their wealth not through the exploitation of labor or land but through their far-sighted commitment to the production of goods. Their dedication to roundabout production methods for future gain distinguished them from other market participants.”
Ludwig von Mises’ approach to all economics could be boiled down to just one a priori principle, the action axiom: all human action is rational and a purposeful consideration of means and ends. He wrote, “Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another.” This was his theory of praxeology, human action. “Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori.” The writer Edward Dolan summarized, “The Austrian method, simply put, is to spin out by verbal deductive reasoning the logical implications of a few fundamental axioms. First among the axioms is the fact of purposeful human action.”
One of Mises’ greatest contributions to business cycle theory was the non-neutral role of the money supply and inflation. Depending on where in the economy the new money was injected, it distorted relative prices, while not adding overall value. Money injection created artificially low interest rates, which precipitated boom and bust cycles, as entrepreneurs were mistakenly signaled into starting capital projects that the natural Wicksellian rate would not have warranted. Mises explained, “The moment must eventually come when no further extension of the circulation of fiduciary media is possible. Then the catastrophe occurs, and its consequences are the worse and the reaction against the bull tendency of the market the stronger, the longer the period during which the rate of interest on loans has been low below the natural rate of interest and the greater the extent to which roundabout processes of production that are not justified by the state of the capital market have been adopted.” Mises was also the Austrian School’s most vociferous critic of socialism. “Once society abandons free pricing of production goods rational production becomes impossible. Every step that leads away from private ownership of the means of production and the use of money is a step away from rational economic activity.”
Friedrich von Hayek stressed the impossibility of calculation in a socialist economy. Calculation of the value of goods is impossible without relative market prices. It is also impossible under socialism because individuals’ subjective values are constantly shifting. There is no objective data of value to compile. The division of knowledge, both technical and of subjective value, is dispersed throughout all of society. In a market economy, Hayek stated, “The spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs in which prices correspond to costs.”
The modern Austrian School of economics is often conflated with the libertarian political persuasion. However, Austrian economists qua economists wanted to keep economics a value-free science. Israel Kirzner explains, “It is quite true that for many in the U.S. the term “Austrian economics” is synonymous with laissez-faire. And I suppose it happens to be true the Austrian economists are generally “in favor of” the free market. But it can, I believe, be maintained (at least I hope so) that Austrian economics by itself does not embody those judgments of value without which, I believe, a case for non-intervention cannot be built.”
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