Austrian Economics Definition

The Gestalt Of Austrian Economics, Austrian Economic

Although it was Menger who first gave meaning to the phrase "Austrian econom­ics," his influence went far beyond the national boundaries of his native land. The "Vienna circle" nurtured second-generation Austrians, most notably Ludwig von Mises (1881-1973) and Joseph Schumpeter (1883-1950), both of whom emigrated to America. Mises in turn taught a third generation that includes Friedrich Hayek

(1889-1992), Oskar Morgenstern (1902-1977), Fritz Machlup (1902-1983), Paul Rosenstein-Rodan (1902-1985), and Gottfried Haberler (1900-1995). In London, Hayek's influence touched G. L. S. Shackle (1903-1992) and Ludwig Lachmann (1906-1990), the latter also a holder of a Vienna doctorate. On American soil, Mises' influence extended to Israel Kirzner and Murray Rothbard (1926-1995), who at­tended his seminars at New York University. In this way, successive generations of "Austrians" were spawned long after the geographic connotation of the word ceased to have any substantive meaning.

Modern expositors of the Austrian approach underscore five major points of em­phasis that distinguish, in their view, Austrian economics from mainstream neoclas­sical analysis. The five distinguishing features are: (1) radical subjectivism, (2) method­ological individualism, (3) purposiveness in human action, (4) casual-geneticism, and (5) methodological essentialism. Each of these requires some elaboration.

Radical subjectivism is a wide net that snares a number of particular Austrian themes. Basic to the Austrian approach is the conviction that all underlying perma­nent relations of economic theory are consequences of human choice. Austrians there­fore emphasize the roles of knowledge and error in individual decision making. What is important is that people differ with respect to their knowledge, interpreta­tions, expectations, and alertness, so that subjectivism has a much broader meaning than merely tastes. All decisions are by their very nature subjective. Certain infor­mation cannot be reasonably expected to be held by anyone other than the individ­ual making a decision, e.g., the intensity and form of his or her preferences and ex­pectations. Since decision making is the province of the entrepreneur, entrepreneurship is consequently given a wide berth in Austrian economics.

The most unique and radical aspect of the Austrian approach, however, lies in its emphasis on the primacy of utility and the denial of costs as a coterminous element (with utility) in the determination of value. This last point constitutes the sharpest break with the English variant (Marshall and Jevons) of neoclassical value theory. Essentially, Austrians argue that economic costs are themselves subjective, based as they are on calculations of utility forgone whenever a choice is made. In other words, Austrians associate costs with a decision, a neutral act, not with an event or a thing. This means that costs are subordinate to, but inextricably joined with, utility. Costs are subjective because they are perceived by the chooser. The price paid for an item therefore represents the utility of it to the purchaser alone, not necessarily its utility to anyone else. This line of thought runs against the strict Marshallian tradition that associates costs with events and therefore regards costs as in some sense objective.

Methodological individualism asserts that the most appropriate way to study eco­nomic phenomena is at the level of the individual. If economics is a science of choice, then one must look to the chooser to understand economic relations. But aren'l some choices collective in the sense that they are made by a body of people (e.g., a committee) rather than by a single individual? There are two things to consider in response to this question. One is that any collective decision-making body is com­posed of persons whose individual decisions make up the collective judgment. The other concerns the nature of aggregates and what kind of information they convey. Austrians argue that aggregates only matter where individual considerations don't matter; yet for Austrians, individual decisions always matter. In the final analysis the choice between individual or aggregate is at least partly a normative issue, and Austrians are quite explicit about their methodological preference in this regard.

There is an element of teleology in the Austrian approach expressed in their em­phasis on purposive human action. However, it is a kind of teleology that does not take goals as absolute. Goals may change over time, and they obviously vary from one individual to the next. The basic proposition Austrians assert in this connection is that individual choice is not the consequence of some mere gravitational pull to­ward utility. Rather, individuals act with a purpose, even if that purpose is frequently frustrated by error or imperfect knowledge. In this regard, Austrians are decidedly anti-Benthamite, for Bentham saw people as being passively pushed about by plea­sure and pain. Austrians regard all choices as forward-looking; consequently ex­pectations are very important economic variables. These expectations, along with the purpose behind each person's actions, shape individual plans and the decisions con­sequent to the carrying out of each plan.

To say that Austrian economics is causal-genetic is to say that it emphasizes essences rather than functional relationships. Functionalism stresses the working out of conditions that must be met in order for some end to be fulfilled (e.g., the enu­meration of characteristics that constitute the competitive model). Austrians claim to be more interested in the nature and essence of things and less interested in their form. There is an Aristotelian strain that runs through the Austrian approach; for ex­ample, attempts to mathematize economic relations are considered fruitless because mathematics is functional and form-oriented and therefore incapable of contribut­ing any real understanding of basic economic relations.

Finally, Austrian economics claims to be nonscientistic. "Scientism" is a word coined by Hayek to refer to the (illegitimate, in his view) application of the princi­ples of natural science to the study of humans. Hayek finds this attempt decidedly unscientific because it involves the mechanical and uncritical application of habits of thought to fields different from those in which they have been formed. Accord­ing to Hayek, "the scientistic as distinguished from the scientific view is not an un­prejudiced but a very prejudiced approach which, before it has considered its sub­ject, claims to know what is the most appropriate way of investigating it" {The Counter-Revolution of Science, p. 24). For Hayek, the chief culprits in promoting the slavish imitation of the method and language of science by the social sciences were Saint-Simon and Comte. As a consequence of this Hayekian view, the claims of Austrian economics are fairly modest. Austrians seek to understand human soci­ety and to make it more intelligible, without concern for making predictions. Thus Austrians stand somewhat apart from mainstream neoclassical economics. (See the box, Method Squabbles 6: Austrians vs. Marshallians: Is There Really a Difference?)

It is beyond the limited scope of this chapter to deal with all aspects of Austrian economics. We offer a brief statement of several Austrian themes: money, credit, the trade cycle, and the nature of competition.