Austrian Economics Of Austria

Austrian Economics, Economics Of Austria

In Previous chapter we examined the role Karl Menger played in the early development of marginal utility theory. Later we looked at some of Menger's students, such as Bohm-Bawerk and Wieser. In turn, their students and their students' students set up a coherent and well-organized approach to economics that has come to be known as the "neo-Austrian," or simply the Austrian, school. Austrian economists parted company from the mainstream for much the same reason that post-Keynesians did—the formalization of economics, which, they argue, has lost or abandoned many insights of earlier writers. Until 1960 Austrian econom­ics was considered part of the mainstream; but as neoclassical economics faded and mainstream economics opted for formal model building, the Austrians reemerged as dissenters.

This is not to say that they did not have differences; they had substantial differences with the mainstream even then. For example, the Austrian analysis of production sees capital as an intermediate good that can be understood only in stages of production analysis. Similarly, Austrians maintained a steadfast adherence to viewing individuals as purposeful actors, not as a type of utilitarian machine that reacted to pleasure or pain. This, in part, led to a strong Austrian emphasis on entrepreneurship. They also maintained a different approach to costs, which they saw as individually subjective, rather than being objectively determined as in the classical school and in some interpretations of neoclassical cost analysis.

These differences, while substantial, did not place Austrians out of the mainstream until the 1960s. But in the 1960s, with (1) the increasing formaliza­tion of economics; (2) the almost total dominance of the mainstream by general equilibrium theory; and (3) the increasing tendency for mainstream economics to see itself as a science in which truth is determined solely by model building and econometric testing, Austrian economics departed from the mainstream. Recent generations of what are now called neo-Austrian economists, especially the students of Ludwig von Mises and Friedrich Hayek—Murray Rothbard, Israel Kirzner, and Ludwig Lachmann—contend that many of Menger's chief insights have been lost.

A central Austrian economic theme is that economic analysis is a process, not a static interaction of individuals, and that time is an essential consideration. It sees competition as a dynamic process through which high profits are eliminated over time. But those high profits play a very important role in driving the system. In Austrian economics, individuals are assumed to operate in a changing envi­ronment in which information is limited and the future unknown. The most interesting analysis, in their view, derives from studying not equilibrium itself but the process through which individuals grope toward equilibrium, a process that emphasizes the entrepreneur and that neoclassical economics calls dis­equilibrium.

Until recently there were strong political overtones in Austrian economics. It remains difficult to find an Austrian who is not a conservative; most simply assume the market is desirable and necessary for achievement of individual freedom. Many Austrians themselves, however, would characterize their political views not as "conservative" but as "radical libertarian" or "anti-statist." They argue that such views follows naturally from a study of history.

Austrian economists object, from time to time, to econometric work and attempts to prove economic theorems empirically. Following von Mises's "praxeology," they perceived their task as one of deriving conclusions deduc­tively from the logic of human action. Conclusions and theories thus derived need not be tested, in their view, because truth had already been logically established. Recently, however, they have taken a somewhat more conciliatory position, arguing that it is the type of empirical work mainstream economics does—which does not include historical and heuristic elements—that is inappro­priate.

Key seminal works in Austrian literature are Hayek's 1937 Economica article, "Economics and Knowledge," and a 1945 American Economics Review article, "The Uses of Knowledge in Society." Hayek raises the legitimate question of how the knowledge presumed to be held by market participants in equilibrium is acquired by the participants. Neoclassical theory assumes the knowledge is given. Hayek finds that an important role of markets and the process of competition is the discovery of knowledge not previously available. Hayek argues that equilib­rium is a situation in which all agents' plans are synchronized; knowledge, expectations, and beliefs are therefore central elements of any economic analysis. Because of uncertainty, coordination of individuals' plans is difficult and beyond a single individual's comprehension. Only through the spontaneous order that develops through the market does our system work. Hayek's policy position follows from his attitude toward knowledge and uncertainty, namely, that we do not know the ultimate effects of our actions. Thus, we should accept institutions that have developed spontaneously, particularly the market, which solves our economic problems much more efficiently and effectively than do political processes.

Although many mainstream economists seem willing to grant the Austrians their acceptance of existing institutions and belief in the importance of uncer­tainty, which makes formal modeling and empirical work difficult, they argue that the Austrians (1) overemphasize the difficulties, (2) have not developed an acceptable alternative, and (3) have allowed value judgments to creep into their heuristic analysis.