The Austrian School

The name “Austrian school” was coined by one of its severest critics, Gustav von Schmoller, who in the so-called Methodenstreit (battle over the method) had levelled a fierce attack at Carl Menger and his followers.

We may distinguish between several generations or layers of Austrian economists and economics. The first comprises Carl Menger, Eugen von Bohm-Bawerk and Friedrich von Wieser and, the second, Ludwig von Mises and Friedrich August von Hayek. Whether and to what extent other Austrian-born economists such as Joseph Alois Schumpeter, Hans Mayer, Oskar Morgenstern, Gottfried Haberler, Fritz Machlup and Paul Rosenstein-Rodan belong to the school is an issue of much debate. John Richard Hicks cherished the temporal aspect of the Austrian and especially Bohm-Bawerk’s approach, which distinguished it from the atemporal Walrasian approach, and sought to develop it in terms of his “neo-Austrian” theory (Hicks 1973). Today, Austrian-cum- libertarian doctrines are encountered especially in some universities and institutes in the United States, especially the George Mason University in Fairfax, Virginia, New York University, the Ludwig von Mises Institute and the Cato Institute. Misesians such as Israel Kirzner and Murray Rothbard developed a radically subjectivist point of view, while others, such as Peter Boettke, Roger W. Garrison, Ludwig M. Lachmann and Steven G. Horowitz followed more the tradition established by Hayek, which implied a much smaller break with mainstream economics. Austrians have founded their own journals, including the Quarterly Journal of Austrian Economics.

Characteristic features

While Austrian economists differ in many respects, they share certain beliefs, methodo­logical positions and views of the world.

(6) The economy is considered a self-organising system that, in principle, can do without any state interference. The same applies to institutions; money is accordingly seen as an institution that emerges as a by-product of the evolution of exchange relationships.

(7) Austrian economists endorse marginal utility theory, which is why their theories are typically considered variants of marginalism or what was later called “neoclassicism”.

(8) Major Austrian economists emphasise that explanations of economic phenomena ought to be causal-genetic (a term Hans Mayer introduced), going back to the roots of the phenomena under consideration that deserve no further examination; they reject the concept of “equilibrium” and are critical of the use of mathematics in economics.

(9) Austrian economists typically mistrust governments and the state and are suspi­cious of the motives of its representatives: these are said to tend to present their own particular selfish interests as the interests of society at large. The baseline of Austrian economics is the advocacy of “free markets” against state interventionism and the con­viction that if things go wrong in the economy it must be because of the harmful activity of the state or the central bank. (10) Politically, Austrian economists take more or less radical libertarian views, with Mises being the most radical of all. Hayek founded in 1947 together with Mises, Frank Knight, Karl Popper, George Stigler and Milton Friedman the Mont Pelerin Society, whose declared aims were to advocate a free market econom­ics, a “liberal order” and a “free society”. Ideas of the Mont Pelerin Society fell on fertile ground with such politicians as Margaret Thatcher and Ronald Reagan.

Austrian economists are divided on a number of issues. These concern, in particular, the following. (1) Some leading representatives like Mises are strictly opposed to the use of mathematics in economics. This use conveys the impression that economics is or ought to be very much like a natural science, preferably physics, possessed of a precision that, however, simply cannot be attained, given its subject matter. Mathematical economics is accused of treating incommensurable qualities as commensurable quantities. Hayek warned that economics must not fall victim to the “pretence of knowledge”. (2) Some authors such as Bohm-Bawerk and Mises are strict adversaries of the method of simul­taneous equations, which at the time began to filter into economics, whereas Wieser, Hayek and others are less adamant in this regard and see at least a heuristic role for it. (3) Most (modern) Austrian economists reject welfare economics in general and not only because it presupposes cardinal utility: welfare economics is said to involve a departure from an approach that considers individual preferences as incommensurable.

The writings of Austrian economists reflect numerous intellectual influences. These include, in particular, the German use value school, the School of Salamanca (and Coimbra), the Scottish Enlightenment and Austrian philosophy, especially Franz Brentano’s (see Smith 1994: ch. 10). Of great importance were the writings of Richard Cantillon, Francis Hutcheson, David Hume, Adam Ferguson and partly also Adam Smith. Two closely related concepts elaborated by them assumed centre stage in Austrian eocnomics: the “invisible hand” and “spontaneous order”. Eugen von Bohm- Bawerk drew attention to some of the sources mentioned in his Kapital und Kapitalzins. Erste Abtheilung: Geschichte und Kritik der Kapitalzinstheorien (1884). Friedrich August von Hayek variously recalled these influences in his writings and stimulated Marjorie Grice-Hutchinson (1952) to write her PhD thesis on the School of Salamanca; see also de Roover (1955). Anticipations of Austrian ideas concern in particular: a subjectiv­ist concept of value; the conception of competition not as a state, but as a process; the importance of information and knowledge; the view of market intervention as a poten­tial violation of natural law; the view of the particular role of banks in the economy; economic liberalism.

While Adam Smith and other authors had subdivided economic history in various phases or stages, with capitalism (or the “commercial society”, as Smith called it) as only the most recent stage, Austrian economists advocated the view that the world has always seen some form of capitalism, because the latter only expresses the natural inclinations of people: crucial features of capitalism are said to be extra-historical socio-economic phenomena.

A main analytical concern of Austrian economists was with refuting criticisms of interest (and profit) taking. They were critical of Aristotle and the churchmen in their condemnation of interest in the doctrine of usury, of Adam Smith’s view of profits and interest as a “deduction from the produce of labour”, and of Karl Marx and the social­ists’ attack on all property incomes (profits, interest and rents of land) as originating in the “exploitation of workers”. While all Austrian economists agreed that property incomes do not per se have an odious smell, but reflect the mutually advantageous exer­cise of individual rights and economic liberties, they differ vastly in explaining the causes and levels of profits and interest.