The Amateur Financier

Welcome once again to another edition of Money-isms.  This time we’re going to cover a philosophy that frequently arises when discussions turn toward the politics and monetary policy (which is to say, almost anytime you bring up government on a money website or money on a political website).  That’s right, it’s time to discuss

The Austrian School

Founded By

Carl Menger was the first to express the principles that formed the foundation of the Austrian School.  His Principles of Economics was one of the first works in economics to stress the importance of individual human actions rather than a broader, logical scheme.

The First Austrian of the Austrian School

The Theory

Austrian School philosophy emphasizes the importance of the individual and free choice in economic interactions.  (The theory is sometimes called ‘Individualism’ as a result; I would have used Individualism as the title of this Money-ism, to keep with the pattern this week, but Austrian School is by far the more recognizable name).

This focus on the individual, and the fact that economic phenomena are caused by individual decisions taken in aggregate, rather than political action or the actions of big corporations.  The consequence of this is the tendency of Austrian School economists to promote a very laissez faire approach from the government, stressing the enforcement of voluntary contracts.  Beyond that, governmental interference should be limited, so as to avoid creating a coercive force.

The focus on individualism leads to the Austrian belief that economics is more art than science.  Since it’s impossible to know how a group of individuals, with their own motivations and goals, Austrian economists tend to avoid using figures and calculations in their writings, a tact that sometimes causes problems with more math intensive economic theories.

Under Austrian School principles, economic benchmarks like the level of economic inequality in a country are the result of numerous individual actions taken in aggregate.  As a result, it’s nearly impossible to use government actions to alter such economic measures; when government actions are implemented, the effects on individual motivations and actions are so varied and dependent on the individuals involved, that the end results are likely to be far different than desired.

Criticism of the Austrian School

The most common criticism of Austrian School economics is that it lacks intellectual rigor.  With its emphasis on logically deducted conclusions and rejection of using numbers to support their conclusions, the Austrian School economists tend to be dismissed from economics journals due to an absence of supporting calculations.

Similarly, Austrian theories come under attack for not using empirically derived data in their theories.  Frequently, these theories are also unfalsifiable, making it impossible to test them and determine whether they apply to the real world.  This untestable nature of Austrian economics, and the aggressive attempts by some Austrians to incorporate any empirical data, put them at odds with the broader economic field.

Another criticism is that, while the Austrian School is quick to criticize other economic theories (including Keynesianism and Monetarism, our earlier Money-isms), it does not provide viable alternatives.  Both Paul Krugman (a neo-Keynesian) and Milton Friedman (the founder of Monetarism) rejected the Austrian explanation of business cycles, one example of where alternate schools have rejected specific Austrian policies.

A Brief History

The Austrian School came into being in Austria during the late nineteenth century, as a result of Menger’s seminal work.  The name ‘Austrian School’ was originally a derisive term used by the Persians to describe the unorthodox theory.

In the late nineteenth and early twentieth century, the Austrian School expanded rapidly, with some of its most dedicated and well-known members, like Ludwig von Mises and Friedrich Hayek making their mark on the theory.  Their two different approaches to Austrian principles indicate some of the division within the Austrian School during the period between the two world wars.

Following World War II, Austrian School principles were held in low esteem.  In the latter part of the 20th century, though, they began to make a come back, with several American universities providing significant Austrian presence and politicians like Ron Paul openly embracing Austrian principles.

Three Sentence Summary

The Austrian School stresses individualism and the individual’s unique motivations above the more statistical views of economics usually used.  It’s been criticized for a lack of mathematical rigor, but serves as a valuable reminder that motivations can vary among individuals.  Austrian theories seem to be enjoying a new life, in no small part to promotion from certain US politicians.

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