On the first day of class, my High School Political Economy teacher wrote on the board – “Praxeology: The study of human action.”. He then drew two branches from Praxeology – one of them read “History: What Happened,” while the other read “Economics: Why It Happened.”
Austrian Economics is a specific lens to view and study the world—the ‘why things happen,’ so to speak. As Economist Steve Horwitz notes in his post What Austrian Economics Is and What Austrian Economics is NOT, “[Austrian Economics is] an approach to the study of human action and the social world.” Austrian Economics provides us with certain tools to analyze human action—whether it be understanding historical, current, or future human behavior.
The Austrian School of Economics was founded by Carl Menger in 1871 at the brink of the Marginal Revolution and continued on by his followers Eugen Bohm-Bawerk and Friedrich Wieser. Menger, Bohm-Bawerk, and Wieser all held faculty positions at the University of Vienna in Austria—and thus formulating the name, ‘Austrian Economics.’ Since its founding, the Austrian School moved to Great Britain and the United States and in the 20th century, economists Ludwig von Mises and F.A. Hayek became the leading scholars in Austrian Economics. While the School contains a wide variety of influences and is integrated with a number of thinkers, there are ten main propositions of Austrian Economics. I adopted these from Economist Peter Boettke’s post on Austrian Economics from the Concise Encyclopedia of Economics. For a more detailed analysis of Austrian Economics, please read Peter Boettke’s post.
First Proposition: Only individuals choose
Also known as methodical individualism, this proposition merely states that the subject of analysis is the individual—the individual is the decision maker, as opposed to a nation. The nation is made up of individuals and thus the starting point of analysis is always the individual.
Second Proposition: The study of the market order is fundamentally about exchange behavior and the institutions within which exchange takes place
As opposed to viewing economics as a problem of allocation, Austrian Economics focuses on economics as an ongoing market process and studies the institutions that allow the exchanges and emergent relationships to occur.
Third Proposition: The “facts” of the social science are what people believe and think
Since economics is the study of human action, the ‘facts’ used for analysis are what people think and do.
Fourth Proposition: Utility and costs are subjective
Value comes from the human mind—there is no such thing as ‘objective’ valuation. Similarly, costs are subjective since they include opportunity costs and opportunity costs are each individuals’ highest-valued alternative forgone.
Fifth Proposition: The price system economizes on the information that people need to process in making their decisions
Prices signal the relative scarcity that individuals use to make decisions. For example, there need not be any decrees stipulating that we need to economize on wood due to Hurricane Katrina. Instead – as the price of wood increases, individuals will economize on its use.
Sixth Proposition: Private Property in the means of production is a necessary condition for rational economic calculation
Without private property rights, economic planners are unable to calculate alternative uses of resources. Ludwig von Mises explains that private property rights allow for profits/losses, which signal to individuals the alternative use of their resources.
Seventh Proposition: The competitive market is a process of entrepreneurial activity
Competition is a process that pushes the market to move to the most efficient allocation of resources through entrepreneurial activity. Utilizing the price system and thus responding to profits/losses, entrepreneurs are able to identify opportunities and create innovations.
Eighth Proposition: Money is nonneutral
This proposition means that money does not enter evenly into the economy. When increasing the supply of money, prices do not all change at the same time, but rather some price changes occur faster or slower than others. The non-neutrality of money draws on a significant aspect of inflation—that is, inflation distorts signals and is destructive for the economy. Economist Roger Garrison draws on F.A. Hayek’s analogy of money non-neutrality, “Pouring money into the economy is like pouring honey into a vat: Where the honey hits the surface, a mound forms and persists as long as the pouring continues. Analogously, where the new money is injected into the economy, misallocations occur and persist as long as the injections are continued.”
Ninth Proposition: The capital structure consists of heterogeneous goods that have multispecific uses that must be aligned
Capital used in the production of each good is different and the entirety of the production process is complex and elaborate. As Peter Boettke explains it, “an auto plant can make cars, but not computer chips.” Therefore, when mistakes are made in alignments of the production process, it requires a number of adjustments in many parts of the system.
Tenth Proposition: Social Institutions often are the result of human action, but not of human design
The market is not something that is designed but rather emerges from each individual attempting to serve his/her own needs in the most effective way. Peter Boettke makes this analogous to paths created on campuses that were formulated by each student taking the fastest way to his/her class, and as each student pursues his/her own end, the path ‘emerges.’
While this post is an extremely concise and minimal summary of Austrian Economics, there are a number of sources that can do justice to this school of thought. Below are just a few:
- Podcast on Austrian Economics: http://www.econtalk.org/archives/2007/12/boettke_on_aust.html
- As mentioned previously, Dr. Boettke’s piece on Austrian Economics
- Steve Horwitz’s post
- Mises Institute– What is Austrian Economics
- Human Action; available online here, study guide available here, and audio book available here
- Peter Boettke’s new book on Contemporary Austrian Economics: http://www.amazon.com/Handbook-Contemporary-Austrian-Economics-Boettke/dp/1847204112
Mises.org