Core Principles
Methodological Individualism › Austrian economics emphasizes that only individuals choose and act. Social phenomena are understood as emerging from the interactions and choices of individuals.
Subjective Value › Value is not inherent in goods and services but is subjectively determined by individuals based on their preferences and circumstances.
Market Process as Entrepreneurial Discovery › Markets are dynamic processes driven by entrepreneurs who seek profit opportunities and coordinate economic activity through their decisions. Competition is seen as a process of discovery and innovation.
Importance of Private Property › Private property rights are essential for economic calculation, rational resource allocation, and the emergence of spontaneous order in the market.
Non-Neutrality of Money › Monetary policy can have real effects on the economy, particularly on the structure of production and investment decisions. Austrian economists argue that monetary distortions can leadLead Lead refers to a prospect or potential customer (who can be an individual or organization) that exhibits interest in your service or product; or any additional information about such entity. to economic instability.
Capital Heterogeneity › Capital goods are not homogeneous but are diverse and have multiple specific uses. This heterogeneity has implications for understanding economic growth, business cycles, and the role of investment
Methodological Foundations
Praxeology › The study of human action, its logic, and its implications. Austrian economics relies on deductive reasoning and logical analysis to derive economic principles from the fundamental axiom of human action.
Understanding › The specific method used in historical analysis to interpret the meaning and relevance of human action in specific contexts. This involves understanding the actors’ motivations, beliefs, and knowledge.
Rejection of Mathematical Economics and Econometrics › Austrian economists are critical of the excessive use of mathematics and statistical methods in economics, arguing that they cannot capture the complexity of human action and market processes. They emphasize the importance of verbal logic and historical narratives
Applications
Critique of Socialism › Austrian economists argue that socialist economic planning is impossible because it lacks a price system and the ability to perform economic calculation. They highlight the importance of private property and market prices for rational resource allocation.
Theory of the Business Cycle › Austrian business cycle theory explains how credit expansion by central banks can lead to malinvestment and economic booms that are followed by inevitable busts. This theory emphasizes the role of interest rates and capital structure in coordinating economic activity.
Analysis of Spontaneous Order › Austrian economists study how order and coordination can emerge spontaneously from the interactions of individuals without central planning. Examples include the evolution of language, money, and legal systems.
Role of Entrepreneurship › Entrepreneurs play a crucial role in discovering and exploiting profit opportunities, driving innovation and economic growth. Austrian economists emphasize the importance of understanding the subjective nature of entrepreneurial judgment and alertness.
Importance of Institutions › While emphasizing spontaneous order, Austrian economists also recognize the importance of institutions, both formal and informal, in shaping economic outcomes. They analyze how institutions can either facilitate or hinder market processes.
Core tenets of the Austrian school
These core principles form the foundation of the Austrian School’s approach to economics, emphasizing individual decision-making, subjective value, and limited government intervention. By understanding these tenets, you’ll gain a deeper appreciation for the Austrian School’s unique perspective on economic phenomena.
Entrepreneurship › Entrepreneurs play the crucial role in driving innovation, economic growth, and progress by identifying and exploiting opportunities.
Time Preference › People tend to value present goods and services more than future ones, leading to a natural interest rate that reflects this time preference.
Institutional Analysis › The Austrian School emphasizes the importance of institutions, such as property rights and the rule of law, in shaping economic outcomes
Spontaneous Order › Economic order emerges from the interactions of individuals pursuing their own interests, rather than through centralized planning or control.
Limited Government Intervention › The Austrian School advocates for minimal government intervention in economic matters, as it can lead to unintended consequences and inefficiencies.
Subjective Value › Value is determined by individual preferences and needs, not by objective measures like labor or production costs.
Uncertainty and Risk › Economic decision-making is inherently uncertain and risky, and individuals must make choices based on incomplete information.
Imputation › The value of a good or service is determined by the value of the goods and services it can produce or facilitate.
Methodological Individualism › Economic phenomena are the result of individual actions and decisions, rather than collective or aggregate behavior.
Critique of Central Banking › The Austrian School is critical of central banking and the manipulation of interest rates, which can lead to economic instability and boom-bust cycles.
The Austrian School of Economics
A Unique Perspective on Human Action
The Austrian School of Economics offers a distinct view of economic behavior that differs significantly from other economic theories.
This approach emphasizes
Methodological Individualism
↳ Focus on individual actions as the basis for economic phenomenaDynamic Processes
↳ Emphasis on ongoing economic processes rather than static equilibrium statesLimited Knowledge
↳ Recognition that economic actors have incomplete informationMethodological Subjectivism
↳ Value is subjective and determined by individual preferencesEntrepreneurship
↳ Central role of entrepreneurs in driving economic development
Contrast with Homo Economicus
Unlike the concept of homo economicus, which assumes rational, self-interested actors with perfect information, the Austrian School views economic agents as:
Fallible and capable of errors
Influenced by various motives, not just self-interest
Limited in knowledge and foresight
Adaptive and learning over time