The Austrian School focuses on methodological individualism, the idea that individual motivations and actions drive all social phenomena, contrasting sharply with orthodox models of economic theory. While this theory has not gained widespread acceptance, certain elements such as the subjective theory of value, the formulation of the economic calculation problem, and marginalism in price theory, have in fact become part of contemporary mainstream economic concepts.
As a whole, however, The Austrian School of economic thought has been rejected by most economists, owing to the fact that this idea of what drives economies does not include mathematical modeling or macroeconomics. Even so, as stated above, parts of this theory have gained respect as valid among nearly all economic theorists and scholars.
Should this idea set be rejected outright? Or, are we missing something? Clearly, mathematical modeling is an essential part of modern economic theory, as our data-centric world lends itself to this sort of analysis, and use of such metric has proven successful time and again, at all levels, from international and national, to examination of specific business sectors and even within a single corporate entity.
We’re not in the information age of the 80s and 90s any longer; we’ve stepped into a new realm of Big Data and AI (artificial intelligence) and super-number crunching. Mathematical modeling is not only here to stay, it’s entered a new and exciting phase.
However, let’s not throw the baby out with the bathwater. Let’s think of the widespread drive among Westerners to live a more healthy and balanced life. It’s only gained traction in the last twenty years. This has spawned an industry focusing on yoga and fitness, year-after-year growth of supplements and vitamins, and changes in purchasing habits to include more organic and natural foods, and fewer processed products. Here, a change in demand fueled economic change.
Also, the passage of the Organic Foods Production Act (OFPA) further instigated an economic shift, as uniform Federal regulation helped to bring organic foods and personal care products into the mainstream. These two elements, consumer demand and regulation, are essential concepts in the Austrian School.
Even leading brands have taken note and adapted. We now have organic baby formula, organic tomato sauce, organic potato chips, and many decades-old legacy products have even been reformulated in keeping with changing consumer demand.
And this is but one example. As consumers want more fuel-efficient and safe cars, manufacturers must adapt. As students wish to pursue new majors at universities, both because of a changing greater society and a gain of new professions and a loss of the old, universities must scramble to adapt, or face inevitable bankruptcy.
The following article is penned by Per Byland, PhD, Assistant Professor of Entrepreneurship & Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship in the Spears School of Business at Oklahoma State University, an Associate Fellow of the Ratio Institute in Stockholm, as well as a Mises Institute Fellow.
-Archie Frank, Associate Editor
If people want to dismiss this school of thought, which many seem inclined to do for political (not theoretical) reasons, at least they should do so based on facts and knowledge, not on falsehoods. Here are corrections:
“Austrian economics is not empirical.”
Empirical studies (“history”) are important in Austrian economics and have larger scope than in mainstream economics. Mises worked with applied research in the Vienna Chamber of Commerce and founded the Austrian Institute for Business Cycle Research, for which he appointed Hayek as the first director.
This is where Hayek did much of the business cycle research that later won him the Nobel Prize. What critics fail to understand is Austrians’ narrower definition of theory, which is not a collection of hypotheses but true, general statements. Austrian economic *theory* cannot be developed using incomplete and imprecise measurements of observations. But this does not mean Austrians cannot or will not do empirical research.
“Austrian economic theory is not related to the real world.”
Austrians, following Mises, derive true statements from the nature of human action: that it is purposeful behavior, i.e., actors aim to achieve something they consider both attainable and valuable using the means they recognize as appropriate and effective.
Action always takes place in the real world and it is through our real-world experience that we recognize that the nature of action is in fact true. What is logically derived from a true statement about action cannot magically lose its empirical relevance just because it is derived logically rather than “letting the data speak.”
Austrians hold the typical view of economists since at least Adam Smith: that theory cannot be derived from observations. Austrian theory, as traditional/classical economic theory, is more like math than empirical physics. Math produces true a priori statements that we use to understand what we observe.
That we can calculate partial derivatives but not observe them does not make them less true in/about the real world. It is the same with Austrian economics.
“Austrian economic theory cannot explain phenomena in the real world.”
Similar to the previous misconception, this statement evaluates Austrian theory using a different definition of theory. Mainstream economics claims to explain more, even specific cases, by adopting a looser and thereby broader definition of theory, which only makes it less reliable.
Simply put, mainstream economics cannot make a claim of truth. Austrian economics can, because its theory solely derives from a true axiom (action as purposeful behavior)—nothing beyond what can be derived logically enjoys the status of theory.
Austrians make the stronger claim but stick within narrower boundaries of theory. This does not make the theory unrelated to the real world, but only more reliable. Just like, e.g., engineers can use true math to make reliable calculations about real-world projects, Austrians use true economic theory as a framework to uncover the real goings-on in the real economy.
“Austrian economics cannot explain why people act.”
The action axiom states exactly why people act: they aim to attain something they personally value, seeking to change their present situation for one anticipated to be better. But it is true that Austrians do not attempt to explain the mental processes that make a person value one thing over another.
That’s not the role of the economist, however. Being logicians, Austrians use very stringent and clear definitions and distinctions. They clearly distinguish between the realms of economics and psychology, the former being the study of action and its effects and the latter the study of the motivations for behavior.
Similarly, within economics, Austrians distinguish between theory, which is a priori and true, and history, which is the study of empirical data through the lens of theory. It is unfortunate that other schools of thought are comparatively sloppy in their definitions and distinctions, which makes them much less reliable, less scholarly, and, so, less scientific.
“There is no way of telling if Austrian economic theory is accurate.”
If this were the case, then there would also be no way of telling if statements of logic, math, geometry, etc. are true. That’s clearly not the case.
The statement makes the error of assuming economic theory is inductive and empirical, which is not true for the Austrian school (see above)—and wasn’t true of economics until well into the twentieth century. Economics was (and properly is) a deductive science.
“Austrian economics is an idiosyncratic take on economics.”
Austrian economics continues the economic reasoning tradition from classical economics but adds the marginalist analysis and value subjectivity of Carl Menger.
It is modern economics that breaks with the discipline’s roots in deductive social theorizing by its physics envy, mathematizing, straying into the realm of psychology, and aiming for efficient social engineering through policy rather than for understanding the market economy.
“Austrian economics is ideological.”
This is the most ridiculous and ignorant of the misconceptions. Note how Austrian economic theory is a priori deductive and based in logic. There is no room for ideology.
In fact, this makes Austrian economics much less ideological than the schools of economic thought that rely on empirical analysis for theorizing, since such analysis necessarily includes a large degree of interpretation (so the theorist’s personal view can easily, and often does, enter).
What this critique means is that the critic has an ideological or emotional resentment of free markets, typically asserting that “markets don’t work.” Austrians don’t make such normative statements, but only explain (by uncovering) how markets work: free, interventionist, and centrally planned.
The value judgment of what is better is not part of theory, but Austrians can expertly point out whether a means is appropriate for the stated end. Also, Austrians properly theorize on the free market first (that is, unhampered [inter]action) to then uncover the impact of specific influences (regulations, changes in preferences, etc.).
You cannot understand how an influence changes things unless you first understand how the economy works without it.