Libertarianism Wiki

The Austrian School of economics is a school of economic thought which bases its study of economic phenomena on the interpretation and analysis of the purposeful actions of individuals.[1][2][3][4] It derives its name from its origin in late-19th and early-20th century Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others.[5] Currently, adherents of the Austrian School can come from any part of the world, but they are often referred to as "Austrian economists" or "Austrians" and their work as "Austrian economics".


The main tenets of the Austrian School are generally considered to be:

  • The theory that economic events are best explained by a deductive study of human action.[2][6]
  • The theory that the use of economic models and statistical methods to model economic behavior are a flawed, unreliable, and insufficient means of analyzing economic behavior and evaluating economic theories.[2][6]
  • The theory that testability in economics and consistently accurate mathematical modeling of an economic market are impossible because mathematical modeling of any real market affects the decision-makers in that market and "testing" relies on real human actors who cannot be placed in a lab setting without altering their would-be actions.[2][6]
  • The theory that the way in which money is produced has real and not only nominal economic effects.[7]
  • The theory that the cost of any activity should be measured by reference to the next best alternative.[8]
  • The theory that, in a free market, interest rates and profits are determined by three factors: monetary gains or losses from a change in the consumption of a good or service, additional output that can be produced by additional inputs, and the time preference of the associated individual agents.[9]
  • The theory that markets clear if prices are allowed to adjust freely.[10]
  • The theory that inflation properly defined relates to an increase in the supply of money (including credit).[11]
  • The theory that capital goods and labor are highly heterogeneous (diverse), that money allows different goods to be analyzed in terms of their cost effectively, that economic calculation requires a common basis for comparison for all forms of capital and labor, that this process is the signaling function of prices, and that it is also a rationing function which prevents over-use of inherently limited resources.[12][13]
  • The theory that the capital structure of economies consists of heterogeneous goods that have multi-specific uses which must be aligned to be effectively allocated, that the economic "boom-bust cycle" is caused by an artificial and unsustainable expansion of credit by the banks, and that this expansion causes businesses to make bad investment decisions which, in turn, necessarily cause major economic dislocation.[14]

Among the contributions of the Austrian School to economic theory are the subjective theory of value, marginalism in price theory, and the Austrian formulation of the economic calculation problem.[15]

Most economists are critical of the current-day Austrian School and consider its rejection of econometrics and other tools of aggregate macroeconomic analysis to be outside of mainstream economic theory, or "heterodox".[16][17][18][19] Austrians are likewise critical of mainstream economics.[20] Although the Austrian School had been considered heterodox since the late 1930s, it began to attract renewed academic and public interest starting in the 1970s.[21]



File:Ludwig von Mises.jpg

Ludwig von Mises

Murray Rothbard

Main article: Action axiom

The Austrian School differs significantly from many other schools of economic thought in that the Austrian analysis of the observed economy begins from a prior understanding of the motivations and processes of human action. To understand purposeful economic behavior and its consequences, the Austrian School follows an approach termed methodological individualism, or, as Ludwig von Mises termed it, "praxeology."[22] Mises was the first Austrian economist to present a theory of praxeology as such. Subsequently, Murray Rothbard presented a different version of praxeology in his work Man, Economy, and State.

Mises argued against the use of probabilities in economic models.[23] Instead, the Austrian praxeological method is based on the heavy use of deductive arguments from undeniable, self-evident axioms or from irrefutable facts about human existence.[24] According to Austrians, deductive economic thought experiment, if performed correctly, can yield conclusions that follow irrefutably from the underlying assumptions and could not be discovered by empirical observation or statistical inference. However, economist Bryan Caplan has stated that the Austrian challenge to the realism of neoclassical assumptions actually helps make those assumptions more plausible.[25]

Most economists assert that conclusions reached by pure logical deduction are limited and weak.[26] Economists Bryan Caplan and Paul A. Samuelson have written that this aspect of Austrian School methodology has led it to be widely dismissed within mainstream economics.[27] Austrians, however, believe that their methodology is superior to the methodology of other economists who they believe attempt to mimic the hard sciences through naive empiricism.[28] In 1952, Austrian School economist L. Albert Hahn stated:[29]

It is seldom realized that belief in the possibility of "scientific" business forecasts, and the forecasting mania of our time, are comparatively new phenomena. Until about 1930 serious economists were not so bold – or so naïve – as to pretend to be able to calculate the coming of booms and depressions in advance. It would not have fitted into their general view on the working of a free economy. They considered the economic future as basically dependent on unpredictable price-cost relationships and on the equally unpredictable psychological reactions of entrepreneurs. Predictions of future business conditions would have seemed to them mere charlatanry, just as predictions, say, regarding the resolutions of Congress two years from now... The basic error of the whole approach lies in the fact that the causative link between objective data and the decision of the members of the community are treated as mechanical. But men are still men and not automatons.

Some Austrians incorporate models and mathematics into their analysis of the economy. Austrian economist Steven Horwitz argues that Austrian methodology is consistent with macroeconomics and that Austrian macroeconomics can be expressed in terms of microeconomic foundations.[30] Austrian economist Roger Garrison argues that Austrian macroeconomic theory can be correctly expressed in terms of diagrammatic models.[31] In 1944, Austrian economist Oskar Morgenstern presented a rigorous schematization of an ordinal utility function (the Von Neumann–Morgenstern utility theorem) in Theory of Games and Economic Behavior.[32]

Opportunity cost[]


Friedrich von Wieser

Main article: Opportunity cost

The opportunity cost doctrine was first explicitly formulated by the Austrian economist Friedrich von Wieser in the late 19th century.[33] Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative foregone (that is not chosen). It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices.[8] The opportunity cost is also the cost of the foregone products after making a choice.

Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice".[34] The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.[35] Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output foregone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs.

Capital and interest[]

Template:See also


Eugen von Böhm-Bawerk

The Austrian theory of capital and interest was first developed by Eugen von Böhm-Bawerk. He stated that interest rates and profits are determined by two factors, namely, supply and demand in the market for final goods and time preference. [9] [36]

Böhm-Bawerk's theory was a response to Marx's labor theory of value and capital. Böhm-Bawerk's theory attacked the viability of the labor theory of value in the light of the transformation problem. He argued that capitalists do not exploit workers; they accommodate workers by providing them with income well in advance of the revenue from the output they helped to produce. Böhm-Bawerk's theory equates capital intensity with the degree of roundaboutness of production processes. Böhm-Bawerk also argued that the law of marginal utility necessarily implies the classical law of costs.[9]

Some Austrian economists therefore entirely reject the notion that interest rates are affected by liquidity preference. In his book America's Great Depression, Rothbard insisted that interest rates are instead determined only by time preference. Says Rothbard, "Increased hoarding can either come from funds formerly consumed, from funds formerly invested, or from a mixture of both that leaves the old consumption-investment proportion unchanged. Unless time preferences change, the last alternative will be the one adopted. Thus, the rate of interest depends solely on time preference, and not at all on "liquidity preference." In fact, if the increased hoards come mainly out of consumption, an increased demand for money will cause interest rates to fall – because time preferences have fallen."[37]


Template:See also Mises believed that price inflation must inevitably result when the supply of money outpaces the demand for money. He therefore used the term "inflation" to mean an excessive increase of the money supply and not, as is the common usage, to refer to price inflation. In Mises' view, inflation is the result of policies of the government or central bank which result in an increase in the circulating money supply, including bank credit.[38] Following Mises, the modern-day Austrian School argues that this semantic distinction is critical to public discussion of price inflation, and that price inflation can only be prevented by strict control of a the money supply. Mises wrote,

"In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.[11]," and elsewhere,
"Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term "inflation" to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.[39]"

Citing Mises' work, some writers have advocated the abolition of central banks and fractional-reserve banking, advocating either a 100% reserve gold standard or that each individual should choose what to accept as money, a system called free banking. Austrian economist Murray Rothbard stated the following:[40]

Given this dismal monetary and banking situation, given a 39:1 pyramiding of checkable deposits and currency on top of gold, given a Fed unchecked and out of control, given a world of fiat moneys, how can we possibly return to a sound noninflationary market money? The objectives, after the discussion in this work, should be clear: (a) to return to a gold standard, a commodity standard unhampered by government intervention; (b) to abolish the Federal Reserve System and return to a system of free and competitive banking; (c) to separate the government from money; and (d) either to enforce 100 percent reserve banking on the commercial banks, or at least to arrive at a system where any bank, at the slightest hint of nonpayment of its demand liabilities, is forced quickly into bankruptcy and liquidation. While the outlawing of fractional reserve as fraud would be preferable if it could be enforced, the problems of enforcement, especially where banks can continually innovate in forms of credit, make free banking an attractive alternative.

Economic calculation problem[]

Main article: Economic calculation problem

Friedrich Hayek

The economic calculation problem is a criticism of socialist economics. It was first proposed by Max Weber in 1920. This led to Mises discussing Weber's idea with his student Friedrich Hayek, who expanded upon it to such an extent that it became a key reason cited for the awarding of his Nobel prize.[41][42] The problem referred to is that of how to distribute resources effectively in an economy.

On the economic calculation problem[]

Austrian theory emphasizes the organizing power of the price mechanism. Mises and Hayek argued that the price mechanism is the only viable solution to the economic calculation problem, as the price mechanism co-ordinates supply and investment decisions most efficiently. Without the information efficiently and effectively provided by market prices, socialism lacks a method to efficiently allocate resources over an extended period of time in any market where the price mechanism is effective (an example where the price mechanism may not work is in the relatively confined area of public and common goods). Those who agree with this criticism argue it is a refutation of socialism and that it shows that a socialist planned economy could never work in the long term for the vast bulk of the economy and has very limited potential application. The debate raged in the 1920s and 1930s, and that specific period of the debate has come to be known by historians of economic thought as The Socialist Calculation Debate.[43]

Mises argued in a 1920 article "Economic Calculation in the Socialist Commonwealth" that the pricing systems in socialist economies were necessarily deficient because if government owned the means of production, then no prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.[43] This led him to declare "…that rational economic activity is impossible in a socialist commonwealth."[12] Mises's declaration has been criticized as overstating the strength of his case, in describing socialism as impossible, rather than having to contend with a source of inefficiency.[19][44]

Business cycles[]

Main article: Austrian business cycle theory

The Austrian theory of the business cycle (or "ABCT") focuses on the credit cycle as the primary cause of most business cycles. The theory was created by Hayek, by integrating Böhm-Bawerk's theory of capital and interest with Mises's arguments concerning how an expansion of the money supply or government manipulation of interest rates contributed to malinvestment (investments of firms being badly allocated).

Empirical research by economists regarding the accuracy of the Austrian business cycle theory has generated disparate conclusions, though most research within mainstream economics regarding the theory concludes that the theory is inconsistent with empirical evidence. Economists such as Gordon Tullock,[45] Bryan Caplan,[46] Milton Friedman,[47][48] and Paul Krugman[49] have said that they regard the theory as incorrect. In 1969, Friedman argued that the theory is not consistent with empirical evidence[50] and using newer data in 1993 reached the same conclusion.[51] However, in 2001, Austrian economist James P. Keeler argued that the theory is consistent with empirical evidence,[52] and, in 2006, Austrian economist Robert Mulligan also argued that the theory is consistent with empirical evidence.[53]

According to Austrian economist Murray Rothbard, the Austrian business cycle theory attempts to answer the following questions about things which Austrians believe appear over the course of a business cycle:[54]

  • Why is there a sudden general cluster of business errors?
  • Why do capital goods industries and asset market prices fluctuate more widely than do the consumer goods industries and consumer prices?
  • Why is there a general increase in the quantity of money in the economy during every boom, and why is there generally, though not universally, a fall in the money supply during the depression (or a sharp contraction in the growth of credit in a recession)?

Rothbard also argues that a feature of the theory is how it integrates "macro" with "micro" economics, being a theory in harmony with general economic theory and other Austrian theories regarding price coordination and capital structure.[55]


According to the theory, a boom-bust cycle of malinvestment is generated by excessive and unsustainable credit expansion to businesses and individual borrowers by the banks.[14] This credit creation makes it appear as if the supply of "saved funds" ready for investment has increased, for the effect is the same: the supply of funds for investment purposes increases, and the interest rate is lowered.[56] Borrowers, in short, are misled by the bank inflation into believing that the supply of saved funds (the pool of "deferred" funds ready to be invested) is greater than it really is. When the pool of "saved funds" increases, entrepreneurs invest in "longer process of production," i.e., the capital structure is lengthened, especially in the "higher orders", most remote from the consumer. Borrowers take their newly acquired funds and bid up the prices of capital and other producers' goods, which, in the theory, stimulates a shift of investment from consumer goods to capital goods industries. Austrians further contend that such a shift is unsustainable and must reverse itself in due course. They conclude that the longer the unsustainable shift in capital goods industries continues, the more violent and disruptive the necessary re-adjustment process. While agreeing with economist Tyler Cowen, Bryan Caplan has stated that he also denies "that the artificially stimulated investments have any tendency to become malinvestments."[57]

The preference by entrepreneurs for longer term investments can be shown graphically by using any discounted cash flow model. Lower interest rates increase the relative value of cash flows that come in the future. When modeling an investment opportunity, if interest rates are artificially low, entrepreneurs are led to believe the income they will receive in the future is sufficient to cover their near term investment costs. Therefore, investments that would not make sense with a 10% cost of funds become feasible with a prevailing interest rate of 5%.

The proportion of consumption to saving or investment is determined by people's time preferences, which is the degree to which they prefer present to future satisfactions. Thus, the pure interest rate is determined by the time preferences of the individuals in society, and the final market rates of interest reflect the pure interest rate plus or minus the entrepreneurial risk and purchasing power components.[58]

If the pricing signal triggering investment in the economy is artificially "fixed" too low, many entrepreneurs can make the same mistake at the same time (i.e. many believe investment funds are really available for long term projects when in fact the pool of available funds has come from credit creation - not real savings out of the existing money supply) because the debasement of the means of exchange is universal, . As they are all competing for the same pool of capital and market share, some entrepreneurs begin to borrow simply to avoid being "overrun" by other entrepreneurs who may take advantage of the lower interest rates to invest in more up-to-date capital infrastructure. A tendency towards over-investment and speculative borrowing in this "artificial" low interest rate environment is therefore almost inevitable.[14]

This new money then percolates downward from the business borrowers to the factors of production: to the landowners and capital owners who sold assets to the newly indebted entrepreneurs, and then to the other factors of production in wages, rent, and interest. Austrians conclude that, since time preferences have not changed, people will rush to reestablish the old proportions, and demand will shift back from the higher to the lower orders. In other words, depositors will tend to remove cash from the banking system and spend it (not save it), banks will then ask their borrowers for payment and interest rates and credit conditions will deteriorate.[14]

Austrians argue that capital goods industries will find that their investments have been in error; that what they thought profitable really fails for lack of demand by their entrepreneurial customers. Higher orders of production will have turned out to be wasteful, and the malinvestment must be liquidated. In other words, the particular types of investments made during the monetary boom were inappropriate and "wrong" from the perspective of the long-term financial sustainability of the market because the price signals stimulating the investment were distorted by fractional reserve banking's recursive lending "ballooning" the pricing structure in various capital markets. This concept is dependent on notion of the "heterogeneity of capital", where Austrians emphasize that the mere macroeconomic "total" of investment does not adequately capture whether this investment is genuinely sustainable or productive, due to the inability of the raw numbers to reveal the particular investment activities being undertaken and the inherent inability of the numbers to reveal whether these particular investment activities were appropriate and economically sustainable given people's real preferences.[59]

Austrians argue that a boom taking place under these circumstances is actually a period of wasteful malinvestment, a "false boom" where the particular kinds of investments undertaken during the period of fiat money expansion are revealed to lead nowhere but to insolvency and unsustainability. It is the time when errors are made, when speculative borrowing has driven up prices for assets and capital to unsustainable levels, due to low interest rates "artificially" increasing the money supply and triggering an unsustainable injection of fiat money "funds" available for investment into the system, thereby tampering with the complex pricing mechanism of the free market. "Real" savings would have required higher interest rates to encourage depositors to save their money in term deposits to invest in longer term projects under a stable money supply. According to Mises's work, the artificial stimulus caused by bank-created credit causes a generalized speculative investment bubble, not justified by the long-term structure of the market.[14]

Mises further argues that a "crisis" (or "credit crunch") arrives when the consumers come to reestablish their desired allocation of saving and consumption at prevailing interest rates.[59][60] Mises conjectured that the "recession" or "depression" is actually the process by which the economy adjusts to the wastes and errors of the monetary boom, and reestablishes efficient service of sustainable consumer desires.[59][60]

Austrians argue that continually expanding bank credit can keep the borrowers one step ahead of consumer retribution (with the help of successively lower interest rates from the central bank). In the theory, this postpones the "day of reckoning" and defers the collapse of unsustainably inflated asset prices.[59][61] It can also be temporarily put off by exogenous events such as the "cheap" or free acquisition of marketable resources by market participants and the banks funding the borrowing (such as the acquisition of land from local governments, or in extreme cases, the acquisition of foreign land through the waging of war).[62]

Austrians argue that the monetary boom ends when bank credit expansion finally stops - when no further investments can be found which provide adequate returns for speculative borrowers at prevailing interest rates. They further argue that the longer the "false" monetary boom goes on, the bigger and more speculative the borrowing, the more wasteful the errors committed and the longer and more severe will be the necessary bankruptcies, foreclosures, and depression readjustment.[59]

Austrian business cycle theory does not argue that fiscal restraint or "austerity" will bring about economic growth.[63] Rather, it argues that attempts by central governments to support asset prices, bail out insolvent banks, or "stimulate" the economy with deficit spending will only make the misallocations and malinvestments worse, further confusing pricing information and therefore resource allocation. Thus, the theory implies that continued mis-pricing by government policy will only prolong the depression and adjustment necessary to return to stable growth.[63] Austrians argue the policy error rests in the government's (and central bank's) weakness or negligence in allowing the "false" credit-fueled boom to begin in the first place, not in having it end with financial crisis or fiscal and monetary "austerity". According to Ludwig von Mises:[59]

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

The role of central banks[]

Austrians generally argue that inherently damaging and ineffective central bank policies, including unsustainable expansion of bank credit through fractional reserve banking, are the predominant cause of most business cycles, as they tend to set artificial interest rates too low for too long, resulting in excessive credit creation, speculative "bubbles", and artificially low savings.[64] Under fiat monetary systems, a central bank creates new money when it lends to member banks, and this money is multiplied many times over through the money creation process of the private banks. This new bank-created money enters the loan market and provides a lower rate of interest than that which would prevail if the money supply were stable.[14][56]

Murray Rothbard argues central banks played a large role in creating an environment of loose credit prior to the onset of the Great Depression, as well as the subsequent ineffectiveness of central bank policies, which he argues delayed necessary price adjustments and prolonged market dysfunction.[63] Rothbard begins with the premise that in a market with no centralized monetary authority, there would be no simultaneous cluster of malinvestments or entrepreneurial errors, since astute entrepreneurs would not all make errors at the same time and would quickly take advantage of any temporary, isolated mispricing. In addition, in an open, non-centralized (uninsured) capital market, astute bankers would shy away from speculative lending and uninsured depositors would carefully monitor the balance sheets of risky financial institutions, tempering any speculative excesses that arose sporadically in the finance markets. In Rothbard's view, the cycle of generalized malinvestment is greatly exacerbated by centralized monetary intervention in the money markets by the central bank.

Rothbard argues that an over-encouragement to borrow and lend is initiated by the mispricing of credit via the central bank's centralized control over interest rates and its need to protect banks from periodic bank runs (which Austrians believe then causes interest rates to be set too low for too long when compared to the rates that would prevail in a genuine non-central bank dominated free market).[14][60]


The School owes its name to members of the German Historical school of economics, who argued against the Austrians during the Methodenstreit ("methodology struggle"), in which the Austrians defended the reliance that classical economists placed upon deductive logic. In 1883, Menger published Investigations into the Method of the Social Sciences with Special Reference to Economics, which attacked the methods of the Historical school. Gustav von Schmoller, a leader of the Historical school, responded with an unfavorable review, coining the term "Austrian School" in an attempt to characterize the school as outcast and provincial.[65] The label remained and was adopted by the adherents themselves.



File:Jean-baptiste Say.jpg

Jean-Baptiste Say

Classical economics theory is generally considered to be a major precursor to the Austrian School. Classical economists Jean-Baptiste Say and Frédéric Bastiat argued that value is subjective. In the late 19th century, attention then focused on the concepts of “marginal” cost and value.

Austrian economist Murray Rothbard has argued that the roots of the Austrian School came from the teachings of the School of Salamanca in the 15th century and Physiocrats in the 18th century.[66]

First Wave[]


Carl Menger

The school originated in Vienna, in the Austrian Empire. Carl Menger's 1871 book, Principles of Economics, is generally considered the founding of the Austrian School. The book was one of the first modern treatises to advance the theory of marginal utility. The Austrian School was one of three founding currents of the marginalist revolution of the 1870s, with its major contribution being the introduction of the subjectivist approach in economics.[67]Template:Page needed While marginalism was generally influential, there was also a more specific school that began to coalesce around Menger's work, which came to be known as the “Psychological School,” “Vienna School,” or “Austrian School.”[68] Thorstein Veblen introduced the term neoclassical economics in his Preconceptions of Economic Science (1900) to distinguish marginalists in the objective cost tradition of Alfred Marshall from those in the subjective valuation tradition of the Austrian School.[69][70]Template:Nonspecific

Carl Menger contributions to economic theory were closely followed by that of Böhm-Bawerk and Friedrich von Wieser. These three economists became what is known as the "first wave" of the Austrian School. Böhm-Bawerk wrote extensive critiques of Karl Marx in the 1880s and 1890s, as was part of the Austrians' participation in the late 19th Century Methodenstreit, during which they attacked the Hegelian doctrines of the Historical School.

Twentieth century[]

File:Israel Kirzner.jpg

Israel Kirzner

By the mid-1930s, most economists had embraced what they considered the important contributions of the early Austrians.[17] After World War II, Austrian economics was disregarded or derided by most economists because it rejected mathematical and statistical methods in the study of economics.[71]

Austrian economics after 1940 can be divided into two schools of economic thought, and the school "split" to some degree in the late 20th century. One camp of Austrians, exemplified by Mises, regards neoclassical methodology to be irredeemably flawed; the other camp, exemplified by Friedrich Hayek, accepts a large part of neoclassical methodology and is more accepting of government intervention in the economy.[19][72]

The reputation of the Austrian School rose in the late-20th century due in part to the work of Israel Kirzner and Ludwig Lachmann, and renewed interest in the work of Hayek after he won the Nobel Memorial Prize in Economic Sciences.[21] Hayek's work was influential in the revival of laissez-faire thought in the 20th century.[73][74] Following Hayek, one of Mises's students, Murray Rothbard, became prominent in Austrian theory. Rothbard opposed fractional reserve banking, viewing it as a fraudulent contract that should be criminalized as a sub-category of embezzlement.[40][75][76][77] [78]

Twenty-first century[]

Several Austrian economists have made contributions to Austrian economics in the twenty-first century, including noted Spanish economist Jesús Huerta de Soto, Anthony Carilli,[79] Gregory Dempster,[79] Roger Garrison,[80] Steven Horwitz,[30] and Robert Murphy.[81] Garrison have contributed to Austrian macroeconomics. Carlilli, Dempster, Garrison, de Soto and Murphy have contributed to the Austrian business cycle theory.


Many theories developed by "first wave" Austrian economists have been absorbed into most mainstream schools of economics. These include Carl Menger's theories on marginal utility, Friedrich von Wieser's theories on opportunity cost, and Eugen von Böhm-Bawerk's theories on time preference, as well as Menger and Böhm-Bawerk's criticisms of Marxian economics.

The former U.S. Federal Reserve Chairman, Alan Greenspan, speaking of the originators of the School, said in 2000, "the Austrian School have reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country."[82] Nobel Laureate James M. Buchanan has stated that he would not object to being identified as an Austrian economist.[83][84][85] Republican U.S. congressman Ron Paul is a firm believer in Austrian School economics and has authored six books on the subject.[86][87] Paul's former economic adviser, Peter Schiff,[88] is an adherent of the Austrian School.[89] Jim Rogers, investor and financial commentator, also considers himself of the Austrian School of economics.[90] Chinese economist Zhang Weiying, who is known in China for his advocacy of free market reforms, supports some Austrian theories such as the Austrian theory of the business cycle.[91] Currently, universities with a significant Austrian presence are George Mason University, Loyola University New Orleans, and Auburn University in the United States and Universidad Francisco Marroquín in Guatemala. Austrian economic ideas are also promoted by bodies such as the Mises Institute and the Foundation for Economic Education.


General criticisms[]

Some economists have argued that Austrians are often averse to the use of mathematics and statistics in economics.[92]

Economist Bryan Caplan argues that Austrians have often misunderstood modern economics, causing them to overstate their differences with it. For example, many Austrians object to the use of cardinal utility in microeconomic theory; however, microeconomic theorists go to great pains to show that their results hold for all strictly monotonic transformations of utility, and so are true for purely ordinal preferences.[93][94] The result is that conclusions about utility preferences hold no matter what values are assigned to them.

Economist Paul Krugman has stated that because Austrians do not use "explicit models" they are unaware of holes in their own thinking.[95]

Economist Benjamin Klein has criticized the economic methodological work of Austrian economist Israel M. Kirzner. While praising Kirzner for highlighting shortcomings in traditional methodology, Klein argued that Kirzner did not provide a viable alternative for economic methodology.[96]

Economist Jeffrey Sachs argues that among developed countries, those with high rates of taxation and high social welfare spending perform better on most measures of economic performance compared to countries with low rates of taxation and low social outlays. He concludes that Friedrich Hayek was wrong to argue that high levels of government spending harms an economy, and "a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness."[97] Austrian economist Sudha Shenoy responded by arguing that countries with large public sectors have grown more slowly.[98]


Critics generally argue that Austrian economics lacks scientific rigor and rejects scientific methods and the use of empirical data in modelling economic behavior.[19][92][99] Some economists describe Austrian methodology as being a priori or non-empirical.[19][27][92][100]

Economist Mark Blaug has criticized over-reliance on methodological individualism, arguing it would rule out all macroeconomic propositions that cannot be reduced to microeconomic ones, and hence reject almost the whole of received macroeconomics.[101]

Economist Thomas Mayer has stated that Austrians advocate a rejection of the scientific method which involves the development of empirically falsifiable theories.[99][100] Furthermore, many supporters of using models of market behavior to analyze and test economic theory argue that economists have developed numerous experiments that elicit useful information about individual preferences.[102][103]

Capital and interest[]

Many social anarchists object to the theory of time preference being applied to an economy as a whole in a capitalist society. They argue that the theory fails to take into account that making profits in a capitalist society is not the provision of future means of consumption, but rather profits for their own sake.[104]

Business cycle theory[]

According to most economists, the Austrian business cycle theory is incorrect.[105]


Some economists argue that Austrian business cycle theory requires bankers and investors to exhibit a kind of irrationality, because the Austrian theory posits that investors will be be fooled repeatedly (by temporarily low interest rates) into making unprofitable investment decisions.[19][45][106] Bryan Caplan writes: "Why does Rothbard think businessmen are so incompetent at forecasting government policy? He credits them with entrepreneurial foresight about all market-generated conditions, but curiously finds them unable to forecast government policy, or even to avoid falling prey to simple accounting illusions generated by inflation and deflation... Particularly in interventionist economies, it would seem that natural selection would weed out businesspeople with such a gigantic blind spot."[57] Addressing this issue, Austrian economists Anthony Carilli and Gregory Dempster argue that a banker or firm would lose market share if it did not borrow or loan at a magnitude consistent with current interest rates, regardless of whether rates are below their natural levels. Thus, they argue, businesses are forced to operate as though rates were set appropriately, because the consequence of a single entity deviating would be a loss of business.[79] Austrian economist Robert Murphy argues that it is difficult for investors to make sound business choices because they cannot know what the interest rate would be if it were set by the market.[81] Austrian economist Sean Rosenthal argues that widespread knowledge of the Austrian business cycle theory increases the amount of malinvestment during periods of artificially low interest rates.[107]

Economist Paul Krugman has argued that the theory cannot explain changes in unemployment over the business cycle. Austrian business cycle theory postulates that business cycles are caused by the misallocation of resources from consumption to investment during "booms", and out of investment during "busts". Krugman argues that because total spending is equal to total income in an economy, the theory implies that the reallocation of resources during "busts" would increase employment in consumption industries, whereas in reality, spending declines in all sectors of an economy during recessions. He also argues that according to the theory the initial "booms" would also cause resource reallocation, which implies an increase in unemployment during booms as well.[49] In response, Austrian economist David Gordon argues that Krugman's argument is dependent on a misrepresentation of the theory. He furthermore argues that prices on consumption goods may go up as a result of the investment bust, which could mean that the amount spent on consumption could increase even though the quantity of goods consumed has not.[108] Furthermore, Roger Garrison argues that a false boom caused by artificially low interest rates would cause a boom in consumption goods as well as investment goods (with a decrease in "middle goods"), thus explaining the jump in unemployment at the end of a boom.[109] Many Austrians also argue that capital allocated to investment goods cannot be quickly augmented to create consumption goods.[110]

Economist Jeffery Hummel is critical of Hayek's explanation of labor asymmetry in booms and busts. He argues that Hayek makes peculiar assumptions about demand curves for labor in his explanation of how a decrease in investment spending creates unemployment. He also argues that the labor asymmetry can be explained in terms of a change in real wages, but this explanation fails to explain the business cycle in terms of resource allocation.[111]

Empirical evidence[]

Hummel argues that the Austrian explanation of the business cycle fails on empirical grounds. In particular, he notes that investment spending remained positive in all recessions where there are data, except for the Great Depression. He argues that this casts doubt on the notion that recessions are caused by a reallocation of resources from industrial production to consumption, since he argues that the Austrian business cycle theory implies that net investment should be below zero during recessions.[111] In response, Austrian economist Walter Block argues that the misallocation during booms does not preclude the possibility of demand increasing overall.[112]

In 1969, economist Milton Friedman, after examining the history of business cycles in the U.S., concluded that "The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false."[47] He analyzed the issue using newer data in 1993, and again reached the same conclusion.[48] In response, Austrian economist Jesus Huerta de Soto argues that Friedman did not understand the Austrian theory of malinvestment and used aggregate data series, (such as GDP) which only measure aggregate expansion and contraction.[113] Furthermore, Austrian economist Roger Garrison argued that Friedman misinterpreted economic aggregates and how they related to the business cycles he reviewed.[114]

Principal works[]

See also[]


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