Understanding Austrian economics: Key theories, beliefs, and lessons

Austrian economics is a distinctive school of thought known for its emphasis on individual choice, free markets, and a deep skepticism of government intervention. 

This article explores the Austrian theory of money, the core beliefs of Austrian economics, the contributions of the school’s most prominent figures, and six key lessons from the Austrian School.

What is Austrian economics?

The Austrian School of Economics began in Vienna during the Austrian Empire, with its foundation generally attributed to Carl Menger's 1871 book, Principles of Economics. This book is widely recognized as one of the first modern texts to promote the theory of marginal utility. Principles of Economics (Grundsätze der Volkswirtschaftslehre) laid the foundation for the Austrian School of Economics and introduced the concept of subjective value, emphasizing: 

The value of goods is determined by the preferences and needs of individuals rather than by intrinsic qualities.

Austrian economics starts with the individual as the fundamental unit of analysis, focusing on how individual choices drive economic outcomes. It contrasts with other economic schools by emphasizing subjective value, spontaneous order, and the importance of entrepreneurship in driving economic progress. 

Austrian economists are particularly critical of central planning and government intervention, arguing that these distortions lead to inefficiencies and economic instability.

Austrian theory of money

The Austrian theory of money is rooted in the belief that money's value is subjective, determined by individual preferences and its purchasing power rather than intrinsic qualities. 

Austrian economists argue that money, particularly gold and silver, emerged naturally from barter economies as commodities that were highly marketable, durable, and divisible. These properties made them universally accepted as mediums of exchange, which facilitated trade and reduced the inefficiencies of barter.

Carl Menger's book on the origin of money is titled "On the Origins of Money" ("Zur Theorie des Geldes"), published in 1892. In this work, Menger explores how money naturally emerged from barter economies through the spontaneous and organic processes of trade, as certain goods became widely accepted as mediums of exchange due to their liquidity and desirability.

According to writer Joshua D. Glawson, Carl Menger, the founder of the Austrian School, emphasized that the origin of money is a market-driven evolutionary product. Menger noted that money emerges not from government decree but from the competitive actions of individuals seeking to facilitate trade.

Ludwig von Mises, as highlighted by Glawson, expanded on this by emphasizing that money cannot originate in any other way than evolving out of a commodity previously valued in direct exchanges.

Sound money

Austrian economists advocate for "sound money," which maintains its value over time and limits inflation and government overreach. They argue that fiat money, not backed by commodities like gold, is prone to inflation and economic manipulation. According to Joshua D. Glawson, Ludwig von Mises famously stated that sound money is an instrument for protecting civil liberties against government overreach.

Murray Rothbard, also cited by Glawson, reinforced this by asserting that sound money is essential for economic freedom, protecting against government power.

F.A. Hayek, as Glawson explains, contributed to this concept by noting that sound money arises naturally within market processes without deliberate government intervention.

Critique of fiat money

Austrians are critical of fiat money, which derives value primarily from government decree. They argue that fiat currencies lead to economic cycles of boom and bust due to the artificial manipulation of the money supply and interest rates by central banks. 

Rothbard, according to Joshua D. Glawson, emphasized the pitfalls of fiat money, noting that throughout history, no fiat paper money has succeeded in maintaining its value, as it is always susceptible to hyperinflation and depreciation. Glawson’s analysis includes a thorough critique of the Federal Reserve system. 

The six core beliefs of Austrian economics

Austrian economics is founded on a set of core principles that distinguish it from other economic schools of thought. 

At its heart, Austrian economics emphasizes the importance of individual actions and decisions, arguing that all economic phenomena stem from these choices—a concept known as methodological individualism. 

The Austrian approach also asserts that value is subjective, determined by individual preferences rather than objective factors like labor or production costs. This school of thought champions the idea of spontaneous order, where social institutions and markets arise naturally from voluntary interactions without the need for central planning. 

Entrepreneurship plays a pivotal role, with Austrian economists viewing entrepreneurs as the driving force behind economic progress and innovation. Additionally, Austrian economics highlights the significance of time preference in shaping interest rates and investment decisions. 

Finally, a strong belief in laissez-faire policies underscores the Austrian view that minimal government interference is crucial for fostering efficient, innovative, and free markets.

Austrian economics is characterized by several key beliefs:

• Methodological individualism: The belief that all economic phenomena can be traced back to individual actions and decisions. The study of methodological individualism is known as praxeology.

• Subjective theory of value: The value of goods and services is subjective, based on individual preferences, rather than determined by labor or production costs.

• Spontaneous order: Social institutions, including markets, emerge naturally from voluntary individual actions, without the need for central planning.

• Entrepreneurship: Entrepreneurs are the drivers of economic progress, discovering and exploiting market opportunities.

• Time preference and capital theory: Time preference, the preference for present goods over future goods, plays a crucial role in determining interest rates and investment.

• Laissez-faire and limited government: Austrian economists advocate for minimal government involvement in the economy, believing that free markets best ensure efficiency, innovation, and individual freedom.

Six key lessons from the Austrian school of economics

The Austrian School of Economics offers several vital insights that have shaped modern economic thought as noted in Mises’ Six Lessons from the Austrian School of Economics. 

Central to this perspective is the role of entrepreneurship, with Austrian economists emphasizing how entrepreneurs drive innovation and economic growth by responding to market signals and assuming risks. 

Another key lesson is the limitations of government intervention; Austrians argue that central planning and regulation often lead to inefficiencies and distortions in the economy. Prices, in the Austrian view, function as crucial information carriers, signaling the relative scarcity of goods and services and thus coordinating economic activity. 

Austrians also warn against the dangers of inflation, noting that an expanding money supply can devalue currency and cause economic instability. The subjective nature of value is another core tenet, with value seen as a reflection of individual preferences rather than an intrinsic characteristic of goods or services. 

Finally, the Austrian school stresses the unpredictability of complex systems, arguing that the economy's inherent complexity makes central planning ineffective, while spontaneous order is seen as a more reliable and natural outcome.

Six lessons from the Austrian school of economics:

1. The importance of entrepreneurship: Entrepreneurs drive innovation and economic progress by responding to market signals and taking on risks.

2. The limits of government intervention: Central planning and regulation often lead to inefficiencies and economic distortions.

3. The role of prices as information: Prices signal the relative scarcity of goods and services, helping coordinate economic activity.

4. The dangers of inflation: Increasing the money supply devalues currency, leading to inflation and economic instability.

5. The subjective nature of value: Value is determined by individual preferences, not by labor or costs. Ludwig von Mises, as discussed by Joshua D. Glawson, stated that value is not intrinsic; it is within us, reflecting how we react to our environment.

6. The unpredictability of complex systems: The economy is too complex for central planning to predict and control effectively, making spontaneous order more reliable.

Leading Austrian economists

The Austrian School of Economics has been shaped and advanced by several influential economists, each contributing significantly to its development. 

Carl Menger, the founder of Austrian economics, laid the groundwork with his introduction of the concept of marginal utility and the subjective theory of value. Eugen von Böhm-Bawerk further developed the school's ideas, particularly in the areas of capital theory and the theory of interest, with his emphasis on time preference as a key economic factor. 

Ludwig von Mises emerged as a towering figure in Austrian economics, contributing to monetary theory, the analysis of business cycles, and a robust critique of socialism. Friedrich Hayek, another prominent Austrian economist, is best known for his work on the theory of knowledge and his critique of central planning, earning him the Nobel Prize in 1974. 

Finally, Murray Rothbard, a leading advocate of libertarianism and anarcho-capitalism, expanded upon Mises’s ideas, profoundly influencing modern Austrian economics with his rigorous defense of free markets and individual liberty.

This section will include a total of 12 references including the 5 leading Austrian economists, 6 modern Austrian economists, and 1 modern writer heavily inspired by Austrian economics.

Austrian economists:

Carl Menger: The founder of Austrian economics, Menger introduced the concept of marginal utility and the subjective theory of value.

Eugen von Böhm-Bawerk: Known for his work on capital theory and the theory of interest, particularly his development of time preference.

Ludwig von Mises: A prominent figure who contributed to monetary theory, business cycles, and the critique of socialism.

Friedrich Hayek: Known for his work on the theory of knowledge and the critique of central planning; F.A. Hayek won the Nobel Prize in 1974.

Murray Rothbard: An influential advocate of libertarianism and anarcho-capitalism, Rothbard built on Mises’s work to shape modern Austrian economics.

Hans-Hermann Hoppe (1949–) – A prominent libertarian and anarcho-capitalist philosopher, Hoppe is known for his work on the relationship between economics and ethics, as well as his criticism of democracy.

Roger Garrison (1944–) – A leading scholar in macroeconomics within the Austrian tradition, Garrison is known for his work on capital theory and the business cycle.

Joseph T. Salerno (1950–) – An economist and historian of economic thought, Salerno has made significant contributions to monetary theory and the study of the history of the Austrian School.

Jesús Huerta de Soto (1956–) – A Spanish economist known for his work on banking, monetary theory, and the theory of entrepreneurship within the Austrian School.

Peter G. Klein (1966–) – A scholar in organizational economics, entrepreneurship, and the theory of the firm, Klein applies Austrian economics to the study of business organizations.

Robert P. Murphy (1976–) – An economist and author, “Bob” Murphy has contributed to Austrian economics through his writings on business cycles, economic theory, and popularizing Austrian ideas.

Joshua D. Glawson (1985–) – A writer who applies Austrian economic principles to contemporary issues, emphasizing the importance of gold sound money, individual liberty, and economic freedom in his writings.

Conclusion

Austrian economics offers a unique perspective on economic theory and policy, rooted in a deep respect for individual choice, free markets, and sound money. Its critique of central planning, emphasis on subjective value, and understanding of entrepreneurship continue to shape economic thought and policy debates. 

The Austrian School’s insights into the importance of sound money, the dangers of inflation, and the role of entrepreneurship remain relevant in today’s economic landscape.