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Austrian school of economics | HearLore
— Ch. 1 · Origins And Etymology —
Austrian school of economics.
~5 min read · Ch. 1 of 7
In 1871, Carl Menger published Principles of Economics in Vienna. This book marked the birth of a distinct economic tradition that would later be called the Austrian school. The label itself did not come from its founders. It emerged during a bitter academic dispute known as the Methodenstreit or methodology struggle. Gustav von Schmoller, a leader of the opposing German historical school, used the term to dismiss Menger and his followers as provincial outsiders. Schmoller wrote an unfavorable review of Menger's work in 1883, labeling their approach merely "Austrian" to imply it was narrow and unscientific. The Austrians defended the role of theory against the historical school's focus on compiling local circumstances. Despite the initial insult, adherents eventually adopted the name themselves. Today, economists working in this tradition are found globally, yet they still identify with the original Viennese label.
First Wave Founders
Carl Menger stood at the center of the movement alongside Eugen von Böhm-Bawerk and Friedrich von Wieser. These three men formed what historians call the first wave of Austrian economists. Menger introduced the subjective theory of value, arguing that worth comes from individual preferences rather than intrinsic properties. Böhm-Bawerk expanded this into theories about capital and interest rates. He argued that time preference drives the price of money over different periods. Wieser contributed the concept of opportunity cost, measuring the value of the next best alternative foregone. Their collective work challenged Karl Marx during the late nineteenth century. Böhm-Bawerk wrote extensive critiques of Marxist doctrine throughout the 1880s and 1890s. They also developed marginalism, showing how prices depend on the significance of the last unit added or subtracted. This trio laid the groundwork for all future Austrian thought by focusing on human action rather than aggregate statistics.
When did Carl Menger publish Principles of Economics to start the Austrian school of economics?
Carl Menger published Principles of Economics in Vienna on the 1st of January 1871. This publication marked the birth of a distinct economic tradition that would later be called the Austrian school.
Who were the three founders of the first wave of Austrian economists?
The three men who formed what historians call the first wave of Austrian economists are Carl Menger, Eugen von Böhm-Bawerk, and Friedrich von Wieser. These figures introduced subjective value theory, capital theories, and opportunity cost concepts respectively.
Why was the term Austrian used for the Austrian school of economics initially?
Gustav von Schmoller used the label Austrian during the Methodenstreit dispute of 1883 to dismiss Menger and his followers as provincial outsiders. The term implied their approach was narrow and unscientific before adherents eventually adopted it themselves.
What year did Friedrich August von Hayek share the Nobel Memorial Prize in Economic Sciences?
Friedrich August von Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences with Gunnar Myrdal. This award brought renewed attention to the Austrian tradition after decades of obscurity.
When did Ludwig von Mises publish Human Action to define praxeology?
Ludwig von Mises published Human Action in English on the 1st of January 1949. He argued that deductive thought experiments yield irrefutable conclusions derived from the axiom of purposeful human action.
How does the Austrian theory of the business cycle explain economic fluctuations?
The Austrian theory identifies bank credit issuance at artificially low interest rates by fractional reserve banks as the root cause of economic fluctuations. This policy causes businesses to invest in unsustainable roundabout production processes leading to an artificial boom followed by a necessary bust.
By the mid-1930s, mainstream economics had largely absorbed the early contributions of the Austrians while rejecting their methodology. Fritz Machlup noted that a school's greatest success is when it stops existing because its ideas become common knowledge. However, Austrian economics itself became marginalized during the middle of the twentieth century. Ludwig von Mises' student Israel Kirzner recalled that in 1954, there was no separate Austrian school as such. The discipline rejected model building and mathematical methods used by other economists. Mises argued against using probabilities in economic models, insisting instead on deductive logic derived from human action. Most universities stopped hiring pure Austrians after the 1940s. Henry Hazlitt wrote many books on the topic from the 1930s to the 1980s, but his work remained outside the academic mainstream. The field survived through private seminars held by Mises at New York University, where students like Friedrich Hayek and Oskar Morgenstern gathered to discuss theory away from public scrutiny.
Nobel Revival And Split
Friedrich August von Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences with Gunnar Myrdal. This award brought renewed attention to the Austrian tradition after decades of obscurity. Hayek's work influenced a revival of laissez-faire thought throughout the late twentieth century. Yet this resurgence also exposed deep ideological rifts within the movement. One camp followed Ludwig von Mises and Murray Rothbard, viewing neoclassical methodology as irredeemably flawed. Another group led by Hayek accepted much of modern economics while remaining critical of government intervention. Hans-Hermann Hoppe published a book in 1999 asserting that Rothbard represented the true mainstream of Austrian Economics. He contrasted Rothbard with Hayek, whom he identified as an opponent of the Mises-Rothbard tradition. Walter Block argued that Hayek's political views clashed with libertarian principles integral to the school. A truce between these factions was signed around 2011, but the division remains visible today. Economists affiliated with George Mason University often align with Hayek, while those at the Mises Institute follow the Mises-Rothbard line.
Methodological Individualism
Austrian theorists derive all economic phenomena from the actions and motivations of individuals. They reject explanations based on aggregate variables or societal groups. Fritz Machlup listed methodological individualism as a core tenet in 1981, stating that groups do not think; people think. This approach examines how subjective choices regarding knowledge, time, and expectation shape outcomes. Ludwig von Mises called his version of this subjectivist approach praxeology. He published Human Action in English in 1949, arguing that deductive thought experiments yield irrefutable conclusions. Mises stated that conclusions could not be inferred from empirical observation or statistical analysis. Instead, economists must deduce truths from the axiom of purposeful human action. Some later thinkers like Ludwig Lachmann rejected Mises' strong a priori formulation. They preferred the interpretive method articulated by Max Weber. Despite these variations, the focus remains on individual agency rather than collective forces.
Business Cycle Theory
The Austrian theory of the business cycle identifies bank credit issuance as the root cause of economic fluctuations. Murray Rothbard wrote America's Great Depression to elaborate on this framework. Ludwig von Mises first posited that fractional reserve banks extend credit at artificially low interest rates. This policy causes businesses to invest in roundabout production processes that eventually prove unsustainable. The resulting misallocation of resources creates an artificial boom followed by a necessary bust. Fritz Machlup summarized the view by stating that monetary factors cause the cycle while real phenomena constitute it. Central banks enable commercial banks to fund loans cheaply, inducing an expansion of credit. This process throws savings and investment out of balance. The economy must then rebalance itself through a corrective recession. Austrians argue that government fine-tuning through money supply changes is actually the source of instability. They advocate leaving financial systems to competitive market forces to ensure stability.
Modern Applications
In the twenty-first century, Austrian principles have influenced cryptocurrency movements and libertarian political thought. Some economists assert that Bitcoin's theoretical foundations trace back to core Austrian ideas like decentralization and sound money. Saifedean Ammous and Nick Szabo use these principles to explain why digital scarcity can create functioning media of exchange. Erik Voorhees became involved in cryptocurrency after being inspired by Austrian economics. He had Ron Paul sign his copy of Murray Rothbard's Man, Economy and State. Proponents argue that cryptocurrencies serve as a Hayekian escape from government currency monopolies. They point to historical failures like the Rai stones of Yap, which were debased when colonists brought new stones with less effort in the 1870s. Bitcoin's 21 million cap prevents similar debasement. While Mises' regression theorem holds that money must originate from commodity value, modern advocates argue that market trust alone suffices. Universities like George Mason University and Auburn University now host significant Austrian presence alongside private organizations such as the Cato Institute and the Ludwig von Mises Institute.