Austrian school of economics
The Austrian School is a heterodox[1][2][3] school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals and their self interest. Austrian school theorists hold that economic theory should be exclusively derived from basic principles of human action.[4][5][6]
Not to be confused with Economy of Austria.
The Austrian School originated in Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others.[7] It was methodologically opposed to the Historical School (based in Germany), in a dispute known as Methodenstreit, or methodology quarrel. Current-day economists working in this tradition are located in many countries, but their work is still referred to as Austrian economics. Among the theoretical contributions of the early years of the Austrian School are the subjective theory of value, marginalism in price theory and the formulation of the economic calculation problem, each of which has become an accepted part of mainstream economics.[8]
In the 1970s, the Austrian School attracted some renewed interest after Friedrich Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences with Gunnar Myrdal.[9]
Criticism[edit]
General[edit]
Mainstream economists generally reject modern-day Austrian economics, and argue that modern-day Austrian economists are too unwilling to use mathematics and statistics in economics.[87] The Austrian Economics school is a small group involving largely online Libertarians, with not much academic support and mainstream economists disagree with many of the views its adherents accept.[88] The Austrian School publishes few articles in mainstream journals because they lack testable hypotheses in their propositions.[89] The Austrian economists also publish relatively little in mainstream journals because they rarely use mathematics.[84] Austrian opposition to mathematization extends to economic theorizing only, as they argue that human behavior is too variable for overarching mathematical models to hold true across time and context. Austrians do, however, support analyzing revealed preference via mathematization to aid business and finance.[90]
Economist Paul Krugman has stated that Austrians are unaware of holes in their own thinking because they do not use "explicit models".[91] In reality during a recession a strong negative multiplier effect reduces output in all parts of the economy.[92]
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.[93] Economist Tyler Cowen has written that Kirzner's theory of entrepreneurship can ultimately be reduced to a neoclassical search model and is thus not in the radical subjectivist tradition of Austrian praxeology. Cowen states that Kirzner's entrepreneurs can be modeled in mainstream terms of search.[94]
Economist Bryan Caplan has noted that Mises has been criticized for overstating the strength of his case in describing socialism as impossible rather than as something that would need to establish non-market institutions to deal with the inefficiency.[95]
Taxation and welfare[edit]
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 harm an economy and "a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness".[96] Nordic countries, Denmark, Finland, Norway, and Sweden promote industrial flexibility by public sector education and retraining to eliminate declining industries. These nations also do research and development and create new sectors. Nordic nations have higher employment rates than the English speaking nations.[97]
Austrian economists can at most maintain it is impossible to determine the effects of government on "social utility". Some people lose while the intervener gains, therefore one cannot make claims over social utility without comparing interpersonal welfare, which Austrian economics denies is possible. If state action cannot be endorsed through claiming efficiency logically state action cannot be denied either claiming efficiency. Austrian economics at most leads to total uncertainty over possible benefits of statism.[84]
Methodology[edit]
Critics generally argue that Austrian economics lacks scientific rigor and rejects scientific methods and the use of empirical data in modelling economic behavior.[98][99] Some economists describe Austrian methodology as being a priori or non-empirical.[87][100][101]
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.[102]
Economist Thomas Mayer has stated that Austrians advocate a rejection of the scientific method which involves the development of empirically falsifiable theories.[99][101] Furthermore, economists have developed numerous experiments that elicit useful information about individual preferences.[103][104]
Although economist Leland Yeager is sympathetic to Austrian economics, he rejects many favorite views of the Misesian group of Austrians, in particular "the specifics of their business-cycle theory, ultra-subjectivism in value theory and particularly in interest-rate theory, their insistence on unidirectional causality rather than general interdependence, and their fondness for methodological brooding, pointless profundities, and verbal gymnastics".[105]
Economist Paul A. Samuelson wrote in 1964 that most economists believe that economic conclusions reached by pure logical deduction are limited and weak.[106] According to Samuelson and Caplan, Mises' deductive methodology, also embraced by Murray Rothbard and to a lesser extent by Mises' student Israel Kirzner was not sufficient in and of itself.[100]
Business cycle theory[edit]
Mainstream economic research regarding Austrian business cycle theory finds that it is inconsistent with empirical evidence. Noted economists such as Gordon Tullock,[107] Milton Friedman[108][109] and Paul Krugman[110] have said that they regard the theory as incorrect. Austrian economist Ludwig Lachmann noted that the Austrian theory was rejected during the 1930s: