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What Is The Austrian School?

August 21, 2014

The Austrian School, which was born officially with Carl Menger’s 1871 book Principles of Economics, offers its own distinct price theory, its monopoly theory, its capital theory, and its own business-cycle theory.

Carl Menger

It is solidly realistic, and grounded in the individual actor and his decisions and preferences. It seeks to understand real-world prices, not the prices of a long-run equilibrium that can never exist except in the minds of economists.

It was Austrian economists who predicted and properly interpreted the Great Depression, the dot-com crash and the Panic of 2008. The point of the Austrian School is that no competing system can do a better job than the market. Only actors on the market can allocate resources in a non-arbitrary way, because only on the market can someone evaluate a course of action according to the economizing principle of profit and loss. This is what the Austrian economists call economic calculation. This is the reason why economist Ludwig von Mises explained in 1920 that socialism could not work.

Ludwig von Mises

Under socialism as traditionally understood, the State owned the means of production. Now if the State already owns all those things, then no buying and selling of them takes place. Without buying and selling, in turn, there is no process by which prices can arise. And without prices for capital goods, central planners cannot allocate resources rationally. They cannot know whether a particular production process should use ten units of plastic and nine units of lumber, or ten units of lumber and nine units of plastic. Without market prices by which to compare in-commensurable goods like lumber and plastic, they cannot know how urgently demanded each input is in alternative lines of production. Multiply this problem by the nearly infinite set of possible combinations of productive factors, and you see the impossible situation the central planning board faces.

Even the non-socialist State has a calculation problem. Since it operates without a profit-and-loss feedback mechanism, it has no way of knowing whether it has allocated resources in accordance with consumer preferences and in a least-cost manner. For example, lets take a look at the State’s production of MRAPs, which stands for Mine-Resistant Ambush Protected. It is an armored vehicle built and used by the United States government and now they are also providing these vehicles for local police forces. Each vehicle costs about half a million dollars to produce and there is no consumer market for them which is why they are so expensive because the State has no way of knowing whether it has allocated its resources in a cost-effective manner and since the money was stolen from you and me via taxation they don’t really care.

MRAP

 

So what you see is that the State’s decisions regarding what to produce and where, in what quantities and using which methods are completely blind from the point of view of social economizing, meaning the process by which we obtain higher-valued ends with lower-valued means. Hence, if we want to ensure that resources are not squandered or spent arbitrarily such as on the ugly monstrosity of a vehicle you see above, we must keep them out of the hands of the State.

So the Austrian School of economics teaches us that certain courses of action are more desirable from the standpoint of human welfare than others. We also learn that the State’s allocation decisions cannot be socially economizing. We learn that the desires of consumers are best served by the free price system, which directs production decisions up and down the capital structure in accordance with society’s demands. And we learn from the Austrian School that the State’s interference with money, the commodity that forms one-half of every non-barter exchange, gives rise to the devastation of the boom-bust business cycle.

I hope this helps with introducing you to Austrian economics and it is my hope it did not scare you off as that was not my intention. I am a young student of the Austrian School myself so I am learning along with you, but I promise you that the Austrian School of economics is based in reality and so you will be able to get it soon.

For more detailed information than this author can provide you here please visit the Ludwig von Mises Institute and become a member.

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