The Austrian School

A MODERN VISION...

A group of brilliant thinkers based in Vienna in the late 1800s helped create our modern economy. This is your guide to the Austrian School - it is the secret history of 20th century economics.

Turn-Of-The-Century Vienna was the site of incredible intellectual activity, producing an array of memorable figures whose work defined our current view of the world.
Great advances in the fields of psychology (Sigmund Freud), art (Gustav Klimt), music (Arnold Schoenberg, Gustav Mahler), medicine (Theodor Billroth) and philosophy (Ludwig Wittgenstein) were all made in this one place. But did you know that Vienna was also the site of our modern view of economics?
While Freud was revolutionizing psychology, a group of vanguard economists, led by Carl Menger, Eugen von Boehm-Bawerk and Friedrich von Wieser, were using similar principles to reinvent economics. Eventually called "The Austrian School", these men rejected the mechanical and deterministic approach of their colleagues, instead, advocating a "pure" economics that accounted for the role of individuals and their desires.
The Austrian School reflected the recognition of risk and uncertainty in their models... and has done more for global wealth creation than possibly any other group.

KNOW YOUR TERMS...

Many of the hot topics in today's economy discussions center around ideas that were first made popular by the Austrian School. You are thinking like an Austrian if you consider any of these economic factors important...

• Individual choice
  
  The Austrian School was the first tradition to portray individuals and their choices as active participants in the economic process. In fact, according to the Austrians, markets are determined by these choices. After all, what value can be given to an object outside of the desire for it?
  
  
• Entrepreneurship
  
  The Austrians did not pretend that the role of the economist was to predict the outcome of the economic process. Too much of that process was uncertain and could not be predicted by one so "out of the loop". The only one with the proper knowledge to predict outcomes and minimize risk was the entrepreneur, perhaps the most important role in any economy.
  
  
• Free and competitive markets
  
  With the Austrian School's belief in a "free and competitive markets" approach to macroeconomics came their equally strong belief in a minimal role for government in our everyday lives. Free markets should be just that: without the intervention of central institutions.
  
  
• Private property
  
  Individual property ownership is the bedrock of a healthy economy according to the Austrian School. Without it, there is no basis for capital, no basis for trade, no basis for value... and there is no basis for a free market.
  
  
• A price system
  
  In the Austrian School model, a realistic price system emerges when free markets are allowed to do their work. It is only through competitive markets that we can find the optimal price for resource distribution, the one that reflects the best situation for both producers and consumers.

THE BEGINNING...

The economic tradition known as the Austrian School began in I87I with the publication of Carl Menger's Principles of Economics, although it would be years before the term "Austrian School" was coined. The Austrians were at the fore-front of a "neoclassical revolution" in economics, a movement that was built on the work of "classical" economists like Adam Smith (theories of demand, specifically) to place human action at the center of the economic worlds. This pit against the Younger German Historical School, which considered history the only science qualified to explain human action. The resulting intellectual battle, dubbed the Methodenstreit ("debate on method"), lasted for several years and had lasting effects. Ironically, history would prove the Austrian School right.

Carl Menger (1840 - 1921)

He tutored Austria's Crown Prince before being named Chair of Political Economy in Vienna's Law Faculty.

According to Ludwig von Mises, "until the end of the (1870s) there was no Austrian School. There was only Carl Menger". Yet Menger's Principles of Economics, the manifesto of the Austrian School, was rarely read when first published - the situation for many works ahead of their time. Many dismissed Menger's theories as "subjectivist" and unscientific; but, where others saw subjectivity, Menger saw the heart and soul of economics: individuals acting to satisfy their wants. It was this wholly natural impulse, according to the Principles, that dictated all economic activity, from trade to consumption to price systems.

MONEY AND CREDIT...

With the end of the Austro-Hungarian empire in I9I8, the Austrian School economists found themselves battling a more pronounced socialist influence in European politics and society. Ludwig von Mises and Joseph Schumpeter remained two of the most prominent champions of free-market policies through the I920s, with Schumpeter being the first to proclaim entrepreneurship as the central actor of economic change.

When Mises began his famous Privatseminar in Vienna, he laid the intellectual groundwork for an entire new generation of Austrian School thinkers. Men like Friedrich A. von Hayek, Oskar Morgenstern, Fritz Machlup and Gottfried von Haberler all studied with Mises. The work of this next generation would again bring the theories of the Austrian School to the world stage.

Ludwig Mises (1881 - 1973)

Although Ludwig von Mises was part of the Austrian School's third generation, studying under Eugen von Boehm-Bawerk, he was also the first of the greats to study with Carl Menger himself. His groundbreaking work on money and credit helped Austria avoid the inflation in the 1920s that Germany suffered. He showed that supply and demand dictated not only the price of goods, but also purchasing power, or the "price" of money. In 1927, Mises and his student, Friedrich A. von Hayek, founded the Austrian Institute for Business Cycle Research, an institution devoted to fostering entrepreneurial activity throughout Austria.

THE GREAT DEBATES...

The Austrian School's unorthodox theories led many famous intellectual battles. The three presented here are considered the "Great Debates" of the School's history.

German Historical School (1870-1885)

Gustav von Schmoller's scathing review of Carl Menger's work led to a heated debate on the very role of economics. Menger "retired" from the Methodenstreit in the late 1880s to focus on other work.

Socialism (1884-1922)

The first Austrian School criticism of Karl Marx came from Eugen von Boehm-Bawerk, but the debate ended in 1922 with Ludwig von Mises' book, Socialism, which proved Marx's economic model fundamentally impossible.

Keynesian School (1932-1940)

In the early 1930s, Friedrich A. von Hayek entered a lengthy debate on macroeconomics with Cambridge economist, John Maynard Keynes, through the journals they each edited. By 1940, the "Keynesian revolution" had won the battle; however, by the 1970s, Hayek's theories would win the war.

BUSINESS AND CAPITAL...

The Great Depression was an important time for the Austrian School. With worldwide unemployment at all-time highs, the need for economic solutions was critical. The work of Mises and Hayek on business cycles in the 1920s and 1930s was nothing short of prophetic: they were two of the very few who predicted the stock market crash in 1929. But their answer to the ills of the world economy - that the depression was due to the interference in free markets, and that it would take the free markets to recover - couldn't compete with Keynesian ideas of public investment.
As the "Keynesian revolution" took hold, men like Mises, Hayek and Leo Schoenfeld-Illy continued to champion free markets with their economic theories. It would take 30 years for the world to come around.

Friedrich August von Hayek (1899 - 1992)

His work on the theory of business cycles earned him a Nobel Prize in 1974.

Friedrich A. von Hayek is well-known outside of economic circles - The Road to Serfdom is a classic example of political philosophy. In economics, however, he is a legend. His theory of the business cycle defended free-market economic systems and showed how economic crises were historically the product of manipulation: lowering interest rates to an unnatural level, central banks would induce "overinvestment" and create false booms.
Hayek's theories sparked a famous debate in the 1930s with John Maynard Keynes, whose work advocated the role of government intervention and regulation in business cycles.

ACTION AND KNOWLEDGE...

By the 1970s, the shortcomings of the Keynesian economic model forced many to reconsider the theories of the Austrian School. According to Keynesian and other neoclassical views, it was possible for economic actors (read: the government) to have knowledge of the end of economic processes. But the crushing stagflation of the decade and Hayek's 1974 Nobel Prize brought the Austrian School's theories on the essential uncertainty of economic processes to the forefront. The work of Mises and Hayek - as well as Fritz Machlup's on "knowledge industries" and "knowledge economics" (terms he invented) and Oskar Morgenstern's on game theory - gained new audiences. The resurgence of free-market policies led to the prosperity of the Thatcher and Reagan years.

Gottfried von Haberler (1901 - 1995)

After retiring from Harvard University, he became a Resident Scholar at the American Enterprise Institute in Washington, D.C.

Free and competitive international trade found one of its most outspoken advocates in Gottfried von Haberler. As Professor of Economics at Harvard University from 1936 until his retirement in 1971, Haberler argued tirelessly against the restrictive economic policies advocated by many of his colleagues - arguments that were influenced by his study in the 1920s and 1930s with Ludwig von Mises in Austria. His published books show a life-long interest in trade and business cycles - The Theory of International Trade, Prosperity and Depression, and Economic Growth and Stability among them.

THE CURRENT SCENE...

The renewed interest in the Austrian School tradition began in the 1970s and continues today. With the fall of Communism in 1989, its theories have become even more relevant.

In Europe...

While Ludwig von Mises' work found powerful allies in Italy (Luigi Einaudi, Bruno Leoni) and France (Jaques Rueff), Friedrich von Hayek's professorship at the London School of Economics introduced at the Austrian School's theories to men like Lionel Robbins and J.R. Hicks. The Austrians' influence can also clearly be seen in the work of Ludwig Erhard and Wilhelm Roepke and Germany's Ordo Liberalism movement. Austrian School theories are now taught in universities from Aix en Provence to Buckingham and Turin.

In the Americas...

Mises' work at New York University and Hayek's at the University of Chicago influenced an entire generation of American economists, including Israel Kirzner, Murray Rothbard, and James M. Buchanan as well as scholars from Europe and the Americas. The founding of the Ludwig von Mises Institute at Auburn University and the Austrian School program at NYU are further indications that Austrian theories are still considered viable alternatives to mainstream economics. The latest generation of Austrian School economists is already taking up major academic positions.

Find out more...

In addition to the original work of Menger, Mises, Hayek and others mentioned in this guide, there are new books, journals, and essays about or in the tradition of the Austrian School published every year. Austrian ideas are studied in classrooms not only throughout the U.S., Latin America and Europe, but also the former Soviet Union, Africa and Asia.

Visit these websites...

• The Mises Institute - www.mises.org
• Hayek Institue - www.hayek-institut.at
• NYU - www.econ.nyu/dept/austrian
• Buchanan Center - www.Gmu.edu/jbc