Austrian School

Canada and the World

Current Events with a Canadian Perspective

Last update

19 November 2010

Site map

Basic Economics Part Six

The Austrian School of Economics

While the classical economists believed that Adam Smith’s laissez-faire economy was the only way to go, the Austrians had their doubts

Carl Menger (1840-1921), founder of the Austrian school, was born in Austrian Poland, the son of a lawyer. He was trained as a lawyer himself but became interested in price theory when he was working in the press section of the prime minister's office in Vienna.

Government Has an Economic Role

It was the heyday of Austrian liberalism, which believed in free enterprise but not the extreme laissez-faire approach of the classical school; the earlier followers of the Austrian school thought government needed to intervene in some cases.

In 1871, Menger completed his Principles of Economics, the work which established him as a significant economic theorist. Menger received the chair of economic theory at the University of Vienna in 1873, when he was just thirty-three.

One of the Austrian school's main pillars, was the subjective theory of value; the idea that it is people's subjective estimations which form the basis for value.

The idea actually goes back to the 16th century Spanish Salamanca School of Economics, which thought the value of a product depended on the abundance or scarcity of goods, merchants, and money. These thinkers asserted that to possess value an object must be both useful and scarce, at a time when value was thought to be linked with cost of production.

Eugen von Boehm-Bawerk (1851-1914) - he made an appearance on Austria’s 100 schilling banknote (above) - before the country adopted the euro - served as the Austrian Finance Minister for nine years. Along with Carl Menger and Friedrich von Wieser, he was another founder of the Austrian School of Economics.

Bawerk’s Capital and Capitalism (1884-89), explains the practical efficiency of capitalism against other economic approaches. In his view, capitalism, with its belief in free-market and private investment, paves the road to efficient production.

Austrian School Spreads Influence

Though Menger retired from public life at an early age, his writings were to inspire several generations of economic thinkers, many of whom would carry the Austrian School of Economics into the post-World War I era. Later representatives, such as Wilhelm Roepke (1899-1966) and Ludwig von Mises (1881-1973), affected American economic thought.

Wilhelm Roepke (left) was chief economic advisor to West Germany’s government under Konrad Adenauer (in power from 1949 to 63). He greatly influenced the development of a liberal German economic policy.

Along with Ludwig Erhard, he was the theorist of the postwar German economic “miracle.” He was principally a writer and teacher whose interests expanded from economics into political and social philosophy.

He was constantly concerned with the delicate balance between the economic and spiritual needs of human life. His works include: Civitas Humana (1948), The Social Crisis of Our Time (1950), and Economics of the Free Society (1963).

His most well-known work is A Humane Economy (1960) which the Wall Street Journal described as “a seminar on integral freedom, conducted by a professor of uncommon brilliance.”

More recently, there has been a revival of interest in the Austrian School, sparked by its two most important followers in the late twentieth century, Ludwig von Mises (right) and Nobel laureate Friedrich A. Hayek (1899-1992). von Mises is noted for his contribution to liberalism in economic theory and his belief in the power of the consumer.

Less Government, More Market

Friedrich Hayek was an Austrian-British economist born in Vienna. He too was an influential member of the Austrian School. His widely read The Road to Serfdom (1944) was an attack on government interference in the market system.

Hayek believed that governmental control of, or intervention in, a free market only postpones such economic ailments as inflation, unemployment, recession, or depression. He won the Nobel Prize for Economics in 1974.

Gunnar Myrdal (1898-1987), was a Swedish economist and sociologist who shared the Nobel Prize for Economics in 1974 with Friedrich Hayek. Myrdal was regarded as a major theorist of international relations and in particular of third world development policies.

Until the early 1930s, Myrdal emphasized pure theory, which grew into a broader concern with applied economics and social problems.

Working at the invitation of the Carnegie Corporation (N.Y.), Myrdal explored the social and economic problems of blacks in America in 1938-40 and wrote An American Dilemma: The Negro Problem and Modern Democracy (1944). In this work, Myrdal outlined a theory he called “cumulative causation.”

In language non-economists understand this means that poverty breeds poverty; if you are born into a poor family that lives among other poor families, you will very likely be poor yourself.

The same idea became a leading feature of Myrdal’s writings on development economics, in which he argued that, rather than rich and poor countries converging with economic development, they might well diverge. The poor countries would become poorer as the rich countries enjoyed economies of scale and the poor ones were forced to rely on primary products.

Back to Part Five

Go to Part Seven

Sources

Hazlitt, Henry. Economics in One Lesson,Three Rivers Press, 1988.

Henderson, David R, et al, Concise Encyclopedia of Economics.

McConnell, Campbell R, Brue, Stanley L. Economics, McGraw Hill

Samuelson, Paul. Economics, McGraw Hill, 1948.

Sloman, John. Essential of Economics, Prentice Hall, 1998

"Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen."

Ludwig von Mises

NO EVIL IN REGULATION

Richard T. Ely (1854-1943) was a leading economic figure of his time (1920s) in the United States.

Ely was noted for his concern with social problems and the role of economists in solving them.

He was a founder of the American Economic Association, and was among the first U.S. economists to discard the theory that government interference in order to regulate the economy is an evil. In fact, he was very much opposed to what was called Social Darwinism.

(William Graham Sumner, one of the most influential social voices of the late 19th century, said that economics punished the weak in the same way that natural selection did. He wrote that the economic system rightly rewarded the rich for their contribution to general well-being and wisely punished the poor for their inadequacy.)

An early influence on Richard Ely was John Stuart Mill’s emphasis on the importance of institutional forces in affecting distribution. Ely became concerned with labour unrest, and with agricultural economics and the problems of rural poverty.

He also founded or helped to create the American Association for Labour Legislation, and the American Association for Agricultural Legislation.

Ely’s concern with social-reform legislation and his association with the progressive state government of Wisconsin made him one of the most influential American economists of his time. He wrote a highly successful textbook, Introduction to Political Economy (1889), as well as many other books and articles.

“An economist is a person who has one foot in the oven and the other in the freezer and says, ‘On the average, things aren’t too bad.’ ”

“Economists are always half right in their forecasts. But they don’t know which half it will be.”

GALBRAITH SPEAKS

“Economic ideas are...a product of their own time and place; they cannot be seen apart from the world they interpret. And that world changes - so economic ideas, if they are to retain relevance, must also change.”

“...I believe the greatest error in economics is in seeing the economy as a stable, immutable structure.”

Economist

John Kenneth Galbraith