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AustrianSchoolofEconomics
byPeterJ.Boettke
AbouttheAuthor

T heAustrianschoolofeconomicswasfoundedin1871withthe
publicationofCarlMengersPrinciplesofEconomics.MENGER,along
RelatedCEEArticles:
Bonds
withWILLIAMSTANLEYJEVONSandLEONWALRAS,developedthemarginalist Competition
revolutionineconomicanalysis.MengerdedicatedPrinciplesof Demand
EconomicstohisGermancolleagueWilliamRoscher,theleading Entrepreneurship
figureintheGermanhistoricalschool,whichdominatedeconomic FreeMarket
thinkinginGermanlanguagecountries.Inhisbook,Mengerargued Inflation
thateconomicanalysisisuniversallyapplicableandthatthe Information
appropriateunitofanalysisismanandhischoices.Thesechoices,he Investment
wrote,aredeterminedbyindividualsubjectivepreferencesandthe KeynesianEconomics
marginonwhichdecisionsaremade(seeMARGINALISM).Thelogicof Marginalism
choice,hebelieved,istheessentialbuildingblocktothedevelopment Microeconomics
ofauniversallyvalideconomictheory. MonetaryPolicy
MoneySupply
Thehistoricalschool,ontheotherhand,hadarguedthateconomicscienceis Socialism
incapableofgeneratinguniversalprinciplesandthatscientificresearchshould
Supply
insteadbefocusedondetailedhistoricalexamination.Thehistoricalschool
TragedyoftheCommons
thoughttheEnglishclassicaleconomistsmistakeninbelievingineconomic
Unintended
lawsthattranscendedtimeandnationalboundaries.MengersPrinciplesof Consequences
Economicsrestatedtheclassicalpoliticaleconomyviewofuniversallawsand
RelatedCEE
didsousingmarginalanalysis.Roschersstudents,especiallyGustav Biographies:
Schmoller,tookgreatexceptiontoMengersdefenseoftheoryandgavethe ArmenA.Alchian
workofMengerandhisfollowers, EUGENBHM BAWERKandFriedrichWieser,the EugenvonBhmBawerk
derogatorynameAustrianschoolbecauseoftheirfacultypositionsatthe JamesM.Buchanan
UniversityofVienna.Thetermstuck. RonaldH.Coase
FriedrichAugustHayek
Sincethe1930s,noeconomistsfromtheUniversityofViennaoranyother
DavidHume
AustrianuniversityhavebecomeleadingfiguresinthesocalledAustrian
WilliamStanleyJevons
schoolofeconomics.Inthe1930sand1940s,theAustrianschoolmovedto
FrankHynemanKnight
BritainandtheUnitedStates,andscholarsassociatedwiththisapproachto
economicsciencewerelocatedprimarilyattheLondonSchoolofEconomics AlfredMarshall

(19311950),NewYorkUniversity(1944),AuburnUniversity(1983),and CarlMenger
GeorgeMasonUniversity(1981).Manyoftheideasoftheleadingmid LudwigvonMises
twentiethcenturyAustrianeconomists,suchas LUDWIGVONMISESand F.A. DouglassC.North
HAYEK,arerootedintheideasofclassicaleconomistssuchas ADAM SMITH and JosephAloisSchumpeter
DAVIDHUME,orearlytwentiethcenturyfiguressuchas KNUTWICKSELL,aswellas
AdamSmith
Menger,BhmBawerk,andFriedrichvonWieser.Thisdiversemixof
VernonL.Smith
intellectualtraditionsineconomicscienceisevenmoreobviousin
LeonWalras

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contemporaryAustrianschooleconomists,whohavebeeninfluencedby KnutWicksell
modernfiguresineconomics.Theseinclude ARMENALCHIAN, JAMESBUCHANAN, RelatedEconlib
Resources:
RONALDCOASE,HaroldDemsetz,AxelLeijonhufvud, DOUGLASSNORTH ,Mancur
PeteBoettkeonAustrian
Olson, VERNONSMITH ,GordonTullock,LelandYeager,andOliverWilliamson,as Economics.Podcastat
wellasIsraelKirznerandMurrayRothbard.Whileonecouldarguethata EconTalk,Dec.2007.
uniqueAustrianschoolofeconomicsoperateswithintheeconomicprofession DonBoudreauxon
Macroeconomicsand
today,onecouldalsosensiblyarguethatthelabelAustriannolonger
AustrianBusinessCycle
possessesanysubstantivemeaning.InthisarticleIconcentrateonthemain Theory.Podcastat
propositionsabouteconomicsthatsocalledAustriansbelieve. EconTalk,Apr.2009.
PeteBoettkeonthe
AustrianPerspectiveon
TheScienceofEconomics BusinessCyclesand
MonetaryPolicy.Podcast
Proposition1:Onlyindividualschoose. atEconTalk,Jan.2009.

Man,withhispurposesandplans,isthebeginningofalleconomicanalysis.
Onlyindividualsmakechoicescollectiveentitiesdonotchoose.Theprimary
taskofeconomicanalysisistomakeeconomicphenomenaintelligibleby
Goto1stEdition
basingitonindividualpurposesandplansthesecondarytaskofeconomic
analysisistotraceoutthe UNINTENDEDCONSEQUENCESofindividualchoices.

Proposition2:Thestudyofthemarketorderisfundamentallyaboutexchangebehavior
andtheinstitutionswithinwhichexchangestakeplace.

Thepricesystemandthemarketeconomyarebestunderstoodasacatallaxy,andthusthe
sciencethatstudiesthemarketorderfallsunderthedomainofcatallactics.Thesetermsderive
fromtheoriginalGreekmeaningsofthewordkatallaxyexchangeandbringingastrangerinto
friendshipthroughexchange.Catallacticsfocusesanalyticalattentionontheexchange
relationshipsthatemergeinthemarket,thebargainingthatcharacterizestheexchangeprocess,
andtheinstitutionswithinwhichexchangetakesplace.

Proposition3:Thefactsofthesocialsciencesarewhatpeoplebelieveandthink.

Unlikethephysicalsciences,thehumansciencesbeginwiththepurposesandplansof
individuals.Wherethepurgingofpurposesandplansinthephysicalsciencesledtoadvancesby
overcomingtheproblemofanthropomorphism,inthehumansciences,theeliminationofpurposes
andplansresultsinpurgingthescienceofhumanactionofitssubjectmatter.Inthehuman
sciences,thefactsoftheworldarewhattheactorsthinkandbelieve.

Themeaningthatindividualsplaceonthings,practices,places,andpeopledetermineshowthey
willorientthemselvesinmakingdecisions.Thegoalofthesciencesofhumanactionis
intelligibility,notprediction.Thehumansciencescanachievethisgoalbecausewearewhatwe
study,orbecausewepossessknowledgefromwithin,whereasthenaturalsciencescannotpursue
agoalofintelligibilitybecausetheyrelyonknowledgefromwithout.Wecanunderstandpurposes
andplansofotherhumanactorsbecauseweourselvesarehumanactors.

Theclassicthoughtexperimentinvokedtoconveythisessentialdifferencebetweenthesciences
ofhumanactionandthephysicalsciencesisaMartianobservingthedataatGrandCentral
StationinNewYork.OurMartiancouldobservethatwhenthelittlehandontheclockpointsto
eight,thereisabustleofmovementasbodiesleavetheseboxes,andthatwhenthelittlehand
hitsfive,thereisabustleofmovementasbodiesreentertheboxesandleave.TheMartianmay

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evendevelopapredictionaboutthelittlehandandthemovementofbodiesandboxes.But
unlesstheMartiancomestounderstandthepurposesandplans(thecommutingtoandfrom
work),hisscientificunderstandingofthedatafromGrandCentralStationwouldbelimited.The
sciencesofhumanactionaredifferentfromthenaturalsciences,andweimpoverishthehuman
scienceswhenwetrytoforcethemintothephilosophical/scientificmoldofthenaturalsciences.

Microeconomics

Proposition4:Utilityandcostsaresubjective.

Alleconomicphenomenaarefilteredthroughthehumanmind.Sincethe1870s,economistshave
agreedthatvalueissubjective,but,following ALFREDMARSHALL,manyarguedthatthecostsideof
theequationisdeterminedbyobjectiveconditions.Marshallinsistedthatjustasbothbladesofa
scissorscutapieceofpaper,sosubjectivevalueandobjectivecostsdetermineprice(see
MICROECONOMICS).ButMarshallfailedtoappreciatethatcostsarealsosubjectivebecausetheyare

themselvesdeterminedbythevalueofalternativeusesofscarceresources.Bothbladesofthe
scissorsdoindeedcutthepaper,butthebladeof SUPPLYisdeterminedbyindividualssubjective
valuations.

Indecidingcoursesofaction,onemustchoosethatis,onemustpursueonepathandnotothers.
Thefocusonalternativesinchoicesleadstooneofthedefiningconceptsoftheeconomicwayof
thinking:opportunitycosts.Thecostofanyactionisthevalueofthehighestvaluedalternative
forgoneintakingthataction.Sincetheforgoneactionis,bydefinition,nevertaken,whenone
decides,oneweighstheexpectedbenefitsofanactivityagainsttheexpectedbenefitsof
alternativeactivities.

Proposition5:Thepricesystemeconomizesontheinformationthatpeopleneedto
processinmakingtheirdecisions.

Pricessummarizethetermsofexchangeonthemarket.Thepricesystemsignalstomarket
participantstherelevant INFORMATION,helpingthemrealizemutualgainsfromexchange.In
Hayeksfamousexample,whenpeoplenoticethatthepriceoftinhasrisen,theydonotneedto
knowwhetherthecausewasanincreasein DEMANDfortinoradecreaseinsupply.Eitherway,the
increaseinthepriceoftinleadsthemtoeconomizeonitsuse.Marketpriceschangequicklywhen
underlyingconditionschange,whichleadspeopletoadjustquickly.

Proposition6:Privatepropertyinthemeansofproductionisanecessaryconditionfor
rationaleconomiccalculation.

Economistsandsocialthinkershadlongrecognizedthatprivateownershipprovidespowerful
incentivesfortheefficientallocationofscarceresources.Butthosesympatheticto SOCIALISM
believedthatsocialismcouldtranscendtheseincentiveproblemsbychanginghumannature.
LudwigvonMisesdemonstratedthateveniftheassumedchangeinhumannaturetookplace,
socialismwouldfailbecauseofeconomicplannersinabilitytorationallycalculatethealternative
useofresources.Withoutprivateownershipinthemeansofproduction,Misesreasoned,there
wouldbenomarketforthemeansofproduction,andthereforenomoneypricesforthemeansof
production.Andwithoutmoneypricesreflectingtherelativescarcitiesofthemeansofproduction,
economicplannerswouldbeunabletorationallycalculatethealternativeuseofthemeansof
production.

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Proposition7:Thecompetitivemarketisaprocessofentrepreneurialdiscovery.

Manyeconomistssee COMPETITIONasastateofaffairs.Butthetermcompetitioninvokesan
activity.Ifcompetitionwereastateofaffairs,theentrepreneurwouldhavenorole.Butbecause
competitionisanactivity,theentrepreneurhasahugeroleastheagentofchangewhoprodsand
pullsmarketsinnewdirections.

Theentrepreneurisalerttounrecognizedopportunitiesformutualgain.Byrecognizing
opportunities,theentrepreneurearnsaprofit.Themutuallearningfromthediscoveryofgains
fromexchangemovesthemarketsystemtoamoreefficientallocationofresources.
Entrepreneurialdiscoveryensuresthata FREEMARKETmovestowardthemostefficientuseof
resources.Inaddition,thelureofprofitcontinuallyprodsentrepreneurstoseekinnovationsthat
increaseproductivecapacity.Fortheentrepreneurwhorecognizestheopportunity,todays
imperfectionsrepresenttomorrowsprofit. 1 Thepricesystemandthemarketeconomyare
learningdevicesthatguideindividualstodiscovermutualgainsandusescarceresources
efficiently.

Macroeconomics

Proposition8:Moneyisnonneutral.

Moneyisdefinedasthecommonlyacceptedmediumofexchange.Ifgovernmentpolicydistorts
themonetaryunit,exchangeisdistortedaswell.Thegoalof MONETARYPOLICYshouldbeto
minimizethesedistortions.Anyincreaseinthe MONEYSUPPLYnotoffsetbyanincreaseinmoney
demandwillleadtoanincreaseinprices.Butpricesdonotadjustinstantaneouslythroughoutthe
economy.Somepriceadjustmentsoccurfasterthanothers,whichmeansthatrelativeprices
change.Eachofthesechangesexertsitsinfluenceonthepatternofexchangeandproduction.
Money,byitsnature,thuscannotbeneutral.

Thispropositionsimportancebecomesevidentindiscussingthecostsof INFLATION.Thequantity
theoryofmoneystated,correctly,thatprintingmoneydoesnotincreasewealth.Thus,ifthe
governmentdoublesthemoneysupply,moneyholdersapparentgaininabilitytobuygoodsis
preventedbythedoublingofprices.Butwhilethequantitytheoryofmoneyrepresentedan
importantadvanceineconomicthinking,amechanicalinterpretationofthequantitytheory
underestimatedthecostsofinflationarypolicy.Ifpricessimplydoubledwhenthegovernment
doubledthemoneysupply,theneconomicactorswouldanticipatethispriceadjustmentbyclosely
followingmoneysupplyfiguresandwouldadjusttheirbehavioraccordingly.Thecostofinflation
wouldthusbeminimal.

Butinflationissociallydestructiveonseverallevels.First,evenanticipatedinflationbreachesa
basictrustbetweenthegovernmentanditscitizensbecausegovernmentisusinginflationto
confiscatepeopleswealth.Second,unanticipatedinflationisredistributiveasdebtorsgainatthe
expenseofcreditors.Third,becausepeoplecannotperfectlyanticipateinflationandbecausethe
moneyisaddedsomewhereinthesystemsay,throughgovernmentpurchaseof BONDSsome
prices(thepriceofbonds,forexample)adjustbeforeotherprices,whichmeansthatinflation
distortsthepatternofexchangeandproduction.

Sincemoneyisthelinkforalmostalltransactionsinamoderneconomy,monetarydistortions
affectthosetransactions.Thegoalofmonetarypolicy,therefore,shouldbetominimizethese

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monetarydistortions,preciselybecausemoneyisnonneutral. 2

Proposition9:Thecapitalstructureconsistsofheterogeneousgoodsthathave
multispecificusesthatmustbealigned.

Rightnow,peopleinDetroit,Stuttgart,andTokyoCityaredesigningcarsthatwillnotbe
purchasedforadecade.Howdotheyknowhowtoallocateresourcestomeetthatgoal?
Productionisalwaysforanuncertainfuturedemand,andtheproductionprocessrequiresdifferent
stagesof INVESTMENTrangingfromthemostremote(miningironore)tothemostimmediate(the
cardealership).Thevaluesofallproducergoodsateverystageofproductionderivefromthe
valueconsumersplaceontheproductbeingproduced.Theproductionplanalignsvariousgoods
intoacapitalstructurethatproducesthefinalgoodsin,ideally,themostefficientmanner.If
capitalgoodswerehomogeneous,theycouldbeusedinproducingallthefinalproducts
consumersdesired.Ifmistakesweremade,theresourceswouldbereallocatedquickly,andwith
minimalcost,towardproducingthemoredesiredfinalproduct.Butcapitalgoodsare
heterogeneousandmultispecificanautoplantcanmakecars,butnotcomputerchips.The
intricatealignmentofcapitaltoproducevariousconsumergoodsisgovernedbypricesignalsand
thecarefuleconomiccalculationsofinvestors.Ifthepricesystemisdistorted,investorswillmake
mistakesinaligningtheircapitalgoods.Oncetheerrorisrevealed,economicactorswillreshuffle
theirinvestments,butinthemeantimeresourceswillbelost. 3

Proposition10:Socialinstitutionsoftenaretheresultofhumanaction,butnotofhuman
design.

Manyofthemostimportantinstitutionsandpracticesarenottheresultofdirectdesignbutare
thebyproductofactionstakentoachieveothergoals.AstudentintheMidwestinJanuarytrying
togettoclassquicklywhileavoidingthecoldmaycutacrossthequadratherthanwalkthelong
wayaround.Cuttingacrossthequadinthesnowleavesfootprintsasotherstudentsfollowthese,
theymakethepathbigger.Althoughtheirgoalismerelytogettoclassquicklyandavoidthecold
weather,intheprocesstheycreateapathinthesnowthatactuallyhelpsstudentswhocomelater
toachievethisgoalmoreeasily.Thepathinthesnowstoryisasimpleexampleofaproduct
ofhumanaction,butnotofhumandesign(Hayek1948,p.7).

Themarketeconomyanditspricesystemareexamplesofasimilarprocess.Peopledonotintend
tocreatethecomplexarrayofexchangesandpricesignalsthatconstituteamarketeconomy.
Theirintentionissimplytoimprovetheirownlotinlife,buttheirbehaviorresultsinthemarket
system.Money,law,language,science,andsoonareallsocialphenomenathatcantracetheir
originsnottohumandesign,butrathertopeoplestrivingtoachievetheirownbetterment,andin
theprocessproducinganoutcomethatbenefitsthepublic. 4

Theimplicationsofthesetenpropositionsareratherradical.Iftheyholdtrue,economictheory
wouldbegroundedinverballogicandempiricalworkfocusedonhistoricalnarratives.Withregard
topublicpolicy,severedoubtwouldberaisedabouttheabilityofgovernmentofficialsto
interveneoptimallywithintheeconomicsystem,letalonetorationallymanagetheeconomy.

Perhapseconomistsshouldadoptthedoctorscreed:Firstdonoharm.Themarketeconomy
developsoutofpeoplesnaturalinclinationtobettertheirsituationand,insodoing,todiscover
themutuallybeneficialexchangesthatwillaccomplishthatgoal.AdamSmithfirstsystematized
thismessageinTheWealthofNations.Inthetwentiethcentury,economistsoftheAustrian

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schoolofeconomicswerethemostuncompromisingproponentsofthismessage,notbecauseofa
priorideologicalcommitment,butbecauseofthelogicoftheirarguments.

AbouttheAuthor

PeterJ.BoettkeisaprofessorofeconomicsatGeorgeMasonUniversity,whereheisalsothedeputydirectorof
theJamesM.BuchananCenterforPoliticalEconomyandaseniorfellowattheMercatusCenter.Heistheeditorof
theReviewofAustrianEconomics.

FurtherReading

GeneralReading

Boettke,P.,ed.TheElgarCompaniontoAustrianEconomics.Brookfield,Vt.:EdwardElgar,1994.
Dolan,E.,ed.TheFoundationsofModernAustrianEconomics.Mission,Kans.:SheedandWard,1976.Available
onlineat:http://www.econlib.org/library/NPDBooks/Dolan/dlnFMA.html

ClassicReadings

BhmBawerk,E.CapitalandInterest.3vols.1883.SouthHolland,Ill.:LibertarianPress,1956.Availableonline
at:http://www.econlib.org/library/BohmBawerk/bbCI.html
Hayek,F.A.IndividualismandEconomicOrder.Chicago:UniversityofChicagoPress,1948.
Kirzner,I.CompetitionandEntrepreneurship.Chicago:UniversityofChicagoPress,1973.
Menger,C.PrinciplesofEconomics.1871.NewYork:NewYorkUniversityPress,1976.
Mises,L.von.HumanAction:ATreatiseonEconomics.NewHaven:YaleUniversityPress,1949.Availableonline
at:http://www.econlib.org/library/Mises/HmA/msHmA.html
ODriscoll,G.,andM.Rizzo.TheEconomicsofTimeandIgnorance.Oxford:BasilBlackwell,1985.
Rothbard,M.Man,EconomyandState.2vols.NewYork:VanNostrandPress,1962.
Vaughn,K.AustrianEconomicsinAmerica.Cambridge:CambridgeUniversityPress,1994.

HistoryoftheAustrianSchoolofEconomics

Boettke,P.,andPeterLeeson.TheAustrianSchoolofEconomics:19502000.InJeffBiddleandWarren
Samuels,eds.,TheBlackwellCompaniontotheHistoryofEconomicThought.London:Blackwell,2003.
Hayek,F.A.EconomicThoughtVI:TheAustrianSchool.InInternationalEncyclopediaoftheSocialSciences.
NewYork:Macmillan,1968.
Machlup,F.AustrianEconomics.InEncyclopediaofEconomics.NewYork:McGrawHill,1982.

Footnotes

1. Entrepreneurshipcanbecharacterizedbythreedistinctmoments:serendipity(discovery),search(conscious
deliberation),andseizingtheopportunityforprofit.

2. ThesearchforsolutionstothiselusivegoalgeneratedsomeofthemostinnovativeworkoftheAustrianeconomists
andledtothedevelopmentinthe1970sand1980softheliteratureonfreebankingbyF.A.Hayek,Lawrence
White,GeorgeSelgin,KevinDowd,KurtSchuler,andStevenHorwitz.

3. Propositions8and9formthecoreoftheAustriantheoryofthe BUSINESS CYCLE,whichexplainshowcreditexpansion

bythegovernmentgeneratesamalinvestmentinthecapitalstructureduringtheboomperiodthatmustbecorrected
inthebustphase.Incontemporaryeconomics,RogerGarrisonistheleadingexpositorofthistheory.

4. Notallspontaneousordersarebeneficialand,thus,thispropositionshouldnotbereadasanexampleofaPanglossian
fallacy.Whetherindividualspursuingtheirownselfinterestgeneratepublicbenefitsdependsontheinstitutional
conditionswithinwhichtheypursuetheirinterests.Boththeinvisiblehandofmarketefficiencyandthe TRAGEDY OF THE
COMMONSareresultsofindividualsstrivingtopursuetheirindividualinterestsbutinonesocialsettingthisgenerates

socialbenefits,whereasintheotheritgenerateslosses.Newinstitutionaleconomicshasrefocusedprofessional
attentiononhowsensitivesocialoutcomesaretotheinstitutionalsettingwithinwhichindividualsinteract.Itis
important,however,torealizethatclassicalpoliticaleconomistsandtheearlyneoclassicaleconomistsallrecognized
thebasicpointofnewinstitutionaleconomists,andthatitwasonlythemidtwentiethcenturyfascinationwithformal

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proofsofgeneralcompetitiveequilibrium,ontheonehand,andtheKEYNESIANpreoccupationwithaggregatevariables,
ontheother,thattendedtocloudtheinstitutionalpreconditionsrequiredforsocialcooperation.

Returntotop

Copyright2008
LibertyFund,Inc.
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