Austrian School

The Austrian School is a heterodox school of economic thought that is based on methodological individualism—the concept that social phenomena result exclusively from the motivations and actions of individuals.In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.And since any inflation, however modest at first, can help employment only so long as it accelerates, adopted as a means of reducing unemployment, it will do so for any length of time only while it accelerates. 'Mild' steady inflation cannot help—it can lead only to outright inflation. That inflation at a constant rate soon ceases to have any stimulating effect, and in the end merely leaves us with a backlog of delayed adaptations, is the conclusive argument against the 'mild' inflation represented as beneficial even in standard economics textbooks.The promise of an Austrian theory of the trade cycle, which might also serve to explain the severity of the Great Depression, a feature of the early 1930s that provided the background for Hayek's successful appearance on the London scene, soon proved deceptive. Three giants – Keynes, Knight and Sraffa – turned against the hapless Austrians who, in the middle of that black decade, thus had to do battle on three fronts. Naturally it proved a task beyond their strength.I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You've just got to let it cure itself. You can't do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm. The Austrian School is a heterodox school of economic thought that is based on methodological individualism—the concept that social phenomena result exclusively from the motivations and actions of individuals. The Austrian School originated in late-19th and early-20th century Vienna with the work of Carl Menger, Eugen Böhm von Bawerk, Friedrich von Wieser and others. It was methodologically opposed to the Prussian Historical School (in a dispute known as Methodenstreit). Current-day economists working in this tradition are located in many different 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. Since the mid-20th century, mainstream economists have been critical of the modern day Austrian School and consider its rejection of mathematical modelling, econometrics and macroeconomic analysis to be outside mainstream economics, or 'heterodox'. Although the Austrian School has been considered heterodox since the late 1930s, it attracted renewed interest in the 1970s after Friedrich Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences. The Austrian School owes its name to members of the German historical school of economics, who argued against the Austrians during the late-19th century Methodenstreit ('methodology struggle'), in which the Austrians defended the role of theory in economics as distinct from the study or compilation of historical circumstance. In 1883, Menger published Investigations into the Method of the Social Sciences with Special Reference to Economics, which attacked the methods of the historical school. Gustav von Schmoller, a leader of the historical school, responded with an unfavorable review, coining the term 'Austrian School' in an attempt to characterize the school as outcast and provincial. The label endured and was adopted by the adherents themselves. The school originated in Vienna in the Austrian Empire. Carl Menger's 1871 book Principles of Economics is generally considered the founding of the Austrian School. The book was one of the first modern treatises to advance the theory of marginal utility. The Austrian School was one of three founding currents of the marginalist revolution of the 1870s, with its major contribution being the introduction of the subjectivist approach in economics. While marginalism was generally influential, there was also a more specific school that began to coalesce around Menger's work, which came to be known as the 'Psychological School', 'Vienna School', or 'Austrian School'. Menger's contributions to economic theory were closely followed by those of Eugen Böhm von Bawerk and Friedrich von Wieser. These three economists became what is known as the 'first wave' of the Austrian School. Böhm-Bawerk wrote extensive critiques of Karl Marx in the 1880s and 1890s as was part of the Austrians' participation in the late 19th-century Methodenstreit, during which they attacked the Hegelian doctrines of the historical school. Frank Albert Fetter (1863–1949) was a leader in the United States of Austrian thought. He obtained his PhD in 1894 from the University of Halle and then was made Professor of Political Economy and Finance at Cornell in 1901. Several important Austrian economists trained at the University of Vienna in the 1920s and later participated in private seminars held by Ludwig von Mises. These included Gottfried Haberler, Friedrich Hayek, Fritz Machlup, Karl Menger (son of Carl Menger), Oskar Morgenstern, Paul Rosenstein-Rodan, Abraham Wald, and Michael A. Heilperin, among others. By the mid-1930s, most economists had embraced what they considered the important contributions of the early Austrians. Fritz Machlup quoted Hayek's statement that 'the greatest success of a school is that it stops existing because its fundamental teachings have become parts of the general body of commonly accepted thought'. Sometime during the middle of the 20th century, Austrian economics became disregarded or derided by mainstream economists because it rejected model building and mathematical and statistical methods in the study of economics. Mises' student Israel Kirzner recalled that in 1954, when Kirzner was pursuing his PhD, there was no separate Austrian School as such. When Kirzner was deciding which graduate school to attend, Mises had advised him to accept an offer of admission at Johns Hopkins because it was a prestigious university and Fritz Machlup taught there. After the 1940s, Austrian economics can be divided into two schools of economic thought and the school 'split' to some degree in the late 20th century. One camp of Austrians, exemplified by Mises, regards neoclassical methodology to be irredeemably flawed; the other camp, exemplified by Friedrich Hayek, accepts a large part of neoclassical methodology and is more accepting of government intervention in the economy. Henry Hazlitt wrote economics columns and editorials for a number of publications and wrote many books on the topic of Austrian economics from the 1930s to the 1980s. Hazlitt's thinking was influenced by Mises. His book Economics in One Lesson (1946) sold over a million copies and he is also known for The Failure of the 'New Economics' (1959), a line-by-line critique of John Maynard Keynes's General Theory.