What is Austrian Economics? – a brief summary | Although, economics is not about things and tangible material objects, rather it is about men, their meanings, and actions, mainstream economic theories often maintain that economic laws can be established solely on the foundations of mathematics or physics. It is assumed that the historical data collected with the aid of statistical means can be used to scientifically reveal, explain, and predict mankind’s social behavior. Even though individual preferences are weighed in the form of elegant indifference curves, current economics continues to miss to grasp the all important motivations, influences, or feelings of acting men. Precisely because it is impossible to accumulate tastes or needs, load them onto a persuasive chart and call it consumer preference. Individual choices, desires or time schedules are strictly subjective and obviously can neither be added to nor subtracted from those of other people. For the Austrian school, the human being is not a mere passive responder or the ‘homo economicus’ who only employs his intellect and decides in a predictable economic rationality paradigm, simply because every human action implies a forgone alternative or an opportunity cost (a term coined by Friedrich von Wieser).
The aim of the Austrian school thus is the elucidation of socio-economic phenomena and not just their description. The school’s methodology is firmly rooted on the insight that under the condition of uncertainty every individual chooses and acts purposively in accordance with his subjective perception and interpretation of the expected actions of others. Simply put, the two most important pillars of the Austrian approach are therefore methodological individualism (a term coined by Joseph A. Schumpeter) and methodological subjectivism. Because knowledge is widely and unevenly dispersed among an unknown number of individuals, the first pertains to the importance of individual freedom and unfettered interactions that produce the social result.
Methodological subjectivism, as the second pillar emphasizes that meaning and significance can be attached to human actions only in terms of a subjective understanding or an interpretation of the knowledge, of the intentions or expectations of the actors themselves. Accordingly, all value judgments are the result of the relationship between an appraising mind and the objects appraised. This so-called “means-end-structure” necessarily goes beyond economics and is valid in all socio-economic circumstances. Finally, for the Austrian school competition is viewed as a ‘discovery procedure’ (a term coined by Friedrich A. von Hayek) that permanently generates new individual knowledge.
All data that lead to an individual’s action can thus in their totality necessarily only be subjectively known by the individual precisely because these data do not relate to the relations between things, but to the relations between men and things, or man and man. And since there are no objective facts which are as such equally recognizable and equally known to all, it is a necessary precondition for the compatibility of the different individual plans that the intended action of one person contains the data for the strategy of the other. This individual utilization of knowledge explains why markets are spontaneously developing dynamic social orders and why even the most well intended effort to design and regulate our socio-economic environment will further curtail our individual freedom. In an essay published in 1968, Friedrich A. von Hayek argued much to the point, that the greatest success of a school is that it stops existing because its fundamental teachings have been integrated into the general body of commonly accepted thought. In the meantime, however mainstream economic thought regretfully seems to have rediscovered the ‘homo economicus’, and thus revert to a formalistic, highly mathematized, and quantitative approach.
In short, Austrian Economics thus is characterized by its five tenets:
♦Methodological Individualism: To explain economic phenomena we have to go back to the actions or inactions of individuals, due to the fact that collectives cannot act.
♦Methodological Subjectivism: To explain economic phenomena we have to go back to the judgments and choices made by individuals in accordance with the particular circumstances of time and place, and the expectations they entertain concerning external developments and consequences.
♦Marginal Utility Analysis: In all decisions, the values, costs, revenues, productivity, etc. are determined by the significance of the last unit added to or subtracted from the total.
♦Opportunity Cost: The costs with which economic actors calculate reflect the alternative opportunities that must be foregone.
♦Individual Time Structure of Production and Consumption: All decisions to save reflect the time preferences concerning acts of consumption in the immediate, distant, or unforeseeable future. The future expected selling price always determines our current outlays.