Austrian school

Austrian economics very much has the psychology of a cult. Its devotees believe that they have access to a truth that generations of mainstream economists have somehow failed to discern; they go wild at any suggestion that maybe they're the ones who have an intellectual blind spot. And as with all cults, the failure of prophecy — in this case, the prophecy of soaring inflation from deficits and monetary expansion — only strengthens the determination of the faithful to uphold the faith.

Austrian economics (or the Austrian school of economics) is libertarian philosophy masquerading as a school of economic thought. This school is notable for its lack of formal mathematical modeling and empirical testing. Among its more unusual traits, the Austrian school draws its conclusions based on deduction and thought experiments, rather than data. In place of the conventional tools of science, the Austrian School favors a narrative approach called "praxeology". Despite its shortcomings, some less nutty features of the Austrian School have leaked into mainstream economics while the more nutty have found a home at libertarian think tanks (Cato Institute and Ludwig von Mises Institute).

As the claims of Austrian economists are difficult to verify through empirical testing (and the same economists openly admit to it), it is generally regarded as a heterodox approach. Austrian arguments as to why statistical methods cannot adequately describe human behavior can seem intuitively compelling, but, when they even eschew models for individual-level decisions, how can they make a persuasive case for applying their ideas to the real world? In this sense, the Austrian school is to economics as a certain other Austrian school was to psychology. Perhaps one reason that "Austrian" advocates are so uncomfortable with empiricism is that Austrian economists are more interested in defending the political ideology of libertarianism than they are in advancing economic understanding, and rigorous testing can sometimes undermine deeply held political beliefs.

Can we take anything positive from it? Sure, but the actual use of some of its foremost ideas can be found in no economy in the world... except Somalia.

Praxeology
I tremble for the reputation of my subject... Murray Rothbard's 1976 Praxeology: The Methodology of Austrian Economics (read here!) described praxeology as an application of deductive reasoning, applied to a set of "unquestionable" axioms. Of course, any implications derived from these axioms are only as good as the analysis that derived them, and as the axioms that they were derived from. This is where praxeologists get into trouble, as they reject less mushy formal analysis in favor of more  weasely verbal analysis. Let's look at the axiom that Rothbard refers to as the foundation of praxeological deduction as an example, the "fundamental axiom of action". Almost immediately, the axiom wades into trouble. It states that:

individual human beings act.

The first part of that assertion is simple enough to grasp, but what does it mean to act? One possible definition of act says it is to "perform an action." This seems to be as far as most Austrian school thinkers take this. However, as an air conditioner, vacuum cleaner and TV all perform actions, it would seem this axiom places human beings in the rather large set of things that act. It would be pretty embarrassing then, to derive any economic conclusions from the fact that people are part of the set of things that act, as the conclusions deriving from being a member of the set of things that act would apply to other members of that set as well. Fortunately, Rothbard is kind enough to clarify his definition:

... that is human beings take conscious action towards chosen goals.

Note that one under-defined concept has now been replaced with two: "conscious action" and "chosen goals". Let us ignore the validity of this assertion, and try to figure out just what chosen goals are. The word choice would seem to imply some form of conscious action was taken in forming these goals, so is the real statement of this axiom "human beings take conscious action towards a consciously acted upon set of goals"? Perhaps Rothbard meant to differentiate between "choosing" and "acting", but that is never clearly expressed. In either case, it would seem that the definition of goal needs some work to be truly useful. Sound logic relies on the clarity of definition, as many arguments are sensitive to subtle changes in meaning, and vague statements hide contradictions.

This approach of verbal deduction also leads to a rather noticeable (ab)use of false analogies and intuition pumps. The Austrians advocate logic and reason the same way that Scientologists advocate the pursuit of Science: it's a buzzword, totally divorced from what buzz phrase actually means, which is why Austrians tend to be treated as jokes by the very academic circles they claim to represent. ("Prax it out, brah!")

This statement is actually totally meaningless. It doesn't even come close to proving that "laissez-faire" capitalism is best. Human beings can take "conscious action" towards socialism just as easily.

Austrian Business Cycle Theory
Austrian Business Cycle Theory (ABCT) is an attempt to explain the business cycle in capitalist economies through the lens of Austrian theory (obviously). ABCT is probably one of the elements of the Austrian school that helps it spread its laissez-faire meme-plex due to its appalling superficiality appealing simplicity.

The Austrian theory of the business cycle has two pillars. One of them is the differentiation between the natural interest rate, based on savings and consumption preferences, and the market interest rate, which can be affected by monetary issues. This idea was put forward by the Swedish economist Knut Wicksell. The other pillar is the theory of capital elaborated by Eugen von Böhm-Bawerk.

In short, the business cycle is due to the creation of the central bank (e.g. the Federal Reserve in the US) — when it sets interest rates too low, this makes credit much easier to get. This easy credit is confused for "real loanable funds" (ie. hard cash money). In other words, the easy credit sends out "false signals" to banks and other creditors to go into a feeding frenzy and make loans to anyone and his dog. This causes a bubble driven by inflation, not true economic growth, which is destined to burst. Recessions and depressions, then, are simply payback for getting drunk on easy credit. They are in fact desirable because they represent a market correction where "misallocated resources" are liquidated and thus free to be "reallocated" to more useful ends.

This has led economist Paul Krugman to dub it the "Hangover Theory," calling it "about as worthy of serious study as the phlogiston theory of fire." Milton Friedman remarked: "The Austrian business-cycle theory has done the world a great deal of harm." Even the noted right-wing welfare-hating sociopath Gordon Tullock claims that with the reallocation of capital the model predicts, "Laborers would be exploiting the capitalists."

Of course, there is some grain of truth in it as low-interest rates can induce risky lending and will be inflationary, but there are some glaring flaws in ABCT that any Joe should have spotted by this point. Like the fact that business cycles existed before the Fed (some try to skirt this issue by redefining "central bank" as any bank with a state or national charter ). It also relies on two misdefined terms:


 * The Austrians define inflation as an expansion of the base money supply, a consequence of which is rising prices, whereas inflation is defined as simply a rise in prices by mainstream economic theory. While the expansion of the money supply can lead to inflation, it does not necessarily do so. Prices do not always track the expansion of the underlying monetary base.
 * The ABCT also relies on a single "natural rate" of interest, but there is no single natural rate of interest.

In addition, the proposal to revert to a gold standard implied by ABCT utterly fails to explain how to deal with the effects of a fixed money supply when population and economic output have been increasing throughout American history. ABCT ultimately is better at explaining why the Austrians and libertarians are such hardcore goldbugs and why they rail against the Fed so much than it is at explaining actual business cycles.

Peter Schiff
It's impossible to make a post on the Internet about the financial crisis, or even anything economic in general, without being bombarded by " was right!!11!!" videos. For the new Austrians (i.e., those who read a few newsletters over at the von Mises Institute and think they have achieved enlightenment), the Austrian-influenced investor Peter Schiff's prediction of the housing bubble was a vindication of all things Austrian. They believed they had finally shown all other economic theories to be utterly bankrupt and discredited. This is massively ironic for a number of reasons:


 * First, Peter Schiff is still horrifically wrong about many things.
 * Second, Austrians have continuously predicted the economic end times and Weimar-style hyper-inflation as they will never be satisfied with the American economy until all regulation is lifted, the Fed is abolished, and we return to a gold standard. Only then will doom be averted. Of course, it's easy to be a Cassandra when all you predict is doom (in short, even a stopped clock can be right twice a day).
 * Third, they overlook the metric buttload of economists and financial guys who also saw it coming. Those guys just weren't put on CNBC alongside the Wall Street cheerleaders. Even one of Dubya's own economic advisers, Greg Mankiw, warned of problems at Fannie Mae and Freddie Mac back in 2003. Hell, firms like Goldman Sachs were shorting their own securities — the bubble was apparently not a big mystery to insiders. Indeed, a major difference between Schiff and some of the economists who predicted the crash, such as Steve Keen and Dean Baker, is that most of the latter published their predictions in academic papers, providing a clear outline of what they expected to happen, whereas Schiff merely gave generalised predictions of a crash in the media.
 * Fourth, the Austrians claim that their immutable laws of economics are not "scientific" in the sense that they are not empirically derived like the laws of physics, and thus are not subject to falsification and do not make predictions, but "illustrate history" (whatever that means). Yet they are now claiming victory over finally making a correct and falsifiable prediction! That sound you hear is the sound of every sane economist's head exploding.

(Peter Schiff is the son of the late, patriarch of American tax protesters, so is at least more right about money in practice than his father.) His rugged good looks are reminiscent of the young Murray Rothbard.

Paging Dr. Pangloss
Despite its death as a credible theory of economics and politics, neoliberalism has stumbled on in zombie form for nearly a decade, maintaining its hold over major political parties and over organizations like the OECD, IMF and European Commission... the economics profession as a whole has learned almost nothing from the Global Financial Crisis. Ideas like austerity that should have been decently buried long ago continue to wreak havoc throughout the world, and most notably in Europe.

The issue with Austrian economists, and libertarianism in general, has always been their sense of 'outcome ambivalence'. They don't believe in "public goods." They don't believe in nations (even their own). What they do believe in is a set of rules. Whatever happens to us because of those rules is irrelevant to them and is seen as part of 'le grand experiment'.

The Austrians get around the problems of market failures, natural monopolies, morality, and rationality through the use of pseudo-clever wordplay. They rely on an extreme form of methodological individualism based on the "action axiom" as described above. To wit: Because only individuals exist, only individuals can act. Societies cannot act because, to quote Margaret Thatcher, "there is no such thing as society." Therefore, all action can be described at the individual level. If an action is good or moral for one individual, then it must be good or moral in the aggregate because good + good = good. In reality, only basic game theory is needed in order to refute this. Austrians claim, for example, that savings represent money that will be invested in the future, and so money can never be "hoarded." They entirely reject the paradox of thrift. A society is simply a group of individuals. What "society acts" really means is that the individuals composing that group act. Individuals can act to cooperate with other individuals. If the Austrian argument were true, it would be impossible for an individual to perform transactions with other individuals; it would be impossible for an individual to cooperate with other individuals to form a business. It would even be impossible for an individual to spread the ideas of Austrian economics to other individuals! You can't tell anybody else about Austrian economics, because in doing so you have created a "society". Clearly, society exists. Austrians think they can get out of this by changing definitions when it suits them.

Some Austrians also use this idea as the basis for an ethical philosophy. This is where they start mixing methodological individualism with methodological subjectivism. As above, if all individual actions are moral, then their aggregate must be moral. In other words, it's a logical derivation of ethical egoism. However, Austrians tend to disagree with each other on what is ethical. Views range from Mises radical utilitarianism to Murray Rothbard inexorable deontology.

This can be used to justify a number of absurdities. Interestingly, the Austrians do not grant the assumption of homo economicus (i.e., that all investors and consumers are endowed with perfect or near-perfect information and rational decision-making skills). However, they redefine "rationality" in subjective terms to mean acting in a way that will fulfill whatever the individual desires. Thus, any action, whether common sense would define it as "rational" or "irrational," is actually "rational" as long as it has utility in meeting a person's needs. This bit of handwaving is often used to deny the importance of self-destructive behavior. That's why economists have no problem talking about "organ donor markets" and never actually question the ethics or implications, since that's for irrational socialist monsters. That's how we end up with the Silk Road drug bazaar, or the "crypto-assassination markets" nobody's supposed to ever talk about.

This also allows them to skirt around the creation of monopolies. The Austrians believe that monopolies can only be sustained through government intervention as monopolistic profits and practices will always lead people to create a viable enterprise that will undercut the prices of the company with the monopoly. If this does not happen, it's not because of barriers to entry or insider deals, it's because people must be happy enough with the monopoly at that time to continue paying its prices! Moreover, they oftentimes ignore the fact that there is a massive incentive for monopolistic businesses to collude with a liberal-democratic government to create monopolies. Monopolistic practices are not immoral, either, because business practices aren't "enforced at gunpoint" (i.e., the gubmint isn't forcing people to buy their stuff). Why, if there's only one telephone provider in the world, no one's forcing you to use the phone. You are "voluntarily" exchanging your money for their goods. Don't like it? Simple, string up duplicate wires across the entire globe and start your own phone company! Or move to another world that is big enough to support more than one phone company.

Probably the most glaring (and quite frankly, the most dangerous) flaw within Austrian school economics is its complete and utter denial of institutional racism and sexism. Austrians oftentimes religiously believe in perfect market efficiency and, while many of them are not explicitly racist or sexist, are therefore incapable of analyzing market inefficiencies and structural problems within capitalism. One example is that of systemic sexual harassment and the ensuing discrimination. Their denial of any problems related to structural power differences between an employer and their employee mixed with their utter denial of things like gender pay inequity or rape culture, makes them utterly unable to understand the difficulties women go through in the workplace. Another example is that of the advantages white people have gained through racist policies which lead to inter-generational wealth being distributed to white people at the expense of people of color. Austrians completely deny that rich people (and rich white people especially) have had any kind of privilege or advantage and this makes them oftentimes completely oblivious and unsympathetic to the plight of minorities. In its most extreme form, you get comically racist and sexist comments from Austrians like Walter Block, who has said, among other things, that property rights didn't exist in Native American societies and that sexual harassment is just voluntary action.

Views on welfare state
No ordered community has callously allowed the poor and incapacitated to starve. There has always been some sort of institution designed to save from destitution people unable to sustain themselves. Far from advocating such a 'minimal state', we find it unquestionable that in an advanced society government ought to use its power of raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market. You're all a bunch of socialists!

Views on welfare state tend to vary on the Austrian School. Hayek extensively wrote about it, criticizing most of the modern welfare state in the world, but was, nonetheless, that the government indeed should provide many services that cannot be provided by the market, giving also giving alternatives. As a result, he was called a “moderate social democrat” by Hans-Hermann Hoppe. Mises, as we saw, was pretty much against that, believing that the welfare state was “against the human nature”, saying that bureaucrats cannot help the poor because these would never know what people actually, advocating for charity instead.

Even though Mises is probably wrong on his assumptions over the welfare state, he is at least well-inclined at helping the poor, while Murray Rothbard just said “who cares?” about them when discussing strategies at how to abolish the welfare state.

Even they admit they just pulled this stuff out of their asses
They seem to follow the maxim "If you can't dazzle them with brilliance, baffle them with bullshit." If you couldn't wade through all their econo-speak and arbitrary redefinitions of commonly used terms, however, they literally do the work for you and come straight out and say they just made everything up. Ludwig von Mises himself wrote of his theory: The subject matter of all historical sciences is the past. They cannot teach us anything which would be valid for all human actions, that is, for the future too ... No laboratory experiments can be performed with regard to human action ... Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts.

In 1942, F.A. Hayek wrote that any theories in the social sciences can "never be verified or falsified by reference to facts".

In other words, it's economic theology. An entire (albeit fringe) school of economics has published book after book and paper upon paper just to say all problems can be boiled down to "gubmint did it" and all solutions can be described as "free market always wins." Despite this, their influence (on the internets, at least) seems to be growing, at least since 2008 and the proliferation of "Peter Schiff was right!!11!!" videos. Hayek's book The Road to Serfdom also got the Glenn Beck bump when it was mentioned on his show.

It should be clear to anybody who studies Austrians and their antics that this "school" of economic thought is nothing but a thinly-veiled justification for horrifyingly pro-upper-class politics. There's nothing novel or progressive about this kind of politics. It's pure, unashamed, elitism.

Austrian economics can basically be summed up as follows: It is in people's best interest to be in a free market because a free market allows people to act in their best interest. Then Austrians define a "free market" to be a system such that people can act in their best interest in it.

Famous Austrians

 * - The man that started everything. Actually an important economist that contributed to the development of the theory.
 * Menger's student. Famous for his critiques of Marx. If (and how much) he was successful is still up to debate.
 * Ludwig von Mises - Böhm-Bawerk student. Despite many interesting insights he was more of a lawyer of laissez-faire capitalism than an economist. His main contribution was on the, but Austrians are still paying the price of his mistakes on epistemology.
 * Friedrich Hayek - A polymath Nobel Prize winner, Hayek's by far the most influential and relevant Austrian economist, even if his legacy as an economist is mixed. His was one of the most important articles on economics of the 20th century, but his beloved theory on business "has done the world a great deal of harm" not according to any Keynesian, but according to Milton Friedman. His works in other areas of knowledge (the man wrote about everything) are also a hit or miss. Perhaps one of the best authors to learn about classical liberalism and the history of ideas, but not very good when it comes to psychology and epistemology. Still better than Mises on the latter subject though.
 * - Made Mises epistemology worse.
 * Murray Rothbard - The father of anarcho-capitalism. Also a polymath, but just awful in every subject.
 * His minions, like Walter Block, Hans-Hermann Hoppe, Lew Rockwell, among others are even worse.
 * - Actually good to learn about entrepreneurship.
 * - A Mises clone, but worse (he is a devoted fanboy of Ayn Rand).
 * - Trying to build a bridge with the mainstream while most of the others Austrians are trying to burn it.
 * - Not an Austrian, despite what some people might say.
 * - Not an Austrian, despite what he might say. This Nobel prize laureate should not be mistaken with the American president too.

Mainline Economics
Academic life is too short and your professional colleagues are too interesting to emphasize differences, rather than commonalities. Constantly seek to find common ground from which to work with the purpose of tackling relevant problems. (...) Our task is one of engagement with our colleagues and our students, not isolation and insulation.

Some professors on George Mason University like and  have decided to create a new stream of the Austrian School called the "Mainline Economics". According to professor Boettke, the Austrian School might have more in common with mainstream economics that most of people also think. Of course, understanding that most people don’t disagree with the Austrian because they are stupid and/or are acting in bad faith is a major step forward for an Economy School that has turned into a cult over the last few decades, but Boettke’s views are still considered overall fringe as his methodologies, despite being more advanced than most of the other Austrians, still differs a lot from the one used by more prominent economists. Even if Boettke doesn’t hold the strange political views of Murray Rothbard and Hans-Hermann Hoppe (being, at this point, closer to Hayek and Mises than to most of the Austrians of the last few decades), he’s still an utilitarian anarcho-capitalist, and his theories still have a hard time explaining how the market can provide public goods and externalities. Therefore, the "mainline" economists still has a lot to do if they to make the Austrian School relevant again.

It comes without saying that people on Ludwig von Mises Institute are pissed with these “Mainline Economists”.

In fairness
The founder of the Austrian school, Carl Menger, along with William Stanley Jevons and Leon Walras, was responsible for starting the Marginal Revolution in the 19th century, an important step forward in economic thinking. Ludwig von Mises is credited with introducing the economic calculation problem in the 1920s, which argued that a state-run economy could not be efficient because prices could not be "known," only decided by the state. Austrians also argued for the non-neutrality of money. In 1974, Hayek shared the Nobel Memorial Prize in Economic Sciences (with Gunnar Myrdal) for his "pioneering work in the theory of money and economic fluctuations and... penetrating analysis of the interdependence of economic, social and institutional phenomena." His works on political theory, that in fact compromised most of his academic carrier can be read separately from his economic writings. Israel Kirzner research on entrepreneurship economics is also widely recognized.

The school hasn't produced anything of much value since then. Now they are primarily a small group of cranks funded by even richer cranks through the von Mises Institute and on the George Mason University looking for self-serving rationalizations couched in the form of economic theory. If you're not interested in the history of the economic thought nor in libertarian theory, you're not missing very much.