The Austrian Economics
The Austrian economics is a tradition of analyzing economic phenomena, based on the understanding that knowledge is imperfect and that people interact in dynamic market processes so that time and evolution are important. Its cornerstones are:
- Methodological individualism: Economic phenomena are explained by the actions of individuals who try to acquire costly information and engage in purposeful action.
- Subjectivism: Economic phenomena have to be explained by the decisions of people who bring to bear their unique perceptions of reality and hence their unique values, aspirations, knowledge and assessments of costs and benefits, and that people act rationally in their own distinctive self-interest, and
- an emphasis on complex, open-ended processes of trial and error which happen in historic time and occur in an environment of uncertainty; economic actions therefore tend to have many unintended and unpredictable side effects.
The Austrian economics began during the late century in Vienna, but is now gaining growing influence in business and policy making, particularly in developing countries.
Austrian economists concentrate on how people coordinate their individual pursuits and what institutions evolve so that they can better cope with lacking knowledge to reach their individual goals.
Different from the instrumentalist approach of neoclassical economics Opens in new window, Austrian economists counsel caution in policy interventions and suggest a focus on cultivating and setting universal rules which channel market processes.
The Austrian School
More recently, institutional economics Opens in new window received mighty impetus from the Austrian School — from Carl Menger and Ludwig von Mises to neo-Austrians, such as Ludwig Lachmann, Friedrich von Hayek, Murray Rothbard and Israel Kirzner. Even Chicago economists Opens in new window, such as George Stigler and Milton Friedman, initiated a discussion of institutions Opens in new window.
The Austrian contribution placed the analysis of rules into the context of limited human knowledge Opens in new window; methodological individualism Opens in new window, the insight that only individuals act (never abstract collectives, such as nations, races, or social classes); constantly changing circumstances and the dynamics of processes of adjustment and adaptation to those changes; and subjectivism Opens in new window, the insight that individuals read the world subjectively and therefore differ in their ability to understand it and relate it to their value judgments.
From this follows that interpersonal differences have to be respected and cannot be easily aggregated into collective goals. The Australian contributions present important analytical and philosophical challenges to orthodox mainstream economics and suggest a cautious treatment of what we mean by rationality Opens in new window and equilibrium Opens in new window (Herta de Soto, 1998; Kasper, 2010).
Ludwig von Mises produced an early critique of the institutions of socialism, which has yet to be fully absorbed into the mainstream of political and economic thought (Butler, 2010, pp. 88-92). His line of argument was carried further by Hayek, Kirzner, Buchanan and Rothbard.
Institutional economics Opens in new window is also based on the conception of the economy as a complex, evolving system. The notion of equilibrium as a durable, or even a desirable, condition is alien to this approach. Instead of such a historical notions as equilibrium, economic life is seen as in the process of gradual evolution; some elements appear and others disappear as people select what suits their diverse purposes (Shackle, 1972; Metcalfe, 1989).