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Source link: http://archive.mises.org/10320/understanding-austrian-economics/

Understanding Austrian Economics

July 19, 2009 by

“Austrian” economics owes its name to the historic fact that it was founded and first elaborated by three Austrians-Carl Menger (1840-1921), Friedrich von Wieser (1851-1926), and Eugen von Böhm-Bawerk (1851-1914). FULL ARTICLE

{ 6 comments }

Emil Suric July 20, 2009 at 8:19 am

Great article, but it seems that the idea’s of Menger conflict with the theories later put forth by Hayek. Menger says that the demand for higher order goods stems directly from the demand for the lowest order goods, or consumption goods. But Hayek explains that this holds true primarily for the lower phases of production, that an increased demand solely for the lowest order goods will cause a consolidation in the structure of production. Market actors will see relative price changes in favor of consumption goods and will begin allocating factors towards the production of such goods, and thus, will benefit the lower phases relative to the higher phases. If Hayek is right, or, if I correctly understood Hayek’s position, it would seem that the demand for lowest order goods necessarily diminishes the demand for the highest order goods, either relatively or absolutely.

fundamentalist July 20, 2009 at 9:26 am

Very nice summary of Austrian economics! Thanks! Hazlitt’s ability to cut through the complexity of issues and explain them clearly is amazing.

Jonathan Finegold Catalán July 20, 2009 at 10:53 am

Unfortunately, I haven’t read anything by Menger, so I can’t comment much on what he said. But, I think you are correct in regards to Hayek and demand for higher and lower order goods. Hayek’s arguments are reiterated by Jesús Huerta de Soto, who does say something similar. An increase in savings would necessarily lower demand for current consumer goods (or lower order goods), and increase an investor’s demand for higher order goods (capital-goods) to widen and extend phases of production.

An investor’s demand for higher order goods ends when there is a decrease in savings, or when the consumer begins saving less in order to buy what are then present goods. And so, the investor begins to fabricate the lower order good to meet that new demand (when interest rates increase).

ganpalou July 21, 2009 at 8:10 am

Very well written; the clarity allowed me to compare ideas.
1. The concept of relative value is spot on. Most of the political-economic issues of our day are outcomes of negotiations and contracts which are unsatisfactory primarily because they have been adhered to.
2. Given a choice, I agree with Adam Smith about man’s propensity to “truck and barter.” I have been a part of negotiations which have negative consequences, agreements which are not in the interest of either party, and that because the negotiations take on a character all their own. Also, how else could one explain work done for charity. Also, even government power, enforceable at the point of a gun, is best done by barter. (Machiavelli was wrong, the people are willing to be oppressed, if they get the opportunity to barter away their Rights.)
3. Finally, the concept of “equilibrium” has serious and fatal logical faults. This is not a criticism of authors and thinkers prior to the 1970s. (It wasnt until computer programs demonstrated the collapse of even the simplest programs that fragility was demonstrated with enough iterations.) Historic thinkers used their best tools to the best advantage. The mathematics used to track economics came from Liebnitz and Newton, and Pascal. It has not been updated to include the mathematics of Poincare, which I cannot get my itty bitty mind around. We attempt to explain behavior as an example of “Cosmos,” rather than “Chaos.” We first assume a closed system. (And that could only exist in an isolated galaxie of dark matter, if any such thing exists). Secondly, we assume a “two body problem” so we can apply the differential calculus. Failing a two body problem, we assume that the multiple variables are of equal weight with equal probability of occurrence. Thus we can achieve regression to the mean, and equilibrium. Movement away from equilibrium, drift, requires us to once again apply the calculus, a “two body” solution.
4. And yes, I do invest my savings in a diversified portfolio based on the concept of the rational market, stupid me.

twv July 21, 2009 at 1:46 pm

The apparent disagreement between Menger and Hayek and (I presume) Huerta de Soto is the result mainly of similar answers to different problems. Menger was basically theorizing about the general problem of the origin and imputation of value, Hayek and others are talking about magnitudes and changes in demand. Different levels of analysis, aren’t they? But then, I don’t know what a “lower phase of production” means, and only half-understood some of the above comments. It’s been years since I’ve read Hayek’s business cycle analysis.

Emil Suric July 21, 2009 at 11:28 pm

twv,

Yeah, that makes sense: people, for the most part, don’t demand iron but rather demand cars which requires steel, which requires iron. This is different from Hayek’s theories which focus on the relative changes in demand/prices for current finished goods relative to future goods, or intermediary/unfinished goods (producer’s goods).

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