Many of us are often asked, “What exactly is Austrian economics?” Why do we care so much about the economy of Austria (or Australia)?
The label “Austrian” describes a particular tradition in economic analysis, one that dates back to Viennese economist Carl Menger’s 1871 Principles of Economics (hence the geographic identifier). The Austrian approach is often associated, particularly in applied fields like industrial organization, firm strategy, and entrepreneurship, with Hayek’s ideas about dispersed, tacit knowledge, Kirzner’s theory of entrepreneurial discovery, and an emphasis on time, subjectivity, process, and disequilibrium. Even Lachmann’s “radical subjectivism” is getting some play. I’ve argued that Austrian capital theory has some implications for entrepreneurship.
Despite this renewed interest in the Mengerian tradition, the Austrian approach to “basic” economic analysis–value, production, exchange, price, money, capital, and intervention–hasn’t gotten much attention at all. Indeed, it’s widely believed that the Austrian approach to mundane topics such as factor productivity, the substitution effect of a price change, the effects of rent control or the minimum wage, etc. is basically the same as the mainstream approach, just without math or with a few buzzwords about “subjectivism” or the “market process” thrown in. Even many contemporary Austrians seem to hold this view.
In a new paper, “The Mundane Economics of the Austrian School,” I suggest instead that the Austrians offer a distinct and valuable approach to basic economic questions, an approach that should be central to research by Austrians on theoretical and applied topics in economics and business administration.
From the introduction:
While I agree . . . that the Austrian tradition is part of a larger, liberal movement, I argue here that Austrian economics is nonetheless a distinct kind of economic analysis, and that the essence of the Austrian approach is not subjectivism, the market process (disequilibrium), or spontaneous order, but what I call mundane economics–price theory, capital theory, monetary theory, business-cycle theory, and the theory of interventionism. Call this the “hard core” of Austrian economics. I argue that this hard core is (1) distinct, and not merely a verbal rendition of mid-twentieth-century neoclassical economics; (2) the unique foundation for applied Austrian analysis (political economy, social theory, business administration, and the like); and (3) a living, evolving body of knowledge, rooted in classic contributions of the past but not bound by them.
My main target is Karen Vaughn’s 1994 book on the “Austrian revival” of the 1970s and 1980s — not her account of the revival itself (though that has been strongly disputed by critics), but her understanding of the economics of the founding Austrians. “Vaughn consistently characterizes the price theory of Menger, Böhm-Bawerk, Mises, and Rothbard as backward-looking, inconsistent, and often wrong. Their elaborations of mundane economics, she says, are mainly verbal ‘neoclassical’ economics, because they rely heavily on equilibrium constructs; indeed, Menger’s price theory is that of a ‘half-formed neoclassical economist’ (Vaughn 1994, p. 19).” Instead, I claim,
Austrian economists from Menger to Rothbard were fully aware of time, uncertainty, knowledge, expectations, institutions, and market processes. Indeed, their understanding of these issues was sophisticated. They employed equilibrium theorizing, but in a precise and deliberate manner. They understood clearly the distinction between their own understandings of mundane economics and that of their Walrasian and Jevonian colleagues. They devoted their energies to developing and communicating the principles of mundane economics, not because they failed to grasp the importance of knowledge, process, and coordination, but because they regarded these latter issues as subordinate to the main task of economic science, namely the construction of a more satisfactory theory of value, production, exchange, price, money, capital, and intervention.
Check it out at the link above. Comments and suggestions are welcome.