What is Austria economics? Christopher J. Coyne and Peter J. Boettke offer a brisk and readable 57-page introduction in The Essential Austrian Economics (2020, Fraser Institute). It is the most recent entry in an \”Essential Scholars\” series that now includes similar books–that is, intro-level discussions by well-qualified academic experts–on F.A. Hayek, Adam Smith, Milton Friedman, John Locke, Joseph Schumpeter, and Robert Nozick.
The origin of the Austrian School of economics is the publication of Carl Menger’s Principles of Economics in 1871. … He also was engaging the German Historical School, which was the dominant source of economic thinking throughout the German-speaking world. The German Historical School held that economic science is incapable of producing universal principles that apply across time and geographic space. Because of this, they held that the best that economists can do is to engage in the historical study of particular circumstances, with the hope of identifying some particular patterns that are specific to the context being studied.In contrast to this view, Menger argued that universal economic laws apply across contexts, and he did so using marginal utility analysis as a foundation. Those in the German Historical School took issue with the claims by Menger and his colleagues—Eugen Böhm-Bawerk and Friedrich Wieser—about the possibility of universal theory and labeled them the “Austrian School” because of their academic positions at the University of Vienna. The label stuck. …
Subsequent generations of Austrian scholars built on the works of Menger, Böhm-Bawerk, and Wieser. Following World War I, Ludwig von Mises and F.A. Hayek assumed the intellectual leadership of the Austrian School. … Since the 1930s, no economists from any Austrian university have become leading figures in the Austrian School of economics. Following the awarding of the Nobel Prize to Hayek in 1974, there was a revival of interest in the ideas of the Austrian School. The major figures in this revival were Israel Kirzner, Murray Rothbard, and Ludwig Lachmann.
This perspective on the economy suggests that government economic planners will face some substantial problems, because the information they need to plan the economy–what will be produced, how it will be produced, what workers should be doing what jobs, what kinds of capital investment would be most useful–is literally not available. That information only becomes discovered through a process of trial-and-error. Moreover, the needed information is not static, but evolves over time. In describing Hayek\’s work critique of socialist economic planning, Coyne and Boettke note:
Even if some stable equilibrium were obtained, it would be fleeting as conditions changed. It is only by allowing decentralized people to participate in an ongoing process of discovery that the knowledge necessary to make rational economic decisions emerges. These numerous discoveries lead to the emergence of knowledge regarding not only what goods and services are desired by consumers, but also the most effective techniques to produce these outputs in a cost-minimizing manner. The problems inherent with market socialism, according to Hayek, were not a matter of placing smarter people in charge or in developing new computational techniques to gather more information. Instead, the issue was that the economic knowledge necessary for coordination is dispersed, tacit, and emergent. This means that the knowledge used by people to coordinate their economic affairs cannot exist outside the context within which they are embedded. The market socialism model left no space for the very activity that generated the knowledge that was necessary for planners to accomplish their stated ends of advanced material production.
Coyne and Boettke add:
The emphasis on the division of knowledge and the market process as a means of discovering and using this knowledge is the crux of the Austrian criticism of both comprehensive and piecemeal government intervention into a freely operating market. Government’s inability to obtain the knowledge necessary to plan or regulate the price system is the fundamental economic criticism of intervention into the market order. We emphasize the term “economics” to highlight that this is not an ideological argument in favour of markets, but rather a subtle argument in technical economics about the type of knowledge, and the source of that knowledge, necessary to use scarce resources in a way that improves human welfare.
The essay digs into some other implications of Austrian thinking. For example, this emphasis on the economy as emerging from subjective decisions in an experimental process leads naturally to an emphasis on time in economic decision-making, and the role of interest rates as a price that emerges on time. It leads to a belief that government inventions in these tradeoffs over time can produce undesired future outcomes, including recessions.The emphasis on specific uses in the present and how those uses can change in the future leads to some alternative ways of thinking about capital, not as a \”homogenous blog\” but as a specific and contextual set of choices. During the pandemic, for example, we have seen a conversion of housing capital and home internet service into the uses previously served by business capital and commercial real estate. Coyne and Boettke write:
[S]tandard economic theory treats capital as a homogeneous blob that can be used interchangeably and does not require any kind of careful planning or coordination through time. If capital goods were indeed homogeneous, they could be used interchangeably to produce whatever final products consumers desire. From this perspective, capital is analogous to a ball of Play-Doh®. The same capital can be shaped into whatever output is desired by the designer. And if mistakes are made, capital resources can be reallocated quickly and with minimal cost by quickly reshaping the ball of Play-Doh®. Scholars working in the Austrian tradition, in contrast, emphasize that capital is not homogeneous. All capital is not the same and cannot be used interchangeably. A pair of pliers is not the same thing as a pickup truck. Each capital good can be used to achieve different purposes. A pair of pliers could not tow a trailer and a pickup truck cannot be used to twist a piece of wire. Based on their unique physical characteristics, it is more accurate to think of capital as LEGO®s rather than a ball of homogeneous Play-Doh®. In order to achieve the desired production plan of building a set of LEGO®s, specific unique pieces must be combined in a certain temporal order. If a mistake is made along the way, it is costly because individual LEGO® pieces need to be carefully removed and specific pieces need to be inserted to correct for the error to achieve the desired production plan. This is the situation that characterizes a complex, advanced economy.
The Austrians view market outcomes as a \”spontaneous order\”–that is, an outcome that is both orderly and not designed in advance. In somewhat the same way as language evolves, the spontaneous order of the economy shifts over time based on interacting decisions of individuals in ways that are often unexpected until they actually emerge.