Austrian school of economics

{{short description|School of economic thought}} {{distinguish|Economy of Austria}} {{Redirect|Austrian school|the education system in Austria|Education in Austria}} {{austrian School sidebar|all}} {{Economics sidebar}} The '''Austrian school of economics'''{{efn|Also referred to as '''Austrian economics'''.}} is a school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals along with their self-interest. Austrian-school theorists hold that economic theory should be exclusively derived from basic axioms of human action, known as praxeology, rather than primarily from statistical analysis.<ref>{{cite book |last1=Menger |first1=Carl |url=https://cdn.mises.org/principles_of_economics.pdf |title=Principles of Economics |publisher=Ludwig von Mises Institute |year=2007 |location=Auburn, Alabama |language=en-us |translator-last1=Dingwall |translator-first1=James |orig-date=1871 |translator-last2=Hoselitz |translator-first2=Bert F.}}</ref><ref>{{cite book|url=https://plato.stanford.edu/archives/spr2015/entries/methodological-individualism/|title=The Stanford Encyclopedia of Philosophy|first=Joseph|last=Heath|editor-first=Edward N.|editor-last=Zalta|date=1 May 2018|publisher=Metaphysics Research Lab, Stanford University|access-date=1 May 2018|via=Stanford Encyclopedia of Philosophy}}</ref><ref name="Mises_Action">Ludwig von Mises. Human Action, p. 11, "Purposeful Action and Animal Reaction". Referenced 2011-11-23.</ref><ref>{{Citation |last=Hausman |first=Daniel M. |title=Philosophy of Economics |date=2014 |work=The Stanford Encyclopedia of Philosophy |editor-last=Zalta |editor-first=Edward N. |url=https://plato.stanford.edu/archives/spr2014/entries/economics/ |access-date=2026-05-24 |edition=Spring 2014 |publisher=Metaphysics Research Lab, Stanford University |editor2-last=Nodelman |editor2-first=Uri}}</ref>

The Austrian school originated in 1871<ref>{{Cite web |title=Austrian School of Economics |url=https://www.econlib.org/library/Enc/AustrianSchoolofEconomics.html#:~:text=By%20Peter%20J.,Boettke&text=The%20Austrian%20school%20of,marginalist%20revolution%20in%20economic%20analysis. |access-date=2024-12-19 |website=Econlib |language=en-US}}</ref>{{Unreliable source?|date=May 2026}} in Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others.<ref>Joseph A. Schumpeter, History of economic analysis, Oxford University Press 1996, {{ISBN|978-0195105599}}.</ref> It was methodologically opposed to the Historical school, in a dispute known as ''Methodenstreit'', or methodology quarrel. Current-day economists working in this tradition are located in many countries, but their work is still referred to as Austrian economics. Among the theoretical contributions of the early years of the Austrian school are the subjective theory of value, marginalism in price theory and the formulation of the economic calculation problem.<ref>{{cite book|last1=Birner|first1=Jack|first2=Rudy|last2=van Zijp|title=Hayek, Co-ordination and Evolution: His Legacy in Philosophy, Politics, Economics and the History of Ideas|location=London, New York|publisher=Routledge|year=1994|page=[https://archive.org/details/hayekcoordinatio0000unse/page/94 94]|isbn=978-0-415-09397-2|url=https://archive.org/details/hayekcoordinatio0000unse}}</ref>

In the 1970s, the Austrian school attracted some renewed interest after Friedrich August von Hayek shared the 1974 Nobel Memorial Prize in Economic Sciences with Gunnar Myrdal.<ref name="GMeijer">{{cite book |last=Meijer |first=G. |title=New Perspectives on Austrian Economics |publisher=Routledge |location=New York |year=1995 |isbn=978-0-415-12283-2 }}</ref>

== History == [[File:Jean-baptiste Say.jpg|thumb|left|upright=0.7|Jean-Baptiste Say. The French liberal school of political economy is an intellectual ancestor of the Austrian school of economics.]]

=== Etymology === The Austrian school owes its name to members of the German historical school of economics, who argued against the Austrians during the late 19th-century ''Methodenstreit'' ("methodology struggle"). In this debate, the Austrians defended the role of theory in economics as distinct from the study or compilation of historical circumstance.<ref name=":5" /> In 1883, Menger published ''Investigations into the Method of the Social Sciences with Special Reference to Economics'', which attacked the methods of the historical school. Gustav von Schmoller, a leader of the historical school, responded with an unfavorable review, coining the term "Austrian school" in an attempt to characterize the school as outcast and provincial.<ref>"Menger's approach – haughtily dismissed by the leader of the German Historical School, Gustav Schmoller, as merely 'Austrian', the origin of that label – led to a renaissance of theoretical economics in Europe and, later, in the United States." Peter G. Klein, in "Forward" to {{cite book |last1=Menger |first1=Carl |url=https://cdn.mises.org/principles_of_economics.pdf |title=Principles of Economics |publisher=Ludwig von Mises Institute |year=2007 |isbn=978-1-933550-12-1 |location=Auburn, Alabama |language=en-us |translator-last1=Dingwall |translator-first1=James |orig-date=1871 |translator-last2=Hoselitz |translator-first2=Bert F.}}</ref><ref name=":6" /> The label endured and was adopted by the adherents themselves.<ref>{{cite book|last=von Mises|first=Ludwig|title=The Historical Setting of the Austrian School of Economics|year=1984|orig-year=1969|publisher=Ludwig von Mises Institute.|url=https://mises.org/etexts/histsetting.pdf|url-status=live|archive-url=https://web.archive.org/web/20140624182138/http://www.mises.org/etexts/histsetting.pdf|archive-date=2014-06-24}}</ref>

=== Precursors === The School of Salamanca (16th-century Spain) and the French Liberal School (19th-century France) are often regarded as early precursors to the Austrian School of Economics due to their contributions to the subjective theory of value and advocacy for free-market principles. Scholars from the University of Salamanca, such as Francisco de Vitoria and Luis de Molina, argued that the value of goods was determined by individual preferences rather than intrinsic factors. They also emphasized the role of supply and demand in setting prices and importance of sound money, laying the groundwork for modern economic concepts that the Austrian School would later refine and expand upon.<ref>{{Cite book |last=Grice-Hutchinson |first=Marjorie |url=https://cdn.mises.org/The%20School%20of%20Salamanca_3.pdf |title=The School of Salamanca |publisher=Oxford at the Clarendon Press |year=1952}}</ref><ref>{{Citation |last=Izbicki |first=Thomas |title=School of Salamanca |date=2023 |work=The Stanford Encyclopedia of Philosophy |editor-last=Zalta |editor-first=Edward N. |url=https://plato.stanford.edu/archives/fall2023/entries/school-salamanca/ |access-date=2026-04-17 |edition=Fall 2023 |publisher=Metaphysics Research Lab, Stanford University |last2=Kaufmann |first2=Matthias |editor2-last=Nodelman |editor2-first=Uri}}</ref>

=== First wave === [[File:Carl Menger.jpg|thumb|left|upright=0.7|Carl Menger]] The school originated in Vienna in Austria-Hungary. Carl Menger's 1871 book ''Principles of Economics'' is generally considered the founding of the Austrian school. The book was one of the first modern treatises to advance the theory of marginal utility. The Austrian school was one of three founding currents of the marginalist revolution of the 1870s, with its major contribution being the introduction of the subjectivist approach in economics.<ref name="keizer">{{cite book |last=Keizer |first=Willem |url=https://books.google.com/books?id=CJ5sFtfZy8AC&q=subjectivist |title=Austrian Economics in Debate |publisher=Routledge |year=1997 |isbn=978-0-415-14054-6 |location=New York |pages=1}}</ref>

John Stuart Mill had earlier expressed a similar idea in his 1848 ''Principles of Political Economy'',<ref>Ahiakpor, J. C. W. (2003): ''Classical Macroeconomics. Some Modern Variations and Distortions'', Routledge, p. 21.</ref> observing that the usefulness of a good to the buyer effectively sets the highest price anyone would rationally pay for it. Market price can fall below this level of usefulness, but it cannot rise above it; otherwise buyers would be paying more than they themselves judge the good to be worth as a means of satisfying their wants.<ref>Mill, J. S. (1848). ''Principles of Political Economy.''</ref>

While marginalism was generally influential, there was also a more specific school that began to coalesce around Menger's work, which came to be known as the "psychological school", "Vienna school", or "Austrian school".<ref>{{cite journal |last1=Kirzner |first1=Israel M. |year=1987 |title=Austrian School of Economics |journal=The New Palgrave: A Dictionary of Economics |volume=1 |pages=145–151}}</ref><ref>{{Cite book |last=Schumpeter |first=Joseph A. |title=History of economic analysis |last2=Schumpeter |first2=Elizabeth Boody |date=1994 |publisher=Oxford University Press |isbn=978-0-19-510559-9 |location=New York}}</ref> Menger's contributions to economic theory were closely followed by those of Eugen von Böhm-Bawerk and Friedrich von Wieser. These three economists became what is known as the "first wave" of the Austrian school. Böhm-Bawerk wrote extensive critiques of Karl Marx in the 1880s and 1890s and was part of the Austrians' participation in the late 19th-century {{lang|de|Methodenstreit}}, during which they attacked the Hegelian doctrines of the historical school.<ref name=":8">{{Cite book |last=Blaug |first=Mark |title=Economic theory in retrospect |date=1997 |publisher=Cambridge University Press |isbn=978-0-521-57153-1 |edition=5th |location=Cambridge ; New York}}</ref>

=== Early 20th century === Frank Albert Fetter (1863–1949) was a leader in the United States of Austrian thought. He obtained his PhD in 1894 from the University of Halle and became Professor of Political Economy and Finance at Cornell University in 1901.<ref>{{Cite book |last=Ekelund |first=Robert B. |title=A history of economic theory & method |last2=Hébert |first2=Robert F. |date=2014 |publisher=Waveland Press |isbn=978-1-4786-0638-3 |edition=6th |location=Long Grove, Ill}}</ref>

Several important Austrian economists trained at the University of Vienna in the 1920s and later participated in private seminars held by Ludwig von Mises. These included Gottfried Haberler,<ref>{{cite web |url=https://mises.org/page/1452/Biography-of-Gottfried-Haberler-19011995 |title=Biography of Gottfried Haberler (1901–1995) |url-status=live |archive-url=https://web.archive.org/web/20140914003239/https://mises.org/page/1452/Biography-of-Gottfried-Haberler-19011995 |archive-date=2014-09-14 |work = Mises Institute|last = Salerno|first = Joseph T.|date = 1 August 2007}}</ref> Friedrich Hayek, Fritz Machlup,<ref>{{cite web|title=Biography of Fritz Machlup|url=https://mises.org/page/1457/Biography-of-Fritz-Machlup-19021983|access-date=16 June 2013|url-status=live|archive-url=https://web.archive.org/web/20130705121450/http://mises.org/page/1457/Biography-of-Fritz-Machlup-19021983|archive-date=5 July 2013}}</ref> Karl Menger (son of Carl Menger),<ref>{{cite web|url= http://www.iit.edu/csl/am/about/menger/about.shtml|title=About Karl Menger – Department of Applied Mathematics – IIT College of Science – Illinois Institute of Technology|website=www.iit.edu|access-date=1 May 2018|url-status=live|archive-url=https://web.archive.org/web/20131029202644/http://www.iit.edu/csl/am/about/menger/about.shtml|archive-date=29 October 2013}}</ref> Oskar Morgenstern,<ref>{{cite web |url=http://library.duke.edu/rubenstein/findingaids/morgenst/ |title=Guide to the Oskar Morgenstern Papers, 1866–1992 and undated |url-status=live |archive-url= https://web.archive.org/web/20121017075648/http://library.duke.edu/rubenstein/findingaids/morgenst/ |archive-date=2012-10-17 |website = Rubenstein Library|publisher= Duke University }}</ref> Paul Rosenstein-Rodan,<ref>{{cite web |title=Rodan; Paul Rosenstein (1902–1985); political economist |url=http://archives.lse.ac.uk/Record.aspx?src=CalmView.Catalog&id=COLL+MISC+0324 |archive-url=https://web.archive.org/web/20110811180137/http://archives.lse.ac.uk/Record.aspx?src=CalmView.Catalog&id=COLL+MISC+0324 |archive-date=2011-08-11 |publisher=Archive at London School of Economics}}</ref> Abraham Wald,<ref>{{cite journal |author=Morgenstern |first=Oskar |date=October 1951 |title=Abraham Wald, 1902–1950 |journal=Econometrica |publisher=The Econometric Society |volume=19 |pages=361–367 |doi=10.2307/1907462 |jstor=1907462 |number=4}}</ref> and Michael A. Heilperin,<ref>{{Cite web | url=https://mises.org/library/studies-economic-nationalism | title=Studies in Economic Nationalism| date=18 August 2014}}</ref> and the sociologist Alfred Schütz.<ref>{{multiref |1={{cite journal |author-link=Peter Kurrild-Klitgaard |last=Kurrild-Klitgaard |first=Peter |title=The Viennese Connection: Alfred Schutz and the Austrian School |journal=Quarterly Journal of Austrian Economics |volume=6 |issue=2 |date=Summer 2003 |pages=35–67 |doi=10.1007/s12113-003-1018-y |s2cid=154202208 |url=http://mises.org/journals/qjae/pdf/qjae6_2_2.pdf |archive-url=https://ghostarchive.org/archive/20221009/http://mises.org/journals/qjae/pdf/qjae6_2_2.pdf |archive-date=2022-10-09 |url-status=live |access-date=2022-08-19}} |2={{cite journal |author-link=Peter Kurrild-Klitgaard |last=Kurrild-Klitgaard |first=Peter |doi=10.1023/A:1011199831428 |title=On Rationality, Ideal Types and Economics: Alfred Schütz and the Austrian School |journal=The Review of Austrian Economics |volume=14 |pages=119–143 |date=2001|issue=2/3 |s2cid=33060092 }} }}</ref><ref>{{Cite book |last=Backhouse |first=Roger |title=The Penguin history of economics |date=2002 |publisher=Penguin Books |isbn=978-0-14-026042-7 |location=London New York Victoria, Australia}}</ref>

=== Later 20th century === [[File:Campus of Mises Institute.jpg|thumb|left|upright=1.5|Campus of Mises Institute, in Auburn, Alabama, United States]] By the mid-1930s, most economists had embraced what they considered the important contributions of the early Austrians.<ref name="Boettke and Leeson">{{Cite book |last1=Boettke |first1=Peter J. |title=A Companion to the History of Economic Thought |last2=Leeson |first2=Peter T. |publisher=Blackwell Publishing |year=2003 |isbn=978-0-631-22573-7 |editor=Samuels |editor-first=Warren |editor-link=Warren Samuels |pages=446–452 |chapter=28A: The Austrian School of Economics 1950–2000 |author2-link=Peter T. Leeson |editor2=Biddle |editor-first2=Jeff E. |editor3=Davis |editor-first3=John B. |chapter-url=https://books.google.com/books?id=3H8gBQv5MysC&pg=PA445}}</ref> Fritz Machlup quoted Hayek's statement that "the greatest success of a school is that it stops existing because its fundamental teachings have become parts of the general body of commonly accepted thought".<ref>{{cite web |date=15 December 2004 |title=Ludwig von Mises: A Scholar Who Would Not Compromise |url=https://mises.org/daily/1700/Ludwig-von-Mises-A-Scholar-Who-Would-Not-Compromise |url-status=live |archive-url=https://web.archive.org/web/20140914002324/https://mises.org/daily/1700/Ludwig-von-Mises-A-Scholar-Who-Would-Not-Compromise |archive-date=2014-09-14 |access-date=2014-09-13}} Homage to Mises by Fritz Machlup 1981.</ref><ref name=":7">{{Cite book |last=Wasserman |first=Janek |title=Marginal revolutionaries: how Austrian economists fought the war of ideas |date=2019 |publisher=Yale University Press |isbn=978-0-300-22822-9 |location=New Haven}}</ref>

Sometime during the middle of the 20th century, Austrian economics was largely sidelined by mainstream economists who favored mathematical modeling and statistical methods.<ref name="Backhouse">{{cite journal| last=Backhouse| first=Roger E| title=Austrian economics and the mainstream: View from the boundary| journal=The Quarterly Journal of Austrian Economics| volume=3| issue=2| pages=31–43| url=https://mises.org/library/austrian-economics-and-mainstream-view-boundary| date=January 2000| access-date=2017-01-24| quote="Hayek did not fall out of favor because he was not Keynesian (neither are Friedman or Lucas) but because he was perceived to be doing neither rigorous theory nor empirical work"| doi=10.1007/s12113-000-1002-8| s2cid=154604886| url-status=live| archive-url=https://web.archive.org/web/20170210110045/https://mises.org/library/austrian-economics-and-mainstream-view-boundary| archive-date=2017-02-10| url-access=subscription}}</ref><ref>{{Cite book |last=Snowdon |first=Brian |title=Modern macroeconomics: its origins, development and current state |last2=Vane |first2=Howard R. |date=2006 |publisher=Elgar |isbn=978-1-84542-208-0 |edition=Paperback ed., reprinted |location=Cheltenham}}</ref> Mises' student Israel Kirzner recalled that in 1954, when Kirzner was pursuing his PhD, there was no separate Austrian school as such. When Kirzner was deciding which graduate school to attend, Mises had advised him to accept an offer of admission at Johns Hopkins because it was a prestigious university and Fritz Machlup taught there.<ref>{{cite web|last=Kirzner|first=Israel|title=Interview of Israel Kirzner|url=https://www.mises.org/journals/aen/aen17_1_1.asp|publisher=Ludwig von Mises Institute|access-date=17 June 2013|url-status=live|archive-url=https://web.archive.org/web/20130909160322/http://mises.org/journals/aen/aen17_1_1.asp|archive-date=9 September 2013}}</ref>

After the 1940s, Austrian economics can be divided into two schools of economic thought and the school split to some degree in the late 20th century. One camp of Austrians, exemplified by Mises, regards neoclassical methodology to be irredeemably flawed; the other camp, exemplified by Friedrich Hayek, accepts a large part of neoclassical methodology and is more accepting of government intervention in the economy.<ref>{{cite web |last=Kanopiadmin |date=30 July 2014 |title=The Hayek and Mises Controversy: Bridging Differences – Odd J. Stalebrink |url=https://mises.org/journals/qjae/pdf/qjae7_1_3.pdf |url-status=live |archive-url=https://web.archive.org/web/20121114044020/http://mises.org/journals/qjae/pdf/qjae7_1_3.pdf |archive-date=14 November 2012 |access-date=1 May 2018 |website=mises.org}}</ref><ref name=":7" /> Henry Hazlitt wrote economics columns and editorials for a number of publications and wrote many books on the topic of Austrian economics from the 1930s to the 1980s. Hazlitt's thinking was influenced by Mises.<ref>{{cite web |url=http://www.thefreemanonline.org/featured/remembering-henry-hazlitt/ |title=Remembering Henry Hazlitt |publisher=The Freeman |access-date=2013-03-11 |url-status=dead |archive-url=https://archive.today/20130113132434/http://www.thefreemanonline.org/featured/remembering-henry-hazlitt/ |archive-date=2013-01-13 }}</ref> His book ''Economics in One Lesson'' (1946) sold over a million copies and he is also known for ''The Failure of the "New Economics"'' (1959), a line-by-line critique of John Maynard Keynes's ''General Theory''.<ref>{{cite web |url=https://mises.org/about/3233 |title=Biography of Henry Hazlitt |publisher=Ludwig von Mises Institute |access-date=2013-03-11 |url-status=live |archive-url=https://web.archive.org/web/20120128182613/https://www.mises.org/about/3233 |archive-date=2012-01-28 }}</ref>

The reputation of the Austrian school rose in the late 20th century due in part to the work of Israel Kirzner and Ludwig Lachmann at New York University and to renewed public awareness of the work of Hayek after he won the 1974 Nobel Memorial Prize in Economic Sciences.<ref name="Meijer 1995">{{cite book |editor=Meijer, Gerrit |title=New Perspectives on Austrian Economics |publisher=Routledge |location=New York |year=1995 |isbn=978-0-415-12283-2 |oclc= 70769328 }}</ref> Hayek's work was influential in the revival of ''laissez-faire'' thought in the 20th century.<ref name="raico">{{cite web |url=https://mises.org/etexts/austrianliberalism.asp |title=Austrian Economics and Classical Liberalism |first=Ralph |last=Raico |work=mises.org |publisher=Ludwig von Mises Institute |year=2011 |quote=despite the particular policy views of its founders ... Austrianism was perceived as the economics of the free market |access-date=27 July 2011 |url-status=live |archive-url=https://web.archive.org/web/20110519183648/http://mises.org/etexts/austrianliberalism.asp |archive-date=19 May 2011 }}</ref><ref>{{cite book |last=Kasper |first=Sherryl Davis |title=The Revival of Laissez-faire in American Macroeconomic Theory |publisher=Edward Elgar Publishing |year=2002 |isbn=978-1-84064-606-1 |page=66}}</ref>

=== Split among contemporary Austrians === Economist Leland Yeager discussed the late 20th-century rift and referred to a discussion written by Murray Rothbard, Hans-Hermann Hoppe, Joseph Salerno and others in which they criticized Hayek. Yeager stated: "To try to drive a wedge between Mises and Hayek on [the role of knowledge in economic calculation], especially to the disparagement of Hayek, is unfair to these two great men, unfaithful to the history of economic thought". He went on to call the rift subversive to economic analysis and the historical understanding of the fall of Eastern European communism.<ref>{{cite book|last=Yeager|first=Leland|author-link=Leland B. Yeager|title=Is the Market a Test of Truth and Beauty?: Essays in Political Economy|pages=93 ff|year=2011|publisher=Ludwig von Mises Institute}}</ref><ref>{{Cite book |url=https://www.emerald.com/books/book/15022/Research-in-the-History-of-Economic-Thought-and |title=Research in the History of Economic Thought and Methodology |date=2016-07-29 |publisher=Emerald Group Publishing Limited |isbn=978-1-78560-960-2 |language=en |chapter=The History of a Tradition: Austrian Economics from 1871 to 2016 |doi=10.1108/S0743-4154201634A}}</ref>

In a 1999 book published by the Ludwig von Mises Institute,<ref>{{cite book|last=Hoppe|first=Hans-Hermann|title=15 Great Austrian Economists – Murray Rothbard|year=1999|publisher=Ludwig von Mises Institute|location=Alabama|pages=223 ff|url=https://mises.org/books/15great.pdf|url-status=live|archive-url=https://web.archive.org/web/20141007115806/http://mises.org/books/15great.pdf|archive-date=2014-10-07}}</ref> Hoppe asserted that Rothbard was the leader of the "mainstream within Austrian Economics" and contrasted Rothbard with Nobel Laureate Friedrich Hayek, whom he identified as a British empiricist and an opponent of the thought of Mises and Rothbard. Hoppe acknowledged that Hayek was the most prominent Austrian economist within academia, but stated that Hayek was an opponent of the Austrian tradition which led from Carl Menger and Böhm-Bawerk through Mises to Rothbard. Austrian economist Walter Block says that the Austrian school can be distinguished from other schools of economic thought through two categories—economic theory and political theory. According to Block, while Hayek can be considered an Austrian economist, his views on political theory clash with the libertarian political theory which Block sees as an integral part of the Austrian school.<ref>{{cite web|title=Dr. Walter Block: Austrian vs Chicago Schools|url=https://www.youtube.com/watch?v=LiX7dzyHkK4|publisher=Mises Canada: Rothbard School 2014|access-date=3 December 2014|url-status=live|archive-url=https://web.archive.org/web/20150518134054/https://www.youtube.com/watch?v=LiX7dzyHkK4|archive-date=18 May 2015}}</ref>

Both criticism from Hoppe and Block to Hayek apply to Carl Menger, the founder of the Austrian school. Hoppe emphasizes that Hayek, which for him is from the English empirical tradition, is an opponent of the supposed rationalist tradition of the Austrian school; Menger made strong critiques to rationalism in his works in similar vein as Hayek's.<ref name=":0">{{cite book|url=https://mises.org/system/tdf/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf?file=1&type=document|title=Investigations into the Methods of the Social Sciences|last=Menger|first=Carl|pages=173–175|url-status=live|archive-url=https://web.archive.org/web/20170211155554/https://mises.org/system/tdf/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf?file=1&type=document|archive-date=2017-02-11}}</ref><ref>{{Cite web |title=Why I Am Not an Austrian Economist |url=https://econfaculty.gmu.edu/bcaplan/whyaust.htm |access-date=2026-04-19 |website=econfaculty.gmu.edu}}</ref> Menger emphasized the idea that there are several institutions which were not deliberately created, have a kind of "superior wisdom" and serve important functions to society.<ref>{{cite book|url=https://mises.org/system/tdf/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf?file=1&type=document|title=Investigations into the Methods of the Social Sciences|last=Menger|first=Carl|pages=146–147|url-status=live|archive-url=https://web.archive.org/web/20170211155554/https://mises.org/system/tdf/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf?file=1&type=document|archive-date=2017-02-11}}</ref><ref name=":0" /><ref>{{cite book|url=https://mises.org/system/tdf/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf?file=1&type=document|title=Investigations into the Methods of the Social Sciences|last=Menger|first=Carl|pages=91|url-status=live|archive-url=https://web.archive.org/web/20170211155554/https://mises.org/system/tdf/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf?file=1&type=document|archive-date=2017-02-11}}</ref> He also talked about Edmund Burke and the English tradition to sustain these positions.<ref name=":0" />

When saying that the libertarian political theory is an integral part of the Austrian school and supposing Hayek is not a libertarian, Block excludes Menger from the Austrian school, too, since Menger seems to defend broader state activity than Hayek—for example, progressive taxation and extensive labour legislation.<ref>{{cite book|url=https://www.hetsa.org.au/hetsa2009/conference_papers/7.%20Yukihiro%20Ikeda%20Carl%20Menger's%20Liberalism%20Revisited.pdf|title=Carl Menger's Liberalism Revisited|last=Ikeda|first=Yukihiro|url-status=live|archive-url=https://web.archive.org/web/20170216010338/http://hetsa.org.au/hetsa2009/conference_papers/7.%20Yukihiro%20Ikeda%20Carl%20Menger's%20Liberalism%20Revisited.pdf|archive-date=2017-02-16}}</ref>

Economists of the Hayekian view are affiliated with the Cato Institute, George Mason University (GMU) and New York University, among other institutions. They include Roger Garrison and George Reisman.<ref name="faculty">{{cite web |url=https://mises.org/Faculty |title=Senior Fellows, Faculty Members, and Staff |publisher=Mises.org |access-date=July 21, 2013 |url-status=live |archive-url=https://web.archive.org/web/20130728094916/http://mises.org/Faculty |archive-date=July 28, 2013 }}</ref> Economists of the Mises–Rothbard view include Walter Block, Hans-Hermann Hoppe, Jesús Huerta de Soto and Robert P. Murphy, each of whom is associated with the Mises Institute and some of them also with academic institutions.<ref name="faculty" />

=== Influence === Many theories developed by "first wave" Austrian economists have long been absorbed into mainstream economics.<ref>It has also influenced related disciplines such as Law and Economics, see. K. Grechenig, M. Litschka, "Law by Human Intent or Evolution? Some Remarks on the Austrian School of Economics' Role in the Development of Law and Economics", ''European Journal of Law and Economics'' 2010, vol. 29, no. 1, pp. 57–79.</ref><ref>{{Cite book |last=Kurz |first=Heinz D. |title=Economic thought: a brief history |date=2017 |publisher=Columbia University Press |isbn=978-0-231-17259-2 |edition= |location=New York |translator-last=Riemer |translator-first=Jeremiah M.}}</ref> These include Carl Menger's theories on marginal utility, Friedrich von Wieser's theories on opportunity cost and Eugen von Böhm-Bawerk's theories on time preference, as well as Menger and Böhm-Bawerk's criticisms of Marxian economics.<ref>{{Cite web|url=https://mises.org/library/austrian-schools-critique-marxism|title=The Austrian School's Critique of Marxism|last=kanopiadmin|date=2011-03-14|website=Mises Institute|language=en|access-date=2019-02-02}}</ref>

Former American Federal Reserve Chairman Alan Greenspan said that the founders of the Austrian school "reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country".<ref>Greenspan, Alan. "Hearings before the U.S. House of Representatives' Committee on Financial Services". U.S. House of Representatives' Committee on Financial Services. Washington, D.C.. 25 July 2000.</ref> In 1987, Nobel Laureate James M. Buchanan told an interviewer: "I have no objections to being called an Austrian. Hayek and Mises might consider me an Austrian but, surely some of the others would not".<ref>{{cite journal |url=https://mises.org/journals/aen/aen9_1_1.asp |access-date=2022-08-19 |url-status=live |title=An Interview with Laureate James Buchanan |archive-url=https://web.archive.org/web/20140914022018/https://mises.org/journals/aen/aen9_1_1.asp |archive-date=2014-09-14 |journal=Austrian Economics Newsletter |volume=9 |issue=1 |date=Fall 1987}}</ref>

As economics has become increasingly quantitative with the rise of statistics and econometrics, the Austrian school is now generally considered heterodox due to its rejection of rejection of such mathematical methods, rather focusing more on decentralised knowledge.<ref>{{Cite web |title=Austrian Economics: Historical Contributions and Modern Warnings |url=https://inomics.com/blog/austrian-economics-historical-contributions-and-modern-warnings-1542898 |access-date=2026-05-24 |website=INOMICS |language=en}}</ref><ref>{{Cite journal |last=Pham |first=Adam K. |date=2017-08-10 |title=Mainstream economics and the Austrian school: Toward reunification |url=https://ejpe.org/journal/article/view/267 |journal=Erasmus Journal for Philosophy and Economics |language=en |volume=10 |issue=1 |pages=41–63 |doi=10.23941/ejpe.v10i1.267 |issn=1876-9098}}</ref>

Currently, universities with a significant Austrian presence are George Mason University,<ref name="fee">{{Cite book|title=The Oxford handbook of Austrian economics|year=2015|isbn=9780199811762|publisher=Oxford University Press|pages=500|oclc=905518129|last1=Boettke|first1=Peter J.|last2=Coyne|first2=Christopher J.}}</ref> King Juan Carlos University,<ref>{{cite journal |first=Cristóbal |last=Matarán López |title=The Austrian school of Madrid |journal=The Review of Austrian Economics |date=2021-01-26 |volume=36 |pages=61–79 |doi=10.1007/s11138-021-00541-0 |s2cid=234027221 |doi-access=free |hdl=11268/9792 |hdl-access=free }}</ref> and Universidad Francisco Marroquín.<ref>{{cite web |url=https://ecaef.org/austrian-school-of-economics/generations-of-the-austrian-school/ |title=Generations of the Austrian School |publisher=European Center of Austrian Economics Foundation}}</ref><ref>{{cite web |url=https://mises.org/library/gabriel-calzada-free-market-education-latin-america |title=Gabriel Calzada on Free-Market Education in Latin America |first=Jeff |last=Deist |date=2017-11-24 |publisher=Mises Institute}}</ref> Austrian economic ideas are also promoted by privately funded organizations such as the Mises Institute<ref>{{cite web |url=https://mises.org/page/1448/About-The-Mises-Institute |title=About the Mises Institute |publisher=Mises.org |access-date=July 21, 2013 |url-status=live |archive-url=https://web.archive.org/web/20130728042035/http://mises.org/page/1448/About-The-Mises-Institute |archive-date=July 28, 2013 }}</ref>, the Cato Institute or the Instituto Juan de Mariana.<ref>{{cite web| url = https://www.cato.org/books/austrian-economics| title = Austrian Economics {{!}} Cato Institute}}</ref><ref>{{Cite book |title=The History of economic thought: a reader |date=2013 |publisher=Routledge |isbn=978-0-415-56868-5 |editor-last=Medema |editor-first=Steven G. |edition=2nd |location=Abingdon, Oxon |editor-last2=Samuels |editor-first2=Warren J.}}</ref>

== Theory == {{capitalism sidebar|theories}} The Austrian school theorizes that the subjective choices of individuals including individual knowledge, time, expectation and other subjective factors cause all economic phenomena. Austrians seek to understand the economy by examining the social ramifications of individual choice, an approach called methodological individualism. It differs from other schools of economic thought, which have focused on aggregate variables, equilibrium analysis, and societal groups rather than individuals.<ref name="White Methodology">{{cite book|last=White|first=Lawrence H.|title=The Methodology of the Austrian School Economists|year=2003|edition=revised|publisher=Ludwig von Mises Institute|url=https://mises.org/mofase.asp|url-status=live|archive-url=https://web.archive.org/web/20140223214514/https://mises.org/mofase.asp|archive-date=2014-02-23}}</ref><ref>{{Cite book |last=Hodgson |first=Geoffrey M. |title=How economics forgot history: the problem of historical specificity in social science |date=2006 |publisher=Routledge |isbn=978-0-415-25717-6 |edition=Digit. Print |series=Economics as social theory |location=London}}</ref>

[[File:Ludwig von Mises.jpg|thumb|left|upright=0.7|Ludwig von Mises]] In the 20th and 21st centuries, economists with a methodological lineage to the early Austrian school developed many diverse approaches and theoretical orientations. Ludwig von Mises organized his version of the subjectivist approach, which he called "praxeology", in a book published in English as ''Human Action'' in 1949.<ref name="Ludwigvon">Ludwig von Mises, Nationalökonomie (Geneva, Switzerland: Union, 1940); Human Action (Auburn, Alabama: Ludwig von Mises Institute, [1949] 1998).</ref>{{rp|3}}<ref>{{Cite book |last=Roncaglia |first=Alessandro |title=A brief history of economic thought |date=2017 |publisher=Cambridge University Press |isbn=978-1-316-62736-5 |location=Cambridge}}</ref> In it, Mises stated that praxeology could be used to deduce ''a priori'' theoretical economic truths and that deductive economic thought experiments could yield conclusions which follow irrefutably from the underlying assumptions. He wrote that conclusions could not be inferred from empirical observation or statistical analysis and argued against the use of probabilities in economic models.<ref>{{Cite web |url=https://mises.org/books/ufofes/ |title=The Ultimate Foundation of Economic Science by Ludwig von Mises |date=20 July 1962 |publisher=Mises.org |access-date=2012-08-13 |url-status=live |archive-url=https://web.archive.org/web/20121029234432/http://www.mises.org/books/ufofes/ |archive-date=2012-10-29 }}</ref>

Since Mises' time, some Austrian thinkers have accepted his praxeological approach while others have adopted alternative methodologies.<ref>{{cite journal |last1=Caldwell |first1=Bruce J. |year=1984 |title=Praxeology and its Critics: an Appraisal |url=http://public.econ.duke.edu/~bjc18/docs/Praxeology%20and%20Its%20Critics.pdf |journal=History of Political Economy |volume=16 |issue=3 |pages=363–379 |doi=10.1215/00182702-16-3-363}}</ref> For example, Fritz Machlup, Friedrich Hayek and others did not take Mises' strong ''a priori'' approach to economics.<ref>{{cite journal |first= Richard N. |last= Langlois |title= From the Knowledge of Economics to the Economics of Knowledge: Fritz Machlup on Methodology and on the "Knowledge Society" |journal= Research in the History of Economic Thought and Methodology |volume= 3 |url= http://web.uconn.edu/ciom/Machlup%20Knowledge%20(1985).pdf |url-status= dead |archive-url= https://web.archive.org/web/20131005013809/http://web.uconn.edu/ciom/Machlup%20Knowledge%20(1985).pdf |archive-date= 2013-10-05 |date= 1985 |pages= 225–235 |access-date= 2012-12-06 }}</ref> Ludwig Lachmann, a radical subjectivist, also largely rejected Mises' formulation of Praxeology in favor of the ''verstehende Methode'' ("interpretive method") articulated by Max Weber.<ref name="White Methodology"/><ref name=Ludwig>{{cite book|last=Lachmann|first=Ludwig|title=Macroeconomic Thinking and the Market Economy|year=1973|publisher=Institute of Economic Affairs|url=http://library.freecapitalists.org/books/Ludwig%20M%20Lachmann/Macro-economic%20thinking%20and%20the%20Market%20Economy.pdf|url-status=dead|archive-url=https://web.archive.org/web/20141216191641/http://library.freecapitalists.org/books/Ludwig%20M%20Lachmann/Macro-economic%20thinking%20and%20the%20Market%20Economy.pdf|archive-date=2014-12-16|access-date=2014-12-16}}</ref>

In the 20th century, various Austrians incorporated models and mathematics into their analysis. Austrian economist Steven Horwitz argued in 2000 that Austrian methodology is consistent with macroeconomics and that Austrian macroeconomics can be expressed in terms of microeconomic foundations.<ref name="Horwitz, Steven 2000">Horwitz, Steven: ''Microfoundations and Macroeconomics: An Austrian Perspective'' (2000). Routledge.</ref> Austrian economist Roger Garrison writes that Austrian macroeconomic theory can be correctly expressed in terms of diagrammatic models.<ref>{{cite web|url=http://library.freecapitalists.org/books/Roger%20W%20Garrison/Austrian%20Macroeconomics%20A%20Diagrammatical%20Exposition.pdf|last=Garrison|first=Roger|title=Austrian Macroeconomics: A Diagrammatical Exposition|year=1978|publisher=Institute for Humane Studies|access-date=5 October 2015|url-status=dead|archive-url=https://web.archive.org/web/20141216183224/http://library.freecapitalists.org/books/Roger%20W%20Garrison/Austrian%20Macroeconomics%20A%20Diagrammatical%20Exposition.pdf|archive-date=16 December 2014}}</ref> In 1944, Austrian economist Oskar Morgenstern presented a rigorous schematization of an ordinal utility function (the Von Neumann–Morgenstern utility theorem) in ''Theory of Games and Economic Behavior''.<ref>Von Neumann, John and Morgenstern, Oskar (1944). ''Theory of Games and Economic Behavior''. Princeton, New Jersey: Princeton University Press.</ref>

=== Fundamental tenets === In 1981, Fritz Machlup summarized what he regarded as the typical views of Austrian economic thinking:<ref>{{Cite book |last=Fritz |first=Machlup |title=The economics of Ludwig von Mises: toward a critical reappraisal ; [Symposium on the Economics of Ludwig von Mises, Atlanta, 1974] |date=1976 |publisher=Sheed and Ward |isbn=978-0-8362-0651-7 |editor-last=Moss |editor-first=Laurence S. |series=Studies in economic history |location=Kansas City |chapter=Homage to Mises}}</ref>

*'''Methodological individualism''': Economic phenomena must be explained by tracing them back to the actions (or inaction) of individuals; groups or collectives act only through their individual members. Groups do not think; people think.<ref name=":5">{{Cite book |last=Vaughn |first=Karen Iversen |title=Austrian economics in America: the migration of a tradition |date=1998 |publisher=Cambridge Univ. Press |isbn=978-0-521-63765-7 |edition=Repr. d. Ausg. von 1994 |series=Historical perspectives on modern economics |location=Cambridge}}</ref> *'''Methodological subjectivism''': Judgments and choices are made by individuals on the basis of their own knowledge, beliefs, and expectations regarding external developments and the consequences of their actions.<ref name=":6">{{Cite book |last=Caldwell |first=Bruce |title=Hayek's challenge: intellectual biography of F.A. Hayek |date=2008 |publisher=University of Chicago Press |isbn=978-0-226-09193-8 |edition=Nachdr. |location=Chicago}}</ref> *'''Tastes and preferences''': Subjective valuations of goods and services determine the demand for them so that their prices are influenced by consumers. *'''Opportunity costs''': The costs of the alternative opportunities that must be foregone; as productive services are employed for one purpose, all alternative uses have to be sacrificed. *'''Marginalism''': In all economic designs, the values, costs, revenues, productivity and so on are determined by the significance of the last unit added to or subtracted from the total. *'''Time structure of production and consumption''': Decisions to save reflect "time preferences" regarding consumption in the immediate, distant, or indefinite future and investments are made in view of larger outputs expected to be obtained if more time-taking production processes are undertaken.

Machlup also identified two additional tenets particularly associated with the Mises branch of Austrian economics: *'''Consumer sovereignty''': The influence consumers have on the effective demand for goods and services and through the prices which result in free competitive markets, on the production plans of producers and investors, is not merely a hard fact but also an important objective, attainable only by complete avoidance of governmental interference with the markets and of restrictions on the freedom of sellers and buyers to follow their own judgment regarding quantities, qualities and prices of products and services.<ref name=":5" /> *'''Political individualism''': Only when individuals are given full economic freedom will it be possible to secure political and moral freedom. Restrictions on economic freedom lead, sooner or later, to an extension of the coercive activities of the state into the political domain, undermining and eventually destroying the essential individual liberties which the capitalistic societies were able to attain in the 19th century.<ref name=":6" />

== Contributions to economic thought == === Opportunity cost === {{main|Opportunity cost}}

[[File:1wieser.jpg|thumb|upright=0.7|Friedrich von Wieser]] The opportunity cost doctrine was first explicitly formulated by the Austrian economist Friedrich von Wieser in the late 19th century.<ref>{{Cite book |title=Subjectivism, intelligibility and economic understanding: essays in honor of Ludwig M. Lachmann on his eightieth birthday |last1=Kirzner |first1=Israel M. |last2=Lachman |first2=Ludwig M. |publisher=Macmillan |year=1986 |edition=Illustrated |isbn=978-0-333-41788-1}}</ref> Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative foregone (that is not chosen). It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices.<ref>{{Cite book |last=Blaug |first=Mark |title=Economic theory in retrospect |date=2006 |publisher=Cambridge Univ. Press |isbn=978-0-521-57701-4 |edition=5. ed., reprint |location=Cambridge}}</ref>

Expectations of the future must also be considered as a form of scarcity; when quantified as time preference, opportunity cost must also be valued with respect to one's preference for present versus future investments. Opportunity cost is a key concept in mainstream economics and has been described as expressing "the basic relationship between scarcity and choice".<ref>{{cite encyclopedia |year=2008 |title=Opportunity cost |encyclopedia=The New Palgrave Dictionary of Economics Online |url=http://www.dictionaryofeconomics.com/search_results?q=opportunity+cost&edition=current&button_search=GO |access-date=2010-09-18 |last=Buchanan |first=James M. |author-link=James M. Buchanan |edition=Second |archive-url=https://web.archive.org/web/20120118213136/http://www.dictionaryofeconomics.com/search_results?q=opportunity+cost&edition=current&button_search=GO |archive-date=2012-01-18 |url-status=live}}</ref> The notion of opportunity cost plays a crucial part in ensuring that resources are used efficiently.<ref>{{cite news |url=https://www.economist.com/research/Economics/alphabetic.cfm?letter=O#opportunitycost |title=Opportunity Cost |work=Economics A–Z |publisher=The Economist |access-date=2010-09-18 | archive-url= https://web.archive.org/web/20101009122334/http://www.economist.com/research/Economics/alphabetic.cfm?letter=O| archive-date= 9 October 2010 | url-status= live}}</ref>

=== Capital and interest === {{see also|Capital and Interest|Marginalism|Neutrality of money|Time preference}} [[File:1Bawerk.png|thumb|upright=0.7|Eugen von Böhm-Bawerk]] The Austrian theory of capital and interest was first developed by Eugen von Böhm-Bawerk. He stated that interest rates and profits are determined by supply and demand in the market for final goods and by time preference.<ref name=":8" />

Böhm-Bawerk's theory equates capital intensity with the degree of roundaboutness of production processes. He also argued that the law of marginal utility necessarily implies the classical law of costs. However, later Austrian economists such as Ludwig von Mises,<ref>Mises (1949)</ref> Israel Kirzner,<ref>Kirzner (1996)</ref> Ludwig Lachmann,<ref>Lachmann (1976)</ref> and Jesús Huerta de Soto<ref>Huerta De Soto (2006)</ref> rejected a productivity explanation for interest rates, viewing the average period of production as a remnant of classical economic thought.<ref name=":9">{{Cite book |last=Screpanti |first=Ernesto |title=An outline of the history of economic thought |last2=Zamagni |first2=Stefano |last3=Field |first3=David |last4=Kirby |first4=Lynn |date=2005 |publisher=Oxford university press |isbn=978-0-19-927914-2 |edition=2e ed. revised and expanded |location=Oxford (GB)}}</ref>

=== Inflation === {{see also|Monetary inflation}} In Mises's definition, inflation is an increase in the supply of money:<ref name=":10">{{Cite book |last=White |first=Lawrence H. |title=The clash of economic ideas: the great policy debates and experiments of the last hundred years |date=2012 |publisher=Cambridge University Press |isbn=978-1-107-01242-4 |location=New York}}</ref> {{blockquote|In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.<ref name="TheTheory">The Theory of Money and Credit, Mises (1912, [1981], p. 272)</ref>}}

Hayek claimed that inflationary stimulation exploits the lag between an increase in money supply and the consequent increase in the prices of goods and services:<ref>{{Cite book |last=Garrison |first=Roger Wayne |title=Time and money: the macroeconomics of capital structure |date=2006 |publisher=Routledge |isbn=978-0-415-77122-1 |edition=transferred to digital printing |series=Foundations of the market economy |location=London}}</ref> {{blockquote|And since any inflation, however modest at first, can help employment only so long as it accelerates, adopted as a means of reducing unemployment, it will do so for any length of time only while it accelerates. "Mild" steady inflation cannot help—it can lead only to outright inflation. That inflation at a constant rate soon ceases to have any stimulating effect, and in the end merely leaves us with a backlog of delayed adaptations, is the conclusive argument against the "mild" inflation represented as beneficial even in standard economics textbooks.<ref>{{cite book |last=Hayek |first=Friedrich August |url=https://books.google.com/books?id=zZu3AAAAIAAJ&q=%22only+while+it+accelerates%22 |title=1980s Unemployment and the Unions: Essays on the Impotent Price Structure of Britain and Monopoly in the Labour Market |publisher=Institute of Economic Affairs |date=1984|isbn=9780255361736 }}</ref>}}

Even prominent Austrian economists have noted the terminological confusion: Austrians define inflation as an increase in the money supply, while most economists and the public define it as rising prices.<ref>{{Cite web |last=Carney |first=John |date=2012-11-29 |title=Krugman Isn't (Quite) Right About Austrian Economics |url=https://www.cnbc.com/2012/11/29/krugman-isnt-quite-right-about-austrian-economics.html |access-date=2026-04-20 |website=CNBC |language=en}}</ref>

=== Economic calculation problem === {{main|Economic calculation problem}}

[[File:Friedrich Hayek portrait.jpg|thumb|upright=0.7|Friedrich Hayek]] [[File:Israel Kirzner.jpg|right|thumb|upright=0.7|Israel Kirzner]] The economic calculation problem refers to a criticism of planned economies first developed by Ludwig von Mises with his 1920 essay "economic calculation in the socialist commonwealth". Mises subsequently discussed his idea with his student Friedrich Hayek, who expanded it in various works including ''The Road to Serfdom''.<ref>{{Cite book |last=Lavoie |first=Don |title=Rivalry and central planning: the socialist calculation debate reconsidered |last2=Boettke |first2=Peter J. |last3=Storr |first3=Virgil Henry |date=2015 |publisher=Mercatus Center, George Mason University |isbn=978-1-942951-12-4 |series=Advanced studies in political economy |location=Arlington, Virginia}}</ref><ref name=":9" /> The calculation problem essentially states that without price signals, the factors of production cannot be allocated in the most efficient way possible, rendering planned economies inefficacious.

Max Weber reached a similar conclusion in his magnum opus "Wirtschaft und Gesellschaft" (posthumously published in 1921), discussing the impossibility of centralized planning of a complex economic system.<ref name=":3">F. A. Hayek (1935), "The Nature and History of the Problem" and "The Present State of the Debate," om in F. A. Hayek, ed. ''Collectivist Economic Planning'', pp. 1–40, 201–243.</ref>

Austrian theory emphasizes the organizing power of markets. Hayek stated that market prices reflect information, the totality of which is not known to any single individual, which determines the allocation of resources in an economy. Because socialist systems lack the individual incentives and price discovery processes by which individuals act on their personal information, Hayek argued that socialist economic planners lack all of the knowledge required to make optimal decisions. Those who agree with this criticism view it as a refutation of socialism, showing that socialism is not a viable or sustainable form of economic organization. The debate rose to prominence in the 1920s and 1930s and that specific period of the debate has come to be known by historians of economic thought as the socialist calculation debate.<ref name="School">{{Cite web|url=http://cepa.newschool.edu/het/essays/paretian/social.htm|archive-url=https://web.archive.org/web/20090218142504/http://cepa.newschool.edu/het/essays/paretian/social.htm|url-status=dead|title=The socialist calculation debate|archive-date=February 18, 2009|access-date=May 20, 2020}}</ref>

Mises argued that the pricing systems in socialist economies were necessarily deficient because if the government owned the means of production, then no prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange", unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.<ref name="School" /> This led him to write "that rational economic activity is impossible in a socialist commonwealth".<ref name="Mises">{{Cite web |author=von Mises |first=Ludwig |title=The Principle of Methodological Individualism |url=https://mises.org/humanaction/chap2sec4.asp |url-status=live |archive-url=https://web.archive.org/web/20090422004804/https://mises.org/humanaction/chap2sec4.asp |archive-date=22 April 2009 |access-date=2009-04-24 |work=Human Action |publisher=Ludwig von Mises Institute}}</ref>

=== Business cycles === {{Macroeconomics sidebar}} {{main|Austrian business cycle theory}}

The Austrian theory of the business cycle (ABCT) focuses on banks' issuance of credit as the cause of economic fluctuations.<ref name="ReferenceA">Murray Rothbard, ''America's Great Depression.''</ref> Although later elaborated by Hayek and others, the theory was first set forth by Mises, who posited that fractional reserve banks extend credit at artificially low interest rates, causing businesses to invest in relatively roundabout production processes. This artificial "boom" then led to a misallocation of resources which he called "malinvestment" that must eventually end in a "bust".<ref>{{Cite book |last=Garrison |first=Roger Wayne |title=Time and money: the macroeconomics of capital structure |date=2001 |publisher=Routledge |isbn=978-0-415-07982-2 |edition=1. publ |series=Foundations of the market economy |location=London}}</ref>

Mises surmised that government manipulation of money and credit in the banking system throws savings and investment out of balance, resulting in misdirected investment projects that are eventually found to be unsustainable, at which point the economy has to rebalance itself through a period of corrective recession.<ref name=":10" /> Austrian economist Fritz Machlup summarized the Austrian view by stating, "monetary factors cause the cycle but real phenomena constitute it."<ref name=":2">{{Cite journal|last=Hughes|first=Arthur Middleton|date=March 1997|title=The recession of 1990: An Austrian explanation|journal=The Review of Austrian Economics|language=en|volume=10|issue=1|pages=107–123|doi=10.1007/BF02538145|s2cid=154412906|issn=0889-3047}}</ref>

Critics have noted that successful entrepreneurs will adjust their investment decisions based on projected long-term interest rates.<ref name="Caplan">[https://econfaculty.gmu.edu/bcaplan/whyaust.htm Why I Am Not an Austrian Economist]</ref> For Austrians, the only prudent strategy for government is to leave money and the financial system to the free market's competitive forces to eradicate the business cycle's inflationary booms and recessionary busts, allowing markets to keep people's saving and investment decisions in place for well-coordinated economic stability and growth.<ref name=":1">{{Cite book |last=Ebeling |first=Richard |title=Austrian Economics and Public Policy: Restoring Freedom and Prosperity |publisher=The Future of Freedom Foundation |year=2016 |location=Fairfax, Virginia |pages=217}}</ref>

A Keynesian would suggest government intervention during a recession to inject spending into the economy when people will not. However, the heart of Austrian macroeconomic theory argues the government "fine tuning" through expansions and contractions in the money supply orchestrated by the government are actually the cause of business cycles because of the differing impact of the resulting interest rate changes on different stages in the structure of production.<ref name=":2" /> Austrian economist Thomas Woods further supports this view by arguing it is not consumption, but rather production that should be emphasized. A country cannot become rich by consuming, and therefore, by using up all their resources. Instead, production is what enables consumption as a possibility in the first place, since a producer would be working for nothing, if not for the desire to consume.<ref>{{Cite book |last=Woods |first=Thomas |title=Meltdown: The Classic Free-Market Analysis of the 2008 Financial Crisis |publisher=Regnery Publishing, Incorporated |year=2018 |location=Washington, D.C.}}</ref>

====Central banks==== According to Ludwig von Mises, central banks enable commercial banks to fund loans at artificially low interest rates, thereby inducing an unsustainable expansion of bank credit and impeding any subsequent contraction. He argued for a gold standard as a monetary reform to constrain growth in fiduciary media.<ref>{{Cite book |last=Selgin |first=George |title=Bank deregulation and monetary order |date=1996 |publisher=Routledge |isbn=978-0-415-14056-0 |series=International studies in money and banking |location=London New York}}</ref> Friedrich Hayek took a different perspective, not focusing on gold but on regulation of the banking sector via strong central banking.<ref>{{cite journal|last=White|first=Lawrence H.|title=Why Didn't Hayek Favor Laissez Faire in Banking?|journal=History of Political Economy|year=1999|volume=31|issue=4|url=http://cameroneconomics.com/white-hayek-hope.pdf|access-date=11 April 2013|doi=10.1215/00182702-31-4-753|pages=753–769|url-status=live|archive-url=http://archive.wikiwix.com/cache/20130412141059/http://cameroneconomics.com/white-hayek-hope.pdf|archive-date=12 April 2013}}</ref><ref>{{Cite book |last=Dowd |first=Kevin |title=Laissez-faire banking |date=1993 |publisher=Routledge |isbn=978-1-134-77563-7 |series=Foundations of the market economy series |location=London New York}}</ref>

Some economists argue money is endogenous and that this refutes the Austrian Business Cycle Theory. Others maintain that the underlying issue of credit expansion would remain the same under any system of fractional-reserve banking, whether central or private.

=== Bitcoin and cryptocurrencies === Some economists assert that Bitcoin's theoretical foundations can be traced back to the Austrian school, through its embrace of core principles such as decentralization, individual sovereignty, sound money, and resistance to fiat money.<ref>{{Cite journal |last=Rector |first=Tully |last2=Allen |first2=Jason Grant |date=2023-06-03 |title=Menger or Marx? The political ontology of cryptocurrency |url=https://academic.oup.com/cje/article/47/3/535/7135623 |journal=Cambridge Journal of Economics |language=en |volume=47 |issue=3 |pages=535–554 |doi=10.1093/cje/bead008 |issn=0309-166X}}</ref><ref>{{Cite journal |last=Fantacci |first=Luca |date=2019 |title=Cryptocurrencies and the Denationalization of Money |url=https://www.jstor.org/stable/48539909 |journal=International Journal of Political Economy |volume=48 |issue=2 |pages=105–126 |doi=10.1080/08911916.2019.1624319 |jstor=48539909 |issn=0891-1916}}</ref><ref>{{Citation |last=Hernandez |first=Omar |title=Cryptocurrencies and the Austrian School: A Reinterpretation of Monetary Theory for Economic Freedom in the 21st Century |date=2025-04-25 |type=SSRN Scholarly Paper |url=https://papers.ssrn.com/abstract=5233771 |access-date=2025-10-23 |place=Rochester, NY |language=en |doi=10.2139/ssrn.5233771 |ssrn=5233771 |id=5233771}}</ref> In the 21st century, some political scientists have argued that Friedrich Hayek would have supported Bitcoin and cryptocurrencies due to their resistance to political pressure and alignment with his emphasis on sound money and competition in currencies.<ref>{{Cite journal |last=Luther |first=William J. |date=2016 |title=Bitcoin and the Future of Digital Payments |url=https://www.jstor.org/stable/24562161 |journal=The Independent Review |volume=20 |issue=3 |pages=397–404 |issn=1086-1653}}</ref><ref>{{Cite web |date=2023-04-17 |title=Hayek and Bitcoin {{!}} The Daily Economy |url=https://thedailyeconomy.org/article/hayek-and-bitcoin/ |access-date=2025-10-23 |language=en-US}}</ref> They have also described cryptocurrency as a potential "Hayekian escape" from government currency monopolies, particularly during periods of hyperinflation.<ref>{{Cite web |last=Pollock |first=Alex J. |date=2022-03-30 |title=Are Cryptocurrencies the Great Hayekian Escape? – Alex J. Pollock |url=https://lawliberty.org/are-cryptocurrencies-the-great-hayekian-escape/ |access-date=2025-10-23 |website=Law & Liberty |language=en-US}}</ref>

In some ways, Bitcoin is at odds with certain Austrian principles such as Mises' regression theorem, which holds that money must originate from a commodity with prior use value. Bitcoin demonstrates that digital scarcity and market trust alone to create a functioning medium of exchange.<ref>{{Cite web |title=Chapter 16: Bitcoin and the Theory of Money {{!}} Mises Institute |url=https://mises.org/online-book/understanding-money-mechanics/chapter-16-bitcoin-and-theory-money |access-date=2025-10-23 |website=mises.org |language=en}}</ref>

Many proponents of Bitcoin and cryptocurrency have been inspired by Austrian economics. For example, Saifedean Ammous and Nick Szabo both use Austrian principles to explain why the Rai stones of Yap failed as a sound money while Bitcoin succeeds. The Rai stones embodied many of the properties such as durability, general acceptance, and "the high cost of acquiring new stones," which made them difficult to debase.<ref>{{Cite journal |last=Mayall |first=Joao Paulo |date=2025 |title=Bitcoin as Validation of the Regression Theorem: An Austrian Synthesis with Szabo and Ammous |url=https://www.ssrn.com/abstract=5376225 |journal=SSRN Electronic Journal |language=en |doi=10.2139/ssrn.5376225 |issn=1556-5068}}</ref><ref name=":4">{{Cite news |last=Epstein |first=Jim |date=2018-07-22 |title=Can Bitcoin Become the Global Monetary Standard? |url=https://reason.com/2018/07/22/bitcoin-standard-ammous-blockchain-gold/ |archive-url=https://web.archive.org/web/20250427020625/https://reason.com/2018/07/22/bitcoin-standard-ammous-blockchain-gold/ |archive-date=2025-04-27 |access-date=2025-11-13 |work=Reason.com |language=en-US}}</ref> However, when colonists visited the island in the 1870s, they were able to bring in new Rai stones with far less effort, inflating the supply and devaluing the currency. Ammous and Szabo argue that Bitcoin's 21 million cap prevents similar debasement.<ref name=":4" /> Ammous also criticizes Keynesian economics for discounting long-term consequences for perceived short-term gain. Erik Voorhees was also inspired to become involved in cryptocurrency, in part, through Austrian economics, having Ron Paul sign his copy of Murray Rothbard's “''Man, Economy and State''.”<ref>{{Cite web |date=2022-04-05 |title=Ron Paul's Revenge |url=https://www.politico.com/news/magazine/2022/04/05/ron-paul-crypto-00022354 |access-date=2025-11-13 |website=POLITICO |language=en}}</ref>

== See also == {{cols|colwidth=14em}} * Carl Menger * Chicago school of economics * Criticism of the Federal Reserve<ref name="Paul2009">{{cite book|author=Ron Paul|title=End the Fed|url=https://archive.org/details/endfed00paul|url-access=registration|date=2009|publisher=Grand Central Publishing}}</ref> * Hard money (policy) * Kraków School of Economics * List of Austrian intellectual traditions * List of Austrian-school economists * New institutional economics * Perspectives on capitalism by school of thought *Peter St. Onge {{colend}}

==References== '''Footnotes''' {{notelist}}

'''Citations''' {{reflist}}

== Further reading == * {{cite journal|last1=Agafonow|first1=Alejandro|year=2012|title=The Austrian Dehomogenization Debate, or the Possibility of a Hayekian Planner|url=https://ideas.repec.org/a/taf/revpoe/v24y2012i2p273-287.html|journal=Review of Political Economy|volume=24|issue=2|pages=273–287|doi=10.1080/09538259.2012.664337|s2cid=154692301|ref=none|url-access=subscription}} * Boettke, Peter J.; Coyne, Christopher J. (2023). "[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4366284 New Thinking in Austrian Economics]". ''Annual Review of Economics'' '''15''' (1). * {{cite journal |last1=Campagnolo |first1=Gilles |first2=Christel |last2=Vivel |title=The foundations of the theory of entrepreneurship in austrian economics – Menger and Böhm-Bawerk on the entrepreneur |journal=Revue de philosophie économique |volume=15 |issue=1 |date=2014 |pages=49–97 |isbn=9782711652105 |doi=10.3917/rpec.151.0049|doi-access=free }} [https://scholar.google.com/scholar?output=instlink&q=info:1jn_vDiNpwIJ:scholar.google.com/&hl=en&as_sdt=5,27&sciodt=1,27&scillfp=7051946006347519767&oi=lle PDF] {{Webarchive|url=https://web.archive.org/web/20210223041750/https://scholar.google.com/scholar?output=instlink&q=info%3A1jn_vDiNpwIJ%3Ascholar.google.com%2F&hl=en&as_sdt=5%2C27&sciodt=1%2C27&scillfp=7051946006347519767&oi=lle |date=2021-02-23 }} {{in lang|en}}. * {{cite book |editor-last1=Hagemann |editor-first1=Harald |editor-first2=Tamotsu |editor-last2=Nishizawa |editor-first3=Yukihiro |editor-last3=Ikeda |title=Austrian Economics in Transition: From Carl Menger to Friedrich Hayek |publisher=Palgrave Macmillan |date=2010}}   * {{cite book |last=Holcombe |first=Randall |title=The Great Austrian Economists |date=1999 |publisher=Ludwig von Mises Institute |isbn=0945466048}}  * {{cite book |editor-last1=Littlechild |editor-first1=Stephen |date=1990 |title=Austrian economics  |publisher=Edward Elgar |isbn=978-1-85278-120-0}}   * {{cite book |last=Papaioannou |first=Theo |title=Reading Hayek in the 21st Century: a critical inquiry into his political thought |publisher=Springer |date=2012}} * {{cite book|last1=Schulak|first1=Eugen-Maria|last2=Unterköfler|first2=Herbert|title=The Austrian School of Economics: A History of Its Ideas, Ambassadors, and Institutions|publisher=Ludwig von Mises Institute|year=2011|url=https://mises.org/library/austrian-school-economics-history-its-ideas-ambassadors-and-institutions|isbn=9781610161343|ref=none}} * {{cite book |last=Wasserman |first=Janek |title=The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas |date=2019}} [https://www.amazon.com/Marginal-Revolutionaries-Austrian-Economists-Fought/dp/0300228228/ (Excerpt via Amazon)].

== External links == {{Commons category|Austrian School}} *[https://mises.org/library/understanding-austrian-economics "Understanding 'Austrian' Economics"] by Henry Hazlitt

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