Austrian School of Economics

Main Characteristics

We may summarize the characteristics of the Austrian School in five main items:

• 1.
  Economic explanations rely on human purposive action. “Purposive” means that it stems from an individual decision aiming at an end or goal—a “subjective” decision. Hence, subjectivism is a relevant trait of Austrian economics. One difference with neoclassical marginalism, stemming from Austrian subjectivism, is its stress on the opportunity cost theory: This theory emphasizes the necessarily subjective role of personal demand preferences in the determination of prices. Austrian economics refuses mathematical and mechanical explanations, considering them inadequate for dealing with purposive human actions. One consequence for businesses of this trait is that Austrians strongly support a market system absolutely free, without governmental controls.
• 2.
  Methodological individualism—the explanation of social phenomena as resulting from purposeful individual subjective actions—is the method of Austrian economics. Hayek developed this issue. A typically Austrian nuance of this perspective is depicted next.
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• 3.
  Individual actions have unintended consequences. The traditionally considered unintended consequence is a tendency toward market equilibrium. However, Austrian economics does not focus on equilibrium outcomes. For Austrians the market is a process that tends toward equilibrium. These last two characteristics reinforce the relevance of freedom in economic actions in the Austrian approach.
• 4.
  A fourth trait—although arguable—is value neutrality as a condition of scientific knowledge. It was defended by Menger, Mises, and Hayek and, despite some dissent, is still defended today. This is relevant for business ethics because value neutrality entails putting aside ethical concerns within economics.
• 5.
  Specifically, economic ideas include concrete approaches to the concept of cost (as mentioned above); a theory of business cycles based on monetary overinvestment; a time-theoretic theory of interest and capital; and the special relevance of the price system for coordinating decentralized, subjective individual preferences to achieve a spontaneous and harmonious order. Kirzner has developed a theory of entrepreneurship in which entrepreneurial alertness has a significant role. For him, entrepreneurial discoveries propel the market process.

The Austrian School versus Neoclassical Economics

From its beginnings, the Austrian School has been differentiated and opposed in several points to the neoclassical school. The causes of these differences may be found in the Austrian School's ontological, anthropological, and epistemological premises. Concerning ontology, while neoclassical economics has a determinist or closed social ontology, Austrians take an open view of society as always subjected to unexpected change. The neoclassical anthropology entails a mechanistic vision of man and of human action, while Austrians are open to freedom in a teleological conception of human action. Both schools have different epistemological assumptions appropriate to those philosophical positions. The Austrian School, rather than supporting neoclassical naturalistic or mechanistic frames, leaves room for an epistemological special framework for social sciences, where human interpretation enters the game. This has been for Austrians a source of continuous criticism of neoclassical economics.

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