. The
French liberal school of political economy is an intellectual ancestor of 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.
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.
First wave 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.
John Stuart Mill had earlier expressed a similar idea in his 1848
Principles of Political Economy, 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. 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". 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 , during which they attacked the
Hegelian doctrines of the
historical school.
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. 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,
Friedrich Hayek,
Fritz Machlup,
Karl Menger (son of Carl Menger),
Oskar Morgenstern, Paul Rosenstein-Rodan,
Abraham Wald, and Michael A. Heilperin, and the sociologist
Alfred Schütz.
Later 20th century , in
Auburn, Alabama, United States By the mid-1930s, most economists had embraced what they considered the important contributions of the early Austrians. 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". Sometime during the middle of the 20th century, Austrian economics was largely sidelined by mainstream economists who favored mathematical modeling and statistical methods. 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. 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. 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. 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. Hayek's work was influential in the revival of
laissez-faire thought in the 20th century.
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. In a 1999 book published by the
Ludwig von Mises Institute, 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. 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. 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. He also talked about
Edmund Burke and the English tradition to sustain these positions. Economists of the Hayekian view are affiliated with the
Cato Institute,
George Mason University (GMU) and New York University, among other institutions. They include
Peter Boettke,
Roger Garrison,
Steven Horwitz,
Peter Leeson and
George Reisman. 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.
Influence Many theories developed by "first wave" Austrian economists have long been absorbed into
mainstream economics. 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. 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". 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". Currently, universities with a significant Austrian presence are
George Mason University,
New York University,
Grove City College,
Loyola University New Orleans,
Hillsdale College,
Monmouth College, and
Auburn University in the United States;
King Juan Carlos University in Spain; and
Universidad Francisco Marroquín in Guatemala. Austrian economic ideas are also promoted by privately funded organizations such as the
Mises Institute and the
Cato Institute. == Theory ==