What Austrian economics is – and what it is not

Austrian economics is a set of analytical propositions, not a set of policy conclusions or settled interpretations of history.

By , Guest blogger

Since the start of the financial crisis and recession, there has been a renewed interest in the ideas of Austrian economics by scholars, public intellectuals, and even the media. For the first time in a long time, the analytical framework of Austrian economics is being taken note of, if not taken seriously, by a variety of opinion makers. This is, of course, a good development.

However, at the same time, this popularity has led to many people using the “Austrian” label to refer to their views on issues beyond those involving the analytical framework they bring to economics. In particular, “Austrian” has become the near-equivalent of “free market” or “libertarian” not only indirectly, but directly through the use of terms such as “Austro-libertarian” to describe particular policy preferences or broader worldviews. The result is that, despite the additional publicity, what Austrian economics IS has often been distorted into something it is NOT.

For example, earlier this month, columnist J. D. Hamel wrote “Viewed through an Austrian perspective, public policy judgments [by Austrians] are hastily rendered and motives easily impugned” and referred to “the Austrian school’s disdain for American foreign policy and willingness to call Lincoln a tyrant.” Austrians should view as troubling the beliefs that: a) our “perspective” involves “hastily rendered” policy judgments; b) our perspective means one needs to impugn the motives of others; and c) Austrian economics requires that one have a particular view on US foreign policy or the Civil War.

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When this is what people associate with Austrian economics, we have failed in communicating its basic ideas and we have especially failed in communicating that it is an approach to the study of human action and the social world, not a set of policy conclusions. If we really want to understand the world for the purpose of improving it, we need the ideas of Austrian economics and we do not need to be pushing people away by creating the impression that Austrian economics requires that one believe things (some of which may be perceived as “nutty,” rightly or wrongly) that are not part of that analytical framework.

I would argue that the blame for this situation is two-fold. First, many journalists and commentators either don’t take the time to understand what Austrian economics is really about despite the abundance of high-quality information on the web and/or have their own biases that lead them to accept whatever caricature of Austrians they can find or invent. Second, self-described Austrians bear blame for this situation too by not making clear the distinctions among “Austrian economics,” “libertarianism,” and their particular views on historical or policy issues. The irony is that Austrians historically, and particularly Mises, were very clear about the idea of “value freedom” and the differences between theory and historical application or understanding.

So as a help to those who want a clearer understanding of what Austrian economics IS so as to also help understand what it is NOT, I would suggest a reading of co-blogger Pete Boettke’s entry on “Austrian Economics” at the Concise Encyclopedia of Economics, which is precisely the sort of source that responsible journalists could look at. There, he offers 10 propositions that define Austrian economics. I will list them below, then offer a few comments afterward.

  1. Only individuals choose.
  2. The study of the market order is fundamentally about exchange behavior and the institutions within which exchanges take place.
  3. The “facts” of the social sciences are what people believe and think.
  4. Utility and costs are subjective.
  5. The price system economizes on the information that people need to process in making their decisions.
  6. Private property in the means of production is a necessary condition for rational economic calculation.
  7. The competitive market is a process of entrepreneurial discovery.
  8. Money is nonneutral.
  9. The capital structure consists of heterogeneous goods that have multispecific uses that must be aligned.
  10. Social institutions often are the result of human action, but not of human design.

Pete does a terrific job in explicating these propositions in the linked article, and there’s no need for me to repeat what he has to say. Instead, I just want to point out how each of these is a statement about the nature of the socio-economic world and/or how we should be analyzing it. Not one of them offers a policy conclusion on economic issues or anything else. To repeat: Austrian economics is a set of ideas useful for analyzing and understanding the world; it is not a set of policy conclusions. There are plenty of non-Austrian economists who hold strongly libertarian policy views (e.g., Bryan Caplan) and there are economists who would accept most if not all of the propositions above, but who are not self-described libertarians (e.g., Roger Koppl). And there are plenty of people who believe Lincoln was a tyrant and US foreign policy is an imperialist nighmare who are not Austrians (and there are Austrians who would disagree with both of those claims).

To get from Austrian economics to conclusions on policy, one has to import some basic non-economic beliefs, such as that social cooperation, peace, and prosperity are desirable and that no other values are more important. In addition, making such claims, especially when they rest on historical understanding, also involves the interpretive judgment of the economist in ways that take him beyond Austrian economics strictly speaking. To say something about policy or history requires that the economist use knowledge from other areas and invoke her understanding of history and the actors of the present. Austrian economic theory alone cannot render such policy judgments or provide such historical understanding.

Consider what Mises says about the task of the historian:

In dealing with a historical problem the historian makes use of the knowledge provided by logic, mathematics, the natural sciences, and especially by praxeology. However, the mental tools of these nonhistorical disciplines do not suffice for his task. They are indispensible auxiliaries for him, in themselves they do not make it possible to answer those questions he has to deal with….

He cannot solve this problem on the ground of the theorems provided by all other sciences alone. There always remains at the bottom of each of his problems something which resists analysis at the hand of these teachings of other sciences. It is these individual and unique characteristics of each event which are studied by the understanding. … It is the method which all historians and all other people always appply in commenting upon human events of the past and in forecasting future events. (Human Action pp. 49-50)

Austrian economics (praxeology) has nothing to say in and of itself about issues such as US foreign policy, the Civil War, whether the Federal Reserve System was the product of a secret bankers’ conspiracy, whether the Bush family has ties to the Nazis, whether same-sex marriage should be legalized, whether Israel is a rogue state, whether intellectual property is legitimate, or whether the atomic bombing of Japan was justified. Again, Austrian theoretical ideas will be, of course, of use in our attempts to understand these issues (as Chris Coyne’s work on US foreign policy demonstrates), but there is nothing, repeat, nothing, that “requires” that someone using Austrian ideas take one position or another on those issues. And no position so taken can rightly be described as “the” Austrian view of the issue.

In addition, Austrian economics has nothing to say about “natural rights.” In fact, Mises denied the existence of natural rights and it isn’t clear what use economics of any school is if one prefers natural rights arguments over consequentialist ones.

Austrian economics IS a set of analytical propositions about the world and how to study it. It is NOT a set of policy conclusions or settled interpretations of history. Whatever one’s views on these other issues, it is incumbent upon Austrians to make clear that they are not a necessary component of making use of an Austrian framework for analysis. And if we can do a better job in making that very Misesian distinction clear, we will be even more likely to get our ideas not just heard but accepted by divorcing them from specific positions on issues that have no necessary connection to Austrian economics and frequently drive away those who might otherwise be sympathetic.

*This has been originally posted at the blog Coordination Problem. It is cross-posted here because of its general importance to those interested in Austrian economics.

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