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{{Austrian School sidebar |expanded=all}}
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The '''Austrian School''' is a [[Schools of economic thought|school of economic thought]] that is based on the analysis of the purposeful actions of individuals (see [[methodological individualism]]).<ref>Carl Menger, Prinicples of Economics, online at http://www.mises.org/etexts/menger/principles.asp</ref><ref name="econlib">{{cite encyclopedia |last1=Boettke |first1=Peter J. |authorlink1= Peter Boettke |last2=  |first2= |authorlink2= |editor= [[David R. Henderson]] (ed.) |encyclopedia=[[Concise Encyclopedia of Economics]] |title=Austrian School of Economics |url=http://www.econlib.org/library/Enc/AustrianSchoolofEconomics.html |year=2008 |edition= 2nd |publisher=[[Library of Economics and Liberty]]  |isbn=978-0865976658 |oclc=237794267}}</ref><ref>[http://plato.stanford.edu/entries/methodological-individualism/ Methodological Individualism at the Stanford Encyclopedia of Philosophy ]</ref><ref name="Mises_Action">Ludwig von Mises.  [[Human Action]], p. 11, "r. Purposeful Action and Animal Reaction". Referenced 2011-11-23.</ref> It originated  in late-19th and early-20th century 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> Current-day economists working in this tradition are located in many different countries, but their work is 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]], each of which has become an accepted part of [[mainstream economics]].<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 = 94 | isbn = 978-0-415-09397-2}}</ref>
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Many economists are critical of the current-day Austrian School and consider its rejection of [[econometrics]], [[experimental economics]], and aggregate [[macroeconomic]] analysis to be outside of [[Mainstream economics|mainstream economic theory]], or "[[Heterodox economics|heterodox]]."<ref name="Austrian Economists: Boettke">{{Cite web|url=http://austrianeconomists.typepad.com/weblog/2008/05/is-austrian-eco.html|title=Is Austrian Economics Heterodox Economics?|last=Boettke |first=Peter|publisher=The Austrian Economists|accessdate=2009-02-13| archiveurl= https://web.archive.org/web/20090328232903/http://austrianeconomists.typepad.com/weblog/2008/05/is-austrian-eco.html| archivedate= 28 March 2009 <!--DASHBot-->| deadurl= no}}</ref><ref name="Boettke and Leeson">{{Cite book|last=Boettke|first=Peter J.|author2=[[Peter T. Leeson]]|title=A Companion to the History of Economic Thought|editor=[[Warren Samuels]], Jeff E. Biddle, and John B. Davis|pages=446–452|chapter=28A: The Austrian School of Economics 1950-2000|url=http://books.google.com/?id=3H8gBQv5MysC&pg=PA445&dq=austrian+school+heterodox+economics |publisher=Blackwell Publishing |year=2003 |isbn=978-0-631-22573-7}}</ref><ref>{{cite news | url=http://www.economist.com/node/21542174 | title=Heterodox economics: Marginal revolutionaries | publisher=The Economist | date=December 31, 2011 | accessdate=February 22, 2012}}</ref><ref name="Caplan">{{Cite web|url=http://www.gmu.edu/departments/economics/bcaplan/whyaust.htm|title=Why I Am Not an Austrian Economist |last=Caplan |first=Bryan |publisher=Byan Caplan at [[George Mason University]] faculty page |accessdate=2008-07-04 | quote=...More than anything else, what prevents Austrians from getting more publications in mainstream journals is that their papers rarely use mathematics or econometrics, research tools that Austrians reject on principle. ...Mises and Rothbard however err when they say that economic history can ''only'' illustrate economic theory. In particular, empirical evidence is often necessary to determine whether a theoretical factor is ''quantitatively significant''. ...Austrians reject econometrics on principle because economic theory is true a priori, so statistics or historical study cannot 'test' theory....}}</ref> Austrians are likewise critical of mainstream economics.<ref>[http://mises.org/journals/qjae/pdf/qjae3_2_3.pdf Austrian Economics and the Mainstream: View from the Boundary], Roger E. Backhouse</ref>  Although the Austrian School has been considered heterodox since the late 1930s, it began to attract renewed academic and public interest starting in the 1970s.<ref name="Meijer 1995">{{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>
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==Methodology==
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The Austrian School believes that the subjective choices of individuals underlie all economic phenomena.  Austrians seek to understand the observed economy by examining the social ramifications of such individual choice.  This approach, termed ''[[methodological individualism]]'', differs significantly from many other schools of economic thought, which have placed less importance on individual knowledge, time, expectation, and other subjective factors and focused instead on aggregate variables, equilibrium analysis, and the consideration of 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=revised ed. 2003|publisher=Mises Institute|url=https://mises.org/mofase.asp}}</ref>
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[[File:Ludwig von Mises.jpg|right|thumb|130px|[[Ludwig von Mises]]]]
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In the twentieth and twenty-first centuries, many diverse approaches and theoretical orientations have developed among economists whose methodological lineage can be traced back to the early Austrian School.  For example, in 1949, [[Ludwig von Mises]] codified his version of the subjectivist approach, which he called "[[praxeology]]", in a book published in English as ''[[Human Action]]''.<ref name="Ludwigvon">Ludwig von Mises, Nationalökonomie (Geneva: Union, 1940), p. 3; Human Action (Auburn, Ala.: Mises Institute, [1949] 1998), p. 3.</ref> In it, Mises presented an extensive statement of his method, and stated that praxeology could be used to deduce ''a priori'' theoretical economic truths. Mises also argued against the use of probabilities in economic models. According to Mises, deductive economic [[thought experiment]] can yield conclusions which follow irrefutably from the underlying assumptions and could not be inferred from empirical observation or statistical analysis.<ref>{{Cite web|url=http://mises.org/books/ufofes/ |title=The Ultimate Foundation of Economic Science by Ludwig von Mises |publisher=Mises.org |date= |accessdate=2012-08-13}}</ref>
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Since Mises time, many, but certainly not all, Austrian thinkers have accepted his praxeological approach. Some have adopted alternative methodologies.<ref>Bruce J. Caldwell "Praxeology and its Critics: an Appraisal" History of Political Economy Fall 1984 16(3): 363–379; {{DOI|10.1215/00182702-16-3-363}}  [http://public.econ.duke.edu/~bjc18/docs/Praxeology%20and%20Its%20Critics.pdf]</ref> For example, [[Fritz Machlup]], [[Friedrich Hayek]], and others, did not take Mises' strong ''[[A priori and a posteriori|a priori]]'' approach to economics.<ref>Richard N. Langlois, "FROM THE KNOWLEDGE OF ECONOMICS TO THE ECONOMICS OF KNOWLEDGE: FRITZ MACHLUP ON METHODOLOGY AND ON THE "KNOWLEDGE SOCIETY" Research in the History of Economic Thought and Methodology, Volume 3, pp. 225–235 [http://web.uconn.edu/ciom/Machlup%20Knowledge%20(1985).pdf]</ref>  Prof. 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://mises.org/books/macrothinking.pdf}}</ref>
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Economist [[Paul A. Samuelson]] has written that most economists believe that economic conclusions reached by pure logical deduction are limited and weak.<ref name="Samuelson">{{Cite book |last=Samuelson |first=Paul |title=Economics |publisher=New York: McGraw-Hill |year=1964 |edition=6th |page=736 |isbn=978-0-07-074741-8}}</ref> According to Samuelson and economist [[Bryan Caplan]], Mises' deductive methodology (also embraced by [[Murray Rothbard]] and to a lesser extent by Mises' student, Israel Kirzner) has been widely dismissed within mainstream economics.<ref name="tremble"/> Caplan has written that the Misesian challenge to the realism of neoclassical assumptions has helped work towards making those assumptions more plausible.<ref name="Austrian Search">{{cite journal|last=Caplan|first=Bryan|title=The Austrian Search for Realistic Foundations|journal=Southern Economic Journal|year=1999|volume=65|issue=4|pages=823–838|jstor=1061278|doi=10.2307/1061278 |url=http://econfaculty.gmu.edu/bcaplan/pdfs/aussearch.pdf  }}</ref>
==Demos==


Starting in the 20th century, various Austrians incorporated models and mathematics into their analysis of the economy. Austrian economist [[Steven Horwitz]] argues that Austrian methodology is consistent with [[macroeconomics]] and that Austrian macroeconomics can be expressed in terms of [[microeconomics|microeconomic]] foundations.<ref name="Horwitz, Steven 2000">Horwitz, Steven: Microfoundations and Macroeconomics: An Austrian Perspective (2000)|''Routledge''</ref> Austrian economist Roger Garrison argues that Austrian macroeconomic theory can be correctly expressed in terms of [[diagram|diagrammatic models]].<ref>http://library.mises.org/books/Roger%20W%20Garrison/Austrian%20Macroeconomics%20A%20Diagrammatical%20Exposition.pdf Garrison, Roger: Austrian Macroeconomics: A Diagrammatical Exposition (1978)|''Institute for Humane Studies''</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>Neumann, John von and Morgenstern, Oskar Theory of Games and Economic Behavior. Princeton, NJ. Princeton University Press. 1944</ref>
Here are some [https://commons.wikimedia.org/w/index.php?title=Special:ListFiles/Frederic.wang demos]:


==Fundamental tenets==


[[Fritz Machlup]] listed the typical views of Austrian economic thinking.<ref name="Machlup Mises">{{cite web|last=Machlup |first=Fritz |authorlink=Fritz Machlup |title=Homage to Mises |url=http://www.mises.org/daily/1700 |publisher=Hillsdale College |accessdate=8 August 2013|pages=19–27|year=1981}}</ref>
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{{quote|
==Test pages ==
:(1) Methodological Individualism: In the explanation of economic phenomena we have to go back to the actions (or inaction) of individuals; groups or "collectives" cannot act except through the actions of individual members.
:(2) Methodological Subjectivism: In the explanation of economic phenomena we have to go back to judgments and choices made by individuals on the basis of whatever knowledge they have or believe to have and whatever expectations they entertain regarding external developments and especially the consequences of their own intended actions.
:(3) Tastes and Preferences: Subjective valuations of goods and services determine the demand for them so that their prices are influenced by (actual and potential) consumers.
:(4) Opportunity Costs: The costs with which producers and other economic actors calculate reflect the alternative opportunities that must be foregone; as productive services are employed for one purpose, all alternative uses have to be sacrificed.
:(5) Marginalism: In all economic designs, the values, costs, revenues, productivity, etc., are determined by the significance of the last unit added to or subtracted from the total.
:(6) 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.


Two important tenets held by the Misesian branch of Austrian economics may also be added to the list:
To test the '''MathML''', '''PNG''', and '''source''' rendering modes, please go to one of the following test pages:
:(7) 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.
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:(8) 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 nineteenth century.}}
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==Contributions to economic thought==
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===Opportunity cost===
==Bug reporting==
{{Main|Opportunity cost}}
If you find any bugs, please report them at [https://bugzilla.wikimedia.org/enter_bug.cgi?product=MediaWiki%20extensions&component=Math&version=master&short_desc=Math-preview%20rendering%20problem Bugzilla], or write an email to math_bugs (at) ckurs (dot) de .
[[File:1wieser.jpg|right|thumb|130px|[[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=McMillan |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 name="investopedia">{{cite web |work=Investopedia |title=Opportunity Cost |url=http://www.investopedia.com/terms/o/opportunitycost.asp |accessdate=2010-09-18| archiveurl= https://web.archive.org/web/20100914214221/http://www.investopedia.com/terms/o/opportunitycost.asp| archivedate= 14 September 2010 <!--DASHBot-->| deadurl= no}}</ref>  This view is currently held by contemporary economists of all mainstream schools of thought.
 
Opportunity cost is a key concept in [[economics]], and has been described as expressing "the basic relationship between [[scarcity]] and [[utility|choice]]".<ref>{{cite encyclopedia |url=http://www.dictionaryofeconomics.com/search_results?q=opportunity+cost&edition=current&button_search=GO |title=Opportunity cost |encyclopedia=The New Palgrave Dictionary of Economics Online |author=James M. Buchanan |authorlink=James M. Buchanan |year=2008 |edition=Second |accessdate=2010-09-18 |ref=harv }}</ref> The notion of opportunity cost plays a crucial part in ensuring that resources are used efficiently.<ref>{{cite news |url=http://www.economist.com/research/Economics/alphabetic.cfm?letter=O#opportunitycost |title=Opportunity Cost |work=Economics A-Z  |publisher=The Economist |accessdate=2010-09-18 | archiveurl= https://web.archive.org/web/20101009122334/http://www.economist.com/research/Economics/alphabetic.cfm?letter=O| archivedate= 9 October 2010 <!--DASHBot-->| deadurl= no}}</ref>
 
===Capital and interest===
{{See also|Capital and Interest|Marginalism|Neutrality of money|Time preference}}
[[File:1Bawerk.gif|right|thumb|130px|[[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 two factors, namely, [[supply and demand]] in the market for final goods and time preference.<ref name="BohmBawerkEugen">Böhm-Bawerk, Eugen Ritter von; ''Kapital Und Kapitalizns. Zweite Abteilung: Positive Theorie des Kapitales'' (1889). Translated as ''Capital and Interest. II: Positive Theory of Capital'' with appendices rendered as ''Further Essays on Capital and Interest''.</ref><ref name="econlib_a">http://www.econlib.org/library/Enc/bios/BohmBawerk.html</ref>
 
Böhm-Bawerk's theory was a response to Marx's [[labor theory of value]] and capital. Böhm-Bawerk's theory attacked the viability of the labor theory of value in the light of the [[transformation problem]]. His conception of interest countered [[Exploitation theory|Marx's exploitation theory]]. Marx famously argued that capitalists exploit workers by paying them less than the fruits of their labor sell for. Bohm-Bawerk countered this claim by invoking the concept of [[time preference]] to demonstrate that everyone values present consumption more than future consumption, and therefore that a difference between the (smaller) salary laborers are paid in the present and the (greater) price for which the goods they produce are later sold need not be exploitative.<ref name="econlib_a" />
 
Böhm-Bawerk's theory equates [[capital intensity]] with the degree of [[roundaboutness]] of production processes. Böhm-Bawerk also argued that the law of [[marginal utility]] necessarily implies the classical law of costs.<ref name="BohmBawerkEugen" /> Some Austrian economists therefore entirely reject the notion that interest rates are affected by [[liquidity preference]].{{citation needed|date=March 2013}}
 
===Inflation===
{{See also|Monetary Inflation}}
Mises believed that money prices and wages will inevitably rise when the supply of money and bank credit is increased.<ref>{{Cite book |first=Ludwig |last=von Mises |chapter=Economic Freedom and Interventionism |editor1-first=Bettina B. |editor1-last=Greaves |title=Economics of Mobilization |publisher=The Commercial and Financial Chronicle |location=Sulphur Springs, West Virginia |pages= |year=1980 |isbn= |chapterurl=http://mises.org/efandi/ch20.asp |ref=harv |quote="Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term "inflation" to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation."}}</ref> He therefore used the term "inflation" to mean an excessive increase of the money supply and not, as is the common usage, to refer to [[inflation|price inflation]].  In Mises' view, inflation is the result of policies of the government or central bank which result in an increase in the circulating money supply.<ref>Ludwig von Mises, [http://mises.org/books/Theory_Money_Credit/Contents.aspx The Theory of Money and Credit]", ISBN 978-0-913966-70-9</ref>{{primary source claim|date=June 2013}} Mises wrote: <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></blockquote>
 
Economist [[Richard Timberlake]] criticized von Mises' view that ''inflation'' must refer to an increase in the money supply.  Timberlake noted that economists since the time of [[John Stuart Mill]] have recognized the distinction between increases in the money stock and increases in the general level of money prices. Timberlake stated that Mises' view has repeatedly been proven false and that statistical measurement of the aggregate price level is necessary in order test the empirical validity of Mises' theory.<ref name=Timberlake>{{cite journal|last=Timberlake|first=Richard H.|title=Austrian Inflation, Austrian Money, and Federal Reserve Policy|journal=The Freeman|date=September 1, 2000|url=http://www.fee.org/the_freeman/detail/austrian-inflation-austrian-money-and-federal-reserve-policy#axzz2JZKoJIRE|accessdate=31 January 2013}}</ref>
 
Economist Paul Krugman has criticized Austrians' views on inflation and the failure to test their views against empirical evidence. In late 2011 he pointed out that the monetary base had tripled in the previous three years, but the average annual inflation rate was only 1.5 percent. There was no "devastating inflation" as predicted by Austrians.<ref name=Madness>{{cite news|last=Krugman|first=Paul|title=G.O.P. Monetary Madness|url=http://www.nytimes.com/2011/12/16/opinion/gop-monetary-madness.html|accessdate=11 June 2013|newspaper=NY Times|date=Dec 15, 2011}}</ref> In late 2012 he chided those who failed to "let the evidence speak" when it disproved the Austrian theory of inflation. Krugman wrote: "If you believe that... expanding credit will simply result in too much money chasing too few goods, and hence a lot of inflation... [Then] the failure of high inflation to materialize amounts to a decisive rejection of [the Austrian] model."<ref>Paul Krugman, [http://krugman.blogs.nytimes.com/2012/11/29/varieties-of-error/ Varieties of Error], 2012.</ref>
 
===Economic calculation problem===
{{Main|Economic calculation problem}}
{{refimprove section|date=May 2013}}
[[File:Friedrich Hayek portrait.jpg|right|thumb|130px|[[Friedrich Hayek]]]]
The economic calculation problem refers to a criticism of [[socialist economics|socialism]] which was first stated by [[Max Weber]] in 1920. Mises subsequently discussed Weber's idea with his student Friedrich Hayek, who developed it in various works including [[The Road to Serfdom]].<ref name=autogenerated5>{{cite book |title=Economic calculation in the Socialist Commonwealth |accessdate=2008-09-08 |last=Von Mises |first=Ludwig |authorlink=Ludwig von Mises |year=1990|format=PDF |publisher=[[Ludwig von Mises Institute]] |url=http://mises.org/pdf/econcalc.pdf |isbn=0-945466-07-2 | archiveurl= https://web.archive.org/web/20080923191714/http://mises.org/pdf/econcalc.pdf| archivedate= 23 September 2008 <!--DASHBot-->| deadurl= no}}</ref><ref>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> The problem concerns the means by which resources are allocated and distributed in an economy.
 
Austrian theory emphasizes the [[spontaneous order|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 the decisions of socialist economic planners lack all of the knowledge to make optimal decisions.  Those who agree with this criticism view it is a refutation of socialism and that it shows that it 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">[http://cepa.newschool.edu/het/essays/paretian/social.htm The socialist calculation debate]{{Dead link|date=August 2011}}</ref>
 
Mises argued in a 1920 article "[[Economic Calculation in the Socialist Commonwealth]]" that the pricing systems in socialist economies were necessarily deficient because if 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|url=http://mises.org/humanaction/chap2sec4.asp|author=Ludwig von Mises|title=The Principle of Methodological Individualism|work=Human Action|publisher=Ludwig von Mises Institute|accessdate=2009-04-24| archiveurl= https://web.archive.org/web/20090422004804/http://mises.org/humanaction/chap2sec4.asp| archivedate= 22 April 2009 <!--DASHBot-->| deadurl= no}}</ref> Economist [[Bryan Caplan]] has written that Mises's has been criticized as overstating the strength of his case, in describing socialism as impossible, rather than that it may need to establish non-market institutions to deal with a source of inefficiency.<ref name="Caplan" /><ref name="Caplan_soc">{{cite journal |last1=Caplan |first1=Bryan |title=Is socialism really "impossible"? |journal=Critical Review |volume=16 |pages=33–52 |year=2004 |doi=10.1080/08913810408443598 |ref=harv}}</ref>
 
===Business cycles===
{{Main|Austrian business cycle theory}}
{{refimprove section|date=May 2013}}
The Austrian theory of the [[business cycles|business cycle]]  ("ABCT") focuses on banks' issuance of credit as the cause of economic fluctuations. Although later elaborated by Hayek and others, the theory was first set forth by von Mises, who believed that banks extend credit at artificially low interest rates, causing businesses to invest in relatively [[Roundaboutness|roundabout]] production processes.  Mises stated that this led to a misallocation of resources which he called ''[[malinvestment]]''.
 
According to the theory, malinvestment is induced by banks' excessive and unsustainable expansion of credit to businesses.<ref name="econlib.org">[http://www.econlib.org/library/Mises/msT.html Theory of Money and Credit], Ludwig von Mises, Part III, Part IV</ref> Businesses borrow at unsustainably low interest rates and overinvest in  capital-intensive production processes, which in turn leads to a diversion of investment from consumer goods industries to capital goods industries. Austrians contend that this shift is unsustainable and must eventually be reversed, and that the re-adjustment process will be more violent and disruptive the longer the putative malinvestment in capital goods industries continues.
 
According to the Austrian view, the proportion of income allocated to [[Consumption (economics)|consumption]] rather than saving is determined by the interest rate and people's [[time preference]], which is the degree to which they prefer present to future satisfactions.  According to this view, the pure interest rate is determined by the time preferences of the individuals in society. If the market rate of interest offered by banks is set lower than this, business borrowing will be excessive and will be allocated to malinvestment.<ref>[http://www.econlib.org/library/Mises/msT.html Theory of Money and Credit], Ludwig von Mises, Part II</ref>
 
Newly extended credit thus malinvested will circulate from the business borrowers to the factors of production: landowners, capital goods producers, and capital goods workers. Austrians state that, because individuals' time preferences have not changed, the market will tend to reestablish the old proportions between current and future production.  Depositors will tend to remove cash from the banking system and spend it (not save it), banks will then ask their borrowers for repayment, and the excessive capital goods will be liquidated at lower prices to retire the now-unprofitable loans.<ref name="econlib.org"/>{{citation needed|date=June 2013}}
 
====Role of government disputed====
According to Mises, [[central bank]]s enable the commercial banks to fund loans at artificially low interest rates, thereby inducing an unsustainable expansion of bank credit and impeding any subsequent contraction.<ref name="econlib.org"/><ref name="The Mystery of Banking">[http://www.mises.org/Books/mysteryofbanking.pdf The Mystery of Banking], Murray Rothbard, 1983</ref>{{citation needed|date=June 2013}} <ref name="econlib.org">[http://www.econlib.org/library/Mises/msT.html Theory of Money and Credit], Ludwig von Mises, Part III, Part IV</ref><ref name="ReferenceA">''[[America's Great Depression]]'', [[Murray Rothbard]]</ref> Friedrich Hayek disagreed.  Hayek did not favor [[laissez-faire]] in banking and said that a freely competitive banking industry tends to be endogenously destabilizing and pro-cyclical, mimicking the effects which Rothbard attributed to central bank policy.  Hayek stated that the need for [[central banking]] control was inescapable.<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|accessdate=11 April 2013|doi=10.1215/00182702-31-4-753|pages=753}}</ref>
 
====Criticism====
Most research regarding the theory finds that it is inconsistent with empirical evidence. Economists such as [[Gordon Tullock]],<ref name="Tullock1988">{{cite journal |author=Gordon Tullock |title=Why the Austrians are wrong about depressions |journal=The Review of Austrian Economics |volume=2 |issue=1 |year=1988 |pages=73–78 |format=PDF |url=http://mises.org/journals/rae/pdf/RAE2_1_4.pdf |accessdate=2009-06-24 |doi=10.1007/BF01539299 |ref=harv}}</ref> Bryan Caplan,<ref name=autogenerated3>{{cite web |url=http://econlog.econlib.org/archives/2008/01/whats_wrong_wit_6.html |title=What's Wrong With Austrian Business Cycle Theory |last=Caplan |first=Bryan |date=2008-01-02 |publisher=Library of Economics and Liberty |accessdate=2008-07-28}}</ref> [[Milton Friedman]],<ref name="Friedman1969">{{cite book |last=Friedman |first=Milton |title=The Optimal Quantity of Money and Other Essays |publisher=Aldine |location=Chicago |pages=261–284 |chapter=The Monetary Studies of the National Bureau, 44th Annual Report}}</ref><ref name="Friedman93">{{cite journal |last=Friedman |first=Milton |title=The 'Plucking Model' of Business Fluctuations Revisited |journal=Economic Inquiry |pages=171–177 |ref=harv}}</ref> and [[Paul Krugman]]<ref name="Krugman">{{cite web |url=http://www.slate.com/id/9593 |title=The Hangover Theory |last=Krugman |first=Paul |authorlink=Paul Krugman |date=1998-12-04 |publisher=Slate |accessdate=2008-06-20| archiveurl = http://www.webcitation.org/5u40jRL5e | archivedate = 2010-11-07| deadurl=no}}</ref> have said that they regard the theory as incorrect. Austrian economist Ludwig Lachmann noted that the Austrian theory was rejected during the 1930s:
<blockquote>The promise of an Austrian theory of the trade cycle, which might also serve to explain the severity of the Great Depression, a feature of the early 1930s that provided the background for Hayek’s successful appearance on the London scene, soon proved deceptive. Three giants – Keynes, Knight and Sraffa – turned against the hapless Austrians who, in the middle of that black decade, thus had to do battle on three fronts. Naturally it proved a task beyond their strength.<ref>Ludwig M. Lachmann, in The Market as an Economic Process (Oxford, 1986), p. ix</ref></blockquote>
In 1969, Milton Friedman argued that the theory is not consistent with empirical evidence<ref>Friedman, Milton. "The Monetary Studies of the National Bureau, 44th Annual Report". The Optimal Quantity of Money and Other Essays. Chicago: Aldine. pp. 261–284.</ref> and using newer data in 1993 reached the same conclusion.<ref>Friedman, Milton. "The 'Plucking Model' of Business Fluctuations Revisited". Economic Inquiry: 171–177.</ref> In 1986, Austrian economist Roger Garrison reviewed Hayek's development of the Austrian Business Cycle Theory and discussed the factors that have sustained interest in the theory despite its longtime rejection by mainstream economics.<ref>{{cite journal|last=Garrison|first=Roger|title=Hayekian Trade Cycle Theory: A Reappraisal|journal=Cato Journal|year=2001|volume=6|issue=2|url=http://www.auburn.edu/~garriro/c4refah.htm|accessdate=19 May 2013}}</ref>
 
==History==
[[File:Jean-baptiste Say.jpg|right|thumb|130px|[[Jean-Baptiste Say]]]]
 
===Origin of the name Austrian school===
The School owes its name to members of the German [[Historical school of economics]], who argued against the Austrians during the ''[[Methodenstreit]]'' ("methodology struggle"), in which the Austrians defended the role of theory in economics as distinct from the study or compilation of historical circumstance. 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]], 2007; in the Foreword to ''Principles of Economics'', Carl Menger; trns. James Dingwall and Bert F. Hoselitz, 1976; Ludwig von Mises Institute, Alabama; 2007; ISBN 978-1-933550-12-1</ref> 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 ed.|publisher=Ludwig von Mises Institute.|url=http://mises.org/etexts/histsetting.pdf}}</ref>
 
===First Wave===
[[File:CarlMenger.png|right|thumb|130px|[[Carl Menger]]]]
The school originated in [[Vienna]], in the [[Austrian Empire]]. [[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 |title=Austrian Economics in Debate |publisher=Routledge |location=New York |year=1997 |isbn=978-0-415-14054-6 }}</ref>{{Page needed|date=August 2011}} 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>Israel M. Kirzner (1987). "Austrian School of Economics," ''[[The New Palgrave: A Dictionary of Economics]]'', v. 1, pp. 145–151.</ref>
 
Menger's contributions to economic theory were closely followed by those of 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, as was part of the Austrians' participation in the late 19th Century ''[[Methodenstreit]]'', during which they attacked the [[Georg Wilhelm Friedrich Hegel|Hegelian]] doctrines of the [[Historical school of economics|Historical School]].
 
===Early Twentieth Century in Vienna===
Several important Austrian economists trained at the University of Vienna in the 1920s and later participated in the private seminar of von Mises. These included Gottfried Haberler,<ref>http://mises.org/page/1452/Biography-of-Gottfried-Haberler-19011995</ref> Friedrich Hayek, Fritz Machlup,<ref>{{cite web|title=Biography of Fritz Machlup|url=http://mises.org/page/1457/Biography-of-Fritz-Machlup-19021983|accessdate=16 June 2013}}</ref>  Karl Menger (son of Carl Menger),<ref>http://www.iit.edu/csl/am/about/menger/about.shtml</ref> Oskar Morgenstern,<ref>http://library.duke.edu/rubenstein/findingaids/morgenst/</ref> Paul Rosenstein-Rodan<ref>http://archives.lse.ac.uk/Record.aspx?src=CalmView.Catalog&id=COLL+MISC+0324 Archive at London School of Economics</ref>
Abraham Wald,<ref>{{cite journal|title=Abraham Wald, 1902-1950|author=Oskar Morgenstern|journal=Econometrica
|volume=19|number=4|date=Oct., 1951|pages=361-367|publisher=The Econometric Society|jstor=1907462}}</ref> among others.
 
===Later Twentieth century===
[[File:Israel Kirzner.jpg|right|thumb|130px|[[Israel Kirzner]]]]
 
By the mid-1930s, most economists had embraced what they considered the important contributions of the early Austrians.<ref name="Boettke and Leeson"/> After [[World War II]], Austrian economics was disregarded or derided by most economists because it rejected mathematical and statistical methods in the study of economics.<ref>"[http://www.springerlink.com/content/kq577622488v4447/fulltext.pdf Austrian economics and the mainstream: View from the boundary]" by Roger E. Backhouse, $34 to view {{Dead link|date=March 2011}}</ref> Fritz Machlup quoted Hayek's statement, "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>http://mises.org/daily/1700/Ludwig-von-Mises-A-Scholar-Who-Would-Not-Compromise Homage to Mises by Fritz Machlup 1981</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=http://www.mises.org/journals/aen/aen17_1_1.asp|publisher=Mises Institute|accessdate=17 June 2013}}</ref>
 
After 1940, 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 name="Caplan"/><ref>http://mises.org/journals/qjae/pdf/qjae7_1_3.pdf</ref>
 
[[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]] |date= |accessdate=2013-03-11}}</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|The Failure of the "New Economics"]]'' (1959), a line-by-line critique of [[John Maynard Keynes]]'s ''[[The General Theory of Employment, Interest and Money|General Theory]]''.<ref>{{cite web |url=http://mises.org/about/3233 |title=Biography of Henry Hazlitt |publisher=The Ludwig von Mises Institute |date= |accessdate=2013-03-11}}</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= http://mises.org/etexts/austrianliberalism.asp |title=Austrian Economics and Classical Liberalism |first=Ralph |last=Raico |work=mises.org |publisher=Mises Institute |year=2011 |quote=despite the particular policy views of its founders ..., Austrianism was perceived as the economics of the free market |accessdate=27 July 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===
According to economist Bryan Caplan, by the late twentieth century, a split had developed among those who self-identify with the Austrian School. One group, building on the work of Hayek, follows the broad framework of mainstream neoclassical economics, including its use of mathematical models and general equilibrium, and merely brings a critical perspective to mainstream methodology influenced by the Austrian notions such as the [[economic calculation problem]] and the independent role of logical reasoning in developing economic theory.<ref name="Austrian Search"/>
 
[[File:MurrayBW.jpg|right|thumb|130px|[[Murray Rothbard]]]]
A second group, following Mises and Rothbard, rejects the neoclassical theories of consumer and welfare economics, dismisses empirical methods and mathematical and statistical models as inapplicable to economic science, and asserts that economic theory went entirely astray in the twentieth century; they offer the Misesian view as a radical alternative paradigm to mainstream theory. Caplan wrote that if "Mises and Rothbard are right, then [mainstream] economics is wrong; but if Hayek is right, then mainstream economics merely needs to adjust its focus."<ref name="Austrian Search"/>
 
Economist [[Leland Yeager]] discussed the late twentieth century rift and referred to a discussion written by Murray Rothbard, Hans-Hermann Hoppe, Joseph Salerno, and others in which they attack and disparage Hayek.  "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" and 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=Yaeger|first=Leland|title=Is the Market a Test of Truth and Beauty?: Essays in Political Economy|page=93ff|year=2011|publisher=Mises Institute}}</ref>
 
In a 1999 book published by the Mises Institute,<ref>{{cite book|last=Hoppe|first=Herr Hans-Hermann|title=15 Great Austrian Economists -- Murray Rothbard|year=1999|publisher=von Mises Institute|location=Alabama|pages=223 ff.|url=http://mises.org/books/15great.pdf}}</ref> Hans-Hermann Hoppe asserted that Murray Rothbard was the leader of the "mainstream within Austrian Economics" and contrasted Rothbard with Nobel Laureate Friedrich Hayek, who he identified as a [[British empiricism|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.
Economists of the Hayekian view are affiliated with the [[Cato Institute]], George Mason University, 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 [[Ludwig von Mises Institute]]<ref name="faculty">{{cite web |url=http://mises.org/Faculty |title=Senior Fellows, Faculty Members, and Staff |publisher=Mises.org |accessdate=July 21, 2013}}</ref> and some of them also with academic institutions.<ref name="faculty"/> According to Murphy, a "truce between (for lack of better terms) the GMU Austro-libertarians and the Auburn Austro-libertarians" was signed around 2011.<ref>[http://consultingbyrpm.com/blog/2011/12/in-defense-of-the-mises-institute.html Robert Murphy blog, December 31, 2011.]</ref><ref name="Yaeger Truth and Beauty">{{cite book|last=Yeager|first=Leland|title=Is the Market a Test of Truth and Beauty?|year=2011|publisher=Mises Institute|page=103|url=http://books.google.com/books?id=-z7Q4rsgdhAC&source=gbs_navlinks_s}}</ref>
 
==Influence==
Many theories developed by "first wave" Austrian economists have 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]].{{citation needed|date=June 2013}}
 
Former [[U.S. 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>[http://mises.org/journals/aen/aen9_1_1.asp An Interview with Laureate James Buchanan] Austrian Economics Newsletter: Volume 9, Number 1; Fall 1987</ref>
 
Chinese economist [[Zhang Weiying]], supports some Austrian theories such as the Austrian theory of the business cycle.<ref>Weiyin, Zhang, "Completely bury Keynesianism", http://finance.sina.com.cn/20090217/10345864499_3.shtml (February 17, 2009)</ref> Currently, universities with a significant Austrian presence are [[George Mason University]], [[New York University]], [[Loyola University New Orleans]], and [[Auburn University]] in the United States and [[Universidad Francisco Marroquín]] in Guatemala. Austrian economic ideas are also promoted by privately funded organizations such as the [[Mises Institute]],<ref>{{cite web |url=http://mises.org/page/1448/About-The-Mises-Institute |title=About the Mises Institute |publisher=Mises.org |accessdate=July 21, 2013}}</ref> and the [[Cato Institute]].
 
==Criticisms==
 
===General criticisms===
Mainstream economists have argued that Austrians are often averse to the use of mathematics and statistics in economics.<ref name="white1"/>
 
Economist Bryan Caplan argues that many Austrians have not understood valid contributions of modern mainstream economics, causing them to overstate their differences with it. For example, Murray Rothbard stated that he objected to the use of [[cardinal utility]] in microeconomic theory. Caplan says that Rothbard did not understand the position he was attacking, because microeconomic theorists go to great pains to show that their results are derived for any [[monotonic]] transformation of an [[ordinal utility]] function, and do not entail cardinal utility.<ref name="Austrian Search"/><ref name="Caplan_ord">{{Cite web|url=http://www.gmu.edu/departments/economics/bcaplan/whyaust.htm|title=Why I Am Not an Austrian Economist |last=Caplan |first=Bryan |publisher=[[George Mason University]] |accessdate=2008-07-04 | quote=According to Rothbard, the mainstream approach credulously accepted the use of cardinal utility, when only the use of ordinal utility is defensible. As Rothbard insists, "Value scales of each individual are purely ordinal, and there is no way whatever of measuring the distance between the rankings; indeed, any concept of such distance is a fallacious one." ...As plausible as Rothbard sounds on this issue, he simply does not understand the position he is attacking. The utility function approach is based as squarely on ordinal utility as Rothbard's is. The modern neoclassical theorists – such as Arrow and Debreau – who developed the utility function approach went out of their way to avoid the use of cardinal utility. ...To sum up, Rothbard falsely accused neoclassical utility theory of assuming cardinality. It does not.}}</ref> The result is that conclusions about utility preferences hold no matter what values are assigned to them.{{Citation needed|date=June 2013}}
 
Economist [[Paul Krugman]] has stated that because Austrians do not use "explicit models" they are unaware of holes in their own thinking.<ref name="Krugman 2">{{Cite web|url=http://krugman.blogs.nytimes.com/2010/04/07/martin-and-the-austrians |title=The Conscience of a Liberal: Martin And The Austrians |last=Krugman |first=Paul |date=4-7-2010 |publisher=''[[The New York Times]]'' |accessdate=2011-09-21}}</ref> In February 2013, Krugman further criticized Austrian School economists on their failure to revise their theory of inflation in light of their incorrect prophecies of government-induced inflation following the 2008 financial crisis.<ref name=Whines>{{cite news|last=Krugman|first=Paul|title=Fine Austrian Whines|url=http://krugman.blogs.nytimes.com/2013/02/20/fine-austrian-whines/|accessdate=11 June 2013|newspaper=New York Times|date=February 20, 2013}}</ref>
 
Economist Benjamin Klein has criticized the economic methodological work of Austrian economist [[Israel M. Kirzner]]. While praising Kirzner for highlighting shortcomings in traditional methodology, Klein argued that Kirzner did not provide a viable alternative for economic methodology.<ref>Klein, Benjamin. "Book review: ''Competition and Entrepreneurship''" (by [[Israel M. Kirzner]], University of Chicago Press, 1973) ''[[Journal of Political Economy]]''. Vol. 83: No. 6, 1305–1306, December 1975.<!--JSTOR has the first page of Klein's review at http://www.jstor.org/pss/1830872. Can this be used as a reference instead please? --></ref> Economist Tyler Cowen has written that Kirzner's theory of entrepreneurship can ultimately be reduced to a neoclassical search model and is thus not in the radical subjectivist tradition of Austrian praxeology. Cowen states that Kirzner's entrepreneurs can be modeled in mainstream terms of search.<ref>{{cite journal|last=Cowen|first=Tyler|title=Entrepreneurship, Austrian Economics, and the Quarrel Between Philosophy and Poetry|journal=Review of Austrian Economics|date=May 2003|volume=16|issue=1|doi=10.1023/A:1022958406273|pages=5}}</ref>
 
Economist [[Jeffrey Sachs]] argues that among developed countries, those with high rates of taxation and high social welfare spending perform better on most measures of economic performance compared to countries with low rates of taxation and low social outlays. He concludes that Friedrich Hayek was wrong to argue that high levels of government spending harms an economy, and "a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness."<ref>{{Cite journal|title=The Social Welfare State, Beyond Ideology |last=Sachs|first=Jeffrey |date = October 2006|journal=Scientific American |url=http://www.sciam.com/article.cfm?id=the-social-welfare-state |accessdate=2008-06-20|ref=harv }}</ref> Austrian economist [[Sudha Shenoy]] responded by arguing that countries with large public sectors have grown more slowly.<ref>Sudha R. Shenoy, ''Are High Taxes the Basis of Freedom and Prosperity?'', http://www.thefreemanonline.org/featured/are-high-taxes-the-basis-of-freedom-and-prosperity/</ref>
 
===Methodology===
Critics generally argue that Austrian economics lacks scientific rigor and rejects scientific methods and the use of empirical data in modelling economic behavior.<ref name="Caplan"/><ref name="white1">{{Cite journal |title=The research program of Austrian economics |publisher=Emerald Group Publishing Limited |first=Lawrence H. |last=White |journal=Advances in Austrian Economics |year=2008 |page=20 |ref=harv }}</ref><ref name="Newton1999">"Rules for the study of [[natural philosophy]]", {{harvnb |Newton |1999 |pp=794–6 }}, from Book '''3''', ''The System of the World''.</ref> Some economists describe Austrian methodology as being ''[[A priori and a posteriori|a priori]]'' or [[empirical|non-empirical]].<ref name="Caplan" /><ref name="tremble">{{cite journal |first=Paul A. |last=Samuelson |title=Theory and Realism: A Reply |publisher=[[American Economic Association]] |journal=The [[American Economic Review]] |date=September 1964 |pages=736–739 |quote=Well, in connection with the exaggerated claims that used to be made in economics for the power of deduction and a priori reasoning ..... – I tremble for the reputation of my subject. Fortunately, we have left that behind us. |ref=harv}}</ref><ref name="white1">
{{Cite journal |title=The research program of Austrian economics |publisher=Emerald Group Publishing Limited |first=Lawrence H.
|last=White |journal=Advances in Austrian Economics |year=2008 |page=20 |ref=harv |postscript= }}</ref><ref name="Mayer1998">{{cite journal
|first=Thomas |last=Mayer |title=Boettke's Austrian critique of mainstream economics: An empiricist's response |publisher=Routledge
|journal=Critical Review |date=Winter 1998 |pages=151–171 |ref=harv
|doi=10.1080/08913819808443491
|volume=12}}</ref>
 
Economist [[Mark Blaug]] has criticized over-reliance on methodological individualism, arguing it would rule out all macroeconomic propositions that cannot be reduced to microeconomic ones, and hence reject almost the whole of received macroeconomics.<ref name=Blaug>{{Cite book|last=Blaug|first=Mark|title=The Methodology of Economics: Or, How Economists Explain|year=1992|publisher=Cambridge University Press|isbn=0-521-43678-8|pages=45–46}}</ref>
 
Economist [[Thomas Mayer]] has stated that Austrians advocate a rejection of the [[scientific method]] which involves the development of empirically falsifiable [[Scientific theory#Pedagogical definition|theories]].<ref name="Newton1999" /><ref name="Mayer1998" /> Furthermore, many supporters of using models of market behavior to analyze and test economic theory argue that economists have developed numerous experiments that elicit useful information about individual preferences.<ref>{{cite web |url=http://www.dictionaryofeconomics.com/article?id=pde2008_M000391 |title=Models |first=Mary S. |last=Morgan |work=The New Palgrave Dictionary of Economics  |year=2008 |accessdate=22 November 2011}}</ref><ref>{{cite web |url= http://www.dictionaryofeconomics.com/article?id=pde2008_C000569 |title=Causality in economics and econometrics |first=Kevin D.  |last=Hoover |work=The New Palgrave Dictionary of Economics  |year=2008 |accessdate=22 November 2011}}</ref>
 
Economist Leland Yeager rejects many favorite views of the Misesian group of Austrians, in particular, "These include the specifics of their business-cycle theory, ultra-subjectivism in value theory and particularly in interest-rate theory, their insistence on unidirectional causality rather than general interdependence, and their fondness for methodological brooding, pointless profundities, and verbal gymnastics. Provoked by mainstream abuses of mathematics, including the frequent merely decorative and pretentious use of symbols, some Austrians have wanted to ban mathematics from economics. But is it not arrogant for someone who does not see how to use certain techniques constructively to suppose that no one else will ever see how either? These Austrians should remember how, in other contexts, they emphasize the openness of the future and scope for novelty."<ref name="Leland Yaeger Truth">{{cite book|last=Yeager|first=Leland|title=Is the Market a Test of Truth and Beauty?: Essays in Political Economy|year=2011|page=103|url=http://mises.org/document/6508/Is-the-Market-a-Test-of-Truth-and-Beauty-Essays-in-Political-Economy}}</ref>
 
===Business cycle theory===
{{main|Austrian business cycle theory}}
According to [[John Quiggin]], most economists believe that the Austrian business cycle theory is incorrect because of its incompleteness and other problems.<ref name="Quiggin">{{cite web  |url= http://johnquiggin.com/index.php/archives/2009/05/03/austrian-business-cycle-theory/  |title=John Quiggin " Austrian Business Cycle Theory |work=johnquiggin.com  |accessdate=19 July 2010 }}</ref>{{elucidate|date=January 2013}}  Economists such as [[Gottfried von Haberler]], [[Milton Friedman]],<ref name="Friedman1969">{{cite book |last=Friedman |first=Milton |title=The Optimal Quantity of Money and Other Essays |publisher=Aldine |location=Chicago |pages=261–284 |chapter=The Monetary Studies of the National Bureau, 44th Annual Report}}</ref><ref name="Friedman93">{{cite journal |last=Friedman |first=Milton |title=The 'Plucking Model' of Business Fluctuations Revisited |journal=Economic Inquiry |pages=171–177}}</ref> [[Gordon Tullock]],<ref name="Tullock1988">{{cite journal |author=Gordon Tullock |title=Why the Austrians are wrong about depressions |journal=The Review of Austrian Economics |volume=2 |issue=1 |year=1988 |pages=73–78 |format=PDF |url=http://mises.org/journals/rae/pdf/RAE2_1_4.pdf |accessdate=2009-06-24 |doi=10.1007/BF01539299}}</ref> [[Bryan Caplan]],<ref name="Caplan">{{cite web |url=http://econlog.econlib.org/archives/2008/01/whats_wrong_wit_6.html |title=What's Wrong With Austrian Business Cycle Theory |last=Caplan |first=Bryan |date=2008-01-02 |publisher=Library of Economics and Liberty |accessdate=2008-07-28}}</ref> and [[Paul Krugman]]<ref name="Krugman">{{cite web |url=http://www.slate.com/id/9593 |title=The Hangover Theory |last=Krugman |first=Paul |date=1998-12-04 |publisher=Slate |accessdate=2008-06-20| archiveurl= https://web.archive.org/web/20080706173751/http://www.slate.com/id/9593| archivedate= 6 July 2008 <!--DASHBot-->| deadurl= no}}</ref> have argued that the theory is incorrect.
 
====Theoretical objections====
Some economists argue that Austrian business cycle theory requires bankers and investors to exhibit a kind of irrationality, because the Austrian theory posits that investors will be fooled repeatedly (by temporarily low interest rates) into making unprofitable investment decisions.<ref name="Caplan"/><ref name="Tullock1988"/><ref>[http://www.reasonpapers.com/pdf/05/rp_5_4.pdf Problems with Austrian Business Cycle Theory]</ref> Bryan Caplan writes: "Why does Rothbard think businessmen are so incompetent at forecasting government policy? He credits them with entrepreneurial foresight about all market-generated conditions, but curiously finds them unable to forecast government policy, or even to avoid falling prey to simple accounting illusions generated by inflation and deflation... Particularly in interventionist economies, it would seem that natural selection would weed out businesspeople with such a gigantic blind spot."<ref name="caplan_abct">
{{cite web
  | first = Bryan
  | last = Caplan
  | title = What's Wrong With Austrian Business Cycle Theory
  | publisher = Liberty Fund, Inc.
  | date = February 12, 2009
  | url = http://econlog.econlib.org/archives/2008/01/whats_wrong_wit_6.html
  | format = news
  | accessdate = 2010-05-17}}
</ref>
 
Economist Paul Krugman has argued that the theory cannot explain changes in unemployment over the business cycle. Austrian business cycle theory postulates that business cycles are caused by the misallocation of resources from consumption to investment during "booms", and out of investment during "busts". Krugman argues that because total spending is equal to total income in an economy, the theory implies that the reallocation of resources during "busts" would increase employment in consumption industries, whereas in reality, spending declines in all sectors of an economy during recessions. He also argues that according to the theory the initial "booms" would also cause resource reallocation, which implies an increase in unemployment during booms as well.<ref name="Krugman" />
 
In response, historian [[David Gordon (philosopher)|David Gordon]] argues that Krugman's analysis misrepresents Austrian theory. Gordon states, "unemployment, as Austrians see matters, stems mainly from rigid wage rates. If workers accept a fall in wages, liquidation of the boom is compatible with full employment."<ref>[http://mises.org/daily/3579 Hangover Theory: How Paul Krugman Has Misconceived Austrian Theory – David Gordon – Mises Daily<!-- Bot generated title -->]</ref> Austrian economist Roger Garrison states that a false boom caused by artificially low interest rates would cause a boom in consumption goods as well as investment goods (with a decrease in "middle goods"), thus explaining the jump in unemployment at the end of a boom.<ref>{{Cite web|author=Auburn User |url=http://www.auburn.edu/~garriro/strigl.htm |title=Overconsumption And Forced Saving |publisher=Auburn.edu |date= |accessdate=2012-08-15}}</ref> Garrison has also stated  that capital allocated to investment goods cannot always be redeployed to create consumption goods.<ref>{{Cite web|author=Roger W. Garrison |url=http://mises.org/daily/1215 |title=Hayek on Industrial Fluctuations – Roger W. Garrison – Mises Daily |publisher=Mises.org |date= |accessdate=2012-08-13}}</ref>
 
Economist Jeffery Hummel is critical of Hayek's explanation of labor asymmetry in booms and busts. He argues that Hayek makes peculiar assumptions about demand curves for labor in his explanation of how a decrease in investment spending creates unemployment. He also argues that the labor asymmetry can be explained in terms of a change in real wages, but this explanation fails to explain the business cycle in terms of resource allocation.<ref name="Hummel">{{Cite web|url=http://www.reasonpapers.com/pdf/05/rp_5_4.pdf ''Reason Papers'' |title=Problems with Austrian Business Cycle Theory |last=Hummel |first=Jeffery Rogers|date=Winter 1979|format=PDF |pages=41–53|accessdate=2011-09-17}}</ref>
 
Milton Friedman objected to the policy implications of the theory, stating the following in a 1998 interview:
 
<blockquote>I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm.<ref>Interview in ''Barron's Magazine'', August 24, 1998 archived at Hoover Institution [http://www.hoover.org/publications/hoover-digest/article/6459]</ref></blockquote>
 
====Empirical objections====
Hummel argues that the Austrian explanation of the business cycle fails on empirical grounds. In particular, he notes that investment spending remained positive in all recessions where there are data, except for the [[Great Depression]]. He argues that this casts doubt on the notion that recessions are caused by a reallocation of resources from industrial production to consumption, since he argues that the Austrian business cycle theory implies that net investment should be below zero during recessions.<ref name="Hummel"/> In response, Austrian economist [[Walter Block]] argues that the misallocation during booms does not preclude the possibility of demand increasing overall.<ref>http://www.reasonpapers.com/pdf/30/rp_30_4.pdf</ref>
 
In 1969, economist Milton Friedman, after examining the history of business cycles in the U.S., concluded that "The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false."<ref name=Friedman1969/> He analyzed the issue using newer data in 1993, and again reached the same conclusion.<ref name="Friedman93"/>
 
Referring to Friedman's discussion of the business cycle, Austrian economist Roger Garrison stated, "Friedman's empirical findings are broadly consistent with both Monetarist and Austrian views", and goes on to argue that although Friedman's model "describes the economy's performance at the highest level of aggregation; Austrian theory offers an insightful account of the market process that might underlie those aggregates."<ref>{{Cite web|author=Auburn User |url=http://www.auburn.edu/~garriro/fm1pluck.htm |title=Plucking Model |publisher=Auburn.edu |date=1982-10-25 |accessdate=2012-08-13}}</ref><ref>Milton Friedman, "The 'Plucking Model' of Business Fluctuations Revisited" Economic Inquiry April, 1993</ref>
 
==Principal works==
* ''[[Capital and Interest]]'' by [[Eugen von Böhm-Bawerk]]<ref name="econlib"/>
* ''[[Individualism and Economic Order]]'' by [[Friedrich Hayek]]<ref name="econlib"/>
* ''[[Principles of Economics]]'' by [[Carl Menger]]<ref name="econlib"/>
* ''[[Human Action]]'' by [[Ludwig von Mises]]<ref name="econlib"/>
* ''[[Man, Economy, and State]]'' by [[Murray Rothbard|Murray N. Rothbard]]<ref name="econlib"/>
 
==See also==
{{Portal|Economics|Libertarianism}}
* [[List of Austrian School economists]]
* [[List of Austrian intellectual traditions]]
* [[Perspectives on capitalism]]
* ''[[Quarterly Journal of Austrian Economics]]''
 
==References and notes==
{{Reflist|2}}
 
==Further reading==
* Alejandro Agafonow (2012). [http://ideas.repec.org/a/taf/revpoe/v24y2012i2p273-287.html “The Austrian Dehomogenization Debate, or the Possibility of a Hayekian Planner,”] ''Review of Political Economy'', Vol. 24, No. 02.
* Harald Hagemann, Tamotsu Nishizawa, and Yukihiro Ikeda, eds. ''Austrian Economics in Transition: From Carl Menger to Friedrich Hayek''  (Palgrave Macmillan; 2010) 339 pages
* Stephen Littlechild, ed. (1990). ''Austrian economics'',  3 v.  Edward Elgar. [http://www.e-elgar.co.uk/bookentry_mainUS.lasso?id=682 Description] and scroll to chapter preview [http://books.google.com/books?id=XoZXUkYGj-oC&printsec=frontcover&source=gbs_v2_summary_r&cad=0#v=onepage&q&f=false links] for v. 1.
 
==External links==
{{Commons category|Austrian School}}
* [http://wiki.mises.org/wiki/Austrian_School Austrian School] at Mises Wiki
* {{dmoz|Science/Social_Sciences/Economics/Schools_of_Thought/Austrian_School/}}
 
{{Austrian School economists}}
{{macroeconomics-footer}}
{{Schools of economic thought}}
 
[[Category:Austrian School| ]]
[[Category:Conservatism in the United States]]
[[Category:Economic theories]]
[[Category:Heterodox economics]]
[[Category:Libertarian theory]]
[[Category:Articles with inconsistent citation formats]]
 
{{Link GA|de}}

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