The Austrian School of Economics is not based on a fictitious homo economicus, but on people as they really are and as they behave. It adequately takes into account the economically relevant aspects of the real world and is consistent with the nature and psychology of human action. In this way, it also corresponds to man’s common sense.
This is how the Austrian Institute in Vienna describes the Austrian School of Economics. It cuts right to the heart of the matter – economics is simply the study of human action. The scientific term for this is praxeology.
That said, Austrian Economics is not contained within Austria. Its origins span the globe… as does its impact today. In fact, the Austrian school is far more prevalent in America than anywhere else on the planet right now.
Yesterday we talked about Frédéric Bastiat. He was a 19th century French economist of the classical school.
Bastiat is credited as the first to illustrate the economic concept of opportunity cost. He also intelligently dismantled the premises underlying protectionist policies and government wealth redistribution.
But Bastiat did not operate in a vacuum. His work built upon that of earlier classical economists. Among them were Richard Cantillon, Anne Robert Jacques Turgot, Adam Smith, and Jean-Baptiste Say.
Each of these gentlemen advocated for individual liberty and free-market capitalism. True capitalism. Not the corporatism we have today. And they did so by demonstrating how these conditions enable a rising standard of living for the greatest number of people possible. They rejected the notion that we should favor certain groups over others.
If we look at it this way, Bastiat continued the work of those who came before him. He was a direct link to the past.
And in just the same way, he was a bridge to the future. The modern school of Austrian Economics advances the principles of Bastiat and the other classical economists today.
An Austrian-born economist by the name of Carl Menger effectively founded the Austrian school when he published his Principles of Economics in 1871. Menger’s work built upon that of the earlier classical economists. And it sparked what’s called the “marginalist revolution”.
Menger’s key contribution was that economic value is subjective. Consumers assign value to economic goods based on their marginal benefits. Producers do the same.
That is to say, the price one is willing to pay for a particular good is not related to how much time or money goes into producing that good. Instead, it’s a function of how much one thinks that good will benefit them.
This may sound like a simple thing, but the earlier economists struggled with the concept of value. They were generally fixated on value being tied to production costs. But that completely ignores individual preference and supply/demand dynamics.
Menger’s marginal theory is what connected it all. This is easy to understand. The more there is of a particular good, the less each individual unit of that good will benefit people. Thus, that good’s value will be lower.
Let’s use consumer electronics to illustrate this concept…
Suppose we just bought our first home and it has nothing in it. The first television or computer we buy will have high marginal utility for us… because we didn’t have one before.
But we won’t value televisions and computers as much afterwards. They won’t be as big of a priority because we already have one of each. Maybe we’ll buy a second TV for another room… and maybe a third for a different room. But each new TV brings less benefit to us. Thus we value them less.
That’s the concept of diminishing marginal utility. It ties in directly with supply and demand dynamics. And it explains how goods are priced in the marketplace.
This was a huge breakthrough. And it officially marked the origin of the Austrian School of Economics.
Another Austrian named Eugen Böhm-Bawerk took Menger’s framework and built upon it. Böhm-Bawerk was especially good at illustrating how individual time preferences impact market-based interest rates.
From there, Austrian-born Ludwig von Mises picked up the torch. And he was an absolute force.
Mises was the first to succinctly present the Austrian theory of the business cycle. And he spent most of his life combatting the rise of socialism in Europe.
In fact, Mises had to flee Austria in the 1930s to escape the German national socialists (Nazis). They were not at all pleased with his work. Mises fled first to Geneva and then to New York to escape.
Around that same time Friedrich Hayek began building upon the Austrian school’s tradition in his own way. Hayek also had to flee Europe in the 1930s to escape the socialists. And he eventually won the Nobel Prize in 1974. The more popular economist Milton Friedman was a big fan of Hayek’s.
From there, both Henry Hazlitt and Murray Rothbard picked up the torch – each in their own way. And both gentlemen helped found the Mises Institute in 1982. Housed in Auburn, Alabama, the Mises Institute is the global center of the Austrian School of Economics today.
Though it gets no coverage in the mainstream press or in academia, the Mises Institute has had an impact on millions of people worldwide. That’s in no small part thanks to the presidential campaigns of Dr. Ron Paul in 1988, 2008, and 2012.
Dr. Paul credits what he learned studying Austrian Economics as one his primary motivations for running for president. And he tirelessly promoted the core tenants of Austrian Economics out on the campaign trail.
I know this kind of exposé isn’t for everyone… but I find this kind of study fascinating.
If we look at it this way, we can clearly see an unbroken chain of people, ideas, and events going back 250 years. It’s all connected. And this shows how the work of our ancestors helped build the world we live in today. That’s amazing to think about.
So I guess all this is to say – dead economists matter. Let’s honor them accordingly.
-Joe Withrow
P.S. For those who find this stuff fascinating like I do, I would highly recommend Tom Woods’ Liberty Classroom. Tom’s program provides a world-class education on both history and economics. And it does so in a compelling and entertaining way. If you would like to review Liberty Classroom’s course listings, just go right here: Tom Woods Liberty Classroom Course Listing