Is the Austrian economic theory complete

Austrian school

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Authors: from the team of Exploring-Economics | December 18, 2016
Patron and academic review: Prof. Dr. Friedrun Quaas

1. Core elements

The Austrian school is an economic perspective, the origin of which is often traced back to the work of Carl Menger. In the English-speaking world, representatives of this perspective are also referred to as “Austrians”. Menger particularly emphasized subjectivism, the utility principle and marginalism in economic analysis (Quaas and Quaas 2013, 34). Later representatives added a number of concepts to the canon of the Austrian school. Various authors, some of whom see themselves as successors of the school, as well as those who view Austrians from the outside, consider the following points to be constitutive:

  • methodological individualism
  • Opportunity costs
  • subjectivism
  • laissez-faire Policy (recommendation)
  • Emphasizing the timing of economic processes
  • fundamental uncertainty
  • Relevance of prices and free competition
  • a montary crisis theory
  • Focus on the entrepreneur
  • Apriorism and strong deductivism
  • Aversion to mathematical and statistical methods

(See e.g. Holcombe 2014, 107ff; Radzicki 2003, 145; Milonakis and Fine 2009, 254-25; Blumenthal 2007, 34-35; Hagemann 2010, 188). These and other concepts are explained in more detail later in the text.

There is a very long time frame between the release of Carl Mengers Principles (1871) and the work of today's Austrians (the so-called New Austrians). Menger, who can be seen as the founder of the school, was a central figure of the marginalist revolution and had a great influence on the development of subjective value theory and the theory of diminishing marginal utility. In the course of the 20th century, however, the Austrian school had to struggle with historical ruptures that resulted from the emigration of important members of Austria and Europe. to the US, as well as the marginalization of perspective in the middle of the century. This “eventful history” of perspective makes it difficult to erect a unified and consistent theoretical building that has been consistently pervasive from the founders to the present day. Considerations of the history of ideas therefore have a historical classification into four - or five, if one counts the current contributions of Austrians - generations or development phases (Quaas and Quaas 2013; Blumenthal 2007). These historical and analytical differentiations are discussed in more detail under point 8). In the rest of the presentation, on the other hand, an entry should be made with an ideal-type description that aims to emphasize more the similarities than the differences. Among other things, the self-description of today's representatives of the Austrians (the so-called New Austrians) are used. In this context, however, it should be borne in mind that the representation as a coherent paradigm can be a deliberately chosen political strategy from marginalized economic perspectives (cf. Backhouse 2004, 268). In this respect, the self-representation, in particular by the New Austrians is made, be commented on critically. This is to prevent a “bastard Austrianism” (Quaas and Quaas 2013, 33) from being reproduced, which consciously or unconsciously falsifies or abbreviates the theories and considerations of the original Austrian school (especially with reference to Menger).

2. Concepts, analysis, conception of the economy

The focus of research in the sense of the Austrian School is on the study of the economic coordination between individuals. To a certain extent, this focus is already present in Menger's work (Blumenthal 2007, 36). Menger's main focus, however, was probably on the tension between human needs and exogenously given scarce goods, which brings him closer to the problem of efficient allocation brings (Yagi 2010, 32-33). Of the Austrians, who orientate themselves on the work of Friedrich A. von Hayek, it can be said, however, that the investigation of the market equilibrium or the efficiency of the market result is of subordinate importance (cf. Holcombe 2014, 51). The market economy is understood as a coordination mechanism that enables individuals to use their information in such a way that they can plan their economic activities in a way that is consistent with the plans of everyone else. This thesis of the Austrians is therefore associated with a positive assessment of markets. However, because at the same time it is admitted that this coordination does not always work perfectly, an essential aim of the economic analysis in the sense of the Austrian school is to find out why this coordination can sometimes break down (Holcombe 2014, 2). In general, the research of the Austrians aims at the processes of the Allocation of resources and the coordination of supply and demand plans to understand (Holcombe 2014, 5).

Austrian economists understand the market as Market process. A central assumption is that the coordination of individual supply and demand plans never works completely because plans are directed towards the future and therefore fundamental uncertainty are subject to (Holcombe 2014, 1). It is therefore believed that an equilibrium price and quantity situation can never be achieved. It is true that there are market mechanisms through which there is a tendency in markets to move towards a state of equilibrium. However, representatives of the Austrian School argue that the “market environment” is constantly changing (preferences, technologies, knowledge) and that the information necessary to achieve equilibrium is scattered across all market participants and can never be aggregated in a way that enables equilibrium to emerge. For the representatives of the Austrian school, the market equilibrium is a hypothetical concept that they also used analytically (cf. Hayek 1976, in Quaas and Quaas 2013, 142). However, for them it is not a description of reality. Rather, it is Market equilibrium understood as a continuously moving target (“continually moving target”). Markets tend to be cleared, but when the existing configuration of prices and quantities is disrupted, this disruption alters the underlying economic conditions so that the economy cannot revert to its previous state (Holcombe, 2014, 11). [ 1]

Another characteristic of the Austrian School is the concept of the spontaneous order, which arises from the decentralized planning of the individuals. The market result, as well as other social institutions such as money or language, are interpreted as “the result of human action, but not of human design (Hayek 1969, 97-107). This assessment makes it clear that the Austrians admit that central planning, government organization and forecasting of economic activities have little or no performance. According to their assessment, neither the overall market result nor the behavior of individual individuals can be predicted or controlled by a central authority (Holcombe 2014, 4).

According to Randall Holcombe (2014, 10), it is crucial for the functioning of decentralized, individual economic planning and the coordination of markets that new information emerges in the market process. This fact is illustrated by the characterization of the market as Discovery process made clear. The market generates information about constantly changing scarcity relationships that enable individuals to adapt their (future) plans to changed conditions and to deal with contingencies (Holcombe 2014, 10). With reference to Hayek's work, it should also be noted that the market is understood here as a competitive market, since the information mentioned can only be discovered in a competitive situation.To demonstrate to what extent the market can be understood as a discovery process, Holcombe (2014 , 13) Leonard Read's example of the production of a pencil, which requires complex coordination of activities involving the division of labor. It is only through the process of market exchange that information about the prices of the production factors (e.g. graphite) is discovered, which enables producers to decide how much of which combination of materials should be used in the manufacturing process. The market thus “discovers” the value of the factors of production and of the goods and services subsequently produced when market exchange is carried out. Information from various market participants is aggregated in the market prices. For example, the maker of a pencil does not need to know how graphite is mined to use the knowledge of those who have such mining expertise. The knowledge remains decentralized, and yet the economic activities of the actors are coordinated in such a way that a finished pencil is created in the end. The representatives of the Austrian School argue that economic subjects without market prices as scarcity indicators only have a very limited ability to coordinate their economic activities because their knowledge has the said decentralized and implicit or tacit character (Holcombe 2014, 14 ).

In the Austrian school there is also between management and entrepreneurship (i.e. entrepreneurship). Finding the optimal combination of inputs and their optimal amount in order to produce a certain output as efficiently as possible for a given production function is the management function of the company. The parameters of the production function are taken for granted. Entrepreneurship, on the other hand, is the discovery of new, previously undiscovered profit opportunities. This happens through the new combination of production factors, the addition of new production factors or the (qualitative) change of the output. Entrepreneurship thus changes the production function (Holcombe, 2014: 24).

The entrepreneurship concept is a central element of the Austrian School because the welfare-increasing effects of the market process are justified. In contrast to the neoclassical, which identifies the market equilibrium in a market with complete competition as a pareto-optimal state, in which no one can further increase his welfare through additional barter acts without putting others in a worse position, such a welfare-optimal state can never be achieved according to the Austrians. Instead, they advocate the thesis that there is continuous growth in welfare in the market process through entrepreneurial action or "entrepreneurial innovation". [2]

Another important point that runs through the analysis of Austrians is the focus on one monetary Economics and the implications of such (Hagemann 2010, 183). Carl Menger starts this tradition with his development of a (commodity) monetary theory, which is based on an evolutionary development of a spontaneous order of individuals and not on state intervention (Menger 1892, Holcombe 2014, 3-4).

In the development of his theory on capital and interest (the so-called Agi theory) put forward the thesis, which is widely used today, that the goods of the present are valued more highly by individuals than future goods, thus justifying the existence of interest. The added value, i.e. the capacity of the producer to generate a higher yield with the borrowed funds used as capital goods and thus to pay the interest, is then explained at Böhm-Bawerk with a temporal extension of the production stages. This production, which is longer in terms of time and is technologically more demanding, is more successful because it yields a higher and higher quality yield through the use of goods in the intermediate stages (cf. Quaas and Quaas 2013, 69-72). [3]

Another important aspect of Austrian theory arises from its more process-oriented understanding of the economy. Works by Austrians have addressed the problem of economic cycles or in various ways Business cycles approached. Among others, Joseph Schumpeter (1911), Friedrich von Hayek (1931), Gottfried Haberler (1937), and Ludwig von Mises (1949) theories on economic cycles and economic crises. While Schumpeter's theory emphasizes the creative destruction of established economic sectors by entrepreneurs and deals with innovation processes (hyperlink to evolutionary economics), the other explanations present (endogenous) monetary phenomena as the cause of crises and cycles Since the late 2000s again aroused increased interest and controversial discussions, the Austrian business cycle theory according to Mises and Hayek is viewed critically in Section 7).

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3. Ontology

The Austrian school starts from a strict one subjectivism and in addition to a methodological one, possibly also an ontological one individualism from (Blumenthal 2007, 35). Subjectivism here means that the only existing world is the one that individuals can perceive. Even if this is more of an epistemological position, it is ontologically relevant as it implies that the existence of social facts such as prices or costs can only be found in the individual (Hall and Martin 2011). From this it follows, for example, that even if institutions or aggregates are part of the discussion, the individual always precedes them as their reason (Hall and Martin 2011,4).

The economic problem for these individual actors is the coordination of plans and the aggregation of knowledge. The individuals can act either as consumers or as entrepreneurs. Consumers articulate demand that determines the market, while entrepreneurs are able to discover new demand (Holcombe 2014, 21, 24). This focus is heavily related to uncertainty, the scattering of knowledge and information as well as the change of framework conditions in historical time. With the older representatives of the school, however, similar to the neoclassical era, the problem of Allocation of scarce resources in connection with human needs in the foreground (see Yagi 2010, 27).

The Austrians' image of man is in some respects not dissimilar to that of the neoclassical, but is expanded by some representatives. While Menger, for example, defended a rather simplistically constructed homo oeconomicus with instrumental rationalism, utility maximization and perfect information as an analytical construct (Quaas and Quaas 2013, 38), other Austrians have included social components such as institutions, power and the social environment in their image of man (e.g. Wieser, cf. Arena 2010, 112-113). Recognizing the context does not mean, however, that the exclusive focus on the individual as the acting subject is abandoned, but only that the actions of the individual receive a different input depending on the historical context.

The newer Austrians also relaxed the concept of maximizing utility compared to the neoclassical. Although individuals act to achieve their personal goals, they do not behave per se maximizing benefits. Instead, they act according to their preferences. If, however, one assumes that uncertainty is ontologically existent, then an action can only ever take place in response to an expectation and only knowledge can be generated as to whether it adds benefit or not. That means there is no maximization towards a global optimum. Since actions take place in historical time, it is also not possible to check whether an alternative action would have generated more benefits (Holcombe 2014, 31). In addition, preferences are not considered stable. They are subjective and dependent on the price. (Holcombe 2014, 19). This in turn leads to inherent uncertainty and complexity at the market level. Uncertainty and variable preferences also imply one dynamic understanding of time. It is therefore assumed that today's decisions by people have a direct influence on the future. People make plans based on the knowledge they have in the present and their expectations of the future. The future is difficult to predict, however, because the uncertainty can also cause unforeseen things to happen.However, based on their accumulated experience, individuals can have more or less realistic expectations about the future.

4. Epistemology

The representatives of the Austrian School emphasize the subjective component of knowledge acquisition. It is therefore not very useful for them to talk about objective observations that can be perceived through sensory experience. Instead, knowledge related to social phenomena is provided by the Interpretations generated by individuals and is therefore socially constructed. Hayek emphasized this point of view by saying that with regard to human action, things are what people think they are (quoted in Hagemann 2010, 257). The New Austrian Peter Boettke expresses himself similarly when he says that the facts of the social sciences are what people believe and think (Boettke)

Basically, this understanding of knowledge and science is subjectivistic as well as hermeneutic - to internal Understand and not on external To explain - to derive the applied approach (cf. Boettke and Prychitko 2011).

In contrast to other social constructivisms, however, this position of the Austrians does not mean that the truth is viewed as relative, i.e. dependent on the viewer, or that a value-free science is viewed as not possible. The deductive orientation to “exact laws” (Menger) as well as the praxeology of Mises assumes that it is possible to derive ahistorically valid laws from central axioms (see methodology). Through introspection and logical thinking it is then possible to identify those human actions or forms of action which are necessarily always “true”. These are independent of historical contingencies as well as of the specific goal that is to be achieved by the respective action. The claim of praxeology to be a value-free and universal science is based on the fact that it establishes general laws that relate to the shape refer to human action and not to it Content. The law of diminishing marginal utility and the rationality of actors are cited as examples of such general laws (Selgin 1990, 19).

In a second step, these general (economic) laws can then be applied to a large number or even to all social phenomena. Mises did it in his main work Human action in order to develop nothing less than a science whose laws are valid regardless of “place, time, origin, nationality or class of the actor” ([own translation] quoted in Milonakis and Fine 2009, 256). Historically, it represents an extreme, if not different, case of the Austrians, who repeatedly emphasize the general validity and broad applicability of the economic principle, i.e. rational, cost-efficient action by individuals to achieve their goals - as well as the importance of analytical concepts such as subjectivism , Have emphasized individualism (cf. Blumenthal 2007, 35). Emanuel Hermann, a rather unknown representative of the school, even went so far as to argue that the economic principle can be applied to all aspects of human activity and nature (Haller 1986, 198). Accordingly, the Austrian school is a theory that is more likely to be accepted the application of a specific perspective on various phenomena as defined by special interest in a particular research object.

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5. Methodology

Austrians' relationship to methodological issues, and particularly empirical issues, makes an interesting case, perhaps best approached from a historical context. The strong meaning of Deduction and Apriorism as well as the rejection of empirical observations for the acquisition of knowledge is possibly with the role and the statements of Carl Menger im Method dispute associated with the German historical school. Friedrun Quaas points out that Menger's defense of the deductive theory, compared to the real-empirical method of the historians, led to a “confusion” among later Austrians, since the latter would like to use empiricism, but are very skeptical about it for theoretical reasons ( Quaas and Quaas 2013, 40-41).

With regard to the praxeological approach, the argument was developed that statistical inferences should not play a role in the formulation of a theory, since the social sciences have to deal with an internal - that is, hermeneutical - access to human decisions. (Milonakis and Fine 2009, 256; Selgin 1990, 14). However, checking hypotheses using empirical data is seen by some Austrians as an adequate means of testing whether a theory can be applied to a particular case and to discard the theory in the event of a negative result in the sense of the logic of falsification (e.g. Hayek see Hagemann 2010, 222). However, they reject a falsification of an entire theory, as postulated by critical rationalism. Critical rationalism is a philosophy of science that can be traced back to the work of Karl Popper, among other things, and argues that an empirical observation contradicting the theory is sufficient to explain this theory to be untrue, i.e. to falsify it. Probably the most famous example that is repeatedly cited to illustrate this procedure is that the observation of a black swan refutes the theory that all swans are white. The younger representatives of the Austrian School have criticized this approach, among other things because they define the understanding of empiricism in the social sciences differently than is the case, for example, in the natural sciences (for a critical discussion see Rothbard 1997, in particular 64-66) . It follows that for the Austrians, an entire theory can only be falsified on the deductive level, i.e. through a logical break or error in the theory formulation.

Another reason given for the Austrians' aversion to statistical and mathematical methods is the ontological complexity of economics. Kurt Leube argues that such methods can only generate knowledge about static and non-thinking, non-purposeful and non-learning and self-changing objects such as stones or water; but by no means about people (Leube 2010, 263). Accordingly, the presentation of facts by the Austrians is often based on verbal descriptions (“Literary economics” in the words of Don Lavoie, cf. Boettke and Prychitko 2011, 136), as well as with the help of historical examples for illustration. Also include Thought experiments and Counterfactuals on the methods used (Aimar 2009, 204-205).

Digression praxeology

The praxeology is a methodological approach that was developed by representatives of the Austrian School (especially Ludwig von Mises) and whose starting point is the so-called “human action axiom”. This means that (only) individuals act purposefully. The praxeological analysis is limited to asking whether a particular means is appropriate to the achievement of a given goal. The question of the origin of these goals is considered irrelevant. The theory thus resists criticisms that emphasize the existence of interpersonally constructed systems of evaluations and needs. In this sense, it is irrelevant whether people influence each other in their goals, since from the point of view of the Austrian School this does not change the fact that People act to achieve certain goals. Even if the presentation by followers of praxeology and an epistemological and methodological approach in the sense of Mises partially emphasize speaking for all Austrians, it must be critically noted that both Hayek, as well as Mises' student Murray Rothbard, use this extreme approach of apriorism and empiricism.


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6. Ideology and Political Aims

Characterizations of the Austrian School, which include the political dimension, often classify the Austrians as close to liberalism or libertarianism and consequently attest to a fundamentally negative attitude towards the state (Radzicki 2016, 145; Blumenthal 2007, 35). Nevertheless, before the theoretical derivation of these positions is dealt with further below, two more qualifications of the political proximity of the Austrians to liberalism should be discussed. The first qualification is historical. As Friedrun Quaas works out, there is a great heterogeneity of political positions in the first three generations of Austrians. In addition to liberalism, representatives also have a more social democratic reformist stance (Sax), conservative nationalism (Wieser) and even Marxism (Grünberg) (Quaas and Quaas 2013, Chapter 1). One possibility of maintaining liberalism as a central and also historically valid point can of course be achieved by not referring to these economists as (real) Austrians. An expulsion of Wieser, for example, would, however, rob the school of one of its constitutive members.

The second qualification regarding the association of Austrians with liberalism is made by Randall Holcombe. Holcombe argues that if one understands the Austrian school as a positive science, there is no compelling reason for a politically liberal stance. For example, the Austrian school comes to the result in its analysis that state intervention can disrupt the market process and reduce welfare. A positive understanding of science would imply that this knowledge is followed by a normative decision in which one weighs up between welfare as a goal and other normative goals (Holcombe 2014, 107). However, Holcombe immediately relativizes this position by advocating a view in which the economic and political system are viewed as interdependent and, consequently, the separation of such decisions is viewed as artificial (Holcombe 2014, 108).

The theoretical justification of laissez-faire and market-oriented policy is derived from the understanding of the Austrian school that the market can distribute resources efficiently and solve the coordination problem (see Section 2). The skepticism about state intervention in the market stems from the assumption that a technocratic authority, in contrast to the market and its prices, will never be able to understand the complexity of the economic system and the scattered information of the market participants accordingly to bundle. This argument was made in particular by Mises and Hayek in the context of Socialist Calculation Debate worked out (Mises 1912, Hayek 1945). [4] If one follows this analysis, it can be assumed that economic regulations also lead to unforeseen consequences due to the scientifically incomprehensible complexity of the economy. But if the results of the intervention create new problems, so another argument of the Austrians, then this leads the government to seek further interventions as a solution. This triggers a vicious circle in which ever new interventions move the economy close to a planned economy in the long term (cf. Holcombe 2014, 108; Hayek 1944).

Another political actor that has drawn severe criticism from Austrians in recent times is the central banks. This criticism is based on the Austrian business cycle theory, which is discussed under 7). In summary, however, it can be said that the negative attitude towards central banks is fueled by the fact that Austrians argue that too low a key interest rate sends false price signals to entrepreneurs, which leads to bad investments and, in the long term, a boom-bust cycle.

Some representatives of the Austrian school grant the state a role in securing common goods such as securing property rights or internal security. Some representatives such as Hayek even went so far as to think about minimum security (Hayek 1944, 124-125). More radical members like Murray Rothbard, who are in the tradition of anarcho-capitalism, however, see even the provision of common goods as better to be managed by the market (Holcombe 2014, 105-106). Basically, however, there is a strong connection between today's Austrians and the philosophical positions of libertarianism.

7. Current Debates and Analysis

Business cycle theory

Representatives of the Austrian school argue that in the face of the failure of conventional economic theories in the global financial crisis, the Austrian Business Cycle (ABC) theory represents an alternative that can provide a better understanding of the crisis (Holcombe 2014, 69).

The ABC theory, as presented here, was mainly developed by Hayek, who refers to the capital theory of Böhm-Bawerk as well as to the monetary theory of Mises.

On this basis, Hayek developed an endogenous Overinvestment theorythat begins with an economy in equilibrium. This balance is then disturbed by an expansion of the banks' credit to the entrepreneurs. If this increase in the amount of credit does not correspond to greater savings, i.e. if money is created in which the price of the money (i.e. the interest) is below the “natural” market-mediated interest rate, then a crisis cycle unfolds. By interpreting the lower interest rate market price signal, the entrepreneurs conclude that consumers have changed their preference for less consumption in the present in favor of higher consumption in the future. According to Hayek, entrepreneurs invest their additional credit money in capital goods that enable a longer, technologically advanced and thus more profitable production process. With reference to Böhm-Bawerk's production stages, Hayek represents this as a triangle in which an extension of the production process increases the duration, but thereby provides a larger amount of consumer goods at a lower value (cf. Quaas and Quaas2013, 155, 203-204 )


Figure 1: Change towards a longer and more efficient production process, based on the graphic processing by Hayek. (Artwork by Roger Garrisson)


If this process occurs through increased savings, it is unproblematic and even increases welfare. If this happens, however, by expanding the amount of credit, there will be a shortage of consumer goods in the present, since the entrepreneurs are now vis a vis consumers have more money to buy consumer goods that convert the former into an input for the production process. The price level is rising accordingly and consumption is falling. Consumers are thereby “forced” to save in the present so that entrepreneurs can manufacture consumer goods in the future. The fact that saving (in the sense of reduced consumption) does not take place voluntarily, but rather through a decision by the banks with regard to credit creation, gives rise to a false (price) signal regarding the future wishes of consumers; i.e. the entrepreneurs invest in production processes for goods that cannot be sold. So the investments are bad investments. As soon as this becomes clear, there will be a crisis in which there is a shortage of consumer goods, i.e. these are relatively expensive, and in which capital goods are stuck in the wrong production processes. In ABC theory, the crisis helps to restore the correct price signals and lead to profitable investments in the production processes. [5]

This version of the ABC theory is very rudimentary for reasons of space. Nevertheless, the historical as well as the current criticism of it should be briefly discussed here.

A first fundamental criticism of Hayek's theory came from Piero Sraffa. Sraffa criticized Hayek's argument of a natural interest rate, among other things, with the reference that, according to this argumentation, there must be a natural own interest rate for all goods in production (Quaas and Quaas 2013, 166-169). Another historical criticism came from Joan Robinson, who asked how the interest rate of a triangle (= production process) is related to the entire capital stock (and its interest?). A more recent review, as well as a summary of historical reviews of the ABC theory, can be found in Quaas and Quaas 2013.Georg Quaas highlights logical, conceptual and empirical deficits in the theory. In an arithmetic representation, for example, the difference between a change induced by voluntary saving and a credit-induced boom collapses (218-223). Furthermore, such a representation leads to the paradoxical result that a more capital-intensive and more profitable production leads to lower capital productivity (214). Conceptually, the linear view of the production process to the exclusion of circular processes can also be criticized (224). Ultimately, even empirical data give little reason to speak of a confirmation of the theory in the last financial crisis (244-248). Answers from New Austrians to the criticism and attempts to further develop the ABC theory can be found in Ludwig Lachmann (1986) and Roger Garrison (2001, 2004), among others.


Another field of research at the Austrian School is the theory of the entrepreneur. In recent literature, a distinction is made between entrepreneurs according to Schumpeter (pioneering entrepreneurs) and entrepreneurs according to Israel Kirzner (resourceful entrepreneurs). While the former destroy economic equilibria and introduce revolutionary changes, the latter are adaptive and develop profitable ways to rebalance the market (Hall and Martin 2011; Douhan and Henrekson 2007, 4).

8. Delimitation: sub-schools, other economic theories, other disciplines

As already mentioned in the introduction, a historical classification of the different generations of the Austrian school is perhaps the most expedient differentiation of the different currents within the perspective. A more complete assignment of the people to the respective generations can be found in section 11).

The firstgeneration um Menger (1840-1921) is, as already mentioned, characterized by the development of subjective value theory, marginalism (or marginal utility) and the focus on the individual. In addition, the methodological dispute with the representatives of the German historical school is an important aspect in which Menger defends the importance of deductive theory. In addition, monetary theory, as well as uncertainty, knowledge and time play a role in Menger's work (Blumenthal 2007, 36). To secondgeneration mainly include Friedrich von Wieser (1851-1926) and Eugen von Böhm Bawerk (1851-1916). As already mentioned, Böhm-Bawerk developed his own theory of capital and money, in which time plays a special role. Wieser, on the other hand, is known for calculating factor prices that are determined backwards on the basis of the (subjective) prices of consumer goods. In Wieser's work, however, there are also sociological approaches that do not coincide with the radical individualism of other Austrians (Arena 2010). The third generation, the economists working in Austria then move away analytically as well as politically from the individualism and liberalism of the school. Carl Grünberg (1861-1941) and Othmar Spann (1878-1950) are representatives of this fraction (Quaas and Quaas 2013, 78). Meanwhile, Ludwig von Mises (1881-1973) was building his Private seminar a new generation of Austrians with a different scientific as well as political focus on. The fourth generation, of which many representatives emigrated to the USA because of the Second World War, therefore mainly consists of the participants in Mises ‘private seminar. While some of these participants dispersed and took on roles and academic positions outside the Austrian school in the course of their lives, the role of Friedrich von Hayek (1899-1992) is central to today's Austrians. Together with Mises, Hayek forms the core of the interpretation on which the fifth generation the New Austrians appointed. Strong market liberalism and a focus on aspects of knowledge, monetary theory and economic cycles play a role in this interpretation. It should be noted, however, that there are differences between those who refer to Hayek and those who refer to Mises. An example already explained in section 5) is the different attitudes towards empiricism and praxeology. Well-known representatives of the New Austrians are Ludwig Lachmann (1906-1990), Murray Rothbard (1926-1995) and Israel Kirzner (1930-). Richard Neck also identifies the analysis of institutions, macroeconomic theory, especially in relation to deflation, growth theory and questions regarding the development of regulations as current research fields (Neck 2014, 123) of the New Austrians.

Regarding the connection of the Austrians to other sciences, it should be noted that some representatives of the school will address questions of the school in their later careers Social theory and the philosophy turned to. Hayek's career is exemplary of this.

The emphasis on hermeneutics by New Austrians, as well as the reference to the work of Max Weber, which is reproduced again and again (e.g. Kobayashi 2010), puts the Austrians close to the in certain questions interpretative social sciences.

Because of the centrality of supply and demand, individualism, marginalism and opportunity costs, the Austrian school is located near the Neoclassical (Koppl 2006, 239). The same applies to the policy recommendations, insofar as they are aimed at expanding the sphere of the market as opposed to that of the state.

There are also connections to evolutionary economics, in particular about the concept of innovation and the entrepreneur (Koppl 2006, 237), as well as about psychology, the Behavioral economics with reference to the role of knowledge and to New Institutional Economics (Koppl 2006, 235).

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9. Differentiation from the mainstream

Historically, the relationship between today's mainstream and the Austrian school was shaped by tension. The first two generations of Austrians (especially Menger, Böhm-Bawerk and Wieser) and their focus on methodological individualism, subjective value theory and marginal utility could easily be integrated into neoclassical theory and contributed to its development. Mises and Hayek and their modern successors, in turn, put emphasis on other aspects such as knowledge aggregation and monetary economic cycle theory outside the mainstream (Milonakis and Fine 2009, 245-246). Another point that separates today's Austrians from the mainstream is their hermeneutical approach to understanding human actions and the associated rejection of statistical and econometric methods that are often used in the mainstream.

In terms of self-image, many Austrians today see themselves as belonging to heterodoxy, which, however, sees itself as part of a newly emerging heterodox, i.e. not neoclassical mainstream (Koppl 2006). As already mentioned at the beginning, however, one should also bear in mind when reading the sometimes very strongly formulated demarcations of the New Austrians from the neoclassical and the mainstream that the exaggeration of the differences can also be seen as a strategy that strengthens the coherence of a perspective as an alternative research paradigm should.

10. Institutions


George Mason University

Auburn University

California State University

Hoover Institute (Stanford)

Think tanks, companies:

Mises Institute

Friedrich A. von Hayek Society

Mont Pelerin Society (associated with Hayek)


Review of Austrian Economics

Quarterly Journal of Austrian Economics


1st generation

a. Carl Menger

b. Emil Sax

c. Robert Zuckerkandl

d. Johann von Komorzynski

e. Victor Mataja

f. Robert Meyer

G. Hermann von Schullern Schrattenhofen

H. Eugen von Philippovich

2nd generation

a. Eugen von Böhm-Bawerk

b. Friedrich von Wieser

3rd generation

a. Carl Grünberg

b. Othmar Spann

c. Hans Mayer

d. Ludwig von Mises

4th generation

a. Gottfried Haberler

b. Fritz Machlup

c. Oskar Morgenstern

d. Friedrich August von Hayek

e. Martha S. Braun

f. Alexander Gerschenkon

G. Alexander Mahr

H. Paul N. Rosenstein-Rodan

5th generation (New Austrians)

a. Hans F. Sennholz

b. Murray N. Rothbard

c. Ludwig Lachmann

d. George L.S. Shackle

And what do you dream of

Our vision is a pluralistic and critical economic science that finds an answer to the climate crisis and other great challenges.

Our vision


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Backhouse, Roger E. "A Suggestion for Clarifying the Study of Dissent in Economics." Journal of the History of Economic Thought 26, no.2 (June 2004): 261-271.

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Grassl, Wolfgang, and Barry Smith eds. Austrian Economics (Routledge Revivals): Historical and Philosophical Background: Volume 18. 1st ed.London: Routledge, 2010.

Hagemann, Harald, Tamotsu Nishizawa and Yukihiro Ikeda eds. Austrian Economics in Transition. Houndsmille: Palgrave Macmillian, 2010.

Hall, Joshua C. and Adam G. Martin. "Austrian Economics: Methodology, Concepts and Implications for Economics Education." JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 2 • (Fall 2011): 1-15.

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Hayek, Friedrich A. Prices and Production. 2nd edition. New York: Augustus M. Kelly Publishers, 1935.

Hayek, Friedrich A. The Constitution of Liberty. Chicago: Chicago University Press, 1978 (1960).

Hayek, Friedrich August. "The Use of Knowledge in Society." The American Economic Review 35, no. 4 (1945): 519-530.

Hayek, Friedrich August von. The Road to Serfdom. Routledge Classics. London: Routledge, 2001 (1944). Hall, Joshua C. and Adam G. Martin. "Austrian Economics: Methodology, Concepts and Implications for Economics Education."JOURNAL OF ECONOMICS AND FINANCE EDUCATION • Volume 10 • Number 2 • (Fall 2011): 1-15.

Holcombe, Randall C. Advanced Introduction to the Austrian School of Economics. Cheltenham: Edward Elgar Publishing, 2014.

Quaas, Friedrun and Georg Quaas. The Austrian School of Economics: Presentation, Criticisms and Alternatives. Marburg, Metropolis, 2013.

Koppl, R. “Austrian Economics at the Cutting Edge.” The Review of Austrian Economics 19, no. 4 (December 2006): 231-41

Milonakis, Dimitris and Ben Fine. From Political Economy to Economics: Method, the Social and the Historical in the Evolution of Economic Theory. Economics as Social Theory. London; New York: Routledge, 2009.

Mises, Ludwig von. The Theory of Money and Credit. Indianapolis: Liberty Fund, 1981 (1912).

Neck, Reinhard. "Austrian Economics Today." Atlantic Economic Journal 42, no. 2 (June 2014): 121-22.

Radzicki, Michael J. “Mr. Hamilton, Mr. Forrester, and a Foundation for Evolutionary Economics. " Journal of Economic Issues 37, no. 1 (March 2003): 133-73.

Rothbard, Murray N. The Logic of Action One: Method, Money, and the Austrian School. Cheltenham, UK: Edward Elgar, 1997.

Schumpeter, Joseph A. Capitalism, Socialism, and Democracy. Mansfield Center, Conn .: Martino, 2011 (1944).

Selgin, George A, and Ludwig Von Mises Institute. Praxeology and Understanding: An Analysis of the Controversy in Austrian Economics. Auburn, Ala .: Ludwig von Mises Institute, Auburn University, 1990.

Other sources

IWP Wiki

History of Economic Thought website

Library of Economics and Liberty


[1] For Hayek, however, there was also the possibility that a disruption could lead to a return to the old equilibrium. See (Hayek, 1935).

[2] Joseph Schumpeter, who is often referred to as the founder of evolutionary economics and a co-founder of socio-economics, but is also associated with the Austrian school, had his doubts whether this function of entrepreneurial innovation could be maintained in the long term. According to Schumpeter, the increasing size and bureaucratisation of companies and organizations leads to an “obsolescence of the entrepreneurial function” and thus, among other factors, to the end of capitalism (see Schumpeter 2011 [1947], 131-139;. Quaas and Quaas2013, 85-88; Milonakis and Fine 2009, 191-210)

[3] Böhm-Bawerk carries out a weighting of the production periods in which a period further back in time has a higher weight and in which a general statement about the production process can be made by means of the average production period. See also Quaas and Quaas 2013, 72-73.

[4] The Austrians' opponents in this debate were Marxist but also neoclassical economists. The model of the Austromarxist Oskar Lange was formulated mathematically in the 1960s by Kenneth Arrow and Leonid Hurwicz and represents an analytical solution for price calculation in a socialist economy in the sense of the neoclassical

[5] For a slightly different portrayal by Roger Garrison et al. with reference to the PPF, see