Austrian Philosophy

Austrian Economics Philosophy

Austrian economics is a school of economic thought that emphasizes the importance of individual choice, subjectivism, and the role of entrepreneurship in the economy. Originating in the late 19th century, Austrian economics challenges many mainstream economic theories, particularly those associated with neoclassical and Keynesian economics. Austrian economists advocate for a free-market approach, arguing that government intervention distorts market signals and leads to inefficiencies.

Austrian economics has faced criticism from mainstream economists, particularly regarding its methodological approaches and views on the business cycle. Critics argue that Austrian business cycle theory lacks empirical support and that its focus on individual actions neglects the importance of aggregate analysis. Despite these critiques, Austrian economics continues to influence debates on economic policy and has experienced a resurgence in interest, particularly among advocates of free-market principles and libertarianism.

The philosophy of Austrian economics offers a distinct perspective on economic analysis, emphasizing individual choice, subjectivity, and the importance of entrepreneurship. By advocating for free markets and critiquing government intervention, Austrian economists provide valuable insights into the functioning of economies and the nature of economic order. While facing challenges from mainstream economic thought, the Austrian School remains an influential force in contemporary discussions about economics and public policy.

The Austrian School of economics emerged in the late 19th century, primarily associated with the works of Carl Menger, who is considered one of the founders of this school. The movement developed further in the early 20th century through the contributions of economists such as Ludwig von Mises and Friedrich Hayek. The Austrian School gained prominence during the 20th century as a critique of both the classical and neoclassical schools and as a response to the rise of socialist and interventionist policies.

Philosophical Economic Discussion 

between 

Carl Menger, Eugen von Böhm-Bawerk, Friedrich Hayek, Friedrich von Wieser, Joseph Schumpeter, Léon Walras, Ludwig Lachmann, Jesús Huerta de Soto, Roger Garrison, and Peter G. Klein

Carl Menger: Let us begin by addressing the foundation of economic theory, which, in my view, lies in marginal utility. Economics must focus on the decisions of individuals. Value does not come from labor or cost of production, but from the subjective preferences of individuals who weigh the utility of additional units of a good. It is this subjective valuation that forms the basis of prices and resource allocation.

Eugen von Böhm-Bawerk: Menger, your marginal utility theory is essential, but I would add that time preference plays a crucial role in determining value. My work on capital and interest emphasized that individuals prefer present goods over future goods, which is why interest rates exist. The structure of production is shaped by these time preferences. Capital is not just a factor of production—it is an embodiment of time itself.

Friedrich von Wieser: I agree with both of you, but we must also acknowledge the importance of opportunity cost. In every economic decision, individuals weigh the benefits of one option against what they must forgo. This concept goes hand in hand with marginal utility and time preference. It is not just the value of the good itself, but the alternatives that must be sacrificed that shape economic choices.

Friedrich Hayek: Building on our Austrian tradition, I argue that the problem of economic coordination cannot be solved by centralized planning, as I discussed in The Use of Knowledge in Society. Prices act as signals, conveying dispersed knowledge about preferences, resources, and opportunities. It is through this decentralized price mechanism that individuals can coordinate their actions without the need for central control. The economy is far too complex for any planner to grasp fully.

Léon Walras: I appreciate the emphasis on individual choice, but my approach focused on the general equilibrium of the entire economy. In my Elements of Pure Economics, I introduced the notion that all markets are interrelated, and the economy moves toward a state of equilibrium where supply equals demand across all markets simultaneously. While I acknowledge the importance of individual decisions, these decisions are part of a larger system that tends toward balance through competition.

Joseph Schumpeter: While Walras speaks of equilibrium, my focus is on creative destruction. Capitalism is a dynamic system, constantly evolving through innovation and entrepreneurship. Economic equilibrium is disrupted by the actions of entrepreneurs, who introduce new products, processes, and business models. This constant innovation drives economic progress, but it also leads to the destruction of existing structures. Capitalism thrives on this cycle of creation and destruction.

Ludwig Lachmann: Schumpeter, I am sympathetic to your view of capitalism as dynamic, but I would stress that economic processes are shaped by radical subjectivism. The future is inherently uncertain, and individuals form expectations about the future that are constantly shifting. This makes equilibrium a fleeting and illusory concept. We must focus on the market process, not equilibrium. The economy is a constantly evolving pattern of plans and adjustments as individuals react to new information.

Jesús Huerta de Soto: Lachmann, I agree with your emphasis on the market process, but we must also consider the dangers posed by central banking and government intervention. In my work, I’ve critiqued fractional reserve banking and argued that it leads to unsustainable booms and busts. The creation of credit not backed by real savings distorts interest rates and investment, leading to malinvestment. This is a key feature of the Austrian business cycle theory.

Roger Garrison: De Soto, you raise an important point about the distortion of interest rates. In my work on capital-based macroeconomics, I’ve built on the Austrian theory by illustrating how changes in interest rates affect the structure of production. Artificially low interest rates, set by central banks, encourage long-term investments that are unsustainable. When the inevitable correction occurs, these investments must be liquidated, leading to recessions. The focus should be on allowing interest rates to reflect genuine time preferences in the market.

Peter G. Klein: I would add that the role of entrepreneurship in the market process cannot be overstated. Entrepreneurs are the driving force behind innovation and the reallocation of resources. In my work, I’ve argued that entrepreneurship is about judgment in the face of uncertainty. It is through entrepreneurial decision-making that resources are reallocated in response to new opportunities and information, facilitating the market process described by Menger and Lachmann.

Menger: Indeed, entrepreneurship plays a crucial role in how resources are used. But it is also rooted in the subjective values of individuals. Entrepreneurs must anticipate future preferences, making decisions based on their understanding of how value is formed. It is the interaction of these subjective valuations that creates the complex patterns of the market.

Böhm-Bawerk: And time remains central to this process. Entrepreneurs must navigate the trade-off between present and future goods, making decisions about the allocation of capital over time. Interest rates signal the scarcity of present goods relative to future goods, and when these signals are distorted by artificial credit expansion, as Huerta de Soto mentioned, the result is widespread malinvestment.

Walras: I understand the importance of time and entrepreneurship, but I would argue that these decisions still take place within the framework of general equilibrium. Even if the system is constantly disrupted by innovation, the economy tends toward balance, as market forces work to align supply and demand across sectors.

Hayek: Walras, your vision of equilibrium is too static for the real-world economy. The economy is in constant flux, as entrepreneurs respond to new information. The price system coordinates these changes, but there is no final state of equilibrium. The process of adjustment is continuous, as knowledge is decentralized and constantly evolving. Central planners simply cannot manage this complexity.

Schumpeter: Hayek, I agree with you. Capitalism’s strength lies in its dynamic nature. Entrepreneurs drive the process of economic change through innovation. This disrupts equilibrium, but that disruption is necessary for progress. The creative destruction of old industries and technologies makes room for new ones, and it is this process that fuels economic growth.

Lachmann: Schumpeter, your emphasis on creative destruction resonates with my belief in the radical uncertainty of the future. Economic actors cannot predict the full impact of innovation or the reactions of other market participants. This uncertainty makes equilibrium a fleeting concept. We should focus instead on how individuals constantly revise their plans in light of new information and changes in their expectations.

Huerta de Soto: Lachmann’s radical subjectivism reminds us that the market process is fragile, especially when disrupted by artificial credit expansion. Central banks, in their attempts to control the economy, end up distorting the market’s signals. We must return to a system of sound money and allow the market to function without the interference of central planners and fiat currency manipulation.

Garrison: And that is why we need to focus on the structure of production. Interest rates, when allowed to reflect true time preferences, guide the allocation of resources across different stages of production. Central bank intervention disrupts this process, leading to misallocation and eventual recession. The Austrian business cycle theory provides the best framework for understanding these dynamics.

Klein: At the heart of these discussions is the role of the entrepreneur. Entrepreneurs drive the reallocation of resources in response to new opportunities, but they also operate under conditions of uncertainty. It is their judgment, not just their ability to calculate costs and benefits, that determines the success of their ventures. This is where the Austrian perspective offers something unique: a focus on entrepreneurship as a process of discovery in an uncertain world.

Menger: Entrepreneurship, time preference, and subjective value all converge in the marketplace. These are the foundations of economic theory. We must never lose sight of the individual—the subjective decisions of each person are what drive the economy, not some abstract notion of equilibrium.

This discussion brings together key Austrian economists with some neoclassical elements, highlighting the ongoing tension between equilibrium models and dynamic, subjective approaches to understanding the economy. The conversation focuses on time preference, the role of entrepreneurship, the dangers of central bank intervention, and the limitations of equilibrium theory.