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What is the Austrian School of Economics?


If you agree with the general public and think that information-thirsty economists are preoccupied with complex formulas and do not think outside the box, it is better to look at the “Austrian school”. Economists at the Austrian School of Economics, like monks living in a monastery, try to solve difficult economic problems with “intellectual experiments.”

The Austrian School of Economics believes that truth can be discovered by thinking aloud. It is interesting to know that this group has unique insights into some of the most important issues in the economy of our time. This article is an excerpt from an encyclopedia article Inostopedia You will learn about the evolution of the Austrian school of economics and its place in the world of economic theories.

Austrian School of Economics What is?

The “Austrian school of economics” or the Austrian school is a school of thought that emphasizes the elimination of any interference and influence of governments and central banks in the money supply and, more generally, in all pillars of the economy.

This school is one of the schools outside the mainstream that considers the best way to organize markets, price mechanism and supply and demand.

What we know as the Austrian school of economics did not take shape overnight. This school has evolved over the years and has been shaped by the wisdom of great people from one generation to the next. Although this school has progressed by acquiring knowledge from external sources, its basic principles have remained the same.

What is the Austrian School of Economics?
Carl Menger

Carl Menger, the Austrian economist who wrote The Principles of Economics in 1871, is widely regarded as the founder of the Austrian school. The title of Menger’s book does not indicate anything unusual; But the contents of this book became one of the pillars of the revolution of marginalism (change of classical thinking).

Marginalists accept the same classical theories and the prophecies of capitalism about freedom, competition, and the criterion of self-interest, but instead of seeing pricing on the supply side, they seek it on the demand side. Marginalism simply states that only the producer or supplier is involved in setting prices.

In his book, Menger explains that the economic value of goods and services is inherently dependent on one’s mindset. So what you think is valuable may not be valuable to your neighbor. Menger goes on to explain that as the number of goods increases, their mental value to the individual decreases. This valuable perspective underpins the concept we call “marginal utility reduction.”

Decreased utility Marginally states that for each individual, the utility of anything decreases with each increase in consumption, but total utility increases with each. For example, a person who buys a car feels less satisfied with buying a second car than when he bought the first car, but his overall satisfaction has increased. According to this principle, high supply can reduce the desirability of a product and reduce its price.

Later, Ludwig von Mises, another great thinker of the Austrian school, used the term marginal utility in his 1912 book The Theory of Money and Credit. The theory of declining marginal utility may help us find the answer to one of the most fundamental questions in economics: “How much money will be too much?” Here, too, the answer is subjective. One extra dollar in a billionaire’s pocket can hardly make much difference. However, this one dollar will be extremely valuable in the hands of a poor person.

Apart from Karl Menger and Ludwig van Mises, other great letters such as Eugen von Bohm-Bawerk, Friedrich Hayek and many others can be seen in the Austrian school. The Austrian School of Economics today is not limited to Vienna and has spread around the world.

Over the years, the basic principles of the Austrian school have led to the development of many valuable views on economics, such as supply and demand laws, inflation factors, the theory of money creation, and the operation of foreign exchange rates. The Austrian school has a different view of each of these issues than the other schools of economics.

In the following sections of this article, you will learn about some of the main ideas of the Austrian School of Economics and how it differs from other schools of economics.

Think in your own way

The Austrian school discovers the applied laws of the world economy using a priori logic or “thought experiments”. A project that is presented to test a hypothesis or theory without the need for direct testing is called an intellectual experiment.

However, other major schools of economics, such as the neoclassical, neo-Keynesian, and م schools, use objective data and mathematical models to prove principles. In this respect, the Austrian school can be particularly at odds with the German historical school, which rejects the universal application of any economic theorem.

Pricing

The Austrian school believes that prices are determined by subjective factors such as a person’s preference for buying or not buying a particular product. While the classical school of economics believes that it is the objective costs of production that determine the price. The neoclassical school also believes that prices are determined by the balance of supply and demand.

What is the Austrian School of Economics?

The Austrian School of Economics rejects both classical and neoclassical views, believing that the cost of production is determined by subjective factors based on the value of alternative uses of scarce resources, as well as the balance of supply and demand by individual mental priorities. For example, the cost of making money is very small, but it is mentally valuable for people.

Capital goods

A key view in the Austrian school is that capital products are not homogeneous. (Capital goods are durable products used to make other goods and services.) In other words, hammers, nails, timber, and bricks are all different and cannot completely replace each other. This sounds obvious, but it has real meaning in aggregate economic models; Capital is heterogeneous.

Keynesian view of capital ignores this. At the output of both micro and macro formulas is an important mathematical function derived from the product of labor and capital. So in the Keynesian model, producing $ 10,000 a nail is exactly the same as producing a $ 10,000 tractor. The Austrian School of Economics argues that the creation of goods with the wrong capital leads to economic loss. In this case, difficult reforms will be needed.

Interest rate

The Austrian school rejects the classical view of capital. The classical view holds that interest rates are determined by the supply and demand of capital. The Austrian school believes that interest rates are determined by a person’s mental decision to spend now or in the future.

In other words, the interest rate is determined by the time priority of the borrower and the lender. For example, an increase in savings rates indicates that consumers have delayed their current consumption. This means that more resources and money will be available in the future.

Inflation effect From the perspective of the Austrian School of Economics

The Austrian school believes that any increase in the money supply, without increasing the production of goods or services, will lead to an increase in prices.

What is the Austrian School of Economics?
Printing money without backing is the main reason for inflation

But the price of all goods does not increase at the same time. The price of some goods may rise faster than others, which leads to more differences in the relative prices of goods. For example, a plumber may find that he or she has had the same income this week, but has to pay the baker more money to buy his or her regular bread.

Changes in relative prices make the baker richer than the plumber. But why does this happen? If the prices of all goods and services increased simultaneously, this change would not be felt. But the price of the goods through which money is injected into the system changes before other goods. For example, if the government injects corn into the money system by buying corn, the price of corn will rise before other commodities, leaving a trail of price change.

Business cycles

The Austrian School of Economics believes that “business cycles” are the result of interest rate manipulation used by the government to control money. The government abuses people’s capital by artificially raising and lowering interest rates, which ultimately leads to a recession.

Why should there be a recession? Labor and capital employed in inadequate industries (such as construction and reconstruction during the 2008 economic crisis) must be directed towards economically feasible goals. This short-term business adjustment reduces real investment and increases the unemployment rate.

The government or the central bank may try to circumvent the recession by lowering interest rates or supporting failed industries. Austrian school theorists argue that this only leads to an increase in misinvestment and exacerbates the impact of the recession on the system.

The emergence of the market From the point of view of the Austrian school

The Austrian school considers the market mechanism as a process and not the output of a project. People create markets to make their lives better, not by making conscious decisions. Therefore, if you leave a group of non-professionals on remote islands, sooner or later their interaction will lead to the creation of a market system.

Concluding remarks

The theory of the Austrian school of economics is based on theological logic. This frees the incomprehensible rhetoric of conventional economics. The Austrian school, despite its stark differences from other schools, has gained a permanent place in the complex world of economic theory by offering unique insights into some of the most difficult economic issues.

This school emphasizes the complete cutting off of governments and banks from monetary and fiscal policies. The Austrian school believes that government interference in the pillars of the economy should be reduced to zero.

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