The Austrian School of Economics
By Randall Holcombe • Thursday May 8, 2014 12:39 PM PDT •
I’ve just published a short book, Advanced Introduction to the Austrian School of Economics, which is designed to give people with some knowledge of economics an explanation of what ideas distinguish the Austrian school from mainstream economic thought. The paperback is relatively affordable ($22.36 if ordered on-line). The book is much slimmer in person (144 pages) than it appears in the graphic on the web site.
The book is not an introduction to economics from the point of view of the Austrian school. I assume the reader has some knowledge of economics, perhaps from taking an introductory college course in economics. Readers with this background may have heard of the Austrian school but be unclear about what makes it different from the mainstream ideas taught in college economics courses, and I hope this book provides an answer.
The Austrian school, which had almost vanished by the mid-20th century, has seen a resurgence in the past several decades. Two reasons for its increased prominence are (1) its critical analysis of central economic planning, and (2) the Austrian theory of business cycles.
Ludwig von Mises and Friedrich Hayek, two of the school’s most prominent 20th century adherents, claimed that central economic planning could not allocate economic resources rationally. Markets, and market prices, are required for rational resource allocation. This argument found little support among mainstream economists, who often argued up through the mid-1980s that the Soviet system was more efficient than American capitalism. The collapse of the Berlin Wall in 1989, followed by the break-up of the Soviet Union in 1991, caused economists to re-think their views, and the arguments of Mises, Hayek, and the Austrian school gained more credibility.
The Austrian business cycle theory says that economic downturns are caused by malinvestment, as a result of price signals distorted by monetary fluctuations. The interest rate is the most significant—but not the only—price that can be distorted. The problem is not too much investment or too little, but investment in the wrong types of capital goods. Macroeconomics typically treats capital as homogeneous, and looks at the aggregate amount of capital, whereas the Austrian school emphasizes the heterogeneous nature of capital.
After the dot-com bust at the beginning of the 21st century, followed by the housing boom and bust, the Austrian idea that macroeconomic problems result from investing in the wrong types of capital gained additional credibility, and Hayek’s ideas again were viewed as competitive with those of Keynes.
The result is that more people have heard of the Austrian school, even though they may not be familiar with its most important ideas. That was the motivation for my book.