As a starting point, who have been the leading thinkers in Austrian economics over time? Coyne and Boettke write:
The origin of the Austrian School of economics is the publication of Carl Menger’s Principles of Economics in 1871. ... He also was engaging the German Historical School, which was the dominant source of economic thinking throughout the German-speaking world. The German Historical School held that economic science is incapable of producing universal principles that apply across time and geographic space. Because of this, they held that the best that economists can do is to engage in the historical study of particular circumstances, with the hope of identifying some particular patterns that are specific to the context being studied.In contrast to this view, Menger argued that universal economic laws apply across contexts, and he did so using marginal utility analysis as a foundation. Those in the German Historical School took issue with the claims by Menger and his colleagues—Eugen Böhm-Bawerk and Friedrich Wieser—about the possibility of universal theory and labeled them the “Austrian School” because of their academic positions at the University of Vienna. The label stuck. ...
Subsequent generations of Austrian scholars built on the works of Menger, Böhm-Bawerk, and Wieser. Following World War I, Ludwig von Mises and F.A. Hayek assumed the intellectual leadership of the Austrian School. ... Since the 1930s, no economists from any Austrian university have become leading figures in the Austrian School of economics. Following the awarding of the Nobel Prize to Hayek in 1974, there was a revival of interest in the ideas of the Austrian School. The major figures in this revival were Israel Kirzner, Murray Rothbard, and Ludwig Lachmann.
What are the key elements of Austrian economics that distinguish it from other schools of economics? One theme emphasized in the discussion is "the concept of `methodological individualism,' which holds that people, with their unique purposes and plans, are the beginning of all economics analysis. ... Menger stressed that the evaluations of the desired ends, as well as the determination of the best means to achieve those ends, are uniquely subjective to the individual chooser."
This emphasis on subjectivism, rooted in preferences and individual experiences, is then combined with an insight that people often do not know what they will do or try until it actually happens. Acting as a consumer, will I buy a package of microwaveable chicken masala at the grocery? I don't know until I see it. I certainly don't know if I will buy it repeatedly in the future. I am not capable of reducing my subjectivism to a rule that will be followed. Acting as a worker, people don't know in advance what jobs they will want to try, or what job they will prefer to stick with over time. They try different options and see what they subjectively prefer. Even those who manage companies don't know their plans fully in advance. They don't know if certain production methods will work until they try them out. They don't know if tweaks or changes to those production methods will work until they try them out. They don't know if revised or new products will appeal to consumers, until they try them out.
As Coyne and Boettke write: "Moreover, this series of choices is open-ended, which means that through time people are learning what ends to pursue and the most effective ways to achieve those ends. As a result, Austrian economists place an emphasis on understanding the process of discovery and
learning that takes place through time."
This perspective on the economy suggests that government economic planners will face some substantial problems, because the information they need to plan the economy--what will be produced, how it will be produced, what workers should be doing what jobs, what kinds of capital investment would be most useful--is literally not available. That information only becomes discovered through a process of trial-and-error. Moreover, the needed information is not static, but evolves over time. In describing Hayek's work critique of socialist economic planning, Coyne and Boettke note:
This perspective on the economy suggests that government economic planners will face some substantial problems, because the information they need to plan the economy--what will be produced, how it will be produced, what workers should be doing what jobs, what kinds of capital investment would be most useful--is literally not available. That information only becomes discovered through a process of trial-and-error. Moreover, the needed information is not static, but evolves over time. In describing Hayek's work critique of socialist economic planning, Coyne and Boettke note:
Even if some stable equilibrium were obtained, it would be fleeting as conditions changed. It is only by allowing decentralized people to participate in an ongoing process of discovery that the knowledge necessary to make rational economic decisions emerges. These numerous discoveries lead to the emergence of knowledge regarding not only what goods and services are desired by consumers, but also the most effective techniques to produce these outputs in a cost-minimizing manner. The problems inherent with market socialism, according to Hayek, were not a matter of placing smarter people in charge or in developing new computational techniques to gather more information. Instead, the issue was that the economic knowledge necessary for coordination is dispersed, tacit, and emergent. This means that the knowledge used by people to coordinate their economic affairs cannot exist outside the context within which they are embedded. The market socialism model left no space for the very activity that generated the knowledge that was necessary for planners to accomplish their stated ends of advanced material production.
Coyne and Boettke add:
The emphasis on the division of knowledge and the market process as a means of discovering and using this knowledge is the crux of the Austrian criticism of both comprehensive and piecemeal government intervention into a freely operating market. Government’s inability to obtain the knowledge necessary to plan or regulate the price system is the fundamental economic criticism of intervention into the market order. We emphasize the term “economics” to highlight that this is not an ideological argument in favour of markets, but rather a subtle argument in technical economics about the type of knowledge, and the source of that knowledge, necessary to use scarce resources in a way that improves human welfare.The essay digs into some other implications of Austrian thinking. For example, this emphasis on the economy as emerging from subjective decisions in an experimental process leads naturally to an emphasis on time in economic decision-making, and the role of interest rates as a price that emerges on time. It leads to a belief that government inventions in these tradeoffs over time can produce undesired future outcomes, including recessions.The emphasis on specific uses in the present and how those uses can change in the future leads to some alternative ways of thinking about capital, not as a "homogenous blog" but as a specific and contextual set of choices. During the pandemic, for example, we have seen a conversion of housing capital and home internet service into the uses previously served by business capital and commercial real estate. Coyne and Boettke write:
[S]tandard economic theory treats capital as a homogeneous blob that can be used interchangeably and does not require any kind of careful planning or coordination through time. If capital goods were indeed homogeneous, they could be used interchangeably to produce whatever final products consumers desire. From this perspective, capital is analogous to a ball of Play-Doh®. The same capital can be shaped into whatever output is desired by the designer. And if mistakes are made, capital resources can be reallocated quickly and with minimal cost by quickly reshaping the ball of Play-Doh®. Scholars working in the Austrian tradition, in contrast, emphasize that capital is not homogeneous. All capital is not the same and cannot be used interchangeably. A pair of pliers is not the same thing as a pickup truck. Each capital good can be used to achieve different purposes. A pair of pliers could not tow a trailer and a pickup truck cannot be used to twist a piece of wire. Based on their unique physical characteristics, it is more accurate to think of capital as LEGO®s rather than a ball of homogeneous Play-Doh®. In order to achieve the desired production plan of building a set of LEGO®s, specific unique pieces must be combined in a certain temporal order. If a mistake is made along the way, it is costly because individual LEGO® pieces need to be carefully removed and specific pieces need to be inserted to correct for the error to achieve the desired production plan. This is the situation that characterizes a complex, advanced economy.The Austrians view market outcomes as a "spontaneous order"--that is, an outcome that is both orderly and not designed in advance. In somewhat the same way as language evolves, the spontaneous order of the economy shifts over time based on interacting decisions of individuals in ways that are often unexpected until they actually emerge.
I should acknowledge that readers of a certain temperament may find themselves writhing with discomfort at this discussion. What do the Austrians have to say about situations where market don't work well? Where's the discussion of poverty and inequality? Of externalities and the environment? Of public goods, schools and infrastructure? Of antitrust and anticompetitive behavior? This short volume doesn't mention these kinds of issues, nor how Austrians would address them.
But it does emphasize that a " foundational principle of Austrian economics is the adoption of the means-ends framework. This entails taking ends as given and focusing on whether the means proposed to achieve the desired ends are suitable." In other words, economics as a subject doesn't specify a set of goals for public policy. Economics is a way of analyzing the extent to which proposed policies are likely to meet the goals.
In this spirit, an Austrian approach to thinking about policies to help the poor or protect the environment does not question the merits of these goals. Instead, the Austrian approach suggests pausing for a moment and considering the assumptions underlying the recommendation. Do the policy proposals treat the economy as a kind of supercomputer--that is, just plug in some new inputs, and the economy will use preset programs to reach a predictable conclusion? Is the policy assuming that the problem is static and unchanging? (It's not.) Is it assuming that it knows the details of how economic actors will respond the the policy? (The economic actors themselves don't know.) Is the policy leaving room for innovation and evolution? When thinking about the economy in an Austrian frame of mind, thoughts about teh design of economic policies may shift as well.
