Where numbers and mathematical analysis are no longer enough, space opens up for a more radical interpretation
Have you noticed how much emphasis economists place on numbers, reports, and mathematical analyses? Everything seems very exact when we talk about economics—or at least it tries to present itself that way. And indeed, many things can be calculated quite precisely, but then why do we still have so many unknowns about the future? Why can’t we predict with greater accuracy whether GDP will grow or fall in the next quarter? Why can’t we know how long inflation will last? And what about production costs, consumer spending, and government subsidies?
Sooner or later, as you fall deeper down the “rabbit hole” of economics, you’ll realize that numbers alone might not be enough—as if something is missing, something that might be better described with words, or perhaps even feelings? Welcome to the Austrian School of Economics.
But hold on—don’t get too excited if you think you’ve stumbled upon an approach that will make understanding the complexity of modern economics easier just because the focus isn’t solely on dry calculations anymore. Yes, there’s something “refreshing” about the Austrian School, but as is often the case, it comes with a certain amount of dogma, as we’ll see. But enough with enigmatic introductions—let’s head to Vienna.
You’ve probably heard that there are various “schools of economics”—we’re not talking about physical locations, of course, but sets of ideas and approaches collectively referred to as “schools.” In this sense, there are as many “schools of thought” as you like: classical political economy, Georgism, neo-Marxist economics, Keynesianism, the French liberal school, Islamic economics, Ricardian socialism… the list goes on. Well, maybe not infinitely, but we could certainly name around 30 distinct “schools,” each with its own unique way of interpreting economics.
All these different ideas, to varying degrees, influence the interpretation (and management) of today’s global economy. Is there one that’s dominant? Certainly—the neoclassical school. But we’ll leave that for another day.
So, the Austrian School of Economics—one of these “schools”—is still influential today and is, one could say, in a state of ongoing evolution (from generation to generation). If you’ve heard anything about it, you may have picked up that it’s somewhat, for lack of a better word, obscure? Or perhaps “controversial” is a better fit? One leading reason for this, as already hinted, is that most economists focus heavily on numbers and mathematics, and are therefore quite skeptical when someone suggests that economics should be interpreted on another level—through social phenomena that stem from the motivations and actions of individuals.
A “serious” economist may take such an approach almost as an insult or a provocation—how can something in economics be interpreted if it’s not backed by numbers?! But the “Austrians” would argue that these very “serious” economists arethe problem—they’re incapable of thinking beyond the supplied and projected figures, and while they’re immersed in their calculations, they fail to notice the iceberg we’re speeding toward—one they’d see if they only “lifted their gaze.”
Like many other influential schools, the Austrian School emerged in the mid-19th century. We won’t go into a full list of names, but for those interested, the key figures are: Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, and Friedrich Hayek.
Who’s the “main” one among them? That would be Carl Menger, who in 1871 published a book with a not-so-thrilling title—Principles of Economics—but with truly exciting content. Menger, in a modern sense, laid the foundation for something truly significant and revolutionary—the theory of marginal utility.
It doesn’t sound all that simple, does it? Don’t let the complex name fool you—here’s an alternative: the law of diminishing marginal utility. Still not helping? All right, here’s what it actually means: it’s an extremely simple theory that tells us that the “utility” (or satisfaction) of something starts to decrease as the quantity of it increases.
Here’s a great example: it’s summer, it’s hot and muggy—wouldn’t a nice scoop of cold ice cream hit the spot right now? Just thinking about it makes your mouth water. That first scoop would be amazing. Want a second? Oh yes, great idea, that would be delicious! A third? A fourth? Well, maybe you really love ice cream and don’t know when to stop, but admit it—what you’re craving most right now is that first scoop you don’t yet have. Each one after brings less and less pleasure, and your desire for more drops accordingly.
And that, in short, is the theory of marginal utility!
But what else becomes clear here? Menger defined it nicely—but he didn’t need numbers to do so. A bit of “common sense” was enough to arrive at this very accurate observation. Yet an economist who only looks at numbers might not even notice something so simple it’s almost trivial—but in the broader context of the global economy, it’s irreplaceable!
Of course, the Austrian School is much broader than just the theory of marginal utility, but this fundamental principle describes it quite well. Its goal is to identify trends and economic situations through individual behavior and impulses—such as the almost universal desire to have something now rather than later. Additionally, “Austrians” observe that individual desires are endless, though they do follow certain priorities.
This all sounds interesting and sensible—so why is the Austrian School often criticized? For several reasons, but mainly because it often clashes with dominant modern economic thinking.
Let’s also note that the “Austrian” School is no longer Austrian in the sense of being tied to Austria as a country. The name stems from the fact that its founders were Austrian, even though many of them soon moved elsewhere, primarily to the U.S. Since the 19th century, the Austrian School has essentially been a global economic school, though the name stuck.
And where exactly does it clash with today’s “mainstream” economists? From the mainstream perspective, the Austrian School might even sound fairly radical. Since they start from the premise that individuals define their own desires—and thus their understanding of economics around them—it’s no surprise that Austrian School supporters are strong advocates of individualism. And what follows individualism in economic terms? That’s right—free markets, maximally free markets.
But we already live in a free market, don’t we? Yes—and no, depending on which “school” you ask. For example, with current concerns about inflation and possible recession, we frequently mention central banks and their major role in trying to control these phenomena. But if you asked most Austrian School supporters, they’d abolish all central banks and leave only commercial banks to independently set and adjust interest rates. Abolish central banks? Yes—for mainstream economics, that’s a very radical position.
What else do the Austrians believe or propose? Well, we’ll have to generalize a bit—this is a school that’s been evolving for nearly two centuries, so of course, there are internal factions and contradictions. That said, the Austrian School today believes that business cycles (booms, busts, recessions…) are directly caused by state and central bank interference—especially when they try to control interest rates and the money supply.
It’s no surprise, then, that Austrians are strong advocates of the gold standard and would love to return to it. Recall that the gold standard in the U.S. was in effect until 1933 (and was fully abandoned in 1971 by Richard Nixon). Until then, the amount of money in circulation had to be directly tied to the amount of gold in reserve. Austrians believe the end of the gold standard opened the door to large-scale currency value manipulation.
They also believe that markets are emergent phenomena, not systems created just because someone decided so. In their view, people create markets in order to improve their lives—it’s not a conscious decision, but rather a natural outgrowth of human desire. They’ll often say that if you placed 100 complete economic amateurs on a deserted island, they would eventually develop some kind of market mechanism.
In the U.S., one well-known advocate of Austrian School principles is former congressman Ron Paul—though that doesn’t mean the Austrian School is identical to American libertarianism, even if the Austrian School provides strong arguments for libertarianism. Also notable in the U.S. is the Ludwig von Mises Institute, founded to promote and research Austrian economics.
The Austrian School maintains that prices cannot be centrally “set”, but are instead directed by the subjective preferences of individuals. In contrast, the classical school would argue that the objective cost of production determines the final price.
There will always be some skepticism toward the Austrian School—especially because some see it as “capitalism on steroids,” or as advocating a system where everything is completely at the mercy of the free market, with minimal state intervention. But that might not be an entirely accurate definition, because you can’t equate the Austrian School with anarcho-capitalism (something we’ll definitely discuss soon). Many of its representatives agree that a society without a state would simply be “inefficient”—but they believe the state’s involvement should be far less than what today’s “mainstream” economists advocate.
Some would even argue the Austrian School is closer to philosophy than economics. Perhaps the two disciplines intertwine more than we usually admit—and maybe that’s not such a bad thing.
Let’s take this as a fairly short introduction to the Austrian School—because it’s a topic that deserves far more space to explore all its details. But for now, it’s important to clarify where it stands and what its basic principles are. We might disagree with some of the Austrian School’s assumptions—but what if that disagreement is just our own personal resistance to something we wish weren’t true?
The Austrian School is definitely still important today. The very fact that there are economists willing to look at some of the world’s most complex economic questions in a different way is incredibly valuable—because the world we live in is becoming increasingly complex, and it can’t be explained by numbers alone.
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