Austrian Economics Page
Revised August 26, 2012
© J. Patrick Gunning
The Nature, Purpose and Origin of Austrian Economics
in a Nutshell
What is the subject matter and purpose of Austrian economics? And how did it originate? This brief essay answers these question on the basis of my familiarity with the work of Carl Menger, Eugen von Böhm Bawerk, Ludwig von Mises, F. A. Hayek, and other contemporaries and followers. First the direct answers and then a more complete explanation.
1. The subject matter of Austrian economics is the discovery and use of means to attain ends in market interaction.
2. The purpose of the economists who study Austrian economics is evaluate proposals concerning the use of coercion to raise the efficiency with which the ends in market interaction are attained.
3. Austrian economics originated with the classical economists.
The ultimate ends that are of concern in Austrian economics are those that can be attained by means, first, of earning money. They are the ends of individuals who perform the function associated with the consumer role. The means of attaining ends consist of factors of production and consumer goods. These means must have prices that are assigned and determined by individuals who interact in the entrepreneur role. Market interaction refers to interaction in a legal environment where private property rights over the means that currently exist are already allocated, where private property rights over newly-discovered but unowned means are assigned to the discoverer, where individuals are free to buy and sell the products they own and cause to be produced, and where a stable money exists so that individuals can calculate profit and loss in terms of money.
People often argue that coercion should be used to supplement or to correct for deficiencies of discovery and use of means to satisfy consumer wants under the conditions of market interaction. The most extreme argument is that the entire system should be abandoned in favor of socialism. Less extreme arguments concern interventions of various kinds, such as price controls, tariffs, restrictions on production or consumption of goods, and government manipulation of the money supply. The purpose of Austrian economics is to evaluate such proposals according to the criterion of whether they can indeed improve the satisfaction of consumer wants.
The history of Austrian economics can be traced to the writings of the classical economists, from the 18th to the mid-19th centuries. The classical economists observed market interaction that was embedded in the existing political and social system of organization. That system contained privilege for various classes of people and the authoritarian ruler claimed jurisdiction over all activity, including factors of production and consumer goods.
The classicals made two points. The first is encompassed by Adam Smith’s invisible hand theorem. Each individual, acting in his own interest, tends to promote the interests of others in the society. This is achieved by means of enhancing the division of labor. Since the writings of Mises, “each individual” has referred to an individuals whose ultimate aim is the consumption of consumer goods and who achieves this aim by acting in the entrepreneur role and in the roles of owners of the factors of production and consumer goods.
The higher productivity achieved by means of a division of labor is discussed by Ludwig von Mises here.
The second classical point is that the use of coercion to restrict the free exchange of goods and factors of production may interfere with the promotion of the interests of others that would otherwise occur in market interaction. Examples of such interference are monopolies that are enforced by the government and barriers to international trade.
Coercion is necessary in order to establish and maintain the conditions required for market interaction in a complex society. However, it may also be used to interfere with market interaction. Some interference may benefit individuals in the consumer role. Each intervention proposal must be evaluated on its merit in accord with whether it can achieve the objectives of its proposer.
How to Study Austrian Economics Today
J. Patrick Gunning
Professor of Economics
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