The Basics of Austrian Economics
Austrian economics is one of the most controversial schools of thought in this subject. While it has some of the world’s brilliant economist in history supporting the ideas behind Austrian economics, it also has some staunched critics. Nevertheless, the ideas in this school of thought have some profound effects in the economy. Anyone aware of this school of thought in economics could even identify its use in some of today’s political and economic stands. Some may not be actively aware of it but they are following Austrian economics at least in its core idea.
Roots of Austrian Economics
The name “Austrian Economics” is not based on the location where it was formulated. This was rather based on the citizenship of its first supporters and founders. Carl Menger, Eugen von Böhm-Bawerk, Friedrich Hayek and Ludwig von Mises are all Austrians. Carl Menger wrote the “Principles of Economics” in 1871 which is considered among the early writings that explicitly explain this school of thought.
The belief of Austrian Economics stemmed from the creation of marginal cost and as well as its value. This is directly in contrast with the concept that labor is equal to the price of the output or product. Through the creation of marginal value, the price of a product and output is not just based on labor but on other factors that contributed to the creation of the said product. This thought was influential to the development of Austrian economics.
Basic Beliefs of Austrian Economics
To better understand the beliefs of Austrian economics its best to learn first what it is not. Austrian economics is not a believer of empirical data and science. In this school of thought, science is not regarded as a tool to explain general economics rather it is only applicable for scrutinizing historical past for information purposes.
Austrian economics believe in laissez faire form of economy. As previously indicated, the roots of this school of thought have been based on the existence of marginal cost and value. The creation of this value is derived from other actions and factors. Allowing these factors to be considered creates a setting wherein the value is not necessarily based on the labor used to create an item or provide a specific service. A laissez faire economy lets the market run its course as it will be naturally molded by businesses, suppliers and consumers. Letting other factors to create marginal value for products simply pushes the economy to a higher level.
Methodology of Austrian Economics
Dismissing science opens a lot of questions for Austrian economics. What would then be considered as factors, principles or philosophies that can provide detailed explanation for the economy? For Ludwig von Mises, economics could be explained by studying praxeology which studies human actions. He further specified that the study of praxeology in relation to scarcity as the basis of formulating economic principles and theories. In gist, studying human actions in their behavior on scarcity will best explain how economics will work. This doesn’t believe on empirical data and other scientific theories but Austrian economics tries to create a logical explanation based on human behavior.
Part of methodology used by Austrian economics is on deduction. While praxeology is study specific to human behavior, the use of deduction is also useful in terms of studying the general economic setting. In this method, economists study the present economic assumptions and use their method of deduction for additional conclusions. This methodology however has been questioned by other followers of Austrian economics because the assumption could be flawed. Besides, the assumption created could have been based on scientific and empirical studies.
Implications and Applications of Austrian Economics
Austrian economics offer some of the most interesting ideas to date. The idea of a free market is one of the most debated economic thoughts as it has positive and negative implications. While it can help improve the economic standing of a country, the advancement is only felt by larger corporations. Free market doesn’t have any limitations which means those with resources can easily handle market challenges. This places smaller players at risk.
The idea of free market is further complemented with the belief that the government should have lesser role in shaping the market. Taxation should be limited and restrictions should only be based on what the market deemed as dangerous. This can provide unlimited capability for businesses but this could easily lead to cutthroat competition.
These are the modern criticisms to Austrian economics with real world implications. However, the possibility of improving economy should not be dismissed. Believers of this school of thought know the challenges. That is why additional study on prexeology or human behavior should be conducted as they would differ in various era.
Austrian economics is an interesting school of thought because of its unique with highly applicable theories and principles. It may have its critics but economic behavior of some countries and communities can be traced to Austrian economics.