Lesson 1 of 7
A school, not a settled science
The Austrian school is a named tradition inside economics, not the settled view of the field. Where it sits, and who argues against it.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- The Austrian school is a named tradition inside economics, not the settled view of the field, and most economics departments do not teach it.
- What makes it a school is a shared starting point, not a shared politics: explanation begins with individual people choosing under conditions they do not fully know.
- A heterodox tradition is read by holding two things at once, the argument and the published objection to it, and this track prints both.
A school of economics is a group of people who share a starting point, argue from it over a long period, and leave a literature behind. The Austrian school is one of those. It is not a consensus, and it is not a fringe: it is a minority position with a continuous body of work and a continuous body of criticism.
Two different things a reader can mistake for each other
A school
- A shared starting point for explanation.
- A literature that argues with itself across generations.
- Named authors who can be read in the original.
- Can be a minority position for a century.
A consensus
- What most working economists currently accept.
- What graduate training reproduces by default.
- What appears in a textbook without attribution.
- Changes, and has changed, more than once.
A school is a way of arguing. A consensus is a count of who agrees.
The three commitments
Three things hold the tradition together, and none of them is a political position.
The first is that explanation starts from individual people. An aggregate such as total investment is a sum of things people did, and the tradition treats the sum as a result to be explained rather than as a cause.
The second is that value is subjective: a fact about the person valuing, not a property of the object. Menger builds his whole account of value on that in chapter III of Principles of Economics, where the value of a good is the importance a person attaches to it because some satisfaction depends on having it.
The third is that time and ignorance are part of the problem rather than frictions to be removed. Menger already treats the gap between committing resources and getting output as unavoidable, in chapter I of the same book.
Where it sits in the profession
It is outside the mainstream and it is not outside the record. Its works are published, reviewed and cited, and one of its members, Hayek, shared the 1974 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. It is also true that a standard graduate curriculum in economics today contains almost none of this material, and that is not an oversight anyone hid.
What its critics say, plainly
The criticism is not decoration on this course. Caplan, writing in the Southern Economic Journal in 1999, examined the attempt by Mises and Rothbard to rebuild economic theory on foundations of their own and argued that it fails, and that their case against the standard foundations is either wrong or much overstated. That is a published argument by a specialist, and this track returns to it rather than filing it away.
Check yourself
What makes the Austrian school a school?
- A shared set of policy conclusions
- A shared starting point for explanation, argued over a long literature
- Agreement among most working economists
Show the answer
Answer: B.
A school is defined by how it argues, not by what it concludes or by how many people accept it. The shared starting point here is explanation that begins with individual people.Which statement about the tradition's standing is accurate?
- It is the consensus position in academic economics
- It is a minority tradition with a published literature and published critics
- It has never been engaged with by economists outside it
Show the answer
Answer: B.
It is heterodox. Caplan's 1999 paper in the Southern Economic Journal is one example of a specialist engaging with it directly and arguing that its foundational project fails.In this tradition, where does the value of a good come from?
- The labour used to produce it
- A property of the object itself
- The importance a person attaches to it, given what depends on having it
Show the answer
Answer: C.
This is the subjectivist commitment, and Menger builds his account of value on it in chapter III of Principles of Economics.Sources
- Menger, Principles of Economics, 1871, English translation 1950, chapter I on goods and the time between them, and chapter III on the nature and origin of value.
- Mises, Human Action, 1949, chapter II, for the method the tradition claims for itself.
- Hayek, 'The Use of Knowledge in Society', American Economic Review, 1945, for the claim that the economic problem is one of dispersed knowledge.
- Caplan, 'The Austrian Search for Realistic Foundations', Southern Economic Journal, 1999, arguing that the attempt to rebuild economics on non-neoclassical foundations fails.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The example is an illustration of two styles of explanation, not a description of any company.
- Being a school says nothing about being right. This lesson places the tradition; it does not defend it.