Austrian Economics Page
November 10, 2004
© J. Patrick Gunning
What Is Austrian Economics? A View from Pat Gunning
Austrian economics is defined here as the economic theory that resulted from consistently following the revolution in thinking about market interaction that was instituted by the subjective value theory as described in Carl Menger'sPrinciples of Economics.(1981 ) Identifying the nature of this economic theory and separating it from other writings by the students of Menger, other economists, and later so-called Austrian and neo-Austrian economists, is arguably the most important task facing those scholars who are interested in the subject today.
Most of those who claim to be Austrian economists today are located in universities, where they face numerous constraints on their professional development and teaching. The private foundations and institutes that support Austrian economics are dominated by free-market liberals whose main interest is not economic theory but the promotion of liberal economic policies.
It so happens that the first step in the study of the subjective theory of value is the elucidation of economic interaction under the conditions of the pure, unhampered market economy. The fact that subjective value theorists begin here gives them a huge advantage over other professional economists in understanding how liberal economic policies give individuals incentives to produce wealth for others. In addition, understanding the imaginary construction of the pure, unhampered market economy demonstrates the illusions and fallacies of the notion that a managed society can achieve comparable results.
However, there is nothing in the study of the subjective theory of value that warrants the assertion that the everyday condition of individuals cannot be improved through government policies. The conditions in everyday life do not match those that are assumed in the imaginary construction of the pure market economy. First, private property rights are never fully defined and enforced partly because it is costly to define and enforce them. Thus, there are common property resources. Second, the image of the pure market economy contains unbridled copying of the products and the techniques of production and distribution. This dampens incentives to invent and be creative. Accordingly, the unhampered market economy limits investment incentives. Third, individuals make erroneous decisions. As a result, others attempt to take advantage of and to promote error. Fourth, some goods have the characteristic of jointness in demand. Finally, there is the problem of the monopoly price.
In fact, we learn from the study of economic interaction under more realistic conditions that there is scope for corrective action. Of course, the possibility that there is scope for corrective action does not mean that such action can be discovered. We almost certainly cannot expect central planning to more effectively satisfy consumer wants than the individual planning that occurs under the conditions of the market economy. Moreover, even if a corrective action can be discovered, it may be impractical to implement. "Market failure" may be outweighed by "government failure." The point is not to claim that government intervention is warranted in every case where these "market failure" properties can be shown to exist. It may well be that in most cases, government intervention would make things worse. The point is that the economist qua economist must approach the subject of market intervention with an open mind.
Economists supported by such think tanks are not inclined to explore the economic theory involved in these cases of so-called market failure.
The proper study of Austrian Economics begins with the master, Carl Menger. After Menger, the next step is to identify those Austrian and neo-Austrians who have proposed flaws, corrections, or extensions of Menger's ideas. Each of these challenges and extensions must be analyzed carefully to see whether it warrants being part of the initial program or whether it should be cast aside. What did Friedrich von Wieser add to, or take away from, Menger? Eugen von Bohm Bawerk? J.A. Schumpeter, Ludwig von Mises? F.A. Hayek? And so on.
In my view, modern students who believe that they can learn Austrian economics by studying it
in any other way are deceiving themselves. It is mistaken to think that one could learn Austrian
economics by studying the papers and books of professional economists whose goal is to achieve
recognition by their peers. Nor is it correct to think that one can learn Austrian economics by
attending seminars taught by "Austrian scholars" supported by free market institutes. Austrian
economics is not "what Austrian economists do." To know how to study Austrian economics,
one must form an independent judgment based on the understanding of the subjective theory of
value that he learns from Menger. There are no shortcuts.
After you read Carl Menger’s Principles of Economics, the next step is to accumulate a full
bibliography of Austrian and neo-Austrian literature. Then accumulate every paper or book about
Menger or which has Menger's name in the index. Check out all of them, compare them to
Menger's Principles, and evaluate them. The following web-published papers by or about
Austrian or Austrian-related economists may help. You may also want to browse the publications
of the Ludwig von Mises Institute , which are now on line.
My personal view of the foundations and procedure of Austrian economics is contained in my essay on the subject. Click here.
Links to other essays on the methodology of Austrian economics can be found on my What is Praxeological Economics page.
New: Opinion about Austrian economics journals.
J. Patrick Gunning
Professor of Economics/ College of Business
Feng Chia University
100 Wenhwa Rd, Taichung
Please send feedback
Go to Pat Gunning's Pages
Mirror Site of Pat Gunning's Pages