About a year and a half ago, I published the text of this article as an introduction to the Austrian school’s characteristics. I am reintroducing these characteristics of the Austrian school, first in this article, which lists them, followed by a series of articles, published over time, that give more detail on each characteristic.
The philosophy, known as the Austrian School methodology, espoused by this author, plays an important role in examining the actions of many economists and politicians.
The theories espoused by the Austrian School of Economics are complex. Fritz Machalup, however, has made a list of the primary characteristics of the Austrian School.
The following excerpt from “The Austrian School of Economics”[i] provides a good description of the distinguishing characteristics of the Austrian School. I have made a few editorial changes, but for the most part, I have quoted directly. In later articles, I will expand in my own words the deeper meaning of these characteristics.
Fritz Machlup later looked back and formulated the six most important characteristics of the Austrian School in an English article for an anthology celebrating the hundredth birthday of Ludwig von Mises (most of the emigrated Austrian economists made contributions), as follows (cf. Machlup 1981, pp. 9–10):
1. Methodological Individualism: The explanation of economic phenomena stems from the actions (or inactions) of individuals; groups or “collectives” cannot act except through the actions of individual members.
2. Methodological Subjectivism: Economic phenomena stem from individual judgments and are based on personal knowledge and subjective expectations toward the future.
3. Taste and Preferences: Subjective valuations of goods and services determine the demand for them; in turn, consumers determine types of goods, quantities, and prices.
4. Opportunity Costs: The economic actor takes into account alternative possible applications; choosing one possible use means sacrificing other possible uses.
5. Marginalism: Economically relevant valuations are determined by the significance of the last unit added to or subtracted from the total.
6. Time Structure of Production and Consumption: Production and consumption are determined by subjective time preferences. Machlup pointed out that within the Austrian School, the economic notion of time is regarded in different ways.
Finally, Machlup introduced two further characteristics that were particularly applicable to Mises and his students:
7. Consumer Sovereignty: Consumer demands are the optimal drivers of production, distribution, prices, and allocation of resources, so long as they are not hindered by the external intervention of laws, public authority measures, or cartel agreements.
8. Political Individualism: Political freedom requires economic freedom. Political and economic restrictions lead, sooner or later, to the extension of coercive measures on the part of the state and undermine individual freedom. [Page 175]
The three basic assumptions of neoclassical economics (optimization behavior, fixed order of preference, and equilibrium) were opposed, then as now, to the basic positions of the Austrians—expedient action, individual preferences, and dynamic processes (cf. Boettke 1994a, pp. 602, 604). [Page 182]
Conclusion
I have adopted the philosophy of the Austrian School because it advocates principles grounded in pure reason. These principles avoid the traps posed by applying empirical logic to the behavior of complex adaptive systems that frequently change behavior between actions.
Read and study these principles critically.
[i] Excerpt From: Eugen Maria Schulak & Herbert Unterköfler. “The Austrian School of Economics.” Ludwig von Mises Institute, 2011. iBooks.