Austrian economics is a school of thought which places great emphasis on free markets, private property and absence of government intervention. Important Austrian economists include Carl Menger, Ludwig Van Mises, and Freidrich Hayek. Modern day supporters include congressman Ron Paul. Austrian economists oppose Keynesian economists on issues related to fiscal policy: see:
Austrian debate.
Main beliefs of Austrian School of Economics
1. Laissez-faire economics. Proponents of Austrian school of Economics believe in free markets and avoiding government intervention in markets. They argue government intervention usually creates more problems than it solves. See:
laissez-faire economics
2. Recessions caused by credit cycles. They argue Central Banks encourage excessive growth of credit by keeping interest rates too low for too long. Some argue the credit bust of 2008 is a good example of Austrian economics theory in action. Ludwig Van Mises also predicted the depression of 1929.
3. Austrians criticise Keynesian fiscal policy. They argue government intervention to stimulate demand just leads to wasted resources, greater inefficiency and stores up more problems. I examined these arguments in detail here: -
Hayek on Eurozone crisis and criticism
4. Support the Gold Standard. Austrian economists are critical of the use of fiat money which enables governments to devalue exchange rates and destroy savings through creating inflation. The gold standard means money would only be created if it can be converted into gold.
5. Critical of Central Banks. Austrian economists are critical of Central banks and their ability to create inflation by printing money and the fractional reserve system.
6. Rejection of statistical econometric models. Austrian economics emphasises the importance of logical deduction from people's behaviour and avoiding the use of statistics and empirical models. This sets them apart from related schools like Chicago and is one reason why they are not in the mainstream of economics.
7. Civil Liberty Support of free markets and control of money supply essential for promoting civil liberty and social progress.
Criticism of Austrian Economics
- The belief in the efficiency of markets is countered by many examples of market failure. E.g. growth of subprime mortgages / securitisation leading up to credit crisis of 2008
- High Tax and high spending regimes do not necessarily impinge on social freedoms. E.g. Many western European economies have high tax and high government spending. But, citizens get a comprehensive welfare state, education and health care. This compares favourably with US, where health care is expensive and piece meal.
- Controlling Money Supply is much more difficult in practise than theory suggests.
- Gold Standard can create severe economic problems such as the deflation and high unemployment suffered by UK in the 1920s.
- Models are too subjective and Vague.
- Keynesian critique that economies will recover without government intervention. Leaving it to market forces may take a very long time to move economy back to full capacity. Their policy prescriptions for the Great Depression are considered to be 'nihilistic' because they advocated no government intervention. They have also been criticised for shaping their political beliefs into economic policy.
Books on Austrian Economics
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