The Austrian "school"

Jody Gomez's picture
Submitted by Jody Gomez on Wed, 2006-02-22 02:46

I have a basic question. I'm embarking on a study of economics(just purchased "Human Action" and "The Capitalist Manifesto"), but what are the basic tenets that distinguish the Austrian school from others? Also, what other "schools" are there?

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Schools table

Rick Giles's picture

To hijack the thread back to the original purpose, this is a table representing my understanding so far of all the schools of economics.

As I understand more schools I modify the table. There is no place on my table for the likes of Frederick Bastiat or the thematic school of Game Theory. The former is more of a gad-fly muse than any school, the latter is a system of logic that is compatable with nearly any school you please.

I think it's really useful to explore these different schools of thought, as I tried to explain on the other thread.

Capital Markets Vs Labour Markets focus

Andrew Bates's picture

I attended the Human Action Seminar at the LVMI in June 2002 and was invited onto an email list shortly thereafter. One of the distinctions not covered here so far is that Keynesians say we need government intervention because labour markets are sticky, monetarists say whatever stickiness there is doesn't justify government intervention and all it's negative effects (though they aren't consistent enough to advocate free banking and non-fiat money) whereas Austrians say the most important markets are capital markets which should be free to fluctuate as these guide entrepreneurs' investment decisions. Basically, when a company's output market (sales) turns sour, it's suppliers can look elsewhere (less so, with high specificity suppliers), it's workers can retrain but you can't change a silicon-chip plant into a tractor.

Interestingly, I was back through there on my tour of the US in June last year. I was having lunch with some Rothbard-sympathetic interns, Lew Rockwell and Joe Salerno. It was a polite (of course, it was the South Eye and beneficial discussion between people who all wanted radically less state but accepted we had some important disagreements that shouldn't prevent us talking to each other.

We discussed such things as the divisions between Objectivists ("Randians") and Rothbardians, the problems with the ARI, and touched upon whether the LvMI should be renamed the Murray Rothbard Institute (I broached) it. Joe Salerno was open to the idea, seeing that most writers were more in line with MR than LvM (anti-religioius, anti-anarchist). I think mention was made of the fact that Rothbard was still alive and LvM had just died when the institute was set up. How often do you set up an institute to honour someone who is still alive?

I agree with the endorsements of Reisman (I've been reading some great articles from his blog recently, both via TFR and Not PC!). I would also point out that there is plenty for us to learn from the articles at, especially reading one of their best writers, Frank Shostak (heavily influenced by Ayn Rand, I think). You should also read what you can find from a recent contributor to TFR, Richard Johnsson, who wrote on the integration between Objectivism and the Austrian school.

Pay 80%!

Andrew Bates's picture

Rand also gave an off the cuff answer once when questioned about what people should pay for defense. She said words to the effect of, "If your country is under threat, pay 80%!"

Now this doesn't mean Ayn Rand advocated a state-mandated 80% flat tax rate during war. She was talking about what an individual would want to do (recognising the value of keeping his free country free), not what the government should do.

So Rand's view was that if your government was defending you from a valid threat you should want to pay what it cost (and you could afford) to enable it to do so. If Rand were alive and supported "intervention such as the Iraq war and military action against Iran" based on a self-interest rationale (the lack of which drove her opposition to interfering in South East Asia), she would support voluntarily paying higher taxes to face down this threat.

That's not to say she would agree with the way the Coalition of the Willing is pursuing this war - she probably wouldn't. I remember after 9/11 that Peikoff was interviewed by Prodos and said the US should tell all the terror-supporting dictatorships to cease and desist existence within 7 days or face Nuclear Annihilation. I imagine Ayn Rand would support putting fewer soldier's lives at risk than are currently being risked.


Aaron's picture

Friedman (and Chicago school in general) has definite faults, but his 'Free to Choose' and 'Capitalism and Freedom' are indeed still both relatively easy and worthwhile reads.

Austrian school I see as directly inline with Objectivism, with Mises, Rothbard and Reisman respectively showing them as more integrated. Anyone wanting to get familiar with it without wading through the huge treates (treatises?) can read smaller or pieces of most of Mises' or Rothbards' work, even online. Mises Institute has been very good at digitizing and making available their and other Austrian writings at Off hand I'd recommend Rothbard's 'What Has Government Done to Our Money?' as a short, easily read piece on money and inflation (I believe that one doesn't even contain any of his an-cap views).

For the 3 major treates - Mises' "Human Action", Rothbard's "Man, Economy, and State/Power and Market", and Reisman's "Capitalism" - I'm pleased to see that all three, even Reisman's, are now available electronically, freely and legally:

George Reisman is #1

Jason Quintana's picture

You won't have my disagreement there. I would recommend that all Objectivists read Reisman's book instead of Mises's if you are looking for a single book on the topic -- though there is nothing wrong with reading both.

At this point though more Objectivists have read Mises or Rothbard then have read Reisman and so when we speak of Austrianism it is their theories that the more economically inclined think of when they think of the Austrian school. And of course it is probably more accurate to call Reisman a "British Austrian" as I noted above.

- Jason

Playboy Interview

Kenny's picture

Those who criticise the purist "Austrian" or "Rothbardian" approach may wish to consider this excerpt from Rand's famous Playboy Interview.

"PLAYBOY: If force may be used only in retaliation against force, does the government have the right to use force to collect taxes, for example, or to draft soldiers?

RAND: In principle, I believe that taxation should be voluntary, like everything else. But how one would implement this is a very complex question. I can only suggest certain methods, but I would not attempt to insist on them as a definitive answer. A government lottery, for instance, used in many countries in Europe, is one good method of voluntary taxation. There are others. Taxes should be voluntary contributions for the proper governmental services which people do need and therefore would be and should be willing to pay for -- as they pay for insurance. But, of course, this is a problem for a distant future, for the time when men will establish a fully free social system."

There you have it - Rand opposed compulsory taxation. I would be interested to know how this can be squared with policies advocated by "Randian" defence and foreign policy "hawks" who support intervention such as the Iraq war and military action against Iran. Rand, of course, consistently opposed US interventionism such as the Korean and Vietnam wars.


Kenny's picture

Surely George Reisman, who blends Objectivism and Austrian economics, deserves to be considered on this thread. He too writes for the Mises Institute after his ostracism from ARI.

So what?

Jon Trager's picture

"It's true that Mises never saw the ultimate implications of his ideas -- or simply refused to acknowledge them."

No, it's false. It's Rothbard who never saw the ultimate implications of his ideas (or idea, as the case may be).

"As for the Mises Institute, yes, it was founded after Mises's death, and with the full and enthusiastic cooperation of his widow, who, in 1986, attended a 60th birthday banquet thrown by the newly founded Mises Institute for that dreaded anarchist Murray N. Rothbard."

So what? That doesn't legitimize associating his name with a position he personally oppposed.

I don't blame you

Andrew Bissell's picture

I certainly wouldn't recommend taking at crack at Monetary History of the United States, but Free to Choose is easily digestible and divided into chapters that stand pretty well on their own. I think Capitalism and Freedom is his most popular work, but I haven't read it or even looked at it myself so I can't really comment.

Thanks for the response

Jason Quintana's picture

Are Friedman's books as massive as the big Austrian treatises (Human Action, Man Econ. State and Capitalism)? I don't know if I want to put myself through the torture test of another book that size on economics Smiling

- Jason


Andrew Bissell's picture

I believe the Austrian methodology suits an Objectivist framework much better than the Chicago school's. First and foremost I would point to the focus on the individual human being as an acting agent who must choose between alternatives.

Now, that said, Mises does have a Kantian rationalistic approach that you have to watch out for. He claims to be able to deduce all of his economic theories from a few basic axioms about the nature of man and human choice. It sort of calls to mind the old joke about Objectivism being a philosophic system where you start with four or five basic axioms and deduce the rest from there (the reality being, of course, that inductive evidence plays a part in every tenet of the philosophy). Prof. Younkins has analyzed this issue quite well in some articles you might be able to find in the old SOLO archives.

I haven't really read Milton Friedman since high school. But whatever his faults (and they are many), I believe he has been a remarkable advocate of liberty in the United States, and has produced some devastating critiques of government economic intervention. So, I'd say you can take or leave his economic theories as you please, but as a figurehead of the libertarian movement it might be well worth it to read his Free to Choose or Capitalism and Freedom. I mean, he's (in)famous for arguing that "the only social responsibility of business is to produce profit for the shareholders," so he can't be all bad!

Mises and Anarchism

jriggenbach's picture

It's true that Mises never saw the ultimate implications of his ideas -- or simply refused to acknowledge them. He even supported military conscription during (and after) World War II. And since slavery -- including conscription -- is sort of a deal-breaker when it comes to libertarianism, it could well be argued that Mises was not a libertarian at all, but merely the architect of one of the most important intellectual structures that *informs* a libertarian viewpoint.

As for the Mises Institute, yes, it was founded after Mises's death, and with the full and enthusiastic cooperation of his widow, who, in 1986, attended a 60th birthday banquet thrown by the newly founded Mises Institute for that dreaded anarchist Murray N. Rothbard.


Mises vs. Anarchism

Jon Trager's picture

It's worth noting that Mises himself never supported anarchism. In fact, he clearly explained the difference between government and the market in his great works. The association of his name with anarchism derives from the Ludwig von Mises Institute, which was founded after his death.

I stand corrected

Jason Quintana's picture

I stand corrected Smiling


jriggenbach's picture

I see some philosophical problems with certain of Mises's premises. I don't see any such problems with Rothbard. And I'm confident that Miss Rand, were she alive, would deny fervently that I am a "Randian."



Jason Quintana's picture

I am not going to argue about anarcho-capitalism with you, but as a Randian don't you see some problems with some of the different Misesian and Rothbardian philosophical premises?

- Jason


jriggenbach's picture

"The thing to understand about is that it is run by Rothbardian Anarcho-Capitalists. And so they tend to promote the idea that Austrianism=Anarcho-Capitalism, which is not necessarily true."

"Anarcho-Capitalism," an unfortunate coinage that Rothbard seldom used himself (it's more properly associated with David Friedman's work), is merely the result of following Austrian principles all the way to their logical conclusions -- that is, the result of accepting the implications of Austrianism instead of trying to wiggle free of them.


Several Flaws

Jason Quintana's picture

Yes, there are several problems with the philosophical positions of the more famous Austrians when looked at from an Objectivist point of view.

The thing to understand about is that it is run by Rothbardian Anarcho-Capitalists. And so they tend to promote the idea that Austrianism=Anarcho-Capitalism, which is not necessarily true.

- Jason

I take issue with certain

I take issue with certain aspects of the Austrian school if this question accuratly represents it. Perhaps this is the philosophical flaw Rand was speaking to?



22. What are the economic implications of national defense?

A. National defense is neutral to the market. On the one hand, it cost taxpayers money, but, on the other, it provides a stable environment that permits peace to flourish and rights to be protected. By its very nature, government should maintain a monopoly over the use of force, and defending the nation against external and internal foes flows from this primary obligation. Before we can even talk about economic production, government-provided security and defense must be firmly in place. Otherwise, we are back to the Hobbesian jungle. Chicago answer

B. National defense is desirable on its own terms, but the strongest economic impact, as with many public-sector programs, is that it creates jobs and boosts incomes to strengthen the economy. It is especially beneficial to the GDP because so much of military production involves heavy industry. The funding does more good for the nation overall if spent on large projects than if spent on small consumer goods. Moreover, public funding generates technological spin offs that assist all of society, and also employs many people who otherwise would lack the training and discipline to earn high wages in a market setting. The military, in fact, is a great example of government planning at work, serving all of society. Socialist answer

C. Government spending on the military is a social cost that crowds out private alternatives, even as its alleged benefits are unquantifiable. Security, like any good desired by individuals in society, can and is provided by the market economy, which is to say, by individuals organizing themselves voluntarily within the matrix of private property and exchange. Private security works vastly better than the government system that squanders trillions, is riddled with bureaucracy, provokes enemies, and doesn't actually work to defend the nation. Governments have used the excuse of "defense" to start wars that reinforce the power of the state over the market. Austrian answer.

D. National defense supplies a public demand that would not otherwise be produced in sufficient quantity if supplied only by the market. This is because national defense is an example of a public good. Everyone benefits from it and these benefits are not excludable in the way market goods are. Because of free riders, and the sheer expense associated with its provision, individuals have no particular incentive to purchase the good for themselves. This is why most societies from time immemorial have charged government with the main obligations of security provision. The benefits surely outweigh the costs. Keynesian/Neoclassical answer

Your answer: A
Chicago answer

For optimal results the answer must be: C
Austrian answer.

About Friedman

Jon Trager's picture

Jason, just to let you know, in Ayn Rand Answers she comments on Milton Friedman, caustically labeling him a "miserable eclectic" and an "enemy of Objectivism" and denigrating his then-popular PBS show, "Free to Choose." The only economist I know of whom she proudly endorsed was Ludwig von Mises, though of course she often criticized him for his lack of concern with philosophy.


Kenny's picture

I scored 99 out of 100 on the Mises Institute quiz. I taught myself Austrian and Chicago school economics - my degrees are in engineering and business. What that says about economics.....

I think Austrians are more

Rick Pasotto's picture

I think Austrians are more aware of time as a factor of production. They recognize that the market is a process rather than a series of static states.

Austrians also emphasize the acting individual and the effects of various policies on him rather than focusing on agragates. This is one reason why Austrian economics is more compatible with Objectivism than other schools.

Virginia School

Kenny's picture

Another "school" worth looking at is the Public Choice or "Virginia" school of James Buchanan and Gordon Tullock. Their books can be purchased from the Liberty Fund.

The Idea Channel website has some interesting video interviews with ecoonmmists of the Austrian, Chicago and Virginia schools. Personally but with many others, I believe that the Austrian school is most compatible with Objectivism.

You might find Bryan Caplan's comments on his website worth a read too.

Virginia School

Kenny's picture

Another "school" worth looking at is the Public Choice or "Virginia" school of James Buchanan and Gordon Tullock. Their books can be purchased from the Liberty Fund.

The Ideal Channel website has some interesting video interviews with ecoonmmists of the Austrian, Chicago and Virginia schools. Personally but with many others, I believe that the Austrian school is most compatible with Objectivism.

You might find Bryan Caplan's comments on his website worth a read too.


Jason Quintana's picture

In comparing methodologies would you say that the Austrian (Misesian) methodology or the Chicago methodology is more adaptable to the Objectivist framework? Is Friedman subject to the same critiques Rand made of modern economics in general in her essay "What is Capitalism"?

I guess what I am really asking is -- is there anything to be gained from reading Milton Friedman?

- Jason

Mark Skousen

Kenny's picture

Mark Skousen has published, within the last few months, a book on precisely this topic. I can't remember the title but will try to find it online.

Are you an Austrian?

Charles Henrikson's picture

I thought that this was enlightening on the differences between the schools:

It is an economics quiz that compairs your answers with the austrian school.



Andrew Bissell's picture

The biggest difference between the two is in terms of monetary policy. The Chicago school tends to favor Milton Friedman's "monetarist" theories, which are opposed to the gold standard and hold that a "low," consistent, positive rate of inflation is the best course to pursue. Austrians, on the other hand, advocate a hard money regime, which usually involves a return to the gold standard and free banking (although some also go so far as to advocate a complete ban on fractional reserve banking).

These two schools also have radically different takes on the origins of the Great Depression. The more inflationist monetarists point the finger at the Fed's contraction of the money supply after the Wall Street crash, while Austrians blame economic distortions created by the Fed's expansion of money supply, credit, and debt throughout the 1920s.

Also, the Chicago school is taken much more seriously by academics, probably because (I would argue) its ideas can be more easily adjusted to fit a collectivist framework.

I have never read Friedman

Jason Quintana's picture

But as I understand it, the Chicagoans advocate certain types of government intervention. The Austrians (with the exception of Hayek who can be thought of as both an Austrian and one of the founders of the Chicago School) are pure laissez faire. The Chicago people are mixed market advocates with a heavy free market bent.

Their intellectual method is supposidly inductive rather then deductive like Mises and the Austrians. For a better explanation of the Chicago school consult some of Ed Younkins's articles on the old SOLOHQ. The only Chicago School economist I have read is Thomas Sowell.

- Jason


Jody Gomez's picture

Thanks for that explanation Jason. So is there a significant(or even minor) difference between Chicago and Austrian?


Jason Quintana's picture

Very basically Austrianism is built from deductions about individual people acting and cooperating. What you will notice if you took economics in college is that in contrast Mises doesn't employ a bunch of equations and graphs to make his points. The Austrians believe that economics should be described as a set of tendencies (rather then predictive models) that explain how things tend to occur in the economy under this or that circumstance. For them, the charts and graphs are useless because you cannot describe principles based upon human action in terms of math. They don't believe in making math based economic forcasts. So when you read Human Action it will be as if you are reading a philosophical text.

Modern economics employs various charts and equations. The Austrians call those who are advocates of modern economic theory Keynesians because their theories developed from the ideas of John Maynard Keynes who essentially advocated that the market could and should be effectively manipulated by the government. Our whole paper money monetary policy and budget deficit creating is rooted in Keynesian theories.

The Chicago school is the other major school that advocates free market capitalism. Its most famous theorist was Milton Friedman. Fredrich Hayek is sometimes listed as a member of the Chicago school but he was a student of Mises and was an Austrian.

The most important Austrian thinker currently living is George Reisman. Reisman might be thought of as a British Austrian in that he also ultilizes a lot of the theories promoted by the British Classical School (Adam Smith, John Stuart Mill and David Ricardo). This is in stark contrast to other Austrians like Murray Rothbard who essentually skipped over these thinkers and promote the idea that their ideas aided Marxism. He is of course also an Objectivist in contrast to Mises who promoted utilitarianism.

- Jason

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