Saturday, February 2, 2008

Brief History of the Austrian School of Economic Thought

The history behind the Austrian School of Economic Thought (known as Austrian Economics) is one of the most interesting stories to tell. Some of you may have never heard about this school. However, Austrian Economics has been part of the academia and our lives for over seven centuries. In this post I will do my best in telling the origin, development, and present of this school; from St. Thomas Aquinas teachings all the way to the influence of Ludwig von Mises.

The setting of the Pre-Austrian movement during the 15th century St. Thomas Aquinas thought at Salamanca University, Spain. His teachings and writings promoted social organization and the understanding of human action. Aquinas’ followers practiced his teachings and believed in the economic law of supply and demand. Furthermore, his disciples understood the importance of cause and effect (Causation), and the subjectivism of economic value. Aquinas’ believes were kept during time his supporters trusted the importance of property rights, trade, and most importantly freedom.

In the years of the Marginal Revolution Richard Cantillon, an economist who understood that the market is a process and it is always evolving. Cantillon was an Irish that established himself in France. In France, Robert Jacques Turgot followed the steps of Cantillon. Turgot published different articles in a variety of topics; some of those subjects cover the value of money, economic choice, and the ranking of individual preferences. This last topic is relevant to appreciate the subjectivism of Austrian Economics. But the French influence in the creation of what is known as the Austrian School of Economics did not end with Turgot. Jean Baptiste SayClaude-Frederic Bastiat developed the ideas of Turgot. However, at this point in history the Pre-Austrian movement decayed in emancipation within scholars. It was time for the British School, this school led to the rise of Marxist doctrine of capitalism exploitation. and

Carl Menger wrote in 1871 a master piece Principles of Economics. Menger is the founding father of the Austrian School. One of the biggest contributions to economics that Carl Menger did was the explanation of Marginal Utility. However, Menger never use that term (marginal utility) to express the idea behind diminishing returns of higher quantities of a good in a determined period of time. The creation of money for Menger was clearly a free market process. It was in the need of people to create money in order to trade goods, and Menger mention that money was not made for consumption but for exchange commodities.

Menger contributions to economics are numberless and in the world of ideas Menger had a tremendous antagonism from different groups. Menger mentioned that economics was a science of human action based on deductive logic. In the battle of ideas Menger was challenged by the German Historical School. The Historical School saw economics as a dismal science and rejected its theory. Menger rose and prevailed over the criticism and planted and seeded that would become into a mainstream of Austrian Economics.

It was Friederich von Wieser who developed Menger’s point of marginal utility. It was precisely Wieser who invented the term “Grenznutzen” German for border-use or commonly known as marginal utility. Wieser and Eugen von Boehm-Bawerk, both Menger’s students, took Austrian Economics to a different level. Boehm-Bawerk reflected on the fact of time preference and used it to explain economic phenomenon such as; value, price, capital and interest. Boehm-Bawerk put together his ideas and in 1884 wrote his book History and Critique of Interest Theories.

In the early 20th century Ludwig von Mises entered to the picture of Austrian Economics and not only that he entered it but he consolidated it as the school that it is in the present. One of Mises important contributions to the school it is the idea of the Austrian Business Cycle. Unlike other explanations of booms and burst within the economy Mises’ explanation is by far more enriching and more precise. Mises is an individual who can be studied for years and years and there will be more of him to learn and understand.

In 1921 Mises wrote his book Socialism. In this book Mises explains in detail how in socialism there is no private property, with no private property there is no exchange of capital goods. When humans are unable of exchange there is not a proper allocation of resources. To Mises socialism is nothing else than chaos and the end of civilization. Furthermore, Mises prolific master piece came out in 1949. During his exile, due to political persecution by the Fascist Government of Germany, in Geneva in World War II Mises wrote “Nationalokonomie” German for Human Action. This work is considered a must for Austrian Economist of all ages because it is the work that defines the Austrian School for once.

A disciple of Mises, Friederich A. Hayek took the teachings of his master (Mises) and brought them to the next level. Hayek wrote extensively on how expansion of credit would create currency crisis. Hayek’s counter part was John Maynard Keynes, British aristocrat who advocated for more government intervention within the market. Hayek and Keynes enjoyed of a battle of ideologies during the second half of the 20th century. In 1974 Hayek received the Nobel Prize in Economics for his contribution on theory of money and economic fluctuations, economics interdependence, social and institutional phenomena.

I hope that you have enjoyed this brief passage on the history of the Austrian School of Economic Thought. This post reflects to the most important years of the creation of this school. It is its history who calls upon brilliant minds to keep the work of St. Aquinas, Turgot, Bastiat, Menger, Boehm-Bawerk, Mises, and Hayek alive.

Note: This post is based on the article wrote by the Ludwig von Mises Institute.

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