Austrian School of Economics Explained: Capital, Interest, Business Cycle - Ron Paul (1988)

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The Austrian School is a school of economic thought that is based on the analysis of the purposeful actions of individuals (see methodological individualism). It originated in late-19th and early-20th century Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others. Current-day economists working in this tradition are located in many different countries, but their work is referred to as Austrian economics. Among the theoretical contributions of the early years of the Austrian School are the subjective theory of value, marginalism in price theory, and the formulation of the economic calculation problem, each of which has become an accepted part of mainstream economics. Many economists are critical of the current-day Austrian School and consider its rejection of econometrics, and aggregate macroeconomic analysis to be outside of mainstream economic theory, or "heterodox." Austrians are likewise critical of mainstream economics. Although the Austrian School has been considered heterodox since the late 1930s, it began to attract renewed academic and public interest starting in the 1970s. According to economist Bryan Caplan, by the late twentieth century, a split had developed among those who self-identify with the Austrian School. One group, building on the work of Hayek, follows the broad framework of mainstream neoclassical economics, including its use of mathematical models and general equilibrium, and merely brings a critical perspective to mainstream methodology influenced by the Austrian notions such as the economic calculation problem and the independent role of logical reasoning in developing economic theory. A second group, following Mises and Rothbard, rejects the neoclassical theories of consumer and welfare economics, dismisses empirical methods and mathematical and statistical models as inapplicable to economic science, and asserts that economic theory went entirely astray in the twentieth century; they offer the Misesian view as a radical alternative paradigm to mainstream theory. Caplan wrote that if "Mises and Rothbard are right, then [mainstream] economics is wrong; but if Hayek is right, then mainstream economics merely needs to adjust its focus."[21] Economist Leland Yeager discussed the late twentieth century rift and referred to a discussion written by Murray Rothbard, Hans-Hermann Hoppe, Joseph Salerno, and others in which they attack and disparage Hayek. "To try to drive a wedge between Mises and Hayek on [the role of knowledge in economic calculation], especially to the disparagement of Hayek, is unfair to these two great men, unfaithful to the history of economic thought" and went on to call the rift subversive to economic analysis and the historical understanding of the fall of Eastern European communism.[75] In a 1999 book published by the Mises Institute,[76] Hans-Hermann Hoppe asserted that Murray Rothbard was the leader of the "mainstream within Austrian Economics" and contrasted Rothbard with Nobel Laureate Friedrich Hayek, whom he identified as a British empiricist and an opponent of the thought of Mises and Rothbard. Hoppe acknowledged that Hayek was the most prominent Austrian economist within academia, but stated that Hayek was an opponent of the Austrian tradition which led from Carl Menger and Böhm-Bawerk through Mises to Rothbard. Economists of the Hayekian view are affiliated with the Cato Institute, George Mason University, and New York University, among other institutions. They include Peter Boettke, Roger Garrison, Steven Horwitz, Peter Leeson and George Reisman. Economists of the Mises-Rothbard view include Walter Block, Hans-Hermann Hoppe, Jesús Huerta de Soto and Robert P. Murphy, each of whom is associated with the Ludwig von Mises Institute[77] and some of them also with academic institutions.[77] According to Murphy, a "truce between (for lack of better terms) the GMU Austro-libertarians and the Auburn Austro-libertarians" was signed around 2011. Many theories developed by "first wave" Austrian economists have been absorbed into mainstream economics. These include Carl Menger's theories on marginal utility, Friedrich von Wieser's theories on opportunity cost, and Eugen von Böhm-Bawerk's theories on time preference, as well as Menger and Böhm-Bawerk's criticisms of Marxian economics.[citation needed] Former U.S. Federal Reserve Chairman Alan Greenspan said that the founders of the Austrian School "reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably an irreversible effect on how most mainstream economists think in this country."[80] In 1987, Nobel Laureate James M. Buchanan told an interviewer, "I have no objections to being called an Austrian. Hayek and Mises might consider me an Austrian but, surely some of the others would not." http://en.wikipedia.org/wiki/Austrian_school