Katalatto Explains: Austrian Economics
The Austrian Economics or the Austrian School is a school of economic thought that is based on methodological individualism – the concept that social phenomena result from the motivations and actions of individuals. It originated in late-19th and early-20th century Vienna with the work of Carl Menger, Eugen Böhm von Bawerk, Friedrich von Wieser, and others. Either, this thought stream includes Friedrich Hayek, Ludwig von Mises, Rothbard.
The Austrian school has given various economic insights like the law of supply and demand, the cause of inflation, the theory of money creation, the opportunity costs, operation of foreign exchange rates.
Less Marx, More Carl
Carl Menger is being considered by many as a founder of the proper Austrian school where his views put this thought on firmer grounds with his book so called “Principles of Economics” published in 1871 in Vienna. Menger was a classical liberal and individualist who viewed economics as the science of individual choice rather than economics as an accumulation of data.
Menger’s book first ever suggested that the economic values of any particular good or service are subjective in nature. A thing might be very valuable for person A whereas person B sees nothing alluring. And if a number of goods incrementally goes on, then their subjective value decreases. Furthermore, the value holds the concept of what is called diminishing marginal utility.
The price determination
The Austrian school of economic thought believes that the subjective factors determine the price. Individual interest or preference particularly defines the value of any goods. Also, the cost of production is determined by subjective factors in accordance with the value of the alternative use of scarce resources. Moreover, demand and supply are also determined by the subjective preference of individuals like to purchase that particular good or not to buy.
Interest rate determination
Unlike the classical liberal view, Austrian school considers any fluctuation in interest rates is an outcome of the subjective decision of individuals to spend money now or in any time in the future.
Austrian economists are sure whether there is no material difference between the concepts of monetary inflation and general price inflation. Austrian economists measure monetary inflation by calculating the growth of new units of money that are available for immediate use in exchange, that have been created over time.
The opportunity cost
Opportunity cost is a key concept in mainstream economics, and has been described as expressing “the basic relationship between scarcity and choice”. The notion of opportunity cost plays a crucial part in ensuring that resources are used efficiently.
The opportunity cost doctrine was first explicitly formulated by the Austrian economist Friedrich von Wieser in the late 19th century. Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative foregone. It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices.
Austrian economics sees the market as a vital process instead of any outcome of the design. Markets are created by individuals intention and personal or natural interest to have better lives. In other words, if a bunch of people were sent to an isolated island, their reciprocal interactions would lead to creating a market mechanism with each other.
The Austrian critique of governmental intervention includes the proposition that taxes on wages, investment returns, entrepreneurial profits, and produced goods, all distort market prices and profits as signals for efficient investment, production, and consumption. The policy consequence is that public goods are better provided by markets, such as with voluntary private communities, or from non-distorting sources of public revenue, namely pollution levies and land rent.