The Evolution Of Austrian Thought

The Evolution Of Austrian Thought

Key early members of the Austrian economic school of thought are Menger, Wieser, and Bohm-Bawerk. Menger is considered one of the founders of neo­classical thought, with its focus on utilitarianism and value determined by the subjective views of individuals, not by costs. Wieser and Bohm-Bawerk were followers of Menger who remained adherents of mainstream neoclassical eco­nomics. But mainstream economics soon gravitated toward formalist mathemati­cal thought, focusing on perfect competition and a narrow analysis that assumed the market's existence and eschewed broad-brush questions. It was on these issues that Austrian economics began to part company with mainstream neoclas­sical economics.

While members of the Austrian school considered formal issues at times, they also considered broad-brush issues, believing them to be more central to eco­nomic thinking than the technical issues. Thus, it was this group that took the lead in responding to the socialist challenge concerning what system was preferable and in defending capitalism. Specifically, Bohm-Bawerk challenged the Marxists on what became known as the transformation problem, and a later Austrian, Ludwig von Mises, challenged the very foundation of socialist econom­ics, arguing that there was no basis for rational resource allocation in a socialist economy.

Despite starting from the same point, Austrian economics became increasingly separated from neoclassical economics in its method and focus: in method because, whereas mainstream neoclassical economics became increasingly mathematical, Austrian economics proceeded nonmathematically, incorporating laws and institutions into its analysis, and in focus because, whereas neoclassical economics focused on equilibrium, the Austrian school focused on the study of institutions, process, and disequilibrium. Also, whereas mainstream neoclassical economics, consisting mainly of English and French neoclassical, focused on perfect competition as a reference point, Austrian economics did not; it had some sense of the correct institutional structure but not of the correct price. For Austrians the correct price was whatever price the correct institutional structure produced. This difference manifested itself in Menger's lack of concern about mathematical formalism and Wieser's combining of a theory of power with his theory of markets to arrive at a full theory of the economy.

As neoclassical economics progressed, the followers of Menger, Wieser, Bohm-Bawerk, Mises, and Hayek grew further and further away from the neoclassical mainstream. But it was only in the last half of the twentieth century that Austrian economics came to be seen as a separate heterodox approach, rather than a subbranch of neoclassical economics. Once Austrian economics was seen as a separate approach, the Austrians' earlier work was reexamined and the differences between them and the neoclassicals were put into focus. Wieser, for instance, emphasized the evolutionary institutional aspect of economics, arguing that institutions, created by individuals, lead to "natural controls" of freedom that affect the behavior of individuals. These natural controls include systems of property rights, contracts, and laws. Thus, in his view, in thinking about economics and policy, economists had to go far beyond markets and market prices and consider the entire process through which market forces work. Wieser also included in his economic analysis a theory of power and, in Social Econom­ics, developed a normative program of economic policy far exceeding any policy program that came from the neoclassical mainstream.

Neoclassical economics became a theory of prices; Austrian economics be­came a theory of economic process and institutions. It was for this reason that the Austrians responded to Marx's attack on capitalism, while mainstream neoclassical economics, for the most part, ignored it.
Let us now turn to the development of socialist economic thought.