The Austrian School of economics is a school of economic thought which bases its study of economic phenomena on the interpretation and analysis of the purposeful actions of individuals. It derives its name from its origin in late-19th and early-20th century Vienna with the work of Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and others. Currently, adherents of the Austrian School can come from any part of the world, but they are often referred to as "Austrian economists" or "Austrians" and their work as "Austrian economics".
The main tenets of the Austrian School are generally considered to be:
- The theory that economic events are best explained by a deductive study of human action.
- The theory that the use of economic models and statistical methods to model economic behavior are a flawed, unreliable, and insufficient means of analyzing economic behavior and evaluating economic theories.
- The theory that testability in economics and consistently accurate mathematical modeling of an economic market are impossible because mathematical modeling of any real market affects the decision-makers in that market and "testing" relies on real human actors who cannot be placed in a lab setting without altering their would-be actions.
- The theory that the way in which money is produced has real and not only nominal economic effects.
- The theory that the cost of any activity should be measured by reference to the next best alternative.
- The theory that, in a free market, interest rates and profits are determined by three factors: monetary gains or losses from a change in the consumption of a good or service, additional output that can be produced by additional inputs, and the time preference of the associated individual agents.
- The theory that markets clear if prices are allowed to adjust freely.
- The theory that inflation properly defined relates to an increase in the supply of money (including credit).
- The theory that capital goods and labor are highly heterogeneous (diverse), that money allows different goods to be analyzed in terms of their cost effectively, that economic calculation requires a common basis for comparison for all forms of capital and labor, that this process is the signaling function of prices, and that it is also a rationing function which prevents over-use of inherently limited resources.
- The theory that the capital structure of economies consists of heterogeneous goods that have multi-specific uses which must be aligned to be effectively allocated, that the economic "boom-bust cycle" is caused by an artificial and unsustainable expansion of credit by the banks, and that this expansion causes businesses to make bad investment decisions which, in turn, necessarily cause major economic dislocation.
Among the contributions of the Austrian School to economic theory are the subjective theory of value, marginalism in price theory, and the Austrian formulation of the economic calculation problem.
Most economists are critical of the current-day Austrian School and consider its rejection of econometrics and other tools of aggregate macroeconomic analysis to be outside of mainstream economic theory, or "heterodox". Austrians are likewise critical of mainstream economics. Although the Austrian School had been considered heterodox since the late 1930s, it began to attract renewed academic and public interest starting in the 1970s.
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