What is Austrian economics?
“I’ll tell you what it’s not first,” said Dr. Walter Block, well-known Austrian economist. “It’s got nothing to do with the economics of Austria.”
It’s named Austrian economics because the creators of it such as Carl Menger, Ludwig von Mises, Friedrich Hayek happened to live in Austria. “It’s similar to the Chicago School of Economics,” said Block. “The Chicago School of Economics has nothing in particular to do with the city of Chicago. It is just that the people who started the Chicago school were all in Chicago. They were at the University of Chicago.”
Block is referring to the likes of Milton Friedman, and George Stigler and Gary Becker and people like that. So now that I said what Austrian economics is not, let me say what it is.
“What it is, is a discipline of economics or a school of economics that has a certain view of economics,” explained Dr. Block. “Other schools would be the Chicago School, the public choice school, the Marxist school, and the Austrian School.”
To Dr. Block, the essence of Austrian economics is not what most Austrian economists think of. “Most Austrian economists think of Austrian economics as a particular view on micro economics or on macro economics, on business cycles, monetary issues, and things like that,” he said. “There are sharp distinctions between the Austrians and others on all of those. But to me, the essence of it, the quintessential part of it, is that it is not an empirical science. It’s a science. If you look upon science as just the amount of knowledge, then a lot of stuff is a science. And Western economics is a science in that sense. But, it’s not an empirical science. In empirical sciences, you come up with a hypothesis; however you come up with it, you could just think of it off hand. Or you see a correlation between a minimum wage and unemployment or something, and then you test it, and you see if it’s true or not.”
Austrian economics is not an empirical science, explains Dr. Block. “So we’re not a part of the logical positivist school of philosophy. We are more a branch of logic, if I had to categorize us in any way. We believe that there are certain premises to human action. People act so as to make the future a bit more like what they would have liked to have occurred, had they not acted, plus a few other principles or assumptions of scarcity of goods and people and resources, we have what we call a predicted necessary truth. Now a necessary truth doesn’t sound like an empirical science, and it’s not an empirical science, it’s rather a branch of logic.”
As an example, Dr. Block points out some books on my desk. About 10 of them. He guesses they cost about $100. “When you bought those books at the time, you valued those books at more than 100 bucks, maybe 125. And the seller of those books probably valued them at $10, because he had plenty of company, and he made a profit of $90, and you made a profit of $15. And, if you understand the English language, you can’t falsify this. You can’t come up with a case where it wasn’t true. I have to say one thing, you might not have liked those books, as far as you’re concerned.” Dr. Block jokes that I might not even read.
“I don’t know why you bought the books, only know there was something about the books. Maybe the books themselves, maybe the fact that it was a pretty girl selling the books, and you wanted to get a date with her? Maybe it was because you felt sorry for the bookseller. I don’t know why. But there was something about those books that you valued at more than 100 bucks. And when you bought them, you made a profit of the difference between how much you value them and how much they cost you, and I’m assuming 25 years they cost you $100 and you paid $125. That’s ex ante.”
Now, Dr. Block explains ex-post. “You might have regretted that you bought the books, although usually people don’t regret buying books, shirts, shoes, whatever, unless the shoes don’t fit or something like that. Now, this is a synthetic a-priori. Namely, it has something to do with the real world. And yet it’s necessarily true.”
Economics consists only of hypotheses, which can be falsified, and we only tentatively accept them, says Dr. Block. “Because many, many times in the past, we’ve done empirical research, and we found that they were true. And that’s the big, big gigantic difference between Austrian economics and mainstream economics.”
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