AUSTRIAN ECONOMICS
ECON 434 | Spring 2011
From last time
Finishing up the emergence of neoclassical
economics and marginalism
Forerunners of marginal analysis

Neoclassical economics
 Emerges
in the mid 1800s
 Application of math to economics
 W. S. Jevons (a founder of marginalism)
 Dupit (price discrimination)
 Cournot (duopoly model; foundations of modern game
theory)
American marginalists



Also called American apologists, marginalist economic thinkers in
America are distinguished from their European counterparts by the
willingness with which they took sides in the policy debates raging in
the late 19th century.
They were uniformly conservative, advocates of late 19th century
industrial growth, and defenders of the status quo.
Wary of government intervention in the economy (i.e. minimum wage
laws, maximum hours laws); strong opponents of the Progressive
movement (especially the emergence of unions)



Simon Newcomb
John Bates Clark
William Graham Sumner
American marginalists and Social
Darwinism



American marginalists adopt Social Darwinism from Herbert
Spencer (England, 1864) who is the first credited with its
development.
He coins the term “survival of the fittest” and extends
Darwin’s theories of natural selection into the realms of
sociology and economics
Simon Newcomb


The late nineteenth-century mathematician and economic thinker
who argued that certain seemingly humanitarian gestures
generate negative externalities (e.g., charity to beggars
stimulates more panhandling and sloth) that significantly outweigh
any possible social benefits
William Graham Sumner
John Bates Clark

Marginal productivity




Under a perfectly competitive market, the return to each factor
of production equals its marginal productivity.
The distribution of income under a perfectly competitive market
reflects each factor’s contribution to the social product and is
therefore equitable.
People are compensated with income strictly in accord with the
amounts of their productive contributions as reflected in wL + E
+ rN + iK
Product exhaustion


Paying each factor its marginal productivity will exhaust the total
product.
A refutation of Marxian surplus value
Outgrowths of marginalism


Three founders of marginalism: Jevons, Carl Menger, and
Leon Walras
Develop marginal analysis simultaneously



The “Marginalist Revolution” takes place from 1871-1874 as the
3 thinkers independently and almost simultaneously publish pathbreaking work in the field.
They never end up working together, despite their similar
research interests.
Carl Menger and Leon Walras go on to found two separate
but related branches of economic thought:


Menger: Austrian school
Walras: Lausanne school
Austrian economics
What it’s all about


Analyzes human behavior from the perspective of
individual agents
Heavy emphasis on non-empirical analysis
 They
aren’t on board with mathematical modeling
 Why not?
 Social sciences are different from natural sciences
because we are what we study. Viewing human
behavior from a scientific point of view blinds
economists to the central mechanisms that drive human
behavior.
What it’s all about

Utility and costs are subjective.
 Goods
have subjective value (what Aristotle called
“value in use”). Goods are worth different amounts to
different people, depending on their situation.
 The value of anything, then, is what someone will pay
for it.
 “The value of a thing is just as much as it will bring”
 Note: Today, Austrians are associated with libertarians.
Important names

Founder: Carl Menger

Heavily influences two Austrian professors, Friedrich von
Wieser and Eugen von Bohm-Bawerk.

Von Wieser


The theorist who expanded upon Carl Menger’s earlier assertions
about pricing with a basic statement of the general law of value
and who also invented the term “marginal utility”
Von Bohm-Bawerk


Round about production: investing in capital goods by postponing
consumption, thereby enabling the production of greater amounts of
consumer goods in the future.
Critic of socialism (“the worst fallacy”)
Important names

Ludwig von Mises
 Macro
focus
 Disagreed with the neoclassical conclusion that “money
is a veil,” arguing that inflation is an uneven process
that disrupts planning by consumers and business
investors (causes uncertainty).
 Reconciles Austrian theory of value with monetary
theory
Important names

Friedrich von Hayek
 The
Road to Serfdom (1943)
 Warns that tyranny (“serfdom”) can result from
increasing government involvement in the economy
 Socialism and freedom are not compatible
 Key opponent to John Maynard Keynes
Important names

Johann von Thunen
 “Location,

location, location”
Hans von Mangoldt
 Organized
violent conflict, including war, might
sometimes contribute significantly to economic and
social progress
 The technological advances stimulated by armed
conflicts might be more valuable than the resources
destroyed during wars
 Similar to Marx
Important names

Joseph Schumpeter
 The
entrepreneur is the pivotal agent in economic
growth and development.
 Creative destruction
 Capitalism cannot survive in the long run
 Why
not?
 Marx’s answer: Marxian capitalistic crises (fewer people
own more wealth)
 Schumpeter’s answer: As democracy increases, socialism will
tend to displace capitalism