Austrian school
Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
The Austrian school was founded by Carl Menger. Its later leaders were Ludwig von Mises and Friedrich Hayek. It stresses:
- the choices of individuals;
- subjective value: a good is worth what people feel it is worth;
- spontaneous order: markets coordinate millions of plans without any planner.
It warns that cheap, easy credit causes malinvestment, meaning money flows into projects that do not pay. The boom then ends in a bust. It also argues that central planning cannot work (Mises, 1920). Hayek wrote The Road to Serfdom (1944) and won the Nobel in 1974. He shared it with Gunnar Myrdal, whose views were the opposite of his.
Example
Suppose very low interest rates lead builders to start too many housing projects that buyers cannot afford. When credit tightens, many projects stall half-built. An Austrian economist would call this malinvestment caused by the credit boom.
Don't confuse with
- Chicago school: it is also pro-market, but it relies on statistics and mathematical models and backs a fixed rule for money growth (monetarism). Austrians focus on credit booms and distrust such models.
Related concepts
- Monetarism
- Chicago school
- Cantillon effect
- Adaptive expectations
- Rational expectations
- Lucas critique
- Real business cycle theory
- Tinbergen rule
- Economic calculation problem
- Supply-side economics