Austrian economics is a framework for understanding how markets work. Contrary to widespread assumptions, it is not a synonym for capitalism or free market economics nor does it have anything to do with economics studied in Austria for that matter. In fact Austrian economics today is mostly studied in the United States with the majority of self-described “Austrians” being Americans. The name originated from the fact that the original founders of the school of thought happen to be from Austria. Additionally, the term Austrian Economics was initially used as a form of derision. In the late 1800s, Germany was often considered the epicenter for intellectual academia, therefore when something was labeled as “Austrian”, it was often done to diminish its prominence. However that name stuck and is now somewhat exhibited as a badge of honor.
Austrian Economics is a set of principles that objectively tries to explain the world in terms of everyday consequences caused by the policies we introduce. In other words, it is a series of assertions about how markets work, how money operates and the role incentives play in our social structure including the daily life of each individual and how we interact with each other to form the economy as a whole. These assertions include ideas such as the notion that prices play a vital coordinating function in the economy. Or the idea that sound and predictable private property rights are at the heart of a healthy economy. Or that interest rates actually hold valuable meaning and are not random fungible numbers we should try to manipulate. These are just a few affirmations at the core of Austrian Economics.
Another significant difference that distinguishes the Austrian School from other schools of economic thought is the method in which economics is studied. Ludwig von Mises, one of the most prominent Austrian Economist of the 20th century, had a method of studying economics which was considered by many to be unconventional. In his book Human Action, Mises argues that to study economics, you must first start with the action axiom which simply implies that humans act. This means that they behave purposefully, and their activities are aimed towards certain “ends and goals, [which] is the ego’s meaningful response to stimuli and to the conditions of its environment.” From there, Mises explains how we can deduce certain implications simply by thinking through the consequences and applying predetermined principles to form logical and realistic conclusions. Mises thought that this was the core of real economic theory which could be reached solely by way of reason and introspection and that economic charts and models often distorted this pure form of analysis.
Considering some of the essential ideas of Austrian economics discussed above, it is important to note that Austrian Economics still does not promote any philosophical agenda. In fact, it is completely conceivable to believe in Austrian principles but advocate for a centrally planned socialist agenda. However, for the two to be simultaneously true, one would have to assume that person to be a radical misanthrope who enjoys the economic destruction of our civilization. So you might be wondering, why is Austrian Economics is so often mistaken for free market capitalism and why do so many Austrian Economists advocate for free market principles? If it’s true what Austrians say about markets, and the assertions made above accurately depict how the world works, then anyone who aspires to live in the most prosperous and thriving society feasible would want to adopt free-market principles to achieve those results. Hence, free market policies breed the most success for the greatest number of people.