The Austrian School and the Theory of Markets

Abstract

The Austrian school of economics emerged as a distinct research program in the 1870s in opposition to the German Historical School. In its early days, it was part of the neoclassical mainstream. The origin of several enduring concepts, such as marginal utility, opportunity cost, and subjective preferences, can be traced to early Austrian contributions. Austrian economists such as Eugen von Böhm-Bawerk and Ludwig von Mises were also among the earliest critics of Marxist economics and central planning, arguing that Marx’s labor of theory of value is erroneous and that a socialist economy is impossible. In the 1930s, the Austrian school diverged from mainstream economics. The new rift was between the Austrian approach, which analyzes markets as institutionally channeled entrepreneurial discovery processes, and the mainstream approach with its focus on models of market equilibria. Within the Austrian school, there was also a deepening of its underlying subjectivism to encompass not only consumer preferences, but also the subjectivity of knowledge and expectations. In the twenty-first century, Austrian concepts and theories remain influential in social theories that emphasize the role of institutions in human development.KeywordsAustrian school Methodenstreit Economic planningMarket processSpontaneous ordersEntrepreneurshipInstitutionsMethodology