The Austrian School of Economics

Oscar B. Johannsen

[Reprinted from The Gargoyle, February, 1978]

As Keynesianism comes increasingly under attack, due to its inflationary bias, it is possible that the Austrian School of Economics may supplant it, at least to some degree. Slowly a group of scholars is arising in academic circles which is developing a body of economic knowledge largely based on the teachings of this School.

This school had its inception with the publication by Carl Menger in 1971 of a small book, "Principles of Economics". Menger was a German-Austrian, who was appointed an Assistant Professor at the University of Vienna in 1873.

His book was a pioneer work on the theory of subjectivism and marginalism. William Stanley Jevons and Leon Walras economists, also developed the concept of marginal utility about the same time.

j What is important about Menger's work was not the development of the technical aspects of this breakthru in economic thought, but rather that it represented one of the beginnings on the European continent of a recognition that economics was a science and that it revolved around the individual rather than around the State.

This was quite a contrast to the German Historical School, which denied that there were theorem of economics which were universally true. Menger and his followers, as Eugene von Bohm-Bawerk and Friedrich von Wieser, considered themselves to be scientists whose function was to place economic theory on a scientific basis.

This approach represented a revolutionary one and as it was not popular with the reigning monarchs, these economists were barely tolerated. The universities in central Europe were owned by the kingdoms. These monarchies were not interested in any science which might bring into question the privileges and positions they enjoyed.

Probably the most famous of his disciples was Bohm-Bawerk because of his works on capital theory as his "Positive Theory of Capital? Latterly, however, Ludwig von Mises, who died only in 1973 in New York City, has overshadowed both Menger and Bohm-Bawerk, and in fact has almost created his own school, which some call the Misean School of Economics.

It is important for Georgists to have some understanding and appreciation of the work of the Austrian School, not only because this school is predicated on the primacy of the individual but it is in the forefront in the defense of the principles of private property, the market economy, sound money and individual freedom.

Much of the economics of the libertarians, whether followers of Ayn Rand or of the various conservative groups tends to be of the Austrian School or variations of it.

The essential difference between the Austrian School and Georgists is on the treatment of land. The Austrians believe land should be held as private property and are indifferent to the fact that in the dim past titles to land might have been acquired thru force or fraud. The assumption is that the market today determines who will hold land by people buying and selling goods and services.

The Austrians, at least some of them, as Bohm-Bawerk and Mises have a time-preference theory of capital. Under this theory, interest is not a measure of the productivity of capital. Rather it represents the discount of future goods as compared to present goods. The fundamental thesis is that since men prefer goods in the present since they are now available, the inducement to withhold consumption to a later time is this interest (or discount). Those who have a high time preference for present day goods tend to be the borrowers -- those who have a lower time-preference tend to be the lenders.

Their view of what is capital is also different from the Georgist viewpoint, but the important thing is that both they and we believe that capital should be privately owned.

Possibly, if they had a different view of capital they might come over to the Georgist view of land tenure. They do generally tend to treat land differently from capital goods but then merge land into capital when considering the return on capital.

In subsequent articles it is hoped that their conception of capital and interest will be discussed to determine any errors which they may have with regard to these two difficult aspects of economics.

A study of their works, particularly "Human Action" by von Mises is highly recommended as this school of thought is bound to have an increasing impact on economic thought in the days to come.