1. The undervalued insights of
the Austrian School of economics
Marcin Senderski
Warsaw, 7 July 2012

2. Agenda
1. What is the Austrian school of Economics
2. Austrian school vs. neoclassical school
3. Thoughts and quotations
4. The Austrian school nowadays
5. Conclusions
The presentation was prepared on the basis of two major sources:
• Huerta de Soto, J. (2006) Money, Bank Credit, and Economic
Cycles, Auburn, Alabama: Ludwig von Mises Institute.
• Huerta de Soto, J. (2008) The Austrian School: Market Order and
Entrepreneurial Creativity, Edward Elgar Publishing.

3. What is the Austrian School of Economics
In general
• The Austrian School of economics is a school of economic thought which advocates an individualist
approach to economics called praxeology
History and ethymology
• The Austrian School derives its name from the identity of its founders and early supporters, who were
citizens of Austria-Hungary
Methodology
• Whereas mainstream economists generally use economic models and statistical methods to model
economic behavior, Austrian School economists argue that they are a flawed, unreliable, and insufficient
• Austrians focus on theory rather than empirics, and employ descriptive analysis, i.e. verbal formalism
Reception
• From the middle of the 20th century onwards, the Austrians have been considered outside the mainstream
• Austrian views are heterodox and mainstream economists are generally critical of its methodology
• Mainstream economists generally argue that Austrian economics lacks scientific rigor
Who are the scholars?
• Multidisciplinary theorists and philosophers, and radical libertarians
Main representatives
• Friedrich Hayek (Nobel Prize 1974), Ludwig von Mises, Carl Menger, Murray N. Rothbard, Eugen von Böhm-
Bawerk, Israel Kirzner

4. Austrian school vs. neoclassical school (1/3)
Points of comparison Austrian paradigm Neoclassical paradigm
Concept of economics (essential A theory of human A theory of decision: maximization
principle): action, understood as a dynamic subject to restrictions (narrow
process (praxeology). concept of „rationality”).
Methodological outlook: Subjectivism. Stereotype of methodological
individualism (objectivist).
Protagonist of social processes: Creative entrepreneur. Homo economicus.
Concept of information: Knowledge and information are Complete, objective, and constant
subjective and dispersed, and they information on ends and
change constantly. A radical means is assumed. Practical
distinction is drawn between (entrepreneurial) knowledge is not
scientific (objective) and practical distinguished from scientific
knowledge (subjective). knowledge.
Reference point: General process which tends Model of equilibrium (general or
toward coordination. No partial). Separation between micro
distinction between micro and and macroeconomics.
macroeconomics: each problem is
studied in relation to others.

5. Austrian school vs. neoclassical school (2/3)
Points of comparison Austrian paradigm Neoclassical paradigm
Concept of „competition”: Process of entrepreneurial rivalry. State or model of „perfect
competition.”
Concept of cost: Subjective (depends on Objective and constant (such that a
entrepreneurial alertness and the third party can know and measure
resulting discovery of new, it).
alternative ends).
Formalism: Verbal (abstract and formal) logic Mathematical formalism (symbolic
which introduces subjective time language typical of the analysis of
and human creativity. atemporal and constant
phenomena).
Relationship with the empirical Aprioristic-deductive reasoning: Empirical confirmation of
world: Radical separation and hypotheses (at least rhetorically).
simultaneous coordination
between theory (science) and
history (art). History cannot
confirm theories.

6. Austrian school vs. neoclassical school (3/3)
Points of comparison Austrian paradigm Neoclassical paradigm
Possibilities of specific Impossible, since future events Prediction is an objective which is
prediction: depend on entrepreneurial deliberately pursued.
knowledge which has not yet been
created. Only qualitative,
theoretical pattern predictions
about the discoordinating
consequences of interventionism
are possible.
Person responsible for making The entrepreneur. The economic analyst (social
predictions: engineer).

7. Thoughts and quotations (1/2)
1. Man does not so much allocate given means to given ends, as constantly seek new
ends and means, while learning from the past and using his imagination to
discover and create the future (via action). Thus, for Austrians, economics forms
part of a much broader and more general science, a general theory of human
action (and not of human decision or choice).
= PRAXEOLOGY
2. For Austrians, cost is the subjective value the actor attaches to those ends he gives
up when he decides to pursue a certain course of action.
= NO OBJECTIVE COSTS
3. Hayek uses the term „scientism” to refer to the unjustified application of the
methodology of the natural sciences to the field of the social sciences.
= NO MATHEMATICAL FORMALISM
4. It is obvious that our concept of entrepreneurship is of an essentially humanistic
nature, a concept which makes economics, as it is understood and advanced by
members of the Austrian school, the quintessential humanistic science.
= HUMANISTIC STNDPOINT

8. Thoughts and quotations (2/2)
5. Those who gauge the just price of an article by the labor, costs, and risks borne by
the person who deals in or produces the merchandise are seriously mistaken; for
the just price springs from the abundance or lack of goods, merchants, and
money, and not from costs, labor, and risks
= BROAD BASE OF FACTORS INFLUENCING PRICE GENERATION
6. The equilibrium price depends on so many specific circumstances that only God
can know it.
= AWARENESS OF LIMITATIONS
7. All unjustified intervention in the market constitutes a violation of natural law.
= LIBERTARIANISM
8. The dynamic process of entrepreneurial coordination would eventually lead
toward a state of equilibrium, though this state can never be reached in real life.
= DYNAMISM
9. It is never feasible for the blind to lead the sighted.
= CRITIQUE OF GOVERNMENT INTERVENTION

9. The Austrian school nowadays
Myths regarding the Austrian school or the points of critique raised by neoclassicals:
1. The two approaches (the Austrian and the neoclassical) are not mutually exclusive,
but complementary
2. Austrians should not criticize neoclassicals for employing simplified assumptions
which make reality easier to understand
3. Austrians fail to formalize their theoretical proposals
4. Austrians produce very few empirical studies
5. Austrians jettison economic forecasting
6. Austrians lack empirical criteria by which to validate their theories
7. Austrians are dogmatic

10. Conclusions
Major „sins” of neoclassical economists that „feed” Austrian economists:
1. Neoclassicals focus exclusively on equilibrium states via a maximizing model
which presupposes that the information is „given”
2. Neoclassicals often arbitrarily select variables and parameters for both the target
function and the restrictions, and in doing so, they tend to include the most
obvious aspects and overlook others which, though of vital importance, are more
difficult to handle empirically (moral values, habits and traditions, institutions etc.)
3. Neoclassicals concentrate on equilibrium models which treat true cause-effect
relationships with mathematical formalism and thus blur them
4. Neoclassicals raise mere interpretations of historical reality to the level of
theoretical conclusions, interpretations which may be significant in certain specific
situations, but which cannot be considered theoretically valid on a universal
scale, since they reflect only knowledge which is historically contingent
5. The insufficient attention to the role played in the market by subjective
information, knowledge, and learning processes