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Austrian Economics

In today’s world, where societies change from capital intensive to knowledge intensive, the private property principle, which is central to liberal doctrines, reaches new dimensions. Private property is taken better care of than non-owned resources, goods or production means. The right to private property is a moral ground for many other rights and liberties and a base to freedom. As Ayn Rand advocates, all of the rights are derived
from the essential right to life. And if a man is to sustain his life he has to be granted a way in which he will be able to sustain his life. In modern societies, individuals, consumers attain the means to sustain life and to reproduce life through the market.

As creation, procreation, production and development are intrinsic to the continuing dynamics of life, the activity related to these processes is essential to the existence and evolution of our civilization. Therefore, freedom to act should not be stifled, where the constitutions of the states proclaim freedom for their citizens as a central virtue. As freedom necessarily implies the freedom to act, this freedom implies that consequences of actions are also to be internalized by the individuals. Individual, that is given the freedom to act, is given the freedom to incur consequences and pursue goals of his choice. As life of humans is indivisibly connected to commodities, resources, goods and information, the freedom and responsibility to act extend to the objects included in the process. In an attempt to create, procreate, produce and consume, an individual participates in market activities through voluntary exchange – to improve his quality of life and that of his family. Modern institutions arrange ownership transfers, selling, buying, attainment or giving out of goods through the market activities, where in mutual consent, transferring of ownership enables individuals to attain goods that they demand in order to sustain the quality of life they choose to sustain. Needs, ambitions, motivations and preferences are diverse, thus actions, goals and outcomes pursued are similarly diverse.

Accumulation of capital, market failures and externalities, sometimes create imbalances and call for urgent interventions and artificial management of ownership. However, at the Ludwig von Mises Institute – Europe, we defend the view that imbalances can be handled through the market in a much better way than through an authoritarian interventionist regime in modern knowledge economies. In a society, where the individual has access to knowledge and information and where knowledge takes the central role in the market, as well as becomes the most valuable of asset, the classic market functioning is faced with a altering of the negotiating powers of participants in the market. The knowledge, familiarity, informed population, information distribution as non-tangible assets, are not as easily capitalized as multiplication cannot be tracked precisely, spillovers are common, ownership comes with blurred boundaries and individuals are empowered as the knowledge they attain is translated to human capital, which is inalienable from the individual in which it is stored. In economies, where shares of human capital, social capital and cultural capital are high, the accumulation of
capital by a small number of owners becomes impossible. As knowledge becomes the most valuable asset, information exchange flows freely and matching mechanism is more efficient. Furthermore, individuals each possess their own “means” to carry out creative processes or to organize and launch them to the market. In other words, they have more negotiating power towards the employers, as these are more dependent on expertise of educated individuals. They are by far more able to offer a marketable service as entrepreneurs as ever before, given the costs of searching for clients becomes lower, the information needed is accessible worldwide, inspiration for creativity is in abundance, information on niche opportunities is easily accessible, demand for services that include almost no other equipment and materials but knowledge is rising.

At the Ludwig von Mises Institute we are thus great advocates of freedom of knowledge formation and attainment and free flow of information, as these are the circumstances that enable the empowerment of the individuals. We are in agreement with many thinkers of the Austrian School of Economics who promoted the thought of entrepreneurs as drivers of economy. Small business is creative business, allows freedom, holds individuals accountable, diminishes dependence and exploitation gives way to voluntary networking and cooperation and allows pursuing more personalized goals, the goals that answer more to the personal preferences of the entrepreneur. At the same time entrepreneurship grants flexibility and a more personalized answer to the demand, to consumers.

For the Austrian school, the role and position of entrepreneurs in the economy is crucial. In fact, the spirit of entrepreneurship is the inherent source of market competition, where agents are dictated by the profit-motive to compete over individuals’ preferences, or desires for goods and services. It is the entrepreneur, who motivates further action by being constantly alert on the opportunities to produce mutual gain through voluntary exchange. However, in order to make entrepreneurship prosper, a society must understand the virtues of the free-market.

Friedrich von Hayek’s’ Ideas and Theories

Nobel prize winner Friedrich Hayek’s theory of “spontaneous order” and the pricing-mechanism are the corner stones for effective entrepreneurship. When the markets are allowed to guide prices through changes in supply & demand, entrepreneurs are better equipped to understand that today’s challenges may be tomorrow’s opportunities.

Hayek, one of the major proponents of monetary theory in Austrian tradition elaborated extensively also on the “illusions of inflation”, where economic and monetary expansions without background tend to collapse, which is how a number of academics and economists explained the dynamics of the recent crisis. F.A. Hayek, who won a Nobel prize in 1974 for his pioneering work in the theory of money and economic fluctuations and for a penetrating analysis of the interdependence of economic, social and institutional phenomena, developed his theories already in 1920, when he visited the United States for the first time. He stated that sometimes stable prices do not mean that the cycle has stabilized or retreated. Rather, that under deceptively smooth surface of stable prices, basic maladjustments were bound to develop that eventually would lead to a severe crisis. The maladjustments were a key concept in his theory.

Ludwig von Mises’ Ideas and Theories

The Austrian economist Ludwig von Mises (1881–1973) produced path-breaking critiques of socialism, central banking, and methodological malpractice in the social sciences. It is precisely because of the methodological issues that he observed that he plunged deeply into epistemology, methodological approach and philosophy in his work.

»Why did he care so much about philosophy?« »Economics ground is set in philosophy. There is no economics without philosophy.« The philosophy of economics concerns itself with conceptual, methodological, epistemological and ethical issues that arise within the scientific discipline of economics. The primary focus is on issues of methodology and epistemology—the methods, concepts, and theories through which economists attempt to arrive at knowledge about economic processes. Philosophy of  economics is also concerned about the ways in which ethical values are involved in economic reasoning—the values of human welfare, social justice, and the trade-offs among priorities that economic choices require. Economic reasoning has implications for justice and human welfare; more importantly, economic reasoning often makes inexplicit but significant ethical assumptions that philosophers of economics have found it worthwhile to scrutinize. Finally, the philosophy of economics is concerned about the concrete social assumptions that are made by economists.

In “Human Action”, the most important book of von Mises, in particular there is an epistemological issue with the causality. »The philosophical, epistemological, and metaphysical problems of causality and of imperfect induction are beyond the scope of praxeology. We must simply establish the fact that in order to act, man must know the causal relationship between events, processes, or states of affairs. And only as far as he knows this relationship, can his action attain the ends sought. We are fully aware that in asserting this we are moving in a circle. For the evidence that we have correctly perceived a causal relation is provided only by the fact that action guided by this knowledge results in the expected outcome. But we cannot avoid this vicious circular evidence precisely because causality is a category of action. And because it is such a category, praxeology cannot help bestowing some attention on this fundamental problem of philosophy.

The majority of mainstream economists are logical positivists, Newtonian mechanic, which focuses on state of affairs, on a closed system, using inductive reasoning of rejection / acceptance of hypothesis.« Austrian economics claims that economic systems are too complex and all encompassing to be able to test anything empirically. They view economic systems as dynamic, not static. Mises himself also viewed the equilibrium as a dynamic category or rather a strictly theoretical construct – an imaginary state towards which the economy tends – an evenly rotating economy. Interpreters and followers identified three conceptually distinct equilibria in Mises’ writing: » The first, the ‘plain state of rest,’ is a temporary state in which all currently desired transactions have been made and, for the moment, no one wants to trade. His example of such a state is the close of the trading day in the stock market…. The second equilibrium notion that they recognize is the “final state of rest”, the state toward which the market tends if there is no change in the data. This could be a notion similar to that of general equilibrium. Whereas the plain state of rest is a phenomenon that is routinely found in markets, the final state of rest is an “imaginary construction” in that it can never be achieved in reality. However, this is a necessary analytic tool for understanding the direction of price changes.


Already mentioned above, the third notion is the »evenly rotating economy« or the ERE. This, too, is an imaginary construction of what the market would be like if there were no changes in the data. »In this construction, however, people continue to be born, to live and to die, and capital is accumulated at a rate just sufficient to maintain current patterns of consumption and investment. Whereas the first two notions have their analogues in contemporary economics, the construct was only suggested by Mises.«