An Introduction to Austrian Economics
Part 1 – by Aaron Koenig
In the late 19th and early 20th century, Vienna had a much higher significance than today. It was the capital of a multi-ethnic empire that comprised the present-day states of Austria, Hungary, the Czech Republic, Slovakia, Slovenia, Croatia, Bosnia-Herzegovina and parts of Italy, Poland, Romania, Serbia, Montenegro and Ukraine. Many great thinkers, scientists and artists lived in the city on the Danube. Some of them made important contributions to modern economics.
The Austrian School of Economics was founded by Carl Menger (1840–1921), who in 1879 became the first professor for political economics at the University of Vienna. His main work was a new theory of prices and values. Equally important was Eugen von Böhm-Bawerk (1851–1914), who served as a minister for the Austrian Empire and taught at several Austrian universities, including the University of Vienna. Böhm-Bawerk became so well-known for his theory on capital and interest that the Austrian 100 Schilling banknote sported his portrait until the Schilling was abandoned for the Euro in 2002.
If you like this article, read and find out how Bitcoin protects you from Inflation: What is Sound Money and Why it Matters? By Kenny Fowler
Mises and Hayek
The most influential thinker of the Austrian school was undoubtedly Böhm-Bawerk’s disciple Ludwig von Mises (1881–1973). He was born in Lemberg (or Lviv), which today belongs to Ukraine. Mises refined Menger’s monetary theory and developed a new theory of business cycles. Unlike his predecessors, he never became a professor at the University of Vienna. This was partly because he was Jewish, as Anti-Semitism befouled Vienna at that time. But even more important was his strong commitment to a free market economy, which contradicted the socialist zeitgeist of the 1920s and 30s.
So he organized a private seminar on economics instead, which was frequented by a number of scholars who later became well-known economists. The most prominent one was Friedrich August von Hayek (1899 – 1992), who became Mises’ partner in the Austrian Institute for the Research of Business Cycles in 1927. When the National Socialists took power in Austria in 1938, Mises escaped, first to Geneva, then in 1940 to the USA. Hayek had already immigrated to England in 1931 to teach at the London School of Economics. In 1950 he subsequently moved to the USA to join the Chicago School of Economics.
As a result of their movements to the US, the Austrian School has become much more popular in the US than in its home country, where it is virtually extinct. Some other important “Austrians” who never lived in Austria are Murray N. Rothbard (1926–1995) and Israel Kirzner (born 1930), both from the USA, and Jesús Huerta de Soto (born 1956) from Spain.
Renaissance of the Austrian School
The early 20th century was dominated by national and international Socialism, and the Austrian School was nearly forgotten. After World War II it regained some ground when Friedrich August von Hayek published his popular book, “The Road to Serfdom.”
Mises and Hayek also co-founded the Mont Pelerin Society, which influenced many politicians, among them the German Minister of Economics, Ludwig Erhard. Erhard’s courageous free market policy was based upon the insights of the Austrian School. Against heavy resistance from all German parties he abolished all post-war price and wage controls and unleashed the power of the free market. This lead to the so-called “Wirtschaftswunder” (“German Economic Miracle”) of the 1950s.
The economic policies of Margaret Thatcher and Ronald Reagan were also partly inspired by Hayek, although they did not roll back the state as much as he would have preferred. The US politician and “Austrian” Ron Paul, who ran as a presidential candidate for the Republican Party in 2008 and 2012, triggered another major popularity boost for the Austrian School. Although his candidacy was not successful, he attracted a huge base of followers – especially among young people – and inspired them to learn more about Austrian Economics.
Economy and Libertarianism
There are many private institutes and think tanks conserving and promoting the teachings of the Austrian School. The most prominent one is the Ludwig von Mises Institute in Auburn, Alabama. Mises Institutes can now be found in many countries all over the world. Classical Liberalism, which in the US is better known as Libertarianism (because “liberal” for some strange reason has become a synonym for “left wing”) is deeply connected to the Austrian School. It is important to realize that the Austrian School is not a political ideology, but rather a set of methods to analyze and understand the economy. However, having apprehended the insights of the Austrian School on prices, values, interest, money and business cycle, it is nearly impossible not to favor a free market economy with no government intervention. Even Ludwig von Mises and Friedrich August von Hayek were Socialists before they discovered the works of Menger and Böhm-Bawerk!
To be continued…
This is an excerpt of Aaron’s book A Beginner’s Guide to Bitcoin and Austrian Economics
Aaron Koenig is a contributor to the Census Blog. He is an entrepreneur, consultant, writer and film producer, specialized in Bitcoin and Blockchain technology. Aaron is the author of the books A Beginner’s Guide to Bitcoin and Austrian Economics, Cryptocoins – Investing in Digital Currencies and The Decentral Revolution