What is Austrian Economics Good For?
The first academic journal article I can remember reading was written by F. A. Hayek. I had taken economics classes before, but the lessons never stuck. The concepts were clever enough, but they also seemed abstract and divorced from the significance I encountered in my other courses in music, literature, religion, and philosophy.
This changed when my comparative economic systems professor assigned Hayek’s essay “The Use of Knowledge in Society.” This work is often considered the seminal treatment of the essential function that prices play in coordinating economic activity. Hayek’s ideas enlightened me to a way of thinking about the world that had great significance and explanatory power. He provided a way to think about the order of the everyday that was not only exciting, but made sense. Seemingly dull, abstract phenomena like market prices and quantities produced were now illuminated in the context of the vastness and complexity of the systems that produced them, and that complexity was grounded in a logic that gave reason and coherence to the actions of the disparate millions of individuals involved.
Since it was Hayek’s ideas that first captured my economic imagination, it’s fitting that I now have the privilege to work as an economist with the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University. In addition to conducting research in Austrian economics, public choice economics, and the political economy of women’s rights, I work to help provide fellowships and other educational opportunities so similarly inclined students can pursue graduate study in political economy and related fields.
Over the next few months, I would like to share with you a series of conversations I have had with some of my colleagues here in the F. A. Hayek Program about the core ideas and methods that drive our research. The series begins with a conversation with Chris Coyne, Associate Professor of Economics at George Mason University and Associate Director of the Hayek Program. Chris and I discuss the analytic framework developed by economists associated with the Austrian school of economics and its relevance for past and present research in political economy.
Austrian economics — a research tradition that includes the contributions of Carl Menger, Ludwig von Mises, Israel Kirzner, and Nobel laureate F. A. Hayek, among many others — is unique in part because of its emphasis on two important foundational assumptions: methodological individualism and subjectivism. Methodological individualism states that an individual action is the most meaningful unit to be taken into account when studying human behavior, and that social organizations and other large-scale phenomena can only be understood in the context of the many individual actions that led to their emergence. Subjectivism holds that the value of an object is not determined by any of its objective properties, but instead varies from person to person according to their plans and the alternatives and constraints they face.
One of the most significant applications of the analytic framework of Austrian economics in the 20th century was its role in the socialist calculation debate. One of the dreams of socialism was that the exploitation and inequality perceived to be inherent in the capitalist system could be eliminated by uncoupling the production and distribution of goods from the use of money. Instead of resources going to those who could afford them, they could be directed to those most in need. However, as argued by Mises and Hayek, this dream failed to account for the knowledge problem.
The knowledge problem is the quandary created by the fact that the information that is most important to successful planning is often known only to “the man on the spot” (to borrow a phrase from Hayek’s “The Use of Knowledge in Society”). In order for an economic system to coordinate economic plans across the thousands, millions, or even billions of men and women on the spot whose actions affect our economic decisions, there must be some way for the knowledge and plans of these diverse individuals to be robustly incorporated into economic decision-making. Hayek, Mises, and other contributors from the Austrian school argue that only the system of property rights, prices, and profit and loss can serve this function. In the absence of this information and incentive system, economic planning is continually frustrated. This is why the attempts made in the Soviet Union and elsewhere to eliminate the market system had such disastrous consequences.
The analytic framework of Austrian economics — including the consistent application of both methodological individualism and subjectivism, and the emphasis on seeking to understand large-scale, systemic coordination such as the planners’ problem described above — continues to be extended and used in new and interesting ways. For instance, Chris uses Austrian ideas to great effect in After War: The Political Economy of Exporting Democracy, Doing Bad by Doing Good: Why Humanitarian Action Fails, and his other research, as have many of the other scholars in the F. A. Hayek Program.
If you share my fascination with these ideas, you can listen to my full conversation with Chris below and sign up to be notified when future conversations are posted here.
If you’d like to take a step further, you can read here about the fellowships and other opportunities available to study Austrian economics and other core ideas in political economy through the Mercatus Center.
Jayme Lemke is a senior research fellow and associate director of Academic and Student Programs and a senior fellow with the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University.