Austrian Economics: Can somebody explain it to me?

[NewUser]

Hi all, I know Ron Paul talks about Austrian Economics often, but I've never seen him or heard him explain what 'Austrian Economics' actually is.

I know of Hayek and Rothbard and that they're apart of the Austrian School of Economics. However, I'm looking at Wikipedia right now and it says under Hayek "Influences: Adam Smith" "Influenced: Milton Friedman", but under Rothbard it says "Opposed: A. Smith and Milton Friedman" so how can Hayek be influenced by Smith while Rothbard opposed Smith, but both Hayek and Rothbard are from the Austrian School of Economics?

Could someone please link me to something that'll help me?

Thank you!

[brandon]

http://mises.org/etexts/austrian.asp

http://en.wikipedia.org/wiki/Austrian_School

[cubical]

http://www.youtube.com/watch?v=DStLhWMRERM

[Bohner]

This is the best "in a nutshell" explanation I've come across.

[helmuth_hubener]

The core differences are in methodology and assumptions.

Austrianism is methodologically individualist. It starts by looking at individuals, and builds from there, in contrast to the almost exclusive focus on aggregates and "classes" in other schools (Classical, Keynesian, and Marxist especially come to mind).

Austrianism is methodologically deductive. It uses logic and deduction, rather than empirical testing and induction. Other schools sometimes try to make economics into a science more like physics or chemistry: make an hypothesis, run an experiment, gather data, etc., etc. Milton Friedman of the Chicago School comes to mind as someone who took a particularly strong stand on this.

Austrianism is causal-realist. It focuses on attempting to explain and elucidate the world as it really is, rather than an inordinate focus on imaginary and often impossible or internally nonsensical models, like "Perfect Competition" or "Y= C+I+G+X–M."

Those are probably the top three defining characteristics. Individualist. Deductive. Causal-realist. That's the Austrian School.

[helmuth_hubener]

And I would say my favorite introductory lecture is this one from Rothbard:

Mises in One Lesson

[boneyard bill]

Let me try to explain it in a nutshell. Austrian economics is a school of Classical economics which differs from other Classical schools mostly on arcane issues such as a priori method and methodological individualism as noted above. As a Classical school, the Austrian school contends that the unregulated market is both stable and self-regulating. Efforts by the government to influence basic economic variables will result in inefficiency and instability. Thus, the Austrian school advocates a policy of laissez-faire, a French term meaning roughly, "leave it alone." Above all, the Austrian school opposes a government-sponsored central bank and argues that it is the prime instrument of intervention.

In contrast, John Maynard Keynes, the leading thinker in modern economics, argued that the private economy is inherently unstable. Keynes claimed that times arose when people saved too much money and therefore created an imbalance between savings and consumption resulting in a decline "aggregate demand." This causes depressions and the government, therefore, needed to run deficits to prevent depressions or to aid their recovery.

The Austrian school also accepts "Say's Law." Keynes defined Say's Law, not entirely accurately, as "Supply creates its own demand," and spent a good deal of time trying to refute it. What Say's Law implies is that "supply" and "demand" are both products or services and that all that these terms really represent are the different points of view of the people in the transaction. Keynes emphasis on aggregate demand and his tendency toward the use of mathematics in economics as well as the continuing influence of mathematics and mathematical-oriented thinkers surrounding modern economics, what I would call "neo-Keynesians," leads students to be taught, essentially, if not directly, that supply = a product or service while demand = money.

Austrians would emphatically deny this. Real demand is a product or service and therefore real demand arises from an increase in supply. Money is a medium of exchange and an increase in the medium of exchange does not create real demand. It merely leads to higher prices - a notion that is easily derived from the law of supply and demand itself.

In modern parlance, therefore, the Austrian school is a "supply-side" school which contends that it is an increase in productivity and supply that drives the economy. The neo-Keynesian school is a "demand-side" school which contends that aggregate demand, understood as an increase in money and credit, is what drives the economy and leads to prosperity.

There's lots more that could be said. Here I've just tried to outline the very basics.

[Bastiat's The Law]

I think this is the best primer for Austrian economics to a layperson.