Advanced Introduction to the Austrian School Of Economics, 2nd Edition PDF by Randall G Holcombe


Advanced Introduction to the Austrian School Of Economics, Second Edition

By Randall G. Holcombe

Advanced Introduction to the Austrian School Of Economics, Second Edition


Preface x

1 The market process 1

1.1 Spontaneous order 3

1.2 Knowledge and economic coordination 7

1.3 Equilibrium: the coordination of individual plans 10

1.4 Equilibrium: the absence of unexploited profit opportunities 12

1.5 The market as a discovery process 13

1.6 The element of time 15

1.7 The subjective nature of value 17

1.8 The subjective nature of cost 19

1.9 Utility and individual action 20

1.10 Competition 21

1.11 Conclusion 23

2 Decentralized knowledge: the role of firms and markets 25

2.1 The entrepreneurial nature of firms 27

2.2 Entrepreneurship as arbitrage 30

2.3 Profit and loss 31

2.4 Profits are not certain 33

2.5 Profit and progress: a caveat 33

2.6 Opportunity cost and profit-seeking 35

2.7 Cost and price 36

2.8 Information, knowledge and wisdom 37

2.9 Research and development 41

2.10 The division of knowledge and the supply chain 43

2.11 Tacit knowledge and agglomeration economies 44

2.12 Firms as repositories of knowledge 45

2.13 Searching for prices: disequilibrium exchanges 48

2.14 Conclusion 50

3 Economic calculation 52

3.1 Ludwig von Mises on economic calculation 52

3.2 The socialists answer Mises 55

3.3 The Austrian school’s answer 56

3.4 Decentralized knowledge 58

3.5 Complex systems 59

3.6 The mixed economy 61

3.7 Institutional entrepreneurship 62

3.8 Economic progress 63

3.9 The evolution of economic activity 66

3.10 Product differentiation and progress 68

3.11 Profit: indicator of progress 70

3.12 Welfare: process versus outcome 72

3.13 Conclusion 75

4 Money, banking and business cycles 78

4.1 The money supply and fractional reserve banking 79

4.2 The basic business cycle theory 80

4.3 The causes of the business cycle 82

4.4 Why do borrowers and lenders make these errors? 83

4.5 The structure of capital 86

4.6 The structure of production and business cycles 89

4.7 The capital stock 91

4.8 The coordination of economic activity 95

4.9 Schumpeterian and Kirznerian entrepreneurship 97

4.10 Inflation 99

4.11 Free banking 101

4.12 Conclusion 102

5 The resurgence of the Austrian school 106

5.1 The rise of the Austrian school 106

5.2 The dormant Austrian school in the mid-twentieth century 109

5.3 The resurgence of the Austrian school 110

5.4 Austrian economics and capitalism 113

5.5 The role of government in the economy 117

5.6 The ideology of the Austrian school 118

5.7 The methodology of the Austrian school 120

5.8 The Austrian school and its allies 124

5.9 Conclusion 127

References 133

Index 138


The Austrian school of economics, nearly extinct in the middle of the twentieth century, has seen a remarkable resurgence toward the end of the twentieth century and into the twenty-first. In addition to an active academic research program, the financial press often refers to the ideas of the Austrian school. College students also have an interest in the Austrian school, I know from talking with my own students, even those who may not intend to go on to graduate study in economics, or look for work in financial institutions. This interest suggests the value of an advanced introduction to the ideas of the Austrian school, in-depth enough that reading it can provide a good understanding of Austrian economics, bu accessible enough that someone with a basic knowledge of economics can read it and understand what differentiates the ideas of the Austrian school, and makes those ideas “Austrian” beyond just being economics.

A school of thought is defined by the ideas of its members, and there is not a clear line that identifies its borders. First, there is the question of who belongs to a school of thought, and even if that is clear (which it is not), often members of a school of thought disagree with each other on some issues, even if they find broad agreement on most. Presumably, those areas that have broad agreement would constitute the ideas of the school – but members of a school might even disagree on identifying areas where there is broad agreement. For example, the role of entrepreneurship in an economy is an indispensable component of Austrian economics, but Israel Kirzner and Murray Rothbard, two of the more important members of the school, have some disagreements about what constitutes entrepreneurship. This volume deliberately glosses over any disagreements and controversies in an attempt to present a straightforward explanation of the school’s major ideas.

One might even call into question the value of describing a school of thought. In a 1974 conference in South Royalton, Vermont that played an instrumental role in the Austrian school’s resurgence in the second half of the twentieth century, Milton Friedman gave an after-dinner talk in which he questioned the value of delineating economic ideas by schools of thought. He said, “There is good economics and there is bad economics,” and said it was more productive to partition economics that way – and do good economics – than to partition it by schools of thought. Why should it matter whether an idea is more closely associated with the Austrian school, or the Chicago school, or the post-Keynesian school, for example? Friedman offered good advice to those in attendance who wanted to engage in economic research, but these schools of thought do have distinguishable ideas associated with them, so despite Friedman’s good advice to the practitioner of economics, there still is value in laying out the ideas of a school for those interested in understanding what gives that school a distinct identity.

In keeping with Friedman’s advice, all of the ideas I have included in this volume are good economics, in my view. An introductory volume like this is not the place to concentrate on controversies within the school, or to explain the problems with ideas I think are flawed. But, while the volume is my vision of the most important and distinguishing ideas of the Austrian school, I did attempt to write it in such a way that those who consider themselves knowledgeable about the ideas of the Austrian school would agree that this volume does, in fact, give a good introduction to the school’s ideas.

My own introduction to the Austrian school came when I was a graduate student, and then because of the interests of several classmates rather than from classroom material or discussion. Even though I was an economics major, I was unaware that there was an Austrian school of economics when I was an undergraduate. The ideas of the Austrian school appealed to me, and I attended a number of conferences devoted to the school’s ideas, as a graduate student and then as a faculty member, including the 1974 South Royalton conference I mentioned earlier. I was a faculty member at Auburn University when the Ludwig von Mises Institute was established there in 1982. I am an Associated Scholar with the Institute, a member of the Society for the Development of Austrian Economics since its founding in 1996 and served as its president in 2007. I have had a long-standing interest in the Austrian school.

As an introduction to the Austrian school, this book is aimed at those who do not have a deep knowledge of the school, and who want to understand what is distinctive about the Austrian school’s methods and ideas. The volume is “advanced” because it assumes that readers have some background in economics, but it is an “introduction” because it does not assume any knowledge about the Austrian school. Because of its orientation as an introduction to the Austrian school, the references throughout the text and listed at the end of the book are to the more significant works by Austrian school authors, or by others whose ideas are related to the Austrian school. The book omits most references to ideas that do not have a specific Austrian connection, so the references listed at the end of the book are designed to have some relevance to the Austrian school rather than to economics more generally.

I gratefully acknowledge the comments of those who have read all or part of the manuscript as it was in progress, including Peter Boettke, Samuel Bostaph, William Butos, Rob Bradley, Peter Klein, Peter Lewin, Dave Garthoff, Sanford Ikeda, Steve Kates, Jonathan Mariano and George Reisman. In trying to present an overview of the ideas of the Austrian school, I recognize that everyone may have a different vision, though I hope there are only slight differences in the details rather than differences related to the broad vision of the school. With that in mind, despite some excellent comments I have received on the project, responsibility for any shortcomings in the way I have presented the Austrian school’s ideas must remain solely with me.

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