The Continuing Relevance of Austrian Economics – Religion & Liberty Daily

In their new book, Austrian Economics: An Introduction, Christopher Coyne and Abigail Hall, both professors of economics, offer a concise, accessible volume with a humble title that fills a major gap in the literature for those curious about the Austrian school of economics. Recognizing that the Austrian school often carries baggage and can be a source of confusion, the authors immediately clarify what it is not. It is not about the economics of Austria, neither is it a political philosophy or libertarian manifesto, nor a rigid checklist of political stances. It is an uncompromising study of purposive human action under conditions of radical uncertainty and scarcity.

This book introduces the economic way of thinking forged over time, beginning with Carl Menger through the first generation of fellow Austrian economists: from Eugen von Böhm-Bawerk and Friedrich von Wieser to more recognizable names like Ludwig von Mises and Friedrich A. Hayek, who were the intellectual leaders during the interwar period. This fervency culminated in the Austrian revival stimulated by Hayek’s Nobel Prize in 1974 and continues with contemporary Austrians building on Hayek’s legacy.

Coyne and Hall provide not only a primer on the foundational ideas of Austrian economics, but also an analytical framework for contemporary issues. Are you confused about trade deficits, monetary policy, inflation, government-owned grocery stores, and government taking equity stakes in private companies? Grounded in the truths of human nature and the realities of the world, Coyne and Hall show that Austrian economics is more relevant than ever, offering a practical way to think about economic forces and our most pressing policy questions.

Economics as a discipline existed long before Menger, who studied economics and wrote Principles of Economics in 1871 to address what he believed were gaps in how classical economists such as David Hume, Thomas Malthus, David Ricardo, John Baptiste Say, and Adam Smith understood price formation. Such economists focused on producers without considering the role of consumers and their valuations of goods and services. From Menger’s breakthrough, however, the Austrian school was born.

Coyne and Hall argue that the unique features of the Austrian tradition emerged in four pivotal moments. The first was Methodenstreit, or battle over methods, in which Menger pushed back against the German Historical School’s claim that no universal laws of economics exist. Menger and those who came after him established just such a universal theory of economics. The second moment was the Socialist Calculation Debate, led by Mises and Hayek in the early 20th century and later extended by Don Lavoie, which showed that economic calculation is impossible without private property rights. The third was the Keynesian Revolution, which argued that markets were volatile and subject to long periods of unemployment and that macroeconomic management using government spending could ease these downturns. Finally, the fourth moment is known as the Neoclassical Synthesis, led by Paul Samuelson, who won the Nobel Prize in 1970, which merged Keynesian macroeconomics with market-failure microeconomics and held that the social sciences should model their methods after the physical sciences.

Over the past century, this turn toward macroeconomic planning has led modern mainstream economists to become infatuated with formal modeling, fostering a false hubris that the economy is an engineering project that experts can fine-tune. The Austrian school forces us to narrow our scope and examine individual human action first. Far from dismissing empirical tools, Austrians realize that any sound social analysis must start with the acting person. Coyne and Hall argue that Menger and those after him help us understand the causal processes that generate outcomes, allowing us to have “an objective social science of subjective human action.” Thus we have a pure theory based on a priori reasoning and applied theory in which we must examine the institutional contingencies of human action.

At the heart of the Austrian framework is methodological individualism, the idea that only individuals choose. Countries don’t choose; firms don’t choose; unique and unrepeatable individuals choose. We must direct our study to them to understand how and why they make these choices. Coyne and Hall argue that this changes our focus as economists from macroeconomic trends to microeconomic actors. In short, each person has purposes and plans, which motivate their choices and help us understand also the choices they refrain from making.

Austrians rightly start with the individual as the focal point, reshaping the theory of value. This also marked a pivot from classical economists such as Adam Smith and David Ricardo, and even figures such as Karl Marx, who tried to measure a good’s final value objectively by summing up labor hours. Carl Menger demonstrated that value is entirely subjective. Rather than residing in physical objects and production costs, it exists in each person’s mind, and how we value things is always subject to change.

This insight resolved the well-known “diamond-water paradox.” Have you ever wondered why diamonds, which are not essential for life, are so expensive, yet water, essential for life, is so cheap? Water has immense total utility; without it, we die, yet it commands a low market price because it is so abundant relative to demand. Diamonds are not necessary for survival, but they command high prices because they are scarce. Moreover, the value we place on each in exchange is context-dependent, and the marginal utility of an additional unit of water is low relative to the marginal utility of an extra diamond, which is high. Our choices depend on the specific situations we face. A runner on a hot day may gladly pay $5 for a cold bottle of water from a local bodega despite paying mere pennies for tap water at home. Marginal utility and subjective valuation govern our real-world choices.

This helps us address one of the most important questions in political economy: How can millions of individuals each pursuing their own plans under scarcity and uncertainty coordinate exchanges peacefully with others? The answer is economic calculation through the market process, buttressed by private property rights.

Using Thomas Thwaites’s Toaster Project as an illustration, Coyne and Hall demonstrate the vast complexity of market coordination. Thwaites painstakingly tried to make a toaster from scratch. He bought a cheap toaster and disassembled it, only to find it had 400 parts, plus he needed raw minerals that he had to travel the world to find. After all that hard work, he watched it short out almost immediately. Coyne and Hall use the word “marvel” throughout the book, as other Austrians have, to characterize the process by which we get these everyday items. The market coordinates dispersed knowledge through prices and voluntary exchange.

Economic calculation also requires private property rights. Property rights grant legal ownership and encourage owners to decide how best to invest their property, fostering a long-term view of investment that protects resources from depletion and directs them to their highest-valued uses. Mises showed that private property rights were necessary for economic calculation because we need to assess the use of a scarce resource against its alternatives. Socialism replaces this with collective ownership. Without property rights, there can be no market prices, and thus no way to evaluate trade-offs or opportunity costs.

Hayek expanded on this insight by emphasizing that the knowledge required to produce even what we consider a simple toaster today does not exist in a single mind, let alone a bureaucratic committee. Knowledge is decentralized, tacit, and local. Market prices act as signals and incentives. Without property rights and prices, we can only make arbitrary guesses about what to produce, when, and how much. Moreover, centralizing economic planning requires granting a small group the power to ration on our behalf. Socialism thus leaves us with a “power problem” because economic planning replaces the market process with a political process, giving state planners discretionary power.

But the market is a dynamic process of discovery and adaptation, not a plan. Markets operate as a catallaxy, a word Mises adopted to describe better how markets work and what they do in real time; translations include “to admit into the community” and “to change from enemy into friend.” Guided by the Three P’s (property rights, prices, and profits and losses), markets foster cooperation and peaceful coordination.

This coordination occurs through the entrepreneur, who holds a vital role in the Austrian tradition. Operating under conditions of radical uncertainty, the entrepreneur must anticipate unmet consumer needs and discover new ways to create value. Profit and loss guide the way and serve as indispensable feedback mechanisms, connecting them directly to consumer desires.

Once the unhampered market process is understood, the danger of interventionism and its distortions becomes clear. Interventionism distorts the signals, prices, and incentives. Hayek warned that interventionists suffer from the pretense of knowledge and thus cannot, even with the best of intentions, direct the economy toward a stated set of ends. Thus, the Austrians do not dismiss interventionism as a matter of ideology but because it undermines the very process that harnesses decentralized knowledge.

As an example, Coyne and Hall open their chapter on interventionism with the story of a former New York City mayor reacting to a nationwide infant formula shortage by imposing a price ceiling. Sounds good on paper. But capping prices distorts the signal that the relative price change gives us. Using policy to obscure that price has several consequences. People will not slow down their consumption, and it encourages hoarding; without the price rise, entrepreneurs are deprived of a necessary signal to produce and deliver more formula. Price caps, in this case, literally bite the hand that feeds us. This is counterintuitive, which is why interventionist policies are so popular and why we need Austrian economics and a focus on the market process to gain clarity on how to respond. Moreover, as Israel Kirzner points out, these policy efforts not only stifle the discovery process; they also foster “superfluous discovery,” which channels entrepreneurial activity into unproductive forms such as rent-seeking, bribes, and black-market activity.

As you might imagine, money is central to the entrepreneurial process. Coyne and Hall highlight that money itself is an emergent order; it arises without a central plan and fosters economic calculation. Thus, the rules central banks adopt matter for whether money facilitates economic activity or whether banking interventions distort exchange and even lead to artificial business cycles.

Their final chapters show the Austrian contributions to money, banking, and business cycle theory. Rather than treating money and capital as macroeconomic factors, Coyne and Hall show that Austrians emphasize that money is spontaneous in its origin, capital is heterogeneous, goods are multi-specific (meaning they can be used for several different production processes), and production is arranged in a time-structured process in which market interest rates reflect time preferences. Business cycles are generated within the economic system through distortions in the banking sector that artificially push interest rates below their natural rate, resulting in booms and busts.

They conclude the book by highlighting areas where contemporary Austrians are making important research contributions, including the robustness of markets, macroeconomics, entrepreneurship, community and society, development economics, and war and defense, among other policy areas. This book provides a concise, high-impact volume that will prove valuable inside and outside the classroom. While adding discussion questions at the end of each chapter might have enhanced its classroom use, the book nevertheless excels as a clear, accessible guide filled with practical, relatable examples. Ultimately, Coyne and Hall demonstrate that Austrian economics is a heterodox school focused on purposive human action, dispersed knowledge, price formation, and subjective value. In short, in a world that has forgotten the many failures of socialism and command economies, it provides the foundation for improving our world and promoting prosperity.