Office of Science & Technology - Return of the Austrians

Return of the Austrians

bridges vol. 25, April 2010 / OpEds & Commentaries

By Sascha Cocron

Sascha Cocron

Once an innovative source of time-tested economic concepts like marginal utility, the Austrian school of economics has gradually fallen out of favor since the middle of the last century and has been increasingly marginalized by academia into the category of "heterodox economics." However, the recent financial crisis and current recession have changed all that. Failure by most economists to predict the economic collapse, and the inadequacy of current economic models to fully explain its causes (not to speak of providing meaningful solutions), have once again raised interest in the theories of Friedrich Hayek, Ludwig von Mises, and other economists associated with the Austrian school. Especially in the public discourse - notably in the blogosphere - commentators are presenting ideas that draw from Austrian school principles particularly apt for our current situation.

The Austrian school, in short, advocates the functioning of a free and unconstrained market. It argues that individuals have the specific knowledge of local market conditions needed to make correct economic decisions. Central government interventions, even well-meaning ones, are necessarily destructive, since they cannot incorporate essential local knowledge. Once enacted, these interventions create inefficiencies or disincentives of their own. Government then feels compelled to intervene even more - and so a vicious circle is created.

Importance of Local Information
Like politics, all economic activity is ultimately local. And yet, in all the spirited discussions about the financial crisis, the perspectives of individual decision makers - consumers and business owners - have notably gone missing. Erudite debates about misguided federal government intervention are plentiful: Were the GSEs Fannie and Freddie to blame? Will bailouts be repaid? Must Glass-Steagall be reinstated? Inadequate government intervention also gets plenty of airtime - we hear about whistle-blowers unheeded, regulations under-enforced. Most of all, we hear about the uniqueness of this particular crisis and its grand scope (the Great Recession). Yet all of these debates seem to ignore the different ways the crisis has played out across the country: Some devastated states like Florida may take decades to recover fully, while in places like Texas, the real estate downturn seems almost not to have happened at all.

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