The Austrian School of Economics: Key Words and Concepts

Question 1

Austrian Method

Answer 1

Definition: Deductive approach starting with general principles and deriving specific conclusions.
Relevance: Rejects the mathematical methods of the mainstream; emphasizes logic and reasoning over empirical data.

Question 2

Subjective Theory of Value

Answer 2

Definition: Value is determined by individual preferences and subjective judgments.
Key Thinker: Carl Menger.

Question 3

Time Preference Theory of Interest

Answer 3

Definition: Interest rates reflect the preference for present goods over future goods.
Key Thinker: Eugen von Böhm-Bawerk.

Question 4

Praxeology

Answer 4

Definition: Study of human action, emphasizing purposeful behavior rather than mechanistic models.
Key Thinker: Ludwig von Mises.

Question 5

Sound Money

Answer 5

Definition: Money backed by commodities (e.g., gold) that maintains purchasing power and stability.
Relevance: Opposed to fiat money and central banking.

Question 6

Malinvestment

Answer 6

Definition: Misallocation of resources during credit-fueled booms, leading to economic inefficiencies.
Relevance: Central to Austrian business cycle theory.

Question 7

Methodenstreit

Answer 7

Definition: Methodological debate between Austrian deductive reasoning and German historical empiricism.
Relevance: Highlights philosophical differences within economic schools.

Question 8

Origins of Money

Answer 8

Key Ideas:
Emergent phenomenon: Arises naturally to solve barter inefficiencies.
Commodity money (e.g., gold, silver): Durable, divisible, portable.
Spontaneous development: Not imposed by governments but emerges from market interactions.

Question 9

Austrian Business Cycle Theory

Answer 9

Key Ideas:
Credit expansion by central banks lowers interest rates artificially.
Boom phase: Cheap credit fuels unsustainable investment in long-term projects (malinvestment).
Bust phase: Resource misallocation revealed; economy corrects through painful adjustments.
Role of Central Banks:
Cause cyclical fluctuations by manipulating money supply and interest rates.
Prolong crises with bailouts and interventions.

Question 10

Critique of Fiat Money

Answer 10

Key Points:
Created by governments or central banks without intrinsic value.
Leads to inflation, reduced purchasing power, and distorted economic signals.
Artificially low interest rates foster malinvestment.

Question 11

2008 Financial Crisis (Austrian Perspective)

Answer 11

Causes:
Federal Reserve kept interest rates artificially low post-2001, fueling excessive borrowing.
Cheap credit encouraged risky investments, especially in housing.
Government policies promoted homeownership through subsidies and guarantees.
Consequences:
Housing bubble burst, triggering widespread defaults and financial institution collapses.
Austrian critique: Bailouts and monetary easing prevented necessary corrections.

Question 12

Role of Free Markets

Answer 12

Key Ideas:
Markets self-regulate through voluntary interactions without government interference.
Minimal government role: Enforce contracts, protect private property, and ensure safety.
Emphasis on individual freedom and entrepreneurial innovation.

Question 13

Free Banking

Answer 13

Definition: A decentralized monetary system where private banks issue currency backed by commodities without government control.
Relevance: Advocates for competitive banking as a solution to instability caused by central banks.

Question 14

Entrepreneurial Discovery

Answer 14

Definition: Entrepreneurs drive innovation and resource allocation by identifying and acting on market opportunities.
Relevance: A central feature of Austrian economics, emphasizing individual decision-making over centralized planning.

Question 15

Spontaneous Order

Answer 15

Definition: Complex economic systems emerge naturally from individual interactions without a central authority.
Relevance: Reflects the Austrian belief in market self-regulation.

Question 16

Economic Calculation Argument

Answer 16

Definition: Rational economic decisions require accurate price signals, which only emerge in free markets.
Relevance: Used to critique socialism, where price signals are distorted or absent.

Question 17

Maladjustment

Answer 17

Definition: Resource misallocation caused by government intervention or central bank manipulation of interest rates.
Relevance: Often leads to economic instability and crises.

Question 18

Austrian Critique of Central Banking

Answer 18

Key Ideas:
Central banks disrupt market signals by manipulating interest rates.
Credit expansion creates artificial booms followed by inevitable busts.
Centralized control leads to inflation, misallocation, and moral hazard.

Question 19

Role of Uncertainty in Austrian Economics

Answer 19

Key Ideas:
Decision-making occurs in a world of imperfect knowledge and uncertainty.
Markets allow individuals to adjust to changing conditions through decentralized knowledge.
Emphasis on entrepreneurs as key actors in navigating uncertainty.

Question 20

Austrian View of Inflation

Answer 20

Key Ideas:
Inflation caused by excessive money supply from central banks.
Leads to reduced purchasing power and distorted economic signals.
Opposed to fiat money; supports sound money like gold standards.

Question 21

Critique of Keynesian Economics

Answer 21

Key Ideas:
Rejects the use of aggregated models and mathematical formalizations.
Disagrees with government intervention to manage demand.
Argues Keynesian policies cause long-term distortions and instability.