capitalism

Economics, Chicago School of 135
Mises and Hayek warned. The reason that both models
failed to achieve the level of economic prosperity promised
was because of what these approaches—market socialism
and Keynesian demand management—had assumed away.
In both instances, the models were predicated on the
assumptions that they sought to prove. Government officials
were assumed to be both benevolent and to possess
omniscience, which allowed the government to be
employed as a corrective to perceived failures. It is almost
certainly because of this intellectual history that Austrian
writers have tended to focus their applied economics on
issues of socialism and macroeconomics.
Macro models suffered the same problems as did models
of market socialism and were plagued by unwarranted
assumptions and excessive aggregation. Classic works in
Austrian macroeconomics by Mises and Hayek were
largely written before the Keynesian hegemony in economics,
which lasted from the 1940s to the mid-1970s. A
younger generation of Austrian economists, however, was
inspired by these classics, the work on monetary theory,
and the business cycle by Murray Rothbard, which sought
to develop further the insights first offered by Mises and
Hayek. They have pioneered work in the area of free banking
and challenged the idea that unregulated banking would
be chaotic. More recent work has challenged the theoretical
coherence of the contending macroeconomic models and
argued that, rather than a labor-based approach, macroeconomics
should restructure its analysis to be capital-based.
The most significant shortcoming of standard macroeconomics
in all its varieties is the slight attention that is paid
to capital theory. Roger Garrison has dubbed this laborbased
macro, as opposed to the more Austrian style capitalbased
macro. The main issue here is not simply a focus on
capital markets, but the way the capital markets are conceived.
Austrian economists view capital not as a stream of
financial resources, but as a structure of capital goods that
must be coordinated in the process of production through
time. Capital goods are heterogeneous and have multiple
specific uses, and Austrians have traced in detail the important
role of capital goods and capital accounting in a modern
economy.
With respect to my original question regarding what
continues to make Austrian economics a worthwhile
approach to the study of the production and distribution of
goods and services, several economists have attempted to
answer this question by way of the biography of a set of
ideas and by developing these ideas in the hope that they
will transform economic scholarship. This approach
springs from an honest commitment to the belief that the
Austrian school provides us with a better opportunity to
gain truth in economic understanding. It is an approach to
economics that is grounded in the choices of human beings.
It shies away from heroic assumptions, and it does not
begin every analysis by postulating an asymmetry between
private and public actors. Instead, the same foibles and
weaknesses that might be attributed to people in the private
sector are equally assumed in describing those in the public
sector. The difference in the conclusions of the comparative
analysis between private and public actors is a function of
the institutional environment within which choices are
made. In the absence of an institutional environment of
secure private-property rights, freedom of price negotiation,
accurate profit and loss accounting, and nondiscretionary
politics, the promise of material progress and social
cooperation will go unrealized.
The Austrian School of Economics provides a set of
utilitarian arguments in support of a classical liberal order
that are indispensable for those who place a high value on
human liberty. However, it is important to stress that these
arguments are a consequence of the analysis that Austrians
undertake and not presumptions that they hold before the
analysis. Austrian economics is not synonymous with libertarianism.
Rather, it is a scientific body of thought that,
when combined with some ethical precepts, leads to a
strong argument for a libertarian society.
See also Banking, Austrian Theory of; Böhm-Bawerk, Eugen von;
Hayek, Friedrich A.; Individualism, Methodological; Kirzner,
Israel M.; Mises, Ludwig von; Praxeology; Rothbard, Murray;
Socialist Calculation Debate; Spontaneous Order
Further Readings
PJB
Boettke, Peter. Coordination and Calculation: Essays on Socialism
and Transitional Political Economy. New York: Routledge, 2001.
———, ed. Socialism and the Market: The Socialist Calculation
Debate Revisited. 9 vols. New York: Routledge, 2000.
Hayek, F. A. Individualism and Economic Order. Chicago:
University of Chicago Press, 1948.
Horwitz, S. Microfoundations and Macroeconomics. New York:
Routledge, 2000.
Kirzner, I. Competition and Entrepreneurship. Chicago: University
of Chicago Press, 1973.
Lachmann, L. Capital and Its Structure. Kansas City, MO: Sheed
Andrews McMeel, 1977 [1956].
Lewin, P. Capital in Disequilibrium. New York: Routledge, 1999.
O’Driscoll, G., and M. Rizzo. The Economics of Time and
Ignorance. 2nd ed. New York: Routledge, 1995.
Rothbard, Murray. America’s Great Depression. Princeton, NJ: Van
Nostrand Press, 1963.
Selgin, G. The Theory of Free Banking. Totowa, NJ: Rowman &
Littlefield, 1988.
ECONOMICS, CHICAGO SCHOOL OF
The Chicago School of Economics refers to that group of
economists associated with the University of Chicago and
most closely identified with the work of Milton Friedman