Schools of Thought in Classical Liberalism, Part 4: The Austrian School





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Published on May 9, 2012

What is the "Austrian School" of economics? Learn more: http://bit.ly/1HVAtKP When people refer to the Austrians, they are usually referring to the ideas of Friedrich Hayek and Ludwig von Mises.

In this video, Professor Nigel Ashford outlines the basic beliefs of these two prominent economists. While the two agree that government should be limited, they also disagree on many points.

Let's look at Friedrich Hayek, Ludwig von Mises, and the Austrian school. Now they have lots of similarities between Hayek and Mises, but I want to identify what I see as the significant differences between these two thinkers. And the first place you can see this difference, I think, is in their methodology.

Hayek tends to emphasize the limits of knowledge, that the limits of reason and understanding what we should do. He's much more willing to give deference to tradition, to how the rules that have evolved over a period of time.

Ludwig von Mises is another Austrian that had a totally different approach. He adopts what's called the a priori deductive reasoning. He believes that we can identify certain truths, what he calls axioms, that we can discover these axioms through our experience and through the use of reason. So in this view, economics is more like math than it is like physics that Chicago School often talk about.

He has many axioms. Let me give you a couple of examples of these axioms that Mises identifies. First of all, he says that human action is purposeful. That is, what humans do is they seek to achieve certain goals. Actions are neither random nor are they predetermined. We can identify what people's goals are, what it is they are trying to achieve through their actions.

A second axiom is that individuals are the only actors. The technical term for this is methodological individualism. In so much political debate, we tend to say France does this. But of course, it's not that all the French people do this. What it is, actually, is a small number of ministers at the top of the French government decide to oppose American foreign policy.

So who are the specific individuals who are actually carrying out this action? Actions are only conducted by individuals. They're not conducted by broad groups. Another example would be Muslims. Is it we should say that some Muslims carried out terrorist acts, but that we should not say that Muslims carried out terrorist acts, that implies that all Muslims did.

So whenever we try and understand any particular choice, we should try and identify who are the actual individuals who are making these specific decisions? And a third axiom is that value is in the eye of the beholder, the so-called subjective theory of value. That is, things do not have value in themselves, but only that to which people attribute to it.

But know the value for the same thing is different for different people. So Mises argues that simply using our reason we can identify these axioms or these truths. Now Mises and Hayek tend to agree about why government should be limited. Because government policy makers lack the knowledge. They can't understand what the goals are of people because everybody has a variety of different goals.

We can't predict, you want this, you want this, you want that. Roles are so diverse. And secondly, government can't work out what is the best means for people to achieve these goals. They can't plan that in advance if we do x the results will be y. So they're very skeptical about the government's ability to identify what people's goals are and to satisfactorily meet those goals.

That's why the Soviet Union collapsed. It wasn't able. It suffered from the knowledge problem of knowing what people wanted, and it suffered from the knowledge problem of knowing how to achieve those goals. So it's a consequentialist view. The consequences of governments carrying their action is often bad, or usually bad.

There is no role for the welfare state, only a minimal state. So here we have two Austrians broadly agreeing on many sorts of questions but they have a different methodology and they have a different conclusion about what the role of government should be.


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