Philosophy Short description of an economic paradigm

In Austrian economics valuation is described as originating from the human mind only and thus all valuation is subjective. Moreover, valuation only manifests itself in the reality of human action. Valuation therefore cannot be "constant". This contrasts with neoclassical economics where preferences exist independent of actions. On the other hand, the things that human beings value are by their very nature heterogeneous. Thus, in essence, Austrian economics describes the world on the basis of a dynamic theory of subjective value and a theory of heterogeneous capital.

Praxeology is the study of the formal implications of human action. Such formal implications are true for any action, i.e. independent of the content of the action. For example, any action reflects some sort of scarcity. No action is conceivable in which this is not the case. Another example, every action is rational in the sense that the acting individual employs a means in order to attain a certain end. Statements like these are logically implied in the concept of action, i.e. they are analytical truths. They cannot be verified or falsified on the basis of experiments or data. Mises calls them categories of human action. These categories form the cornerstone of all Austrian analysis.

Almost in analogy with praxeology, Austrian capital theory is developed around the formal and most obvious statements that describe the physical nature of capital. For example, it is taken as self-evidently true that capital is heterogeneous, i.e. there exists a variety of different types of capital goods that are not perfect substitutes and that are incommensurable. That is, there is no common unit in which they can be measured. Rather, capital goods generally need to be understood in the context of time and space and usage. The combination of capital goods leads to the production of other goods, but such combinations are not arbitrary. Hence, there are complementarities in the capital structure. These complementarities are essential for the understanding of economics and must enter any form of sound analysis.

Human action is per se rational. This does not mean, however, that Austrians consider economic actors as infallible. Rather it means that in order to act economic actors have to have a certain understanding of the world. They must assume that by doing something they get or achieve something they desire. Again, this understanding is non-arbitrary. In Austrian economics acting individuals are considered as teleological beings that have an understanding of the world that is sufficient to pursue their goals. This understanding includes the ability to calculate. Acting men weigh and sort things and they compare them by appraising their exchange value. In a monetary economy of indirect exchange this appraisement is made on the basis of accounting practices.

In Austrian economics all economic inquiry is based on methodological individualism and methodological singularism. That is, there is no such thing as abstract macroe- conomic laws. There are only actions of individual beings and there are economic patterns that emerge from the interaction of individuals. Such patterns are the only kind of prediction that economics as a science is capable of. They are the result of highly complex processes and yet they exhibit certain regularities since all acting men are subject to scarcity and thus react to incentives of all kinds. It is this principle that guarantees that a market economy generates a resource allocation that is in congruence with the preferences of consumers, despite the fact that the information about the en- tire economy is nowhere concentrated. Austrian economics as such thus also describes complex systems and it is therefore fully compatible with complexity economics, but, in addition, Austrian economics states certain principles that prevent those complex systems from being arbitrary. These principles were summarized in the three previous paragraphs. They can be summarized as praxeology, capital theory, and well-defined accounting rules. Together they are sufficient to formulate an Austrian approach and their combination with agent-based techniques allows to investigate the implications of the Austrian premises.

In Austrian economics all economic agents are treated as true economic actors and not as mere reactors to their environment, as is characteristic for the neoclassical school. The Austrian perspective thus implies that all economic analysis is based on the principle of cause and effect, which, as a corollary, implies the passage of time. Austrian economics therefore depicts the economy as a process, as opposed to the static interdependency of neoclassical economics. The process character of economic reality is here implemented using techniques that were originally developed in evolutionary and post-Keynesian economics. It thus becomes possible reconcile some of that literature and to contrast these insights with the tenets of equilibrium-based approaches.

Furthermore, much of what runs under the heading of Austrian economics today is not rigorously formulated in the Austrian methodology. Rather, many Austrian scholars apply equilibrium-like constructs, probably for lack of better alternatives. However, the idea of this model is to emphasize the essentialist character of the Austrian approach and to describe economic insights based on processes that are driven by human action alone. This may help to better frame the Austrian ingenuity.