Austrian School

 


Austrian school is one of the economic schools of thought that focuses on individualism and the free markets. Many economists from Austria initially contributed to this in early 20th century. Noted economists were Hayek,  Mises etc. It lost much of its relevance post 'Keynesian Revolution'.

Austrian school economists developed Austrian Business Cycle Theory (ABCT) . It says boom in the economy happens due to low interest rates. Low interest rates by banks induce individuals and companies to do investments which are not viable earlier. This will increase employment in the short term. Boom and expansion will sustain as long as low interest rate prevails. But the credit driven boom cannot go on forever and eventually resulting in a bust/recession. On 'the day of reckoning', when interest rates rise, many of the investments will turn bad. The recession is to correct the malinvestments.

Some Austrians viewed Fractional Reserve Banking system kept the interest rates low and argued for full reserve banking system. Austrians were against any action not only by Govt , but by Fed also even during depression. They believe Govt/Fed intervention will make things worse. Main Stream economists reject Austrian school of thought. Milton Friedman criticized Austrian school's advice of 'do nothing' when Banks were failing during Great depression.

Austrian school mainly focuses on studying micro level economics to formulate macro level arguments. This method is also contested. When an individual is servicing his debt, savings is advised. But when a Govt is indebted much, if it goes for savings(austerity), or all individuals/companies(private sector) goes for savings at the same time, the demand falls. GDP falls. Tax collection falls as the result.  Govt end up with little savings at the end.

Mises Institute has some resources on Austrian school. Free market economic policies , which argues for less Govt involvement and more market oriented reforms are termed as ‘Neoliberal policies’ in political discussions

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