The Austrian Economics Wiki - User contributions [en]

Ayn Rand

2011-01-28T02:08:02Z

Paul: Spelling/format correction

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'''Ayn Rand''' (1905–1982) born Alisa Zinov'yevna Rosenbaum was a [[Russia|Russian]]-[[United States|American]] novelist and philosopher. She is most famous for her novels ''[[The Fountainhead]]'' (1943) and ''[[Atlas Shrugged]]'' (1957). Other literature attributed to her is ''We the Living'' (1936), ''Night of January 16th'' (1934), and ''Anthem'' (1938). Her non-fiction titles include ''For the New Intellectual'' (1961), ''The Virtue of Selfishness'' (1964), ''Capitalism: The Unknown Ideal'' (1966), ''The Romantic Manifesto'' (1969), ''The New Left: The Anti-Industrial Revolution'' (1971), ''Introduction to Objectivist Epistemology'' (1979), and ''Philosophy: Who Needs It?'' (1982). She was a [[laissez-faire]] [[capitalist]], but refused to call herself a [[libertarianism|libertarian]] on the grounds that she didn't want to associate herself with [[Anarchism|anarchists]].

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{{DEFAULTSORT:Rand, Ayn}}
[[Category:Libertarians]]
[[Category:Novelists]]
[[Category:Philosophers]]

Ralph Raico

2011-01-27T11:23:12Z

Paul: correct spacing

{{Wikipedia text}}
[[Image:Ralph raico.gif|frame|right|Ralph Raico delivering a lecture at the Ludwig von Mises Institute in Auburn, AL]]

'''Ralph Raico''' is an [[United States of America|American]] [[history|historian]], [[libertarianism|libertarian]], and specialist in European [[classical liberalism]] and [[Austrian Economics]]. He is currently a professor of history at [[Buffalo State College]] and a senior faculty member of the [[Ludwig von Mises Institute]]. Raico was a student of [[Ludwig von Mises]] and learned [[German language|German]] at Mises' suggestion. Raico translated Mises' ''[[Liberalismus]]'' into English.

Raico was the editor of the [[New Individualist Review]], along with [[Ronald Hamowy]], a journal initially sponsored by the [[University of Chicago]] chapter of the [[Intercollegiate Society of Individualists]]. It declared itself "founded in a commitment to liberty." The first article of the first edition was titled "Capitalism and Freedom." [[Milton Friedman]], [[F. A. Hayek]], and [[Richard M. Weaver]] were the first faculty advisors, later to be joined by [[George Stigler]] and [[Benjamin Rogge]]. Between 1961 and 1968, seventeen issues were published including articles by [[Russell Kirk]], [[William F. Buckley, Jr.]], [[Ludwig von Mises]], and [[Murray N. Rothbard]].

The complete run of the magazine is available from [[Liberty Fund]]. In his introduction to this reprint edition, Milton Friedman—one of the magazine's faculty advisors—writes that the Review set "an intellectual standard that has not yet, I believe, been matched by any of the more recent publications in the same philosophical tradition."

Raico was also a founding member of the [[Circle Bastiat]], and was considered its poet laureate.

In 1999, Raico wrote ''Die Partei der Freiheit: Studien zur Geschichte des deutschen Liberalismus'', a German-language book discussing the [[classical liberalism|liberal]] tradition in [[Germany]].

In 2000, Raico was awarded the "Gary G. Schlarbaum Prize for Lifetime Achievement in the Cause of Liberty" by the Mises Institute.[http://www.mises.org/schlarbaum/raico.asp]

In 2006, Raico became one of the charter members of the Property and Freedom Society, which was founded at the instigation of [[Hans-Hermann Hoppe]] as a more radical counterpart to the [[Mont Pelerin Society]].

==External links==
* [http://www.lewrockwell.com/raico/raico-arch.html Raico's archives at LewRockwell.com]
* [http://mises.org/articles.aspx?AuthorId=344 Raico's article archives at Mises.org]
* [http://mises.org/media.aspx?action=author&ID=344 Raico audio/video lectures at Mises.org]
* [http://www.fff.org/aboutUs/bios/rxr.asp Bio] at [[Future of Freedom Foundation]]

{{DEFAULTSORT:Raico, Ralph}}
[[Category:Historians]]

Full reserve banking

2011-01-27T11:22:41Z

Paul: /* Criticism */ correct spacing

'''Full-reserve banking''' is a [[bank]]ing practice in which the full amount of each [[Deposit account|depositor's]] funds are kept in [[bank reserves|reserve]] (as [[cash]] or other highly liquid assets) when each depositor has the legal right to withdraw them. In other words, deposits available for immediate withdrawal would not be [[Loan|lent out]] for extended periods but rather would be retained by the bank to allow the depositor immediate access to the funds. Only [[certificates of deposit]] (or [[term deposit]]s) would be used for normal lending activity. Full-reserve banking was practiced historically by the [[Bank of Amsterdam]] and some other early banks but was displaced by [[fractional reserve banking]] after 1800.<ref>[http://www.mises.org/books/desoto.pdf ''Money, Bank Credit, and Economic Cycles''], Jesus Huerta de Soto, First English edition (2006), pp. 98-114</ref> Proposals for the restoration of full-reserve banking have been made,<ref>[http://www.mises.org/books/desoto.pdf ''Money, Bank Credit, and Economic Cycles''], Jesus Huerta de Soto, First English edition (2006)</ref> but are generally ignored or dismissed by [[mainstream economics|mainstream economists]], who believe that the costs of such a change would outweigh any benefits.<ref>{{cite web|url=http://www.richmondfed.org/publications/research/region_focus/2009/winter/full_interview.cfm |title=Interview: George Selgin |accessdate=2009-10-29 |last=Slivinski |first=Stephen |publisher=The Federal Reserve Bank of Richmond }}</ref>

==Debate over full-reserve banking==

The debate over the benefits and costs of full-reserve banking trace back over centuries.<ref>[http://www.mises.org/books/desoto.pdf ''Money, Bank Credit, and Economic Cycles''], Jesus Huerta de Soto, First English edition (2006)</ref> During the [[Great Depression]], a number of [[Chicago economists]] suggested [[monetary reform]]s, which included some calling for the ending of [[fractional-reserve banking]] in two 1933 memoranda that came to be known as the "[[Chicago plan]]". After an apparent recovery in the mid-1930s, America was again in [[Recession of 1937-1938|recession]] and in 1939 a number of economists circulated a draft proposal entitled ''[[A Program for Monetary Reform]]'' calling once more for an end to [[fractional-reserve banking]].

With the advent of the [[Financial crisis of 2007-2010]], some [[monetary reform]] advocates are again calling for an end to fractional-reserve banking and a return to full-reserve banking. One proposal is being put forward by [[Stephen Zarlenga]] and the [[American Monetary Institute]]; this is known as the ''American Monetary and Financial Security Act''.<ref>{{Citation
| last = Zarlenga
| first = Stephen
| title = Presenting the American Monetary Act
| publisher = American Monertary Institute
| year = 2009
| month = July 18
| url = http://www.monetary.org/amacolorpamphlet.pdf}}</ref>

[[Mainstream economists]] seldom discuss the merits of full-reserve banking. However, [[monetarist]] and [[Nobel Memorial Prize in Economic Sciences|Nobel Prize]] winning economist, [[Milton Friedman]] once supported a 100% reserve requirement for checking accounts.<ref>{{Citation
| last = Solow
| first = Robert M.
| title = Financial crises, contagion, and the lender of last resort
| publisher = Oxford University Press
| date = March 28, 2002
| chapter = On the Lender of Last Resort
| page = 203
| chapterurl = http://books.google.com/books?id=2486Jp8TjEcC&pg=PA201&dq=financial+crises,+contagion,+and+the+lender+of+last+resort&source=gbs_toc_r&cad=9#v=onepage&q&f=false
| isbn = 978-0199247219}}</ref> And, well known for his advocacy of similar reforms, economist [[Laurence Kotlikoff]] has also called for an end to fractional-reserve banking.<ref>{{Citation
| last = Kotlikoff
| first = Laurence J.
| last2 = Leamer
| first2 = Edward
| title = A Banking System We Can Trust
| journal = Forbes.com
| date = April 23, 2009
| url = http://people.bu.edu/kotlikoff/newweb/Abankingsystemwecantrust_4_2009.pdf
| accessdate = September 14, 2010}}</ref> In April 2009, Kotlikoff and Professor Edward Leamer called for the implementation of Limited Purpose Banking, which would turn banks away from fractional-reserve banking activities and permit them only to conduct "pure" financial intermediation, in a manner similar to pooled mutual funds.<ref>{{Citation
| last = Kotlikoff
| first = Laurence J.
| last2 = Leamer
| first2 = Edward
| title = A Banking System We Can Trust
| journal = Forbes.com
| date = April 23, 2009
| url = http://people.bu.edu/kotlikoff/newweb/Abankingsystemwecantrust_4_2009.pdf
| accessdate = September 14, 2010}}. Quote: 'If such mutual funds sound revolutionary, they're not. Funds of this kind have been around for centuries. They go by the name "tontines," or systems of "pari-mutuel betting." Limited Purpose Banking would enhance liquidity, since all funds would trade in the market even if their underlying assets are illiquid. It would permit the extension of as much credit as the public--which is the ultimate source of credit--wishes to provide by buying mutual funds that purchase household and business loans. And it would force banks to charge fees and pay their employees based on their mutual fund performances as determined by the market. What LPB will eliminate is insider rating, free riding on FDIC insurance, self-custody arrangements, no-doc loans, institutionalized gambling, me-now compensation plans, financial malfeasance and the possibility of future financial collapse. In other words, it would be a system we can trust.'</ref>

Most recently, in late 2010, two British MP's, Douglas Carswell and Steven Baker, sought to introduce legislation into the British Parliament that would allow depositors to decide if their money should be lent out and for what period.<ref>[http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8004540/The-radical-reform-that-would-end-boom-and-bust-in-banking.html ''The Radical Reform in Banking''], Toby Baxendale, ''Daily Telegraph'', 15 Sept 2010</ref> If this legislative reform were to pass, British depositors would have the option to elect to save their money in full-reserve bank accounts.

Active debate regarding the merits of full reserve banking have occurred amongst [[Austrian economists]] for decades, and Austrians such as [[Murray Rothbard|Murray N. Rothbard]] and Jörg Guido Hülsmann support full-reserve banking and hold that fractional-reserve banking is immoral, inherently "fraudulent and inflationary" and is a form of legalized [[embezzlement]] that is analogous to a government-supported [[Ponzi scheme]].<ref>{{Citation
| last = Engelhardt
| first = Lucas M.
| title = 100% Reserves Now
| journal = Mises Daily
| date = December 8, 2008
| url = http://mises.org/daily/3237
| accessdate = September 14, 2010}}</ref><ref>{{Citation
| last = Rothbard
| first = Murray N.
| title = The Case for a 100 Percent Gold Dollar
| journal = Mises Daily
| date = May 23, 2005
| url = http://mises.org/daily/1829
| accessdate = September 14, 2010}}</ref><ref>{{Citation
| last = Rothbard
| first = Murray N.
| title = The Mystery of Banking
| publisher = Ludwig von Mises Institute
| url = http://www.mises.org/Books/mysteryofbanking.pdf
| accessdate = September 14, 2010
| isbn = 978-1-933550-28-2}}</ref><ref>{{Citation
| last = Hülsmann
| first = Jörg Guido
| title = Free Banking and the Free Bankers
| journal = The Review of Austrian Economics
| volume = 9
| issue = 1
| publisher = Ludwig von Mises Institute
| year = 1996
| url = http://mises.org/journals/rae/pdf/RAE9_1_1.pdf
| accessdate = September 14, 2010}}</ref><ref>{{Citation
| last = Hülsmann
| first = Jörg Guido
| title = Has fractional-reserve banking really passed the market test?
| publisher = Independent Review
| date = January 1, 2003
| url = http://www.accessmylibrary.com/coms2/summary_0286-2737288_ITM
| accessdate = September 14, 2010}}</ref>

==The case for full reserve ==

This would eliminate (or at least greatly reduce) the financial risks associated with [[bank run]]s, as the bank would have all the [[money]] in reserve needed to pay depositors - regardless whether depositors actually claimed their money.<ref>[http://www.mises.org/Books/mysteryofbanking.pdf ''The Mystery of Banking''], Murray Rothbard</ref><ref>[http://mises.org/story/1829 The Case for a 100% Gold Dollar], Murray Rothbard</ref><ref name=FBFB>[http://mises.org/journals/rae/pdf/RAE9_1_1.pdf Free Banking and the Free Bankers], Jörg Guido Hülsmann, Quarterly Journal of Austrian Economics (Vol. 9, No. 1)</ref>

Proponents argue that this form of banking would also eliminate the need for a [[lender of last resort]] (such as a [[central bank]]), which is normally needed to support the banking system in times of [[systemic risk]] or [[financial contagion]], as these financial risks would not exist in a full-reserve banking environment.<ref>[http://mises.org/journals/qjae/pdf/qjae1_3_8.pdf Free Banking and Fractional Reserve Banking], Jörg Guido Hülsmann, Quarterly Journal of Austrian Economics (Vol. 1, No. 3)</ref> This simply requires that the resources available to the banks issuing credit money and demand deposits would be sufficient to convert ''all'' currency at once if so required. It was a central component in [[Social Credit]] proposals.<ref>[http://www.theuniversityconcourse.com/VIII,1,9-30-2002/Heydorn.htm Social credit a distributist reform of the financial system] by Oliver Heydorn</ref>

Were the [[United States]] to adopt full-reserve, all currency would be created by the federal government, and as a result all [[seigniorage]] revenue would also accrue to the federal government.<ref> [http://worthpublishers.com/html/staticcontent/nonstandard/include/0716771616/Krugman2e_Econ_Ch30.pdf], Paul Krugman, Robin Wells, Macroeconomics 2nd Ed. Worth Publishers, Page 808 </ref> This is in contrast to the current US system, where a large proportion of the currency supply is in the form of demand deposits created by private banks.<ref> Krugman, pg 802</ref> When the Federal Reserve creates currency and uses it to buy treasury bills, it collects seigniorage revenue in the form of interest payments which it then returns to the United States<ref>[http://www.gao.gov/new.items/d04283.pdf] GAO Report 04-283, Page 2</ref> (for example, in 2002 the United States earned $24.495 billion in this manner).<ref>GAO Report, pg 14</ref> When a private bank creates currency, the government cannot collect any seigniorage from it. Since the Federal Reserve has a target for the size of the currency stock, any currency created by private banks is currency that is not created by the Fed and thus constitutes lost seigniorage.<ref>[http://worthpublishers.com/html/staticcontent/nonstandard/include/0716771616/Krugman2e_Econ_Ch30.pdf] Paul Krugman, Robin Wells, Macroeconomics 2nd Ed. Worth Publishers, Page 816</ref> Some consider this an illegitimate "privatization" of what should be a public good, with these profits being retained by the government to finance essential social services and capital works.<ref name="books.google.com">{{cite book |last= Brown |first= Ellen H. |title= Web of Debt |url= http://books.google.com/?id=ILMGrEC524UC |accessdate= 2007-12-15 |year= 2007 |publisher= Third Millennium Press |location= Baton Rouge, Louisiana |isbn= 0979560802 }}</ref><ref name="death">{{cite book |last= Rowbotham |first= Michael |title= The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics | year= 1998 |publisher= Jon Carpenter Publishing |isbn= 9781897766408 }}</ref><ref name="monetary.org">[http://www.monetary.org/lostscienceofmoney.html Stephen A. Zarlenga, ''The Lost Science of Money'' AMI (2002)]</ref>

It is argued by these economists that, in contrast to fractional-reserve banking, full-reserve banking ''guarantees'' a stable money supply, which ensures that the [[means of exchange]] is not debased over time. This improves the efficiency of the [[price mechanism]], promotes saving and the deferral of consumption, provides much greater confidence in the financial system and in the integrity of all commercial transactions and therefore encourages sustainable, non-speculative, productive investment.<ref>[http://mises.org/story/3237 100% Reserves Now], Lucas M. Engelhardt</ref><ref>[http://mises.org/story/1829 The Case for a 100% Gold Dollar], Murray Rothbard</ref><ref name=FBFB>[http://mises.org/journals/rae/pdf/RAE9_1_1.pdf Free Banking and the Free Bankers], Jörg Guido Hülsmann, Quarterly Journal of Austrian Economics (Vol. 9, No. 1)</ref><ref>[http://www.mises.org/Books/mysteryofbanking.pdf ''The Mystery of Banking''], Murray Rothbard</ref>

Advocates of full-reserve banking do not necessarily advocate that the government lay down regulations stipulating a full-reserve system. In fact, some economists, such as [[Murray Rothbard]] (of the [[Austrian School]]) believe that government intervention sustains fractional-reserve banking, as governments have formalized the practice by making it legal and supporting it through the creation of central banks. Murray Rothbard argues that in doing this they have prevented periodic bank runs and other natural checks that would otherwise be placed on banks by astute customers, anti-fractional-reserve consumer groups, and other such organizations. Rothbard expresses this concern, and argues the case for 100% gold or silver-backed money, in his book ''[[What Has Government Done to Our Money?]]'' and other published works.<ref>[http://www.mises.org/Books/mysteryofbanking.pdf ''The Mystery of Banking''], Murray Rothbard</ref>

== Criticism==
The most common criticism of full-reserve banking, and by contrast, argument for fractional reserve banking, is the need for [[financial intermediation]] and capital formation. [[F. A. Hayek]] accepted that bank credit and fractional reserve banking — even if they contributed to business cycles — were necessary as "the price we pay for a speed of development exceeding" that which would otherwise be possible, and that "financial institutions have never been prohibited from holding fractional reserves."<ref>http://mises.org/journals/rae/pdf/RAE9_1_3.pdf Walter Block and Kenneth A. Garschina, "Hayek, Business Cycles and Fractional Reserve Banking: Continuing the De-Homogenization Process", Review of Austrian Economics, 1996.</ref> Austrian monetary theorist [[George Selgin]] has argued: "Those self-styled Austrian economists, mostly followers of [[Murray Rothbard]], who insist on fractional-reserve banking's fraudulent nature or inherent instability are, frankly, making poor arguments. I don't think the evidence supports their view, and that they overlook overwhelming proof of the benefits that fractional reserve banking has brought in the way of economic development by fostering investment."<ref>{{cite web|url=http://www.richmondfed.org/publications/research/region_focus/2009/winter/full_interview.cfm |title=Interview: George Selgin |accessdate=2009-10-29 |last=Slivinski |first=Stephen |publisher=The Federal Reserve Bank of Richmond }}</ref>

Under full-reserve banking, deposits available for immediate withdrawal would sit idle ready for depositors to claim they money, while entrepreneurs went without this potentially usable capital.<ref> {{cite web|url=http://www.karlwhelan.com/Teaching/International%20Monetary/part3.pdf |title=International Monetary Economics: Banks and Financial Intermediation |accessdate=2009-10-29 |last=Whelan |first=Karl |date=2009-01-29 |format=PDF |publisher=School of Economics, [[University College Dublin]] }} {{Dead link|date=September 2010|bot=H3llBot}}</ref> This would be likely to significantly reduce the capital available to borrowers and therefore reduce total spending and aggregate demand in the economy.

Full-reserve banking would also, by definition, lead to severe reductions in the growth of the [[money supply]] and liquidity. Transitioning to a full-reserve banking system would therefore be likely to cause significant economic dislocation and possibly a severe [[credit crunch]].

[[Pascal Salin]], former professor at the Université Paris-Dauphine and former [[Mont Pelerin Society]] president, opposes such regulation of banking and disputes Murray Rothbard's characterization of fractional-reserve banking as a simple form of recursive [[embezzlement]]. He argues that a situation of perfect certainty doesn't exist even in a full-reserve banking system. He also argues that in a perfectly free banking system any customer must be free to choose the kind of notes and the system of payments for services he prefers since optimality cannot be defined independent of the wants of the individual.<ref>[http://mises.org/journals/qjae/pdf/qjae1_3_7.pdf Free Banking and Fractional Reserves: A Comment], Pascal Salin</ref>

=== Criticisms of full-reserve banking combined with a gold standard ===

[[Central bank]]s currently control the growth of the [[money supply]]. Full-reserve banking removes the need for setting prudential or reserve requirements, as the effective reserve fraction is one. Some supporters of full-reserve banking also support a gold standard. The combination of the two would eliminate the need for open market purchases and related policy tools by central banks, as the money supply would be fixed by the amount of the metallic commodity in circulation; the value of money would also be tied to the value of one commodity. This creates additional implications that do not necessarily apply to all full-reserve banking proposals, as it would render the [[central bank]]'s functions largely redundant.

Among criticisms of a full-reserve banking system combined with [[commodity money]] (e.g. a [[gold standard]]) is that it implicitly means that there is no government-controlled "[[monetary policy]]" ''at all''. Critics also argue that full-reserves, commodity money system leaves the economy with an inelastic money supply, not able to be manipulated by a central bank. Proponents argue that the lack of a government-manipulated money supply (the lack of a "monetary policy") and the presence of a sound currency (as opposed to an "elastic" one) are ''advantages'', not disadvantages. More subtly, since full-reserve banking combined with commodity money means that during periods of high [[demand for money]], the prices of other goods must fall, the broader real economy may bear adjustment costs that are (in principle) no different from those it would bear during periods of moderate inflation (that is, if the cost of adjusting to absolute prices is low or negligible, moderate inflation should be no more problematic than moderate deflation).<ref>[http://books.google.com/books?id=DFv6OzeBWpQC&pg=PP3&dq=steven+horwitz++banking&sig=VZasp_8pGVvpQsFKMI3W9yp4AlM#PPA231,M1 Microfoundations and Macroeconomics: An Austrian Perspective], Steven Horwitz, pp. 223-232.</ref> However, this subsequent deflationary effect is likely to have deleterious consequences if some prices are [[Sticky (economics)|stickier]] than others; in particular, [[wages]] are often significantly stickier than other prices. Most mainstream academic economists believe that given wage stickiness, the adjustment costs of deflation are significantly higher than an equivalent inflation.<ref> {{cite web|url=http://econlog.econlib.org/archives/2009/10/additive_shocks.html |title=Additive Shocks |accessdate=2009-10-29 |last=Caplan |first=Bryan |date=2009-10-28 |work=EconLog |publisher=Library of Economics and Liberty }}</ref>

== Current examples ==

There are currently no examples of full reserve banking with an established history of operation. However, a variety of organisations aspire to provide full-reserve banking or claim to do so.

===Islamic banking===

In theory, [[Islamic banking]] is often synonymous with full-reserve banking, with banks achieving a 100% reserve ratio.<ref name=TFP>[http://faculty.capebretonu.ca/mchoudhu/money.htm A MONETARY SYSTEM WITH 100-PER CENT RESERVE REQUIREMENT AND THE GOLD STANDARD: THEORY, FACT AND POLICY]</ref><ref>{{cite journal |last=Siegfried |first=NA |year=2001 |month=April |title=Concepts of Paper Money in Islamic Legal Thought |journal=Arab Law Quarterly |volume=16 |issue=4 |pages=319–332 |issn=0268-0556 |url=http://www.springerlink.com/content/9ky3cbkr791256vq/ |accessdate=2006-10-16 |doi=10.1163/A:1013840123393 |format={{Dead link|date=June 2008}} – <sup>[http://scholar.google.co.uk/scholar?hl=en&lr=&q=author%3ASiegfried+intitle%3AConcepts+of+Paper+Money+in+Islamic+Legal+Thought&as_publication=Arab+Law+Quarterly&as_ylo=2001&as_yhi=2001&btnG=Search Scholar search]</sup>}}</ref> In practice, however, this is not the case, and no examples of 100 per cent reserve banking are observed. According to [[Islami Bank]] Bangladesh: <ref name="urlConcept and ideology :: Issues and problems of Islamic banking">{{cite web |url=http://web.archive.org/web/20070716151628/http://www.islamibankbd.com/page/ih_12.htm |title=Concept and ideology :: Issues and problems of Islamic banking |format= |work= |accessdate=}}</ref>
{{quote|The fractional reserve system versus 100% reserves would have different policy implications. Under the former system, banks would have the ability to draw profits on funds that they have exerted no productive effort. Such earning is against the original spirit of Islamic banking. One solution may lie in the nationalization of commercial banks, which has already occurred in most of these countries. As regards the latter, we have a fair amount of theoretical insight from the western literature but do not have any valuable empirical observations on the operations of 100% reserves even in countries that have adopted Islamic banking. These Islamic banks are still operating under fractional reserve system. Hence, the operation of monetary policy under 100% reserves system needs further research.}}

===Digital gold or silver===

Since 1996, a form of [[private currency]] called [[digital gold currency]] has been in circulation. Many of these currency providers claim to act like full-reserve "[[private bank]]s" with a one-to-one ratio of the currency they issue and the hard asset, usually [[gold]] or [[silver]], that they store as reserves. The most prominent examples are [[GoldMoney]] and [[e-gold]], with the latter encountering various issues.<ref>[http://www.thestandard.com/news/2008/07/22/internet-currency-firm-pleads-guilty-money-laundering Internet currency firm pleads guilty to money laundering]</ref> Also available are physical gold exchangers and storage providers, such as [[BullionVault]].

Some [[monetary reform]]ers believe a new free market will emerge in money production and distribution, as the [[Internet]] allows renewed decentralisation and competition in this area, eroding the [[central government]]'s and bankers' old [[monopoly]] control of the [[means of exchange]].<ref>[http://www.lewrockwell.com/podcast/?p=episode&name=2009-02-01_095_not_losing_your_head.mp3 ''Not Losing Your Head''], Speech by Lew Rockwell</ref><ref>[http://www.mises.org/store/Free-Market-Monetary-System-A-P553.aspx?AFID=14 ''Free Market Money System''] by F.A. Hayek</ref> Some monetary reformers believe that in a genuine free market, where government did not impose a monopoly currency on the populace, a predominantly full-reserve banking system, backed by a [[gold standard]] or [[silver standard]] monetary system, would arise spontaneously out of the [[free market]].<ref>[http://www.mises.org/books/Theory_Money_Credit/Contents.aspx The Theory of Money and Credit], Ludwig von Mises</ref>

== See also ==
<div style="column-count:3;-moz-column-count:3;-webkit-column-count:3">
*[[Gold standard]]
*[[Irving Fisher]]
*[[Ludwig von Mises]]
*[[Money creation]]
*[[Monetary reform]]
*[[Murray Rothbard]]
*[[Reserve requirement]]
*[[Seignorage]]
*[[Silver standard]]
</div>

==References==
{{Reflist|colwidth=30em}}

== External links ==
*[http://www.mises.org/Books/mysteryofbanking.pdf ''The Mystery of Banking''], Murray Rothbard
*[http://www.mises.org/books/desoto.pdf ''Money, Bank Credit and Economic Cycles''], [[Jesus Huerta de Soto|Huerta de Soto, J.]] (2006), Ludwig von Mises Institute
*[http://mises.org/books/moneyproduction.pdf ''The Ethics of Money Production''], [[Jörg Guido Hülsmann]] (2008), Ludwig von Mises Institute
*[http://mises.org/journals/qjae/pdf/qjae1_3_7.pdf Free Banking and Fractional Reserves: a Comment] ([[Pascal Salin]])
*[http://www.apvision.com.pk/company.html Alternatives to Conventional Banking Products By Maryam Ayaz]
*[http://www.mises.org/journals/scholar/salin.pdf In Defence of Fractional Reserve Banking] (Pascal Salin)
*[http://elib.suub.uni-bremen.de/diss/docs/E-Diss1237_Dis_Money_upside_down.pdf Money upside down]
*[http://www.seek2know.net/pdf.html Transforming Money]
*[http://mars.superlink.net/~neptune/BankFAQ.html Free Banking FAQ]
*[http://www.monetary.org/greeningthedollar.ppt Greening the Dollar] Reclaiming our democratic Values Through Monetary Reform

[[Category:Banking]]
[[Category:Money]]

Frank Fetter

2011-01-27T11:21:46Z

Paul: /* Professional life */ correct spacing

{{Wikipedia text}}
[[File:Frank fetter.jpg|thumb|right]]
'''Frank Albert Fetter''' (8 March 1863 – 21 March 1949) was an [[United States|American]] economist of the [[Austrian School]]. Fetter's treatise, ''The Principles of Economics'', contributed to an increased American interest in the Austrian School, including the theories of [[Eugen von Böhm-Bawerk]], [[Friedrich von Wieser]], [[Ludwig von Mises]] and [[Friedrich Hayek]].

Fetter notably debated [[Alfred Marshall]], presenting a theoretical reassessment of land as capital. Fetter's arguments have been credited with prompting mainstream economists to abandon the [[Henry George|Georgist]] idea "that land is a unique factor of production and hence that there is any special need for a special theory of ground rent...."<ref name="Blaug" /> A proponent of the [[subjective theory of value]], Fetter emphasized the importance of [[time preference]] and rebuffed [[Irving Fisher]] for abandoning the pure time preference theory of interest that Fisher had earlier espoused in his 1907 book, ''The Rate of Interest''.<ref name="Rothbard" />

==Early life and education==
Frank Fetter was born in [[Peru, Indiana]] to a [[Quaker]] family during the height of the [[American Civil War]].<ref name="Brown">Brown, J. Douglas. [http://etcweb.princeton.edu/CampusWWW/Companion/fetter_frank_albert.html "Fetter, Frank A."] ''A Princeton Companion.'' (Alexander Leitch, ed.). Princeton University Press, 1978.</ref> Fetter proved an able student as a youth, as demonstrated by his acceptance to [[Indiana University]] in 1879 when he was only sixteen years old. At Indiana, he joined the Phi Kappa Psi Fraternity.<ref>"Beta Chapter of Indiana." ''Grand catalogue of the Phi kappa psi fraternity, 1922''. Hilburn & West. [http://books.google.com/books?id=00tNAAAAYAAJ&lpg=PA241&ots=H5zGkgKquD&dq=frank%20fetter%20phi%20kappa%20psi&pg=PA241#v=onepage&q&f=false]</ref> Fetter was on track to graduate with the class of 1883, but left college to run his family's bookstore upon news of his father's declining health. Working in the bookstore offered an opportunity for the young man to acquaint himself with some of the economic ideas that would later prove formative. Chief among the intellectual influences Fetter encountered at this time was [[Henry George]]'s ''Progress and Poverty'' (1879).<ref name="Herbener">[http://www.mises.org/content/fetterbio.asp Herbener, Jeffrey. "Frank A. Fetter: A Forgotten Giant." ''Mises.org'']</ref>
[[File:Frank fetter-young.gif|right|thumb]]
After eight years, Fetter returned to academia and finally completed his [[Bachelor of Arts|B.A.]] in 1891. In 1892, [[Jeremiah Jenks|Jeremiah W. Jenks]]—who had taught Fetter at Indiana University—acquired a teaching position at [[Cornell University]] at the new [[President White School of History and Political Science]] and subsequently secured a fellowship for Fetter at that institution. Fetter completed his [[Master of Philosophy]] degree the same year. Jenks then convinced Fetter to study, as Jenks himself had, under [[Johannes Conrad]] at the [[Sorbonne]] in [[Paris, France]]. Fetter earned his [[Ph.D.]] in 1894 from the [[University of Halle]] in Germany, where he wrote his [[doctoral dissertation]], a critique of [[Thomas Robert Malthus#An Essay on the Principle of Population|Malthusian population theory]].<ref name="Herbener" />

==Professional life==
After earning his doctoral degree, Fetter accepted an instructorship at Cornell, but quickly left after being offered a position as a professor at Indiana University. In 1898, [[Stanford University]] lured him away from Indiana, but Fetter resigned from Stanford three years later over a dispute regarding [[academic freedom]]. After leaving Stanford in 1901, Fetter went back to Cornell, where he remained for ten years.<ref name="Brown" /> In 1911, he again found himself in professional transition, accepting the position of chairman in an interdisciplinary department at [[Princeton University]] which incorporated [[history]], [[politics]], and economics.<ref name="Herbener" /> Fetter was the first chairman of Princeton University's Department of Economics and Social institutions.<ref name="Brown" />

Despite his ideological proximity and personal rapport with eminent Austrian School economists such as [[Eugen von Böhm-Bawerk]] and [[Friedrich von Wieser]], as well as his favorable reviews of works by [[Ludwig von Mises]] and [[F. A. Hayek]], Fetter referred to himself, [[Thorstein Veblen]], and [[Herbert J. Davenport]] more specifically as being members of the "American Psychological School."<ref name="Newschool">[http://cepa.newschool.edu/het/profiles/fetter.htm "Frank A. Fetter, 1863–1949."] [[The New School]].</ref> The appellation "Psychological School" is now generally considered to be synonymous with "[[Austrian School]]."<ref>Israel M. Kirzner (1987). "Austrian School of Economics," The New Palgrave: A Dictionary of Economics, v. 1, pp. 145-51.</ref>

Fetter was a staunch opponent of [[Franklin D. Roosevelt]]'s plan to end the [[gold standard]] and worked with other economists in lobbying against the move to a [[fiat currency]]. As some indication of Fetter's role in these efforts,
<blockquote>In January 1933, a letter was sent to the president-elect, urging him not only to lower tariff barriers to revive international trade, but to maintain the gold standard "unflinchingly." The letter was signed by a number of prominent "traditional" economists, headed by the American "Austrian," Frank A. Fetter, of Princeton.<ref>[[Ralph Raico|Raico, Ralph]]. [http://www.fff.org/freedom/0700f.asp "FDR—The Man, the Leader, the Legacy."] ''Freedom Daily''. July 2000. [[Future of Freedom Foundation]].</ref></blockquote>

==Theoretical contributions in economics==
===Land as capital===
Fetter participated in a notable debate with [[England|English]] economist [[Alfred Marshall]], both through his 1904 ''Principles of Economics'' and a number of journal articles in the [[American Economic Association]]'s journals and in the ''[[Quarterly Journal of Economics]]''. He contested Marshall's position that land is theoretically distinct from capital.<ref>[http://www.encyclopedia.com/doc/1G1-97188176.html "Land as a factor of production."] ''The American Journal of Economics and Sociology''. 1 December 2002.</ref> Fetter argued that such a distinction was impractical, stating that,
<blockquote>The notion that it is a simple matter to distinguish between the yield of natural agents and that of improvements is fanciful and confusing.... The objective classification of land and capital as natural and artificial agents is a task that always must transcend the human power of discrimination.<ref>Fetter, Frank. [http://www.econlib.org/library/NPDBooks/Fetter/ftCIR.html ''Capital, Interest, and Rent'']. Murray N. Rothbard, Ed. Kansas City: Sheed, Andrews, and McMeel, Inc. 1977. Part 2, Essay 2, para. 13.</ref></blockquote>

Fetter's stand on this issue further led him to oppose [[Georgism|Georgist]] ideas like the [[land value tax]]. [[Mark Blaug]], a specialist in the history of economic thought, credits Fetter and [[John Bates Clark]] with influencing mainstream economists to abandon the idea "that land is a unique factor of production and hence that there is any special need for a special theory of ground rent.... This is in fact the basis of all the attacks on Henry George by contemporary economists and certainly the fundamental reason why professional economists increasingly ignored him."<ref name="Blaug">Blaug, Mark. Interview in Andelson, Robert V. [http://books.google.com/books?id=-fdaZGXDF4cC&pg=RA1-PA745&lpg=RA1-PA745&dq=fetter+%22land+value+tax%22&source=web&ots=kTrNZReHay&sig=--g6F89lzbPOKOVx8EKww7XKoBU#PRA1-PA686,M1 ''Critics of Henry George: An Appraisal of Their Strictures on Progress and Poverty'']. Blackwell Publishing. 1979. p. 686.</ref>

===Applications of subjective value theory===
Fetter believed in the [[subjective theory of value]], and thus supported a pure [[time preference]] theory of [[interest]]. [[Richard Ebeling]] wrote that Fetter "constructed a consistent theory of value, price, cost, and production in the context of emphasizing the time-valuational element in all consumption and production choices."<ref>Ebeling, Richard. [http://www.fff.org/freedom/0600h.asp "Book Review: ''15 Great Austrian Economists''."] ''Freedom Daily''. June 2000. Future of Freedom Foundation.</ref> According to [[Jeffrey Herbener]], Fetter asserted that "just as the price of each consumer good is determined solely by subjective value, the rate of interest is determined solely by time preference."<ref name="Herbener" />

Likewise, Herbener explains, this led Fetter to also conclude that "[t]he rental price of each producer good is [[Imputation (economics)|imputed]] to it by entrepreneurial demand and is equal to its discounted [[marginal value]] product. The capital value of each durable good is equal to the discounted value of its future rents." Fetter's contribution to the Austrian subjectivist tradition, then, is that he "showed how this uniform, subjective theory of value implies the demise of [[socialism|socialist]] theories of [[Exploitation#Marxist theory|labor exploitation]], [[David Ricardo|Ricardian]] theories of rent, and productivity theories of interest."<ref name="Herbener" />

===Criticism of Fisher's theory of interest===
In "Interest Theories, Old and New" (1914), Fetter criticized [[Irving Fisher]] for abandoning the pure time preference theory of interest that Fisher had earlier espoused in his 1907 book, ''The Rate of Interest'', a tome which had heavily influenced Fetter. As [[Murray Rothbard]] recounts, upon further review of Fisher's earlier work,
<blockquote>...Fetter discovered that the seeds of error were in Fisher's publication of 1907. Fisher had stated that valuations of present and future goods imply a preexisting money rate of interest, thereby suggesting that a pure time-preference explanation of interest involves circular reasoning. By way of contrast, and in the course of explaining his own pure time-preference, or "capitalization," theory of interest, Fetter showed that time valuation is prerequisite to the determination of the market rate of interest.<ref name="Rothbard">Rothbard, Murray N. [http://www.mises.org/story/1965 "Fetter the Radical." Introduction to ''Capital, Interest, and Rent'']. Institute for Humane Studies. Kansas City: Sheed Andrews and McMeel, Inc., 1977.</ref></blockquote>


==Reception in academia==
In 1909, at the age of forty-six, Fetter was awarded an honorary [[LL.D.]] from [[Colgate University]],<ref name="Brown" /> and he was made president of the American Economic Association in 1913.<ref>[http://www.vanderbilt.edu/AEA/officerspast.htm "Past AEA Officers." American Economic Association]</ref> Additional honorary doctoral degrees were conferred on Fetter by [[Occidental College]] in 1930 and [[Indiana University]] in 1934.<ref>Howard, Stanley E. and E. W. Kemmerer. [http://links.jstor.org/sici?sici=0002-8282%28194303%2933%3A1%3C230%3AABN%3E2.0.CO%3B2-G&size=LARGE "A Birthday Note."] ''[[American Economic Review]]'', Vol. 33, No. 1, Part 1 (March 1943), pp. 230–235. ''JSTOR''.</ref> He was a fellow of the [[American Academy of Arts and Sciences]] and a member of the [[American Philosophical Society]]. In 1927, he was awarded the [[Carl Menger|Karl Menger]] Medal by the [[Austrian Economic Society]].<ref name="Brown" />

Fetter's treatise, ''Principles of Economics'' (1904), has been described by Herbener as "unsurpassed until [[Ludwig von Mises]]'s treatise of 1940, ''Nationaloekonomie''."<ref name="Herbener" /> In Rothbard's preface to the 1977 edition of Fetter's ''Capital, Interest, and Rent'', he notes that he was first introduced to Fetter's work via a citation in Mises' ''[[Human Action]]'' and describes Fetter's views on interest and rent as being "Austrian" and influential on his own views.
<blockquote>...while reading Fetter's oeuvre in the course of writing my ''[[Man, Economy, and State]]''... I was struck by the brilliance and consistency of his integrated theory of distribution and by the neglect of Fetter in current histories of economic thought, even by those that are Austrian oriented. For Fetter's systematic theory, while challenging and original (particularly his theories of interest and rent), was emphatically in the Austrian school tradition.<ref name="Rothbard" /> </blockquote>

Upon Fetter's death in 1949, J. Douglas Brown, who would later be named Provost of Princeton University, wrote a "Memorial" to Fetter for the ''[[American Economic Review]]''. He opened the tribute with the announcement that "with the death of Frank Albert Fetter the great company of American economists has suffered an irreparable loss."<ref>Brown, J. Douglas. [http://links.jstor.org/sici?sici=0002-8282%28194909%2939%3A5%3C979%3AMFAF1%3E2.0.CO%3B2-E&size=SMALL "Memorial: Frank Albert Fetter], 1863–1949." ''American Economic Review''. Vol. 39, No. 5 (September 1949), p. 979.</ref>

==Books==
* ''Versuch einer Bevolkerungslehre ausgehen von einer Kritic des Malthus'schen Bevolkerungsprincips'' (Translation: "An Essay on Population Doctrine based on a Critique of the Population Principles of Malthus"). Jena: Gustav Fischer, 1894.
* ''[http://mises.org/etexts/fetter.asp The Principles of Economics]''. [http://mises.org/etexts/fetter.pdf] New York: The Century Co., 1905
* ''[http://chestofbooks.com/finance/economics/Source-Book-In-Economics/ Source Book in Economics]''. New York: The Century Company., 1912.
* ''[http://chestofbooks.com/finance/economics/Economics1-Economic-Principles/ Economics, Volume 1: Economic Principles]''. [http://mises.org/books/principles-fetter.pdf] New York: The Century Co., 1915.
* ''Manual of References and Exercices in Economics for Use with, Vol. 1: Economic Principles''. New York: The Century Co., 1916.
* ''[http://chestofbooks.com/finance/economics/Economics2-Modern-Economic-Problems/ Economics, Vol. 2: Modern Economic Problems]''. [http://mises.org/Books/moderneconomicprob.pdf] New York: The Century Co., 1916. Revised 2nd edition, 1922.
* ''Manual of References and Exercices in Economics for Use with, Vol. 2: Modern Economics''. New York: The Century Co., 1917.
* ''Masquerade of Monopoly''. New York: Harcourt, Brace & Co., 1931.
* ''[http://www.econlib.org/library/NPDBooks/Fetter/ftCIR.html Capital, Interest and Rent: Essays in the theory of distribution]''. [http://mises.org/books/capital-fetter.pdf] [[Institute for Humane Studies]]. Kansas City: Sheed Andrews and McMeel, Inc., 1977.

==Articles==
*"[http://socserv2.mcmaster.ca/~econ/ugcm/3ll3/fetter/capital.htm Recent Discussion of the Capital Concept]" by Frank A. Fetter, ''Quarterly Journal of Economics'', (1900)

==References==
<references/>

==External links==
*[http://mises.org/literature.aspx?action=author&Id=117 Works by Frank Fetter] at the [[Ludwig von Mises Institute]].
*[http://www.indiana.edu/~liblilly/lilly/mss/html/fetter.html Information] on Fetter's papers housed at Indiana University.
*[http://www.gutenberg.org/author/Frank_Albert_Fetter Works] by Frank Fetter at Project Gutenberg
{{DEFAULTSORT:Fetter, Frank}}
[[Category:Economists]]

F.A. Hayek

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Paul: Redirect to Friedrich Hayek

#REDIRECT [[Friedrich Hayek]]

Argumentation:ABCT

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Paul: /* Business cycle as a historical fact */ typo correction

This highly experimental page is devoted to the attempt to create an argumentation chain for the [[Austrian Business Cycle Theory]]. It is not intended to cover every possible angle, merely to build up one (or more) ways to explain ABCT. People may pick up any part in their own argumentation.

==General assumptions==
===Money is not wealth===
In everyday life money is a good indicator for wealth and is sometimes seen as the same thing. For an extreme example of why it isn't the case, check the [[hyperinflation]] in [[Zimbabwe]] or [[Inflation in the Weimar Republic|Weimar Germany]].

The value of money is [[subjective]], it is what people can expect to exchange it for. Having more money does not necessarily mean you will be able to buy more for it.

{{See also|Money}}

===Business cycle as a historical fact===
Entrepreneurs try to predict the future state of the market (consumer demand, prices of their inputs, etc.) and plan accordingly. Of course, sometimes they fail - that is only human and predicting the future is always hard.

What is known as the bust - a part of the business cycle - is not simply failure. It is a large number of failures, coming apart at the same time, coupled with a general downturn in economic activity. The bust is preceded by a boom - an increase in economic activity, often later perceived as unhealthy or speculative in nature. The regularly occurring booms and and busts were observed from approximately late eighteenth century.

{{See also|Business cycle}}
{{See also|Entrepreneurship}}

==Economic growth and the interest rate==
===Lowering of interest rate with increased savings===
Interest rates coordinate investment and consumption across time. When interest rates come down naturally it is because people are saving more. Banks become flush with cash which causes them to lower rates to stimulate loans.

Entrepreneurs are receiving two signals from the market when this happens:
# That new resources are available to make new investments.
# That demand exists that is not currently being satisfied (people are forgoing purchases for the future).

When investment is made in this environment, there is, as always, the possibility of failure, but the investment is backed by actual saved resources and there is pent up consumer demand that can make it profitable upon completion.

The lower interest rate is also signal for consumers that there are more funds they can borrow and enjoy (providing they repay them, of course).

{{See also|Interest rate}}
{{See also|Saving}}

==Monetary policy==
===Perfect creation of new money===
Many economists claim, that by creating new money out of nowhere can be created economic wealth.

Let's consider first an unrealistic scenario. An angel listens to the pleas of many people for more money and with magic doubles the amount of money everyone has (the Angel Gabriel model by [[David Hume]]). What would happen?

While everybody would be happy to have twice the money as before, society wouldn't be better off - there would be no increase in capital, productivity or goods. The only effect would be the (approximate) doubling of prices and the currency would lose half of its purchasing power.

{{See also|Money}}

===Creation of new money in reality===
What if interest rates are brought down artificially, but not so obviously, for example by a [[central bank]] like the [[Federal Reserve]]? Entrepreneurs still receive and act upon the same economic signals, but no new investable resources exist to complete the new projects, and no pent up demand exists to justify their undertaking.

But the situation is much worse than that. The lower rates encourage people to take out what savings they have and spend it now. (And more consumers are encouraged to borrow and enjoy consumption.) As a result, actual demand will be even lower when the completed projects are ready to enter the market.

This is what is meant by [[malinvestment]] and overconsumption from changing interest rates. It creates an artificial boom in economic activity followed by a bust when the economy realizes the errors it made.

There is no free lunch. All of those rate cuts have to eventually be increased, at which point all of the stimulative forces reverse and the bad investments reveal themselves. The alternative to rate increases is continued inflation, which can only end in a [[hyperinflation|collapse of the currency]].

{{See also|Inflation}}

===Consequences===
The creation of new money out of thing air really creates what appears to be growth. Signaling, that more resources are available, businessmen invest, start new projects, employment rises, consumers enjoy more consumption, analytics rejoice.

This fake prosperity - also known as a boom - ends in a very real crisis - the bust. The [[Malinvestment|wrong investments]] reveal, that many resources have been wasted on nonviable projects and produced goods the customers didn't want. Many projects cannot be completed at all. [[Unemployment]] will rise and the economy will suffer a crisis.

The repeating of the boom-and-bust is the familiar [[business cycle]].

{{See also|Malinvestment}}
{{See also|Business cycle}}
{{See also|Austrian Business Cycle Theory}}

[[Category:Argumentation]]
[[Category:Austrian School of Economics]]
{{Stub}}

Austrian School

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Paul: /* Criticism of mainstream practices */ typo correction

{{TOC right}}
The '''Austrian School of Economics''' derives its name from its Austrian founders and early supporters, including [[Carl Menger]], [[Eugen von Böhm-Bawerk]] and [[Ludwig von Mises]]. Other significant Austrian writers and economists include [[Murray Rothbard]], Nobel Laureate [[Friedrich Hayek]] and [[Henry Hazlitt]]. Current research is produced by, among many others, scholars from the [[Mises Institute|Ludwig von Mises Institute]], and "Austrian" economists can now come from any part of the world. They are identified with the School through their shared views on the nature of economic science and its proper methodology.

The School emphasizes the spontaneous organizing power of the price mechanism and holds that the complexity of subjective human choices makes mathematical modeling of the evolving market extremely difficult (or impossible) and therefore its scholars eschew what they consider "naïve" and pointless mathematical modelling of the economy, considering much of mainstream economics a form of economic charlatanism.<ref>[http://mises.org/daily/3582 Keynesians Can't Predict], L. Albert Hahn, ''The Freeman'', October 6, 1952</ref> Its proponents tend to advocate the strong protection of private property rights and the strict enforcement of voluntary contractual agreements between economic agents, but otherwise advocate a laissez faire approach to the economy and hold that the smallest imposition of coercive force (especially government-imposed force) on commercial transactions is the most effective way to secure long-run economic stability and wellbeing.

In particular, they argue for an extremely limited role for government regulation in commercial affairs and the smallest possible amount centralized government intervention in the economy, especially in the area of money production (advocating instead the abolition of coercive [[legal tender]] laws and the return to full reserve - or free - banking, where the financial system is decentralized and not dominated or controlled by [[monopoly]] government or a [[monopoly]] central bank).

==History==
While the Austrian School of Economics has connections as far as 15th century, it began with notable 19th century economists of Austrian origin. Austrian economists no longer need to be from Austria, and the term describes a particular school of economic thought rather than the nationality of its practitioners.

===Pre-Austrian Economists===
With noted contributions of earlier thinkers, like [[Nicole Oresme]], the Austrian school traces its roots to the followers of St. Thomas Aquinas, writing and teaching at the [[School of Salamanca|University of Salamanca]] in Spain.

These Late Scholastics established the first modern economic theories and argued, in current terms, for free [[trade]] and property rights. Over the course of several generations, they discovered and explained the laws of [[supply]] and [[demand]], the cause of [[inflation]], the operation of foreign exchange rates, and the subjective nature of economic [[value]]. They were advocates of property rights and the freedom to contract and trade. "Austrians share the scholastic belief that there is no such thing as an economic science dealing with autonomous variables. Economic problems are aspects of larger social phenomena; and it is most expedient to deal with them as such, rather than to analyze them in some twisted separation."<ref name="Hulsmann_scholastics">Jörg Guido Hülsmann. [http://www.mises.org/books/moneyproduction.pdf "Ethics of Money Production"], online version, Introduction p. 12, referenced 2009-05-10.</ref>

The first general treatise on economics, [http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/cantillon/index.html Essay on the Nature of Commerce], was written in 1730 by [[Richard Cantillon]], a man schooled in the scholastic tradition. Born in Ireland, he emigrated to France. He saw economics as an independent area of investigation, and explained the formation of [[price]]s using the "thought experiment." He understood the market as an entrepreneurial process, and held to an Austrian theory of money creation: that it enters the economy in a step-by-step fashion, disrupting prices along the way.

Cantillon was followed by [[Anne Robert Jacques Turgot]], the pro-market French aristocrat and finance minister under the ''ancien regime'', one of the [[Physiocrats]]. His economic writings were few but profound. His paper "Value and Money" spelled out the origins of money, and the nature of economic choice: that it reflects the subjective rankings of an individual's preferences. Turgot solved the famous [[Wikipedia:Paradox of value|diamond-water paradox]] that baffled later classical economists, articulated the law of diminishing returns, and criticized usury laws (a sticking point with the Late Scholastics). He favored a classical liberal approach to economic policy, recommending a repeal of all special privileges granted to government-connected industries.

Turgot was the intellectual father of a long line of great French economists of the eighteenth and nineteenth century, most prominently [[Jean-Baptiste Say]] and [[Frederic Bastiat|Claude-Frederic Bastiat]]. Say was the first economist to think deeply about economic method. He realized that economics is not about the amassing of data, but rather about the verbal elucidation of universal facts (for example, wants are unlimited, means are scarce) and their logical implications.

Say discovered the productivity theory of resource pricing, the role of [[capital]] in the division of labor, and "[[Say's Law]]": there can never be sustained "overproduction" or "underconsumption" on the free market if prices are allowed to adjust. He was a defender of laissez-faire and the industrial revolution, as was Bastiat. As a free-market journalist, Bastiat also argued that nonmaterial services are subject to the same economic laws as material [[good]]s. In one of his many economic allegories, Bastiat spelled out the "[[Parable of the broken window|broken-window fallacy]]" later popularized by [[Henry Hazlitt]].

Despite the theoretical sophistication of this developing pre-Austrian tradition, the [[Wikipedia:Classical economics|British school]] of the late eighteenth and early nineteenth centuries won the day, mostly for political reasons. This British tradition (based on the objective-cost and labor-productivity theory of value) ultimately led to the rise of the Marxist doctrine of capitalist exploitation.

===The First Austrians===
The dominant British tradition received its first serious challenge in many years when [[Carl Menger]]'s [[Wikipedia:Principles of Economics|Principles of Economics]] ([http://mises.org/etexts/menger/principles.asp text]) was published in 1871. Menger, the founder of the Austrian School proper, resurrected the Scholastic-French approach to economics, and put it on firmer ground.

Together with the contemporaneous writings of [[Wikipedia:Leon Walras|Leon Walras]] and [[Wikipedia:William Stanley Jevons|Stanley Jevons]], Menger spelled out the subjective basis of [[Value|economic value]], and fully explained, for the first time, the theory of [[Utility|marginal utility]] (the greater the number of units of a [[good]] that an individual possesses, the less he will value any given unit). In addition, Menger showed how money originates in a free market when the most marketable [[commodity]] is desired, not for consumption, but for use in trading for other goods.

Menger's book was a pillar of the "[[Wikipedia:Marginalist revolution#The_Marginal_Revolution|marginalist revolution"]] in the history of economic science. When Mises said it "made an economist" out of him, he was not only referring to Menger's theory of money and prices, but also his approach to the discipline itself. Like his predecessors in the tradition, Menger was a classical liberal and methodological individualist, viewing economics as the science of individual choice. His Investigations, which came out twelve years later, battled the [[Wikipedia:Historical school of economics|German Historical School]], which rejected theory and saw economics as the accumulation of data in service of the state. They took great exception to his defense of "theory" and gave the work of Menger and his followers the derogatory name "Austrian school" because of their faculty positions at the University of Vienna. The term stuck.<ref name="School">[http://mises.org/about/3467#Austrian_Economics "FAQ: What is Austrian Economics"], ''[[Mises Institute]]'', referenced 2009-04-27.</ref>

As professor of economics at the University of Vienna, and then tutor to the young but ill-fated [[Wikipedia:Rudolf, Crown Prince of Austria|Crown Prince Rudol]]f of the House of Habsburg, Menger restored economics as the science of human action based on deductive logic, and prepared the way for later theorists to counter the influence of socialist thought. Indeed, his student [[Wikipedia:Friederich von Wieser|Friederich von Wieser]] strongly influenced Friedrich von Hayek's later writings. Menger's work remains an excellent introduction to the economic way of thinking.

Menger's admirer and follower at the University of Innsbruck, [[Eugen von Böhm-Bawerk]], took Menger's exposition, reformulated it, and applied it to a host of new problems involving [[value]], [[price]], [[capital]], and interest. His [[Wikipedia:Capital and Interest|History and Critique of Interest Theories]] ([http://mises.org/books/capitalandinterest.pdf pdf]), appearing in 1884, is a sweeping account of fallacies in the history of thought and a firm defense of the idea that the interest rate is not an artificial construct but an inherent part of the market. It reflects the universal fact of "[[time preference]]," the tendency of people to prefer satisfaction of wants sooner rather than later (a theory later expanded and defended by [[Wikipedia:Frank Fetter|Frank Fetter]]<ref name="Fetter">Jeffrey Herbener. [http://mises.org/about/3231 "Frank A. Fetter (1863-1949): A Forgotten Giant"], ''[[Mises Institute]]'', referenced 2009-04-28.</ref>).

Böhm-Bawerk's ''Positive Theory of Capital'' ([http://mises.org/books/positivetheory.pdf pdf]) demonstrated that the normal rate of business profit is the interest rate. Capitalists [[Saving|save]] money, pay laborers, and wait until the final product is sold to receive profit. In addition, he demonstrated that [[capital]] is not homogeneous but an intricate and diverse structure that has a time dimension. A growing economy is not just a consequence of increased capital investment, but also of longer and longer processes of production.

Böhm-Bawerk engaged in a prolonged battle with the [[Wikipedia:Marxian Economics|Marxists]] over the exploitation theory of capital, and refuted the socialist doctrine of capital and wages long before the communists came to power in Russia. Böhm-Bawerk also conducted a seminar that would later become the model for Mises's own Vienna seminar.

Böhm-Bawerk favored policies that deferred to the ever-present reality of economic law. He regarded interventionism as an attack on market economic forces that cannot succeed in the long run. In the last years of the Habsburg monarchy, he three times served as finance minister, fighting for balanced budgets, sound money and the [[gold standard]], free trade, and the repeal of export subsidies and other monopoly privileges.

===Mises and Hayek===
It was Böhm-Bawerk's research and writing that solidified the status of the Austrian School as a unified way of looking at economic problems, and set the stage for the School to make huge inroads in the English-speaking world. But one area where Böhm-Bawerk had not elaborated on the analysis of Menger was [[money]], the institutional intersection of the "micro" and "macro" approach. The young [[Ludwig von Mises]]<ref name="Mises">Murray N. Rothbard. [http://mises.org/about/3248 "Ludwig von Mises (1881-1973)"], ''[[Mises Institute]]'', referenced 2009-04-26.</ref>, economic advisor to the Austrian Chamber of Commerce, took on the challenge.

The result of Mises's research was ''[[The Theory of Money and Credit]]'' ([http://mises.org/books/Theory_Money_Credit/Contents.aspx text]), published in 1912. He spelled out how the theory of [[Utility|marginal utility]] applies to [[money]], and laid out his "regression theorem," showing that money not only originates in the market, but must always do so. Drawing on the [[British Currency School|British Currency School]], [[Wikipedia:Knut Wicksell|Knut Wicksell]]'s theory of [[interest rate]]s, and Böhm-Bawerk's theory of the structure of production, Mises presented the broad outline of the [[Austrian Business Cycle Theory|Austrian theory of the business cycle]]. A year later, Mises was appointed to the faculty of the University of Vienna, and Böhm-Bawerk's seminar spent a full two semesters debating Mises's book.

Mises's career was interrupted for four years by [[Wikipedia:World War I|World War I]]. He spent three of those years as an artillery officer, and one as a staff officer in economic intelligence. 1919, at war's end, he published ''Nation, State, and Economy'' ([http://mises.org/nsande.asp text]), arguing on behalf of the economic and cultural freedoms of minorities in the now-shattered empire, and spelling out a theory of the economics of war. Meanwhile, Mises's monetary theory received attention in the U.S. through the work of [[Benjamin Anderson|Benjamin M. Anderson, Jr.]]<ref name="Anderson">Mark Thornton. [http://mises.org/about/3226 "Benjamin Anderson (1886-1949)"], ''[[Mises Institute]]'', referenced 2009-04-26.</ref>, an economist at Chase National Bank. (Mises's book was panned by [[John Maynard Keynes]], who later admitted he could not read German.{{Fact|reason=It would be cool to quote this somewhere.}})

In the political chaos after the war, the main theoretician of the now-socialist Austrian government was Marxist [[Wikipedia:Otto Bauer|Otto Bauer]]. Knowing Bauer from the Böhm-Bawerk seminar, Mises explained economics to him night after night, eventually convincing him to back away from Bolshevik-style policies.{{fact|reason=It would be great to have a resource on this.}} The Austrian socialists never forgave Mises for this, waging war against him in academic politics and successfully preventing him from getting a paid professorship at the university.

Undeterred, Mises turned to the problem of socialism itself, writing a blockbuster essay in 1921, which he turned into the book ''[[Socialism (book)|Socialism]]'' ([http://www.mises.org/books/socialism/contents.aspx text]) over the next two years. Socialism permits no private property or exchange in [[Capital|capital goods]], and thus no way for resources to find their most highly valued use. Socialism, Mises predicted, would result in utter chaos and the end of civilization.

Mises challenged the socialists to explain, in economic terms, precisely how their system would work, a task which the socialists had hitherto avoided. The debate between the Austrians and the socialists continued for the next decade and beyond, and, until the collapse of world socialism in 1989, academics had long thought that the debate was resolved in favor of the socialists.

Meanwhile, Mises's arguments on behalf of the free market attracted a group of converts from the socialist cause, including [[Friedrich Hayek|Hayek]], [[Wilhelm Roepke]]<ref name="Roepke">Shawn Ritenour. [http://mises.org/about/3241 "Wilhelm Röpke (1899-1966): Humane Economist"], ''[[Mises Institute]]'', referenced 2009-04-27.</ref> , and [[Wikipedia:Lionel Robbins|Lionel Robbins]]. Mises began holding a private seminar in his offices at the Chamber of Commerce that was attended by [[Wikipedia:Fritz Machlup|Fritz Machlup]]<ref name="Machlup">Mark Thornton. [http://mises.org/about/3237 "Biography of Fritz Machlup (1902-1983)"], ''[[Mises Institute]]'', referenced 2009-04-27.</ref>, [[Wikipedia:Oskar Morgenstern|Oskar Morgenstern]], [[Wikipedia:Gottfried von Haberler|Gottfried von Haberler]]<ref name="Haberler">[http://mises.org/journals/aen/aen20_1_1.asp "Between Mises and Keynes An Interview with Gottfried von Haberler (1900-1995)"], ''The Austrian Economics Newsletter'' Spring 2000 Volume 20, Number 1, referenced 2009-04-27.</ref>, [[Wikipedia:Alfred Schutz|Alfred Schutz]]<ref name="Schutz">Peter Kurrild-Klitgaard. [http://mises.org/journals/qjae/pdf/qjae6_2_2.pdf "The Viennese Connection: Alfred Schutz and the Austrian School"](pdf), ''The Quarterly Journal Of Austrian Economics'' Vol.6, no.2, referenced 2009-04-27.</ref>, Richard von Strigl<ref name="Strigl">Jörg Guido Hülsmann. [http://mises.org/about/3243 "Richard von Strigl (1891-1942)"], ''[[Mises Institute]]'', referenced 2009-04-27.</ref>, [[Wikipedia:Eric Voegelin|Eric Voegelin]], [[Wikipedia:Paul Rosenstein-Rodan|Paul Rosenstein-Rodan]], and many other intellectuals from all over Europe.

Also during the 1920s and 30s, Mises was battling on two other academic fronts. He delivered the decisive blow to the [[Wikipedia:Historical school of economics|German Historical School]] with a series of essays in defense of the deductive method in economics, which he would later call [[praxeology]] or the logic of [[action]]. He also founded the Austrian Institute for Business Cycle Research, and put his student Hayek in charge of it.

During these years, Hayek and Mises authored many studies on the [[business cycle]], warned of the danger of credit expansion, and predicted the coming currency crisis. This work was cited by the [[Wikipedia:Nobel Memorial Prize in Economic Sciences|Nobel Memorial Prize]] committee in 1974 when Hayek received the award for economics. Working in England and America, Hayek later became a prime opponent of [[Wikipedia:Keynesian economics|Keynesian economics]] with books on exchange rates, capital theory, and monetary reform. His popular book [[Road to Serfdom]] helped revive the classical liberal movement in America after the [[New Deal]] and [[World War II]]. And his series [[Law, Legislation, and Liberty]] ([http://books.google.com/books?id=wK49AAAAIAAJ&dq=Law,+Legislation+and+Liberty&printsec=frontcover&source=bl&ots=YAvviNdntc&sig=ZdwmZeD_vlQzvUM5nIIs2xmqp50&hl=en#PPP1,M1 online]) elaborated on the Late Scholastic approach to law, and applied it to criticize egalitarianism and [[Wikipedia:Nostrums|nostrums]] like [[Wikipedia:Social justice|social justice]].

===Outside of Austria===
In the late 1930s, after suffering from the [[Great Depression|worldwide depression]], Austria was threatened by a Nazi takeover. Hayek had already left for London in 1931 at Mises's urging, and in 1934, Mises himself moved to Geneva to teach and write at the [[Wikipedia:Graduate Institute of International Studies|International Institute for Graduate Studies]], later emigrating to the United States. Knowing Mises as the sworn enemy of national socialism, the Nazis confiscated Mises's papers from his apartment and hid them for the duration of the war. Ironically, it was Mises's ideas, filtered through the work of Roepke and the statesmanship of [[Ludwig Erhard]], that led to Germany's postwar economic reforms and rebuilt the country. Then, in 1992, Austrian archivists discovered Mises's stolen Vienna papers in a reopened archive in Moscow.<ref name="Documents">Richard M. Ebeling. [http://www.fff.org/comment/ed0397e.asp "The Discovery of the Lost Papers of Ludwig von Mises"], ''The Future of Freedom Foundation'', March 1997, referenced 2009-04-28.</ref>

While in Geneva, Mises's wrote his masterwork, ''Nationalokonomie'' ([http://www.mises.org/books/nationaloekonomie.pdf pdf]), and, after coming to the United States, revised and expanded it into [[Human Action]] ([http://mises.org/resources/3250 text]), which appeared in 1949. His student [[Murray N. Rothbard]]<ref name="Rothbard">David Gordon. [http://mises.org/about/3249 "Murray N. Rothbard (1926-1995)"], ''[[Mises Institute]]'', referenced 2009-04-28.</ref> called it "Mises's greatest achievement and one of the finest products of the human mind in our century. It is economics made whole." It remains the economic treatise that defines the School. Even so, it was not well received in the economics profession, which had already made a decisive turn towards Keynesianism, which accepted fiat money, fractional-reserve banking and central banking, as well as the premise that government had to intervene in the economy because somehow the free market sometimes did not "work" - all principles that Mises found objectionable and wrong.

Though Mises never held the paid academic post he deserved, he gathered students around him at New York University, just as he had in Vienna. Even before Mises emigrated, journalist [[Henry Hazlitt]] had become his most prominent champion, reviewing his books in the New York Times and Newsweek, and popularizing his ideas in such classics as ''[[Economics in One Lesson|Economics in One Lesson]]'' ([http://fee.org/download/13/ pdf]). Yet Hazlitt made his own contributions to the Austrian School. He wrote a line-by-line [[The Failure of the New Economics|critique]] ([http://www.mises.org/books/failureofneweconomics.pdf pdf]) of Keynes's ''[[The General Theory of Employment, Interest and Money|General Theory]]'' ([http://www.marxists.org/reference/subject/economics/keynes/general-theory/ text]), defended the writings of Say, and restored him to a central place in Austrian macroeconomic theory. Hazlitt followed Mises's example of uncompromising adherence to principle, and as a result was pushed out of four high-profile positions in the journalistic world.

Mises's New York seminar continued until two years before his death in 1973. During those years, [[Murray Rothbard]], a PhD student at Columbia, attended Mises's seminars and become student of the Austrian School, moving further away from "mainstream" economics the more he studied the Austrian School.

===Murray Rothbard and the revival of the Austrian School===

Although [[Murray Rothbard]] proved to be a brilliant student, he had difficulties obtaining his PhD from Columbia, and the rejection of his views within mainstream economic thought was to become a theme throughout his professional career. Although a prolific writer and polymath, he never obtained an academic posting at any Ivy League institution, having to accept an academic posting at Brooklyn Polytechnic and later becoming a professor of economics at the University of Nevada.

In the tradition of many Austrian scholars, Rothbard was uncompromising in his views and was ostracized from many influential political bodies because of his perceived radicalism, even within right-leaning conservative groups that would normally have been sympathetic to his views. William F. Buckley wrote a bitter obituary on Rothbard's death, and supporters of [[Ayn Rand]] ultimately rejected his views on the corrupting influence of big business on politics.

Rothbard wrote of the betrayal of the "true spirit" of the American conservative movement in his book, ''[[The Betrayal of the American Right]]''.

On economic matters, Rothbard's ''[[Man, Economy, and State]]'' ([http://www.mises.org/rothbard/mes.asp text]) was patterned after ''Human Action'', and in some areas--[[monopoly]] theory, [[utility]] and [[welfare]], and the theory of the state--tightened and strengthened Mises's own views. Rothbard's approach to the Austrian School followed directly in the line of Late Scholastic thought by applying economic science within a framework of a natural-rights theory of property.

What resulted was a full-fledged defense of a capitalistic and stateless social order, based on [[property]] and freedom of association and contract. Rothbard extended and in a sense "completed" Mises's views on economic thought, removing inconsistencies and drawing more radical policy conclusions than Mises's early works (that were, in themselves radical in their day and are still considered to be so even today).

Rothbard followed his economic treatise with an investigation of the [[Great Depression]], which applied [[Austrian Business Cycle Theory]] to show that the stock market crash and economic downturn was attributable to a prior [[bank]] [[Inflation|credit expansion]]. Then in a series of studies on government policy, he established the theoretical framework for examining the effects of all types of intervention in the market.

Rothbard extended and "radicalized" the Austrian School, taking Mises's insights and pushing them to their logical conclusion. Unlike Mises's view that there was a role for the State (in providing public goods and services such as law and order and basic infrastructure) it was Rothbard's view that all goods and services could be - and should be - produced by the private sector. He viewed many regulations and laws ostensibly promulgated for the "public interest" as self-interested power grabs by scheming government bureaucrats engaging in dangerously unfettered self-aggrandizement, as they were not subject to real competition. Rothbard held that there were inherent inefficiencies involved with governments providing commercial services and asserted that real competition would eliminate these efficiencies, if those services could be provided by the private sector.<ref>[http://www.lewrockwell.com/rothbard/rothbard40.html The Great Society: A Libertarian Critique], Murray Rothbard</ref><ref>[http://www.lewrockwell.com/rothbard/rothbard53.html The Noble Task of Revisionism], Murray Rothbard</ref><ref>[http://www.lewrockwell.com/rothbard/rothbard37.html The Fallacy of the 'Public Sector'], Murray Rothbard</ref>

Rothbard was equally condemning of state corporatism. He criticized many instances where business elites co-opted government's monopoly power so as to influence laws and regulatory policy in a manner benefiting them at the expense of their competitive rivals.<ref>''For a New Liberty'', Chapter 3</ref>

He argued that [[taxation]] represents coercive theft on a grand scale, and "a compulsory [[monopoly]] of force" prohibiting the more efficient voluntary procurement of defense and judicial services from competing suppliers.<ref>[http://www.lewrockwell.com/rothbard/rothbard24.html Tax Day], Murray Rothbard</ref> He also considered [[central bank]]ing and [[fractional reserve banking]] under a monopoly [[fiat money]] system a form of state-sponsored, legalized financial [[embezzlement|fraud]], antithetical to [[Libertarianism|libertarian]] principles and ethics.<ref>Rothbard, Murray. [http://www.mises.org/Books/mysteryofbanking.pdf ''The Mystery of Banking''] Ludwig von Mises Institute. 2008. p. 111</ref><ref>{{cite news |url=http://www.accessmylibrary.com/coms2/summary_0286-2737288_ITM |title=Has fractional-reserve banking really passed the market test? (Controversy). |date=January 2003 |format= |work= Independent Review|accessdate=}}</ref><ref>[http://www.fff.org/freedom/0999c.asp The Case for the 100% Gold Dollar], Murray Rothbard</ref><ref>See also Murray Rothbard articles: [http://www.lewrockwell.com/rothbard/rothbard191.html Private Coinage]; [http://www.lewrockwell.com/rothbard/rothbard190.html Repudiate the National Debt]; and [http://www.lewrockwell.com/rothbard/rothbard181.html Taking Money Back]</ref>

It was Rothbard who firmly established the Austrian School and classical liberal doctrine in the U.S., especially with ''[[Conceived in Liberty]]'' (volumes [http://mises.org/books/conceived1.pdf I], [http://mises.org/books/conceived2.pdf II], [http://mises.org/books/conceived3.pdf III], [http://mises.org/books/conceived4.pdf IV]), his four-volume history of colonial America and the secession from Britain. The reunion of natural-rights theory and the Austrian School came in his philosophical work, ''[[The Ethics of Liberty]]'' ([http://www.mises.org/rothbard/ethics/ethics.asp text]), all while he was writing a series of scholarly economic pieces gathered in the two-volume ''Logic of Action'', published in Edward Elgar's ''Economists of the Century'' series.

The founding of the [[Mises Institute|Ludwig von Mises Institute]] in 1982, with the aid of Margit von Mises as well as Hayek and Hazlitt, provided a range of new opportunities for both Rothbard and the Austrian School. Through a steady stream of academic conferences, instructional seminars, books, monographs, newsletters, studies, and even films, they carried the Austrian School forward into the post-socialist age.

The Austrian School enters a new millennium with many new advocates, including economists such as prominent Spanish economist Jesus Huerta de Soto, German economist Jörg Guido Hülsmann and American economists William Anderson, Robert Murphy and Walter Block, writers such as Thomas Woods, Lew Rockwell, and Charles Goyette, and media commentators and public figures such as Peter Schiff and Ron Paul. Some commentators have described this as a recent renaissance of classical liberal scholarship and thought.<ref>[http://www.nationalreview.com/articles/255968/who-ron-paul-interview Ron Paul Interview], National Review Online</ref>

==Methodology==
Austrian School economists advocate strict adherence to [[Wikipedia:Methodological individualism|methodological individualism]] – analyzing human [[action]] from the perspective of individual agents.<ref name="Mises_Individualism">Ludwig von Mises [http://mises.org/humanaction/chap2sec4.asp "The Principle of Methodological Individualism"], ''[[Human Action]]'' online edition, [[Mises Institute]]. Referenced 2009-04-24}.</ref> Proponents of this method, [[praxeology]], argue that the only means of arriving at a valid economic theory is to derive it logically from basic principles of human action. Proponents of this method hold that it allows for the discovery of fundamental economic laws valid for all human action. Alongside praxeology, the school has traditionally advocated an interpretive approach to history to address specific historical events.

Austrian economists reject empirical [[Econometrics|statistical methods]] as tools applicable to economics, saying that while it is appropriate in the natural sciences where causal factors can be isolated in laboratory conditions, the actions of human beings are far too complex for this "numerical" treatment as passive non-adaptive subjects. Instead one should isolate the logical processes of human action. Von Mises called this discipline "[[praxeology]]" – a term he adapted from [[Alfred Espinas]] (but which had been in use by others).<ref>Ludwig von Mises, Nationalökonomie (Geneva: Union, 1940), p. 3; Human Action (Auburn, Ala.: Mises Institute, [1949] 1998), p. 3.</ref>

The Austrian praxeological method is based on the heavy use of logical [[deductive reasoning|deduction]] from what they assert to be undeniable, self-evident [[axioms]] or irrefutable facts about human existence. The primary axiom from which Austrian economists deduce further certain conclusions is the action axiom, which holds that humans take conscious action toward chosen goals.<ref>Hans-Hermann Hoppe, Economic Science and the Austrian Method (Auburn, Ala.: Mises Institute, [1995] 2007), p. 63.</ref>

Austrian school theorists, like [[Ludwig von Mises]], insist that praxeology must be [[positive economics|value-free]]—that the method does not answer the question "should this policy be implemented?", but rather "if this policy is implemented, will it have [[Law of unintended consequences|the effects you intend]]"? However, Austrian economists often make policy recommendations that call for the elimination of government regulations and their policy prescriptions often overlap with [[libertarian]] or [[Anarcho-capitalism|anarcho-capitalist]] solutions. These recommendations are similar to, but further reaching than the [[minarchism|minarchist]] ideas of [[Chicago School (economics)|Chicago School]] economists, and frequently address issues that other schools ignore, such as [[monetary reform]].<ref>{{cite book | last = Skousen | first = Mark | title = Vienna & Chicago, Friends or Foes? | publisher = Capital Press/Regnery Pub | location = Washington | year = 2005 | isbn = 0-89526-029-8 }}</ref>

Austrian economists view [[entrepreneurship]] as the driving force in [[economic development]], see [[private property]] as essential to the efficient use of resources, and usually (if not always) see [[government]] interference in market processes as counterproductive. In this, their views do not differ far from those of the Chicago school.

As with neoclassical economists, Austrian economists reject [[classical economics|classical]] cost of production theories, most famously the [[labor theory of value]]. Instead, they explain value by reference to the [[Subjective theory of value|subjective preferences of individuals]]. This psychological aspect to Menger's economics has been attributed to the school's birth in turn of the century [[Vienna]]. [[Supply and demand]] are explained by aggregating over the decisions of individuals, following the precepts of [[methodological individualism]], which asserts that only individuals and not collectives make decisions, and [[marginalist]] arguments, which compare the costs and benefits for incremental changes.

[[Frank van Dun]] outlines the basic difference between the methods:
: The central dogma of [[positivism]] in fields such as “law” and “economics” is that every order is artificial. There are no [[natural order]]s, or, if there are, they are not suitable objects of scientific investigation. Consequently, persons can be admitted as objects of study only if they are disguised as artificial persons. In economics, positivism typically involves the personification of “theoretical constructs” (for example, utility functions) constrained by the rules of a model or a simulation.13 It fits the profile of a technology of want-satisfaction that characterises modern neo-classical and mainstream economics, but obviously is useless for the anarchocapitalists’ program of research into the conditions of order and disorder of the real human world.<ref>Frank van Dun. [http://www2.units.it/etica/2003_2/index.html ''Natural Law: A Logical Analysis'']. Etica & Politica, 2003.2. Dipartimento di Filosofia, Lingue e Letterature, Università di Trieste.</ref>

===Criticism of mainstream practices===
Austrians consider their methodology to be superior to the attempt to mimic the "hard' sciences through what Austrians consider to be a "naive" [[empiricism]]. This "naive" attempt by the mainstream academic community to mimic the hard sciences through econometrics has had questionable results. German economist, banker and Keynesian critic, L. Albert Hahn, noted the following in October 1952:<ref>[http://mises.org/daily/3582 Keynesians Can't Predict], L. Albert Hahn, ''The Freeman'', October 6, 1952</ref>

{{quote|It is seldom realized that belief in the possibility of "scientific" business forecasts, and the forecasting mania of our time, are comparatively new phenomena. Until about 1930 serious economists were not so bold — or so naive — as to pretend to be able to calculate the coming of booms and depressions in advance. It would not have fitted into their general view on the working of a free economy. They considered the economic future as basically dependent on unpredictable price-cost relationships and on the equally unpredictable psychological reactions of entrepreneurs. Predictions of future business conditions would have seemed to them mere charlatanry, just as predictions, say, regarding the resolutions of Congress two years from now... The basic error of the whole approach lies in the fact that the causative link between objective data and the decision of the members of the community are treated as mechanical. But men are still men and not automatons... Insufficiently educated in the history of economic thought, they [Anglo-American economists] do not realize that Keynesianism — down to the most technical details, like the concept of the foreign exchange multiplier — is mercantilism or, more precisely, John Lawism pure and simple... Reading, quoting, praising, and promoting each other, and only each other, will not liberate these economists from their voluntary isolationism. They will remain in their dream world. They will continue to predict the unpredictable.}}

Mainstream economists mostly ignore the Austrian assertion that prediction in economics is inherently impossible and continue to focus on mathematical modelling of the economy derived from simplified assumptions about human behaviour.<ref>[http://www.lewrockwell.com/orig11/rosen-e1.1.1.html What is the Current State of Economic Science?], Erwin Rosen</ref>

In their rejection of mainstream practices, Austrians have long argued that mainstream economic models have a very poor record of prediction, citing the [[Global Financial Crisis]] as an example.<ref>[http://www.lewrockwell.com/orig11/rosen-e1.1.1.html What is the Current State of Economic Science?], Erwin Rosen</ref><ref>[http://www.lewrockwell.com/thornton/thornton38.html You Heard It Here First], Mark Thornton, LRC</ref><ref>[http://mises.org/media/4019 Business Cycles and Prediction, Mark Thornton]</ref> However, on the other hand some Austrian adherents have themselves been labeled as "Chicken Littles" for continually making predictions of "catastrophic" financial crises.<ref>[http://www.goldensextant.com/SavingtheSystem.html Saving the System], Robert K. Landis</ref><ref>{{cite news
|last=Brodie
|first=Lee
|title=Is This Market Heading For A Serious Correction?
|date=2009-08-17
|work=CNBC
|url=http://www.cnbc.com/id/32441070/Is_This_Market_Heading_For_A_Serious_Correction }}
</ref>

==Contributions==
Some significant general contributions of Austrian economists are listed below:
* The Regression Thereom of Money, wherein Mises hypothesized that the creation of money is a time-dependent process where market participants, by spontaneously engaging in barter and trading goods, quickly reach a market-based consensus regarding what should be commonly accepted as a medium of exchange in that market. An item becomes "money" based primarily on participants' subjective values - their past experience of ''other'' traders accepting this "good" as money - and their expectation that it will be accepted by others in future. If people stop trusting that others will accept this item as money in future, this item can loose its "moneyness" suddenly and immediately.
* A fundamental rejection of mathematical methods in economics, seeing the function of economics as investigating the essences rather than the specific quantities of economic phenomena. This was seen as an evolutionary, or "genetic-causal", approach against the alleged "unreality" and internal stresses inherent in the "static" approach of [[economic equilibrium|equilibrium]] and [[perfect competition]], which are the foundations of mainstream Neoclassical economics (see also [[praxeology]]). This methodology is also driven by the belief that [[econometrics]] is inherently misleading in that it creates a fallacious "precision" in economics where there is none.
* [[Eugen von Böhm-Bawerk]]'s critique of [[Karl Marx|Marx]], which centered on the untenability of the [[labor theory of value]] in the light of the [[transformation problem]]. There was also the connected argument that capitalists do not exploit workers; they ''accommodate'' workers by providing them with income well in advance of the revenue from the output they helped to produce.
* Eugen von Böhm-Bawerk's demonstration that the law of marginal utility, as formulated by [[Carl Menger|Menger]] necessarily implies the classical law of costs and hence the vast majority of the conclusions of the British [[classical economists]]. This discovery was later fully developed and its implications traced by a student of [[Ludwig von Mises|von Mises]], [[George Reisman]], in his book, ''Capitalism''.
* An emphasis on [[opportunity cost]] and reservation demand in defining [[marginal theory of value|value]], and a refusal to consider supply as an otherwise independent cause of value.<ref>"Values are not seen (as they are in Marshallian economics) as ''jointly'' determined by subjective (utility) and objective (physical cost) considerations. Rather, values are seen as determined ''solely'' by the actions of consumers... Cost is seen (by Menger, and especially by Wieser...) merely as prospective utility deliberately sacrificed (in order to command more highly preferred utility)." Israel M. Kirzner, "The Austrian School of Economics", ''The New Palgrave: Dictionary of Economics'' (1987)</ref> (The British economist [[Philip Wicksteed]] adopted this perspective.)
* The Mises-Hayek [[business cycle]] theory, which is asserted as explaining depression as a reaction to an intertemporal production structure fostered by [[monetary policy]] setting [[interest rate]]s inconsistent with individual time preferences.
* Mises and Hayek's view of prices as permitting agents to make use of [[dispersed knowledge|dispersed tacit knowledge]].
* The [[time preference theory of interest]], which explains interest rates through [[intertemporal choice]] - the different time preferences of the borrower or lender - rather than as a price paid for a [[factor of production]].
* The [[economic calculation debate]] between Austrian and [[Marxist]] economists, with the Austrians claiming that Marxism is flawed because prices could not be set to recognize opportunity costs of factors of production, and so [[socialism]] could not make rational decisions.
* [[Friedrich Hayek]] was one of the few economists who gave warning of a major economic crisis before [[Wall Street Crash of 1929|the great crash]] of 1929.<ref>{{cite book |title=The Making of Modern Economics |last=Skousen |first=Mark |authorlink=Mark Skousen |year=2001 |publisher=M.E. Sharpe |isbn=0-7656-0479-5 |page=284 }}</ref><ref>{{cite web |url=http://nobelprize.org/nobel_prizes/economics/laureates/1974/press.html |title=The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1974 |accessdate=2008-10-12 |publisher=[[Nobel Foundation]] |date=1974-10-09 }}</ref> In February 1929, Hayek warned that a coming financial crisis was an unavoidable consequence of reckless monetary expansion.<ref>{{cite book |title= Keynes and Hayek |last= Steele |first=G. R. |year=2001 |publisher= Routledge |isbn= 0-415-25138-9 |page=9 }}</ref>
* Stressing uncertainty in the making of economic decisions, rather than relying on "[[Homo economicus]]" or the rational man who was fully informed of all circumstances impinging on his decisions. The fact that perfect knowledge never exists, means that all economic activity implies risk.
* Seeing the entrepreneurs' role as collecting and evaluating information and acting on risks.
* An emphasis on the forward-looking nature of choice, seeing time as the root of uncertainty within economics (see also [[time preference]]).

==Notable theories==
===Economic calculation problem===
{{Main|Economic calculation problem}}
The economic calculation problem was first proposed by Ludwig von Mises in 1920 and later expounded by Friedrich Hayek.<ref name="Mises">{{cite book |title=Economic calculation in the Socialist Commonwealth |accessdate=2008-09-08 |last=Von Mises |first=Ludwig |authorlink=Ludwig von Mises |year=1990|format=pdf |publisher=[[Ludwig von Mises Institute]] |url=http://mises.org/pdf/econcalc.pdf |isbn=0945466072 }}</ref><ref>F. A. Hayek, (1935), "The Nature and History of the Problem" and "The Present State of the Debate," om in F. A. Hayek, ed. ''Collectivist Economic Planning'', pp. 1–40, 201–243.</ref> The problem referred to is that of how to distribute resources efficiently in an economy. The capitalist or free market solution is to produce and distribute goods and services according to the [[price mechanism]]; Mises and Hayek argued that this is the only viable solution, as the [[price mechanism]] co-ordinates supply and investment decisions most efficiently, producing goods and services want to buy and eliminate those goods and services that are not wanted by reducing their prices and thereby rationing the resources given to "unwanted" or inefficient producers. Without the "feedback" information being provided by market prices, centrally planned [[socialism]] lacks a method to efficiently allocate resources over an extended period of time in any market where the [[price mechanism]] is effective (an example where the [[price mechanism]] may not work is in the relatively confined area of [[public goods|public]] and [[common good (economics)|common goods]]). This thereom implies that a [[socialist]] [[planned economy]] could never be sustainable in the long term for the vast bulk of the economy, as huge shortages of desired goods and large surpluses of unwanted goods would continually occur in the economy, resulting in misallocations and dislocations that would eventually cause chaos throughout the economic system. The debate over whether socialism was a viable economic system raged in the 1920s and 1930s, and that specific period of the debate has come to be known by historians of economic thought as ''The Socialist Calculation Debate.''<ref name="School">[http://cepa.newschool.edu/het/essays/paretian/social.htm The socialist calculation debate]</ref>
[[Ludwig von Mises]] argued in a famous 1920 article "[[Economic Calculation in the Socialist Commonwealth]]" that the pricing systems in socialist economies were necessarily deficient because if government owned the [[means of production]], then no prices could be obtained for [[capital goods]] as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.<ref name="School" /> This led him to declare "…that rational economic activity is impossible in a socialist commonwealth."<ref name="Mises" />

===Inflation===
The Austrian School has consistently argued that a "traditionalist" approach to inflation yields the most accurate understanding of the causes (and the cure) for [[inflation]]. Austrian economists maintain that inflation is ''by definition'' always and everywhere simply an increase in the [[money supply]] (i.e. units of currency or [[means of exchange]]), which in turn leads to a higher nominal price level for assets (such as housing) and other goods and services in demand, as the real value of each monetary unit is eroded, loses purchasing power and thus buys fewer goods and services.

Given that all major economies currently have a [[central bank]] supporting the private [[bank]]ing system, money can be supplied into these [[economy|economies]] by way of private bank-created [[credit (finance)|credit]] (or [[debt]]).<ref>[http://mises.org/media/4014 The Economics of Legal Tender Laws], [[Jorg Guido Hulsmann]] (includes detailed commentary on [[central banking]], [[inflation]] and [[fractional reserve banking|FRB]])</ref> Austrian School economists therefore regard the private bankers and the state-sponsored [[central bank]] as the main cause of [[inflation]] in an economy where the bulk of the money supply is created through debt, because they regard the central bank as the institution charged with supporting the banking system and supplying cash to the banking system when needed by the banks.<ref>[http://www.lewrockwell.com/north/north803.html Why Deflation Is not Inevitable (Sadly)], Gary North</ref>

The Austrian School also views the "contemporary" definition of [[inflation]] as inherently misleading in that it draws attention only to the ''effect'' of inflation (rising prices) and does not address the "true" phenomenon of [[inflation]], which they believe simply involves the debasement of the [[means of exchange]]. They argue that this semantic difference is important in defining inflation and finding a cure for inflation. Austrian School economists maintain the most effective cure is the strict maintenance of a stable money supply.<ref>{{cite web|url=http://mises.org/story/908 |title=Defining Inflation |accessdate=2008-09-20 |last=Shostak, Ph.D |first=Frank |date=2002-03-02 |publisher=Mises Institute }}</ref> [[Ludwig von Mises]], the seminal scholar of the Austrian School, asserts that:

<blockquote>
Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.<ref>{{Cite book |first=Ludwig |last=von Mises |chapter=Economic Freedom and Interventionism |editor1-first=Bettina B. |editor1-last=Greaves |title=Economics of Mobilization |publisher=The Commercial and Financial Chronicle |location=Sulphur Springs, West Virginia |pages= |year=1980 |isbn= |chapterurl=http://mises.org/efandi/ch20.asp |ref=harv}}</ref>
</blockquote>

Austrian economists tend to measure the inflation by calculating the growth of what they call 'the true money supply', i.e. how many new units of money that are available for immediate use in exchange, that have been created over time.<ref>Ludwig von Mises Institute, "[http://mises.org/content/nofed/chart.aspx?series=TMS True Money Supply]"</ref><ref>Joseph T. Salerno, (1987), Austrian Economic Newsletter, "[http://www.mises.org/journals/aen/aen6_4_1.pdf The "True" Money Supply: A Measure of the Medium of Exchange in the U.S. Economy]"</ref><ref>Frank Shostak, (2000), "[http://www.mises.org/journals/qjae/pdf/qjae3_4_3.pdf The Mystery of the Money Supply Definition]"</ref>

Austrian School economists claim that the state uses subtle forms of inflation as one of the three means by which it can fund its activities, the other two being taxing and borrowing.<ref>[[Lew Rockwell]], interview on "[http://mises.org:88/Now NOW with Bill Moyers]"</ref> Because of the disruptive and dislocating effects of inflation, many Austrian School economists support the abolition of the [[central bank]]s and the [[fractional-reserve banking]] system, and advocate instead a return to money based on the [[gold standard]], or less frequently, [[free banking]].<ref>Ludwig von Mises Institute, "[http://mises.org/books/goldstandard.pdf The Gold Standard]"</ref><ref>Ron Paul, "[http://mises.org/books/caseforgold.pdf The Case for Gold]"</ref> Money could only be created by finding and putting into circulation more gold under a [[gold standard]].

Advocates argue that the abolition of legal tender laws and the spontaneous return to a gold or silver monetary system would effectively constrain unsustainable and volatile [[fractional-reserve banking]] practices, ensuring that [[money supply]] growth ("[[monetary inflation|inflation]]") would never spiral out of control.<ref>Murray Rothbard, "[http://mises.org/rothbard/100percent.pdf The Case for a 100 Percent Gold Dollar]"</ref><ref>Ludwig von Mises Institute, "[http://mises.org/story/2870 Money, Banking and the Federal Reserve]"</ref>

In relation to the current [[central bank]]-managed [[fractional reserve banking|fractional reserve]] [[fiat currency]] [[debt-based monetary system|system]], Austrian economist [[Murray Rothbard]] stated the following:<ref>Rothbard, Murray. [http://www.mises.org/Books/mysteryofbanking.pdf ''The Mystery of Banking''], p. 261</ref>

{{quote|Given this dismal monetary and banking situation, given a 39:1 pyramiding of checkable deposits and currency on top of gold, given a Fed unchecked and out of control, given a world of fiat moneys, how can we possibly return to a sound noninflationary market money? The objectives, after the discussion in this work, should be clear: (a) to return to a gold standard, a commodity standard unhampered by government intervention; (b) to abolish the Federal Reserve System and return to a system of free and competitive banking; (c) to separate the government from money; and (d) either to enforce 100 percent reserve banking on the commercial banks, or at least to arrive at a system where any bank, at the slightest hint of nonpayment of its demand liabilities, is forced quickly into bankruptcy and liquidation. While the outlawing of fractional reserve as fraud would be preferable if it could be enforced, the problems of enforcement, especially where banks can continually innovate in forms of credit, make free banking an attractive alternative.}}

[[Ludwig von Mises]] asserted that, in addition to reducing the serverity of business cycles and eliminating inflation, civil liberties would be better protected through a return to the gold standard:

<blockquote>
It is impossible to grasp the meaning of the idea of [[sound money]] if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the nonobservance of old customs by kings.<ref>{{cite book |last=von Mises |first=Ludwig |authorlink=Ludwig von Mises |coauthors= |title=The Theory of Money and Credit |publisher=Liberty Fund, Inc. |date=1981-07-01 |location= |pages=Chapter 21 |url=http://mises.org/story/2276 |doi= |id= |isbn=0-913966-71-1 |nopp=true }}</ref>
</blockquote>

===Business cycles===
{{Main|Austrian Business Cycle Theory}}
The Austrian School is one of the few schools of economic thought that considers different forms of money to be "non-neutral" - meaning that changes in the money supply can have real economic effects, disrupting the price mechanism and causing "ripple" effects throughout the economy. Mainstream theories generally consider money to be "neutral" (in other words, they consider that changes in the money supply do not have significant effects in the real economy). According to Austrian School economist [[Joseph Salerno]], what most distinctly sets the Austrian school apart from [[neoclassical economics]] is the [[Austrian Business Cycle Theory]]:<ref>{{Cite journal
| last = Salerno
| first = Joseph
| author-link = Joseph Salerno
| title = Why We're Winning: An Interview with Joseph T. Salerno
| journal = The Austrian Economics Newsletter
| volume = 16
| issue = 3
| pages =
| date =
| origyear =
| year = 1996
| month =
| url = http://mises.org/journals/aen/aen16_3_1.asp
| archiveurl =
| archivedate =
| doi =
| id =
| ref = harv }}
</ref>
{{quote|The Austrian theory embodies all the distinctive Austrian traits: the theory of heterogeneous capital, the structure of production, the passage of time, sequential analysis of monetary interventionism, the market origins and function of the interest rate, and more. And it tells a compelling story about an area of history neoclassicals think of as their turf. The model of applying this theory remains [[Murray Rothbard|Rothbard]]'s ''[[America's Great Depression]]''.}}

Austrian School economists focus on the changes in the money suppy and the associated credit cycle as the primary cause of most business cycles. Austrian economists assert that the pernicious monetary effects of [[fractional reserve banking]] are the predominant cause of most business cycles, as the inflating effects of the practice result in lower interest rates than would prevail in a stable money system, thereby causing excessive credit creation, speculative "[[economic bubble|bubbles]]" and "artificially" low savings.<ref>Thorsten Polleit, [http://mises.org/story/2810 Manipulating the Interest Rate: a Recipe for Disaster], 13 December 2007</ref>

According to the Austrian School business cycle theory, the business cycle unfolds in the following way:

Fractional reserve banking continually causes inflation through the "artificial" lowering of interest rates (compared to what they would be in a stable money environment). This can occur indefinitely with the aid and assistance of the central bank. Low interest rates encourage fresh borrowing and new credit creation, thereby increasing the short term profitability of the banking system. But this expansion of credit also causes an expansion of the [[money supply|supply of money]], through the [[money creation]] process in a [[fractional reserve banking]] system and misallocates resources, skewing production to "unwanted" capital goods industries and encourages Ponzi-like speculation. This artificial increase in money and credit inevitably leads to an unsustainable "credit-fuelled boom" during which the "artificially stimulated" borrowing seeks out diminishing investment opportunities and causes widespread [[malinvestment]]s, where capital resources are misallocated into areas that would not attract investment if the money supply remained stable.

[[Murray Rothbard]] used the concept of malinvesment and the distorting effects of bank-induced credit creation to study the [[Great Depression]] is his [[historical revisionism|revisionist]] work, ''[[America's Great Depression]]'':<ref>[[Murray Rothbard]], [http://mises.org/rothbard/agd/chapter1.asp#cluster_of_error|''America's Great Depression'', 2005, 5th Edition, Ludwig von Mises Institute, Chapter 1, ''The Cluster of Error''].</ref>

{{quote|A credit expansion may appear to render submarginal capital profitable once more, but this too will be malinvestment, and the now greater error will be exposed when this boom is over. Thus, credit expansion generates the business cycle regardless of the existence of unemployed factors. Credit expansion in the midst of unemployment will create more distortions and malinvestments, delay recovery from the preceding boom, and make a more grueling recovery necessary in the future. While it is true that the unemployed factors are not now diverted from more valuable uses as employed factors would be (since they were speculatively idle or malinvested instead of employed), the other complementary factors will be diverted into working with them, and these factors will be malinvested and wasted. Moreover, all the other distorting effects of credit expansion will still follow, and a depression will be necessary to correct the new distortion.}}

Austrian School economists argue that a correction or "[[credit crunch]]" – commonly called a "[[recession]]" or "bust" – occurs when credit creation cannot be sustained. They claim that the [[money supply]] suddenly and sharply contracts when markets finally "clear", causing resources to be reallocated back toward more efficient uses.

Economist [[Steve H. Hanke]] identifies the [[financial crisis of 2007–2010]] as the direct outcome of the Federal Reserve Bank's interest rate policies as is predicted by Austrian school economic theory.<ref>{{Cite web |url= http://www.cato.org/pub_display.php?pub_id=10100 |title=The Fed's Modus Operandi: Panic | Cato Institute: Commentary |first=Steve H. |last=Hanke |work=cato.org |accessdate=17 July 2010 }}</ref> Some analysts such as Jerry Tempelman have also argued that the predictive and explanatory power of ABCT in relation to the recent [[Global Financial Crisis]] has reaffirmed its status and, perhaps, cast into question the utility of mainstream theories and critiques.<ref>[http://mises.org/journals/qjae/pdf/qjae13_1_1.pdf ABCT and the GFC: Confessions of a Mainstream Economist] by Jerry Tempelman</ref>

===Monetary Reform===
{{Main|Debt-based monetary system}}
The Austrian School is currently the only major school of economic thought that advocates radical monetary reform and actively debates the efficacy of fundamental banking reform.<ref>See for example these [[Murray Rothbard]] articles: [http://www.mises.org/money.asp What Has Government Done to Our Money?], [http://www.mises.org/story/1829 The Case for the 100% Gold Dollar]; [http://www.lewrockwell.com/rothbard/cartelization.pdf The Fed as Cartel], [http://www.lewrockwell.com/rothbard/rothbard191.html Private Coinage], [http://www.lewrockwell.com/rothbard/rothbard190.html Repudiate the National Debt]; [http://www.lewrockwell.com/rothbard/rothbard181.html Taking Money Back], [http://www.lewrockwell.com/rothbard/rothbard163.html Anatomy of the Bank Run], [http://www.lewrockwell.com/rothbard/rothbard128.html Money and the Individual]</ref>

All other schools of economic thought (including Keynesian, monetarist and neo-classical) implicitly accept the current fiat money and central bank-dominated financial system as optimal - or at least as not actively destructive of the economy.<ref>[http://mises.org/story/3108 Sound Money], [[Lew Rockwell]]</ref><ref>[http://mises.org/story/1971 Our Money Madness], [[Lew Rockwell]]</ref>

Austrian scholars, on the other hand, uniformly see coercive legal tender laws and the current fractional-reserve financial system as an extremely dysfunctional and disruptive influence on the economy.<ref>[http://mises.org/story/3108 Sound Money], [[Lew Rockwell]]</ref><ref>[http://mises.org/story/1971 Our Money Madness], [[Lew Rockwell]]</ref> Through the centralized control of interest rates, through the arbitrary diversion of scarce resources to repeatedly bail out the "too big to fail" banks, through the manipulation of financial markets via the buying of government bonds (so called "quantitative easing"), Austrian scholars see coercive legal tender laws, central banking and the current financial system generally as a source of continual disruption in the price discovery mechanism, misleading investors and market participants and ultimately causing continual and ongoing misallocations in scarce resource distribution, resulting in massive [[malinvestment]]s and wrenching and disruptive business cycles.<ref>[http://mises.org/daily/4880 The Faults of Fractional-Reserve Banking], Thorsten Polleit</ref>

However, Austrian scholars are divided on the optimal solution to this urgent problem.<ref>[http://mises.org/daily/4898 ''Free Banking''], review by John P. Cochran</ref>

Some Austrian scholars advocate "free banking", where banks are permitted to engage in fractional-reserve banking activities provided they comply with the laws against fraud and are not supported in any way against the possibility of bank runs and are forced into bankruptcy should they not be able to pay their debts as and when they fall due.<ref>[http://mises.org/daily/4898 ''Free Banking''], review by John P. Cochran</ref>

Advocates of this system of banking include Lawrence White, Stephen Horwitz, George Selgin, and Kevin Dowd, amongst others.<ref>[http://mises.org/daily/4898 ''Free Banking''], review by John P. Cochran</ref> F.A. Hayek also advocated the de-nationalization of money production and implicitly supported a free banking financial system in some of his works on monetary reform.<ref>[http://www.mises.org/store/Free-Market-Monetary-System-A-P553.aspx?AFID=14 ''Free Market Money System''] by [[F.A. Hayek]]</ref>

Other Austrian scholars advocate "full-reserve banking", considering fractional-reserve banking to be inherently unethical, disruptive and dysfunctional, akin to embezzlement.<ref>See for example these [[Murray Rothbard]] articles: [http://www.mises.org/money.asp What Has Government Done to Our Money?], [http://www.mises.org/story/1829 The Case for the 100% Gold Dollar]; [http://www.lewrockwell.com/rothbard/cartelization.pdf The Fed as Cartel], [http://www.lewrockwell.com/rothbard/rothbard191.html Private Coinage], [http://www.lewrockwell.com/rothbard/rothbard190.html Repudiate the National Debt]; [http://www.lewrockwell.com/rothbard/rothbard181.html Taking Money Back], [http://www.lewrockwell.com/rothbard/rothbard163.html Anatomy of the Bank Run], [http://www.lewrockwell.com/rothbard/rothbard128.html Money and the Individual]</ref> [[Full reserve banking]] would require banks to retain in reserve all deposits that are legally available for immediate withdrawal, and permit lending only from longer-term deposits.

Advocates of this system of banking include [[Murray Rothbard]],<ref name="The Mystery of Banking">[http://www.mises.org/Books/mysteryofbanking.pdf ''The Mystery of Banking''], Murray Rothbard</ref><ref name="The Case for a 100% Gold Dollar">[http://mises.org/story/1829 The Case for a 100% Gold Dollar], Murray Rothbard</ref> [[Jesus Huerta de Soto]],<ref>[http://www.mises.org/books/desoto.pdf ''Money, Bank Credit, and Economic Cycles''], Jesus Huerta de Soto, First English edition (2006), pp. 98-114</ref> and [[Jörg Guido Hülsmann]],<ref>[http://mises.org/media/4014 The Economics of Legal Tender Laws], [[Jorg Guido Hulsmann]] (includes detailed commentary on [[central banking]], [[inflation]] and [[fractional reserve banking|FRB]])</ref><ref name=FBFB>[http://mises.org/journals/rae/pdf/RAE9_1_1.pdf Free Banking and the Free Bankers], Jörg Guido Hülsmann, Quarterly Journal of Austrian Economics (Vol. 9, No. 1)</ref><ref>[http://www.lewrockwell.com/lewrockwell-show/2011/01/04/181-hyperinflation-ahead/ Interview with Jörg Guido Hülsmann], The Lew Rockwell Show</ref> amongst others.<ref>[http://mises.org/daily/4880 The Faults of Fractional-Reserve Banking], Thorsten Polleit</ref>

==Criticism of the Austrian School==
Critics argue that modern Austrian economics generally lacks scientific rigor,<ref name="white1">{{Cite journal |title=The research program of Austrian economics |publisher=Emerald Group Publishing Limited |first=Lawrence H. |last=White |journal=Advances in Austrian Economics |year=2008 |pages=20 |url=http://www.emeraldinsight.com/books.htm?chapterid=1775479&show=pdf}}</ref> which forms the basis of the most prominent criticism of the school. Austrian theories are not formulated in formal mathematical form,<ref>{{cite web |first=Deborah L. |last=Walker |title=Austrian Economics |publisher=Library of Economics and Liberty |url=http://www.econlib.org/library/Enc1/AustrianEconomics.html |accessdate=2010-01-23 }}</ref> but by using mainly verbal logic and what proponents claim are self-evident axioms. Mainstream economists believe that this makes Austrian theories too imprecisely defined to be clearly used to explain or predict real world events. Economist [[Bryan Caplan]] noted that, "what prevents Austrian economists from getting more publications in mainstream journals is that their papers rarely use [[mathematics]] or [[econometrics]]."

There are also criticisms of specific Austrian theories. For example, Nobel laureate [[Milton Friedman]], after examining the history of business cycles in the US, concluded that "The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false."<ref name="Friedman1969">{{cite book|last=Friedman |first=Milton |title=The Optimal Quantity of Money and Other Essays |publisher=Aldine |location=Chicago |pages=261–284 |chapter=The Monetary Studies of the National Bureau, 44th Annual Report}}</ref><ref name="Friedman93">{{cite journal|last=Friedman|first=Milton|title=The 'Plucking Model' of Business Fluctuations Revisited|journal=Economic Inquiry|pages=171–177|url=http://onlinelibrary.wiley.com/doi/10.1111/j.1465-7295.1993.tb00874.x/abstract}}</ref><ref name="Friedman_ABCT_false">{{cite book|last=Friedman |first=Milton |title=The Optimal Quantity of Money and Other Essays |publisher=Aldine |location=Chicago |pages=261–284 |chapter=The Monetary Studies of the National Bureau, 44th Annual Report | quote=The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false. }}</ref> In addition to Milton Friedman's criticism, noted liberal [[Neo-Keynesian Economics|neo-Keynesian]] economist [[Paul Krugman]] has criticized the theory.<ref name="Krugman">{{cite web|url=http://www.slate.com/id/9593 |title=The Hangover Theory |last=Krugman |first=Paul |date=1998-12-04 |publisher=Slate |accessdate=2008-06-20}}</ref>

[[Jeffrey Sachs]] has argued that high tax rates and a "mixed" economy (with some "socialist" elements such as high levels of social welfare transfer payments) appears to have generated higher growth rates in the second half of the 20 century - which appears to run counter to the Austrians' assertion that strong deference to private property rights (and therefore low tax rates) are essential for a properly functioning free market economy. Sachs asserts that poverty rates are lower, median income is higher, the government budget has larger surpluses, and the trade balance is stronger (although unemployment tends to be higher).<ref>{{cite journal|title=The Social Welfare State, Beyond Ideology |last=Sachs|first=Jeffrey |date=October 2006 |journal=Scientific American |url=http://www.sciam.com/article.cfm?id=the-social-welfare-state |accessdate=2008-06-20|ref=harv }}</ref> In response to Sachs' article, [[William Easterly]] states that Hayek, writing in 1944, correctly recognized the dangers of large-scale state economic planning. He also questions the validity of comparing poverty levels in the Nordic countries and the United States, when the former have been moving away from social planning toward a more market-based economy, and the latter has historically taken in impoverished immigrants.<ref>{{cite news |url=http://online.wsj.com/article/SB116355956112023480.html?mod=opinion_main_commentaries|title=Dismal Science|accessdate=2008-09-07|author=[[William Easterly]]
|date=2006-11-15|publisher=[[The Wall Street Journal]]}}</ref>

==Seminal works==
* ''[[Principles of Economics]]'' (1871) by [[Carl Menger]]
* ''[[Capital and Interest]]'' (1884–1921) by [[Eugen von Böhm-Bawerk]]
* ''[[Human Action]]'' (1940–1949) by [[Ludwig von Mises]]
* ''[[Economics in One Lesson]]'' (1946) by [[Henry Hazlitt]]
* ''[[Individualism and Economic Order]]'' (1948) by [[Friedrich Hayek]]
* ''[[Man, Economy, and State]]'' (1962) by [[Murray Rothbard|Murray N. Rothbard]]
* ''Competition and Entrepreneurship'' (1973) by [[Israel Kirzner|Israel M. Kirzner]]

==References==
{{Reflist}}

==External links==
* [http://mises.org/etexts/austrian.asp What is Austrian Economics?] from the [[Mises Institute]]
* [[Wikipedia:Austrian School|Austrian School]] on Wikipedia
* [http://www.econlib.org/library/Enc/AustrianSchoolofEconomics.html Austrian School of Economics] from The Concise Encyclopedia of Economics
* [http://homepage.newschool.edu/het//schools/austrian.htm The Austrian School] from the History of Economic Thought page
* [http://mises.org/daily/4390 A Primer on Austrian Economics] by Jonathan M. Finegold Catalan, June 2010

[[Category:Austrian School of Economics|*]]