22 Dec

Austrian School of Economics

The Austrian School of Economics is actually a school of economic thought, rather than an institution. It is based on the analysis of the purposeful actions of individuals. It is a very influential way of thinking, spread around the world, followed and improved on by successful business individuals.
Even though the first foundations of the concept behind this methodology were created centuries ago, I find this way of understanding economics still very current to date as it sees the market as an entrepreneurial process.

What is Austrian School of Economics?

The main thinkers behind current state of this theory are Carl Menger, Eugen Boehm von Bawerk, Friedrich August von Hayek, Fritz Machlup, Joseph Schumpeter, Murray Rothbard and especially Ludwig von Mises – accomplished entrepreneurs, economists, philosophers and authors of revolutionary books and theses.
The Austrians are central to all of my books and thinking, because they are the only economic school of thought that assigns entrepreneurship a pivotal role in economic development.
A popular book Road to Serfdom by F. A. Hayek, was crucial in helping in the revival of the classical liberal movement in America after the New Deal and World War II. Other books included new approaches on exchange rates, capital theory and monetary reform – many of the theories stated are used in today’s market and some of them became key in the evolution of business as we know it today.

How does Austrian School of Economics work?

Austrian School of Economics scheme

A Map of The Austrian Economics Framework

Well, it has nothing to do with Austria, really, apart from the fact, that Vienna was the origin of this school of economy and also that I am from Vienna too. The method of the Austrian School of Economics is the deductive one. Realizing that economy is not just about amassing data and adding them to some abstract formulas to predict the unpredictable.
There is much more to count in and add to your formulas if you really want to understand the world of economy and business. Adding universal facts about the world we live in and about people will make your formulas much more complex. So complex, in fact, they are not really formulas anymore. Using deduction and logical implication of common truth (for example, wants are unlimited, means are scarce) will push your business plan to the whole new level – one that doesn’t work just inside “the world of economy“ as science, but is open to the real world and communicates with it.

A businessman’s task is to apply his resourcefulness to track down knowledge and opportunities for profits – in other words, to utilize the advantages that come from information. Taking a risk while protecting the existing business is the crux of every decision a businessman makes. The more successfully he makes each decision, the more successful his business will be. The more successful the businessman is in the economy, the more successful the economy will be.

Philosophy of the Austrian School

Theories set by the Austrian school of economy mainly battle against the German Historical School that used to be very popular in the past. The key is to restore the economy as a human based science, not just a list of overlapping formulas. Thanks to the works of Hayek and others, it was demonstrated that capital is not homogeneous but an intricate and diverse structure that has a time dimension. His works became very popular in 1970s and were cited by the Nobel Prize committee in 1974 – the year when Friedrich August von Hayek was awarded the Nobel Prize for Economy.
One of his followers – Menger was the first to actually restore economics as the science of human action based on deductive logic. With his works he was able to prepare the way for later theorists to counter the influence of socialist thought.
Currently, universities with a significant Austrian presence are George Mason University, New York University, Loyola University New Orleans, and Auburn University in the United States and Universidad Francisco Marroquín in Guatemala.

Fundamental Principles of the Austrian School

Austrian economics are based upon these main principles considering individuality and subjectivity.

  1. Methodological Individualism
    To understand the action of the whole group, we have to go to the each separate individual within this group and understand the way of thinking of that particular individual. Using logic and deduction we can then reflect the thoughts of the individual upon the whole group to foresee it actions.
  2. Methodological Subjectivism
    Even the explanation of the given acts of the individual and his thinking are still subjective as they are judged by another individual or a group.
  3. Determination of Price
    The Austrian School of Economics rejects the classical approach that states the price is determined by supply and demand or production costs. It contemplates that the price of any given goods are defined by subjective needs, requirements and desires of the individual.
  4. Determination of Interest Rates
    Adding individualism and the aspect of time explained a lot about interest rates. The Austrian economics sees money in relationship with time and its owner, who might want to save the money or spend it right now.
  5. Business Cycles
    All of the above in cooperation creates an uneven economy map, which in reaction creates business cycles to reach the equilibrium.
  6. Pivotal to that economic model is the Entrepreneur
    The entrepreneur is not only capable of seeing opportunities that others miss, but is innovative in taking advantage of them and exploiting them to the profit of themselves, their companies and their local and national economies.

Famous Austrian Economists

There were many authors and economists who contributed to the overall creation of the theory, but the most influential and known were Carl Menger, Ludwig von Mises and Friedrich August von Hayek.

Carl MengerCarl Menger (1840 – 1921)

The founder and father of the whole Austrian School of Economics and first to ever to look at economy as actions of individuals rather than an exact science. His works were rejected at first for being “subjectivist” and inaccurate, just to be praised later for unveiling economy for what it really is: individuals acting to satisfy their wants. Used his “subjective theory of value” he arrived at one of the most powerful insights in economics – both sides gain from exchange. Learn more about Carl Menger…

Ludwig von MisesLudwig von Mises (1881 – 1973)

Being a student of Carl Menger himself, Mises was quick to evolve and push Megner’s philosophy even further. Explaining what causes business cycles and being able to save Austria form inflation, that troubled Germany in 1920s, he truly is one of the great minds of Austrian School of Economics. His groundbreaking work on money and credit and deeper exploration of an individual need behind the supply and demand and the “price“ of money itself solidified the position of Austrian economics in the world. Learn more about Ludwig von Mises…

Friedrich August von HayekFriedrich August von Hayek (1899 – 1992)

A well-known philosopher, thinker and author of his era, Nobel Prize laureate and a legend in the world of economy. His theories proved that financial crises in history were a fabrication of powerful government manipulations – creating false booms, lowering interest rates and so forth. His works defended free market and free entrepreneurial spirit that drives the business and the world of economy. Learn more about Fridrich von Hayek…

I am an Austrian Economist

With the Austrian theory of the business cycle, new understanding of the sales process and the ever-changing approach towards market and economy in the modern world, there is not much that can really stay constant and fixed, even within the snug, accurate world of economic sciences. Economy cannot exist by itself, apart from the real world with people. IT gives us revolutionary tools to break new ground and explore the individual minds even deeper, aiding the entrepreneurship within ourselves. The only thing that economy can always rely on is the entrepreneurial spirit within the people.

We will conclude by defining society as a process (i.e. a dynamic structure)which is: spontaneous, and thus not consciously designed by anyone; highly complex, since it comprises millions and millions of people with an infinite range of constantly changing goals, tastes, valuations, and practical knowledge; and composed of human interactions (which are basically exchange dealings that frequently yield monetary prices and are always carried out according to certain rules, habits, or standards of conduct). All such human interactions are motivated and driven by the force of entrepreneurship, which continually creates, discovers, and transmits information or knowledge, as it adjusts and coordinates different people’s contradictory plans through competition and enables them all to coexist in an increasingly rich and complex environment.
Jesus Huerta de Soto, The Austrian School – Market Order and Entrepreneurial Creativity; p.36

Therefore we developed sales management software “Pipeliner CRM”, a programmatic product that is based on the highly relevant findings of 150 years of economic history and economic theory as developed by the Austrians. The objective is to provide the best possible support for entrepreneurship.

The Pipeliner Philosophy

About 150 years ago, several of our compatriots back in Austria did a little research into how economies work. There were five key players, Carl Menger, Friedrich August von Hayek, Israel M. Kirzner, Murray Rothbard and especially Ludwig von Mises. Their findings formed the basis of the Austrian School of Economics (It’s not an actual school with a building, it’s a school of thought, a way of looking at things).

Anyway, in a nutshell, von Mises and his colleagues had a radical thought – What if they applied something called praxeology to economics? Praxeology says that people are not just reactive, they’re proactive. The things they do are purposeful. That’s the principle behind the action axiom.  And, perhaps the most purposeful, most active, people in any commercial enterprise, besides the entrepreneur are the salespeople. They are truly the entrepreneurs in the enterprise.

Once you know that, you understand how salespeople make decisions. Once you know a bit about decision theory, you can plan for the types of things salespeople do and you can support the ways they think and work. You can follow the natural order of things.

That’s what drove the way we designed and built Pipeliner CRM. Instead of top-down, management-heavy CRM directives that make salespeople cringe and turns them into box-checking automatons, Pipeliner CRM is built on the notion that salespeople naturally want to sell; they’re driven to it naturally, organically, entrepreneurially. Pipeliner gives them the insights and the tools to do just that – visualize and realize the sales goals they’re pursuing. Pipeliner not only protects the entrepreneurial process, it multiplies it.

Are you an Austrian Economist? What do you like the most about the Economic School?

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