What Modern Economists Can Learn from the Austrian School of Economics

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Alonso Santos Rodríguez
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The Austrian School of Economics represents a heterodox methodological approach to economics that significantly differs from the orthodox teachings represented by mainstream economics. The Austrian School’s approach is multidisciplinary, comprising not only economists but also historians, sociologists, jurists, and philosophers who aim to explain social phenomena stemming from human action, which serves as the fundamental pillar of the school. Below, we will explore some of the substantial discrepancies between these schools of thought and provide a conclusion on the relevance of the Austrian School today.

Methodology

The main tools of the Austrian School are represented by methodological individualism and apriorism. Methodological individualism is a systematic approach that focuses on the individual as the fundamental unit of study in economics and how individual goals and actions transcend the personal sphere and influence society. It differs from collectivism, which focuses on the collective as the primary subject of study, relegating the individual to a mere part of the whole. Methodological individualism does not deny the aggregate impact of groups on individuals, but argues that social groups, or the collective, are ultimately composed of individuals with their own goals and objectives, whose convergence fosters the formation of such groups. In other words, collective groups are ultimately several acting individuals.

Apriorism holds that the most basic human knowledge is innate, based on certain logical structures embedded in the mind that enable valid reasoning without the need for empirical data. Thus, this knowledge is valid and certain in all contexts. A prominent example relevant here is that of human action, which cannot be denied without human action, and other consequent economic laws.

In contrast to apriorism, empiricism is employed by the mainstream through the scientific method. Empiricism is characterized by using hypotheses and testing to generate new knowledge derived from sensory information. By testing a hypothesis through experimentation, it is either validated or discarded; in the former case, scientific theories are temporarily formed. The main problem of empiricism in the field of social sciences lies in the absence of constants, the uniqueness of historical events, the element of human choice, as well as ethical issues related to experimental subjects. While constants are useful in the natural sciences, the use of mathematics, physics, or statistics is unproductive in the context of social sciences and human action. The conclusions drawn do not provide useful knowledge but rather inform that, under certain conditions, a specific, unrepeatable event occurred due to the absence of such constants. Therefore, their conclusions are not generalizable. There could never be certain economic knowledge.

The Role of the Entrepreneur in Society

For followers of the Austrian School, entrepreneurial function represents an action of special interest, as it drives human progress. According to Professor Jesús Huerta de Soto, entrepreneurial function is defined as follows: “In a broad sense, entrepreneurial function coincides with human action itself. In this sense, it could be said that any person who acts to modify the present and achieves their goals in the future exercises entrepreneurial function.”

The essence of human action—and thus entrepreneurial function—is achieving goals (ends) by using means to alleviate or reduce the individual’s felt uneasiness. In a stricter sense, entrepreneurial function is defined as a persistent attitude of alertness to different market opportunities that can be leveraged, not only for personal benefit, but also for the benefit of other market participants. By discovering new opportunities, the entrepreneur manages information that is transmitted to the rest of society, allowing for the correction of imbalances between prices of factors and subjective consumer demand. This entrepreneurial activity has an equilibrating function. However, this does not imply that society is in or could ever be in permanent equilibrium; as these imbalances are corrected, new ones emerge, which can be leveraged by other alert individuals, generating a virtuous cycle of opportunity exploitation.

To benefit from their actions in the market, entrepreneurs must offer the best conditions for consumers to feel the need to purchase their product or service. Thus arises the concept of consumer sovereignty. In general, in the absence of state intervention, the companies that prevail are those offering better products or conditions to consumers. This does not mean that succeeding once in the market guarantees protection against competitors; past success does not guarantee future success.

In contrast, mainstream economics mentions entrepreneurs or entrepreneurship but relegates them to a secondary role. Often, however, entrepreneurs and their function is neglected altogether. Entrepreneurs are considered actors (or automata) who, given pre-existing conditions, seek the best course of action to exploit opportunities. The difference between the two perspectives lies in the role of information and entrepreneurship in the economy. Orthodox economists criticize entrepreneurial actions when their results do not align with “optimal” outcomes. They fail to perceive that entrepreneurs act rationally ex ante but may make errors ex post. Entrepreneurs may err because information is not a given but is dispersed and must be created by the entrepreneur. Errors occur when the information they possess lacks value for consumers or when other activities become more urgent for scarce resources, but that is powerfully indicated by the power of profit and loss.

Consumption, Savings, and Investment

Without savings, there can be no investment. This phrase is considered a maxim of Austrian thought and derives from fundamental axioms of economic laws. If capital or resources are not accumulated, it is impossible to carry out an investment requiring such inputs. A simple example is the construction of a cabin in the woods. For this project, materials like wood must be gathered and manipulated; without production and savings, the cabin cannot be completed. The same applies more broadly to capital and monetary accumulation. For the Austrians, capitalism—understood as an economic system ensuring private property and characterized by capital accumulation—is fundamental. In any case, savings are essential. Thus, for Austrian economists—alongside entrepreneurial function—savings are essential for stable economic growth.

For Keynesians (also part of the mainstream), the driving force shifts to consumption. They argue that aggregate demand enables economic growth and must be stimulated by any means if consumption falters. This fosters societal debt to boost consumption (and investment) and discourages saving, which remains necessary but diminishes over time. Beyond economic effects, this perspective influences moral values, promoting short-termism at the expense of long-term planning and accountability, potentially strengthening the state’s role and interventions.

Conclusions

The Austrian School’s role is becoming increasingly important, with a growing number of students, educators, entrepreneurs, philosophers, sociologists, historians, and even politicians playing a fundamental role in spreading the ideas of sound, praxeological economics in society. It is necessary, in my view, to constructively critique the ideas propagated by socialists, neoclassicals, Keynesians, and other mainstreamers, which have caused great harm not only to economic science but also to the social sciences in general. I believe it is essential for anyone who calls themselves an economist to reflect on the ideas presented in this article and not settle for a single perspective. Debate is a powerful tool that—in the right hands—allows society to advance toward a brighter future.

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