Economics: The Austrian School vs. The Chicago School
Summary
TLDRThis video explores the Austrian and Chicago Schools of Economics, contrasting their approaches to economic theory. The Austrian School, with roots in subjective value and human action, emphasizes causal realism and rejects mathematical modeling, focusing on concepts like time preference and the business cycle. In contrast, the Chicago School views economics as a hard science, using empirical evidence and mathematical models to analyze resource allocation and advocate for minimal government intervention. Both schools share a commitment to free-market principles, yet diverge on monetary policy and the role of government in the economy.
Takeaways
- 🏛️ The Austrian School of Economics emphasizes individual human action and subjective value, with key figures like Carl Menger, Ludwig von Mises, and Friedrich Hayek.
- 🌐 The Chicago School of Economics, founded by Frank Knight and including economists like Milton Friedman, focuses on the allocation of scarce resources and sees economics as more of a hard science.
- 📊 Austrian economists reject mathematical modeling due to the unpredictable nature of human behavior, unlike the Chicago School which utilizes mathematical models and empirical evidence.
- 💡 The concept of 'demonstrated preference' in Austrian economics highlights that economic value comes from individual choices based on personal preferences.
- 🔄 The Austrian School is known for theories like marginal utility, opportunity cost, and time preference, which emphasize the subjective nature of economic decisions.
- 📉 The Austrian theory of business cycles attributes economic instability to expansionary credit policies, a view contrasting with mainstream economics.
- 💸 The economic calculation problem introduced by Mises argues that central planning cannot efficiently allocate resources due to the lack of market price signals.
- 🌟 Hayek's knowledge problem extends the economic calculation issue, stating that dispersed knowledge in an economy makes centralized decision-making ineffective.
- 📈 Milton Friedman's quantity theory of money from the Chicago School posits that the total money supply influences prices and that central banks can impact economic stability.
- 🔎 The Chicago School's rational expectations hypothesis assumes that people in economic models act rationally, a point of criticism given real-world irrational behavior.
Q & A
What are the four major schools of economics mentioned in the script?
-The four major schools of economics mentioned are Marxism, Keynesianism, the Chicago School of Economics, and the Austrian School of Economics.
Who is considered the founder of the Austrian School of Economics?
-The founder of the Austrian School of Economics is Karl Menger.
What is the central tenant of Austrian economics regarding value?
-The central tenant of Austrian economics is that value is subjective and always subjective.
How do Austrians view the role of mathematics in economics?
-Austrians reject the use of mathematical modeling in economics, arguing that human behavior cannot be predicted like physical phenomena and that constant variables are unattainable in the real world.
What is the Austrian theory of the business cycle?
-The Austrian theory of the business cycle posits that most boom-bust cycles in the economy are caused by expansionary credit.
What is the economic calculation problem as introduced by Ludwig von Mises?
-The economic calculation problem is the argument that in the absence of a market economy, socialist systems would not know how to allocate resources effectively because they lack prices as signals of what people want.
Who introduced the knowledge problem in the Austrian School of Economics?
-F.A. Hayek introduced the knowledge problem, which extends the economic calculation problem to include virtually all decisions made by central decision-making units.
What is the Chicago School's view on the use of mathematics in economics?
-The Chicago School has no objections to utilizing mathematical models, as they see economics as closer to a hard science, and they use data-driven approaches to refine and revise models for predictive accuracy.
What is the key contribution of Milton Friedman from the Chicago School?
-Milton Friedman's key contribution is his quantity theory of money, which posits that the total amount of the money supply dictates real-world prices.
How do the Austrian and Chicago Schools differ in their approach to economic theory?
-The Austrian School advances its arguments through a priori rationalism and a causal realist approach, while the Chicago School uses empirical evidence and quantitative approaches, often employing mathematical models.
What is the main difference between the Austrian and Chicago Schools' views on prices?
-The Austrian School maintains a consistently subjective approach to prices, based on individual preferences, while the Chicago School, inheriting the neoclassical view, sees production costs as a factor in determining prices.
What is the main similarity between the Austrian and Chicago Schools despite their differences?
-Both the Austrian and Chicago Schools support the free market, oppose government interventions and regulations, and are opposed to socialism. They also broadly accept Hayek's insights about the knowledge problem, which allows them to analyze various aspects of life beyond traditional economic topics.
Outlines
📚 Introduction to Economic Schools: Austrian vs. Chicago
The video introduces the four major schools of economics, focusing on the Austrian and Chicago schools. The Austrian school, founded by Carl Menger, emphasizes subjective value, purposeful human action, and the importance of time in economic decisions. It rejects mathematical modeling and government intervention in the market. Key Austrian economists include Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, Ludwig von Mises, and F.A. Hayek. The Chicago School, in contrast, views economics as the study of resource allocation, is more empirical and data-driven, and does not oppose mathematical models. It was founded by Frank Knight and includes notable economists like James M. Buchanan, George Stigler, and Milton Friedman.
🌟 Key Concepts of Austrian Economics
Austrian economics is characterized by its focus on subjective value, demonstrated preference, and the causal realist approach. It argues that value is inherently subjective and that economic actions are driven by individual preferences. Austrians believe that production costs do not determine prices, which are instead based on subjective preferences. They also reject the idea of economics as a hard science due to the unpredictable nature of human behavior. The school emphasizes the importance of time in economic decisions and is known for contributions like marginal utility, opportunity cost, and the theory of the business cycle, which attributes economic fluctuations to expansionary credit policies.
📈 The Chicago School's Empirical Approach to Economics
The Chicago School takes a more empirical and quantitative approach to economics, seeing it as the study of scarce resource allocation. It is open to mathematical modeling and views economics as closer to a hard science. The school's contributions include Milton Friedman's quantity theory of money, which posits that the money supply dictates prices, and the concept of rational expectations, which assumes model agents are rational. Other contributions include Gary Becker's work on the economics of the family, George Stigler's theory of regulatory capture, and James M. Buchanan's public choice theory, which analyzes government functions and failures.
🤝 Similarities and Differences Between Austrian and Chicago Schools
Despite their differences, both the Austrian and Chicago schools share a commitment to free-market principles and opposition to socialism. They also agree on the importance of the knowledge problem in economic decision-making. The Austrian school emphasizes a priori rationalism and the role of time, while the Chicago School relies on empirical evidence and mathematical models. The Austrians are consistently subjective in their view of prices, whereas the Chicago School considers production costs as a factor in price determination. Macroeconomically, the Austrians focus on the business cycle and credit expansion, while the Chicago School follows Keynes in considering aggregate statistics but emphasizes the money supply over aggregate demand.
Mindmap
Keywords
💡Austrian School of Economics
💡Subjective Value
💡Demonstrated Preference
💡Opportunity Cost
💡Time Preference
💡Business Cycle Theory
💡Economic Calculation Problem
💡Knowledge Problem
💡Chicago School of Economics
💡Rational Expectations
💡Regulatory Capture
Highlights
Marxism advocates for government control until a new utopia is achieved.
Keynesianism supports government intervention in the economy.
The Chicago School of Economics favors minimal intervention in the market.
The Austrian School of Economics promotes no intervention and total laissez-faire.
Austrian economics focuses on purposeful human action and demonstrated preferences.
Value in Austrian economics is considered subjective and based on individual preferences.
Austrians reject the idea that economics can be a hard science due to unpredictable human behavior.
Austrian economics emphasizes the importance of time in economic decisions and actions.
Marginal utility, a concept by Karl Menger, is a key contribution of the Austrian School.
Opportunity cost, introduced by Friedrich von Wieser, is a central concept in Austrian economics.
The Austrian School's theory of the business cycle attributes economic fluctuations to expansionary credit.
Ludwig von Mises introduced the economic calculation problem regarding resource allocation in socialist systems.
F. A. Hayek's knowledge problem highlights the dispersed nature of economic decision-making knowledge.
The Austrian School has split into branches following Hayek and Mises-Rothbard with differing views on the state's role.
The Chicago School views economics as the study of the allocation of scarce resources with alternative uses.
Chicago economists use empirical evidence and mathematical models to analyze economic policies.
Milton Friedman's quantity theory of money posits that the money supply dictates real-world prices.
The Chicago School's rational expectations theory assumes rational behavior within economic models.
George Stigler's work on regulation and regulatory capture is a significant contribution to the Chicago School.
James M. Buchanan's Public Choice theory analyzes government functions and challenges market failure claims.
The Chicago School has expanded economic analysis to various aspects of life beyond traditional economic topics.
Both Austrian and Chicago Schools support free markets and oppose socialism and government interventions.
The Austrian School uses a priori rationalism, while the Chicago School relies on empirical evidence.
Austrians see prices as subjective, whereas the Chicago School considers production costs in price determination.
The Austrian School rejects the distinction between micro and macroeconomics, focusing on the business cycle theory.
The Chicago School follows Keynes in considering the economy as a whole but emphasizes the money supply over aggregate demand.
Transcripts
the four major schools of economics are
Marxism which is generally for
government control at least until the
new utopia Keynesianism which is
generally for government intervention
the Chicago School of Economics which is
generally for minimal intervention in
the market and they've been hit
government and the Austrian School of
Economics which is generally for no
intervention in the market at all hence
total laissez-faire in this video I will
be concentrating on the differences
between the Austrian school and the
Chicago School let's start with the
Austrians the founder of the school was
karl menger who was writing in the 1870s
he had two outstanding students
Eugene bomba Berk and Friedrich von
visor
each of whom had their own outstanding
students in Ludwig von Mises and F a
Hayek respectively
so that's who they are but what is
Austrian economics the starting point is
the study of purposeful human action we
all way up alternatives and make
decisions upon which we act but
economics is not concerned with the
psychology of such choices but with
which actions were chosen such actions
are called demonstrated preference or
revealed preference if I offer you $10
or $100 whichever one you actually take
is your demonstrated preference this is
purposeful action a central insight of
Austrian economics then is that
everything that happens in an economy is
driven by real human beings
demonstrating their preferences through
these purposeful actions hence their
description of the economy is said to be
causal realist the only ones making
anything happen are people the central
tenant of Austrian economics is that
value is subjective and that it is
always subjective you
prefer coffee and I might prefer tea you
might like coffee an awful lot whereas I
might like tea only marginally more than
I like coffee
four austrians prices in the real
economy are always based on these
subjective preferences which we
inherently cannot measure indeed your
own preference for coffee might change
over time I didn't drink it when I was
17 but I do know for example for more on
this see my video pricing a cup of
coffee
Austrians argue that other economists
despite claiming to believe that value
is subjective end up forgetting this
when modelling prices in their hidden
assumption that production costs
determine crises Austrians insist that
production costs do not determine prices
only subjective preferences because we
cannot know what people's subjective
preferences and valuations of things are
Austrians reject the idea that economics
can be a hard science like for example
physics they argue you cannot predict
what people may or may not do because
human beings are not like stones which
react to conditions in predictable ways
and besides you can never get constant
variables in the real world anyway
therefore Austrians reject mathematical
modeling in economics and the final
feature of Austrian economics is that
they never forget the role of time
because humans must act in a world bound
by time time is a constant feature of
our economic affairs which is often
overlooked by other economists this is
important when considering such things
as pricing inflation and the role of the
entrepreneur and I have videos on these
topics if you're interested
the key Austrian contributions to
economic theory have been marginal
utility which was advanced by karl
menger and concerns the subjective
theory of value I have already discussed
imagine you are thirsty in a desert in
the baking Sun what would you give for a
glass of water now imagine you've just
finished drinking a whole pint of water
what would you give for the next class
I'd warrant it will be considerably less
than you'd give if you were thirsty in
the desert
another key austrian contribution this
time from friedrich von wieser is the
idea of opportunity cost which is simply
put the loss of other alternatives when
one alternative is chosen which face
such choices all the time in real life
imagine the choice between seeing a
movie with your friends or studying hard
to get a good grade for the examination
you have the next day the opportunity
cost for studying hard is forgoing the
enjoyment of the movie and spending time
with your friends however the cost of
seeing the movie is a lower grade on the
exam next there is the concept of time
preference introduced by Eugene Bambara
if I offer you the choice between 100
dollars today or 100 dollars in one
month's time the chances are you'll go
for the 100 dollars today this is your
preference for having something now
instead of in the future if I offer you
10 pounds today or 100 dollars in one
month's time you might have a more
difficult choice can you forego the ten
dollars now to make the hundred dollars
in a month this would be a low time
preference if you take the ten dollars
today we'd say that you have a high time
preference you prefer to consume the ten
dollars now than have a hundred in a
month one of the theories for which the
Austrian school is famous is their
theory of the business cycle which
argues that most of the boom-bust cycles
we see in the modern economy are caused
by expansionary credit this was first
outlined by Ludwig von Mises in 1912 in
his landmark book called the theory of
money
crédit lots of people instinctively know
the Austrians are correct about this and
yet very little has been done to stop
boom and bust cycles in the hundred
years since Mises first introduced the
theory another famous concept introduced
by Mises is the economic calculation
problem Mises argued that in the absence
of a market economy socialist systems
would not know how to allocate resources
effectively because they are missing
prices as signals of what people want
and first argued this in his book
socialism in 1922 and would be proven
correct by the collapse of virtually
every socialist government in the next
80 years of the 20th century finally F a
Hayek introduced the knowledge problem
this is an extension of the economic
calculation problem to include virtually
all decisions made by central
decision-making units Peck argues that
the knowledge required to make effective
decisions in the economy are dispersed
among thousands of people on the ground
and no one person can possibly acquire
the data to make even a semi informed
call as to what to do now probably the
most accessible book on the knowledge
problem was written by Thomas Sol it is
called knowledge and decisions today the
Austrian School of Economics has split
into two different branches roughly
speaking between followers of FA Hayek
and followers of the Ludwig von Mises
and his American protege Murray Rothbard
the followers of Hayek tend to analyze
real world institutions and policies
emphasizing the miss allocations of
resources and avert able disasters
caused by interventionism and promoting
the efficacy of the market mechanism
which produce accountability and
feedback loops the Hayek Ian's have a
stronghold at George Mason University
and the meketa Center I've listed some
of them there the followers of nieces
and Rothbard
meanwhile are more radical in their
advocacy of laissez-faire and in their
opposition to the state
the Rothbard Ian's have a stronghold at
the Ludwig von Mises Institute and argue
for the strongest free market positions
including their opposition to central
banking and the Federal Reserve System
fiat currency as against the hard
commodity money such as gold and
fractional reserve banking which they
want to abolish across the Austrian
school
however opinions range on how large the
state should be from mini kists and
contraction Asst who want a limited
government or a night watchman state to
full anarcho-capitalists who believe all
functions would be better handled by
private enterprise the Chicago School
was founded chiefly in the 1940s under
Frank Knight at the University of
Chicago Knight had three extraordinary
students James M Buchanan who went on to
found a sub branch of political economy
known as public choice George Stigler
who wrote the seminal book on price
theory as well as developed the economic
theory of regulation and finally perhaps
one of the most famous economists of all
time Milton Friedman who was the driving
force of monetarism in the late 20th
century in contrast to the Austrian
school which as we have seen emphasizes
human action the Chicago School sees
economics as studying
the allocation of scarce resources which
have alternative uses the focus on
resources as opposed to people may seem
maya but it does have major consequences
one consequence is that unlike the
Austrians the Chicago School see
economics as being closer to a hard
science resources can be recorded as
data hard data can be analyzed as
empirical evidence and thus economists
can study the economic effects of
various policies almost like scientists
in a lab as a result of this the Chicago
School develops an almost entirely
data-driven view of the world and of
economics
whereas Austrian economists tend to a
their arguments a priori using reason
from first principles Chicago school
economists are more likely to say things
like show me the evidence partly as a
result of this nearly entirely
data-driven view of the world the
Chicago School has no objections to
utilizing mathematical models the test
of any model is if it can predict what
happens in the real world if the model
gets it wrong then refine and revise
until it gets it right
so what contribution has the Chicago
School made to economics first there is
of course Milton Friedman's quantity
theory of money in which the total
amount of the money supply is said to
dictate real world prices Friedman held
that central bank's exacerbated the
Great Depression in the 1930s by
restricting the supply of money they
should have printed more he said he also
argued that the Keynesian focus on
aggregate demand was misplaced and that
the government intervention should be
restricted to controlling the money
supply this is in contrast to the
Austrian view which as I mentioned
chiefly holds expecially credit as
responsible for recessions and not the
supply of money another contribution of
the Chicago School is what is typically
called rational expectations that is
when they build their models Chicago
economists assume that agents within the
models are rational agents of course
these models have been criticized
because people in the real world
are not always rational for example let
us take Gary Becker's rotten kid theorem
imagine you have an altruistic parent
who gives two siblings $10 each one
sibling is mean and decides to bully the
other one therefore next time a parent
decides to give the victim sibling $20
and give the bully nothing the
incentives are such them but bullying is
punished and being a victim is
compensated in Gary Becker's terms the
parent has transferred utility from the
wrongdoer to the victim but apply this
to any real family
we be sure if it would have the desired
effect George Stigler has made the
contribution to the Chicago School is
his work on regulation and especially
the phrase a regulatory capture which is
the insight that once set up regulatory
bodies have incentives to grow far
beyond their original ream it's again
I'd recommend the book knowledge and
decisions by Thomas Sowell on this
incidentally soul was stigler's doctoral
student in this book he essentially
combines stigler's insights on
regulation with earth a Hayek's
knowledge problem James M Buchanan's
Virginia School of Public Choice which
grew out of the Chicago School developed
a robust way of analyzing the functions
of government and government departments
and agency to push back against
Keynesian claims of market failure by
pointing out the hundreds of examples of
government failure finally one of the
chicago schools most lasting
contributions is how they were able to
turn the tools of economics to focus on
topics other than trade or money popular
examples include hidden order by David
Friedman or Freakonomics by Steven
Levitt and Stephen Dubner the Chicago
School has strongholds in where else but
the University of Chicago but also at
think tanks such as the Hoover
Institution in Stanford you can see some
are Chicago economists listed here and
as with the Austrian school opinions
range within the Chicago School from
mini kiss or contraction ists and those
who want limited government or
Nightwatchman state to full
anarcho-capitalists in closing i want to
review the similarities and differences
of the chicago school and the Austrian
school the Austrian school advances its
arguments through a priori rationalism
taking a causal realist approach which
emphasizes the role of time the Chicago
School in contrast advances its
arguments through empirical ever
using a quantitative approach which
utilizes mathematical models in addition
the two schools differ in their view of
prices the Austrians are consistently
subjective in their approach where is
the Chicago School inherit the
neoclassical view of seeing production
costs as a factor in determining prices
finally the two schools differ on
macroeconomic theory the Austrians
reject the distinction between
microeconomics and macroeconomics
entirely and insist that most recessions
can be explained by their theory of the
business cycle and expansion Airy credit
the chicago school meanwhile follow john
maynard keynes in considering the
economy as a whole
zoomed out in aggregate statistics but
differ from keynes in their emphasis on
the money supply rather than demand for
goods as being the area in which
government should focus their
intervention however despite these
differences let us not forget how many
similarities there are between these two
schools both Austrians and Chicago
advocates support the free market they
are generally opposed through government
interventions and regulations they are
utterly opposed to socialism both also
broadly accept Hayek's insights about
the knowledge problem which enable them
to branch out in order to analyze
aspects of everyday life as well as
things we typically think of as
economics such as trade or money now
people often ask me if I'm more towards
the Austrian school or the Chicago
School my personal view is that on the
substantive areas of disagreement such
as on monetary policy or pricing the
Austrian school is generally correct in
fact whenever the two schools disagree
it seems to me that the offspring of you
is more consistently and rigorously
argued however I tend to disagree with
the Austrian insistence on a priori
rationalism the chicago school ended up
winning many more battles in the real
world because they had the data to back
them up its most persuasive to be backed
by statistic
and I see no reason why Austrians
shouldn't engage in empirical analysis
of historical data themselves they can
maintain their objections to predictive
models as being impossible where humans
are concerned but think about their own
general theories which is the business
cycle and the economic calculation
problem which have been borne out in the
real world I mean these is predicted
both of those things correctly so not
pointing this out with robust at data
analysis is to cede the ground to their
opponents on issues where they should
win easily anyway I hope you learned
something here now get out and a very
special thanks to Sir Percy Blakeney the
crimson Satya the ambivalent onion Andy
Swenson Bailey in Aurora David vishesh a
Christopher Shirley home natural rights
binary surfer holy spatula horny toad
Jones Kosta Michael Tainan time stealer
Toyotomi Amy tragic vision William Angus
Blake Burroughs and Edward Dara
Ver Más Videos Relacionados
The Most Important Economic Schools of Thought | Economics Explained
Ideology and ECONOMIC POLICY [AP Gov Review, Unit 4 Topic 9 (4.9)]
SEJARAH PERKEMBANGAN ILMU EKONOMI
16 Books That Will Make You Smarter Than 99% of People
Macroeconomics: Crash Course Economics #5
What's all the Yellen About? Monetary Policy and the Federal Reserve: Crash Course Economics #10
5.0 / 5 (0 votes)