Economics: The Austrian School vs. The Chicago School

Summary

This 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.