Economic Theory

The diversity of modern Austrian thinking

Randall Holcombe’s new textbook, Advanced Introduction to the Austrian School of Economics, is an important addition to the general Austrian economics literature. The book gives an erudite, accessible, and lucidly written introduction to the core principles, ideas and diversity of modern Austrian thinking.

Milton Friedman was once asked about the value of delineating economic thinking by the schools of thought. He opined that although it is always tempting to partition economics into schools of thought, there are only two kinds of economics: ‘good’ economics and ‘bad’ economics. However, as the different schools each have distinguishable ideas associated with them it is useful to compare and contrast the assumptions and the approaches they promote. Moreover, Holcombe’s book clearly demonstrates why the common sense economics of Menger, Bohm-Bawerk, Mises, Hayek, Kirzner, Rothbard, and more recent Austrian scholars, constitutes what Milton Friedman would describe as ‘good’ economics.

The thin volume offers ‘an advanced introduction’ targeted at an informed reader or student who has a conceptual understanding of the neoclassical economics that is built on the foundation of equilibrium analysis. In contrast to the equilibrium economics framework, the Austrian school believes the market economy is a spontaneous order resulting from human action, but not from human design. Although the Austrian school economists refer to the equilibrium concept, they consider it a moving target in a continually evolving economy. The dynamic nature of economic activity that focuses on the ongoing process by which economic coordination takes place leaves the equilibrium outcome a theoretical state. Hence, for Austrian economics equilibrium analysis is a matter of secondary importance. The text succinctly addresses the major theoretical constructs of the Austrian school including the market process, decentralised knowledge and the role of the firm and markets, economic calculation, money, banking and business cycles, and methodology. As a management scholar I consider the discussion of entrepreneurship and the entrepreneurial nature of firms to be the book’s most valuable contribution. Although Mises considered the entrepreneur the ‘driving force of the market’ and a fundamental economic agent, modern economics has maintained an ambivalent relationship with entrepreneurship, with little consensus on how the entrepreneurial role should be modelled and incorporated into economic theory.

Foss and Klein in their recent major contribution to the Austrian entrepreneurial theory of the firm state that in mainstream economic literature, the concepts of entrepreneurship such as Schumpeter’s account of innovation, Knight’s theories of profit, and Kirzner’s analysis of entrepreneurial discovery, remain an enigma. Similarly, strategic management literature has not given much attention to entrepreneurship. The discipline’s dominant perspective, the ‘resource based view of the firm’, is founded on the neoclassical model of perfect competition and the production function view of the firm. However, Edith Penrose’s (1959) approach to the growth of the firm has recently made some inroads into strategy research. Penrose’s theory, that is more akin to the Austrian and evolutionary concepts of the firm, argues that firm growth is, over time, driven by the evolving knowledge base of the firm’s managers and limits to the rate of growth are imposed by the time that it takes to integrate new managers and employees into the firm’s knowledge structure. Due to the introductory nature of Holcombe’s book it is impossible to cover entrepreneurial theory and different perspectives on entrepreneurship in full. However, the book clearly demonstrates the central role the Austrian school gives to the entrepreneur and entrepreneurship as a judgemental process that is based on spotting, and acting on, a profit opportunity that previously has gone unnoticed.

The publication of the book is well timed as management and business schools are beginning to show renewed interest in entrepreneurship. Research and teaching of entrepreneurship is increasingly becoming incorporated into the disciplines of management, strategy and finance rather than a standalone subject about business formation, business planning, small business management, and technology innovation. As Austrian economics remains a minority focus within the mainstream economics faculties, the renewed relevance of the Austrian perspective could perhaps best be approached through formal management and business studies. Holcombe weaves together the concepts of uncertainty, distributed tacit knowledge, entrepreneurial discovery and arbitrage, and the role of prices and profit into a seamless framework that has much to offer in advancing and informing students’ and policymakers’ understanding of the crucial role of entrepreneurship in a well functioning market economy.

Professor Holcombe concludes with some notes on the Austrian method and an elegant discussion of the ideology of the Austrian school. The degree to which Austrian economics and libertarian political philosophy are connected is a matter of interpretation. According to Holcombe the answer depends on the extent to which one believes that economic and political institutions are co-dependent. Holcombe observes, however, that most proponents of the Austrian school tend to support libertarian views. These views are grounded in ‘good’ economics, the idea that the economy – and society in general – is a self-regulating complex system that is the result of human action, but not of human design. Attempts to intervene in that system are likely to result in negative unintended economic consequences as they cloud entrepreneurial judgement and human action in general. The book should be read by anyone interested in current Austrian thinking, and I envisage the text will be a welcome addition to the curricula in strategic management studies.