New Perspectives on Austrian Economics

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The work of the great American economist Frank H. Knight likewise shares some key themes and insights with the Austrian school — notably his emphasis on entrepreneurship and uncertainty — and in our discussion of Austrian perspectives on entrepreneurship we reference some of his most relevant ideas.

Given this colorful cast of characters, it is well to ask what makes Austrian economics unique and valuable. Its first notable characteristic is its scope. Austrian economics attempts to offer a wide-ranging but integrated account of economic relations, with a focus on realistic explanations of the causal relationships between economic phenomena. In other words, it seeks to understand value, prices, and other economic facts as they exist in the world, rather than how they might behave under highly abstract or unrealistic conditions, such as long-run equilibrium. We argue that this emphasis on realism is one reason Austrian work is ideally suited for the study of both theoretical and applied problems in the management disciplines.

It is difficult to reduce Austrian economics to only a few ideas; nevertheless, a limited review of some of its most important contributions is necessary. We choose to focus here on themes that are usually included among the first two of these topics. These themes are: subjectivism, tacit and dispersed knowledge, capital, time and uncertainty, and entrepreneurship.

These topics lie at the heart of Austrian approaches to management studies, particularly issues germane to entrepreneurship, strategy, and the theory of the firm.

Unpacking them will help underline a vital conclusion that frames much Austrian work in these fields: the market is not a static or equilibrium state, but rather a dynamic process in which individuals use the price system to coordinate their actions and improve their welfare over time. Entrepreneurs play the leading role in this process, which is therefore also a starting point for investigating a wide range of problems in management studies. However, individualism comes in different forms. Thus, laymen associating Austrian economics with individualism often have political individualism in mind, as in the political philosophies of classical liberalism or libertarianism.

It is true that many Austrians have been associated with individualism in this sense. Indeed, when it is said that Austrian economics is built on individualistic premises, something quite different is meant. Austrians subscribe to ontological individualism, that is, the position that ultimately only individuals can truly act. The closely related methodological position asserts that individuals and the things they perceive, like, plan, do, etc. Collectives such firms, groups, divisions, etc.

Extreme structuralist positions in sociology, according to which individual action is entirely determined by structural roles, is one articulation of the opposite position of methodological collectivism. Since individuals are anonymous occupants of structural roles and are in essence alike, they are of little or no analytical interest, and any attention should center on macro structures.

Modern economics, particularly macroeconomics, sometimes also slips into methodological collectivism of this sort. In fact, even management theory often makes use of methodologically collectivist arguments. However, much management theory is as methodologically collectivist as sociology in that it emphasizes structures, practices, routines, capabilities, competencies, and other constructs over the individuals who comprise them.

So do most modern economists, of course, but microfoundations can take different forms.


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Indeed, Austrian microfoundations differ from those of mainstream economists in several key respects. Nevertheless, the Austrian variant based on a methodological individualism, which highlights the plans individuals form in order to pursue their goals, continues to provide valuable foundations for entrepreneurship and management research McCaffrey, a. Austrian economists from Menger onward have emphasized that value is subjective.


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  • For example, costs and benefits, and the incentives they offer, must ultimately be understood with reference to the subjective views of individuals. The notion of subjective value, though simple, has far-reaching consequences for the way economic theory is developed and applied. In particular, it places the individual consumer at the center of economics. It implies, for example, that the prices of all consumer goods and services, as well as all factors of production land, labor, capital , can be traced back to individual preferences and to marginal decision-making.

    The end of all production is consumption, in other words, the creation of value for consumers. And it is with consumer welfare in mind that economic behavior is organized. The prices of the factors reflect their marginal contributions to the creation of useful final goods for consumers, and combining and allocating factors is the job of entrepreneurs.

    Crucially though, the ultimate test of entrepreneurial success lies with consumers, whose decisions to buy and not to buy determine profits and losses. Austrians have extended the idea of subjectivism of preferences to include subjectivism of knowledge, information, and expectations. Such knowledge is experiential rather than vicarious and may be difficult to articulate explicitly. As such, it is difficult to transmit to, for example, a central planning board.

    These in turn influence investment, financing, and production decisions, and are thus intimately bound up with the whole structure of the economy.

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    New Perspectives on Austrian Economics

    Austrian ideas about the tacit, dispersed, and subjective nature of knowledge dovetail in many ways with current management thinking. Thus, organizational theory has long understood that the decentralization of organizational structures is dependent on the dispersed nature of knowledge e. Like Hayek , this literature highlights tacit knowledge as a key barrier. The subjectivity of knowledge and expectations are also central to management research.

    Thus, scholars often stress how organizations may form their interpretive frameworks for making sense of what goes on in their environments Foss, Klein, Kor and Mahoney, The process of valuation and want-satisfaction is not automatic or given, because uncertainty provides a constant barrier to successful action. Uncertainty is a natural implication of two facts: first, the existence of tacit and dispersed knowledge, and second, the fact that action takes place in time.

    These factors, especially the temporal character of action, introduce the possibility of incomplete information and error, which lead to the frustration of plans and the waste of scarce resources.

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    However, not all future events are unforeseeable or impossible to cope with, and so it is necessary to introduce a distinction between different types of unknown future events: risks and uncertainties. Different scholars have different ways of expressing this distinction, but the core differences are that risks are homogeneous, repeatable, and relatively predictable, whereas uncertainties are heterogeneous, unique, and inherently unpredictable. Risks can be mitigated using insurance contracts and similar devices, but uncertainties defy attempts at control.

    In fact, we argue that they pose a special problem that requires a particular type of talent to solve, namely, entrepreneurial judgment. The special role of the entrepreneur is to use good judgment to overcome uncertainty, and is the subject of the next section.

    For the moment though, it is enough to point out that uncertainty is pervasive in all areas of human life, not only in economic affairs or in management contexts. Furthermore, the persistent flow of time means that only temporary equilibria are possible in any market: because the data of the economy are constantly in flux, no long-run equilibrium ever truly exists.


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    • It is for this reason that Austrian economic research often stresses the idea of the market as a ceaseless process rather than an end-state. Foss and Klein , ch.

      Meeting blindly… Is Austrian economics useful for dynamic capabilities theory? - ScienceDirect

      Production leads naturally to the problem of capital. Although capital is often neglected in mainstream treatments of economic theory, for Austrian economics it is indispensable. Instead, modern economics holds a view of capital as a homogeneous mass of inputs. Which view of capital one holds matters for understanding phenomena like entrepreneurship, strategy, and organization.

      Thus, if capital is truly homogeneous, combining and organizing resources is trivial. There are few, if any, problems of management as it is unproblematic to coordinate identical resources. Cooperation problems e. And if resources are identical, resource-based competitive advantages cannot exist, by definition.

      These thought experiments merely serve to illustrate that actual management thinking presupposes heterogeneity on the resource, or capital, side of things. By the same token, a realistic picture of the economic process presupposes a notion of capital heterogeneity.

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      In sum, Austrian economics strives for a realistic analysis of economic and social relations, beginning with the basic facts of human choice and ultimately building to an explanation of aggregate economic activity and complex social institutions. The wide but practical scope of Austrian work can thus serve as a foundation for research in many fields of the social sciences and business disciplines.

      The remaining sections of this Element explain a series of ways this is being done, beginning with one further part of Austrian theory, the one that is most fundamental to management studies: the theory of entrepreneurship. Entrepreneurship plays a central role in Austrian economics. To avoid confusion about these different strands of thought, we first clarify the domain of entrepreneurship theory, while in the following sections we explore some major themes and points of contention in the literature.

      Quarterly Journal of Austrian Economics

      We then build on this foundation with a discussion of the judgment-based approach to entrepreneurship, which synthesizes and extends many key elements in Austrian work. It is vital to begin by defining the domain of entrepreneurship theory, as there are several research streams within the academic literature, each with its own methods and units of analysis. Following Klein , we distinguish between occupational, structural, and functional theories. Occupational theories define entrepreneurship as self-employment and treat the individual as the unit of analysis.

      They describe the characteristics of individuals who start their own businesses and explain the choice between employment and self-employment e.

      Austrian Perspectives on Entrepreneurship, Strategy, and Organization

      One strand of occupational theories of entrepreneurship is formulated in the language of neoclassical economics and can be considered part of the subfield of labor economics in which the choice between employment and self-employment is a maximizing choice on the margin. Psychological and sociological approaches looking at the personal characteristics of individuals or the effect of social forces on personality, with the goal of explaining why some people and not others choose self-employment, are also occupational in this sense. Various literatures on industry dynamics, firm growth, clusters, and networks have in mind a structural concept of entrepreneurship e.

      Structural approaches are common in the economic geography and evolutionary economics research streams. Functional theories view entrepreneurship as a series of actions, or as a process, rather than an outcome like launching a start-up company Klein, Such theories are a foundation of the activity-based, processual research trend in entrepreneurship studies Shepherd, ; McCaffrey, a , and are also the subject of this section.

      Austrian Economics - Friedrich A. Hayek

      While valuable research exists on each of these topics, our focus will mainly be on entrepreneurial judgment and related concepts.

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