The Austrian School of economics is a school of economic thought advocating methodological individualism in interpreting economic developments, the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have multispecific uses which must be aligned.
The major cornerstones of Austrian economics are methodological individualism, methodological subjectivism, and an emphasis on processes rather than on end states.
Since the Austrian economist holds all costs and benefits to be subjective and, therefore, not measurable, only the individual can decide what actions are efficient or inefficient.
The Austrians are the most concerned with fiat money, whose value is eroded over time by a government and central bank that print it with the purpose of transferring to themselves the buying power of the citizenry. Similarly, in the fractional reserve system, private banks create money when they create debt, and by charging interest when they do so, ensure that, over time, real wealth is transferred from productive workers to financiers who produce nothing directly.
The basic question for the Austrian economist is, Which institutions enable individuals to reach their own goals, and which do not? Therefore, their policy recommendations run to changes in the institutional framework within which a society operates.
In other words, the economy is too complicated for politicians to avert recessions and unemployment without unintended consequences that may well be worse.
Together with the contemporaneous writings of Leon Walras and Stanley Jevons, Menger spelled out the subjective basis of economic value, and fully explained, for the first time, the theory of marginal utility (the greater the number of units of a good that an individual possesses, the less he will value any given unit). In addition, Menger showed how money originates in a free market when the most marketable commodity is desired, not for consumption, but for use in trading for other goods.
"Austrian" economics owes its name to the historical fact that it was founded and first elaborated by three Austrians: Carl Menger (1840–1921), Friedrich von Wieser (1851–1926), and Eugen von Böhm-Bawerk (1851-1914).
Essentially, Austrian economists are proponents of the laissez-faire or free-market approach, and decry any form of government intervention in the markets.
The Austrian school’s thinking centres on the way “malinvestment” orchestrated by central banks distorts the business cycle. By keeping interest rates artificially low, central banks trick entrepreneurs into believing that society is more abstemious than it really is. The entrepreneurs then embark on ambitious, long-gestation investment projects, only to discover that the men and materials they require are otherwise engaged in the production of more immediate gratifications. Once this realisation dawns, the entrepreneurs abandon their follies, firing their workers. If wages are flexible and workers mobile, this bust need not be too bad. But misguided attempts by the government or the Fed to prevent unemployment will delay the necessary reshuffling of labour from industries too tied up in the future to those catering to the needs of the present.
Austrian school economist Friedrich A. von Hayek predicted the Great Depression years in advance of the infamous 1929 Wall Street stock market crash. Hayek’s Monetary Theory and the Trade Cycle — first published from Austria in 1929 — predicted the Great Depression. Hayek was granted a Nobel Prize in Economics (much later, in 1974) for his pre-Depression and Depression-era related work in the study of economics.