The Austrian School Economists - Essay Example

Research Paper The development of economic thought has been a logical reflection of economic reality in people’s conscience. However, a significant moment always was a subjective side of perception that different representatives of economics held regarding surrounding actuality based on personal mentality, belonging to social layer or preferences for the school of thought. Economics has a long history of its formation and progress. Though the theory started its development in XVI-XVII centuries, as an independent science, economics was proclaimed with the appearance of Classical Economics. According to this economic school, the source of wealth in the society is a production but not a circulation. The creation of equilibrium on the market theoretically is possible. There are two mechanisms of its formation: the first situation presumes that during the shortage of labor force, entrepreneurs are ready not only to attract new workers with unchangeable wage, but also to increase its level in order to make busy vacant workplaces; the second situation supposes the existence of unemployed people, who are ready to work for more decreased payment. In this respect, economists of Classical school saw the reason of unemployment in requirements of potential workers for high wage. Furthermore, unemployment could be eliminated automatically with the help of market mechanism based on the pressure of labor supply on wage level down to the equilibrium point. In other words, unemployment per se was able to decrease wage and increase employment level. In addition, “wealth accumulation by the state was superseded by the satisfaction of individuals' wants” (Steele par. 8). Consequently, taking into account that initially market obtains necessary regulators that are able automatically provide the usage of present resources, the intervention of government in economics becomes superfluous. In contrast to Classical School, the main principle of Keynesian School lays in the deduction that economy is non-equilibrium and instable system, therefore, intervention of government into it is absolutely normal measure. There is a multiplicative effect that means that production crisis will affect the economy in general. The capitalism is prone to have inner contradictions. Aggregated demand is influenced by monetary and fiscal policy. According to Keynesian School, “economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man” (Runde and Mizuhara 24). Keynesian Economics pointed out the main psychological law: with a rise of profits, a person is prone to increase own consumption but in fewer rates than the growth of profits. While Classical School believes that economic recession is an ordinary and even necessary event that is regulated by invisible hand on the market, representatives of Keynesian School consider depression in economy as a disease that should be treated appropriately by the government. Moreover, Keynesians think that unemployment is more crucial problem than inflation. The major element of Austrian School is the studying of marginal utility. The most vivid methodological peculiarities of this economic thought are successive and uncompromised subjectivism and strict methodological individualism. According to the views of Austrian School’s supporters, there is unpredictable and dynamic nature of consumers and markets, which give place to constant uncertainty in economy (Laclau par. 8). Such economists oppose any formal summarizing of homogeneous indicators, including some kind of macroeconomic approach. They actively use econometrics modeling in their researches. Due to the opinion of Austrian School’s proponents, everything that happens in economy should be explained just as a resultant force of individual preferences and decisions. Time factor plays an important role on the decision-making process of consumers and production issues. Austrian School assumes that the lack of one raw material needed for the production of goods increases the value of another raw material, therefore, “values are also interdependent” (Hazlitt par. 7). In contrast to Classical School’s statement that the value of goods is determined by the cost of production, supporters of Austrian School presume that production cost is influenced by the value of consumption goods and not vice versa (Hazlitt par. 9). The comparison analysis of Classical and Keynesian Schools will show significant differences that are represented in the table below: Classical School Keynesian School Unemployment is a common happening that enlivens economy. When a full employment is achieved, the system of market self-regulation starts to work. Unemployment is a main evil for the economy of any state because it may cause social shock; therefore, government must stimulate its decrease. Government should not intervene in the economy since the effect of invisible hand takes place in the market. The entire monitoring of economy is a necessary measure of the government. In order to reach effectiveness in a fight against inflation, it is imperative to unite the ideas of monetary and fiscal policy. The minimization of interest rate for the stimulation of investment to production is a requirement. There is a strong correlation between the level of wage and influence of supply and demand change. Prices and wages react slowly to the changes in supply and demand. This creates surplus or shortage of labor force. It is no doubt that each of the schools is able to affect my future professional life. For instance, being an entrepreneur and in case of facing problem of the shortage of labor, I will be willing to increase the average level of wage in order to attract new workers. And vice versa, being unemployed for a long time, most like, I will be ready to accept an offer of lower wage in order to be hired. Hence, the statements of Classical School work fairly. As Keynesian School proclaims, I am sure that with an increase of profits, I will raise my consumption level but it will not be exactly the same as the growth of wage. In addition, all my decisions connected with personal or professional life will be definitely formed under the influence of subjective values and preferences; therefore, the deductions of Austrian School will be implemented into practice. Consequently, analyzing all three schools, it is fair to state that each of them managed to provide a great contribution to the economic and social spheres of every person and country in general. Works Cited Hazlitt, Henry. “Understanding "Austrian" Economics.” Ideas on Liberty. 53.9 (2003): 30. Print. Laclau, Yannick. “To `Austrian School' Economists, Robinson Crusoe Describes It Best These Free-Market Advocates Rely on Logic, Deductive Reasoning, and Colorful Metaphors.” The Christian Science Monitor 4 Aug. 1994: 8. Print. Runde, Jochen, and S. Mizuhara. The Philosophy of Keynes' Economics: Probability, Uncertainty and Convention, New York: Routledge, 2003. Print. Steele, Gerry. “The Money Economy: Mercantilism, Classical Economics and Keynes' General Theory.” The American Journal of Economics and Sociology. 57.4 (1998): 485. Questia. Web. 19 Nov. 2014. Read More