Mises Institute: Why did you decide to write this book?
Randall Holcombe: I received an inquiry from Edward Elgar, the publisher, asking me if I’d be interested in writing it, and I agreed. They wanted a short book of about 50,000 words that would introduce people to the ideas of the Austrian School, and that’s what I wrote. The text runs just 116 pages, which doesn’t count the preface, index, and an extensive list of references at the end.
Writing the book was the publisher’s idea, and I thought about it for a while before I agreed. One reason I hesitated is that, if you talk with a group of Austrian economists, they all have different ideas about the core ideas of the School. I didn’t want to write a book saying, “here are the most important ideas of the Austrian School,” and then start a debate about what I might have left out, or included that didn’t really belong. Ultimately, I decided that the benefits of writing the book would outweigh those risks, so I took on the project.
MI: Who is the target audience?
RH: Economics students, including undergraduates, are groups I am targeting with the book. The book is not an introductory economics text from an Austrian perspective, and assumes that the reader already knows some economics. But even a student who has only taken an introductory economics course will have enough background to understand what is in the book. The idea was to write a book for people who already know some economics, but are not familiar with the Austrian School. There are lots of people with some background in economics who have heard of the Austrian School, but don’t have a good idea about what distinguishes the Austrian School from mainstream economics, or from other schools of thought. So the idea was to write a book that emphasizes the ideas that separate the Austrian School from other approaches to economics.
MI: Have you noticed any increase in interest in Austrian economics among the students you see?
RH: Yes, absolutely. We don’t have a course in Austrian economics at Florida State, so I don’t teach Austrian theory directly. But we have an active student libertarian club that is interested in Austrian economics, and word gets around that I take an Austrian approach to my teaching. I often have students come up to me after class asking me about books and articles written by Austrian School economists. They find them on their own, without my referring to them in class. One of the most common places they find these ideas is on the Mises Institute website, so I have to give the Institute a lot of credit for making so much Austrian scholarship readily available.
MI: Why do you think there is more interest now?
RH: There are several reasons. One is that academic economists are increasingly looking for alternatives to mainstream ideas. Economists were probably most unified on the mainstream paradigm back in the 1970s when the neoclassical framework defined microeconomics and Keynesianism defined macroeconomics. Since then, there has been more diversity in the way that academic economists have viewed the discipline. The new institutional economics has been developed, experimental and behavioral economics has challenged neoclassical utility theory, and that has opened the door to looking at the ideas of the Austrian School too.
The collapse of the centrally-planned economies in the Eastern bloc also helped the Austrian School. The Austrian idea that rational economic planning cannot take place without markets and market prices was dismissed as wrong by many prominent economists up through the late 1980s, but it is now generally accepted. The socialist calculation debate, which worked against the Austrian School up through the 1980s is now working in the school’s favor.
Also, the Austrian business cycle theory, which emphasizes malinvestment as a fundamental cause, is increasingly seen as a credible alternative in macroeconomics. The dotcom boom and bust, followed by the similar housing market boom and bust, make it apparent that mainstream macro models, which almost always treat capital as homogeneous, are inadequate for explaining macroeconomic phenomena over the past two decades. The Austrian approach to macroeconomics, which is built on a foundation of heterogeneous capital, lends much more insight.
All the reasons I’ve just given are reasons to take the ideas of the Austrian School seriously, but one of the big reasons they have been taken more seriously is that the internet has made those ideas more accessible. As I noted before, my students are discovering the ideas of the Austrian School on the Mises Institute website and other places on the internet, and that just would not have been possible twenty years ago.
MI: What insight of Austrian economics would you say is the most valuable to someone who is interested in economics but does not necessarily think of himself or herself as “an Austrian”?
RH: The two broad areas I would cite are entrepreneurship and macroeconomics. Mainstream economics is built on a foundation of equilibrium. The mainstream competitive model depicts competitive firms after all the competition has already taken place, so the role of entrepreneurship is left out. Profit is depicted as a sign of inefficiency, either because it is a sign of monopoly or a sign that markets are not in equilibrium. In fact, profit is necessary for efficiency, because profit is both the lure that encourages entrepreneurship and the sign that entrepreneurship has been successful at creating value. I place heavy emphasis on this idea in my book. With regard to macroeconomics, the whole sub-discipline has been focused on how government policy can stabilize the economy. That’s been true for a century. But because of its aggregate nature, the destabilizing effects that interventions have because they distort relative prices have been left out of mainstream macroeconomics. The Austrian approach to macroeconomics looks at the effect of government policy on relative prices — with the interest rate being the most important price, but not the only one — to show how government policy often is destabilizing. As I noted earlier, the Austrian approach to macroeconomics lends much more insight into the macroeconomic issues of the past two decades.
MI: If someone asked you to summarize what makes Austrian economics different in one or two sentences, how would you do it?
RH: That’s a tough question, because that’s what I tried to do in my book, and it runs more than one hundred pages! The insights about entrepreneurship, the market process, and the distinctive Austrian approach to macroeconomics would have to factor in. Actually, the fact that it is difficult to summarize in a sentence or two is what makes the Austrian School different and is something that keeps Austrian ideas from filtering into the mainstream more than they do. One big motivation for my writing the book was to answer just that question, and explain how Austrian economics is different from mainstream economics that students see in their introductory classes.
MI: As a tenured faculty member in economics, have you found that your use of Austrian economics has helped you as an economist, or is it a liability?
RH: This hasn’t been an issue in my department. Nobody is critical of me because I am an Austrian economist. But then, I don’t advertise myself as an Austrian economist, and I have been fairly successful publishing in academic journals, which is a big component on how I am evaluated by my colleagues. I do what I think is good economics, using the best ideas that are available to me. The Austrian School has lots to offer, not because they are Austrian ideas but because they are good ideas.
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