what is the difference between chicago school economics and austrian school?

[Franz Ferdinand]

i've been doing research into them both and they seem to have libertarian ideas and free-market principles but i don't really see the differences. i'm kind of thinking austrian might be a little more free-market than chicago but i'm not sure. also, how many schools are there? like do they span the whole spectrum of economic theories? thanks

[Spotty J]

The pizza is thicker in Chicago.

[Mr Economist]

The Austrian school is far less static in its asasumptions than the Chicago school. For example, the Austrian school rejects the idea of equilibrium (where supply and demand are equal) as factors such as these are constantly changing.

The Austrian school assumes people do not have perfect information, i.e. knowledge is limited and thus individuals cannot possibly know fully the implications of their decisions. The Chicago model accepts the idea of perfect competition as perfect knowledge is assumed but the Austrian model acknowledges that knowledge is finite and no one possesses perfect knowledge. Therefore, the market is not perfectly competitive and some firms have managed to achieve market power through superior use of knowledge.

To conclude, the Chicago school is much more static and theoretical in its assumptions, and the Austrian school is much more dynamic and realistic.

[fufu]

The most important thing that differentiates these schools is their understanding of money. Monetarism is a branch of Keynesianism because monetarists believe that if you keep the money supply growing at a constant low pace (2-3 % per year) you will create the best conditions for the economy to prosper. Monetarists don't understand that in a prosperous economy prices should be falling because they believe that falling prices are always bad - the lesson they learned from the Great Depression. Monetarists want to beat Keynesians at their own game - we should have inflation but not too much.

Austrians say that the state shouldn't influence the money supply at all. They understand that there is no such a thing as 2-3 % inflation per year. The main problem is that different prices rise or fall at a different pace. During the same period, some prices can rise at 10 % per year (real estate 2000-06) while others can fall at 50 % per year (cellphones and smartphones - when adjusted for the increase in functionality). Government induced (through the central bank) inflation always benefits some parts of the population more than others. Monetarists seem to be unaware of this - they think that when the CPI (an arbitrary index construed in a way to reduce social security payments - see the 1996 Boskin Commission Report - http://www.ritholtz.com/blog/2010/01/eco...-masters/) rises by 2-3 %, everything is ok.

Monetarists take a macro view, while Austrians say that macroeconomics is nonsense and we have to look at the micro structure. Hayek: "Friedman's theory is based on supposed regularities between statistical magnitudes. He is convinced, and he believes he has historically demonstrated that there's a simple relationship between the total quantity of money and the price level." http://www.youtube.com/watch?v=fXqc-yyoVKg

[Sienna]

Both are libertarian, but the Austrian school moreso, For example, Milton Friedman, the dean of the Chicago school, favoured government manipulating the supply of money so as to ensure an increase in line with the growth of the economy; whereas the Austrian school favours the abolition of government control of the money supply, and identifies government-sponsored inflation of the money supply as the cause of many economic, social and moral evils.

1. Difference in methodology

There is a fundamental difference in the underlying questions of what methods are appropriate to economic science. The Chicago school are positivists. They adhere to the scientific model of the physical sciences: - the scientist proposes a hypothesis to explain the facts in the most parsimonious way, and then tries to confirm or falsify it by evidence, for example by comparing measurements of prices. They use mathematical and statistical methods.

The Austrian school rejects this method. They say that since all economic phenomena arise out of the valuations of real human beings, and since those valuations are *subjective*, there is a fatal defect in economic science that tries to rely on objective measurement. Such measurements, for example the price of potatoes in Idaho in 1932 compared to 2010, are fatally flawed. They attempt to compare things that are incommensurate, that cannot be compared. They are history - records of one-off events - not theory - logical explanations of universally true propositions of cause-and-effect. Their findings are always contingent.

By contrast, Austrian methodology uses logical method. You take self-evident universal propositions of fact, which cannot be denied without self-contradiction - for example "man in taking action always prefers A to B". (Even if you deny it - "No he doesn't!" - you have to take action preferring A to B, and thus perform a self-contradictions, thus also confirming the proposition as true.) From these basic axiomatic logical building blocks, they build up a theory of prices, capital, interest, inflation, the boom-bust cycle - all economic phenomena with *universally valid* propositions of human action.

The difference in methodology is important because evidence of the failure of government policies never finally convinces positivists that these policies are unworkable. They always look for more "evidence" that they might work; whereas Austrians think that's like looking for "evidence" that 2 + 2 might equal 5. Austrians are able to conclude that interventionist policies don't work, because they can't work, because they fail to meet the threshold test of logically sound propositions in the first place.

2. Austrians more free-market
Although the Chicago school was the theoretical underpinning of free market economics under Reagan and Thatcher, and are called "far right" and "ultra right" and "unrestrained capitalism" by socialists, in fact they were very much in favour of many government interventions. Not just the classic ones of military and police, but government funding of education, and interventions to facilitate voluntary exchanges, as well as many functions of a charitable or paternalistic nature.

The Austrians, on the other hand, reject economic interventions in general, arguing that they *must necessarily* produce worse results in terms of human welfare than liberty. They inevitably produce economic chaos, abuse of political power, and social exploitation. The descent of America into police state fascism is the inevitable outcome of decades of interventionists economic policy.

Furthermore we are able to know this is true in advance by the fact that
a) all government revenue is taken by force or threats - ie people obviously place a higher income on their own income than on paying tax
b) government operations displace profit and loss and therefore are incapable of economic calculation and hence are fumbling in the dark in terms of satisfying consumers,
c) government central planning does not and can never have the knowledge that is dispersed throughout the entire population, and which *is* available to the market.

The Austrian school is now resurgent following the blatant failure of both Chicago school and Keynesian economic theory which directed economic policy into the global financial crisis.

[Anjaree]

Libertarian and monetarist are different. But to know exactly what the differences are you should read what Murray Rothbard said about Milton Friedman. The most quoted sentence is " As we examine Milton Friedman's credentials to be the leader of free-market economics, we arrive at the chilling conclusion that it is difficult to consider him a free-market economics at all.