On Menger, Austrian Economics, and the Use of
General Equilibrium.
Kurt R. Leube*
Hoover Institution, Stanford University
ICER, Torino
F.A. von Hayek Institute, Vienna


Nowadays mainstream economic textbooks maintain that economic laws can be
established solely on the foundations of the exact sciences, such as mathematics or
physics. The implication is that the historical date collected with the aid of statistics and
other technical means can be used to scientifically unveil, explain, and predict
mankind’s behavior.

Although economics today embodies individual tastes in the form
of elegant charts that are depicted in text books as ‘indifference curves’, it has not gone
further in characterizing the all important motivations, influences, or feelings of the
acting individuals. If the sole purpose of economic research is to analyze the properties
of general equilibrium in the conditions of perfect knowledge and perfect competition,
this may well suffice.

It seems as if all approaches to economic phenomena which do
not follow this doctrine are quickly branded unscientific and repudiated. Rather than
constructing a system of timeless general equilibrium prices, as is the goal of the
mathematically oriented schools of thought, in our world of scarcity, lack or dispersion
of knowledge, and ever changing degrees of expectations, the Austrians attempt to
explain the forces and causes that stand behind the price formation. The two main
pillars of the Austrian school of economics are methodological individualism (a term
used by J.A. Schumpeter) and methodological subjectivism.

This approach to economic phenomena builds scientific analysis upon the insight that every individual chooses and
acts purposively and in accordance with his perception of the expected actions of
others. In observing the actions of others we are aided by our ability to “understand” the
meaning of such actions because we are human beings and thus have insights into the
behavior of our fellow men.

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