Austrian Economics: An Introduction
By Christopher J. Coyne and Abigail R. Hall.
Polity, 2026.
Paperback, 224 pages, $24.95.
Reviewed by Gene Callahan.
Christopher J. Coyne and Abigail R. Hall have written an excellent book, perhaps the second-best introduction to Austrian economics in print. (I joke because I have written one myself: full disclosure, this book is a close competitor to Economics for Real People.) The fact that, in this review, I will focus on a few places in which I disagree with their claims should in no way be taken to mean that the above praise is not true. Rather, it is simply that I think the most interesting things I have to say about their book involve a few places where I differ from what they say.
Quite naturally, the authors begin by explaining what Austrian economics is. It is not the study of the Austrian economy, nor are Austrian economists all from the country of Austria. Rather, it is a distinctive approach to economics that was developed first in Austria and has since attracted practitioners from across the world.
The authors caution the reader that, contrary to some popular beliefs: “Austrian economics… is not a political philosophy, ideology, or worldview – e.g. ‘conservatism,’ ‘libertarianism,’ or ‘neoliberalism’.
The authors are correct that, at its core, Austrian economics is none of these things. It is only a number of pages later that the authors explain why a confusion between Austrian economics and libertarianism often exists, which is that Murray Rothbard and his followers attempted to firmly link them.
They then provide a brief history of the Austrian school, beginning with its founder, Carl Menger. Menger is regarded as one of the three leading figures of the “marginalist revolution” in economics, which fundamentally changed the way that economists understand how goods come to be valued. Menger’s theory of marginal utility superseded the labor theory of value for explaining the price of goods.
The labor theory of value, accepted by the classical economists like Adam Smith, as well as by Karl Marx, held that the value of a good is determined by the value of its inputs. Menger stood the classical theory on its head, demonstrating that it is the price of consumer goods that determines the price of their inputs, and not the reverse.
The labor theory of value was a serious attempt at explaining how goods are valued, even if it turned out to be wrong. In fact, in equilibrium, the labor theory and the marginal utility theory will yield the same result, which is why, among lay people, the labor theory retains its popularity: at first glance, it appears accurate. It is only in disequilibrium that the superiority of the marginal utility theory shines forth.
Coyne and Hall point out that value is not something that inheres in goods, but is the result of an act of valuation. Thus, there is no such thing as a “store of value.” Acts of valuation cannot be stored. What is possible is that we can set aside some good in the hope that people will value it highly in the future. But that does not make the good a “store of value”: setting aside immediate consumption of some good in the hopes of achieving a profit by selling it in the future is always a speculative venture, never a simple act of storage.
The authors then describe Menger’s theory of the origin of money, in which money arises spontaneously through the process of people trading a good they have for one that is more widely traded, with the most traded good finally emerging as money. But they do not address the fact that there is little historical evidence that this is how money actually arose.
Menger’s theory is logically coherent and elegant, and I myself used it to describe the origin of money in Economics for Real People. But as Max Weber pointed out, it is necessary but not sufficient for an ideal type used in a social scientific explanation to be logically coherent: we must supplement the logical coherence of our type with empirical research demonstrating that it actually applies in some particular case.
After discussing Menger, the authors go on to present the ideas of subsequent major figures in the history of the Austrian school, including Eugen von Böhm-Bawerk, Friedrich von Wieser, Ludwig von Mises, F.A. Hayek, Israel Kirzner, and Murray Rothbard.
In the next section, on the science of economics, Coyne and Hall take care to differentiate the social sciences from the physical sciences. We can study human action differently than the physical sciences because, as humans ourselves, we comprehend the logic that underlies choosing. Following Mises, they refer to the study of the logic of choice as “praxeology.”
Coyne and Hall offer a very nice example of how limited an understanding one can achieve, using only the physical sciences, of rush-hour commuting in and out of Grand Central Station. To really understand what is going on, one must take into account the purposes of the people commuting and the institutional settings in which they act.
The authors assert that methodological individualism, meaning that all analysis of human action must begin with the individual, is the correct approach for studying economic phenomena. But I think this assertion is unjustified. The study of individual motivations certainly should not be neglected, and it can yield very important insights about social phenomena. But that does not mean that it is the only correct approach to understanding them. If we wish to understand the rise of Nazism in Germany, we may undertake a study of the individual motivations of people who joined the Nazi party. But we might also take our starting point by considering Nazism as an idea-force, and proceed to examine how that idea influenced the behavior of people who joined the party.
Of course it is true that a political party would not exist absent the party members. But at the same time the party members would not exist as party members without the party. In fact, as the British philosopher Bernard Bosanquet pointed out, while it is true that groups are composed of individuals, it is also true that individual minds are structured by the groups they are in and surrounded by: individuals and the groups in which they participate compose an organic unity. Of course an organism does not exist absent its organs, but at the same time, the organs’ existence depends upon the organism as a whole. As St. Paul wrote, “There is one body, but it has many parts. But all its many parts make up one body… And so we [Christians] are formed into one body.” The struggle between methodological individualism and methodological holism is unnecessary: we should employ one or the other (or even both) as fits the occasion.
In discussing the theory of action, Coyne and Hall write that “If a party to an exchange is coerced, this does not invalidate… the theory of voluntary exchange; instead, the theory is not applicable to that specific situation because a required condition… is absent.”
But the authors are underselling praxeology here. In fact, the logic of action fully applies even to exchanges we call coerced. What the coercer has done is use the threat of violence to raise the cost of some choice for the victim. If an extortion racket tells a store owner “either pay us $100 a month for insurance, or we will damage your store, and eventually you,” they have changed the choice set facing their victim. Now, instead of choosing to keep the $100 or buy the insurance, the victim is choosing to keep the $100 and suffer a significant amount of economic and physical damage, or buy the insurance. And we can still say, if the victim pays up, that he preferred the second option to the first.
In some respects this is analogous to someone selling an avalanche barrier to a hotel in the Alps: “If you don’t buy this, your hotel will be destroyed by an avalanche.” Any owner chooses between paying for the barrier, or possibly suffering the damage from an avalanche. The difference in “involuntary” exchanges is that the avalanche itself will be caused by the person selling the insurance. The praxeological analysis is identical; it is just that the aggressor has forced a new choice set upon the victim which changes the options he faces. And of course that may be morally blameworthy, but praxeology applies just as much to morally blameworthy actions as it does to the actions of saints. (There are cases where we do not condemn the person using coercion: for instance, if someone threatens to shoot a robber if he does not put down the goods he is stealing and surrender, many people will approve of that use of coercion.)
Praxeologically speaking, all human action is voluntary, as opposed to involuntary physiological processes such as digestion. Ludwig von Mises makes this distinction clear in the section of Human Action called “Purposeful Action and Animal Reaction” (1.1).
And of course I am not trying to correct people’s ordinary speech. When a husband drags his spouse to a party, it’s fine to say that she came “involuntarily.” But as social theorists, our job is to speak as precisely as possible. Even a person facing coercion is still a human actor, and still can choose how to respond. It is possible to stand in front of a column of tanks at Tiananmen Square. It is possible to proclaim “Give me liberty or give me death.”
A little later, the authors claim: “We cannot make sense of the world without pure theory because we must have a theoretical grounding to orient our efforts and understanding.”
This is a puzzling contention to me. As I understand it, a theory is an abstraction from concrete reality. If we do not first have some comprehension of concrete reality, how could we ever abstract a theory from it? A theory is an attempt to better understand what is already, at least to some extent, understood. If we began from a state of sheer incomprehension about some aspect of experience, there is no possibility we could formulate a theory about it.
In their chapter on “Catallaxy,” Coyne and Hall define that word as the study of exchange and the institutions which support it. They contrast the “allocation paradigm,” which takes as its starting point a given stock of resources, and asks how to best allocate them, with the “exchange paradigm.” In the “exchange paradigm,” a phrase coming from Nobel Prize winner James Buchanan, the focus is instead on how that stock comes into being as a result of the process of exchange. Unfortunately, much of mainstream economics is focused on the allocation paradigm, because it is more susceptible to mathematical treatment than is the exchange paradigm.
Coyne and Hall do an excellent job covering the socialist calculation debate. That debate began when Mises showed the necessity of prices for rational economic calculation. Several socialist economists responded by inventing “market socialism,” which they held could employ prices even more efficiently than could businesses competing with each other.
Hayek entered the debate at that point. Contra some who have tried to “de-homogenize” Mises and Hayek, Hayek did not offer a different argument for why socialism could not work than did Mises; instead he explained why Mises’s contention was correct.
Why couldn’t the socialists just assign prices to things based on their best guesses, and then calculate from those prices? Hayek showed why the market process itself is necessary to produce the knowledge upon which meaningful prices are based.
The authors next turn their attention to the market process. They quote Israel Kirzner, who claims that “What occurred as a result of [the socialist calculation debate] was that the Austrians were inspired… to identify more carefully the aspects of their understanding of the market process that their critics had failed to recognize.”
The market process view, while not rejecting the importance of equilibrium conditions in markets (when the quantity supplied and the quantity demanded perfectly mesh), insists that the process by which equilibrium is approached is much more important and interesting than the equilibrium condition itself. Mises and Hayek extensively developed this theory, and in our day, it has been advanced most significantly by Kirzner.
In their chapter on interventionism, the authors claim that, when it comes to government policies interfering with market exchanges, “We know some people are made worse off because they are no longer able to engage in voluntary exchanges that they otherwise would have engaged in absent the government intervention.” But this analysis conflates the correct idea that people only engage in exchanges that they believe will make them better off with the mistaken notion that all such exchanges actually make them better off. Consider a young person considering buying heroin: if they do so, they must believe they are made better off as a result. But if years of addiction later, they find their life in ruins, they will regret the decision and realize it did not actually make them better off. A law forbidding such sales might, in fact, make the would-be purchasers better off than if they had been allowed to proceed. Mises himself characterized this always-speculative character of all choices with the phrase, “There’s many a slip twixt cup and lip.”
And this is precisely the kind of move, from the apodictically correct statement that before a trade they agree to, both actors engaging in the trade believe they will be better off from it, to declaring that they are, in fact, better off, that is often used to move from sound praxeological reasoning to unwarranted libertarian conclusions.
In their chapter on money in banking, Coyne and Hall discuss the possibility that a free banking regime, where private banks issue their own currency, might be preferable to government-monopolized issuance of money. They also touch upon the intra-Austrian debate between those who believe fractional reserve banking (where a bank does not hold every dollar deposited in its vaults but instead lends out some fraction of those dollars, and thus keeps the reciprocal fraction in reserve) can be conducted responsibly, and those Austrians who argue that it is inherently fraudulent.
The authors devote a chapter on Austrian business cycle theory. That theory offers an explanation of why the economy seems to go through booms and busts. It treats the interest rate as a price like any other, and understands attempts by the government to set the interest rate at a different level than market participants would set it as creating distortions in economic activity. When those distortions come home to roost, we get the periodic downturns in the economy that we call recessions and depressions. The theory has sometimes been called a hangover theory.
The authors conclude their work with a survey of current research directions in Austrian economics, including robust political economy, monetary theory, entrepreneurship, developmental economics, behavioral economics, alternative governance structures, and collective action challenges.
This book is an excellent introduction to the Austrian school of economics. Again, to the extent this review has focused on a few points of disagreement, it is only because those were the most interesting points to discuss.
Gene Callahan is the author of Economics for Real People and Oakeshott on Rome and America, and co-editor of the books Tradition vs. Rationalism, Critics of Enlightenment Rationalism, and Critics of Enlightenment Rationalism Revisited. He has a PhD in political theory from Cardiff University and teaches at NYU.
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