The Austrian School of Economics was founded in 1871 when Carl Menger published Principles of Economics, in which he argued for the universality of economic analysis and placed human choice at its core. Menger believed that the only real obstacle to a unified global economic theory was the inherent diversity in human reasoning when making decisions. The principles of this school were built on several key assumptions, all of which treated human behaviour as the fundamental basis of economic thought.
One of these assumptions is that ‘only individuals have the power to choose’. According to Austrian economists, the economy must be analysed from the perspective of individuals and their personal goals, as collective entities cannot, in themselves, think or make choices. Another key idea is that ‘market analysis is, at its core, a study of exchange behaviour within institutional frameworks’. Here, the price system is understood as a consequence of exchanges occurring in the marketplace, followed by the act of exchange itself, and finally the institutions that facilitate these transactions.
A further principle holds that ‘social sciences are shaped by what people believe and accept as truth’. The Austrian School argues that societies must acknowledge and understand the motives and objectives of ‘others’, simply because all humans share similar fundamental instincts. This leads to a sharp critique of materialist sciences, which attempt to develop models that categorise individuals and societies, imposing rigid frameworks on them despite the unpredictable nature of human behaviour. This notion is extended by the idea that ‘social institutions are created as a result of human behaviour, not the other way around’. Many institutions, according to this view, emerge from repetitive individual actions that eventually become widespread social behaviours, later formalised into structured institutions.
To illustrate these economic assumptions through human behaviour, imagine a summer afternoon in Cairo’s vast Tahrir Square. Suppose that, years ago, an individual was in a hurry and struggling to endure the oppressive heat while needing to cross the square. Would he follow the designated pathway around the square as intended by the planners? Of course not. He would instinctively cut across the central garden to avoid unnecessary discomfort (at least from his perspective). Others might follow, their footsteps marking a visible path across the grass. As more people adopt this shortcut, it gradually becomes an accepted route, evolving into a common social practice.
Applying this analogy to economics, the Austrian School suggests that people do not consciously create layers of transactional complexity or price indicators in order to function within a market economy. Their only intention is to improve their personal quality of life. Yet, through their actions, they inadvertently generate what we recognise as the ‘market system’. In this sense, Austrian economics aligns with pure capitalism, as long as it remains free from the distortions of economic imperialism. However, the political climate in Austria during the early and mid-20th century was not conducive to this school of thought, leading to its migration first to Britain and then to the United States. Over time, the Austrian School was gradually absorbed into and interwoven with classical capitalism and the legacy of Adam Smith. In the process, it faded into obscurity—along with the hope that economics could evolve into a discipline that truly understands human behaviour and respects cultural diversity, rather than imposing one-size-fits-all solutions from one nation onto another.
This article is originally published by AlBorsa in Arabic and later AI-translated by South Push.