Freedom is the mother of order

The economic thought of the 20th century was largely defined by the confrontation of ideas, where each school tried to offer its vision of the ideal structure of society. While the Chicago School, with its faith in the market as a universal solution to all problems, became a symbol of neoliberalism, the Austrian School marked a different path — a philosophical one, emphasizing individual freedom.

Based on the ideas of Carl Menger, Ludwig von Mises, and Friedrich Hayek, it rejects complex mathematical formulas, focusing on human nature and spontaneous order. In the era of digitalization, when decentralization and freedom of choice become key themes, Austrian ideas gain new relevance.

Let's figure out how the Austrian school differs from the Chicago approach and how its principles manifest in the modern world.

Origins of the Austrian School

In 1871, Carl Menger published the book "Principles of Political Economy," in which he formulated the revolutionary theory of marginal utility. He suggested that the value of things is determined not by the costs of production, but by the needs and perceptions of the consumer.

Menger's ideas formed the basis of the subjective theory of value, which was developed by his students. Among them, Eugen von Böhm-Bawerk particularly stood out — the author of the fundamental work "Capital and Interest" (1884–1889).

After World War I, the Austrians also played a key role in the development of the calculation argument concept aimed at criticizing planned economies. According to them, socialist planning cannot effectively allocate resources due to the lack of market prices that reflect the individual preferences of final consumers.

One of the peculiar manifestos of the Austrians in the 20th century was Ludwig von Mises's treatise "Human Action" (1949). This book outlines the principles of praxeology — a theoretical approach that views economics as a result of the actions of rational individuals.

But the most celebrated representative of the school was the Nobel laureate Friedrich August von Hayek, who among other things updated the theory of spontaneous order that dates back to the works of Adam Smith.

Antipode of Chicago

Unlike the Chicago school, which relies on empirical data and mathematical models, the Austrians prefer philosophical and logical analysis. Their ideas are built on three key principles:

• subjectivity of value and marginal utility. Each person determines for themselves what is valuable based on subjective assessment rather than objective properties of the thing. Menger showed that the value of a good depends on its marginal utility — the benefit derived from an additional unit of the good, which decreases as saturation occurs. For example, from the perspective of biological needs, a glass of water is vital, whereas works of art are not. However, a painting may be worth millions to a collector who has searched for it for a long time, while having no value for most other people. Conversely, a person dying of thirst in the desert would be willing to give everything for a glass of water, which under normal conditions would be obtained almost for free;
• spontaneous order. The market is a self-organizing system that arises from numerous individual decisions without centralized control. Hayek compared the market to language: no one invented it intentionally, but it effectively coordinates people's behavior. According to the Austrians, government intervention often disrupts this spontaneous order;
• individual freedom. Mises believed that economics starts with the actions of the individual, not with abstract models. The freedom of choice is the foundation of prosperity, and any coercion, especially from the state, decreases efficiency and stifles initiative.

Austrians claim that economics is the science of behavior, which is too complex for precise equations, and are skeptical of the mathematical models popularized by the Chicago school. Instead, they propose praxeology—a logical analysis that studies economic phenomena using a deductive approach based on fundamental principles, such as that people act purposefully, seeking to improve their situation.

School representatives link crises to artificial credit expansion caused by the actions of central banks. Within this approach, the Austrians, particularly Mises and his follower Murray Rothbard, advocated for the complete abolition of central banks, believing that their intervention distorts natural market signals. They proposed a return to the gold standard or a system of free banking, where money is issued by private institutions based on market demand rather than government control.

If the Chicago school under Milton Friedman relies on monetarism, the Austrians propose a more flexible approach. They share a belief in the market but see it as a complex system based on freedom of choice. They emphasize that the market is effective only under conditions of true freedom, not under the pressure of monopolies or excessive deregulation, which can lead to chaos.

The Chicago School allowed minimal intervention (, such as control of the money supply ), but the Austrians were initially more radical. Mises and Hayek viewed the state as a threat to freedom, especially in economic planning. However, they did not idealize the market: Hayek warned that, without protection of individual rights, it could be seized by large players, such as corporations or monopolies.

Spontaneous Order in Action

The ideas of the Austrian School are manifested in the real world, especially in the era of digitalization, when decentralization has become a key trend. Let's consider a few vivid examples:

• Silicon Valley. The growth of technological startups such as Google, Amazon, or Tesla illustrates the idea of spontaneous order. These companies emerged not due to government planning, but from the free initiative of entrepreneurs. A decentralized ecosystem of venture capital, startups, and competition has created innovations that have changed the world: the market finds effective solutions on its own without directives from above.
• cryptocurrencies and blockchain. Bitcoin, created by Satoshi Nakamoto, became the embodiment of Austrian ideas of freedom from central control. A decentralized network, independent of banks or governments, reflects the principle of spontaneous order. Smart contracts allow for the automation of agreements without intermediaries, which aligns with the Austrian principle of minimizing intervention;
• platform economy: Platforms like Uber, Airbnb, or Upwork demonstrate spontaneous order in action. They coordinate the activities of millions of people, allowing supply and demand to be regulated without central planning. However, these platforms face challenges such as local laws or discontent from traditional industries, highlighting the limits of spontaneous order;
• decentralized autonomous organizations (DAO). DAOs implement Austrian ideas through blockchain, where governance is conducted by the community rather than a central authority. They allow participants to make decisions collectively, minimizing the role of intermediaries, which is an example of self-organization.

This journey has seen both successes and challenges. Silicon Valley has produced monopolies that restrict competition and freedom, which goes against Hayek's ideas. Cryptocurrencies, despite their decentralization, have faced issues of speculation and instability. These examples show that Austrian concepts work best in conditions where freedom is combined with protection against monopolies and chaos.

Decentralization in the Digital Age

Today, the principles of the Austrian School are actively discussed in the context of the future of the economy. The development of digital technologies has increased attention to Web3 and DeFi. This resonates with the Austrian view of spontaneous order, where decisions are made at the individual level rather than by central structures.

Austrian skepticism towards state control also resonates with criticism of big tech. Companies like Meta or Google, which dominate the market, limit freedom of choice by creating digital monopolies. Hayek would likely advocate for decentralized alternatives that return control to users. For example, projects like IPFS aim to create an internet where data belongs to people, not corporations.

At the same time, Austrian ideas inspire debates about freedom in the economy. The rise in popularity of libertarian ideas, especially in the USA, is partly due to the influence of Mises and Hayek. Mises' "Human Action" and Hayek's "The Road to Serfdom" (1944) remain relevant works for those who see state control as a threat to innovation and freedom.

Idealism or practicality?

Critics of the school, such as neo-Keynesian Paul Krugman, point to its idealism. The rejection of mathematical models makes Austrian ideas difficult to verify and apply in real politics.

Thus, the fight against the climate crisis requires global coordination, which contradicts the radical anti-state approach of the Austrians. Keynesians criticize the Austrians for ignoring the role of the state in stabilizing the economy during recessions, such as the Great Depression or the 2008 crisis, when fiscal and monetary policies mitigated the consequences.

Another weakness is the vulnerability of spontaneous order to monopolies. Without minimal regulation, large players can suppress competition, as seen in the example of big tech. The financial crisis of 2008, which some associate with excessive faith in market self-regulation, highlights the risks of radical deregulation.

Critics also note that Austrian ideas work better in theory than in practice, especially in countries with unstable institutions, where freedom without rules can lead to chaos.

Lessons for the Economy of the 21st Century

The Austrian School offers an alternative to the dogmatism of the Chicago School, reminding us that economics is not just numbers but also a philosophy of freedom. Its emphasis on decentralization and individual choice is particularly relevant in the age of digitalization, when technologies create new opportunities for natural ordering.

However, these ideas require balance: freedom is only effective when combined with protection against monopolies and consideration of social challenges such as rising inequality or the climate crisis.

For the future of the economy, Austrian principles can be integrated with other approaches. Decentralized systems based on AI are capable of embodying spontaneous order while minimizing external intervention. In the political context, the Austrian emphasis on freedom can counter authoritarian regimes striving for total control.

Like classical liberalism, the Austrians teach us to value the market but not to idolize it. Their skepticism towards centralized management inspires the search for new models where technology and human initiative create order without coercion.

In a world where big tech, climate crises, and inequality challenge the economy, the Austrian School remains a source of ideas, encouraging the search for balance between freedom and responsibility. A hybrid approach that combines the Austrian belief in spontaneous order with minimal regulatory mechanisms could serve as the foundation for a sustainable economy in the 21st century.

Text: Anastasia O.