The economics universities don’t teach

As a social science, economics seeks to understand how people interact with one another and use limited resources to satisfy their needs. Since individuals and society are infinitely complex, one might expect a variety of approaches to studying the field.

Unfortunately, today only one methodology dominates European universities and politics. It is called mainstream economics, modern macroeconomics, or simply the dominant school of thought. This approach encompasses several traditions of thought that are sometimes divided between orthodox and heterodox economists, including neoclassical, Keynesian, and Chicago school economists.

Although these schools of thought are presented as different, they are relatively similar in their way of reasoning. They share a common heritage: the marginalist revolution of the late 19th century. The revolution's most prominent figure was the economist Léon Walras (1834–1910).

The only real alternative, the Austrian school, has almost disappeared from universities.

Here, we will briefly present the major differences between these two economic traditions and what is lost by studying one and not the other.

The Marginalists

At the beginning of the 1870s, three European economists—William Stanley Jevons in England, Carl Menger in Vienna, and Léon Walras in Lausanne—independently theorized marginal utility, which would revolutionize the entire field of economics. William Stanley Jevons in England, Carl Menger in Vienna, and Léon Walras in Lausanne each arrived at this realization on their own. Marginal utility is defined as the satisfaction an individual derives from consuming an additional unit of a good or service. Once a need is met, an additional unit does not hold the same interest or value.

Therefore, the value of a good is assessed on a marginal and individual basis. This approach is essential because it invalidates decades of Western economic thought, from the classical economists such as Adam Smith and David Ricardo to Karl Marx, who could not escape an objective conception of value.

While both were marginalists, Walras and Menger differed radically in their use of marginalism. Walras incorporated it into a broader, systemic, mathematical theory: the theory of general equilibrium. In this theory, the market tends toward equilibrium through the adjustment of supply and demand. To make this system calculable, Walras treats utility as a measurable quantity. However, Menger adopts a different vision: utility remains subjective and cannot be measured. It can only be arranged by order of preference. His entire analysis is based on intransigent subjectivism and individualism.

The split between these two radically different approaches to analyzing economic phenomena is evident in their foundational works from 1871 to 1874. Menger's approach is individualist, subjectivist, and causal-process-oriented, while Walras's approach is mathematical and equilibrium-centered (and, to a lesser extent, so is Jevons's approach). This initial split would later fuel the Austrian critique of general equilibrium theory and lead to the well-known controversies of the socialist calculation and business cycle debates of the 1920s and 1930s.

This is not just a matter of economic disagreement. The difference lies in methodology rather than economic analysis, so it is fundamental. The Austrian school reasons by deduction. It begins with the unquestionable premise of human action and logically deduces economic laws without attempting to prove them with statistics. Ludwig von Mises later named this method praxeology, the science of human action. In contrast, the dominant approach is empirical. It creates mathematical models and attempts to validate them with observed data. These differences will have profound political and economic consequences throughout the 20th century.

The Austrian school uses deductive reasoning. It begins with the axiom that human action is certain and logically deduces economic laws without seeking to prove them with statistics.

One paradigm, two camps

Today, most economists share the neoclassical paradigm that emerged from the marginalist revolution. Whether they are neoclassical, Keynesian, or monetarist, none question the methodology overwhelmingly used in the study of economics: reasoning by aggregates, equilibrium, optimization, and mathematical formalism. The few schools of thought that diverge significantly, such as the Austrian school, have been pushed to the margins.

Friedrich Hayek, an economist from the Austrian school, understood this hidden relationship better than anyone. He said, for example:

“Milton’s monetarism and Keynesianism have more in common with each other than I have with either . . . The Chicago School thinks essentially in “macroeconomic” terms. They try to analyze in terms of aggregates and averages, total quantity of money, total price level, total employment, all these statistical magnitudes.“

— Hayek, interview with Thomas W. Hazlett, Reason, July 1992; quoted in Jesús Huerta de Soto, The Austrian School, 2008, p. 89

This statement may surprise mainstream economists today, but it is true: Friedman's methods are closer to Keynes's than to those of any Austrian economist, including Hayek.

Their dispute confirms this similarity. Unlike Friedman, later Chicago economists moved away from Marshallian partial analysis toward general-equilibrium modeling. Despite their differences, both accept the fundamental idea that economic equilibrium is attainable, even if only partially. This idea is important because it gives legitimacy to the idea that controlling the economy through the state is possible and desirable.

In public debate, they are portrayed as the two sides of economics even though their differences stem from minor technical disputes rather than methodological ones. These disputes concern the proper balance of stimulus and budgetary rigor, the scale of public spending, and the optimal management of the monetary base.

The alternative to Keynesianism is not another calibration of that shared equilibrium heritage. It must be found elsewhere by revisiting the origins of the Austrian school.

The true lines of division

To understand the differences between the Austrian school and the dominant economic schools of thought — neoclassical, Keynesian, and monetarist — a good starting point is The Austrian School by Professor Jesús Huerta de Soto. The author devotes two tables to this methodological difference: one comparing Austrians and neoclassicals (pp. 2–4), and the other comparing Austrians and Keynesians and monetarists (pp. 85–86). We are combining them here because they describe the same common ground that Hayek referred to earlier.

Here are the most striking distinctions out of a total of 29:

Entrepreneur and Capital Theory

To illustrate the importance of these differences to our understanding of the economy, let's consider two examples.

The entrepreneur is perhaps the best one. According to the Austrian individualist approach, entrepreneurs are essential and unique market actors and the main drivers of innovation. They identify new ways to use available information to create value. His ingenuity and creativity are his alone, making him irreplaceable.

Mainstream economists, however, view the entrepreneur as a much more utilitarian reality: a rational resource allocator who makes investment decisions to maximize profits. He calculates and possesses all the necessary information to act as a "homo economicus." He is a calculating machine and interchangeable.

Another example concerns the nature of capital and the production system. This is one of the major differences between the Austrian and neoclassical schools of thought. For the former, capital is heterogeneous. Production goods have unique characteristics; they are not interchangeable or easily reallocated. For example, a tractor is not equivalent to a data center, yet both are capital.

Neoclassical economists most often treat capital as a homogeneous mass of production goods. Some models, such as the Solow-Swan model, use the concept of "capital stock" without considering its composition. The structure of capital—that is, the arrangement of its stages—is underestimated, if not entirely overlooked.

Capital becomes a static, homogeneous concept whose intermediate goods are allocated and exchanged instantly. Time, entrepreneurs, and the specific nature of capital become irrelevant.

The example of recessions

Nothing illustrates this divergence more clearly than a recession. For a Keynesian, a recession is characterized by insufficient global spending. According to Robert P. Murphy in Lessons for the Young Economist, Teacher’s Manual, Lesson 3, p. 40, "too little has been spent, so demand must be stimulated." He reasons with a macroeconomic variable: total spending. For the Austrian economist, however, the cause lies upstream. During the years when the interest rate—the price of credit—was kept artificially low, monetary distortions occurred in the production structure. Entrepreneurs engaged in projects that did not respond to real demand, and investors financed activities whose viability depended on "cheap money." According to this interpretation, the crisis is the moment when the market liquidates these bad investments.

Hayek analyzed this in his 1931 book Prices and Production. Huerta de Soto summarizes Hayek's view of the Keynesian remedy as "bread for today and hunger for tomorrow" (The Austrian School, p. 84).

One might argue that the stimulus acts quickly and saves jobs. This motivates interventionism, which aims to correct the market's alleged defects and "irrationality." However, by doing so, we prevent the market from returning to its normal state before the crisis and from redistributing capital to more productive hands. This example, like others, will be the subject of another article. Ultimately, though, it stems from this original difference in approach. This difference results in disagreement about when a crisis begins and ends.

The cost of ignoring the Austrian school

The differences between the mainstream and the Austrian School are significant. They are primarily methodological, representing two radically different visions of the economic process that evolve in parallel and have little to do with each other.

Currently, Austrian economics is not taught in French or European universities, except briefly in history of economic thought courses. However, the absence of this tradition impoverishes everyone by depriving economists and political leaders of a relevant analytical tool for understanding certain economic phenomena.

A student has every right to prefer Keynesianism to other schools of thought. Nevertheless, it is important to present them with an alternative so they know what they are giving up by choosing one paradigm over another.

The question remains: How far does this silence extend? What influence does each school have in French, German, and British universities? What happens to a nation when all its future leaders learn economics the same way? The following two articles in this series answer these questions with data.