Austrian school of economics

[[John Stuart Mill]] had earlier expressed a similar idea in his 1848 ''[[Principles of Political Economy]]'',Ahiakpor, J. C. W. (2003): ''Classical Macroeconomics. Some Modern Variations and Distortions'', Routledge, p. 21. observing that the usefulness of a good to the buyer effectively sets the highest price anyone would rationally pay for it. Market price can fall below this level of usefulness, but it cannot rise above it; otherwise buyers would be paying more than they themselves judge the good to be worth as a means of satisfying their wants.Mill, J. S. (1848). ''Principles of Political Economy.''

[[John Stuart Mill]] had earlier expressed a similar idea in his 1848 ''[[Principles of Political Economy]]'',Ahiakpor, J. C. W. (2003): ''Classical Macroeconomics. Some Modern Variations and Distortions'', Routledge, p. 21. observing that the usefulness of a good to the buyer effectively sets the highest price anyone would rationally pay for it. Market price can fall below this level of usefulness, but it cannot rise above it; otherwise buyers would be paying more than they themselves judge the good to be worth as a means of satisfying their wants.Mill, J. S. (1848). ''Principles of Political Economy.''

While marginalism was generally influential, there was also a more specific school that began to coalesce around Menger's work, which came to be known as the "psychological school", "Vienna school", or "Austrian school".{{cite journal |last1=Kirzner |first1=Israel M. |year=1987 |title=Austrian School of Economics |journal=[[The New Palgrave: A Dictionary of Economics]] |volume=1 |pages=145–151}}{{Cite book |last=Schumpeter |first=Joseph A. |title=History of economic analysis |last2=Schumpeter |first2=Elizabeth Boody |date=1994 |publisher=Oxford University Press |isbn=978-0-19-510559-9 |location=New York}} Menger's contributions to economic theory were closely followed by those of [[Eugen von Böhm-Bawerk]] and [[Friedrich von Wieser]]. These three economists became what is known as the "first wave" of the Austrian school. Böhm-Bawerk wrote extensive critiques of [[Karl Marx]] in the 1880s and 1890s and was part of the Austrians' participation in the late 19th-century {{lang|de|[[Methodenstreit]]}}, during which they attacked the [[Hegelianism|Hegelian]] doctrines of the [[Historical school of economics|historical school]].{{Cite book |last=Blaug |first=Mark |title=Economic theory in retrospect |date=1997 |publisher=Cambridge University Press |isbn=978-0-521-57153-1 |edition=5th |location=Cambridge ; New York}}

While marginalism was generally influential, there was also a more specific school that began to coalesce around Menger's work, which came to be known as the "psychological school", "Vienna school", or "Austrian school".{{cite journal |last1=Kirzner |first1=Israel M. |year=1987 |title=Austrian School of Economics |journal=[[The New Palgrave: A Dictionary of Economics]] |volume=1 |pages=145–151}}{{Cite book |last=Schumpeter |first=Joseph A. |title=History of economic analysis |last2=Schumpeter |first2=Elizabeth Boody |date=1994 |publisher=Oxford University Press |isbn=978-0-19-510559-9 |location=New York}} Menger's contributions to economic theory were closely followed by those of [[Eugen von Böhm-Bawerk]] and [[Friedrich von Wieser]]. These three economists became what is known as the "first wave" of the Austrian school. Böhm-Bawerk wrote extensive critiques of [[Karl Marx]] in the 1880s and 1890s and was part of the Austrians' participation in the late 19th-century {{lang|de|[[Methodenstreit]]}}, during which they attacked the [[Hegelianism|Hegelian]] doctrines of the [[Historical school of economics|historical school]]. name=":8">{{Cite book |last=Blaug |first=Mark |title=Economic theory in retrospect |date=1997 |publisher=Cambridge University Press |isbn=978-0-521-57153-1 |edition=5th |location=Cambridge ; New York}}

=== Early 20th century ===

=== Early 20th century ===

{{see also|Capital and Interest|Marginalism|Neutrality of money|Time preference}}

{{see also|Capital and Interest|Marginalism|Neutrality of money|Time preference}}

[[File:1Bawerk.png|thumb|upright=0.7|[[Eugen von Böhm-Bawerk]]]]

[[File:1Bawerk.png|thumb|upright=0.7|[[Eugen von Böhm-Bawerk]]]]

The Austrian theory of capital and interest was first developed by [[Eugen von Böhm-Bawerk]]. He stated that interest rates and profits are determined by [[supply and demand]] in the market for final goods and by time preference.>Böhm-Bawerk, Eugen Ritter von; ''Kapital Und Kapitalizns. Zweite Abteilung: Positive Theorie des Kapitales'' (1889). Translated as ''Capital and Interest. II: Positive Theory of Capital'' with appendices rendered as ''Further Essays on Capital and Interest''.</ref>

The Austrian theory of capital and interest was first developed by [[Eugen von Böhm-Bawerk]]. He stated that interest rates and profits are determined by [[supply and demand]] in the market for final goods and by time preference.

Böhm-Bawerk's theory equates [[capital intensity]] with the degree of [[roundaboutness]] of production processes. Böhm-Bawerk also argued that the law of [[marginal utility]] necessarily implies the classical law of costs. However, many Austrian economists such as [[Ludwig von Mises]],Mises (1949) [[Israel Kirzner]],Kirzner (1996) [[Ludwig Lachmann]],Lachmann (1976) and [[Jesús Huerta de Soto]]Huerta De Soto (2006) entirely reject a productivity explanation for interest rates, viewing the average period of production as an unfortunate remnant of damaged classical economic thought on Böhm-Bawerk.

Böhm-Bawerk's theory equates [[capital intensity]] with the degree of [[roundaboutness]] of production processes. Böhm-Bawerk also argued that the law of [[marginal utility]] necessarily implies the classical law of costs. However, many Austrian economists such as [[Ludwig von Mises]],Mises (1949) [[Israel Kirzner]],Kirzner (1996) [[Ludwig Lachmann]],Lachmann (1976) and [[Jesús Huerta de Soto]]Huerta De Soto (2006) entirely reject a productivity explanation for interest rates, viewing the average period of production as an unfortunate remnant of damaged classical economic thought on Böhm-Bawerk.