Dragan D. Lakićević

English

Research Papers in Economics

 
PANOECONOMICUS, 2010, 1, pp. 119-122 
Received: 25 November 2009. 
Book review
 
 
 
Dragan D.  
Lakićević 
 
Institute for European Studies,  
Belgrade,  
Serbia 
 
 lakicevicdragan@ikomline.net  
The Austrian School 
 
by Jesus Huerta de Soto 
 
Edward Elgar, 2008 
 
 
 
In his book The Austrian School Jesus Huerta de Soto took as his goal to explain both 
the fundamental principles of the Austrian Economic School and to show its superi-
ority compared to the other competitive economic teachings, above all the dominant 
neo-classical school. It is a difficult and brave task that deserves respect, irrespective 
of the way it has been carried out, as it is well known that the Austrian School does 
not belong to the mainstream of economic theories today and, as such, many econo-
mists treat it as obsolete and old fashioned, making this work even more intriguing 
and interesting.  
According to de Soto, two main features of the Austrian teachings contain its 
inner core: its peculiar understanding of market dynamics and its perceiving of eco-
nomic science as a theory of action. Both of these two characteristics can contain all 
other aspects of the theory: the denial of the idea of market equilibrium as the main 
concept of economic science and the adoption of the theory of action, as the wider 
and more comprehensive notion than the decision theory of the neo-classic school. 
Initially, Carl Menger introduced the concept of human action as the main object of 
inquiry of all social sciences. At the same time human action is perceived primarily 
as a complex economic activity. It means that decisions, as the key notion of the neo-
classical school, have become just a part of a more complex process. Namely the 
decisions, as de Soto points out, are embodied in human actions. Human action in-
cludes a series of acts, shifts of the point of view, taking into account new informa-
tion, permanent new adaptive acts and coordinating activities. All these various ac-
tivities were missing in the narrow concept of the decision theory. Correspondingly, 
starting from such a complex understanding of human behavior, the Austrian school 
refused to reduce the economic theory to fit within the decision theory, but insists it 
to be a theory of the process of human interactions. Ludwig von Mises introduced a 
name for it – praxelogy. 
The main feature of the neo-classic paradigm, de Soto claims, is that it reduces 
economic problems to the purely technical problem of allocation of available re-
sources, i.e. to the problem of optimalisation and maximalisation. The further conse-
quence of such a narrow view is that the theory reckons that the knowledge of avail-
able resources and posed goals already exists. Therefore the only thing left is the 
question of right decision. In contrast to this, the Austrian school perceives the prob-
lem quite differently: people do not engage themselves so much in allocation of the 
means towards the chosen goals, as to discovering new means and projecting new 
ends. This dynamic aspect of economic action could be seen most clearly if it is per-
ceived through the main actors of economic activity – the entrepreneurs.  120  Dragan D. Lakićević
PANOECONOMICUS, 2010, 1, pp. 119-122 
The second chapter of the book is entitled "The knowledge and the entrepre-
neurship". It shed more light on the concept of entrepreneurial activities. The interest 
of the author is focused on the epistemological activity of entrepreneurs in the market 
process. It clarifies how the entrepreneur obtains relevant information, how he com-
bines it in the process of seeking the best solutions for achieving his plans, how he 
corrects his own activities on the basis of acquired experience in that process, etc. It 
is obvious that for Austrians the entrepreneurial activity is synonymous for human 
actions in general. In that sense every human being who modifies reality and pursues 
some ends could be seen as an entrepreneur. To corroborate that claim de Soto de-
velops an extended etiological explanation about the very meaning of the notion of 
entrepreneurship. "Indeed the Spanish word empresa and French and English word 
enterpreneur  derive etiologically from the Latin verb in-prehendo-endi-ensum, 
which means "to discover, to see, to perceive, to realize, to capture; and the Latin 
term in prehensa clearly implies action and means "to take, to seize". 
Therefore within the epistemology of entrepreneurship is a creative activity, 
similar to the activity of a scientist or an artist, it is a contemplative act that leads to 
the discovery of some new possibilities that were hidden by now. Therein lies the 
fundamental difference between the Austrian and neo-classic school. The Austrian 
paradigm insists on the momentum of creativity and invention, of bringing new ideas 
in the spheres of productions and distributions. In that sense human action is con-
ceived as permanently seeking new ideas and new combinations; it is not so much 
about rational decisions within the already defined possibilities, but about constant 
searching for new means and new ends.  
This is the basis upon which these innovative activities and the dynamics of 
market activities came about. New products, new use of technical skills, new ways of 
exploitation of nature, new technical inventions, new needs and preferences – all this 
permanently produces "market disturbances" and forces the actors of the market 
game to change their plans and adapt to new circumstances. In other words, the capi-
talist mode of production bears within itself a powerful dynamic element that is in-
herent to its own nature. 
What are the findings of the entrepreneur? In the epistemological sense it is 
new information. This information is of a subjective nature: as Ludwig von Mises 
has pointed out, it is something that only the acting person knows. The content of the 
new information could be entirely different – new resources, new technological 
knowledge, discovery of the future preferences of the costumers, etc. – but what is 
important is that that kind information is basically of a practical nature. It is dis-
persed among thousands of actors and can hardly be linguistically articulated or in 
some way formalized. Most often it is practical knowledge bonded to a specific place 
and time.  
 It is important to notice that neo-classical economists do not recognize such 
information as a discovery of a particular subject, but as an objective entity, as some-
thing that is at everyone’s disposal. But, as De Soto stresses, this is not the case: that 
kind of information is not something that is objectively given. It is a creation of the 
subjective mind and at the beginning only he knows about it. It is of essential impor-
tance how this new knowledge would be used by the individual who discovered it. 121  The Austrian School - by Jesus Huerta de Soto 
PANOECONOMICUS, 2010, 1, pp. 119-122
Without this complementary act new information would be of no value. New infor-
mation becomes an economic fact only if it enables the economic subject to use new-
discovered choices and produce some benefit. The benefit is possible if this informa-
tion enables him to form an alternative practice by which the hidden opportunities 
newly discovered alternatives are used. The profit would be the criteria of the success 
of an entrepreneurial activity based on the new way of using available resources.  
The innovative activity of the individual and his successful use of new knowl-
edge require a new coordination of the activities. That information of new entrepre-
neurial discovery would be signalized through the price mechanism of the market 
and the profit rise. The competitive mechanism forces the market players to adapt 
their plans and actions towards that new fact. The dynamical modifications of entre-
preneurial behavior and swift use of new information are the agents of permanent 
change. Starting from that basic comprehension the interest of the Austrian school 
above all is to analyze the process of competition and dynamic nature of the market. 
Its interest is focused on the innovative entrepreneurial acts and market risks. One of 
the consequences of the acquired view is that the use of mathematics and statistics in 
economic research is inadequate. since these sciences can operate within the frame-
work of a static model of the market process. But the market is primarily one dy-
namic system essentially linked to the individual’s unpredictable activities and sub-
jective judgments: in that area the formalized knowledge is of little real help. For the 
Austrians there is only dynamic market process towards to the equilibrium, but not 
market equilibrium as such. Concerning how they conceive entrepreneurial activities 
the achieved equilibrium would be a pure contradiction in terms.  
Opposed to it the neo-classic economists have focused on the model of market 
equilibrium and use of comparative statistics. The model of market equilibrium has 
an implicate presupposition that all relevant information  for the derivation  of the 
function of supply and demand are already given. Correspondingly, it is only about 
successful or unsuccessful operationalisation of available data.  
From this fundamental difference come the other disputes and disagreements 
between the neo-classic and the Austrian schools. De Soto, as his prime goal, took to 
elaborate the main disputes between the founders of the school and their opponents. 
So, the four following chapters are devoted to the great intellectual debates through 
which the Austrians earned their distinguished position in economic science: 
 
  Carl Menger versus historical school (famous Methodenstreit); 
  Eugen von Böhm Bawerk versus Marshal, Marx and John Bates Clark; 
  Ludwig von Mises versus Otto Neurath and other followers of socialist 
planning; 
  Friedrich von Hayek versus Lord Keynes and the Chicago School. 
 
The Austrian concept of society is based on the idea of society as a dynamic 
structure which spontaneously grows. It is highly complex and comprises millions of 
people with an infinite range of constantly changing goals, tastes, values and practi-
cal knowledge. All these interactions are driven by force of entrepreneurship that 
creates, discovers and transmits new information and knowledge. Through competi-122  Dragan D. Lakićević
PANOECONOMICUS, 2010, 1, pp. 119-122 
tion the economic actors are forced to adjust their plans and actions and to use their 
skills and knowledge in the most productive way for the whole of society.  
 Starting from these essential premises de Soto concludes: "Economic sciences 
should center precisely on the study of this social process as defined above. Austrian 
economists feel that the essential purpose of economics is to analyze how the sponta-
neous social order enables us to take advantage of a huge volume of practical infor-
mation which is not available anywhere in a consolidated form, but rather is dis-
persed or diffused throughout the minds of millions of individuals."  
De Soto’s book is at the same time analytical and polemical. Its analyses are 
devoted to the core of Austrian teachings and the mainstream influence it produced. 
The polemical part of the book concerns the disputes with the representatives of the 
neo-classic paradigm. The whole of chapter VII is devoted to rehabilitate the school 
from the main accusations of the contemporary economics. There is a list of usual 
critical comments to which de Soto tries to answer: "Are the approaches of the Aus-
trians and the neoclassic mutually exclusive or complementary?", "Why do the Aus-
trians fail to formalize their theoretical proposals?", "Why do the Austrians produce 
very few empirical studies?", "Why are Austrians so dogmatic?", "Why do the Aus-
trians jettison economic forecasting?", etc. As an adherent of the school the author 
gives convincing explanations within the framework of the main premises from 
which the whole teaching starts. The other problem is how this argumentation is per-
ceived by its opponents and could it make them to change their views? 
Nonetheless, the de Soto book is worth reading: it is at the same time concise 
and comprehensive. The work explores the fundamental ideas of the fathers of the 
Austrian school as well as the contributions of its contemporary representatives. 

The Austrian School by Jesus Huerta de Soto (Edward Elgar, 2008)

http://www.panoeconomicus.rs/casopis/2010_1/07.pdf

The Austrian School by Jesus Huerta de Soto (Edward Elgar, 2008)

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