Advanced Introduction To The Austrian School of Economics

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Review:
Holcombe, R. G. (2014) Advanced Introduction to the Austrian School of
Economics, Edward Elgar Publishing Limited, Cheltenham, UK.

Reviewer:
Mikko Arevuo
Senior Lecturer in Strategic Management; Fellow at Adam Smith Institute

Randall Holcombes new textbook Advanced Introduction to the Austrian
School of Economics makes an important addition to the general Austrian
economics literature. The book gives an erudite, accessible, and lucidly written
introduction to the core principles, ideas, and diversity of modern Austrian
thinking. Milton Friedman was once asked about the value of delineating
economic thinking by the schools of thought. He opined that although it is always
tempting to partition economics into the schools of thought, there are only two
kinds of economics: good economics and bad economics. However, as the
different schools each have distinguishable ideas associated with them it is
useful to compare and contrast the assumptions and the approaches they
promote. Moreover, Holcombes book clearly demonstrates why the common
sense economics of Menger, Bohm-Bawerk, Mises, Hayek, Kizner, Rothbard, and
more recent Austrian scholars, makes what Milton Friedman would describe as
good economics.
The thin volume offers an advanced introduction targeted at an
informed reader or student who has a conceptual understanding of the
neoclassical economics that is built on the foundation of equilibrium analysis. In
contrast to the equilibrium economics framework, the Austrian school believes
the market economy is spontaneous order resulting from human action, but not
from human design. Although the Austrian school economists refer to the
equilibrium concept, they consider it a moving target in a continually evolving
economy. The dynamic nature of economic activity that focuses on the ongoing
process by which economic coordination takes place leaves the equilibrium
outcome a theoretical state. Hence, for Austrian economics equilibrium analysis
is a matter of secondary importance.
The text succinctly addresses the major theoretical constructs of the
Austrian school including the market process, decentralized knowledge and the
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role of the firm and markets, economic calculation, money, banking and business
cycles, and methodology. As a management scholar I consider the discussion of
entrepreneurship and the entrepreneurial nature of firms to be the books most
valuable contribution. Although Mises considered the entrepreneur the driving
force of the market and a fundamental economic agent, modern economics has
maintained an ambivalent relationship with entrepreneurship, with little
consensus on how the entrepreneurial role should be modeled and incorporated
into economic theory. Foss and Klein (2012)
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in their recent major contribution
to the Austrian entrepreneurial theory of the firm state that in economic
literature, the concepts of entrepreneurship such as Schumpeters account of
innovation, Knights theories of profit, and Kirzners analysis of entrepreneurial
discovery, remain an enigma. Similarly, strategic management literature has not
given much attention to entrepreneurship. The disciplines dominant perspective,
the resource based view of the firm, is founded on the neoclassical model of
perfect competition and the production function view of the firm. However,
Edith Penroses (1959)
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approach to the growth of the firm has recently made
some inroads into strategy research. Penroses theory that is more akin to the
Austrian and evolutionary concepts of the firm argues that firm growth is, over
time, driven by the evolving knowledge base of the firms managers and limits to
the rate of growth are imposed by the time that it takes to integrate new
managers and employees into the firms knowledge structure. Due to the
introductory scope of Holcombes book it is impossible to cover entrepreneurial
theory and different perspectives on entrepreneurship in full. However, the book
clearly demonstrates the central role the Austrian school gives to the
entrepreneur and entrepreneurship as a judgmental process that is based on
spotting, and acting on, a profit opportunity that previously has gone unnoticed.
The publication of the book is well timed as management and business
schools are beginning to show renewed interest in entrepreneurship. Research
and teaching of entrepreneurship is increasingly becoming incorporated into the

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Readers interested in recent Austrian economics based scholarship on the
entrepreneurial theory of the firm should consult Foss, N. J. and Klein, P. G (2012)
Organizing Entrepreneurial Judgment: A New Approach to the Firm, Cambridge
University Press, Cambridge.
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Penrose, E. (1959) The Theory of the Growth of the Firm, Oxford University Press,
Oxford.
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disciplines of management, strategy, and finance rather than a standalone
subject about business formation, business planning, small business
management, and technology innovation. As Austrian economics remains the
minority within the mainstream economics faculties, the renewed relevance of
the Austrian perspective could best be approached through formal management
and business studies. Holcombe weaves together the concepts of uncertainty,
distributed tacit knowledge, entrepreneurial discovery and arbitrage, and the
role of prices and profit into a seamless framework that has much to offer in
advancing and informing students and the policy makers understanding of the
critical role of entrepreneurship in a well functioning market economy.
Professor Holcombe concludes with some notes on the Austrian method
and an elegant discussion of the ideology of the Austrian school. The degree to
which Austrian economics and libertarian political philosophy is connected is a
matter of interpretation. According to Holcombe the answer depends on the
extent to which one believes that economic and political institutions are co-
dependent. Holcombe observes, however, that most proponents of the Austrian
school tend to support libertarian views. These views are grounded in good
economics, an idea that the economy, and the society in general, is a self-
regulating complex system that is the result of human action, but not of human
design. Attempts to intervene in that system are likely to result in negative
unintended economic consequences as they cloud entrepreneurial judgment and
human action in general. The book should be read by anyone interested in
current Austrian thinking, and I envisage the text will be a welcome addition to
the curricula in strategic management studies.

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