The Austrian school of economics dates back to early in the 19th century, when Carl Menger and Eugen Bohm-Bawerk laid foundations for modern theories of demand. Austrians rejected earlier emphases on “objective” costs (e.g., labor theories of value accepted by Smith and Ricardo) as underpinning market dynamics. Prices, they said, were ultimately subjective: things are worth what people think they are worth. The foremost disciples of this approach in the 20th century were Ludwig von Mises and Friedrich A. Hayek (1899-1992), who stressed how our perceptions broadly shape the entire spectrum of economic activities.
Born in Austria, von Mises taught at the University of Vienna before fleeing to America to escape Hitler's invasion. As a youth he was fond of tennis, but when someone noted that he was not very good at it, he replied, “The fate of the ball does not interest me very much.” Human creativity and its consequences were his passions. Von Mises chose not to be limited to a narrowly defined economics. He attempted, instead, to survey the full range of human action, focusing on the supremacy of the individual as a purposeful decision-maker who constantly adjusts prices, production, and consumption in order to live better and to enjoy maximum freedom. In a free marketplace, economic calculation provides prices and profits as signals that motivate firms to mesh production with consumers' demands. But in a government-directed economy, agencies have no measure comparable to profits by which to evaluate their operations.
Von Mises also rejected the Keynesian notion that business cycles can be cured by countercyclical policy. Such an idea ignores the fact that politicians have a strong propensity to spend in good times as well as bad. Von Mises viewed government managers as always fumbling in the dark because they cannot possibly know all the data needed to make “correct” macroeconomic adjustments. He concluded that budget management is likely to set off a chain reaction of, first, inflation, then price controls, and, ultimately, economic stagnation.