Austrian economics is a heterogeneous school of classical, monetarist, laissez faire, and protectionist political economy. The Austrian School is also called the Viennese School of Economic Thought. The main theoretical foundation of the Austrian School is the proposition that in economic activity individuals can act in ways that do not affect the outcomes of that activity to any ultimate, external factor. Consequently, it denies the viability of political or social institutions as means of influencing the distribution of income and wealth in a society.
More to the point, the theoretical foundations of Austrian economics hold that there is a distinction between what is called free-market capitalism and laissez faire or protectionism, characterized by the existence of tariffs and other kinds of economic intervention designed to protect certain segments of the market from adverse external influences (such as competition from foreign producers). According to this school, the theory of the cause and effect relationship between economic policies and the distribution of wealth and income is false. According to the Austrian School, there is no such thing as a free-market or laissez faire economy because market prices reflect all the forces operating in the economy. These include demand and supply curves, production and consumption levels, and other economic variables affecting the allocation of resources among available goods and services. Furthermore, the theory of the cause and effect relationship between economic policies and the distribution of wealth and income is further strengthened by the argument that entrepreneurs, businesses, and households exert certain indirect influences on the level of economic activity through their choices and decisions, which ultimately affect the direction and growth of the economy.
The theories of this school of thought were deeply affected by the First World War and the effects it had on the Austrian economy. There were widespread restrictions on trade and production and entrepreneurs and small businesses found it extremely difficult to survive during those times. Thus, many Austrian economists argue that protectionism was the major factor behind the onset of the depression and the ensuing wars. In the following passages, I will discuss the implications of protectionism on the analysis of laissez-faire economic policies.
Protectionism results in discrimination against specific firms based on their production capacity, technology, location, and many other relevant economic factors. This leads to increased unemployment, investment loss, higher costs for basic raw materials and other inputs, and a decline in overall economic welfare. On the other hand, laissez faire neither prohibits nor controls the production of some economic goods and services, such as automobiles and computers. Therefore, protectionism reduces aggregate demand, and in turn, harms the overall economy.
Austrian economists argue that protectionism is not only harmful to the efficiency of the economy, but also to its balance. laissez faire basically helps businessmen to gain an advantage over other businesses, thus leading to monopoly or duopoly conditions. Protectionism therefore does not help the economy achieve a balanced level of output and employment. Finally, excessive protectionist policies to reduce the level of competition, which is beneficial for all consumers and producers alike.
The debate between laissez faire and protectionism turns upon the goals of the two economic systems. Protectionism tries to promote economic efficiency by eliminating or controlling competitors. It is designed to promote economic welfare by ensuring that prices are set to efficiently serve the needs of society. However, laissez faire tries to foster competition, which it believes improves the efficiency of the market. The two views have different economic philosophy and have opposing policy prescriptions.
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