Price Determination

The Austrian school holds that prices are determined by subjective factors like an individual's
preference to buy or not to buy a particular good, whereas the classical school of economics
holds that objective costs of production determine the price and the neoclassical school holds
that prices are determined by the equilibrium of demand and supply.2

The Austrian school rejects both the classical and neoclassical views by saying costs of
production are also determined by subjective factors based on the value of alternative uses of
scarce resources, and the equilibrium of demand and supply is also determined by subjective
individual preferences.

Capital Goods
Capital goods vary; hammers, nails, lumber, machines differ, affecting economic models.
Keynesian approach ignores this, treating all capital equally, while Austrian school
emphasizes the importance of capital heterogeneity and its impact on economic efficiency.

Interest rates
Regarding interest rates, Austrians reject the classical view that ties rates to capital supply
and demand. They assert that interest rates result from individuals' subjective decisions about
current or future spending, reflecting their time preference. Increased saving indicates
delayed consumption and potential future resource availability.

Business Cycles

The Austrian school holds that business cycles are caused by distortion in interest rates due to
the government's attempt to control money. Misallocation of capital takes place if the interest
rates are kept artificially low or high by the intervention of the government. Ultimately, the
economy goes through a recession.5

Why does there have to be a recession? The labor and investment employed
toward inappropriate industries (such as construction and remodeling during the financial
crisis of 2008) need to be redeployed towards actually economically feasible ends. This short-
term business adjustment causes real investment to drop and unemployment to rise.

The government or central bank might attempt to circumvent the recession by lowering
interest rates or propping up the failed industry. Austrian theorists believe that this would
only cause further malinvestment and make the recession that much worse when it actually
strikes.

freedom in a free market

Friedrich Hayek's economic thought is famous for his opinion on the importance of
individual freedom in a free market. According to him, the free market is the most efficient
economic system and provides the greatest benefits to society. He believed that the free
market would allocate resources efficiently and produce stable economic growth.
In addition, Hayek also argued that government interference in the economy would only lead
to imbalances and inefficiencies in resource allocation. He viewed that government economic
policy should be limited to basic functions, such as maintaining monetary stability and
maintaining law and order.