The Austrian School of Economics offers a distinctive approach to understanding economic phenomena, and is based on the following premisses: (1) Firstly, methodological individualism, the belief that social and economic events result from individual actions, and that individuals act based on their subjective preferences (so called-preference maximization). (2) And secondly, the school emphasizes subjective value theory, where value is not intrinsic to goods but determined by individuals' preferences. (3) Lastly, the theorists believe in spontaneous order, wherein markets—when left free—naturally lead to efficient outcomes. Austrian economists, such as Ludwig von Mises and Friedrich Hayek, are also highly skeptical of central planning, arguing that no authority can fully understand or control the complex, decentralized knowledge that drives economic systems.
However, insights from political theory and political psychology—particularly Prospect Theory—and theories of power challenge key assumptions of the Austrian framework. These perspectives raise important questions about the nature of individual decision-making and the broader context in which economic choices are made.
Prospect Theory, developed by Kahneman, challenges the classical economic assumption that individuals are rational, utility-maximizing agents. Instead, Prospect Theory shows that individuals are prone to cognitive biases, particularly in conditions of risk and uncertainty. For example, individuals exhibit loss aversion, valuing losses more heavily than equivalent gains, and are highly susceptible to framing effects, where the way choices are presented influences decision-making. These insights stand in contrast to Austrian economics’ assumption that individuals, while subjective in their valuations, act consistently and rationally based on their preferences. If people's decisions are systematically shaped by psychological biases, the Austrian emphasis on rational market processes is weakened. The theory suggests that individuals may not act in the clear, predictable ways Austrian economics presupposes.
In addition to these psychological challenges, power theories—notably the third and fourth dimensions of power—further complicate the Austrian understanding of individual decision-making. The third dimension of power, as articulated by political theorist Steven Lukes, explores how power operates not just through direct control or institutional structures, but also by shaping people’s preferences and desires in subtle ways. Think of how the instagram algorithm makes you addicted to scrolling, or how hollywood defines ideals and status symbols. This suggests that individual preferences, which Austrian economists take as given, may themselves be shaped by external forces, including cultural, political, or economic interests. Rather than acting on freely formed preferences, individuals may be unknowingly following desires that have been influenced or manipulated by powerful actors.
The fourth dimension of power, as explored by theorists such as Michel Foucault, goes even further by examining how norms, discourses, and subconscious influences shape our identities and desires before we are even aware of them. If people's economic choices are embedded in broader social and discursive structures, the Austrian idea of autonomous, independent individual decision-making becomes even more questionable. The market is not just a venue for free exchanges; it is shaped by power dynamics that influence what people think they want or need.
From a Gramscian perspective, the Austrian view of the economy would be seen as overly simplistic in its treatment of individual autonomy. Antonio Gramsci’s theory of cultural hegemony emphasizes that the ruling class maintains control not just through coercive force but by dominating the cultural, ideological, and intellectual spheres. According to Gramsci, capitalist hegemony is sustained through institutions like media, education, and religion, which shape individuals' worldviews, making capitalist relations seem natural and inevitable.
In this context, the free-market ideal promoted by Austrian economists could be viewed as a manifestation of capitalist hegemony—a system that appears as "spontaneous order" but is actually underpinned by deeply entrenched power relations. The individual decisions that Austrians place at the heart of economic theory are, in a Gramscian framework, influenced by dominant ideologies that reinforce the status quo. Gramsci would argue that the apparent "freedom" in market choices is shaped by cultural norms and economic forces that benefit the capitalist class, making genuine individual autonomy an illusion.
The Austrian School champions minimal government intervention, emphasizing free markets as the most efficient and fair way to allocate resources. Austrian economists advocate for policies like deregulation, low taxation, and the elimination of central banking. These recommendations rest on the belief that markets—left free from external interference—will generate optimal outcomes, with individuals acting in their own rational self-interest and thereby benefiting society as a whole.
However, when we introduce the new premises discussed above—namely, the influence of psychological biases, power dynamics, and hegemonic forces—the conclusions that Austrians draw about market efficiency and fairness may no longer hold. If individuals are not rational actors, but instead prone to irrational behavior under uncertainty (as Prospect Theory shows), then market outcomes could be far less predictable and efficient than Austrian economists assume. Market failures driven by herd behavior, loss aversion, or framing effects might be more common than Austrians acknowledge.
Similarly, if individual preferences are shaped by power structures, as suggested by Lukes’ theory of power and Gramscian thought, then the Austrian ideal of a free market—where individuals autonomously express their preferences—becomes questionable. Markets may reinforce existing inequalities and power dynamics, rather than correcting them, because the preferences and choices that drive market transactions are shaped by hegemonic forces that benefit those already in power.
Take the case of a crypto trader who, influenced by hype and social media, makes speculative investments based on irrational optimism or fear of missing out (FOMO). According to the Austrian School, the trader is acting on his subjective preferences in a free market, and his decisions should theoretically lead to efficient outcomes. However, Prospect Theory and behavioral economics reveal that his choices are likely driven by cognitive biases such as loss aversion or herding behavior, rather than rational assessment. When prices crash, his losses are not the result of poor market signals but of emotional and irrational decision-making—demonstrating how the Austrian ideal of a self-regulating market fails to account for real-world psychological influences.
Similarly, consider someone from an economically deprived region who believes that Austrian economic policies—such as deregulation, low taxes, and free markets—will improve their life. According to Gramscian theory, this belief might be shaped by the cultural hegemony of free-market ideology, which presents capitalism as the only viable solution to economic problems. In reality, however, this individual may find that deregulated markets favor entrenched interestsand corporate elites, leaving little opportunity for upward mobility. Without government intervention or redistribution, the structural inequalities that limit this person’s economic prospects would likely persist, suggesting that the Austrian solution overlooks the role of power dynamics in maintaining economic disparity.
This shift in perspective would call for a reassessment of Austrian policy recommendations. Instead of assuming that markets naturally lead to just and efficient outcomes, acknowledging the role of psychological, cultural, and power-based influences might suggest a need for greater regulation, redistribution, or policy interventions to mitigate the inequalities and inefficiencies that free markets could exacerbate. Public goods, social safety nets, and anti-monopoly regulations could be seen not as hindrances to market efficiency, but as essential correctives to the distortions introduced by cognitive biases and entrenched power structures.
In conclusion, while the Austrian School offers valuable insights into the limitations of central planning and the importance of individual actions, recognizing the influence of psychology, power, and hegemony shifts the debate. The free market may not be as self-correcting or liberating as Austrian economists claim. Instead, markets may reflect and reinforce power imbalances and psychological biases, suggesting that social interventions could be necessary to ensure both fairness and efficiency in economic outcomes.
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