FormalPara Definition

Austrian economics emphasizes the process aspects of competition, subjectivity of economic value, methodological individualism, resource heterogeneity, distributed knowledge, the time-structure of production and the entrepreneur. Key Austrian economists are Carl Menger, Friedrich von Hayek, Ludwig von Mises and Israel Kirzner.

In terms of direct influence, the impact of Austrian economics (AE) on strategic management is relatively limited (e.g., Jacobson 1992; Young et al. 1996; Foss et al. 2008). Different kinds of industrial economics, namely the structure-conduct-performance (SCP) approach, the Chicago–UCLA school, and game-theoretical industrial economics, have clearly been stronger influences. Assessing the impact of AE depends somewhat on how broadly ‘Austrian’ is defined. Notably, a definition that includes Joseph Schumpeter will imply a stronger impact than one that does not. However, the points of contact and even overlap between the mainstream of strategic management and AE are many, and AE has the potential to contribute to the further development of the field.

The Austrian School

The Austrian tradition begins with Carl Menger (1871), who emphasized the process aspects of competition, the subjectivity of economic value, marginal analysis, resource heterogeneity, distributed knowledge, the time-structure of production and the entrepreneur. Menger also stressed that social science explanations must conform to methodological individualism, that is, phenomena on the social domain should be explained in terms of the actions and interactions of individuals, taking place within an institutional setting (in itself explainable in terms of individuals’ actions and interactions).

In the 1880s and 1890s an Austrian School coalesced around Menger and his disciples, most notably Eugen von Böhm-Bawerk and Friedrich Wieser, and extended these Mengerian themes. Ludwig von Mises and Friedrich von Hayek would develop and extend the Austrian tradition in the early twentieth century (von Hayek 1948; von Mises 1949), with Israel Kirzner, Murray Rothbard, both Mises’ students, and Ludwig Lachmann, a Hayek student, making critical contributions in the 1950s, 1960s and 1970s (e.g., Kirzner 1973; Lachmann 1977).

Although the Austrian School is not homogenous (Salerno 1993), and Austrians differ, for example, in terms of how critical they are of ‘mainstream’ economics, nevertheless modern Austrians share a number of distinct basic views. Thus, Austrians insist that more attention be devoted to market processes as distinct from (Walrasian or game-theoretical) equilibria: they emphasize entrepreneurship as uncertainty-bearing, entrepreneurial appraisal and investment (von Mises 1949), or as alertness to hitherto unnoticed opportunities for pure profit (Kirzner 1973); they are staunch methodological individualists; and they stress the essential heterogeneity of capital/resources, and the fundamental subjectivity of costs and expectations (Lachmann 1977).

Applying Austrian Economics to Strategic Management

AE has had some, albeit limited, direct influence on the evolution of strategic management, for example on work on competitive dynamics (Young et al. 1996), entrepreneurial top-management teams (Foss et al. 2008) and the tangled links between rents and costs (Lippman and Rumelt 2003). Nevertheless, there have been very significant overlaps between AE and the core of strategic management thinking since the 1990s.

For example, much of Mintzberg’s (e.g., 1991) critique of the planning approach in strategic management is based on a fundamentally Hayekian (von Hayek 1948) understanding of organizations as systems of dispersed knowledge in which centralized planning and resource allocation may be inefficient relative to bottom-up processes. Moreover, the foundations of strategy’s dominant resource-based view may be seen as strongly Austrian. For example, the point that there must be a divergence between the (acquirer’s) estimate of resource value and the current price of resources for competitive advantage to exist (Barney 1986) may be seen as an application of Austrian ideas on privately held information, entrepreneurial appraisal and expectational disequilibrium (see also Denrell et al. 2003). The current strong emphasis on resource heterogeneity as underlying performance differences is closely related to the Austrian emphasis on heterogeneous, yet specific and complementary capital goods (Lachmann 1977). Notions of ‘capabilities’ and ‘competencies’ may be seen as firm-level manifestations of the kind of localized knowledge that von Hayek (1948) in particular emphasized. The emerging focus on new value creation (i.e., the emerging strategic entrepreneurship field), and the increased interest in the dynamics of strategy (e.g., Grimm et al. 1999) may also be seen as reflecting fundamentally Austrian themes. Thus, it could be argued that there in fact is an ‘Austrian school of strategy’ (Jacobson 1992).

However, on closer inspection, Austrian ideas have been only imperfectly absorbed in current strategic management thinking. Much strategy thinking has a streak of methodological holism; specifically, firm-level outcomes are explained in terms of collective notions such as ‘capabilities’ with little or no reference to individuals and their interaction (Abell et al. 2008). Much strategy thinking is still based on equilibrium models and is therefore primarily taken up with examining the conditions under which resources may yield rents in equilibrium. Although process issues are not lacking in contemporary strategic management, the Austrian point that different men not only know different things but also from different expectations is not sufficiently addressed in thinking about the sources of new value creation, innovation and competitive advantage (Foss et al. 2008). Thinking about resource heterogeneity is fundamentally ad hoc, whereas Austrian capital theory offers a foundation for such thinking (Foss et al. 2007). Recognizing the imperfect overlap between strategic management and AE may, however, be taken as a call for more fully drawing on AE ideas in strategic management.

See Also