Don Lavoie Fellowship Discussion: Module 1
Intro to the Austrian, Virginia, and Bloomington Schools of Political Economy
The Analytic Framework of Austrian Economics
Welcome to the first module of the Don Lavoie Fellowship discussion portal. During the next two weeks of discussions you will be joined by Dr. Peter Boettke, Dr. Abigail Hall Blanco, and Dr. Arielle John who will help lead the discussion, pose additional questions and comments.
To get started with the questions below, please learn about the Austrian economics and the two foundational assumptions that provide a framework for understanding the issue of social coordination - start by reading the piece by Jayme Lemke. Further, in this episode of the Hayek Program Podcast, learn more about the writings of FA Hayek and the knowledge problem, calculation vs coordination, and much more.
Question: Austrian economists emphasize the important role of knowledge in society. How do you understand this role? What are some examples of such knowledge within your own community?
Aashish Reddy: The material world is characterized by scarcity—we have limited resources and infinite wants. At the same time, individuals subjectively value goods differently. It is impossible for any single person or central authority to possess all the knowledge of both of these things needed to efficiently allocate resources, because this knowledge is dispersed among billions of individuals who each hold a fragment of the relevant information. Austrian economists emphasize the critical role of decentralized processes like markets, which, through prices, aggregate and transmit information about how others are acting on the knowledge they possess. Prices condense complex information about scarcity, demand, and opportunity costs into a signal that guides individual decisions, even though no one person can know all the underlying details.
For example, if one were planning to build a railway line, a central planner without access to market signals might consider using platinum, given its superior strength compared to steel. However, market prices reveal that platinum is far more expensive, likely due to its scarcity and high demand for other uses that people value more highly. (The market price does not tell me which of these is the "true" reason for the high price; but I can adjust my activities based on the price appropriately regardless.) This price signal enables the planner to realize that using platinum would be an inefficient use of resources and prompts them to choose steel instead, without needing to know all the factors driving the high price of platinum. Note that if I felt that platinum would be necessary for my intended uses, or would lead to me receiving greater return on my investment (if consumers would pay correspondingly more to use the platinum track), I would be willing to pay the higher price. But as this isn't the case, I can opt for the inferior metal that is just as good for my purposes, allowing the platinum to be employed in more productive ends (i.e., satisfy greater human desires). High revenues reflect that I have satisfied consumer demands; high profits reflect that I have satisfied them using available resources efficiently.
An example from my community might be seen in university tuition fees. In the UK, the cap on tuition fees distorts the signals that students typically rely on when deciding whether the returns from a degree are worth the investment. Normally, a flexible market for education would allow tuition fees to vary depending on the costs and expected economic returns of different degrees. This variation would signal to students the value of a degree in relation to their personal goals and the labour market demand. However, with tuition fees capped, the price signal is compressed, and students cannot accurately assess the true cost versus benefit of their education.
As a result, there may be an oversupply of university graduates, which shifts the labour market equilibrium. Employers, faced with an abundance of degree holders, begin requiring bachelor’s degrees for positions that don’t necessarily need them. This leads to credential inflation, where degrees are valued more for their signalling effect than for the actual skills gained, and many students pursue higher education even when alternative forms of training or work might better align with their interests and society's needs. This distortion reflects how capped fees fail to allow proper knowledge transmission through prices, leading to inefficiencies in both education and the broader economy.
(Note that this is not per se an argument for the abolition of the tuition fee cap, but does illustrate the Austrian dynamics about how such a cap compresses the information signals usually conveyed through prices).
Question: What are some unique characteristics of the Austrian school?
Aashish Reddy: The Austrian school of economics is distinguished from other approaches by its emphasis on the subjectivity of value—value is seen as residing in the preferences and judgments of individuals, rather than being intrinsic to goods or determined by external factors (as in the labour theory of value). This subjective value theory leads to the Austrian focus on the individual as the fundamental unit of economic analysis. Human affairs are viewed as complex and unpredictable because billions of individuals pursue diverse ends, each valuing things differently based on personal preferences.
Austrians emphasize the role of decentralized institutions, especially the market (under conditions of private property, etc.), in reflecting real-world conditions. For example, prices rise when a good becomes scarcer due to an external shock, signalling to individuals to adjust their behaviour accordingly. These market signals help coordinate individual actions, leading to more efficient resource allocation. Entrepreneurs play a central role by anticipating future consumer preferences and combining different types of capital to create innovative goods that fulfil needs people may not yet realize they have.
The Austrian school also emphasizes the importance of decentralized processes as a way to cope with the fundamental limitations of knowledge. Individuals not only have subjective preferences, but also operate with incomplete knowledge of both others' values and the objective conditions of the world. Markets, by aggregating dispersed information through price signals, enable individuals to act and make decisions in the face of this uncertainty. Consequently, Austrians are sceptical of government interventions that distort these signals, as such actions can impair the ability of individuals to coordinate and respond to changing conditions in ways that best reflect their knowledge and preferences.
Examining the Virginia School of Political Economy
What does it mean to think a public choice economist? Read this article and listen to the enclosed podcast to learn about how to apply economic analysis to government institutions as well as the other core insights of the Virginia School of Political Economy. Further, in this essay by Professor Peter Boettke learn what Economist James Buchanan had to say about the use of science in society.
Question: Public choice suggests that we treat people similarly no matter what sector they are participating in. How does this differ from other ways of studying political action?
Aashish Reddy: It likely does not differ drastically from most other ways of studying politics in its stated assumptions: if one were to ask most other such academics if they accepted that human nature was generally the same across the public and private sectors, they would likely agree that it was.
But sometimes when economists identify some market failure - some issue that arises in the free cooperation of individuals in the market - and also take the view that the issue in question could in principle be fixed by some exogeneous alteration, they make the implicit assumption that government can function as a Deus ex machina and resolve the problem.
Public choice theory enables a more rigorous analysis of this part of the reasoning, noting that the government too is comprised of individuals with their own interests. One can then consider if the fact of democratic accountability means that government intervention can in fact be net positive (as it doubtless often can); or if it is more likely that officials are beholden to special interest groups so that their incentive is to intervene in the market in a manner that is likely to make the problem worse.
Question: What are some examples of the effects from rent-seeking on the society in your country?
Aashish Reddy: In Britain in 2024, rent-seeking in the housing market through restrictive land use and planning regulations continues to create significant divides. Homeowners and property developers often lobby local governments to maintain stringent controls on new housing developments, particularly in high-demand areas. This benefits a bloc of people—homeowners—because the restrictions keep property values high, which increases their net worth. Rising house prices are seen as a positive outcome for this group, as their assets appreciate, enhancing their financial security and wealth.
However, for those who do not yet own property, particularly younger people and lower-income individuals, these same rising house prices present a formidable barrier to getting on the housing ladder. As supply is limited by restrictive regulations, demand continues to outstrip availability, leading to inflated prices that make homeownership increasingly unattainable. The divide between these two groups deepens, with homeowners benefiting from the current system while prospective buyers face higher costs, rising rents, and fewer opportunities to secure housing.
This rent-seeking behaviour is often driven by NIMBYism (Not In My Backyard), where local homeowners oppose new developments that could potentially lower their property values or change the character of their neighbourhoods. By blocking new housing projects, these groups help preserve the status quo, benefiting existing property owners while exacerbating the housing crisis for others. The result is a system that entrenches inequality, creating societal costs like homelessness, overcrowding, and long commutes, while serving the interests of a narrow group.
Question: What are the implications of the "non-romantic" view of politics for public policy?
Aashish Reddy: That having identified a market failure that one could imagine being fixed by government, one must consider the institutional and incentive structures that would affect the action actually taken by government should it attempt to redress the issue. The political actors to whom the task would fall are exactly as fallible as market participants - there is no selection pressure that makes them any more or less selfish, flawed, limited, etc.
The probable implication in most cases is to make one more sceptical or wary of government intervention, especially in those areas where powerful special interest groups may be able to influence legislation to extract rents.
Examining the Bloomington School of Political Economy
This week please start by reading the article "Putting the Action back in Collective Action" in which Jayme Lemke discusses the collective action problem. Also, learn more about the multiple methodologies of institutional analysis used by the Bloomington School of Political Economy in this episode of the Hayek Program Podcast. To supplement this week's review, please listen to another podcast episode in which Drs Stefanie Haeffele, Carolina Dalla Chiesa, and Crystal Dozier discuss culture and economics. After reviewing these materials, please offer your comments on the following questions.
Question: What are some examples of successful coordination within your community/city/county? What, if any, was the role of the knowledge in this process?
Aashish Reddy: Perhaps the way in which sports fixtures between my school and rival schools were organised. One had to determine where a given match would be played, how many teams each school would be putting up, the plan for afterwards, etc.
It isn't obvious to me what the role of knowledge is here, except for the obvious importance of local knowledge: that of the needs and capacities of schools, the balance of home/away matches schools would be expected to play, the distance that it would sometimes be necessary to travel, and so on.
Question: How can people overcome the tragedy of the commons? Do they always need other people or the government to intervene?
Aashish Reddy: Collective action problems in general may be solved (or at least mitigated) in one of two ways: through decentralised processes like markets; or through some top-down imposition. This latter can be either an exogenous intervention, perhaps by government. But it can also be true of rules of self-governance that a community voluntarily adopts.
Top-down solutions when they are "endogenous" become more liable to failure at greater scale. Rules imposed on each member of a household are extremely easy to enforce in a small family. Even in larger families, there is often more chaos and a necessary shift towards more decentralised solutions (older siblings often playing a quasi-parental role towards younger siblings and so on). At the level of a community or a country, self-governance rules are essentially impossible to enforce without (and even sometimes with) government intervention.
Although it is quite possible for people to overcome tragedy of the commons situations in small groups using rules of self-governance (for example, the community of dog walkers in a small neighbourhood), as the commons refers to more and more people, it is necessary to opt for more decentralised solutions that disperse responsibility. One should concede that when this isn't possible, it is entirely legitimate to desire some kind of government intervention - sometimes businesses may even desire this - but it should not be a default assumption whenever a tragedy of the commons situation arises.
Bringing it all together
Please read the article in which Dr. Jayme Lemke provides connections among the three schools of political economy. Then, watch this video that further discusses the commonalities among the three approaches, Austrian, Virginia, and Bloomington which together help create a comprehensive understanding of the social world. In addition, please listen to this episode of the Hayek Program Podcast, in which Professor Peter Boettke interviews Dr. Federica Carugati on reframing modern political economy.
Question: What scholars and/or readings that you have encountered have similar or complementary approaches?
Aashish Reddy: F.A. Hayek's The Road to Serfdom was the book that first clued me into this way of thinking about the world.
I recently read a book called Bitcoin is Venice that analyses contemporary finance, academic economics and capitalism (which the authors argue is a poor name for the present regime of political economy, since it fails to allow for the growth and preservation of the capital stock). The authors draw repeatedly on Elinor Ostrom's Governing the Commons, as well as Israel Kirzner's insights on entrepreneurship; in their discussion claiming that the EMH is false, they argue that they are simply drawing out the consequences of value being subjective.
(I am agnostic, mostly sceptical, on whether this latter book is correct, and am not personally long or short Bitcoin.)
Question: What analytical tools and insights come from combining these schools, Austrian, Virginia, and Bloomington?
Aashish Reddy: The combined insights from Austrian economics, public choice theory, and the Bloomington School provide a powerful framework for understanding complex social, political, and economic phenomena. A key insight is the emphasis on individual action as the foundational unit of analysis, highlighting how the behaviours and incentives of individuals shape broader systems. Austrian economics emphasizes the subjectivity of value and the limitations of centralized knowledge, arguing that decentralized decision-making allows individuals to respond to local circumstances more effectively than any central authority could. Public choice theory adds the insight that politicians, bureaucrats, and interest groups also operate with self-interest, leading to rent-seeking behaviour and inefficiencies in political systems, much like in markets.
The Bloomington School complements this with its focus on institutional diversity and context-specific governance, showing how local actors often develop effective rules and governance structures through decentralized, self-organized processes. This school also emphasizes that solutions to collective action problems often emerge spontaneously through bottom-up coordination rather than top-down enforcement. Together, these insights emphasize the importance of polycentric governance, adaptability, and the dynamic nature of systems, where continuous interactions between individuals and institutions drive social and economic change. The framework underscores scepticism toward centralized control, advocating instead for solutions rooted in local knowledge, decentralized processes, and flexible, context-specific governance.
Question: What are some questions or phenomena that you think would benefit from applying the framework that combines the three schools?
Aashish Reddy: Applying the combined framework of Austrian economics, public choice theory, and the Bloomington School to the issue of digital censorship and platform governance offers a multifaceted approach to understanding the challenges of balancing free speech with content moderation. Public choice theory highlights how governments and tech companies may operate under incentives that do not necessarily align with the public good. For example, politicians may push for regulations that favour their political interests or help their allies, while large platforms like Facebook or Twitter may engage in rent-seeking behaviour by lobbying for rules that protect their market dominance, reducing competition and innovation. These actions can lead to overregulation or biased content moderation that prioritizes political or economic interests over the needs of users.
Austrian economics, with its focus on spontaneous order and decentralized decision-making, suggests that more competition between platforms could provide a solution that aligns with the preferences of diverse users. Instead of a one-size-fits-all moderation policy imposed by a few dominant platforms, a decentralized market of social media services might allow individuals to choose platforms that reflect their values, whether that’s prioritizing free speech or stricter content control. Additionally, the Bloomington School’s emphasis on self-governance and local rules suggests that empowering users to create and enforce community standards within platforms could lead to more nuanced and context-specific solutions. Platforms might develop decentralized moderation systems where communities are involved in shaping their own content policies, leading to governance models that reflect the diverse preferences of users across different cultural and social contexts. By combining these perspectives, we can envision a digital ecosystem where governance is both flexible and responsive, driven by user preferences and local knowledge, rather than top-down regulation.