Market Process Theory

This overview of the Austrian school of economics' theory of entrepreneurship was originally a college paper by Ken Gaillot.

The study of economics is based on the premise that there exists a regularity in economic phenomena, laws as inescapable as the law of gravity. Economic theory seeks to establish these laws. One essential aspect of economic theory, the theory of the market, tries to explain the relationships observed under a system of private property. Although most economists today follow an equilibrium approach to market theory, the body of market theory associated with the Austrian school provides a better understanding of market processes, being able to explain events that equilibrium analysis cannot.

The Austrian theory of the market is one of market process, of action, change and uncertainty. Exponents of Austrian economics, also called subjectivist economics, explain economic activity in terms of its ultimate cause, purposeful human action. Austrians believe an economic theory is valid for situations in which its assumptions are present, if the theory is logically consistent.

Conventional neoclassical equilibrium analysis takes a fundamentally different approach. Reality is to be modeled, as it is in the natural sciences, tested against empirical data, and refined if necessary. Models make assumptions to simplify reality and focus on areas of interest. An economic theory is valid for reality if the results it predicts are present in the situation and the theory is logically consistent.