Austrian Economics 101

Here at Bogpaper we take a fairly Austrian and Libertarian line on things. We have been lucky enough to have Redmond Weissenberger, Director of the Ludwig von Mises Institute of Canada, write us a brief introduction to the subject of Austrian economics, exclusively for Bogpaper.

If you have anything you would like to contribute or say, please get in touch: bogpaper@gmail.com.

Does the government need to control the money supply in order for the economy to function?  Do bureaucrats and the bicameral whorehouse otherwise known as your national legislative branch, as Fred Reed calls it, need to control your life for you to be happy?  Does prosperity flow from the printing press?  One read of the New York Times editorial page may have you believing that “yes” is the correct answer to the above questions.

The recent popping of housing bubbles around the globe brought about a financial crisis of epic proportions which has since decimated economic growth and vanquished millions of job opportunities.  Being that the United States is the world’s largest economy, its housing market collapse lead the global nosedive.  It’s become plainly obvious by now that the majority of the mainstream economics profession missed the housing bubble with flying colors.  To see this pathetic display, watch the Youtube sensation “Peter Schiff was Right.”

Despite the failings of the so-dubbed insightfulness of mainstream economics, one school of thought in particular did see the housing bubble unfolding.  Proponents of this school not only warned about an impending financial crisis many years in advance but espoused a theory which logically explains the causes of recessions and depressions.  This school is known as the Austrian school of economics.

What is Austrian economics and who were its leading theorizers?  The following will attempt to answer that question as succinctly as possible.

The school was given the name “Austrian” because its early thinkers hailed from Vienna in the Austro-Hungarian Empire.  It emphasizes a few key concepts vital to economic analysis including a focus on the individual, the varied nature of production and goods, and the fallacy of applying precise mathematics to unpredictable human action.

The birth of Austrian economics begins with Carl Menger; one of founders of the “marginalist revolution.  In answering the simple dilemma of why diamonds tend to be worth more than water, the marginalist position was one of explaining how items are valued by subjective preference and scarcity.  As an individual trades for goods, their value scales or rank of preferred items are fulfilled in accordance of the utility of each good.  Basically, if I prefer a cow over my two chickens, and my trading partner prefers my chickens over his cow, our trade is mutually beneficial.  In addition to emphasizing the use of individual methodology and deductive reasoning, Menger outlined how commodities such as gold and silver become money; a fact that the current fiat paper printers in government would like to be ancient history.

Eugen Bohm von Bawerk, who was a devout follower of Menger, made significant contributions in the development of Austrian economics by pointing out time’s important relation to production.  In his devastating critique of Karl Marx, Bohm-Bawerk described the “roundabout” nature of production in that capitalists risk their own saved capital to invest and pay workers in the time it takes to yield a final product.  Such a revelation was a slap in the face of all those who tried to paint capitalism as a system of exploitation.  The imagery Marx and his modern day followers want to create was that of an overly large man with a monocle, cigar, and whip towering over shackled and starved workers.  Bohm-Bawerk thankfully made short work of this more than a century ago.

The leading economist of the Austrian school was Ludwig von Mises.  Mises, whose ambitious treatise Human Action serves as the best guide of the Austrian worldview, embraced economics as a “value-free” science and applied a number of universal truths to deduce that laissez faire capitalism was the best economic system for improving man’s standard of living.  The fundamental Mises truth, or axiom, is “human action is purposeful behavior” through which he developed his entire view of economics.  Besides his approach to economics, Mises developed a number of groundbreaking explanations for why central banks and government intervention wreak havoc on market economies.  Most famously, Mises applied marginal utility to the money printing policies of central banking and concluded that credit expansion not backed by an increase in savings on part of the general public leads to distortions in how people make decisions on if they are going into debt to purchase large scale goods.  To lower interest rates, central banks print money to increase the supply of loanable money.  If inflation takes hold and prices rise, central banks slow down printing which in turn then reveals bad investment and typically causes a recession.  In short, artificially low interest rates lead to the cycle of booms and busts- usually called the Austrian Business Cycle theory.  Like Bohm-Bawerk before him, Mises dismantled any notion of socialism possibly working by showing that prices act as signals to buyers and producers on what is in high demand.  Think in terms of if Kim Kardashian wears a pair of Gucci sunglasses and people rush out to buy them.  The Gucci Company would see the price isn’t high enough as to ensure the glasses are available to anyone that wants them.  Socialism would either try to give Gucci glasses to all, leaving less materials for other goods, or wouldn’t produce them at all.  Applied to all goods and services, socialism is doomed to fail without the pricing process.  This is why Mises was virtually shunned by the progressive movement of the early 20th century.

Perhaps the most famous of the Austrian economists was Freidrich Hayek.  Hayek, being a student of Mises, made great strides in developing the Austrian Business Cycle Theory.  Hayek’s lasting influence however comes from his explaining the disbursement of knowledge throughout society.  In arguably the most important economic essay ever written, The Use of Knowledge in Society, Hayek shows how marketable information can never possibly reside in the minds of few central planners and that markets must remain unobstructed in order to work efficiently.  It’s doubtful Hayek would be welcome among the chief advisors of President Barack Obama.

Economist Murray Rothbard took the Misean approach to another level by combining it with a theory of the natural right each man has to their body and property.  Rothbard’s Man, Economy, and State and Power and Market rank along with Human Action as the premier treatise on Austrian economic theory.  In addition to his work in economics, Rothbard was also a rigorous historian and libertarian theorist who developed a substantial body of work of applying the fundamental libertarian “non aggression axiom” which holds that force shouldn’t be applied to anyone unless as an act of pure defense.  Rothbard famously coined the term “anarcho capitalism” to describe his preferred economic system where all services are provided by the private, competitive sector and the lack of a state.

So there you have it; a short history and background of the Austrian school of economics.  Despite its logical principles, it has yet to gain the recognition it deserves.  The fact that it serves as intellectual ammo to counter those who feed at the trough of government privilege certainly hasn’t helped its broad acceptance.  The last thing a politician wants is to be told that any action they take will likely have a negative consequence rather than a positive one.

Though Austrian economics is not as popular or eminent as the popular Keynesian or Chicago school, it has seen yet another revival in the U.S. with the presidential campaign of Texas Congressman Ron Paul and the deepening worldwide economic downturn.  As interest of the true cause of the financial crisis continues to grow, the Austrian school stands to gain much more attention from a broader audience.

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