Tuesday, September 11, 2012

Austrian Economics Explained

Austrian economics is a school of thought which places great emphasis on free markets, private property and absence of government intervention. Important Austrian economists include Carl Menger, Ludwig Van Mises, and Freidrich Hayek. Modern day supporters include congressman Ron Paul. Austrian economists oppose Keynesian economists on issues related to fiscal policy: see: Austrian debate.

Main beliefs of Austrian School of Economics

1. Laissez-faire economics. Proponents of Austrian school of Economics believe in free markets and avoiding government intervention in markets. They argue government intervention usually creates more problems than it solves. See: laissez-faire economics

2. Recessions caused by credit cycles. They argue Central Banks encourage excessive growth of credit by keeping interest rates too low for too long. Some argue the credit bust of 2008 is a good example of Austrian economics theory in action. Ludwig Van Mises also predicted the depression of 1929. 

3. Austrians criticise Keynesian fiscal policy. They argue government intervention to stimulate demand just leads to wasted resources, greater inefficiency and stores up more problems. I examined these arguments in detail here: - Hayek on Eurozone crisis and criticism 

4. Support the Gold Standard. Austrian economists are critical of the use of fiat money which enables governments to devalue exchange rates and destroy savings through creating inflation. The gold standard means money would only be created if it can be converted into gold.

5. Critical of Central Banks. Austrian economists are critical of Central banks and their ability to create inflation by printing money and the fractional reserve system.

6. Rejection of statistical econometric models. Austrian economics emphasises the importance of logical deduction from people's behaviour and avoiding the use of statistics and empirical models. This sets them apart from related schools like Chicago and is one reason why they are not in the mainstream of economics.

7. Civil Liberty Support of free markets and control of money supply essential for promoting civil liberty and social progress.

Criticism of Austrian Economics

  1. The belief in the efficiency of markets is countered by many examples of market failure. E.g. growth of subprime mortgages / securitisation leading up to credit crisis of 2008
  2. High Tax and high spending regimes do not necessarily impinge on social freedoms. E.g. Many western European economies have high tax and high government spending. But, citizens get a comprehensive welfare state, education and health care. This compares favourably with US, where health care is expensive and piece meal.
  3. Controlling Money Supply is much more difficult in practise than theory suggests.
  4. Gold Standard can create severe economic problems such as the deflation and high unemployment suffered by UK in the 1920s.
  5. Models are too subjective and Vague.
  6. Keynesian critique that economies will recover without government intervention. Leaving it to market forces may take a very long time to move economy back to full capacity. Their policy prescriptions for the Great Depression are considered to be 'nihilistic' because they advocated no government intervention. They have also been criticised for shaping their political beliefs into economic policy.

Books on Austrian Economics

External Links

4 comments:

Anonymous said...

I would like to respond, in turn, to the criticisms of Austrian economics you have listed.

1). This criticism can be dismissed. The credit crisis of 2008 is merely further evidence of the failure of government-controlled/regulated markets. Not, as asserted, the failure of markets in general. Only government controlled/regulated markets exist.

2). This can also be dismissed. Taxation IS an impingement on all freedoms. It prevents people distributing the products of their mind/labour as they wish. Also, healthcare is expensive in the U.S. because entry into the market is highly restricted by government. No competition/freedom to enter the market prevents prices being driven down. That healthcare is expensive in the U.S. is only evidence to support the argument AGAINST government control of people's economic affairs, not for.

3). Austrian economics does not advocate 'controlling' of money supply, so this is not a criticism of Austrian economics.

4). Evidence? Also, post-war government fiat currencies, central banking, government control of the money supply and interest rates, and expansionist economic policies have created the most severe global economic depression in human history. Even if we accept the assertion that a Gold Standard can create 'severe economic problems', that still isn't an argument for the government-induced economic meltdown we are living through now.

4). Too vague in itself to be a valid criticism. Examples needed. I suspect what this is really bemoaning is the fact that Austrian economic theory describes exactly what we should NOT be doing, and actually prescribes very little positive action. People who see mistakenly see economies as 'things' in themselves to be steered, controlled, managed and tinkered with cannot comprehend such a theory.

5). It is utterly absurd to describe Austrian Economic prescriptions as 'nihilistic'. It is the ONLY theory of economics that holds the life of the individual as worth anything, as it's the only one that does not deny self-ownership. All other theories that are built on the assumption that government force is necessary for society to function hold the products of the minds of individuals (alive and yet to be born) to be the means to the ends of the imaginary entity known as The State. When government borrows money secured against the future earnings of unborn tax payers and repeatedly prints money they demonstrate an utter contempt for the well-being of those individuals because they know what their actions will lead to: inflation, higher taxes, and much lower levels of general prosperity.

Austrian economics isn't mainstream because it disproves Keynesian economic theory and therefore invalidates the virtue of everyone who has and is benefiting most from the governments' control of people's economic affairs – i.e. politicians and their cronies, public sector workers and corrupt corporations. It is attacked and vilified, and not taught in state schools or mainstream colleges, precisely because it exposes their immorality.

Anonymous said...

This is a succint reply to the criticisms of the Austrian school and I feel you have summed up the the Austrian school and general liberty theory using first principles which makes it philosophically sound too.

I would add criticism to what I feel is the most insidious and inaccurate portrayal of liberty that it is somehow 'Nihilistic'. What is completely immoral is enslaving future tax-payers into debt without consent using the argument of the 'Social Contract' as a way of justifying monetary policy. Young and future-taxpayers are coerced into accepting a system of debt accumulation which reflects the way our political and economic system is set-up based on the concept of 'Family'. The parents (Government) gives a say to the children (Voters) but ultimately the parent has the final say.

renegadeteacher said...

The previous two posters both provide fantastic examples of the blindly dogmatic stance followed by advocates of Austrian economics.

The contradictions are obvious and extend to outright hypocrisy.

Firstly: Austrian economists on the one had dismiss empiricism - suggesting that quantitative, aggregated models are irrelevant. They also maintain that every economic event is subject to a unique set of circumstances and cannot be used to predict future events or even current outcomes. The contradiction arises when, as exemplified by the first respondent, they are happy to state certain cause and effect relationships as fact. Here's an example:
"post-war government fiat currencies, central banking, government control of the money supply and interest rates, and expansionist economic policies have created the most severe global economic depression in human history".
So on the one hand, you cannot determine macro-economic events based on a given set of circumstances, but you can categorically state that the ONLY reasons for the great depression were, conveniently, policies that happen to be against Austrian ideology.

In truth, it is impossible to accurately prove that the cause of the great depression and recent GFC were a result of government intervention in the same way that it is impossible to prove that it was exacerbated by a lack of it, in spite of heavy deregulation of the financial system leading up to 2007. The previous poster is happy to state his argument as fact, however.

Austrian economists dismiss empiricism, but are happy to cherry pick events throughout history to supposedly support their theoretical claims as fact. When the same process is used by mainstream economists, they resort back to pointing out unreliability of the evidence and the inaccuracies of so many confounding economic variables. Get the picture?

The simplest ploy they engage in is blaming all macro-economic failure on government intervention, by virtue of the fact that government interventionism was in existence during the time of a catastrophic event. This is classic correlation proves causation logical fallacy. Using the same logic it is equally possible to argue that any period of economic prosperity was also a direct result of government intervention, merely by virtue of the fact that government intervention existed at the time.

In conclusion, Austrians make it easy for themselves by making all of their theories unfalsifiable.

The clearest criticism is that they use very obvious confirmation bias, seeking 'evidence' to suit their ideology rather than holding themselves up to scrutiny.

renegadeteacher said...

The previous two posters both provide fantastic examples of the blindly dogmatic stance followed by advocates of Austrian economics.

The contradictions are obvious and extend to outright hypocrisy.

Firstly: Austrian economists on the one had dismiss empiricism - suggesting that quantitative, aggregated models are irrelevant. They also maintain that every economic event is subject to a unique set of circumstances and cannot be used to predict future events or even current outcomes. The contradiction arises when, as exemplified by the first respondent, they are happy to state certain cause and effect relationships as fact. Here's an example:
"post-war government fiat currencies, central banking, government control of the money supply and interest rates, and expansionist economic policies have created the most severe global economic depression in human history".
So on the one hand, you cannot determine macro-economic events based on a given set of circumstances, but you can categorically state that the ONLY reasons for the great depression were, conveniently, policies that happen to be against Austrian ideology.

In truth, it is impossible to accurately prove that the cause of the great depression and recent GFC were a result of government intervention in the same way that it is impossible to prove that it was exacerbated by a lack of it, in spite of heavy deregulation of the financial system leading up to 2007. The previous poster is happy to state his argument as fact, however.

Austrian economists dismiss empiricism, but are happy to cherry pick events throughout history to supposedly support their theoretical claims as fact. When the same process is used by mainstream economists, they resort back to pointing out unreliability of the evidence and the inaccuracies of so many confounding economic variables. Get the picture?

The simplest ploy they engage in is blaming all macro-economic failure on government intervention, by virtue of the fact that government interventionism was in existence during the time of a catastrophic event. This is classic correlation proves causation logical fallacy. Using the same logic it is equally possible to argue that any period of economic prosperity was also a direct result of government intervention, merely by virtue of the fact that government intervention existed at the time.

In conclusion, Austrians make it easy for themselves by making all of their theories unfalsifiable.

The clearest criticism is that they use very obvious confirmation bias, seeking 'evidence' to suit their ideology rather than holding themselves up to scrutiny.