The Austrian School of Economics Gets It Right
There is a place in life for expert opinion. If a doctor tells us our heart is going to quit because we’re drinking too much beer and not exercising enough, we listen to him. If a physicist tells us that jumping from high places without a parachute could be bad for our health, we listen to him. If Tiger Woods tells us how to correctly hit a one iron or send a saucy text message, we listen to him.
But if a group of economists tells us that a government tax delivers a public benefit, we are inclined to guffaw in their collective face.
Most of the economics profession that gets quoted in so-called respectable publications has studied the wrong textbooks over the last 50 years. They are doctors prescribing remedies based on an incorrect understanding of illness.
Most mainstream textbook economists are reading from the playbook of John Maynard Keynes. They believe, and will say on command – not because there’s any evidence that it works but because it’s how you get tenured and earn grant money or get a government job – that when private demand falls because households and business de-leverage, it is the proper role of government to boost consumption and aggregate demand by increasing public spending. Amen.
As a scientific proposition, empirically speaking, there is zero evidence that this policy works. The one example trotted out is FDR’s spending boom in the Great Depression. But the evidence now suggests that it was war-time production that dragged the American economy out of depression, not morally enlightened fiscally policy.
There no evidence to suggest the big deficit spending really is better than doing nothing. But time after time, the interventionist mantra gets trotted out like the Ten Commandments in the Ark of the Covenant to incinerate anyone who doubts its gospel truth. Yet it’s just a bunch of superstition with very little basis in fact.
Economics is simply not a science in the same way that chemistry and physics are sciences. It’s probably not a science at all, to be honest. Or, if it is, it’s a pseudo science, having more in common with psychology than geology.
Complex adaptive systems like the modern marketplace do not behave mechanistically. They cannot be controlled precisely with the rods and levers of monetary and fiscal policy. To believe so is an enormous – and as we’re finding out – costly error. It’s also massively arrogant and conceited.
There’s a reason the great Austrian economist Ludwig von Mises called his great book “Human Action.” Economics is the study of human action. And human action is sometimes rational, sometimes irrational, sometimes predictable…but ultimately…very difficult to model and predict with charts.
As Nassim Taleb points out, all the most important stuff in your life probably happened or will happen in non-predictable ways. Most of the time, today is going to be like yesterday and tomorrow is going to be liked today. But the most life-changing things happen to you at times you’d have no way of predicting or preparing for. But not everyone is comfortable with this kind of un-planned spontaneity.
Please note the Austrian School of Economics was the only school of economic thought that accurately predicted the current crisis. Why? The Austrians correctly identified the influence of credit (free money to change your life) on human action. Altering the price of money alters incentives and changes individual calculations across the breadth and depth of an economy.
The Austrians pointed out that government-controlled interest rates are the real cause of the business cycle inasmuch as they lead to credit booms and inevitable busts. When the price of money is rigged, the market isn’t free. Only if you understand the “root cause” of the business cycle can you learn how to prevent bubbles from blowing up and popping later. The Austrian answer is, by the way, sound money.
Regards,
Dan Denning
Whiskey & Gunpowder
May 27, 2010
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Dan Denning
Dan Denning is the author of 2005's best-selling The Bull Hunter. A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia, and is a frequent contributor to The Daily Reckoning Australia.
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As a child of the Depression, I grew up on “debt is bad”. As an adult I figured out that it was a useful tool albeit not a way of life. Even as a kid I figured out that high taxes meant less money in the family pocket, regardless of intended use–whether a milkshake for me or to buy more cows or a newer tractor. I didn’t have to know the word “investment” or anything about Keynes to figure out about money.
These last fifteen or so years of learning about the Austrian School and monetary policy, etc., have merely reinforced my long-held views. (Pardon me while I pat myself on the back.)
So, Mr. Denning, from a choir member, kudos and thank you.
‘Rat
By definition, governments do nothing efficiently and often do things innefectively. If governments only pursued worthwhile causes (fat chance) there would still always be a net sum loss from government expenditures. Whether these actions are covered by direct taxation or the inflation tax either way there is still the net loss. The only exception to this is possibly a defensive citizen military (local or national).
John B.
The Austrian Economists predicted the Great Depression, the inflation of the 1970s, and the current mess.
http://pair.offshore.ai/38yearcycle/#austrian
para 5, last sentence, “not morally enlightened fiscally policy.”
change “fiscally” to “fiscal”.
-bill
Spot on!, Dan. The tragedy is that this generation will not understand the CAUSE of what is happening to them.
Birds build nests every year, not because their parents taught them while the parents were building the nest, but because the instructions of the “HOW” and “WHY” nests are built are stored permanently in the bird’s genes or their Epigenome.
Not so for human beings. Each generation of humans has to be taught all over again from the very beginning, how to build something. Thus, this generation has no memory or understanding of the CAUSE, the “HOW” and “WHY” of economic miseries. This is for two reasons:
1. The CAUSE, or creation process of future economic miseries transcends three or more human generations.
2. By the time the EFFECTS are seen and felt, the present generation has no personal experience as to the “HOW” or “WHY” of their suffering.
Simply stated, we have no collective, genetic way to remember and know why.
Thus, It has been well said that those who fail to heed, or are unable to remember the lessons of history, are doomed to repeat the same mistakes.
Respectfully,
David Franklin
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The Austrian Economists predicted the Great Depression, the inflation of the 1970s, and the current mess.
http://pair.offshore.ai/38yearcycle/#austrian
[...] Schiff, the Austrian School Economist who Predicted the Great Meltdown » The Cobden Centre The Austrian School of Economics Always Gets It Right AUSTRIAN ECONOMICS RISING – Austrian economists predicted the Great Depression and America's [...]
Maybe the Austrian economists understood better the nature of scarcity, better than other schools of economics have been able to.
And a nice site, with a gorgeous name…
*Please to remember the Fifth of November……*