I’m currently writing up an article series entitled Gold Standard 101: What You Need To Know About The Gold Standard. It’s a basic overview of how a gold standard works, and includes a discussion on the nature of money and real bills. Note that this isn’t just typical Austrian analysis — it’s influenced more by the New Austrian school than the American Austrian school.
The first article in the series is entitled What Is Money? Enjoy!
The following article on currency competition was written by Leah Stiles, a student of government and history at Regent University. She has completed a Koch leadership program and an internship with the Foundation for Economic Education.
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Millennia ago, the first men to construct homes out of mud and reeds could never have foreseen coming, towering skyscrapers of glistening steel and glass. Similarly, bygone farmers trading eight chickens for one pig could never have predicted that, one distant day, humans would utilize money and enjoy the corresponding freedom to conveniently and directly buy and sell goods beyond their loftiest musings.
Beyond these brief examples, history repeatedly demonstrates that a truly astounding, uncoordinated creative process will continue to indefinitely and unimaginably improve human life and society. The only natural enemy to this process is the intervention of outside force.
Classical liberal philosopher Friedrich Hayek discusses this inventive process at length and employs the term “spontaneous order” to encapsulate the unplanned, creative outcomes of human interactions. Hayek further argues that, of all that has arisen from spontaneous order, money is one of the most direct and important examples. However, this argument has major implications for the way that society presently views money and its ability to continuously and spontaneously evolve.
In a society driven by a fascination with government and its assumed powers of central planning, it is often taken for granted that something as vital as money must be managed by government agents. Alas, as classical liberal thinkers would contend, this assumption ignores the long history of money’s inception and evolution. Perhaps even more dangerously, it overlooks what free and unconstrained money and exchange could one day become. Under the continued limits and restrictions of government control, mankind may never know what opportunities could await them under a system of free and efficient money.
What is money and from where did it come?
Before proceeding further with the classical liberal argument, a brief discussion of money’s function and history is in order. Put quite simply, Ludwig von Mises explains that, in a market that fosters exchange, “the function of money is to facilitate the business of the market by acting as a common medium of exchange” (Mises 1953, 29). Through this market process of production, consumption, and exchange, the market discovered that certain commodities were more effective media of exchange than others and, at first, these commodities varied considerably but eventually narrowed (Mises 1953, 32).
A discussion of the specific commodities employed would be here unnecessary. Instead, the vital principle is that the market gradually demonstrated that trading good for good in a barter system is inefficient. In its place, media of exchange began to signify certain values that could stand in for an unimaginable combination of goods and that could universally satisfy the needs of those from whom one wished to purchase a good. Ever since, money has served as the primary method of fair exchange and compensation.
Government involvement
Because it was clearly necessary that said media of exchange were legitimately valuable, governments initially began to manufacture coins that were identical in weight, manufacture, fineness, and other vital factors affecting value (Mises 1953, 71). Additionally, early states also began to provide a stamp guaranteeing the sanction and legitimacy of each piece of money. However, this limited interaction with the monetary system has increased steadily and significantly.
Hayek explains that this minting power, under Roman emperors, became a treasured part of a ruler’s sovereignty for its ability to increase the ruler’s revenue. During the Middle Ages, princely revenue became chiefly focused on this minting power and its benefits for the ruler (Hayek 1976, 28-29). Thus, Hayek argues that “as coinage spread, governments everywhere soon discovered that the exclusive right of coinage was a most important instrument of power as well as an attractive source of gain” (Hayek 1976, 28-29). From this point, discussions of “the good,” or even of economic efficiency, halted and were replaced by arguments of symbolic government power.
Thus, presently and for some time, “the principal instrument of monetary policy at the disposal of the State is the exploitation of its influence on the choice of the kind of money” (Mises 1953, 219). Consequently, the state controls the mint, money-substitutes, and the individual’s choice of his or her medium of exchange (Mises 1953, 219).
Regardless of this level of control, government’s power over monetary policy remains limited by something that no human institution can overcome. Governments lack perfect or prophetic knowledge to foresee the actual consequences of any given intervention (Mises 1953, 239). As such, governments of today are just as limited in perfect, future knowledge as yesteryear’s inhabitant of the house made of mud and reeds. Defenders of interventionist monetary policies thus vest limited minds with the power to curb unlimited possibilities.
Implications and applications
With all of this in mind, when one analyzes law, language, and the myriad other societal elements effected by spontaneous order, one cannot help but observe that monetary institutions are the least developed and progressive (Hayek 1988, 103). Hayek strongly condemns and explains this state of affairs by writing that “money has almost from its first appearance been so shamelessly abused by governments that it has become the prime source of disturbance of all self-ordering processes in the extended order of human cooperation” (Hayek 1988, 103). Essentially, he contends that government monopoly of monetary matters has made any form of experimentation or evolution impossible.
The implication of this government patronage of money is that alternative means have yet to be discovered or tested. Indeed, we have no idea what money could become or how much more efficiently it could meet human needs. The natural alternative to this government monopoly is to limit the role of government in monetary affairs and to allow the market to discover absent innovation.
Admittedly, even though many around the world agree that the present monetary structure is broken, few are willingly to minimize or abolish government intervention. Instead, most merely ask that the government approach the topic differently – essentially handing government more mud and reeds and asking that they construct a different house. However, the same leaks and dangers will await a home constructed out of the same inefficient materials.
As such, we must work to alter economic policy broadly and the ways that individuals view their money, government, and market. Indeed, as Mises contends, “there cannot be stable money with an environment dominated by ideologies hostile to the preservation of economic freedom” (Mises 1953, 438). If economic freedom were restored as a primary value, then the solution to the monetary problem would lay in restoring control to the market and fostering a system of free trade in money. This is Hayek’s “practical proposal” (Hayek 1976, 23) for discovering the most efficient, market-driven medium of exchange.
If more voices advocated for such a change in the monetary system, small and uncoordinated sparks of ingenuity would likely ignite a torrent of creative possibilities that would render our current system as archaic as the trading of chickens for pigs. Indeed, in the face of a vastly undiscovered field of possibilities, all that we can know with certainty is that humankind would benefit from such an opportunity to explore and to create. When faced with the status quo, this is justification enough.
References
Hayek, Friedrich. Denationalization of Money. London: The Institute of Economic Affairs, 1976.
Hayek, Friedrich. The Fatal Conceit: The Errors of Socialism. Chicago: The University of Chicago Press, 1988.
Mises, Ludwig Von. The Theory of Money and Credit. New Haven: Yale University Press, 1953.
By Jason Hughey, Capitalism Institute staff writer
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As I noted in my last article, Austrian economics begins with the axiom of human action. From this, it derives its analytical approach of methodological action. When applied to the actual study of economics, this means that Austrians like to get at the root of the matter by understanding the impact of economic phenomena upon the individual and the impact that the individual has on economic phenomena.
In this article, I will present some more applicable concepts within Austrian economics that you can apply to the way you look at the world. These concepts may affect your political viewpoint or even reconsider certain assumptions you have about business and finance. The concepts will cover:
1. Hazlitt’s One Lesson of Economics
2. Austrian Economics and Entreprenuership
3. Austrian Economics and Monopoly
Henry Hazlitt: The One Lesson of Economics
An Austrian economist named Henry Hazlitt articulated this principle by saying that economics could be boiled down to one very simple lesson. In his book, Economics in One Lesson, he stated that the one basic lesson of economics “consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
Therefore, it is only rational to consider how economic realities will affect all groups of individuals within a given society for the long-term if we want to come to valid deductions about true economic principles. Otherwise, we run the risk of ignoring the “Forgotten Man” that the sociologist, William Graham Sumner, once described in his essay by that name. Hazlitt accepts the concept of the “Forgotten Man” as well, noting that it refers to all individuals that are taken for granted by economic policymakers, including those in the short and long-term. If a bank man requests a stimulus, then it must come from someone else in society who has the money to give it to him.
In modern political terms, Hazlitt’s concept of analyzing economic policy solely by its long-term effects on the interests of all is a revolutionary, but mostly ignored, notion. Understanding Hazlitt’s lesson gives us the tools to analyze the inefficiencies and economic dangers hiding behind many economic policies. Hazlitt’s lesson challenges the established wisdom of mainstream economists and politicians who believe that there is such a thing as “corporations that are too big to fail.” If this is true, it assumes that something must be done now to serve the economic interests of a group of society, regardless of the cost to the rest of society.
Likewise, it challenges the belief that stimulus spending is a good idea. Other, more complex arguments in Austrian economics also challenge this notion, such as the theory of capital structure and the Austrian business cycle theory, but the simple logic of Hazlitt’s lesson provides a compelling reason to consider deficit spending a risky danger. This is because deficit spending, particularly in times of crisis, is motivated by the needs of the present and the interests of select groups. Central banks, politicians, and financial institutions cry out for deficit spending to save the economy, but they almost never consider the long-term effect of deficit spending upon current and future members of society.
Hazlitt’s lesson also requires us to come to grips with the scarcity of conditions. If capital, time, and money can only be used toward any one end at any specific time, use them wisely with a long-term vision in mind. Think to yourself constantly about maximizing the output of your input. This might seem too arduous for some, but it’s absolutely necessary. Being frivolous and carefree is extolled in our cultural entertainment and it’s practically the linchpin of most economic policy in the United States, but it’s the death knell of wisdom and sound financial management.
Austrian Economics and Entrepreneurship
One of the most wonderful insights that the Austrians have gifted us with is the Austrian explanation of the phenomenon of entrepreneurship. If you are interested in learning more about the actual scholarship behind the Austrian theory of entrepreneurship, Israel Kirzner and Joseph Schumpeter are considered to be two of the most important Austrians who contributed to its development—although Kirzner does not always agree with Schumpeter. Therefore, for the purposes of clarity, let’s keep to a simple summary of what Austrian economics generally teaches us about the entrepreneur.
Have you ever wondered why we have businesses, products, and advertising in the first place? Austrian economics, with its emphasis on methodological individualism, reminds us that the entrepreneur is the true driver of these endeavors. Whether he is the CEO of a booming corporation or a self-employed small business owner, such an individual is an entrepreneur. This means that, absent government intervention, he has a gift (or a talent) for discerning a need in society and producing something that helps other people meet that need at such a value that he gains a profit in order to sustain himself and his operation.
This means that he can also adjust to the fact that the value of his products change over time. According to the Austrians, this is one of the most miraculous aspects of the entrepreneur. Although admittedly imperfect, entrepreneurs can react almost instantaneously to adjustments in demand, to excesses or shortages in supply, and to the competitive effects of other companies. Certainly, this entrepreneurial process has a few flaws, but the Austrians effectively show that it is, by far, the most efficient means of achieving healthy output in correlation with demand at true market value.
There is one essential caveat to the efficiency of the entrepreneur: he cannot be insulated from either the rewards or punishments of the market by an external force if he is to sustain efficient and profitable production. This means, by extension, that government protections, bailouts, subsidies, fines, price regulations, etc. act to distort the incentives of the business owners who are intended recipients of these policies as well as entrepreneurs that are affected by their unforeseen consequences.
Thus, CEO’s and business owners who lobby the government for more regulation in the market, by definition, cannot be considered true entrepreneurs. Instead, they are rent seekers who are simply facades that rely upon corrupt corporatism to keep their operations successful. They do not earn the respect of consumers by producing quality products and working to satisfy consumer desires. Instead, they demand and rely upon the support of the taxpayer, regardless of whether or not the taxpayer even wants their product. This is the opposite effect of what the entrepreneur provides to society, according to the Austrians.
This understanding of real entrepreneurship has relevance for both the way that we think and the way we act. The next time you take the chance to consider all the stuff that you own, think about how it got there. It didn’t get there because a very nice man thought that someday you personally would like to have a bunch of stuff, so he took the time to make everything you now own and give it to you. Nor was it a group of very nice men who each made one of the things that you own and gave it to you. And it certainly wasn’t because the government stole your money and gave it to well-connected lobbyists.
The reason that you own most of the stuff you do is because thousands of entrepreneurs all over the world who don’t know your name realized that you (and a lot of other people) really wanted something that they were very good at making. They started a company, and whether it is large or small, they did not ever think about you personally. Using their talent and skill, they worked hard to determine what price they could sell their product so as to keep producing and innovating it in order to sustain a profitable enterprise. One day, you decided you wanted a product that these entrepreneurs were making and you bought it. That same process has continued until the very moment that you are reading this article.
That’s how entrepreneurship works. In the realm of social cooperation under a free market, entrepreneurs function as agents of change who overcome obstacles for the benefit of others. In a sense, they are both geniuses and heroes, who make the world a better place for us, often without knowing anything about the people that they are helping. If we can think about entrepreneurship like this, it will help us better understand and reject those policies that stifle entrepreneurship, especially if we can see through the crony corporatism that lies at the heart of many such policies. Unfortunately, as Jeffrey Tucker shows, it is becoming harder to look at mainstream products and not see how they have been either propped up or made worse by government interventions.
Austrian economics and Monopoly
No, this is not an explanation as to why Austrian economics finds fault with the rules of the board game, “Monopoly.” Economist, Ben Powell, has already succeeded in pointing out the game’s flaws here. What we’re really here to consider is the true definition of monopoly powers while we decide what that means for us.
The Austrians contend that the fear of a market-based monopoly power in a free market is unwarranted. This is for a host of reasons, but I’ll boil it down to the basic argument. Austrians believe that having one company own 90% of a given market is not a harmful problem to society. In fact, it’s an efficient solution to many social problems because it means that some entrepreneur has figured out how to make lots of people pleased with his product at a price they are willing to pay for it. This enhances social cooperation, and therefore, it should not really be considered a monopoly.
If you think about it, this makes sense. Just because a company owns the vast majority of the market in the production of a certain good, they can only maintain their dominant share (in a free market) by continuing to excel in the provision of that product. If they slip up or another company figures out a better way to produce a similar product, then they lose their advantage in the eyes of consumers. The key principle is that such falsely called “monopolies” are still subject to the principles of competition, market price changes, and consumer sovereignty.
It’s important to note that Austrians don’t contend that monopolies can’t exist. Instead, they believe that government power is the source of monopoly power because it insulates companies from market forces, allowing such companies to exist regardless if they are truly a good company. This protects inefficiency and subsidizes poor service. In short, it completely distorts the incentives of the free market mechanism, granting companies a social reward in the form of taxpayer dollars that they would not have received had they been subject to market forces.
What does this understanding of monopoly power mean to us? Although this is a complete deviation from the actual theory of Austrian economics, I see in this definition of monopoly power a warning against envy. Whether in sports or in business, when the same people win over and over again, people tend to get very jealous of their victories. Now, if those victories come because of corruption, then there may be basis for some righteous indignation. However, when companies truly succeed because their skill is great, our legal system has created anti-trust laws to break them up. It’s become expected that we should tear down the best just because they are the best.
It’s a perfect shame, really. If we were students of Austrian methodology, we might better understand that using coercive authority to break up successful companies does nothing except hurt the people that those companies are serving. Moreover, it satisfies our envious passions. Either way, it seems a little odd to believe that we should amputate Tom Brady’s arm or make Kobe Bryant play blindfolded just because we are tired of their success. Likewise, it should seem odd to desire that successful companies that have emerged through the competitive process of the market should be legally punished for their success at serving us.
The only time we should criticize monopolies is when we find those that are propped up by government through laws, protections, and subsidies. We should seek to remove those protections and allow the company to compete with the rest of the market.
Conclusion
Ultimately, what matters most in regard to applying what we know about Austrian economics is that you take the time to research and consider the important issues yourself. One of the greatest reasons for the economic mess that we are in is because individuals no longer want to think about the hard stuff and hold others accountable to rigorous standards of critical thinking. This has to change on both personal and societal levels if there is to be a successful reform of this country’s economic system. Therefore, even if Austrian economics simply challenges the way we think about certain issues—and nothing more—it will have been successful at making a significant personal impact.
Additional Resources:
“Entrepreneurship,” by Russell S. Sobel (Online version accessible at: http://www.econlib.org/library/Enc/Entrepreneurship.html)
“The Forgotten Man,” by William G. Sumner (Online version accessible at: http://mises.org/daily/2485)
Economics in One Lesson by Henry Hazlitt (Online version accessible at: http://www.fee.org/library/books/economics-in-one-lesson/)
“Kirzner, Entrepreneurship, and the Market Approach to Development,” by Israel Kirzner (Online version accessible at: http://oll.libertyfund.org/index.php?option=com_content&task=view&id=504&Itemid=282)
What is the Austrian School of economics? If you’re even slightly familiar with this school, you’ve probably heard of economists such as Hayek and Mises. If you’ve done more than cursory research, you’ve also probably come across some thoughts by Murray Rothbard, Israel Kirzner, and Carl Menger. You might be aware of some interesting insights into the Austrian theory of the business cycle, the study of human action, the concept of “deciding at the margin,” Austrian theories of banking, or the socialist calculation debate.
These names and ideas are great starting places for those who are interested in Austrian economics. However, it’s always important to take a step back from the conglomeration of names and theories in order to better understand the comprehensive whole.
Whether you are in the middle of attempting to dissect Mises’ most famous treatise on economics, Human Action, or you have a copy of Economics in One Lesson by Hazlitt sitting on your bookshelf, it is always important to go back and remind ourselves to ask: what is the Austrian School of economics?
Defining the Austrian School of economics
The term “Austrian School” is a label that we use to categorize a certain type of economic methodology. Now, I understand that labels are often criticized for oversimplifying issues and lumping complex beliefs into broad categorizations. Leaving aside the fact that this accusation refutes itself (since it labels all labels as being overly broad), this contention also overlooks the reason that we make labels. We make labels because it helps us to distinguish between different viewpoints, methods, and presuppositional biases. This clarification is significant because it helps us look for the most compelling reasons to separate various schools of thought from each other.
In the case of the Austrian school, what are the unique distinctions that separate it from other economic schools? Without getting too technical, let’s look at five of the most basic fundamentals of Austrian economic methodology:
1. Austrian economics is deductive
2. Austrian economics presupposes the axiom that humans act
3. Austrian economics derives methodological individualism from human action
4. Austrian economics rejects empiricism as the standard for proof
5. Austrians economics does not endorse a political ideology
Without further ado, let’s briefly unpack the theory behind each of these principles in order to develop a comprehensive understanding of what Austrian economics is.
1. Austrian economics is deductive
The Austrian School’s economic methodology is an exercise in deductive reasoning. The big, fancy way to describe Austrian economics is to call it axiomatic deductivism. This means that Austrian economists study human decision-making by starting with a set of fundamental axioms and then reasoning from those axioms to truths about economic principles. Now, remember, an axiom is a presupposition that cannot be deductively proven, but is nevertheless self-evident and irrefutable.
In this sense, Walter Block says that Austrian economics takes a geometric approach to scientific inquiry. Much like Euclid’s system of geometry, which builds itself upon fundamental axioms and necessary postulates using abstract theory, Austrian economics systematizes its understanding of human action before diving into the specific circumstances. Why does this matter? Because Austrian economics is a thoroughly systematic approach that provides us with a rigorous and robust framework for understanding economic issues.
This does not mean that Austrian economists agree on everything!
Just like there were many debates among Greece’s students of geometry, there are disagreements between Austrian economists over certain issues, including some aspects of methodology. However, the point is not that Austrians always agree, rather, the point is that they attempt to construct their economic system based upon a generally shared and accepted deductive methodology. This brings us to the question: what is the starting point for the Austrian methodology? The answer is found in the second principle of Austria economics:
2. Austrian economics presupposes the axiom that humans act
The fundamental axiom for the Austrian is that humans act. This is irrefutable because if anyone tries to disprove it, they have to in some way think, read, write, and speak in order to make their argument. In other words, they have to act in order to prove that humans do not act.
A necessary assumption that is derived from this outcome is that humans act purposefully, given their limited knowledge and means in any given circumstance. This does not mean that Austrians argue that humans necessarily behave rationally or that they always have good reasons for acting. It also does not mean that the result of the outcome will align with the individual’s perception of desired results. It simply means that humans do things because they perceive either a non-negative outcome or a benefit as a result of the action, given the constraints placed upon them.
Murray Rothbard clarified that the Austrian concept of human action, “contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals.” Austrian economics is not meant to provide us with the tools of studying purposeless and random behavior. That is left to the domain of other fields of study.
However, the irrefutable fact that humans generally act toward perceived goals remains–and it’s quite evident in the world around us. People act purposefully and rationally to improve their conditions around them given the state of affairs they find themselves in and the incentives they perceive. If this wasn’t true, then we wouldn’t have all of the advances of modern civilization.
Therefore, properly speaking, Austrian economics goes beyond the study of exchanges involving money, goods, and services. Instead, as Mises said, it is a subset of the study of all human decision-making that is purposefully conducted. The fancy word for this study is praxeology.
3. Austrian economics derives methodological individualism from human action
After having proven human action as a reliable postulate, Austrians move on to the notion of methodological individualism, arguing that individual human actors are the most important factors in understanding observable causation in this world. The ultimate question of methodological individualism is: who acts?
Think about it this way: ideas are not people, thus, they cannot act. Moreover, since a group of people can only exist because multiple individuals are acting within the group, then the notion of a group of people is a helpful description of the concept of multiple people acting—i.e. a group of people is just a descriptive idea. Therefore, since a group of people is nothing more than an idea, then a group of people cannot act since ideas cannot act.
Thus, businesses, governments, society, neighborhoods, etc. do not act. Individuals forming associations in such environments are the stimulants of all action that occur within such group frameworks. This is why Mises argued in Human Action that, “a social collective has no existence and reality outside of the individual members’ actions.”
Again, a clarification point is needed: the concept of methodological individualism as a method of analysis does not carry with it the value implications of a moral or philosophical advocacy of individualism. By saying that individuals, not groups, act, Austrians are not necessarily saying that the individual is the source of reality or that the individual is the highest form of a moral being. Regardless of what they personally believe about theology, ethics, and metaphysics, Austrian economists do not claim to answer these questions within their economic methodology, arguing that these issues lie outside of the scope of economic inquiry.
Instead, Austrians are simply saying that if we are to understand purposeful human behavior, we must seek to understand it at its most basic level: the individual human actor. From this, we can extrapolate to different levels of social cooperation and community behavior, but the Austrian never forgets that the individual is the reason for and the source of action in society.
4. Austrian economics rejects empiricism as the standard for proof
The deductive approach of Austrian methodological individualism starkly contrasts with the empirical and mathematical approaches of much of the rest of economics. Although Austrians do not contest the notion that economics is a science, they recognize that it is not a quantifiable science in the way that chemistry is a quantifiable science. Thus, they do not believe that the primary means of understanding economics should come through models, graphs, formulas, and equations.
Because of the plethora of variables involved with each individual action, it is mathematically impossible to understand each variable behind each human action on an aggregate level. There are literally hundreds of variables acting upon one individual as he faces the decision to make one action. Multiply this by millions of individuals facing hundreds of their own specialized variables, and you can see why developing mathematical formula to rule and predict human behavior is ultimately futile. This is why Mises said, “All authors eager to construct an epistemological system of the sciences of human action according to the pattern of the natural sciences err lamentably.”
A few important clarifications are necessary at this point: although Austrians will not deny that there is a place for econometrics and mathematical modeling, the difference between Austrians and most other economists is one of emphasis. Most mainstream economists place their emphasis on understanding human decision-making with statistics, graphs, GDP, indexes, etc. Austrians believe that this is a hopeless endeavor and thus emphasize the discovery of economic principles through a deductive approach that incorporates the math, graphs, and statistics when it properly aligns with those economic principles that are established by logic.
The Austrian is not opposed to trying to measure and model economic phenomena; however, he does not believe we can learn the fundamental truths about economics through such empirical analysis. While isolating variables in biology, physics, and chemistry can indeed tell us more about scientific truths, the inability to isolate variables in economics can potentially lead us to false knowledge if we continue to assume that we can hold “everything else equal.” If policy and business decisions are enacted based on these false understandings, then there will likely be disruptions, inefficiencies, fraud, and cheating in the market system.
5. Austrians Economics does not endorse a political ideology
Ultimately, the goal of Austrian economics is to tell us both why and how humans act, make decisions, and conduct economic exchanges. In other words, it’s a “nuts and bolts” explanation for economic transactions and human choice.
It is absolutely not meant to be a moral prescription for government policy.
Although the principles of Austrian economics help us to better understand the economic phenomena associated with modern circumstances and political realities, it cannot be emphasized enough that Austrian economists view their study as a science of inquiry, not necessarily a prescription for policy.
This distinguishes Austrian economics, which is an economic school of thought that attempts to describe the way things happen, from libertarianism, which is a political philosophy that tries to tell us what government and society should look like. Now, often the two do seem to go together since most Austrian economists nowadays are libertarians. Furthermore, most of the influential Austrian economists, such as Hayek, Mises, and Rothbard all held to varying degrees of libertarian political philosophy. Much of the findings of Austrian economics, such as Hayek’s business cycle theory, do seem to mold very well with the ethical and policy prescriptions of libertarians. Ultimately, however, applying Austrian economic methodology does not require an individual to be a libertarian and vice versa.
That said, many defenders of liberty have found the methodological analysis of Austrian economics to be an important tool in refuting advocates of big brother government. Austrian economics helps bring the arguments back to reality, pointing statists to the facts that deficit spending creates inflation, that inflation creates unsustainable booms, that government stimulus programs cannot create employment, etc. Yet, Austrian economic methodology never actually makes any statements about reality outside of what it deduces and observes in human behavior. Prescriptions about what to do in light of the findings of Austrians are left to the area of political philosophy.
Lesson 1: Conclusion
There is a very deep and rich history behind Austrian economics, going all the way back to Carl Menger who pioneered the Austrian school with his elaboration of the principle of subjective value theory. Although Austrian economics has unfortunately never been a mainstream viewpoint, its consistency and accuracy in helping us to understand the world around us is forcing scholars of the modern era to check their Keynesian premises and seriously consider the Austrian school. It is these real-world considerations that will be considered in my next article in this guide to Austrian economics.
Additional Resources
Human Action by Ludwig von Mises (Online version accessible at: http://mises.org/resources.aspx?Id=3250&html=1)
“Praxeology: The Method of Austrian Economics,” by Murray Rothbard (PDF file accessible at: http://mises.org/rothbard/praxeology.pdf)
“Austrian Economics and Libertarianism” by Walter Block (Youtube video of lecture accessible at: http://www.youtube.com/watch?v=Xn6TXqgyj_M)
Economics for Real People (2nd ed.) by Gene Callahan (PDF file accessible at: http://mises.org/books/econforrealpeople.pdf)
Copyright Capitalism Institute, 2011-present.
