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The Austrian School of Economics

Updated: Oct 27, 2020

People of the Small-State and the No-State persuasion are generally followers of the Austrian School of economists.


People of the Small-State and the No-State persuasion are generally followers of the Austrian School of economists. It had precursors in the 16th century Spanish Scholastic tradition, but the school arose in Austria-Hungary during the nineteenth century – a rapidly developing, brilliant, and essentially Classical Liberal polity. Its leading lights are Ludwig von Mises, sometime Austrian finance minister, who came to America late in life after WWII and Murray Rothbard who was based in New York until his death 25 years ago. Austrian economics is common-sense economics. So it is not taught much in universities where Keynsian inflationists dominate, or understood at all in central banks.


Key aspects of Austrian thought include:


1) All voluntary transactions in society, not just commercial ones, are exchanges of goods and services intended by all participants, in their subjective view, to increase their wellbeing (their ‘Psychic Income’) or reduce their ‘sense of felt unease’. Charitable and mutualist undertakings are envisaged and analysed alongside conventional economics’ commercial focus. Involuntary transactions, in other words state enforced win-lose deals, are shown to reduce wellbeing in society.


2) Prices and costs generated by voluntary transactions supply, in principle, all the information needed to decide what productive activities are worthwhile. As a businessman friend put it succinctly ‘you do the numbers and if it works you do it’. Mises in 1920 pointed out the impossibility of economic calculation under socialism. Without the freedom to own and dispose of one’s own property and labour there cannot be valid prices and costs on which to base calculations about what to produce. (The Soviets joked that one capitalist country would have to be kept going to tell them what prices should be.)


3) The Austrians understand the Credit Cycle, or ‘Boom and Bust’ business cycle, to be the unavoidable result of Government encouragement of inflationism, of state sponsored banks creating money out of thin air. It is not an inherent defect of capitalism, as Keynes claimed. Pushing interest rates down through money printing falsifies businessmen’s – and indeed politicians’ – calculations and makes a painful cull of dud schemes – ‘malinvestments’ - unavoidable. In the absence of political intervention interest rates will be stable, reflecting savers’ genuine ‘time preference’ – that is their willingness to delay consumption into the future. Also they will be low since there will be no inflation premium. The constant increase in the costs of living, averaging around 5% annually for a century, is purely a (deliberate) result of state policy and fraudulent banking practices.


4) Information about how to create more value is understood to be expensive, difficult to discover, and subject to a high degree of uncertainty and change. Being good at managing information and unearthing new information all the time is what successful entrepreneurs do. This approach is different to the conventional assumption that information is generally and cheaply available to all. Unless you understand that finding actionable information is hard and a key entrepreneurial task, you will not understand why competitive businesses cannot be managed by public sector bureaucrats.


5) Genuine honest to God saving – deferring consumption to free up resources for investment – is recognised as central to maintaining and increasing prosperity. Keynes’s deeply confused view that saving is bad and savers should be wiped out and replaced by money printing is going to be the number one cause of the forthcoming collapse of Democratic Socialism.


Whether espoused by proponents of small government or no government, the thrust of Austrian School economics is individualistic and co-operative. Human beings operating under effective legal protection of person and property automatically create as much prosperity as changing technology and unchanging human nature allow. The State cannot improve on this result in either theory or practice. It can only damage cooperation in order to favour politically well connected predators.


The individual has the knowledge of his own situation to make the best arrangements with others. He also is the person most incentivised to improve his lot. Interfering elected or unelected officials, not so much, on either count. 

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