A Beginner’s Guide to Austrian Economics
by Jason Peirce
“Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping towards destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.” – Ludwig von Mises
December 16, 2014—Of course, Mises above is addressing the need for “everyone” to understand basic, sound economics. This is why it’s heartening to see such renewed interest in the Austrian School since the 2008 financial crisis.
Here is a beginner’s guide in which we’ll briefly examine the basic principles and answer the basic questions about Austrian economics.
The “Austrian School” of economics grew out of the work of the late 19th and 20th century Vienna economists Carl Menger, Eugen von Bohm-Bawerk, Ludwig von Mises, and Friedrich Hayek (though of course Austrian School economists need not hail from Austria). Austrians focus strongly on the analysis of individual human action. This is known as praxeology, the study of the logical implications of the fact that individuals act with purpose, from which all economic theory can be deduced. Austrians also note the correlation between greater economic freedom and greater political and moral freedom. This in part explains why Austrian economics is the intellectual foundation for libertarianism. Austrians rightly attribute the repeated implosions of mainstream Keynesian economics to the latter’s focus on empirical observations, mathematical models, and statistical analysis.
It’s important to note that Austrians sound a minority voice in economics and are widely marginalized by mainstream Keynesian economists in academia and media. Consider why this may be. It’s certainly not due to unsound theory. Perhaps because of academic group-think, since tenure is largely denied for Austrians? Or maybe because there is a lack of financial incentive to be Austrian, because Austrians cannot be “Jonathan Gruber-ized” and bought and sold by government, bankers, and the moneyed lobbyists and powers-that-be? What do you think?
The Austrian contributions to economic thought are best-evidenced when comparing Austrian economics to mainstream Keynesian economics. Here are 3 examples of how Austrians differ from Keynesians:
Example 1: The Role of Savings, Capital, and Prices
Keynesians assert that consumer and government spending drive economic growth and that GDP determines the strength of the economy. Seeing savings as the enemy of growth, Keynesians advocate government deficit spending, monetary inflation, and artificially low interest rates to boost “aggregate demand.” Of course, inflation, spending, and debt destroy savings, capital, and prices.
“Keynes did not teach us how to perform the ‘miracle of turning a stone into bread’ but the not-at-all miraculous procedure of eating the seed corn.” – Mises
On the other hand, Austrians rightly see that savings and production drive economic growth and determine the strength of an economy. Also, Austrians recognize that prices act as signals in the economy, and that natural interest rates and prices determine the amount of savings and production in the economy.
“The essence of Keynesianism is its complete failure to conceive the role that saving and capital accumulation play in the improvement of economic conditions.” – Mises