A Primer on Austrian Economics

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I got a couple of emails last week asking about the Austrian School of Economics, so I thought I’d address them on the blog. Many of my comments are based on this line of thinking. I apologize in advance for oversimplifying some of their arguments in this post, but my aim is to cover the basics and connect the Austrian view to the broader conservative movement.

 

Let’s start with a few key contributors. Carl Menger is recognized as the founder of the Austrian School, completing most of his significant work over a 100 years ago. Ludwig von Mises (1881-1973) followed, and the Mises Institute (www.mises.org) is named in his honor. Friedrich Hayek’s (1899-1992) seminal work—The Road to Serfdom—is considered by many to be the most significant contribution written for a broader audience. Thomas Woods is one of my favorite present day “Austrians.” His most recent book—Meltdown—is a must read for anyone who wants a detailed application of Austrian thinking to the current situation. Ron Paul is the best known political advocate of this school of thought.

 

The Austrian School adopts a largely libertarian view of economics. Austrian business cycle theory explains how the booms and busts we experience can be traced to government intervention in the economy. The basic argument is that the economy can take care of itself and works best when left to work out its own problem. For example, when the Federal Reserve artificially lowers interest rates to banks to spur economic growth when times are slow, it encourages banks to make loans that would otherwise not have been made. The Fed’s intervention creates excessive economic activity for a while (a boom), but inevitably results in high default rates and misdirected investment (a bust) when the economic factors required to sustain this artificial level of activity are not available. Left leaning politicians typically respond to a bust by calling for more even government intervention to overcome “the failings of capitalism.” This props up the economy for another cycle, and the process continues.

 

Austrian economists and conservatives are often on the same page when it comes to public policy, but the Austrians often push the conservative arguments one step further. For example, conservatives want reduced deficits and limits on the amount of currency that the government can print to hold down inflation. Austrian economists want to eliminate the Fed altogether and return to a commodity-backed (gold/silver) currency so that the government can’t print money and deficits become difficult to finance in the first place. Conservatives argue for genuine middle class tax cuts, while the Austrians argue for an overhaul of the system in favor of a flat or fair fax. Austrians argue that government policies like the Community Reinvestment Act fuel the fire of the boom-bust cycle, but that the system itself is the root cause and needs to be changed if we are going to have any lasting prosperity. In other words, Austrian economists don’t necessarily disagree with the conservative economic agenda as an alternative to the left, but their focus is on changing the structure of the system so that government influence is reduced and vote-buying is more difficult to accomplish.

 

Austrian thinkers are often characterized as radicals or extremists because they directly challenge the socialism that massive government authority that has crept into our economic system over the years. I’m not an economist, but I have strong Austrian leanings. The more I ponder the current state of affairs, the more I convinced they are right. While the nature of politics requires compromises and “the system” can’t be changed overnight, we need a plan that implements fundamental change, not just a tax cut here and there. If that makes me an extremist, then so be it.

 

By the way, if you agree but haven’t read Hayek or Woods, now is a good time to do so. You’ll discover the logic that underpins the ideas you may already support. You’ll also equip yourself to defeat socialist arguments at the water cooler.

4 Comments

4 Comments

  1. Rob Huxley  •  Apr 10, 2009 @8:35 PM

    We have entered into a time where our freedom and liberties are under assualt. I have been doing what I can to fight this and the Austrian view is unequivocally the best arguement by far. The only chance we have is to start eliminating parts of the system that are broken and get back to solid currency. I do not believe that the founders would be proud of this massive deficit that we have and are continuing to grow. I hope freedom and liberty will win the day but I am nervous.
    On a side note if you are an extremist for your belief in the Austrian school then sign me up!

  2. Jeff  •  Apr 12, 2009 @7:12 AM

    Dr. Parnell, I read Woods’ book and like you I highly recommend it. Another good book along these lines is Sowell’s “Basic Economics”. The Austrian school and a broader sense capitalism and conservatism, are logical and appeal to common sense. I am confident that if an intellectually honest person would sit down and simply read some of these items, they would have an “ah-ha” moment like I did several years ago. On that note, we can be opimistic.
    The challenge is to get this messge out to the audience that needs to hear it. This is not easy given all the “noise”, the biased media and all the other mouth pieces for the left. Please continue your writings and appearances on Wilkow. At a grass roots level,we have to encourage folks to learn, get involved and talk to people about these issues.

  3. Phil  •  Apr 19, 2009 @3:14 PM

    Dr Parnell,
    I always enjoy your writings. It seems as though conservatism takes intellectual thought and understanding where as liberals only require the emotional issue of the moment. This is where I fear conservatism has failed in that our schools and society as a whole is less educated. My question is this: I heard the argument to come off the gold standard is that we need an elastic currency. What is an elastic currency and do we really need it??

  4. John Parnell  •  Apr 19, 2009 @10:22 PM

    An elastic currency can be expanded or contracted according to changes in economic conditions. The short answer to your question is no, we don’t need it. The lack of a (gold) standard enables the federal government to manipulate the economy (namely inflation) based on political whims. Politicians argue for elasticity because it gives them the power to exert central control over the economy.