Friday, February 1, 2013

#19.2 The Austrian School, agreements and divergences – Part 2

Source -

We continue with the discussion of socialism,

Mises challenged the socialists to explain, in economic terms, precisely how their system would work, a task which the socialists had hitherto avoided. The debate between the Austrians and the socialists continued for the next decade and beyond, and, until the collapse of world socialism in 1989, academics had long thought that the debate was resolved in favor of the socialists.

The bankers' grand scheme to enslave the world has many layers, but since they are based on a few very old but very mistaken concepts, they are doomed from the start. Socialism's flaw is based on reliance on the state to own and operate everything, to be the principle buyer for everyone in society. Who does this benefit? The bankers, who get a steady stream of take or rake in the form of interest paid on loans of their own money, from the government who becomes their permanent debtor. This is how the elites always saw socialism. You of the people, or even the John Galts of this world, are you now beginning to see just how socialism, or ANY form of collectivism, has been and always will be the wrong path to progress and freedom?

Meanwhile, Mises's arguments on behalf of the free market attracted a group of converts from the socialist cause, including Hayek, Wilhelm Roepke[8], and Lionel Robbins. Mises began holding a private seminar in his offices at the Chamber of Commerce that was attended by Fritz Machlup[9], Oskar Morgenstern, Gottfried von Haberler[10], Alfred Schutz[11], Richard von Strigl[12], Eric Voegelin, Paul Rosenstein-Rodan, and many other intellectuals from all over Europe.

Also during the 1920s and 30s, Mises was battling on two other academic fronts. He delivered the decisive blow to the German Historical School with a series of essays in defence of the deductive method in economics, which he would later call praxeology or the logic of action. He also founded the Austrian Institute for Business Cycle Research, and put his student Hayek in charge of it.

During these years [1920's and 1930's], Hayek and Mises authored many studies on the business cycle, warned of the danger of credit expansion, and predicted the coming currency crisis. This work was cited by the Nobel Memorial Prize committee in 1974 when Hayek received the award for economics. Working in England and America, Hayek later became a prime opponent of Keynesian economics with books on exchange rates, capital theory, and monetary reform. His popular book Road to Serfdom helped revive the classical liberal movement in America after the New Deal and World War II. And his series Law, Legislation, and Liberty (online) elaborated on the Late Scholastic approach to law, and applied it to criticize egalitarianism and nostrums like social justice.

We will take serious looks at these. But as always we are working toward the practical realization of a working monetary system; (the or an VEN). We're not really interested in economic theorizing, which E. C. Riegel himself advised against.

Outside of Austria

In the late 1930s, after suffering from the worldwide depression, Austria was threatened by a Nazi takeover. Hayek had already left for London in 1931 at Mises's urging, and in 1934, Mises himself moved to Geneva to teach and write at the International Institute for Graduate Studies, later emigrating to the United States. Knowing Mises as the sworn enemy of national socialism, the Nazis confiscated Mises's papers from his apartment and hid them for the duration of the war. Ironically, it was Mises's ideas, filtered through the work of Roepke and the statesmanship of Ludwig Erhard, that led to Germany's postwar economic reforms and rebuilt the country. Then, in 1992, Austrian archivists discovered Mises's stolen Vienna papers in a reopened archive in Moscow.[13]

While in Geneva, Mises's wrote his masterwork, Nationalökonomie, and, after coming to the United States, revised and expanded it into Human Action, which appeared in 1949. His student Murray N. Rothbard[14] called it "Mises's greatest achievement and one of the finest products of the human mind in our century. It is economics made whole." It remains the economic treatise that defines the School. Even so, it was not well received in the economics profession, which had already made a decisive turn towards Keynesianism, which accepted fiat money, fractional-reserve banking and central banking, as well as the premise that government had to intervene in the economy because somehow the free market sometimes did not "work" - all principles that Mises found objectionable and wrong.

Here we stop for clarification. It is said here that the Austrians do not accept what the Keynesians would accept; fiat money, fractional-reserve banking and central banking, as well as the premise that government had to intervene in the economy because somehow the free market sometimes did not "work". A dollar Federal Reserve bank note may or may not be “backed” by something. Do you care? Why should you care? Will it affect how that dollar spends and buys things? It might if the government is the primary buyer and buys things that make other things purchased by dollars more expensive.

This is of course price inflation and is NOT caused by the money being FIAT money AT ALL. It is ENTIRELY related to who gets to issue the money. Mr. Still and his friends, believing themselves to be patriotic constitutional Americans, believe we should follow the ERROR in the constitution and give the job of issuing our money back to the government through the US Treasury department. We covered our objections to this in #9 here. They even wrongly believe that the government is “we the people.” But this is certainly not the case.

It is far better to let the issuance of money be the responsibility of those who operate LOCALLY and determine who is truly indigent and without money to trade. Fractional reserve banking also relates to who gets to offer finance and under what rules. The rules for (the or an) VEN credit contract will be designed so that absolutely no more money is demanded back than was created. Central banking is a dinosaur of a concept and shall die a natural death. It's what befalls anything that gets too big to survive.

In future, no government will dare intervene in the affairs of legitimate business without stirring up a tax rebellion (one may be impending anyway) or the electoral approach to replace government officials. We look forward to a time when our votes really matter, because we know and trust those who run for office, not because they have passed some politically correct litmus test, and been given generous backing by interested corporate and banking interests, but because they represent our interests LOCALLY as well as nationally, etc.

Though Mises never held the paid academic post he deserved, he gathered students around him at New York University, just as he had in Vienna. Even before Mises emigrated, journalist Henry Hazlitt had become his most prominent champion, reviewing his books in the New York Times and Newsweek, and popularizing his ideas in such classics as Economics in One Lesson. Yet Hazlitt made his own contributions to the Austrian School. He wrote a line-by-line critique of Keynes's General Theory, defended the writings of Say, and restored him to a central place in Austrian macroeconomic theory. Hazlitt followed Mises's example of uncompromising adherence to principle, and as a result was pushed out of four high-profile positions in the journalistic world.

Mises's New York seminar continued until two years before his death in 1973. During those years, Murray Rothbard, a PhD student at Columbia, attended Mises's seminars and become student of the Austrian School, moving further away from "mainstream" economics the more he studied the Austrian School.

Murray Rothbard and the revival of the Austrian School

Although Murray Rothbard proved to be a brilliant student, he had difficulties obtaining his PhD from Columbia, and the rejection of his views within mainstream economic thought was to become a theme throughout his professional career. Although a prolific writer and polymath, he never obtained an academic posting at any Ivy League institution, having to accept an academic posting at Brooklyn Polytechnic and later becoming a professor of economics at the University of Nevada.

In the tradition of many Austrian scholars, Rothbard was uncompromising in his views and was ostracized from many influential political bodies because of his perceived radicalism, even within right-leaning conservative groups that would normally have been sympathetic to his views. William F. Buckley wrote a bitter obituary on Rothbard's death, and supporters of Ayn Rand ultimately rejected his views on the corrupting influence of big business on politics.

That's because both Rand and Buckley were essentially corporatists, which is after all a form of collectivism.

Rothbard wrote of the betrayal of the "true spirit" of the American conservative movement in his book, The Betrayal of the American Right. In economic matters, Rothbard's Man, Economy, and State was patterned after Human Action, and in some areas—monopoly theory,utility and welfare, and the theory of the state--tightened and strengthened Mises's own views. Rothbard's approach to the Austrian School followed directly in the line of Late Scholastic thought by applying economic science within a framework of a natural-rights theory of property.

We'll probably have to look into this too.

What resulted was a full-fledged defence of a capitalistic and stateless social order, based on property and freedom of association and contract. Rothbard extended and in a sense "completed" Mises's views on economic thought, removing inconsistencies and drawing more radical policy conclusions than Mises's early works (that were, in themselves, radical in their day and are still considered to be so even today).

Rothbard followed his economic treatise with an investigation of the Great Depression, which applied Austrian Business Cycle Theory to show that the stock market crash and economic downturn was attributable to a prior bank credit expansion. Then in a series of studies on government policy, he established the theoretical framework for examining the effects of all types of intervention in the market.

This might be interesting but of secondary importance to getting the or an VEN up and running. In the coming months, you can count on reading more about this here, where we will examine in some depth the basic rules for defining a Value Exchange Network (VEN) in your area.

Rothbard extended and "radicalized" the Austrian School, taking Mises's insights and pushing them to their logical conclusion. Unlike Mises's view that there was a role for the State (in providing public goods and services such as law and order and basic infrastructure) it was Rothbard's view that all goods and services could be - and should be - produced by the private sector. He viewed many regulations and laws ostensibly promulgated for the "public interest" as self-interested power grabs by scheming government bureaucrats engaging in dangerously unfettered self-aggrandizement, as they were not subject to real competition. Rothbard held that there were inherent inefficiencies involved with governments providing commercial services and asserted that real competition would eliminate these efficiencies, if those services could be provided by the private sector.[15][16][17]

We are in complete agreement with this.

Rothbard was equally condemning of state corporatism. He criticized many instances where business elites co-opted government's monopoly power so as to influence laws and regulatory policy in a manner benefiting them at the expense of their competitive rivals.[18] He was a seminal writer in an area that would later branch out to become public choice theory, but his work is now rarely associated with this area of study.

Well let it be known that we are TOTALLY opposed to any and all state corporatism as this business structure defies all our basic rules for doing ethical and responsible business.

He [Rothbard] argued that taxation represents coercive theft on a grand scale, and "a compulsory monopoly of FORCE" prohibiting the more efficient voluntary procurement of defence and judicial services from competing suppliers.[19]

This would be an interesting side discussion within the VEN communities, but secondary to the basic objectives to educate people concerning E. C. Riegel's ideas and to get an understanding of what is required to set up a IE in every local area.

He [Rothbard] also considered central banking and fractional reserve banking under a monopoly fiat money system a form of state-sponsored, legalized financial fraud, antithetical to libertarian principles and ethics.[20][21][22][23]

Obviously we also share this opinion.

It was Rothbard who firmly established the Austrian School and classical liberal doctrine in the U.S., especially with Conceived in Liberty (volumes I, II, III, IV), his four-volume history of colonial America and the secession from Britain. The reunion of natural-rights theory and the Austrian School came in his philosophical work, The Ethics of Liberty (text), all while he was writing a series of scholarly economic pieces gathered in the two-volume Logic of Action, published in Edward Elgar's Economists of the Century series. 

The Logic of Action [Volume 1]
The Logic of Action [Volume 2]

The founding of the Ludwig von Mises Institute in 1982, with the aid of Margit von Mises as well as Hayek and Hazlitt, provided a range of new opportunities for both Rothbard and the Austrian School. Through a steady stream of academic conferences, instructional seminars, books, monographs, newsletters, studies, and even films, they carried the Austrian School forward into the post-socialist age.

The Austrian School enters a new millennium with many new advocates, including economists such as prominent Spanish economist Jesus Huerta de Soto, German economist Jörg Guido Hülsmann and American economists William Anderson, Robert Murphy and Walter Block, writers such as Thomas Woods, Lew Rockwell, and Charles Goyette, and media commentators and public figures such as Peter Schiff and Ron Paul. Some commentators have described this as a recent renaissance of classical liberal scholarship and thought.[24]


Austrian School economists advocate strict adherence to methodological individualism – analyzing human action from the perspective of individual agents.[25] Proponents of this method, praxeology, argue that the only means of arriving at a valid economic theory is to derive it logically from basic principles of human action. Proponents of this method hold that it allows for the discovery of fundamental economic laws valid for all human action. Alongside praxeology, the school has traditionally advocated an interpretive approach to history to address specific historical events.

Austrian economists reject empirical statistical methods as tools applicable to economics, saying that while it is appropriate in the natural sciences where causal factors can be isolated in laboratory conditions, the actions of human beings are far too complex for this "numerical" treatment as passive non-adaptive subjects. Instead one should isolate the logical processes of human action. Von Mises called this discipline "praxeology" – a term he adapted from Alfred Espinas (but which had been in use by others).[26]

The Austrian praxeological method is based on the heavy use of logical deduction from what they assert to be undeniable, self-evident axioms or irrefutable facts about human existence. The primary axiom from which Austrian economists deduce further certain conclusions is the action axiom, which holds that humans take conscious action toward chosen goals.[27]

Austrian school theorists, like Ludwig von Mises, insist that praxeology must be value-free—that the method does not answer the question "should this policy be implemented?", but rather "if this policy is implemented, will it have the effects you intend"? However, Austrian economists often make policy recommendations that call for the elimination of government regulations and their policy prescriptions often overlap with libertarian or anarcho-capitalist solutions. These recommendations are similar to, but further reaching than the minarchist ideas of Chicago School economists, and frequently address issues that other schools ignore, such as monetary reform.[28]

Monetary reform? There can't be any without dismissing all forms of usury. It's easy, under the rules governing (the or an) VEN, loans will be structured to return only the money that's created and no more. This is not really alternate financing, this is returning to rational and realistic financing based on a simple set of agreed upon principles that everyone will readily understand. There are of course those out there that insist that interest rates are indispensable. No, they are the essence of the problem, the significant indicator of the cancer that is destroying the economies of the world.

Austrian economists view entrepreneurship as the driving force in economic development, see private property as essential to the efficient use of resources, and usually (if not always) see government interference in market processes as counterproductive. In this, their views do not differ far from those of the Chicago school.

Nor do ours. E. C. Riegel called his idea “free enterprise money.” We equate entrepreneurship as necessary for as many people as possible. We view governments, limited liability corporations and government / corporatist combines supported by the banks from behind the scenes, as preventing entrepreneurship. We also draw a distinction between free enterprise and capitalism. A future discussion of the difference will follow in a forthcoming post.

As with neoclassical economists, Austrian economists reject classical cost of production theories, most famously the labour theory of value. Instead, they explain value by reference to the subjective preferences of individuals. This psychological aspect to Menger's economics has been attributed to the school's birth in turn of the century Vienna. Supply and demand are explained by aggregating over the decisions of individuals, following the precepts of methodological individualism, which asserts that only individuals and not collectives make decisions, and marginalist arguments, which compare the costs and benefits for incremental changes.

Frank van Dun outlines the basic difference between the methods:

The central dogma of positivism in fields such as “law” and “economics” is that every order is artificial. There are no natural orders, or, if there are, they are not suitable objects of scientific investigation. Consequently, persons can be admitted as objects of study only if they are disguised as artificial persons. In economics, positivism typically involves the personification of “theoretical constructs” (for example, utility functions) constrained by the rules of a model or a simulation. It fits the profile of a technology of want-satisfaction that characterizes modern neo-classical and mainstream economics, but obviously is useless for the anarchocapitalists’ program of research into the conditions of order and disorder of the real human world.[29]
Criticism of mainstream practices

Austrians consider their methodology to be superior to mainstream economists' attempts to mimic the "hard' sciences through what Austrians consider to be a "naive" empiricism. This "naive" attempt by the mainstream academic community to mimic the hard sciences through econometrics has had questionable results. German economist, banker and Keynesian critic, L. Albert Hahn, noted the following in October 1952: [30] 

We accept the views of the Austrians here.
It is seldom realized that belief in the possibility of "scientific" business forecasts, and the forecasting mania of our time, are comparatively new phenomena. Until about 1930 serious economists were not so bold — or so naive — as to pretend to be able to calculate the coming of booms and depressions in advance. It would not have fitted into their general view on the working of a free economy. They considered the economic future as basically dependent on unpredictable price-cost relationships and on the equally unpredictable psychological reactions of entrepreneurs.

This is sort of on the level of quantum mechanics as applied to the economics of private individual actions. The implications are similar, the uncertainty principle. Yet unrealistically we have those affecting markets who insist on a reliable yield form investments in their paper assets, either equities (stocks) or debt (bonds).

Predictions of future business conditions would have seemed to them mere charlatanry, just as predictions, say, regarding the resolutions of Congress two years from now... The basic error of the whole approach lies in the fact that the causative link between objective data and the decision of the members of the community are treated as mechanical. But men are still men and not automatons... Insufficiently educated in the history of economic thought, they [Anglo-American economists] do not realize that Keynesianism — down to the most technical details, like the concept of the foreign exchange multiplier — is mercantilism or, more precisely, John Lawism pure and simple... Reading, quoting, praising, and promoting each other, and only each other, will not liberate these economists from their voluntary isolationism. They will remain in their dream world. They will continue to predict the unpredictable.

Agreed! The Austians are lucky, we wouldn't even bother with the Keynesians as their ideas are discredited by their real world applications to economies around the world. Having governments be the principle buyer in any economy is a grave mistake. Having the government do it with money borrowed at interest from some bank is even worse. Recall that everything government does is by law and as Bastiat said, law is FORCE.

Mainstream economists mostly ignore the Austrian assertion that prediction in economics is inherently impossible and continue to focus on mathematical modelling of the economy derived from simplified assumptions about human behaviour and preferences.[31] However, in the past some mainstream economists and central bankers held similar views to those of the Austrians, eschewing econometric analysis and disparaging attempts to control statistical data that were not amenable to central control and direction (or prediction).[32] For example, H. Parker Willis co-authored the 1936 text The Theory and Practice of Central Banking and wrote the following:

Central banks will do wisely to lay aside their inexpert ventures in half-baked monetary theory, meretricious statistical measures of trade, and hasty grinding of the axes of speculative interests with their suggestion that by so doing they are achieving some sort of vague 'stabilization' that will, in the long run, be for the greater good.

Perhaps it would be redundant to admit here again that all of this would be pointless in (the or an) VEN.

In their rejection of mainstream practices, Austrians have long argued that mainstream economic models have a very poor record of prediction, citing the Global Financial Crisis as one of many examples of the utter uselessness of theoretical economic modelling - and risk analysis - just when it is needed most.[33][34][35] However, some Austrian adherents have themselves been labelled as "Chicken Littles" for continually making predictions of "catastrophic" financial crises.[36][37][38]

Well yes, the failure to adequately predict financial catastrophes is in part due to the levels of trade that are artificially created and destroyed among the largest banking houses. Again, we are dealing with a whole class of people who live from their “yields” without producing anything and those who work for them owe their jobs to making predictions where they may win or lose by matters of fractions of percentages. This is all nonsense that will not be carried forward into (the or an) VEN.


Some significant general contributions of Austrian economists are listed below:

The Regression Thereom of Money, wherein Mises hypothesized that the creation of money is a time-dependent process where market participants, by spontaneously engaging in barter and trading goods, quickly reach a market-based consensus regarding what should be commonly accepted as a medium of exchange in that market. An item becomes "money" based primarily on participants' subjective values - their past experience of other traders accepting this "good" as money - and their expectation that it will be accepted by others in future. If people stop trusting that others will accept this item in future, this item can lose its tradeability - or "moneyness" - suddenly and immediately.   

Of course this is true. But Mises of course would insist that only gold and silver will do as no matter what, neither would be worth nothing. The history of this subject -The Babylonian Woe by David Astle, available on line – reveals that there were other articles used from time to time as money and that as was said above, gold and silver coinage was MARKETED with threats of FORCE since the bankers also were involved in the war / slave complex of the day just as they are today.

A fundamental rejection of mathematical methods in economics, seeing the function of economics as investigating the essences rather than the specific quantities of economic phenomena. This was seen as an evolutionary, or "genetic-causal", approach against the alleged "unreality" and internal stresses inherent in the "static" approach of equilibrium and perfect competition, which are the foundations of mainstream Neoclassical economics (see also praxeology). This methodology is also driven by the belief that econometrics is inherently misleading in that it creates a fallacious "precision" in economics where there is none. 

We don't either and we don't care.

Eugen von Böhm-Bawerk's critique of Marx, which centred on the untenability of the labour theory of value in the light of the transformation problem. There was also the connected argument that capitalists do not exploit workers; they accommodate workers by providing them with income well in advance of the revenue from the output they helped to produce.  

We will examine this in some detail later on too.

Eugen von Böhm-Bawerk's demonstration that the law of marginal utility, as formulated by Menger necessarily implies the classical law of costs and hence the vast majority of the conclusions of the British classical economists. This discovery was later fully developed and its implications traced by a student of von Mises, George Reisman, in his book, Capitalism.    

We will be tracking this down and have more to say later.

An emphasis on opportunity cost and reservation demand in defining value, and a refusal to consider supply as an otherwise independent cause of value.[39] (The British economist Philip Wicksteed adopted this perspective.)

The Mises-Hayek business cycle theory, which is asserted as explaining depression as a reaction to an intertemporal production structure fostered by monetary policy setting interest rates inconsistent with individual time preferences.

Mises and Hayek's view of prices as permitting agents to make use of dispersed tacit knowledge.

The time preference theory of interest, which explains interest rates through intertemporal choice - the different time preferences of the borrower or lender - rather than as a price paid for a factor of production.

This one would require at least one post to discuss it.

The economic calculation debate between Austrian and Marxist economists, with the Austrians claiming that Marxism is flawed because prices could not be set to recognize opportunity costs of factors of production, and so socialism could not make rational decisions. 

We accept the Austrians position as the correct one.

Friedrich Hayek was one of the few economists who gave warning of a major economic crisis before the great crash of 1929.[40][41] In February 1929, Hayek warned that a coming financial crisis was an unavoidable consequence of reckless monetary expansion.[42] 

It is also directly related to the government being the principle buyer and doing it with money borrowed at interest from the central banks.

Stressing uncertainty in the making of economic decisions, rather than relying on "Homo economicus" or the rational man who was fully informed of all circumstances impinging on his decisions. The fact that perfect knowledge never exists, means that all economic activity implies risk.  

It does, which is why entering into agreements to become associated with a local IE will involve some transforming of thinking concerning money.

Seeing the entrepreneurs' role as collecting and evaluating information and acting on risks. 

They do too. Everyone who goes into business will do this whether they use some kind of formal methods or not. This will be discussed in a future post.

An emphasis on the forward-looking nature of choice, seeing time as the root of uncertainty within economics (see also time preference).

To be continued,

David Burton

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