June 10, 2010
I had been wanting to write up a series of articles on here explaining the basics of Austrian economics, especially their views on pricing and the business cycle. Unfortunately I never got around to doing this.
Then I was pleased to find that two top Austrian economics professors have already produced an introductory course and its posted on YouTube. The video lectures are found below.
I wish they’d gone into more depth and included more, but this is definitely a good introduction. If you wish to learn more you’ll have to read Ludwig von Mises books, as well as those of Fredrich Hayek and Murray Rothbard.
Unlike a lot of other schools of economic thought, these guys saw the housing bubble way in advance. When it comes to the business cycle, I think these guys have more credibility than any other school. They’re never talked about, and if you take economics in college you may well only hear Mises, Hayek and Rothboard mentioned in passing, but you won’t be taught any of their work. When Krugman wrote his article for the New York Times, “How Did Economists Get It So Wrong“, you won’t hear any talk about Mises or Hayek. And what’s strange is Friedrich Hayek won the 1974 Nobel prize in economics yet nobody is interested in his work. His theories perfectly predicted everything but you won’t hear his name mentioned by anyone. I guess considering the article is “How Did Economists Get It So Wrong”, Hayek doesn’t belong 🙂
Maybe Austrian economics seems less scientific because it lacks all the complex mathematical models and econometrics (which don’t even work). I don’t know.
From what I’ve seen, most rich Wall Street investors and wealthy entrepreneurs hold views similar to the Austrian school (not necessarily exactly), especially when it comes to the business cycle and the effects of government policies, such as deficit spending. Take Robert Kiyosaki for instance. He made fortunes investing in real estate during the Fed inflated boom. He’s known for his books like Rich Dad Poor Dad, and writing mindset books for entrepreneurs. He understands this stuff (though his books don’t share technical details) and knows the correlation between Fed interest rates and housing prices. He recently wrote a new book called Rich Dad’s Conspiracy Of The Rich. Here’s an article about the book: (here)
“Robert Anton Wilson, in his book Everything Is Under Control, reported that “a random telephone survey of 800 American adults in September 1996 found that 74 percent – virtually three out of four citizens – believe that the U.S. government regularly engages in conspiratorial and clandestine operations.”
Robert Kiyosaki – the author of Rich Dad’s Conspiracy of the Rich – agrees with the 74 percent surveyed in 1996. As Kiyosaki writes in his book: “So has there been a conspiracy? I believe so, in a way.” He goes on to explain why he believes so, citing the lack of financial education in the school systems, the Federal Reserve Act, and Nixon’s 1971 dismissal of the gold standard. And most interestingly, Kiyosaki believes that 401(k) retirement vehicles placed the retirement money of average people in the hands of Wall Street.
The first chapter of the book is entitled ‘Can Obama Save the World?’ Kiyosaki’s answer is no. And apparently, Obama doesn’t want to even if he could. For he appointed Summers and Geithner, both of who played a part in repealing the Glass Steagall Act. In other words, it’s the same old same old. Nothing has changed. Which means that the average person needs to understand how taxes, debt, inflation, and retirement affect them. Kiyosaki sums up the chapter by stating that once one understands the new rules of money, then one can “opt out of the conspiracy of the rich.”
From there, Kiyosaki moves on to explain how we got where we are. He points the finger at the Federal Reserve Bank, which inflates the money supply, which destroys the value of savings and retirement plans. And he makes it very clear that the rules of money changed dramatically when the U.S. went off the gold standard in 1971. For up until that time, “technically, prior to 1971, the U.S. dollar was a derivative of gold. After 1971, the U.S. dollar became a derivative of debt.”
Kiyosaki proceeds to discuss what he calls ‘The Invisible Bank Robbery.’ He says “since money is invisible, a derivative of debt, bank robberies by bankers have become invisible.” Two ways these invisible robberies occur are: fractional reserve banking, which is nothing more than banks lending money they don’t have; and deposit insurance, which “protects the bankers – not savers.” Then he asks a very pertinent question: “why should an insurance company like AIG receive bailout money in the first place? Isn’t bailout money reserved for banks?” His answer is gloriously simple: “because it owed the biggest banks in the world a lot of money and didn’t have the cash to pay up.”
After allocating the first half of his book to talking about the conspiracy, Kiyosaki utilizes the second half of the book describing how to fight back. And although he acknowledges that the Fed is the culprit, he does not advocate abolishing it. For as he asks, “What would replace it? How much chaos would that cause? And how long would that take?” Instead, Kiyosaki advocates using the new rules of money to one’s advantage.
Kiyosaki then states that he thinks the present financial crisis will only get worse, not better.
And in his summary to the book, he reminds his readers that “knowledge is the new money.”
Kiyosaki has made millions through real estate, all because he knew the economics of what was going on. Now he sees that the bubble is popping. He’s warning everyone and letting people in on the game that the rich are playing. His mindset is, “Well, I know this system is terrible and unjust, but I’m not going to live a life of poverty getting screwed. Here’s how it works and here’s how you can protect yourself and your money.” And in his case, exploit the same loopholes the rich are using. Is it unethical? I don’t know. It’s a gray area to me.
I’ll say this though. When it comes to economics, I find the subject very disappointing, no matter which school of thought you use. Austrian economics isn’t perfect, it’s just the best I’ve found.
The reason I prefer Austrian economics to all others is their love of liberty, protection of personal property, and sound money.
A major problem with Austrians is that they’re almost always negative about the economy. Some argue that, “Sure they’ll predict an oncoming crash — they’re ALWAYS predicting an upcoming disaster and never anything else.” That’s not really true. Austrians are predicting booms in various foreign countries. They just seem negative all the time because the politicians in most nations don’t believe in or follow true free market policies anymore. Their central banks are always expanding the money supply inflating bubbles.
Even so, the Austrian theory of the business cycle being induced by artificially low interest rates set by the central banks which brings about a spending binge, various booms, then a subsequent bust from all the mal-investments, seems pretty sound to me. Keynesians, like President Obama, during a recession see the problems completely differently, thinking it’s a lack of demand and that we need more spending. They’re completely opposite perspectives and bring about completely different tactics to addressing the problem.
What pisses me off watching the news is they make the debate about government regulation (progressives and democrats) versus low taxes and no regulation (Republicans). Neither side ever deals with the real problems inherent in the banking system and the Federal Reserve.
It’s not so much about regulating them as shutting down fractional reserve banking, stopping the excessive flow of printed money, and restoring the soundness of money by backing it with a gold standard. The gold standard is to keep the government from printing more money and debasing the currency. It’s to protect us from inflation, bankers loaning out money out of thin air, and wild government spending. Proper free market mechanisms would be superior to any regulations that could be imposed centrally. But Keynesians don’t see it that way. They have all kinds of reasons why the money supply must always increase.
I think Keynesian economics, and their belief in fractional reserve banking, has left us all buried in debts which were cooked up out of thin air. Bankers have come to dominate the world. Such policies are also a big reason behind dominance by the big corporations. Low interest rates and cooked up money from the Federal Reserve give the Fortune 500 corporations access to cheap credit, which they use to expand their empires.
Keynesian policies and the Federal Reserve also destroy our savings, making it harder for entrepeneurs to save up their money and build up their businesses. It’s an indirect form of eliminating competition. It gives them access to cheap funds, and naturally since you’re just a start up entrepeneur without an established track record, you don’t get access to the cheap funds.
Keynesian policies of spending cooked up money keeps the status quo. Once the big corporations profits begin to drop the Fed and politicians say, “Uh oh. Consumption is down. The economy is contracting. We need to rev things up! Lower the interest rates. Get people spending borrowed money!” The corporations make a killing yet we as a nation get buried in mountains of debt and the prosperity they promised us (and which they were counting on the pay off the debts) never comes. Just look at Japan. Read about how pissed they are, and after decades of Keynesian policies leaving them buried in mountains of debt, huge stimulus after huge stimulus, they now are saying, “We want a leader who will cut government spending. This Keynesian stuff doesn’t work.”
In fact, officers at the Fed right now are mad that we’re not spending more. They’re currently working on policies to inflate away everyone’s savings – a sort of forced spending. This is the sort of invisible robbery Kiyosaki is talking about. Got to love ol’ helicopter Ben.
Austrian economics is common sense economics. We all know that America is in the mess its in now because we’ve been living too lavishly, living beyond our means. We’ve buried ourselves in mountains of debt and things aren’t going to turn around if we take one last trip to the buffet and gorge, stuffing ourselves with as much Chinese imported goods as possible, purchased on credit. We have to begin producing things again. We need to get our factories back. We need to stop juggling money around and start producing real products and services. No more paper money fortunes.
Austrian economists have a respect for currency and money that you won’t find anywhere else. They hate the paradox of thrift and believe that savings has to be the fuel behind all real investment. They don’t fear deflation. In fact it’s praised. Deflation indicates the purchasing power of the currency is increasing which I think is a good thing. Their theory of pricing is way better than what you find in most economic texts with their abstract concept of “utils”.
I wish the lecture on banking was more detailed but oh well. It should’ve been 3 or 4 lectures instead of just one. To learn more about that you’ll have to read Murray Rothbard’s Case Against The Fed and America’s Great Depression.
Some accuse Austrian economists of abandoning scientific method, which is nonsense. Watch the lecture on Praxeology and you’ll see the real argument. One of professor Hoppe’s examples is great. He asks, “If I were to set the minimum wage rate at $1,000,000 an hour, I know that unemployment will be very high. How do I know this?” Then he shows how stupid it is to think that every economic statement has to be empirically verified or falsified. It’s more akin to geometry where you begin with a set of intuitive axioms and build on top of those, assuming the axioms as true. Those axioms are rooted in the nature of human action.
Anyways, here’s the lectures. These guys are both economics professors who hold the Austrian perspective. Professor Hülsmann is from Université d’Angers in France. Professor Hoppe used to be a professor of economics at the University of Nevada Las Vegas (UNLV) before his retirement in 2008. There’s eleven lectures total. Enjoy 🙂
Mises and the Austrian School (by Jörg Guido Hülsmann) – Introduction to Austrian Economics, Lecture 1 of 11
Value, Utility and Price by Jörg Guido Hülsmann
Division of Labor and Money by Hans-Hermann Hoppe
The Theory of Banking by Hans-Hermann Hoppe
Capital and Interest by Hans-Hermann Hoppe
Praxeology: The Austrian Method, by Hans-Hermann Hoppe
Business Cycle Theory, by Jörg Guido Hülsmann
The Economics of Deflation, by Jörg Guido Hülsmann
Theory and History, by Hans-Hermann Hoppe
The Foundations of Welfare Economics, by Jörg Guido Hülsmann
Law and Economics, by Hans-Hermann Hoppe