6 ms·

The Austrian school of economics has been advocating for an alternative form of monetary thinking since the 1920s, and despite predicting with astonishing accur

by Qasaur 7y ago

The Austrian school of economics has been advocating for an alternative form of monetary thinking since the 1920s, and despite predicting with astonishing accuracy the mechanics of almost every recession since then nobody takes them seriously because the teachings goes against establishment economists at the Federal Reserve, the IMF, and other central planners (probably related to the fact that they show with logic that recessions and the "business cycle" are to a large extent created by interference by central banks and not a natural consequence of the free market). What needs to happen after the coming recession is the total abandonment of the notion that centrally planning the price and quantity of money to induce inflation is somehow a necessary policy to ensure that the economic machine functions, and with that the complete abolishment of central banking and a return to either a gold standard or, with recent developments in mind, the adoption of a crypto-backed money supply that cannot be manipulated by governments. Inflationary monetary policy is the root cause of many of the issues we see today (widespread inequalities, political tension, erosion of purchasing power and, yes, ridiculous startup valuations) we see today, and it is about time that we abandon it.

burntoutfire 7y ago
> probably related to the fact that they show with logic that recessions and the "business cycle" are to a large extent created by interference by central banks and not a natural consequence of the free market. Huh? Wasn't the economy very cyclical throughout the entire XIX century - before FED, IMF and fiat currency in general were established?
- Qasaur 7y ago
  Economic malinvestment will always be a phenomenon that arises naturally in a free market - its a product of imperfect information. Thus, isolated booms and busts are also a natural occurence in an economy as companies that aren't profitable shutdown due to aforementioned judgement errors. The fundemental question behind the development of Austrian monetary theory is not why there are booms and bust, but why these errors of judgement occur throughout the economy in often times very different sectors at the same time. Turns out this is more often than not because of significant, and crucicially, artificial distortions to the price system that causes resources to be put to use in places where they otherwise would not be, and creates illusions of profits to those who control said resources (individual employees, investors, executivies in companies etc.). Eventually the law of scarcity catches up, and the bust materialises and prices realign themselves (through deflation, which establishment economists are terrified of) to what they should be in a natural price system. The only way to avoid this inevitable deflationary collapse of prices is to continue the illusion, of course, which is what central banks have been doing since 2008. This makes the eventual realignment much worse though since the price system continues to be distorted to an extent larger than it previously was. The panics that occured prior to the instatement of the Federal Reserve were more often than not caused by either inflationary policies pursued by the the Treasury and general government interference, as was the case in the panic of 1907 in an effort to save overleveraged banks, or overextension of credit (and consequent overexpansion of the money supply) by fractional-reserve banks. In most cases however, these recessions resolved themselves rather quickly and did not lead to prolonged depressions and recovery periods like we saw in the 1930s during the Great Depression.
  - QuesnayJr 7y ago
    Read Friedman and Schwartz' Monetary History of the United States. The Great Depression was so severe because the money supply contracted so suddenly, which led to the largest deflation in US history. Mainstream economists worry about deflation because in the 30s it nearly doomed the entire system. The single largest quarter of growth in US history was the first quarter of FDR's first term, when he stopped the money supply from contracting further with the bank holiday and stopped defending the gold standard. It is amazing to me that we live in an era with tiny amounts of inflation despite large central bank interventions, and yet Austrians still presume to claim that their theory is vindicated. Prominent Austrians claimed we would have runaway inflation after QE, and it just didn't happen. There are no set of facts that will ever cause Austrians to admit their theory is wrong.
    - Qasaur 7y ago
      >It is amazing to me that we live in an era with tiny amounts of inflation despite large central bank interventions, and yet Austrians still presume to claim that their theory is vindicated. I think it is amazing to me that economists have redefined the definition of inflation from an increase in the money supply to an increase in the consumer price index. Yes, we haven't seen significant rises in CPI yet, but you cannot deny there has been hyperinflation in other sectors of the economy like equities and real estate. As far as I can tell mainstream economists don't really believe in the Cantillon effect (that inflation happens in a gradual sector-by-sector fashion) so inflation in certain sectors of the economy is unthinkable as, according to them, money is neutral and inflation always happens everywhere at the same time and that for some reason CPI is the best measure for this. This is categorically and logically wrong and does not hold up to critical analysis. >Prominent Austrians claimed we would have runaway inflation after QE, and it just didn't happen. Just because it hasn't happened yet does not mean it won't happen. All fiat currencies have always throughout history, without exception, and always for the same reasons, ended with hyperinflation and the total destruction of the currency. I don't see how the US Dollar possesses properties that renders it immune to monetary laws.
      - QuesnayJr 7y ago
tomrod 7y ago
Economist here! Austrian economics hasn't been totally ignored. However, the school of thought's aversion to econometrics makes their policy advice self-limiting compared to mainstream/mainline economic theory. This means Austrian methods can occasionally diagnose a potential cause to a given economic malaise, but the methods can't quantify impact nor fully assess hypotheses regarding causal factors. The second issue with the Austrian school is in the quest for ideological purity, extreme workarounds substitute for what the mainline has already worked through in the decades or centuries prior (e.g. Rothbard vs. utility). I recommend reading over Bryan Caplan's piece on why he is not an Austrian despite working in the famous US Austrian-supporting school, George Mason University.[0] As for your specific points, that the large central financial institutions are, according to Austrian theory, causing recessions, even Austrian RBC doesn't completely agree.[1] Economic busts will happen with or without central banks -- being able to bail out key financial platforms is a good thing if it prevents the unnecessary misery of millions or billions. As every economics student should learn in the second half of economics 101, the free market does not always perfectly allocate resources, either immediately or over time (see discussions on externalities). [0] https://econfaculty.gmu.edu/bcaplan/whyaust.htm https://econfaculty.gmu.edu/bcaplan/whyaust.htm [1] https://mises.org/wire/economic-busts-can-happen-free-market-central-banks-make-things-much-worse https://mises.org/wire/economic-busts-can-happen-free-market...
- QuesnayJr 7y ago
  This is way too kind. Once upon a time there was a school of important, economists who were literally Austrian -- Menger, Bohm-Bawerk, Hayek -- who had certain commonalities. Mises and Rothbard turned it into an ideological movement that deliberately did not engage with anyone else's ideas. A healthy intellectual movement doesn't need to be convinced to pay attention to empirical evidence.
  - tomrod 7y ago
    Fair point. Although in my defense I don't come to HN looking for or to start ideological fights :)
  - Qasaur 7y ago
harimau777 7y ago
My understanding is that would create a tragedy of the commons sort of situation where, even if it was in the overall greater good, any country that cannot manipulate their currency would be at a disadvantage to those who can. Particularly in extraordinary situations such as during a war. Does the Austrian school have a solution or counter point to that argument?
- logicchains 7y ago
  Devaluing the currency to increase exports makes everybody in the country poorer (reduces their purchasing power for all imported goods). It also can't necessarily reduce the price of exports that depend on imports (e.g. importing iron, exporting steel) because the price of the imported components rises, causing an increase in the price of the finished good. Switzerland is an example of a country with a strong currency and citizens with very high purchasing power because of this.
QuesnayJr 7y ago
The Austrian school has gotten nothing right, and if it ever became influential it would spell the end of capitalism. If Austrian were allowed to hold sway, Marx' idea that capitalism contains the seeds of its own destruction would prove true.
- RhodesianHunter 7y ago
  The Austrian school gets everything right. Like a broken clock is right twice a day, Austrian adherents endlessly predict recession and are eventually right, though anyone who invested based in their theses loses their shirt.
  - QuesnayJr 7y ago
    Fair enough.
qubex 7y ago
> total abandonment of the notion of centrally planning the price and quantity of money Ah, so how do we handle that total cap of 21 million bitcoins?
- hndamien 7y ago
  Infinite divisibility.
  - qubex 7y ago
    I assume you’re joking. In the sad case that you’re not, what:’s the difference between “infinite divisibility” of a bitcoin and, say (for the sake of argument) joint ownership (perhaps through shareholding of a firm with a single monetary asset) of a single dollar cent?
    - hndamien 7y ago
      Your share-holding of the firm can be diluted by an investor that brings $10 to the table. You don't maintain custody of the asset, unless you are using bearer instrument, in which case, your infinite divisibility, security and monetary properties are going to be pretty weak compared to Bitcoin.
      - qubex 7y ago
        You’re splitting hairs here so I might as well go sub-atomic: my default there is no automatic right for one shareholder to out-dilute others, and it would be illogical to use $10 to swamp the possession of a firm whose only asset is a single cent. Besides which, one could easily institute a shareholder agreement that expressly bans such acts.
Mikeb85 7y ago
Deflationary policies are far worse for inequality than inflationary ones.
- hndamien 7y ago
  Only for debt holders denominated in that currency.
  - Mikeb85 7y ago
    Not just debt holders. Deflation encourages people to hoard cash, so economic growth slows, wages stay stagnant, investment doesn't happen, and there's far less opportunity for social mobility. Inflation reduces the value of money over time which encourages investment and economic growth. It also punishes those who hoard cash and rewards anyone who engages in economic activity like say, working or starting a business. There's a reason that governments support inflationary policies.
    - api 7y ago
      You can see this in cryptocurrency. My hypothesis for a long time has been that the 2017 Bitcoin price blow off was actually a hyper-deflationary collapse. Before that peak Bitcoin was starting to see adoption. The peak and its aftermath coincided with the abandonment of Bitcoin by adopters like Coinbase and Steam. Now it's pretty much only for speculation. As it got adoption its deflationary nature really took off, igniting a speculative bubble that made it useless for actual commerce. Bitcoin is unbelievably deflationary, much more so than gold. You have a hard limit combined with breakage due to lost keys and hoarding which causes more deflation which causes more hoarding.
      - hndamien 7y ago
        This is incorrect. The people (god forbid "saving money") are getting a return on the currency appreciation, and are encouraged to save. The rate of return (risk adjusted) they are getting sets a base for what an investment would need to yield before a rational actor would exchange it for investment purposes. As the total "market cap" grows the % yield of capital gain declines, making investment more enticing and the amount of capital available for investing high. So savers both help the growth of the economy, and benefit from its growth (but at a slower rate than shrewd investors). The less shrewd get weeded out.

by Qasaur 7y ago

burntoutfire 7y ago

> probably related to the fact that they show with logic that recessions and the "business cycle" are to a large extent created by interference by central banks and not a natural consequence of the free market. Huh? Wasn't the economy very cyclical throughout the entire XIX century - before FED, IMF and fiat currency in general were established?

Qasaur 7y ago
Economic malinvestment will always be a phenomenon that arises naturally in a free market - its a product of imperfect information. Thus, isolated booms and busts are also a natural occurence in an economy as companies that aren't profitable shutdown due to aforementioned judgement errors. The fundemental question behind the development of Austrian monetary theory is not why there are booms and bust, but why these errors of judgement occur throughout the economy in often times very different sectors at the same time. Turns out this is more often than not because of significant, and crucicially, artificial distortions to the price system that causes resources to be put to use in places where they otherwise would not be, and creates illusions of profits to those who control said resources (individual employees, investors, executivies in companies etc.). Eventually the law of scarcity catches up, and the bust materialises and prices realign themselves (through deflation, which establishment economists are terrified of) to what they should be in a natural price system. The only way to avoid this inevitable deflationary collapse of prices is to continue the illusion, of course, which is what central banks have been doing since 2008. This makes the eventual realignment much worse though since the price system continues to be distorted to an extent larger than it previously was. The panics that occured prior to the instatement of the Federal Reserve were more often than not caused by either inflationary policies pursued by the the Treasury and general government interference, as was the case in the panic of 1907 in an effort to save overleveraged banks, or overextension of credit (and consequent overexpansion of the money supply) by fractional-reserve banks. In most cases however, these recessions resolved themselves rather quickly and did not lead to prolonged depressions and recovery periods like we saw in the 1930s during the Great Depression.
- QuesnayJr 7y ago
  Read Friedman and Schwartz' Monetary History of the United States. The Great Depression was so severe because the money supply contracted so suddenly, which led to the largest deflation in US history. Mainstream economists worry about deflation because in the 30s it nearly doomed the entire system. The single largest quarter of growth in US history was the first quarter of FDR's first term, when he stopped the money supply from contracting further with the bank holiday and stopped defending the gold standard. It is amazing to me that we live in an era with tiny amounts of inflation despite large central bank interventions, and yet Austrians still presume to claim that their theory is vindicated. Prominent Austrians claimed we would have runaway inflation after QE, and it just didn't happen. There are no set of facts that will ever cause Austrians to admit their theory is wrong.
  - Qasaur 7y ago
    >It is amazing to me that we live in an era with tiny amounts of inflation despite large central bank interventions, and yet Austrians still presume to claim that their theory is vindicated. I think it is amazing to me that economists have redefined the definition of inflation from an increase in the money supply to an increase in the consumer price index. Yes, we haven't seen significant rises in CPI yet, but you cannot deny there has been hyperinflation in other sectors of the economy like equities and real estate. As far as I can tell mainstream economists don't really believe in the Cantillon effect (that inflation happens in a gradual sector-by-sector fashion) so inflation in certain sectors of the economy is unthinkable as, according to them, money is neutral and inflation always happens everywhere at the same time and that for some reason CPI is the best measure for this. This is categorically and logically wrong and does not hold up to critical analysis. >Prominent Austrians claimed we would have runaway inflation after QE, and it just didn't happen. Just because it hasn't happened yet does not mean it won't happen. All fiat currencies have always throughout history, without exception, and always for the same reasons, ended with hyperinflation and the total destruction of the currency. I don't see how the US Dollar possesses properties that renders it immune to monetary laws.
    - QuesnayJr 7y ago

tomrod 7y ago

Economist here! Austrian economics hasn't been totally ignored. However, the school of thought's aversion to econometrics makes their policy advice self-limiting compared to mainstream/mainline economic theory. This means Austrian methods can occasionally diagnose a potential cause to a given economic malaise, but the methods can't quantify impact nor fully assess hypotheses regarding causal factors. The second issue with the Austrian school is in the quest for ideological purity, extreme workarounds substitute for what the mainline has already worked through in the decades or centuries prior (e.g. Rothbard vs. utility). I recommend reading over Bryan Caplan's piece on why he is not an Austrian despite working in the famous US Austrian-supporting school, George Mason University.[0] As for your specific points, that the large central financial institutions are, according to Austrian theory, causing recessions, even Austrian RBC doesn't completely agree.[1] Economic busts will happen with or without central banks -- being able to bail out key financial platforms is a good thing if it prevents the unnecessary misery of millions or billions. As every economics student should learn in the second half of economics 101, the free market does not always perfectly allocate resources, either immediately or over time (see discussions on externalities). [0] https://econfaculty.gmu.edu/bcaplan/whyaust.htm https://econfaculty.gmu.edu/bcaplan/whyaust.htm [1] https://mises.org/wire/economic-busts-can-happen-free-market-central-banks-make-things-much-worse https://mises.org/wire/economic-busts-can-happen-free-market...

QuesnayJr 7y ago
This is way too kind. Once upon a time there was a school of important, economists who were literally Austrian -- Menger, Bohm-Bawerk, Hayek -- who had certain commonalities. Mises and Rothbard turned it into an ideological movement that deliberately did not engage with anyone else's ideas. A healthy intellectual movement doesn't need to be convinced to pay attention to empirical evidence.
- tomrod 7y ago
  Fair point. Although in my defense I don't come to HN looking for or to start ideological fights :)
- Qasaur 7y ago

harimau777 7y ago

My understanding is that would create a tragedy of the commons sort of situation where, even if it was in the overall greater good, any country that cannot manipulate their currency would be at a disadvantage to those who can. Particularly in extraordinary situations such as during a war. Does the Austrian school have a solution or counter point to that argument?

logicchains 7y ago
Devaluing the currency to increase exports makes everybody in the country poorer (reduces their purchasing power for all imported goods). It also can't necessarily reduce the price of exports that depend on imports (e.g. importing iron, exporting steel) because the price of the imported components rises, causing an increase in the price of the finished good. Switzerland is an example of a country with a strong currency and citizens with very high purchasing power because of this.

QuesnayJr 7y ago

The Austrian school has gotten nothing right, and if it ever became influential it would spell the end of capitalism. If Austrian were allowed to hold sway, Marx' idea that capitalism contains the seeds of its own destruction would prove true.

RhodesianHunter 7y ago
The Austrian school gets everything right. Like a broken clock is right twice a day, Austrian adherents endlessly predict recession and are eventually right, though anyone who invested based in their theses loses their shirt.
- QuesnayJr 7y ago
  Fair enough.

qubex 7y ago

> total abandonment of the notion of centrally planning the price and quantity of money Ah, so how do we handle that total cap of 21 million bitcoins?

hndamien 7y ago
Infinite divisibility.
- qubex 7y ago
  I assume you’re joking. In the sad case that you’re not, what:’s the difference between “infinite divisibility” of a bitcoin and, say (for the sake of argument) joint ownership (perhaps through shareholding of a firm with a single monetary asset) of a single dollar cent?
  - hndamien 7y ago
    Your share-holding of the firm can be diluted by an investor that brings $10 to the table. You don't maintain custody of the asset, unless you are using bearer instrument, in which case, your infinite divisibility, security and monetary properties are going to be pretty weak compared to Bitcoin.
    - qubex 7y ago
      You’re splitting hairs here so I might as well go sub-atomic: my default there is no automatic right for one shareholder to out-dilute others, and it would be illogical to use $10 to swamp the possession of a firm whose only asset is a single cent. Besides which, one could easily institute a shareholder agreement that expressly bans such acts.

Mikeb85 7y ago

Deflationary policies are far worse for inequality than inflationary ones.

hndamien 7y ago
Only for debt holders denominated in that currency.
- Mikeb85 7y ago
  Not just debt holders. Deflation encourages people to hoard cash, so economic growth slows, wages stay stagnant, investment doesn't happen, and there's far less opportunity for social mobility. Inflation reduces the value of money over time which encourages investment and economic growth. It also punishes those who hoard cash and rewards anyone who engages in economic activity like say, working or starting a business. There's a reason that governments support inflationary policies.
  - api 7y ago
    You can see this in cryptocurrency. My hypothesis for a long time has been that the 2017 Bitcoin price blow off was actually a hyper-deflationary collapse. Before that peak Bitcoin was starting to see adoption. The peak and its aftermath coincided with the abandonment of Bitcoin by adopters like Coinbase and Steam. Now it's pretty much only for speculation. As it got adoption its deflationary nature really took off, igniting a speculative bubble that made it useless for actual commerce. Bitcoin is unbelievably deflationary, much more so than gold. You have a hard limit combined with breakage due to lost keys and hoarding which causes more deflation which causes more hoarding.
    - hndamien 7y ago
      This is incorrect. The people (god forbid "saving money") are getting a return on the currency appreciation, and are encouraged to save. The rate of return (risk adjusted) they are getting sets a base for what an investment would need to yield before a rational actor would exchange it for investment purposes. As the total "market cap" grows the % yield of capital gain declines, making investment more enticing and the amount of capital available for investing high. So savers both help the growth of the economy, and benefit from its growth (but at a slower rate than shrewd investors). The less shrewd get weeded out.