Saturday, 14 August 2010

What is the Austrian School of Economics? How does it differ from Marxist, Keynesian and Chicago Schools of Economics?

Economics is, understandably, known as ‘the dismal science’. Get a large group of economists in a room together, and they will likely provide a huge variety of different, and mutually contradictory, answers to the same question. It may be a question about government policy, or about what causes prosperity, or about what causes booms and busts. It may even be a more fundamental question about a basic economic law or principle.

Economists are often misunderstood, and misunderstand each other. They often have different definitions of basic terms like money, inflation, monopoly, savings and profits. Debates about economics often sound like the Tower of Babel, where mutual misunderstandings abound.

Economists will even disagree with each other on the question: what is economics?

Economists are categorised according to which “school of thought” they subscribe to. The major schools are Marxists, Keynesians, Chicagoans, and Austrians.

The Austrian School has a unique approach to economics. While all the other schools perceive economics as being an empirical subject – in which hypotheses are created from observations, data and statistics, and tested using predictions – the Austrian School perceives economics as an axiomatic-deductive subject, similar to mathematics. Austrian economists reason with logic rather than through use of the “scientific method”, which they criticize as being inappropriate for the science of economics.

All Austrian economic laws and principles are logically derived from a single axiom: that humans act. That is, humans behave purposefully, using means to try to achieve chosen ends; rearranging their environment to a more satisfactory condition to try to remove “felt uneasiness”.

Basic economic principles – such as the law of association (aka the law of comparative advantage), the law of marginal utility, and the law of diminishing returns – can be derived from the action axiom using logic.

By understanding the laws of human action, we can understand how the market process works. The market process is coordinated by profits, and operates through entrepreneurs being free to seek profits. This is the so-called ‘invisible hand’ which guides the actions of humans and results in a complex structure of production that maximises prosperity. Due to the market process, no central planner is needed for society to function or for prosperity to be generated. No state is needed.

In fact, Austrian economics shows that all government actions – the very existence of government itself – must lower the level of prosperity in society. All government actions waste resources, because when a government involves itself, it disrupts the market process which maximises prosperity. Governments can only redistribute and destroy wealth; they cannot add to it.

Austrian economics is “value-free”. It does not assume any particular ideology. It merely demonstrates the effects of different ideologies, policies and actions. If the economist adopts prosperity as his goal, he must advocate free markets. If the economist favors poverty, at least for some individuals, he must endorse some from of government interventionism. This is the lesson of Austrian economics.

The ultimate form of government interventionism is pure socialism: a monopoly run by the government. This arrangement will lead to impoverishment. The major problem with monopoly, from an economic perspective, is an ability to calculate. The monopolist cannot rationally allocate resources, since that requires prices that have been formed in a free market. Supply and demand are thus critically severed, and there is vast wastage of resources.

A government monopoly, unlike a free market firm, does not go out of business when it fails to satisfy consumer desires efficiently. It endures, and may even receive more of the proceeds of taxation. Incentives are chronically skewed. Corruption is endemic. The structure of production is geared not towards satisfying consumers, but towards enriching the monopolist at the expense of consumers. A monopoly is a system of coercive wealth redistribution.

The two alternatives – free markets or monopolies – are central to any political discussion. Should any given industry be run by a monopoly or by free market firms? The question is always the same. Austrian economics shows us that, whatever the industry, a free market will best satisfy consumers.

A market that is subject to regulations, but not entirely socialized, is a middle-of-the-road policy. The number, nature and scope of the regulations in an industry determine the extent of cartelization in that industry. A cartel is a set of firms that has been given a monopoly privilege in a given industry. All regulations have the effect of cartelizing industries; benefiting existing producers at the expense of potential new competitors, and protecting large firms at the expense of smaller firms.

In terms of policy endorsements, Marxist economists tend to favor full socialism, aka communism. Keynesians and Chicago School economists tend to favor full socialism in certain industries (such as law, security, money, roads, education). In other industries, Keynesians tend to favor heavy regulations, a system known as corporatism or State-capitalism, while Chicago economists tend to favor some free markets. These economists have reached different conclusions based on their various ways of analysing and interpreting economic data, which is the nature of economics in their view.

Austrian economists disregard data when formulating theories. Data can only be used to demonstrate Austrian theory in action. Austrian theories cannot be falsified by any new data or observations. Austrian economics is logically derived from an incontestable axiom; so long as the logic is sound, the theories are similarly incontestable, or apodictically certain.

Since Austrian economics demonstrates unequivocally that free markets generate prosperity better than monopolies or government interventionism, in any industry, Austrian economists tend to be libertarian anarchists.

1 comment:

  1. When I was at University, many years ago, the Economics Dept displayed on its noticeboard the following tale:

    A chemist, a physicist and an economist were shipwrecked on a desert island. They methodically inventorised what had been washed ashore with them. It turned out that they were pretty well supplied. They had water; tinned food, and the wherewithal to light a fire. All they lacked was a tin opener.

    "No problem" said the chemist "while you guys get the fire going, I'll calculate the temperature necessary to cook the food and then burst the tin it's in".

    "And I", said the physicist, "will calculate the trajectory of the food once the can has exploded, so we can catch it before it hits the ground."

    The two of them turned to their economist colleague to see what he might contribute.

    "Let us", he said thoughtfully, "assume we had a can opener...."