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Back to School: Austrian School
Please take this as penance for my recent, and recently-deleted, post regarding the Fed. Out of that regrettable conversation came, I hope, one good thing: an opportunity to open a door for the genuinely curious who wonder what I’m so worked up about. Specifically, let me present a good launching point. It isn’t a massive scholarly tome, but it isn’t (or at least isn’t merely) opinionated handwaving.
What Has Government Done to Our Money? and The Case for the 100 Percent Gold Dollar is Murray Rothbard’s famous manifesto on sound money. First published in 1963 in the style of a pamphlet designed for mass distribution, it is one of his most influential works.
Murray Rothbard needs no introduction in libertarian economic circles. For the rest, Rothbard might best be characterized as an economist analogue of David Horowitz. Raised by parents of the Left, he was intellectually unable to reconcile cant with reality, but sincere in his belief in freedom, both in the abstract as a moral good in itself, and in practice the best vehicle for improving the lot of the less fortunate.
Rothbard, a student of Ludwig von Mises and hence the Austrian school of economics, begins with a brief apologia for taking freedom as a guiding principle in discussing money. It isn’t likely to convince the unconvinced, but is characteristic of any student of von Mises, who was a stickler for making assumptions as explicit as possible. “If we favor the free market in other directions,” Rothbard writes,” if we wish to eliminate government invasion of person and property, we have no more important task than to explore the ways and means of a free market in money.”
Part II, “Money in a Free Society,” is worthwhile by itself as an excellent capsule summary of Austrian monetary theory. He quickly argues the value of exchange generally:
If no one could exchange, if every man were forced to be completely self-sufficient, it is obvious that most of us would starve to death, and the rest would barely remain alive. Exchange is the lifeblood, not only of our economy, but of civilization itself.
He surveys primitive barter schemes and their limits: “Clearly,” he observes, “any sort of civilized economy is impossible under direct exchange.” Next he treats indirect exchange: “At first glance, this seems like a clumsy and round-about operation. But it is actually the marvelous instrument that permits civilization to develop.’ From this, he concludes:
A most important truth about money now emerges from our discussion: money is a commodity. Learning this simple lesson is one of the world’s most important tasks. So often have people talked about money as something much more or less than this. Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a “claim on society”; it is not a guarantee of a fixed price level. It is simply a commodity. It differs from other commodities in being demanded mainly as a medium of exchange. But aside from this, it is a commodity—and, like all commodities, it has an existing stock, it faces demands by people to buy and hold it, etc. Like all commodities, its “price”—in terms of other goods—is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. (People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.)
He notes the benefits of money. Because of it, “an elaborate ‘structure of production’ can be formed, with land, labor services, and capital goods cooperating to advance production at each stage and receiving payment in money.”
Next he treats monetary units, noting that “the free market will choose as the common unit whatever size of the money-commodity is most convenient. If platinum were the money, it would likely be traded in terms of fractions of an ounce; if iron were used, it would be reckoned in pounds or tons. Clearly, the size makes no difference to the economist.” If the size makes no difference, neither does its shape. He then considers private coinage:
Champions of the government’s coinage monopoly have claimed that money is different from all other commodities, because “Gresham’s Law” proves that “bad money drives out good” from circulation. Hence, the free market cannot be trusted to serve the public in supplying good money. But this formulation rests on a misinterpretation of Gresham`s famous law. The law really says that “money overvalued artificially by government will drive out of circulation artificially undervalued money.”
In the section treating the “proper” supply of money you’ll find a pillar of his critique of central banking; to wit, that the decision about the “proper” supply should be left to the market:
Aside from the general moral and economic advantages of freedom over coercion, no dictated quantity of money will do the work better, and the free market will set the production of gold in accordance with its relative ability to satisfy the needs of consumers, as compared with all other productive goods.
“The critic of monetary freedom is not so easily silenced, however,” he concedes:
There is, in particular, the ancient bugbear of “hoarding.” The image is conjured up of the selfish old miser who, perhaps irrationally, perhaps from evil motives, hoards up gold unused in his cellar or treasure trove—thereby stopping the flow of circulation and trade, causing depressions and other problems. Is hoarding really a menace?
He believes not:
Money is only useful for exchange value, true, but it is not only useful at the actual moment of exchange. This truth has been often overlooked. Money is just as useful when lying “idle” in somebody’s cash balance, even in a miser’s “hoard.” For that money is being held now in wait for possible future exchange—it supplies to its owner, right now, the usefulness of permitting exchanges at any time—present or future—the owner might desire. …
We have seen that society cannot satisfy its demand for more money by increasing its supply—for an increased supply will simply dilute the effectiveness of each ounce, and the money will be no more really plentiful than before. People’s standard of living (except in the non-monetary uses of gold) cannot increase by mining more gold. If people want more effective gold ounces in their cash balances, they can get them only through a fall in prices and a rise in the effectiveness of each ounce.
There goes Keynes.
In another pillar of his argument against central banking, he points out that those who seek to “stabilize the price level” must necessarily overrule freedom, “[s]ince the price of money would admittedly fluctuate on the free market.” Indeed, “[a]rtificial stabilization would, in fact, seriously distort and hamper the workings of the market.” Money he concludes, “is not a ‘fixed yardstick.’ It is a commodity serving as a medium for exchanges. Flexibility in its value in response to consumer demands is just as important and just as beneficial as any other free pricing on the market.”
Nor does he see the need for a single currency. To the contrary: “The free market is eminently orderly not only when money is free but even when there is more than one money circulating.
What kind of “standard” will a free money provide? The important thing is that the standard not be imposed by government decree. If left to itself, the market may establish gold as a single money (“gold standard”), silver as a single money (“silver standard”), or, perhaps most likely, both as moneys with freely-fluctuating exchange rates (“parallel standards”)
But where will these currencies be stored? Worry not. “There is every reason to believe that gold warehouses, or money warehouses, will flourish on the free market in the same way that other warehouses will prosper.”
In sum, he argues:
[F]reedom can run a monetary system as superbly as it runs the rest of the economy. Contrary to many writers, there is nothing special about money that requires extensive governmental dictation. Here, too, free men will best and most smoothly supply all their economic wants. For money as for all other activities, of man, “liberty is the mother, not the daughter, of order.”
You could stop there and have a better understanding of money than 98 percent of the populace, whether you agree with Rothbard’s conclusions or not. Such is the quality of Rothbard’s exposition.
In Part III, “Government Meddling With Money,” Rothbard the teacher gives way to Rothbard the polemicist. “The Economic Effects of Inflation,” “Permitting Banks to Refuse Payment” (AKA “Bank Holidays”), “Central Banking: Removing the Checks on Inflation,” “Going Off the Gold Standard,” etc., all explain, in detail, the central lie of central banking: It doesn’t control inflation; it creates it, and usually on purpose:
We have seen that, over the centuries, government has, step by step, invaded the free market and seized complete control over the monetary system. We have seen that each new control, sometimes seemingly innocuous, has begotten new and further controls. We have seen that governments are inherently inflationary, since inflation is a tempting means of acquiring revenue for the State and its favored groups. The slow but certain seizure of the monetary reins has thus been used to (a) inflate the economy at a pace decided by government; and (b) bring about socialistic direction of the entire economy.
Furthermore, government meddling with money has not only brought untold tyranny into the world; it has also brought chaos and not order. It has fragmented the peaceful, productive world market and shattered it into a thousand pieces, with trade and investment hobbled and hampered by myriad restrictions, controls, artificial rates, currency breakdowns, etc. It has helped bring about wars by transforming a world of peaceful intercourse into a jungle of warring currency blocs. In short, we find that coercion, in money as in other matters, brings, not order, but conflict and chaos.
Part IV, “The Monetary Breakdown of the West,” is Rothbard the teacher again, in my opinion at his best. Economic theory, to qualify as scientific, must show explanatory and predictive power. Here Rothbard uses his command of Austrian monetary theory to look at the Classical Gold Standard of 1815-1914, World War I, the Gold Exchange Standard of 1926-1931, the Fluctuating Fiat Currency regime of 1931-1945, the Bretton Woods agreement of 1945-1968, Bretton Woods Unraveling 1968-1971 (a period I personally remember), Bretton Woods’ End in 1971, The Smithsonian Agreement 1971-1973, and Fluctuating Fiat Currencies 1973-?Folks my age can fill in the blanks: the Carter years and Carter bonds; Reagan, Friedman, and Volker’s Fed, etc.
In Rothbard’s view,
As we face the future, the prognosis for the dollar and for the international monetary system is grim indeed. Until and unless we return to the classical gold standard at a realistic gold price, the international money system is fated to shift back and forth between fixed and fluctuating exchange rate,s with each system posing unsolved problems, working badly, and finally disintegrating. And fueling this disintegration will be the continued inflation of the supply of dollars and hence of American prices which show no sign of abating. The prospect for the future is accelerating and eventually runaway inflation at home, accompanied by monetary breakdown and economic warfare abroad. This prognosis can only be changed by a drastic alteration of the American and world monetary system: by the return to a free market commodity money such as gold, and by removing government totally from the monetary scene.
The conjoined volume, “The Case for the 100 Percent Gold Dollar,” takes a few pieces of the first volume, elaborates on how they abet the central bank in inflating, addresses some popular objections, and presents a rough plan for returning to a classical gold standard. Of these, I’d say only the last is essential, but it’s just a sketch. For more detail, you’ll need one of the scholarly tomes. If there’s any interest, I may write about one of them next. Fair warning.
So here it is. Yes, I’m angry. Not as angry as Rothbard, but angry. However, my anger is not directed toward any individual on Ricochet, and I was wrong preemptively to forestall debate from those I am admittedly already satisfied are wrong — not evil, just wrong. The right thing to do is make what case I can, and let that speak for itself. I hope this first attempt is of value to someone.
Published in Economics, General
I’ve been an economist since Dr. Johnson said I was in 1989 and never thought of myself a scientist graded on predictions.
Most economic models are useful for explaining relationships, not for generating specific values. Some economic models, such as Barkha highlights have been hijacked to further political agendas and of no use.
Does that make economics useless or the Austrian school invalid? I am not sure I follow that line of thinking.
Exactly. Fluid dynamics won’t let you calculate where a molecule of jet fuel is in the engine at time X… but try designing a jet engine without it.
BTW: editors, thanks for making my post seem at least 3X better than it actually was!
I’d rather go with Bacon & Descartes than with your professions of faith. You have to do better than them if you want me to believe you really know better…
You misunderstand politics. Are you fit to judge Descartes or Bacon? I wonder whether people who think your way are even able to understand that people like Galilee & Bruno were intent on political revolution. Natural science was a part of it & follows from & upon political science. Why they were punished…
Science says, knowledge is knowing causation. First for us is not the physicist or the economist. First for us is the political situation of man–what is to be known & done for us to be who we are. How are humans able to think in causal terms?
CFD…easy as
Ok, sure, but nobody needed to know Austrian economics or anything like it to design any modern commercial republic. There are such things, they are provably successful, but they are the work of political philosophy or political science. Politicians who educated themselves by political science or political philosophy actually did the work, like whoever does the education & work in the case of jet engines… The people who did the only obvious work about founding institutions & laws for how America or Britain work were politicians. I’m sure some kind of economics was part of their work–but they treated as inferior to the directing concern of framing good laws & institutions. It strikes me that laws & constitutions are meant to be predictive in many ways. People are supposed to be able to live with them, to actually live with them, & to prosper thereby. That requires some kind of account of human action in causal terms & something like a comprehensive account at that–without possibly fatal misunderstandings or ignorance.
I was told there would be no math. Is that math?
We all are.
Do you honestly think modern scientists don’t know this? This combination of ignorance and arrogance is why the majority of working scientists ignore philosophy, not out of lack of awareness.
Your strawman version of science says…
By the induction the philosophers tell us is impossible.
Could this be any more tiresomely trite, shopworn, pedantic?
Allow me to retort. The fact that our modern commercial republic is saddled with $19T of debt, systematic inflation, endless bureaucracy, international currency wars, and wealth concentration is due partly in fact that the influence of the Austrian school and other free market principles were abandoned in the 20th century in favor of more ‘scientific’ formulas that generated answers supporting fiat currencies and expansion of central government control.
If the Austrian school doesn’t pass muster as science then I will take it over the implementation of bad science any day.
However things may be with the Austrian school, it never had any influence in American politics, except maybe in some way with Reagan. Like in Britain with Thatcher. That’s not nothing, but America up to then apparently needed none of this stuff… Even so, it seems like what it means is, Hayek could be a counter-poison to Keynes. That’s all-
If this is an answer to the question–I have never heard anything more philistine on Ricochet & hope never to again…
I think if you had to explain how & why modern accounts of causality come out of a political revolution effected by philosophers, you’d be lost in a daze. Of course, you can prove me a fool & become famous all in one brief post. Have at it-
Maybe you think this is some kind of drunken brawl with words? Please explain, what knowledge is there without accounts of cause & effect?
That’s not saying anything about, is it basically true or false. You want me to return an insult? Thanks, no.
I find the gold-standard argument unconvincing, specifically because of the hoarding problem that Rothbard dismisses but, in my view, wholly fails to answer.
Deflation causes economic disaster. Who is going to part with his gold to build a factory today, if that factory is necessarily going to be worth much, much less next year? Better to hoard that gold. So in a deflationary situation, all investment and lending breaks down. Why should a farmer plant, when his crop will be worth less then the seed corn?
This is because there is a mathematical inflection point when the rate of interest hits zero. You cannot maintain a nominal interest rate less than zero.
The gold standard became untenable because, due to both population and productivity increases, the economy grew much faster than the gold supply.
Certainly there were disastrous experiments with fiat money leading to inflation, which is also a serious problem, but not as bad as deflation.
In my view, the Fed has done a very good job since the early 1980s in managing the money supply, resulting in low inflation. The Fed does not have perfect control over either the money supply or the price level, so it has (sensibly and successfully) targeted a low inflation rate.
FYI, I think that there might be examples of a very slightly negative nominal interest rate.
Understand what this means in practice — if you have money in the bank, the bank would be taking out a small amount each month. People would tolerate a very small negative interest rate, in return for the convenience of having money available through the banking system. They would view it as a monthly service charge. Modern electronic banking is more convenient than having to store and carry around gold and silver coins.
If we implement Hayek as counter-poison to Keynes, let’s make it a double.
Look, I badmouth Keynes more than he deserves. What the left has prostituted Keynes to be is the problem, not Keynes.
If you do not understand that a cat may look at a king, then maybe you don’t understand the Anglo-American mindset very well. And perhaps not the scientific mindset either.
Just because people have been great people (like Bacon and Descartes) does not mean that lesser people aren’t supposed to evaluate their works – to learn from them and yes, even correct them.
I’m ashamed to admit that, as a shy girl naturally intimidated by authority, I have missed several opportunities to correct much greater authorities than myself when it was clear they were wrong about something. Yes, the opportunity arises more often than outsiders might suppose, because even great people aren’t perfect.
If the C student believes that because the professor is a world-renowned scientist, the student is not entitled to correct the professor’s mistakes, or prompt the professor when the professor forgets something, then the C student, by remaining silent, actually wastes everybody’s time. And what is the point of that?
Of course, fools who offer wrong “corrections” are an even bigger waste of time, but scientific knowledge is not so esoteric that even C students are incapable of telling some right corrections from “wrong” corrections.
There was a great review of Fear the Boom and Bust that I can’t find right now, regrettably. It made the excellent point that Keynes and Hayek have both suffered the fate of all public intellectuals: to be reduced to cardboard caricatures and trotted out by politicians to support whatever programs the politicians want anyway, e.g. the Left conveniently ignoring Keynes’ insistence that government save during booms, and the Right conveniently ignoring Hayek’s support of a national social insurance program.
And to be fair to Titus, perhaps that gets to his point, rather than any argument about science vs. philosophy, or philosophy of science.
I’d appreciate an elaboration on this, because under the classical gold standard, the only scenario in which the factory could be “worth much, much less next year” would be if the factory produced something no one was willing to buy at a price that would be “worth it” to the factory owner, and the factory owner tried to sell the factory, and was unable to find a buyer except at a much, much lower price than it cost to build the factory.
That’s not deflation. That’s price signals working correctly.
Mr. Mansfield has a great couple of insights on Keynes here (you gotta search for keynes–it’s two different sections for the whole story, he’s tricky that way), how he was abused & why he was bound to be abused. He’s trying to show that a really good economist ignored how politics works & set himself up to bring the worst in politics while making his virtues ineffective. It’s quite funny, except we’re kind of suffering from the consequences. (He makes fun of Mr. Summers in a similar way elsewhere…)
I’d add that if G^3 is right about his thesis, then it’s not at all clear why a mathematical expression of psychology shouldn’t be science.
There’s considerable evidence that the human psychology is what it is because humans are a kind of organic learning machine – that is, that humans do machine learning, too. Which isn’t to say that we’re the only kind of organic critter that does. Indeed, the great surprise would be if organic life managed to a) survive and b) ever reach any degree of sentience by some means completely divorced from machine learning!
If that is Titus’s point, I will happily concede it.
Q: You know why God made economists?
A: To make meteorologists look good!
Great post, Ghost!
Great people? I guess… They were philosophers & they’re very interesting because of the way they made up natural science out of political science. They may even be unique. The point is, no one has achieved what they achieved. First you gotta think through their intentions & achievements, then you get to evaluate & correct them. The notion that maybe everyone is already in a position to judge is laughable to me!
Sure, that’s all as you say. This is nothing to the point, however. When you feel like showing me how you figured out that you get things better than they did, please–anyone who can do that is great people, as you say!
What do you mean by this?
By building on their legacy, we have gone on to achieve even greater things.
What do you think science does?
Actually, I can do some things – many things, really – better than both Bacon and Descartes could – and through no merit of my own, let me emphasize!
I’m the beneficiary of the scientific tradition, a huge body of knowledge that has continued – and improved upon – Bacon and Descartes’ legacy. Poor Bacon couldn’t even integrate, for heaven’s sake!
Do you not think accumulating a tradition can advance understanding?
What you seem to be saying, Titus, is that none of us even has the right to consider Bacon and Descartes primitive or mistaken in any of their ideas until
and
But a) and b) are no way to do science! Insisting on a) and b) is a great way to waste time and opportunity!
So… let’s assume for the sake of argument that none of us today can advance science in our time as “greatly” as Bacon and Descartes advanced science in their time. So what? Does that mean science can no longer advance – that people who do science now can no longer improve on the wisdom that came before them? No.
All it means is that, by your metric of “greatness” (whatever it is), the improvements we make today are somehow “humbler” than the improvements that came before. I can live with that.
I don’t think you understand what the Austrians are up to, then. They rose in opposition to the Socialists like Keynes who thought they had a better idea than classical, liberal economics. The Austrians championed the classical liberalism that inspired the American Revolution, even when no one else in America was doing so.
As for its influence:
The Austrians were core to the post-war effort to restore American Conservativism.
I considered pointing out I understand both analytic geometry and the mind/body problem much, much better than Descartes did, but decided not to wade off into the weeds. But since I apparently won’t be alone… ;-)
As for Bacon, I share Eco’s appreciation of him in The Name of the Rose, and again can’t help but wonder just what accomplishment of Bacon’s modern science is supposed to be unaware of, or at least insufficiently appreciative of.
*shrug* this is all par for the course: scientists getting their hands dirty applying philosophy; philosophers going on about “well, sure, it works in practice, but how does it hold up in theory?”
I think accumulating knowledge does everything to bury the truth about what becomes a tradition. I think science is in some ways a sect or a faith, so it does have traditions & I believe its origins have been completely concealed. Indeed, today kids can learn more math than everybody in the world knew up until maybe two hundred years back? I’m not sure anyone asks themselves how they can acquire any kind of knowledge.
I do not know much about natural science, but I do know some things about politics. It seems obvious to me that both in the mass & at the elite level, people are far blinder to the basics.
I mean, modern science has a specific account of causality that has an easily detectable philosophical origin, built rather obviously as an attack on the classical account of knowledge or science or philosophy. The people who created this new outlook–the ones who were also scientists in the way people are agreed to be scientists today were Bacon & Decartes more than any other–were fully aware of & in various ways critical of the alternative they were rejecting. That account of causality is at least somewhat defective. I’m not saying these people were running a corporation, but that they were there when the change happened, very influential with their posterity, & most clear-eyed about what they were doing. What is rarer than for some philosophers to be influential & revolutionary?
Heh. Do you think Madison & Hamilton & Lincoln were for what Hayek was for? Or Mises? People like Hayek may have said they championed classical liberalism–like libertarians say–but read say Rothbard on Adam Smith. Want me to find it for you? Meanwhile, for shame-
Ok, aside from Reagan, tell me, what’s this great achievement of Austrian School economists that restored anything. I’m not sure what you mean by restore ‘American conservatism’? Restore Lincoln’s party? Improvements & tariffs & all? Or Hamilton’s, as opposed to the Dem?
Now that you mention it, Classical Economics: An Austrian Perspective on the History of Economic Thought would be a good follow-up.
Maybe Ricochet needs a seminar for early modern political philosophers…
I have no idea what you think Descartes thought about mind-body. People usually say something vulgar about dualism–not long back, a mindless guy wrote a book–he thought he was making fun of Descartes by refuting dualism. Hilarious, but no serious about Descartes. Then again, not a few serious scholars would say he believed in God–you know, he proved it!
I have no high opinion of Eco. The novel did not impress me. I cannot say anything meaningful about it… Now, Bacon decided to teach mankind that thinking about the stuff you see around you is about getting power–getting things you want or need. Falsifiability types like Popper mock him mindlessly. He was wiser than they were, though they know modern math.