Thursday, March 25, 2010

Use Logic to Understand Economics

The citizenry of the world are being misled by the faulty economic doctrine of Keynesianism, which places consumption as the most important factor in producing prosperity. Business is slow? Then boost spending! Already in debt up to your eyeballs? Then borrow even more! Can’t borrow more? Then lobby the federal government to spend! It is not limited in its spending; it can print all the money that it needs. This is what passes for economic reasoning at the pinnacles of government power throughout the world.

The challenge of understanding economics is that observation of economic activity sheds little light on the “why” of things. If business is slow, observation does little to inform us why business is slow. People aren’t buying; goods are accumulating on shelves; they can be sold only by dropping prices, probably below cost. Our observation and experience tell us that selling below cost is the route to bankruptcy. So, it is easy for government to convince us that deflation—i.e., falling prices—is an evil that must be avoided. Therefore, only the government has the power to boost total spending, clearing the market of unsold goods, and at a profit, too!

Unfortunately, this doesn’t work. Our observation of conditions may be accurate, but a higher level of thinking is required to understand how we came to those conditions and how to correct the problem. This is the role of logic, the foundation of Austrian school economics.

Keynesian economics would place itself solidly within the discipline of the natural sciences, which have gained such a well-deserved reputation since the beginning of the industrial revolution. The natural sciences call upon research based upon observation and empirical testing to arrive at the truth or at least the truth until new observations and new testing arrives at a greater truth. In the natural sciences there is no such thing as irrefutable truth. We may be absolutely certain about physics, medicine, and even mathematics, until some new observation comes along to give us a new truth. An example is that of Einstein supplanting Newtonian physics. So all truth in the natural sciences is conditional and subject to refutation, even though we may believe that there are some things that will never be supplanted. But this just is not the case. It is this wing of science into which the Keynesians have attempted to place all of economics.

Contrary to placing economics in the natural science, observational and testing discipline, the Austrians claim that economics is a social science subject to deductive reasoning. Deductive reasoning requires NO observation and NO testing. If one postulates an irrefutable maxim and deduces other maxims from it in a logical manner, then these other maxims are irrefutable, too. Thusly, we arrive at the truth, and this truth requires no observation.

Here is the primary maxim in Austrian economics, as postulated by Ludwig von Mises—Man Acts. This is an irrefutable maxim, because if one attempts to refute the maxim he has only confirmed it: to refute the maxim that Man Acts is to “act”! The maxim is irrefutable! Furthermore, from this maxim much truth can be implied. For example, we must conclude that man acts purposefully; that is, he is rational and his actions are not merely physiological reflect actions; he acts in the context of time, performing one act ahead of another; he acts out of an understanding of cause and effect, for he believes that prior actions will bring about later desired results; he performs the more important actions ahead of the less important ones; he expects the result of his actions to improve his position in some way; etc., etc..

Let us now turn to how an Austrian would analyze the previously mentioned condition that business is slow. Austrians know that supply and demand constantly move toward equilibrium; this is known as Say’s Law. Therefore, Austrians would ask what external forces intervened to cause a general overabundance of unsold goods. Austrians would examine subsidies that encourage production of more goods of one type at the expense of other goods more desired by the market. This is the case with many agricultural gluts, which have their origin in government subsidy programs. Austrians would examine why costs are so high in relation to what consumers are willing and able to pay. Labor, environmental, safety, and licensing rules would draw their attention.

In other words, Austrian economists would look for the logical causes of undesirable circumstances, which most often reside well in the past. Therefore, the Austrian prescription of what to do differs radically from those of the Keynesians. Austrians would recommend the removal of all obstacles to the smooth interplay of supply and demand in a free market; whereas, the Keynesians would recommend more interventions, such as greater subsidies to more businesses in order to prevent their failure.

There is no doubt that the Keynesian prescription of vigorous, direct action is more appealing, at least in the short run, than the Austrian one of removing the shackles on the smooth running of the market. The Keynesian points to recipients of government bailout money and proclaims that businesses and jobs were saved; the Austrian advises that what is unseen is the price the rest of society pays through monetary debasement. The Keynesian prescription is further boosted by the shameless claim that what we have is a failure of the free market. But no country in the world today has a free market. All are managed, guided, restricted, and encouraged in some form by government. Some markets may be more free than others, and some are freer by some measures and less free by others; for example, some countries may have lower taxes but more stringent labor laws. This merely reflects the internal power politics of given countries.

The challenge to those of us who believe that we understand “real economics” is to recognize the appeal of the Keynesians and counter that appeal with a more powerful one of our own—the appeal to freedom. Keynesianism represents more government intervention and more loss of freedom; Austrian economics represents less government intervention and more freedom. America was founded on the principle that man is born free and that it is the proper role of government to protect his freedom not stifle it. The greatest attack upon our freedom has not come from foreign enemies bearing bombs and guns but from false economic doctrines bearing the poisonous idea that by giving up our economic freedom we will get the greater freedom of economic security. Not only is this a false statement—those countries with the least economic freedom have the least economic security--but freedom itself is indivisible. Economic freedom cannot be separated from political freedom--just try not paying your new healthcare taxes and see what happens!


  1. This is a perfect article to share to people who are unsure about the rational behind Austrian economics. Great work!

  2. The Keynesians original philosophy was to have government intervene into the free markets only to smoooth out the downward business cycle inherent in free market economies by stimulating the economy through government spending UNTIL the business cycle picks up and the economy starts the upward business cycle. Unfortunatly the reality is that politics prevents the government from withdrawing once they implement spending programs or tax code incentives which as you state in your article distorts the free market economic priciples and inherently provides government intervention into our personal decisions!