As faculty advisor to the “Students for Austrian Economics” club at the University of Iowa, I was asked to speak to the group about the importance of Austrian economics in the world today and why it is especially important to young people. I was flattered by this request, because I admire the courage of the members of this group who stand against most of what they hear every day about how the world works. But I was also challenged to state clearly something that I had not considered for some time. Although I read Austrian economics almost exclusively, I had not thought much about why I read it—to me it was self-evidently true. Therefore, I found it a challenge to state the case for Austrian economics to members of the club who might not be as devoted to the discipline as I am and who desire to be convinced.
Road Map for Government Policy
First of all, Austrian economics is important to everyone, not just young people, because it provides a road map for government policy. Wrong government policy can destroy nations and entire civilizations. I fear that we are on the path to just such destruction right now. But why I think this does require some basic understanding of just what Austrian economics is.
I prefer the definition of my friend Michael McKay, host of the weekly radio show Radio Free Market. Michael begins each of his shows with the statement that “Austrian economics is 'reality’ economics and reality is not optional”. There are two main elements of Austrian economics that make it real—its placement in the social sciences rather than the natural sciences and its emphasis on micro as opposed to macro analysis. Ludwig von Mises’ last book, The Ultimate Foundation of Economic Science, explained the proper place of economics in the social sciences, relying upon deduction from the rock solid foundation of irrefutable truths. Because we are dealing with man and his preferences, economics is not a natural science with its reliance upon empirical observation to discover natural laws from which to develop mathematical predictions of economic outcomes.
For example, we cannot with any certainty state that the recession will come to an end X number of months after the Fed injects Y amount of money into the system. But that is exactly what other economic disciplines, primarily Keynesianism, purport to be able to do. Austrian economics tells us is that increases in the money supply will debase all money currently in the hands of the public, reducing money’s purchasing power and redistributing the ownership of wealth assets. This is not a theory based upon empirical observation, but an economic truth deduced from irrefutable maxims.
This is important, because so much misguided policy flows from this very basic misunderstanding, and we are witnessing it right now. As Ludwig von Mises stresses in chapter 17 of Human Action, “catallactic precision cannot be applied to historical problems” and that “attempts to measure economic magnitudes are based on entirely fallacious assumptions and display ignorance of the fundamental principles both of economics and of history.” Massive spending and monetary pump priming have not gotten the desired results that the current batch of Keynesian economists desired, so they are poised to engage in an even more radical step called quantitative easing. Quantitative easing just means that since the interest rate cannot be driven any lower than zero, the central bank must simply print money and give it to the government to spend as it pleases. And, since the Keynesians in government believe that economics is a natural science, they will point to their own meaningless statistics to rationalize their actions.
Spending Does Not Equal Prosperity
Nowhere is this dichotomy between Keynesians and Austrians more apparent than in how each school of economic thought would measure economic success. For example, we are constantly told by our government that the recession technically ended last year, because GNP stopped shrinking. Here is the great macro vs. micro approach. Whereas Austrians take the individual as the object of analysis, Keynesians place emphasis on GNP. And they measure GNP by total spending in the economy. Now let’s just look at this for a moment. For the Keynesians spending is the be all and end all. As long as people are spending, then they must be buying something that someone produces. Therefore, Keynesians equate spending with prosperity. If people reduce their spending and increase their savings, GNP will fall. When this happens, government spending must increase to replace private sector slack. Taken a step further, government spending can spur an economy to new heights, if private spending is not positive enough. Now isn’t this a wonderful theory--that government can spend the nation into prosperity? Unfortunately this isn’t working very well.
Austrians would not place any emphasis on total GNP, because spending does not equal prosperity. If a man spends a great deal, we may conclude that he earns a lot or it may just be that he is spending profligately. The latest spending craze in housing is an excellent example. Housing sales skyrocketed for years, but it turns out that many of these sales were to people who really could not afford to purchase them. They lost their homes when the bubble burst, which was a direct result of government making it appear as if more people could afford homes that was actually the case. Spending did increase, for awhile anyway, but it could not be sustained. Reality was not optional, after all.
By contrast the Austrians place all economic analysis on the individual, not society as a whole. The economy is just the aggregation of all individual decisions, so once you understand how individual men act you will understand how to make an economy work better. For example, Austrians place more emphasis on freeing man from the straightjacket of government taxes and regulations that prevent him from freely cooperating with other men in order to achieve his goals. Other men are seeking the same cooperation of him, so their mutual cooperation creates winners all around. Each expects to improve his situation. If we look only at what man spends, we really do not know whether he is creating wealth or consuming it.
Justice, Law, and Inalienable Rights
But Austrian economics is important for much deeper reasons. Whereas all other economic schools of thought are willing to sacrifice some members of society or citizens of other countries for supposed economic gains, Austrian economics emphasizes the importance of law, justice, and God-given inalienable rights that accrue to each and every individual. These are not a hindrance to economic progress but are part and parcel of economic progress. Not only does Austrian economics focuses on the welfare of the individual, it holds the life, liberty, and property of all individuals sacrosanct. Although few today openly call for persecuting minorities, most economic schools of thought denigrate the importance of private property. Some even openly support confiscating the property of the rich for redistribution to the poor. Austrians place property rights as an extension of individual rights, for without property man cannot survive. Thus, Austrian economics promotes not just a higher standard of living but it does so by holding the individual as an inviolate entity whose rights precede those of society and the state. This has further implications for international peace, for Austrian economics asserts that economic science does not end at political borders. The benefits of free exchange can and should extend to the entire world, spreading peace and prosperity instead of war and poverty. At no time since the end of the Second World War have governments expressed such outright hatred of foreigners and attempt to blame them for all economic ills. Even this week our own Secretary of the Treasury Timothy Geithner fanned the flames of international ill will by blaming our current economic woes on the Chinese. This is as preposterous economically as it is dangerous politically. This is a prime example of how an economic theory can lead nations to war—if a government really believes that Chinese economic policies are harmful to us, it will feel justified to protect us. When goods stop crossing borders, armies will. As Ludwig von Mises states in chapter nine of Human Action, it is the autarkic policies of hegemonic states that are the main cause of war.
The Young Can Free Themselves from Entrenched Ideas
We now conclude with why Austrian economics is so important for young people. The current Keynesian system has created an entrenched class who will never admit the limitations of their fervently held ideas, because they benefit from them. The government is a revolving door of Wall Street bankers, environmental activists, union supporters, and others dependent upon government interventions. They will never give up their power and their privileges. Therefore, it is up to a new generation who is not yet tainted by the corruption of government to “stand up for freedom”, as Michael McKay always ends his Radio Free Market show. Austrian economics provides the analytical tools to expose the reality of a corrupt system in which the few gain at the expense of the many. The young have a choice. They can join the corrupt system or they can throw it out. Will they choose peace and prosperity, or will they choose poverty and war?