Austrian economics = faulty due to paradox

Discussion in 'Economics' started by scriabinop23, Dec 17, 2008.

  1. Had an idea...

    Correct me if I'm wrong on any of the fundamentals, as I'm still learning the whole essence of the Austrian school of economics, but I think I found a paradox which discredits a major part of the philosophy, and essentially invalidates it at the core.

    From what I understand, the modern Austrians don't like government intervention, banking multipliers (leverage). They like pure and free markets. If there is a built in deflationary bias due to productivity and population growth, the Austrian school (or at least the Ron Paul obsessed) don't believe money supply should be ever -not- backed by some precious metal commodity. I am not sure their attitude on adjusting money supply if the commodity is available to account for deflationary bias (ie if the fed needs to increase dollar supply, it stockpiles more gold). Someone correct me or answer this question please.

    Finally, from what I understand, they like completely free and unfettered markets, and ultimately buy the 'invisible hand' concept. The market will take care of itself when prices end up where they should be. Social consequences don't matter to the Austrians (correct me if I'm wrong).

    In the end, the currency is viable, but there is no trampoline or safety net. Money for investment (due to lack of fractional reserve and credit) is harder to come by, and I imagine only what society determines the best investment gets money.

    So the flaw I see besides an inherent incompatibility with socialist society: A paradox. Austrian economics want pure capitalism (self interest), yet they want to purposefully exclude self interest motivated capitalistic behavior in the government and beholden sectors (banking) from acting capitalistic. In truth, what is happening today is a perfect example of the banking cartel having their way, continuing a transfer of wealth from the populous to themselves through their connections. But by definition, this is free market behavior, just as monopolies and oligopolies occur in free market.

    In fact, one could call the banking system an oligopoly that ultimately controls all of our wealth using the Fed as its proxy (indirectly (arguable) forcing them to dilute the money supply right now). Political will does not accept economic catastrophe. Austrians do.

    So if I am seeing it correctly, the Austrians want their cake (a government and banking cartel not involved in the capitalistic pursuit) and at the same time unfettered capitalism.

    But by definition, the behavior of those in power to continue the perpetuate their power is the hallmark of unfettered and unregulated capitalism.

    Those are my two cents. Please no "sound money" mantras ... But please educate me without blasting me on how I'm an idiot because I don't buy into the Austrian hype. Correct me if I'm wrong on any fundamental points and point me to specific areas I have flaws and I'll be glad to learn more details. Just getting into this.
  2. Read more, check out Mises institute. Many articles.

    They don't all believe the same exact methodology, there are many variations. The basics are what's important.

    The basics in regard to monetary policy is that manipulating money supply is what causes inflation/deflation and booms/busts. This is actually based on history, ancient history. Fractional reserve banking has some very interesting beginnings. It was, and still is, essentially fraud, embezzlement & manipulation.

    Ron Paul has his plan, but it has its faults. Gold is a metal that is largely held by the same institutions which are in charge of the current central banks. Also, the concept of a pure free market is just fantasy. Unrestricted capitalism tends to be self-destructive.

    Regardless, Ron Paul's plan would actually put this nation on the right track, instead of further down the toilet.
  3. Jander


    There is no paradox there, save the one created by your logic. Of course capitalistic behavior should be excluded from the government. Do you really want the gov't striving to turn a profit? Who do you think would end up on the wrong end of that deal?

    Also, the banking system today has nothing to do with free market behavior at all. The gov't has introduced regulations to encourage risky 'leverage' as you put it. A free market would have all these levered institutions going under and folks losing alot of money. Under a free market, the smart, sound, reasonably levered institutions would have customers lined up, bringing deposits and turning a tidy profit. I have to laugh when a few months ago, people were flooding to these astronomical CD rates at countrywide, WAMU, etc. "who cares? It's insured!!" LOL

    I am by no means an Austrian expert, but would appreciate a discussion on its merits. I wonder about your attempt to discredit an entire economic theory based on your post though...

    And yes, I second what anaconda says ::
  4. I agree boom/busts are significantly amplified by the credit cycle (result of fractional reserve lending), but they are inevitable even without a levered banking approach as greed and fear plays into human psychology. And they tend to discount the benefits of the boom cycle, ie imagine how fractional reserve accelerated the adoption and infrastructure buildout of the Internet. Yes, we oversupplied fiber, but now today thanks to that boom, I don't have to go anywhere to order anything at the best price. That progress to humanity maybe came quicker as a result of the amplified boom.

    (too bad the same technological progress justified the next round of boom driven by flawed assumptions by statisticians...)
  5. But that's precisely my point. How can human nature be avoided.. For the same reason implementations of communism did not work (natural capitalistic urge of those on the top of the hierarchy to dictate and hoard wealth), Austrian theory (or the idea government should not be involved with money and banking. someone help delineate if this is not Austrian theory) is broken. Government can not help but avoid capitalistic behavior - I am not justifying it.

    (PS: Can someone reply without referring me to Mises.. It seems to me like a cult, seriously.)
  6. More accurately, it's based on fantasy. Booms and busts are impossible to stop and have occurred and will continue to occur under every conceivable type of monetary policy/base.

    It would be nice if at some point economists started building theories on what is, rather than on what will never be. With such a shoddy assumptional base it's no wonder they come up with such kooky ideas.
  7. Which is another point... Why has Austrian theory been so disregarded by the majority of economists (and schools) throughout the world? They would argue the governments, policymakers, and academics are all beholden to the powers that be. That is kooky in itself - the ultimate conspiracy theory of idealogy being withheld for no reason other than power structure.
  8. Jander


    Why is that kooky? Big government w/ big money/power is slow to adopt a small government/less interventionist stance? I suppose you think it's strange for people to avoid giving up their job and income for the greater good? You keep talking conspiracy/cult talk --- can we just have a civilized discussion?

    You are being referred to mises because it is pretty much the authority on the subject that you are inquiring about. It surely doesnt appear that you are open to new ideas :D
  9. There's plenty of jobless economists and students who are open to new ideologies, yet it remains fringe. I'm not convinced by your points.

    If you presented a strong logical argument, I would be engaged.

    I've spent a bit of time there already. When one website is the clearing for all of a branch of economics, it doesn't exactly wreak of credibility. Please refer me to other places that are a tad more objective.
  10. My question is to the people who talk about reviving the gold standard..

    In the event of a catastrophic collapse of the global financial system, great depression II, what good is gold if it's just about as useless as paper?

    You can't eat it, drink it, smoke it, build with it, or heat your house with it etc.(at least fiat money can be burned :) )

    I don't know. It seems gold's store of value is just as subjective and slippery as fiat. And it's only useful to us because we arbitrarily gave it value from a comfortable perspective, when in reality, it represents nothing other than a shiny, useless hunk of rock.

    Would people be interested in jewelry if they don't have a job or couldn't even eat?
    #10     Dec 17, 2008