By Logan Blakeslee
Among all mainstream schools of economic thought in the western world, one black sheep stands out. The Austrian School, as it is commonly known, was founded by Carl Menger and Ludwig von Mises in the late 19th and early 20th centuries. Their ideas and those of their contemporaries, far from being outdated or incompatible with the modern global economic structure, are quite possibly the tools necessary to save it from collapse.
The Austrian School is built upon one crucial fact of life: human beings value things in a subjective and rational manner. This idea can be contrasted with the Marxist principle of Labor Value Theory, which postulates that value is objective and tied to the effort—or labor—put into the production and distribution of a good or service. Followers of the Austrian School observe that when socialist (not social-democratic, like the Scandinavian Model supported by Bernie Sanders) economic policies are put into practice, inefficiency ensues. This inefficiency is created by the leftist assumption that value can be magically separated from supply and demand. In reality, this leads to severe shortages of essentials and consumer goods in countries with planned economies, such as the Soviet Union, Cuba, North Korea, etc.
Mises referred to this historically-repeated outcome as the “Economic Calculation Problem,” which turned socialism from a noble idea into a mathematical impossibility. It also touches upon how capitalist nations likewise make poor economic decisions for similar reasons. Whether capitalist or socialist, governments can never accurately determine the true value of a good or service because they do not make decisions like individual consumers do. Without supply and demand guiding the market, there is no way to observe whether something in the economy is actually wanted by its people. Price signals are integral to deciding what gets produced, always proving to be far more efficient than “from each according to his ability, to each according to his needs,” as the Marxists posit.
Because of the emphasis on guiding economic thought through the lens of individual consumers, the Austrian School is popular among libertarians, fiscal conservatives, anarcho-capitalists, and a few other political minorities on the right. It wholly rejects collectivism as a means to lift nations out of poverty or to maintain prosperity. It also uses a form of logic called “praxeology,” which presupposes that human action is deliberate, something that carries over into the everyday decisions people make that affect the market. Unlike the Keynesians or their ideological kin, members of the Austrian School come to their conclusions via a priori reasoning, or simply using theoretical deductions to understand the economy rather than direct observation. This is a point of contention and perhaps the foremost factor in Mises’ unpopularity among most academics.
The most pertinent idea belonging to the Austrian School is the Business Cycle Theory. Currently, inflation in the United States and elsewhere is hurting the livelihoods of millions, and supply chain issues continue to plague most industrial sectors. Although the unemployment rate appears low, it does not account for individuals who are no longer seeking employment or can no longer find it. Thousands of businesses shut down during the COVID-19 pandemic and a large percentage of them will likely never reopen, skewing the unemployment rate touted by liberals in government. The Business Cycle Theory addresses these problems succinctly: they were caused by government intervention.
As Ludwig von Mises once said, “Inflation is an increase in the quantity of money without a corresponding increase in the demand for money, i.e., for cash holdings.” When the government prints significant amounts of money beyond what is needed or lowers interest rates beneath the market rate (according to Dan Mahoney), it creates a fiscal bubble destined to pop. The Trump Administration twisted the Federal Reserve’s arm to keep interest rates low, an action that provided short-term gains and long-term consequences. Likewise, both the Trump and Biden presidencies have overseen unprecedented injections of new money into circulation, as can be seen in the ever-rising national debt.
Is it any wonder, then, that the state of the global market in 2022 is so abysmal? John Maynard Keynes cemented the notion that more deficit spending and inflation can rescue an economy from recession, but this has been thoroughly disproven since the 1970s. While politicians like to blame COVID for our woes, it only encouraged policymakers to act on their worst instincts and take as much power for themselves as possible, while spending as much money as possible. Average Americans are left to foot the bill for generations to come.
The boom-and-bust cycle of a modern economy is hard to break. It requires a number of reforms, such as ending fractional reserve banking, cutting market regulations, balancing the federal budget, and potentially restoring the gold standard. There are pros and cons to each of these suggestions, but they may be the cures to the more endemic disease of government mismanagement. In this author’s humble opinion, a truly free market is preferable to the mess we see today. If the White House cares for good advice, they should listen to the Austrians.