What Is an Austrian?

Occasionally, I run across a good popular explanation of Austrian Economics.  For those of you who find economic theory about as exciting as ping-pong on the radio, bear with me.  It matters.

At the heart of the matter is why an economy goes through boom and bust cycles.  Why do things seem to go well for a while, and then plunge into a recession?  Lord Keynes proposed in the early 1900’s that all we need to do to stimulate a debilitated economy (in this case, the Great Depression) is induce spending.  Keynes was in favor of the government essentially creating money and giving it to people to spend (or spending money itself).  This in turn would spur business activity to provide all the things consumers would then want.

Keynes was not an evil man by anyone’s reckoning, despite we libertarians’ low opinion of his economic recommendations.  He was intelligent in the extreme and appeared to have a genuine concern for the well-being of his fellow man.  Yet within his economic theory was the seed of a great deal of evil.  After WWII, his policies were largely adopted and capitalist nations started considering themselves providers of a long list of “social” benefits–retirement, health care, etc.  We now participate in an economy that cannot by anyone’s reckoning sustain itself.  We have not just spent our present money on “social good,” but the money of our children and grandchildren.  It will not, cannot, work.

At the time, another school of thought proposed something quite different, but lost out in the court of bureaucratic opinion.  The Austrian School suggested that government interference in the economy distorts market signals, which in turn leads to bigger booms and deeper busts.  The central banks, which most Austrian School adherents think are both unnecessary and destructive by nature, lower interest rates when things are not going so well. Businesspeople invest in long-term projects like building factories and such because they think it will pay off when they actually have something to sell.

The problem is that when interest rates are artificially lowered by the central banks, businesses are being set up for a fall.  If the market is left alone, interest rates tend higher and businesses do not tend to invest in bad projects.

The foregoing explanation is brief and leaves out a number of important elements, but let’s cut to the chase.  The Federal Reserve, our central bank, is creating money like rabbits make babies.  Yet businesses are not responding.  Unemployment is not dropping.  Consumers are not spending.  The Keynesian remedy is not working.  Why not?

The article to which I refer above offers a good explanation.  Businesspeople may not be fooled any longer by false interest rates.  It’s like Bernanke is on the other side of a crocodile-infested river cajoling them to swim across.  They remember what happened last time when they lost a leg and are quite content to stay safely on the bank.

And where does that leave us?  In a melluvahess.  Our economy is beyond fragile.  Europe is about to get crushed by the same kind of debt we have.  Because we courted Keynes for so long, we have become addicted to an illusion–that government can provide for its citizens.  It can’t.  Watch the next few months.  Dollars to doughnuts, the Fed will pour more newly-created money into the economy until it is bursting the vault doors of the banks that actually do the lending.  Obama will beg and plead, kiss up to the Chamber of Commerce, and pretend to love business.  Then, at some point, businesses will get suckered in and start swimming across the river.  This time, though, the crocodile won’t take just a leg.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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2 Responses to What Is an Austrian?

  1. Jeff jones says:

    my understanding, which may be flawed, was that spending was to occur during bad times to stimulate the ecnonomu (prime the pump), but government spending was to DECREASE during the good times. But the idea of saving up for a raining day is something our politicians could never grasp…or even spending less. While am, by no stretch of the imagination, one for excessive government control…there may be something to the central part of this idea…but without drunken sailors being in charge.

    It has been awhile since I listened to this…check out act four.

    http://www.thisamericanlife.org/radio-archives/episode/373/the-new-boss

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  2. Rae Ann McNeilly says:

    It seems that perhaps the general public is actually smarter than the federal government. According to someone somewhere, businesses are sitting on about a trillion dollars in savings and not spending it, individuals are reducing debt where they can and saving anything they can squeeze out of their budget. These actions of individuals will likely provide the safety net for the economy in the long run. The government could learn from John Q. Public that the rampant, irresponsible spending has got to stop and that we should build up a rainy day fund. The belief that the rainy day is imminent is becoming more wide-spread.

    Like

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