AUSTRIAN ECONOMICS AND ITS OPPOSITE – MARXISM, SOCIALISM AND OTHER AUTHORITARIAN DOCTRINES
By Dr. Lawrence Wilson
© March 2013, L.D. Wilson Consultants, Inc.
Economics is the study of what people do with their money, basically. It has to do with the laws and habits of producing goods and services, distributing those goods and services, and the buying and selling of them.
While it may seem a little esoteric, in fact, it is one of the most critical areas of human society and human behavior because on it depends the prosperity and often the physical and mental health of the people and their nations. Also, good economics wins wars and often prevents wars, while bad economic situations create wars and chaos in society.
THE SCHOOLS OF ECONOMIC THINKING
Some people will say that the following is a horrible oversimplification. However, for the sake of brevity and simplicity, I will say that there are only two basic schools or alternative ways of thinking about economics today.
1. Keynesian or Marxist economics. This is the dominant theory of economics today, if one looks at most nations on earth today. It is basically interventionist economics, sometimes also called command and control economics. It might also be called collectivist, socialistic, statist or communistic economic theory.
This theory presupposes that:
A. The unrestrained and unrestricted behavior of producers and consumers in their voluntary exchanges of goods and services in what is called the “free market” is not a reliable, safe or correct way to operate an economy.
The reasons for this, they say, are that some will dominate others, capitalists will dominate the workers, for example, and the large will dominate the small, and so on. Also, people are fickle, selfish, stupid, stubborn and often do not understand what is best for society. If given too much freedom, they say, this will lead to poverty, social unrest, war and the collapse of society.
B. Therefore, a powerful, interventionist and basically dictatorial central government is required to keep the ship of state afloat and in balance. This government must research and learn what is needed economically. To do this, the government must spy on the people, make them keep all kinds of records for the benefit of the government, and control most areas of life such as health care, welfare, education, entertainment, child-rearing, and more.
Then, to keep the wheels of society running smoothly, the government must impose a heavy hand on both producers and consumers, forcing them to behave in certain ways. It must use selective taxation, regulations, subsidies, fines and even direct intervention, also called nationalization or takeover of entire industries, perhaps, to keep things running smoothly. This is especially true in times of war, but also in times of peace. Laws must be selectively enforced using the principle of social justice, rather than equal justice, to move society forward in its evolution. This means basically that the laws are not the same for all people. Those who cooperate are treated better than those who oppose the goals of the government.
In this way, the government basically must force its will on the people, discouraging what it considers backward, irrational, bigoted, discriminatory economic behavior while at the same time encouraging economic behavior that benefits the common good.
This is a supremely elitist view of economics, but one that is dominant on the world scene, even in nations such as the United States of America, which did not start out this way.
2. Free market or capitalist economic theory. The other basic economic system, always in conflict with the one described above, is called by various names that are not exactly the same, but are related. These include the terms capitalism, laissez faire, free marketism, classical liberalism, libertarian, Republican, or the Austrian or Chicago schools of economics.
Some readers will object to my linking all of these together under one heading. However, for the sake of simplification, my reasoning is that they all, to one degree or another:
A. Governments, they say, are not smart enough to set the prices for all goods and services, so government-controlled economies always fail to serve the public. One must have free markets in which prices are determined by the law of supply and demand in which those goods and services most in demand will command the highest price. Those that no one wants will be sold at much lower prices. This always requires that people bargain and set prices according to what the marketplace demands.
In other words, voluntary exchanges between sovereign individuals in free market settings with a free flow of information to set prices, is a better way to achieve economic growth, happiness, peace and prosperity.
B. Therefore, for prosperity and peace, society should maximize economic freedom and the free flow of information. Also, we must set up fair laws that forbid the government from playing favorites and manipulating the economy through taxation, subsidies and other means, as these always cause chaos and misallocation of capital and other resources. Only in this way will we have truly free markets, with the free exchange of goods and services based only upon mutually agreed upon prices and conditions.
This is a “common man’s” economic theory in which the role of government is to protect individual rights and individual liberty, rather than to “steer” society through economic restrictions of various types mentioned above.
In fact, they say, government blunders, in many cases, lead the people to poverty and war, often in part, at least, to obscure the failure of their command and control economics. In other words, they need to plunder other societies because they cannot produce enough food, and other goods and services, to satisfy the needs of their people.
Marxism and socialism, the first economic perspective above, is widely taught in school, and most people are quite familiar with it. The second is not taught as much, today, and yet I believe it is the future system, as it really works much better. Thus, it is the subject of the rest of this short article on a very large subject.
AUSTRIAN ECONOMICS, ITS FOUNDERS
Classical liberalism, which began with the writings of authors such as Adam Smith (1723-1790), and before him British philosophers such as John Locke, and others, is a strand of history that honors the individual in society. It proposes that society should be based mainly, if not totally, on voluntary exchanges of goods and services. The United States of America was the first real proving ground for this view of the individual and of this system of economics, which is sometimes called capitalism.
A more modern, more technically oriented version of this perspective is called the Austrian school of economics. The name Austrian is given because a number of its founders, such as Carl Menger, Eugen von Böhm-Bawerk, and Ludwig Von Mises, came originally from Austria in the mid-1800s and early twentieth century.
The most prominent of the Austrian school founders was Ludwid Von Mises, who lived from 1881 to 1973. He is considered one of the most important philosophers, sociologists, economists, and classical liberals of the twentieth century. He understood six languages and spoke five of them fluently. Although he moved around Europe as a professor of sociology and economics, later in his life he moved to the United States to escape Hitler’s takeover of Europe. Ludwig Von Mises was the central figure in the development of Austrian economic theory, along with Frederich Hayek.
Other names that are associated with The Austrian school of economics movement are Frederich Hayek, Murray Rothbard, Milton Friedman, Walter Williams, Thomas Sowell, and a number of other economists and philosophers of the twentieth and twenty-first century.
WHAT IS AUSTRIAN ECONOMIC THEORY?
At its most simple, it states that economics is nothing but human behavior. This is a slight simplification, but it is the right principle. In other words, economics does not require complex theorems and axioms, as some economics uses. Instead, one must simply understand human behavior, which is to maximize one’s profit, one’s bargaining power, convenience, at times, or other things that people want.
In fact, Austrian economics has come to be synonymous with so-called free market capitalism. This is because if one leaves the market system alone, people will automatically build an economic system that today we would call capitalist or laissez faire or free market. That is just how people operate or behave to take care of their needs. They reward those who produce goods cheaply and of good quality, and they punish those who produce the wrong goods, or the wrong quantity, or who charge too much, or whose goods are shoddily made. This is just natural human behavior.
In addition, Austrian economics holds that human beings will always behave rationally, if given the chance, and that rational economic behavior, in fact, can benefit the entire population if things are set up so that the individual man and woman can elect which goods and services to buy, when to buy them, and reduce the barriers to the free voluntary exchange of goods and services in society. This, too, is sometimes called capitalism, although it is really just the free voluntary exchange of goods and services among all the people.
This economic freedom would seem to be obvious, but, in fact, in most nations, including the United States and Europe, markets are not all that free, especially in some key areas such as education, energy policy and health care.
Indeed, government regulations, some of which may be needed, restrict the free market in most areas of life to one degree or another. It is no accident, in my opinion, that the areas of life where innovation is the greatest – electronics, communications and computer science – are those with the least government regulation. Indeed, in these areas the government is often 10 steps behind research and industry, in part simply because these are complex areas to understand. However, the other reason is that the government simply has not had the time to infiltrate and control these newer industries.
In many areas, and more and more of them, the government intervenes and taxes some more than others, subsidizes some but not others, restricts entry with licenses and other barriers, and rewards and punishes buyers and sellers in other ways, too. These are called unfree markets or socialism if the government controls things too much.
This is but a brief introduction to a large subject. This article will be expanded in the future. Other articles on related topics on this website are found by reading the following sections of articles: Economics And Business and Political Theory.