Austrian School of Economics Is on the Rise

The Austrian School of economics is gaining popularity, and followers. Fueling this shift is a belief that Keynesian loose-money policies led our current crisis. While die-hard mainstream economists like Paul Krugman aren’t budging, millions of people are rethinking the role government should play in the economy. Many of them are looking to the Austrian School for answers.

Public outrage over bailouts and rising debt is widespread. The outcry has Wall Street and mainstream economists on the defensive. Banks are so concerned about this “populist overreaction” that their leading industry group, SIFMA, just launched a major PR offensive against this “populist overreaction” (yes, that’s their wording. Read the Bloomberg piece for more). One commenter quipped that the campaign slogan should be Stop Complaining About Getting Fleeced.

The Austrian Answer

Many people are attracted to this school of economic thought because of the fiscal discipline inherent to it. Responsible spending, low taxes, and small government are all major themes. Austrian advocates like Ron Paul and Lew Rockwell have been fighting inflationary and easy-money policies for decades. It looks like the crisis they have been warning about has finally arrived. And reflating the bubble may not work this time.

That’s not the only reason their popularity is on the rise, though. Their anti-war stance is popular with the Left, while their small-government policies appeal to fiscally conservative Republicans, who are disillusioned in the wake of Bush’s reckless deficit spending.

Mises.org Traffic: Evidence of Increasing Interest

The Ludwig Von Mises Institute is Mecca for Austrian Economists (in the US, at least). The organization, chaired by Lew Rockwell, has a huge collection of material catering to liberty-minded economists. I contacted their webmaster to see how traffic has been since the crisis started. Their traffic is up rougly 80% YoY. Note the traffic spike in September of last year when Lehman was dying:

A Shift or a Fad?

It’s unclear if what we’re seeing is a major shift in economic thinking, or a temporary blip. If government can successfully reflate the bubble, interest in Austrian economics will probably fade, as Americans once again get comfortably numb. Like a drug addict, hitting rock bottom may be necessary before significant change happens. Whether we have reached that point remains to be seen.

Judging by the shift in consumer spending, Americans are well on their way to a permanent change in lifestyle. We’ve never seen a dramatic shift like the one that happened over the past year or so. I don’t think it’s a temporary one, either. To me, this is a strong indication that a major shift is underway. Austrian economics seems a likely leader at the policy level.

Any rational person can see how unsustainable our current path is. But our political and financial leaders remain convinced that the answer lies in more debt/credit. This may delay pain for a few more years, but only makes the long-term picture uglier. A sea-change is inevitable. Exactly how everything will play out is unknown, but it’s going to be interesting to watch.

h/t Jesse’s Cafe for the Greenspan toon
Disclosures: No positions in any stocks mentioned

Comments

[YoYoMama:]

I guess Austria didn't adhere to it's own school of economics. I was visiting many years ago, and the tour guide sighed that although their tax rate was 60%, they still had their Alps...

Jul 12 08:29 AM

[Ferdinand E...:]

Millions of people are rethinking....and many of them are looking to the Austrian School for answers...

Now that's what I call pure wishful thinking. Millions of people can't spell Austrian School, and a large slice of thos who can think that Austria is in Sweden - like some of my students in Singapore.

I wonder what an intelligent teacher of economics would think if his department head told him to teach Austrian economics. Note that I said 'think'. because he would probably say 'yes sir' to that dumb creep.

Jul 12 09:03 AM

[The Arthurian:]

Adam, some things are economics and some things are not. A position for or against war may be a moral stance. But it is not economic in nature. Nor is a position on size-of-government an economic matter. It is pure politics. And again, public outrage is not economics. It is, however, the result of economic incompetence.

And this: "If government can successfully reflate the bubble, interest in Austrian economics will probably fade, as Americans once again get comfortably numb." But surely these are not the only alternatives! Incompetent economics versus neanderthal economics?

Ferdinand, if people try to spell "Austrian Economics" and end up spelling "Arthurian Economics" that's okay with me.

Jul 12 10:24 AM

[swygert@law...:]

The so-called "Austrian School of Economics" has little new to offer, at least in terms of theory. In fact, it is an outgrowth of the Arron Director and Walter Friedman founders of the "Chicago School of Economics," which served as the theoretical justification for Ronald Reagan's economic views (with a strong influence of Ann Rand 's libertarian philosophy. (Recall that President Reagan campaigned for smaller government, smaller government spending, and for the economy to rest primarily on free market principles.) In short, the "Austrian School" tenets, as I understand them, are older ideas wrapped in new paper. The tenets remain sound.

Jul 12 10:34 AM

[Vienna:]

In Austria w do have a overall spending on "socialistic" issues of approximately 50% of income. This includes pension insurance, medical insurance, unemployment insurance, tax and other further small payment like subway tax etc.
Average taxation is approx. 30% due to progressive taxation.
This is probably the amount that is required to keep a system running sustainably. As we can see in the US many public goods have not maintained, and these will get back at you, due to lack of investment of private companies. Roads, Power grid, School ...

Jul 12 10:46 AM

[texpat:]

Check the history. It's called the Austrian School because it arose from Carl Menger and Eugene von Bohm-Bawerk (in Austria) in the latter half of the 19th century. It predates the Chicago School, Ayn Rand, and Ronald Reagan, none of whom were adherents. More recent proponents included Mises, Hayek, and Rothbard. The tenets indeed remain sound and make far more sense than those of other schools of economic thinking, even those that also reach free-market conclusions.

On Jul 12 10:34 AM [e-mail] wrote:

> The so-called "Austrian School of Economics" has little new to offer,
> at least in terms of theory. In fact, it is an outgrowth of the Arron
> Director and Walter Friedman founders of the "Chicago School of Economics,"
> which served as the theoretical justification for Ronald Reagan's
> economic views (with a strong influence of Ann Rand 's libertarian
> philosophy. (Recall that President Reagan campaigned for smaller
> government, smaller government spending, and for the economy to rest
> primarily on free market principles.) In short, the "Austrian School"
> tenets, as I understand them, are older ideas wrapped in new paper.
> The tenets remain sound.

Jul 12 10:47 AM

[milkchaser:]

The Mises Institute does inject anti-war, libertarian politics into its presentations, along with Austrian economics. They are fascinating presentations, nonetheless. I tend to dismiss the anti-war, anti-Lincoln stuff. Intelligent people often disagree.

Jul 12 10:59 AM

[Adam855:]

Everything can be related to economics or discussed in economic terms. War is no different, since it obviously has tremendous economic effects. When huge percentages of GDP are spent through government mechanisms, I can't imagine how that isn't a topic of discussion for economics, even if the conclusion were to be that it has no effect (doubtful).

One example (related to Austrian economics) is the "broken window parable", which Bastiat and Hazlitt both touched upon (I highly recommend reading both). Here's a wikipedia article on it: en.wikipedia.org/wiki/...

War is an application of this parable, since there are people who argue that war is beneficial to economies, with one classic example being "WWII pulled us out of the Great Depression".
Under this logic, breaking windows, destroying buildings, factories, or other components of an economic system is beneficial. It's worth tracing through the argument to see that this is a fallacy, regardless of your moral beliefs on war.


On Jul 12 10:24 AM The Arthurian wrote:

> Adam, some things are economics and some things are not. A position
> for or against war may be a moral stance. But it is not economic
> in nature. Nor is a position on size-of-government an economic matter.
> It is pure politics. And again, public outrage is not economics.
> It is, however, the result of economic incompetence.
>
> And this: "If government can successfully reflate the bubble, interest
> in Austrian economics will probably fade, as Americans once again
> get comfortably numb." But surely these are not the only alternatives!
> Incompetent economics versus neanderthal economics?
>
> Ferdinand, if people try to spell "Austrian Economics" and end up
> spelling "Arthurian Economics" that's okay with me.

Jul 12 12:43 PM

[The Arthurian:]

Yeah, Adam855, I know.

Jul 12 02:19 PM

[Spartacuss:]

In my view economics is and should be simple. A stable currency, private sector financing, The law should prescribe and mandate a ten percent rule of leveraging to cover the 'fat tail' aspects of lending risk.

Things to be abolished: First, the FED, second, the power of governance to interfere monitarily in the economy, and third, the government shall by edict keep a balanced budget, and fourth get the government out of all social programs and set up the mechanics for private capital to provide, health care, pensions, and so on.

In this way, governance would pass laws to regulate commerce and not run it, and prices due to better technologies would typically be going down, thus encouraging savings and investment.

Yes, very small government with less perks, less pork, less opportunity for graft and throw in term limits, and on.

Nothing complicated at all. And end progressivism and let the ONLY TAX be a tax on income.

Jul 12 02:21 PM

[PhillyDan:]

Except that both the California and Federal government grew under RR!


On Jul 12 10:34 AM [e-mail] wrote:

> The so-called "Austrian School of Economics" has little new to offer,
> at least in terms of theory. In fact, it is an outgrowth of the
> Arron Director and Walter Friedman founders of the "Chicago School
> of Economics," which served as the theoretical justification for
> Ronald Reagan's economic views (with a strong influence of Ann Rand
> 's libertarian philosophy. (Recall that President Reagan campaigned
> for smaller government, smaller government spending, and for the
> economy to rest primarily on free market principles.) In short,
> the "Austrian School" tenets, as I understand them, are older ideas
> wrapped in new paper. The tenets remain sound.

Jul 12 02:32 PM

[PhillyDan:]

I guess you are "pro-war"? I don't see anything wrong with being anti-war as you imply. If I misread, please accept my apology.


On Jul 12 10:59 AM milkchaser wrote:

> The Mises Institute does inject anti-war, libertarian politics into
> its presentations, along with Austrian economics. They are fascinating
> presentations, nonetheless. I tend to dismiss the anti-war, anti-Lincoln
> stuff. Intelligent people often disagree.

Jul 12 02:35 PM

[PhillyDan:]

Yes, the capitalists will care for the poor, needy and the least among us....Give me a break! Capitalism run amok is what got us in our financial mess. In order to have an effective economic system, we need to have a hybrid system mixed with elements of capitalism and socialism (safety nets to protect and provide for people in tough times) which is what we have in place now. I agree that it needs reworking from time to time but a mix of 70/30 of Capitialism/Socialism is a good mix that allows for economic growth but not at the expense of destroying the infrastructure, the environment, or providing a backstop for people in times of need.
Vienna comments above about Austria are a good example of a sustainable system that is fair for all Americans and allows even the Capitalists to make their profits.

"and fourth get the government out of all social programs and set up the mechanics for private capital to provide, health care, pensions, and so on"


On Jul 12 02:21 PM Spartacuss wrote:

> In my view economics is and should be simple. A stable currency,
> private sector financing, The law should prescribe and mandate a
> ten percent rule of leveraging to cover the 'fat tail' aspects of
> lending risk.
>
> Things to be abolished: First, the FED, second, the power of governance
> to interfere monitarily in the economy, and third, the government
> shall by edict keep a balanced budget, and fourth get the government
> out of all social programs and set up the mechanics for private capital
> to provide, health care, pensions, and so on.
>
> In this way, governance would pass laws to regulate commerce and
> not run it, and prices due to better technologies would typically
> be going down, thus encouraging savings and investment.
>
> Yes, very small government with less perks, less pork, less opportunity
> for graft and throw in term limits, and on.
>
> Nothing complicated at all. And end progressivism and let the ONLY
> TAX be a tax on income.

Jul 12 02:49 PM

[Sugar Charlie:]

Attacking Keynes for imprudent and excessive deficit-spending ("Keynesian loose-money policies led to our present crisis") is like attacking antibiotics because they are often overused or improperly used. Keynes, on the fiscal side, recommended countercyclical fiscal policies,-- deficits or surpluses, as circumstances might require. Deficits were to be rainy-day deficits, not everyday deficits.

And in terms of monetary policy, he did not recommend excessive creation of fiat money.

He cannot be blamed for the indiscipline of legislatures, governments and policy-markers. He believed, and said, that his theories were essentially conservative: they allowed market economies to survive economic convulsion. (Contrast this with statist systems like that of the U.S.S.R., which displace the market Do you like that better?)

Of course the role of innovation, stressed by Schumpeter and the "Austrian school", has an important place in economic theory and policy. It is perfectly conciliable with Keynesian principles. And it is ridiculous to assess Schumpeterian theories by examining the state of Austrian economic policy or the economy of Austria.

As this article and blog, and so many of the others on Seeking Alpha show, doctrinaire thinking and blathering ideologues replace careful analysis and balanced judgment, which requires first of all that we understand that one theory or one thinker or one policy does not hold all the answers. Ideologues, like monomaniacs, do not make prudent policy-makers.

And,-- oh yes,-- wars are have been fought to achieve economic objectives, moral objectives, personal objectives, and a variety of social objectives. But whatever the objectives, wars have great economic consequences and so are economic factors. Just like, say, natural disasters. --

We can leave the significance of an adequate social safety-net,-- which some bloggers waht to get rid of,-- for another day. Skeptics might usefully think about what would happen to the social fabric of the U.S., and for example its capacity to deal with foreign threats, if poverty rose to Depression levels.

Steve in Montreal.

Jul 12 05:46 PM

[The Arthurian:]

Sugar, ain't you sweet! So many people blame Keynes for things Keynes didn't do, didn't want, and didn't recommend! I like reading his stuff -- you can <i>feel</i> how brilliant he was. Adam Smith, too.

Jul 12 06:04 PM

[nym:]

Adam855: thanks for wikipedia link - the sections on war and terrorism are particularly telling.

Jul 12 08:11 PM

[perceptions...:]

According to CNBC, it seems that Austria may not follow Austrian economics, as are 7th on the following CNBC Debt survey.

The following, are Debt figures by nation, as provided by CNBC. Whilst I can not vouch for the accuracy, they may provide a snapshot and give some guidance, in some areas.
Also following is a link to the top countries, by GDP size, for reference. These figures may answer some questions and raise others.
Something's which will become apparent, as the next few years pass, is that DGP, EDC & GED will increase, whilst GDP will decrease!

Note: All countries are among the top 50 largest economies, as surveyed by CNBC and some figures could be slightly outdated. In particular, some countries that have put in large Stimuli, may have undergone substantial changes.

Debt to GDP % (DEBT = Total External Govt & Private Debt)
1) Ireland - 881%DGP, $549,819 EDC, $2.3T GED, $285B GDP
2) UK - 336% DGP, $153,616 EDC, $9.4T GED, $2.8T GDP
3) Belgium - 327% DGP, $155,362 EDC, $$660B GED, $495B GDP
4) Hong Kong - 295% DGP, $85,539 EDC, $660B GED, $223B GDP
5) Netherlands - 268% DGP, $145,959 EDC, $2.4T GED, $909B GDP
6) Switzerland - 264% DGP, $171,478 EDC, $1.3T GED, $492B GDP
7) Austria - 191% DGP, $100,787 EDC, $827B GED, $432B GDP
8) France - 168% DGP, $78,070 EDC, $5.0T GED, $3.0T GDP
9) Denmark - 159% DGP, $107,026 EDC, $589B GED, $370B GDP
10) Germany - 137% DGP, $63,757 EDC, $5.2T GED, $3.8T GDP
11) Spain - 137% DGP, $57,090 EDC, $2.3T GED, $1,7T GDP
12) Sweden - 129% DGP, $73,245 EDC, $663B GED, $513B GDP
13) Finland - 116% DGP, $62,579 EDC, $328B GED, $281 GDP
14) Norway - 114% DGP, $118,353 EDC, $551B GED, $481B GDP
15) USA - 95% DGP, $44,358 EDC, $13.6T GED, $14.3T GDP

DGP = Debt % to Gross domestic Product
EDC = External Debt per Capita
GED = Gross External Debt
GDP = Gross Domestic Product

CNBC Link -
www.cnbc.com/id/303089...

GDP Site -
en.wikipedia.org/wiki/... GDP_(nominal)

Jul 12 09:19 PM

[perceptions...:]

We will give that GDP one more try -

en.wikipedia.org/wiki/...)

Jul 12 09:22 PM

[Blackeyebart:]

RR didn't say it because he believed it. -
He said it because you believed it.

Jul 13 01:29 AM

[Allan Frain:]

The Keynesian ponzi/fiat operation has begun its inevitable decline.

Jul 13 09:50 AM

[Mark Wallace:]

This country has not had pure capitalism for at least 70 years now. When you have government sponsored deposit insurance, a central bank, Medicare, Medicaid, Social Security, etc. you don't have capitalism. What we have is Crony Capitalism, where the politically well connected receive all kinds of direct and indirect benefits and the parasitic classes are pacified through government giveaways financed by taxing the middle class.


On Jul 12 02:49 PM PhillyDan wrote:

> Yes, the capitalists will care for the poor, needy and the least
> among us....Give me a break! Capitalism run amok is what got us in
> our financial mess. In order to have an effective economic system,
> we need to have a hybrid system mixed with elements of capitalism
> and socialism (safety nets to protect and provide for people in tough
> times) which is what we have in place now. I agree that it needs
> reworking from time to time but a mix of 70/30 of Capitialism/Socialism
> is a good mix that allows for economic growth but not at the expense
> of destroying the infrastructure, the environment, or providing a
> backstop for people in times of need.
> Vienna comments above about Austria are a good example of a sustainable
> system that is fair for all Americans and allows even the Capitalists
> to make their profits.
>
> "and fourth get the government out of all social programs and set
> up the mechanics for private capital to provide, health care, pensions,
> and so on"

Jul 13 11:40 AM