What is an Austrian school of economics?

What is an Austrian school of economics?

By Kluma | InterestingCrypto | 22 Jun 2020


What is an Austrian school of economics?

The Austrian School of Economics (AES) is a branch of economic theory, the main postulate of which is the idea of ​​the primacy of the self-organizing power of the market price mechanism.

 

What are the key points of the AES concept?

  • Value is subjective in nature and does not exist outside the human consciousness, and labor expended in producing a good (product or service) is neither a source nor a measure of its value.
  • Consumer behavior is difficult to predict, the nature of markets is constantly changing, so mathematical modeling in the economy, as well as a planned economy, is practically impossible.
  • The only way to build a meaningful economic theory is to derive it from the basic principles of human activity.
  • The main principles of economic policy should be non-interference (or minimal intervention) in the economy by the state, economic liberalism and libertarianism .

 

How did the Austrian economic school originate and develop?

AES got its name from the origin of its founding father, the Austrian economist Karl Menger, whose fundamental work, The Foundations of Political Economy , was published in 1871.

His main students and followers were Eugene (Eugen) Böhm-Bawerk, author of the Foundations of the Theory of Value of Economic Benefits (1886), Friedrich von Wieser, author of the book Theory of Social Economy (1914), and Ludwig von Mises, whose main work , “ Human Action: A Treatise on the Economy, ” was published in 1949.

Other prominent AES representatives are economists Henry Hazlitt, Murray Rothbard, and Nobel laureate Friedrich von Hayek.

The Austrian school is classified as one of the national schools (along with Lausanne , Anglo-American or Cambridge), which developed such a direction of economic science as marginalism . Its other names are “Psychological School” and “Vienna School”.

The Austrian school was an influential direction of economic thought in the first half of the 20th century, but gradually the Keynesian school , founded by John Maynard Keynes in the 1920s, became much more influential .

The essence of Keynes's doctrine (state regulation of the economy through the control of interest rates and money supply) ideally corresponded to the existing state system. Keynesianism has become the dominant economic doctrine in the West. In line with this ideology, the International Monetary Fund (IMF) was created during the Bretton Woods Conference on Monetary and Financial Issues in 1944. This organization played a decisive role in the formation of the post-war global monetary system, having approved gold and the US dollar as a standard.

Another influential economic school in the 20th century was Marxism , which believed that money, as an instrument of capitalism, was not viable, since the capitalist system itself was doomed.

The West came under the influence of Keynes's ideas, and the USSR and the countries of the socialist camp - under the influence of the ideas of Karl Marx, and the Austrian school became quite marginal, but in the second half of the last century began to restore its position. Nowadays, the Ludwig von Mises Institute and the Society for the Development of Austrian Economic Theory are active, which publish new works of economists working in the Austrian tradition, reprint the works of classics of this direction, publish journals and conduct scientific conferences.

In the 21st century, there has been a surge in interest in AES, not least because of the development of blockchain technology and cryptocurrencies.

 

How did AES affect the formation and development of cryptocurrencies?

The roots of Bitcoin go to the movement of cryptanarchists , who rely heavily on the work of Austrian economists. Bitcoin's whitepaper was first published on the email list (mailing list) of cryptographers and programmers seeking to ensure the confidentiality and financial independence of people through technological innovation.

The bitcoin genesis block hash contains the title of the article “Chancellor on brink of second bailout for banks” by The Times, a British publication. The article describes the provision of state assistance to banks during the 2008 economic crisis. Although the title is quoted out of context, the quote may indicate that the creator of Bitcoin, like AES, considered government intervention in the economy unacceptable.

Bitcoin's whitepaper also contains quotes from the work of British cryptographer Adam Beck and computer engineer Wei Day . According to Satoshi Nakamoto, bitcoin “is an implementation of Wei Dai’s b-money offer ... and Nick Sabo’s Bitgold offer .” Szabo was directly influenced by AES representative F. Hayek. In turn, the manifesto of Wei Day, in which he puts forward the idea of ​​b-money, begins with the words: "I admire Tim May's cryptanarchism."

In the Cryptanarchist Manifesto , Timothy May writes:

“Cryptanarchy is a cybernetic embodiment of anarcho-capitalism that does not recognize state borders and allows citizens to carry out any economic operations by consensus.”

This ideal is close to the views of the American political philosopher Murray Rothbard, a follower of AES. In Rothbard's book The Ethics of Liberty, libertarian anarcho-capitalism is presented as the natural and only possible embodiment of the ideas of the autonomy of a subject endowed with free will.

Rothbard suggests that anarcho-capitalist society will be based on the rejection of violence per se. In his opinion, any aggression by the individual or the state, including coercion by the "rulers", has no moral justification.

Bitcoin and other cryptocurrencies are purely voluntary and peaceful in nature. They involve a financial infrastructure based on voluntary cooperation. The purpose of cryptocurrencies is to endow people with financial instruments to protect themselves from inflation and state supervision. The success of cryptocurrencies is possible due to their own effectiveness as a technology for economic exchange, and not as a result of coercion by the state.

The ideological sympathy of Satoshi Nakamoto echoes the views of the AES representatives, and Vitalik Buterin, creator of the second largest Ethereum cryptocurrency, owns the words: “I believe that the Austrian economy was a whole world.”

The characteristics of the Bitcoin protocol make you recall the book “Private Money” by Friedrich von Hayek, in which this representative of an Austrian school points out the need to eliminate the government monopoly on the issue of means of payment and suggests creating a competitive system of means of payment between legal entities and individuals.

Even analysts at the European Central Bank (ECB) in the report “Schemes with Virtual Currencies” draw a direct link between the decentralized digital currency and the Austrian school. The document says that the roots of Bitcoin's philosophy go back to "direct criticism of existing fiat money and interference from governments and other agencies," which, according to Mises, Hayek and Böhm-Bawerk, "led to a deterioration in business cycles and significant inflation."

 

How do modern AES representatives feel about cryptocurrencies?

Decentralized digital currencies are more free from state control than fiat currencies. The mechanism by which new units of bitcoin are created and transmitted ensures its scarcity and respect for the independence of the individual user. These characteristics cannot but cause sympathy of AES.

In her book A Brief History of Money , Seyfedin Ammus, a modern representative of the Austrian school, substantiates Bitcoin's claim to the role of "hard money", which AES talks about. He explains that, according to AES theorists, the value of a currency is not due to external collateral (in the form of gold or other assets), but to the ratio of supply and demand - the level of confidence. In the case of cryptocurrencies, the psychology of the behavior of market participants influences the formation of their price. While people consider Bitcoin and other cryptocurrencies credible, the demand for them is growing. Depreciation is only possible in case of loss of public confidence. Thus, maintaining a stable favorable environment in the cryptocurrency industry already serves as a guarantee of exchange rate stability.

Although some representatives of the modern AES (Conrad Graf, Daniel Kravitz, Robert Murphy, Seyfedin Ammus) call themselves bitcoin maximalists, others doubt that bitcoin and its analogues will be able to replace fiat currencies.

For example, economist Joseph Salerno (other representatives of the Austrian school agree with him) supports the idea of ​​a currency free from state control, but doubts the rapid development and implementation of new financial technologies.

The Austrian school considers the free market as the highest value and believes that the market itself determines the best form of money based on the efficiency factor. These AES representatives consider the “aggressive” promotion of bitcoin as money the contrary to the concept of a free market. Joseph Salerno says:

“In connection with bitcoin, I am confused by the fact that no one is conducting a campaign in favor of gold. Why impose bitcoin? Why not just let him win the market? I am not sure of its viability. Now it is viable, being an effective means of payment. However, I do not think that he has already become a medium of exchange. ”

In the fundamental works of Menger, Mises, Rothbard, and Hayek, money is defined as a “tangible object.” This characteristic is not applicable to cryptocurrencies, which gives skeptics among the AES followers an excuse not to consider them money.

Their opponents object to this, indicating that the idea that the product should be physical and tangible is outdated. According to them, before the appearance of Bitcoin, there was no concept of a “scarce digital product”. If before there was no corresponding technological base for a digital product, now it is available, and the stereotype of the physical nature of value should be abandoned.

Many economists at an older Austrian school consider gold to be the best form of money, while their younger counterparts tend to cryptocurrencies. Perhaps this is due to the fact that young representatives of AES are better acquainted with the technological side of the issue and are able to understand how the principles set forth in the writings of the founding fathers of the school are applicable in the world of advanced technologies.

Today, the AES followers cannot but admit that their hopes for gold as "hard money" have remained theorized, while cryptocurrencies have already become quite functional money with real use cases.

Some AES representatives believe that stablecoin secured with gold can become “hard money” , although they admit that such a model risks becoming an object of state control, since the state can always confiscate security.

All AES representatives agree that the free market will sooner or later determine the best form of money, especially if there is no government intervention. Until this happens, it is necessary to continue to exert ideological pressure on the state, they say.

How do you rate this article?


2

0


InterestingCrypto
InterestingCrypto

about any interesting for me crypto projects

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.