Once you have bought your first bit of bitcoin and have fallen into the proverbial rabbit hole, it is inevitable that you will eventually come across the Austrian school. This economic movement dates from the late 19th and early 20th century and originated in the Austrian capital Vienna, hence its name.
Why does this economic movement resonate with bitcoiners? And to what extent does the Austrian school differ from the Keynesian economic philosophy that has been instrumental in shaping our current financial system? In this first article I will try contrast the Austrian school with the Keynesian school and discuss the main differences between the two economic trends. After reading this article, you will better understand why Austrians are generally comfortable with the underlying thoughts of bitcoin.
The difference between these two economic trends is best explained by means of a (true) story. Forest fires are a major concern in many parts of the United States. Natural areas were destroyed and wood processing companies were severely affected by the forest fires.
To prevent future forest fires, substantial investments were made in training staff and improving infrastructure around and around forests. After a few years, they had reached their goal, little to no fires broke out, and efforts seemed to be paying off.
A few years after the investments, however, a fire broke out that was unprecedented. In a short time, more than 30 percent of the forest was destroyed. Shortly afterwards, this kind of violent fire continued to emerge, with all its consequences.
How could this happen after all those prevention measures? Wasn't the problem solved? It soon came to the conclusion that the small fires from the past prevented weeds from spreading through the forest. By preventing the small fires, the weeds had the opportunity to spread throughout the forest. This allowed the weeds to function as a good fuel, so that it could now also reach the larger old trees.
The moral of the story? Let nature take its course, because in time it will rebalance itself.
Let go of the financial market
Supporters of the Austrian school are of the same opinion on the financial markets. In their view, markets should be left alone and government intervention will only disrupt the natural course of economic cycles and the equilibrium in the markets.
Austrians believe that recessions and crises have the same function as the small wildfires described above. It is only normal in a healthy economy that things do not go so often. In those lesser periods, the weeds are eradicated.
Keynesians, on the other hand, argue in favor of steering the market through legislation, taxation and monetary policy.
Own currency, central power
An important tool from the government toolbox that can steer the economy in the desired direction is having its own currency. In recent years, this power over money has been used in two main ways to stem an imminent recession.
You've probably seen it in the news that interest rates are creeping towards zero and have even turned negative in some markets. The idea behind lowering interest rates by central banks is that it becomes cheaper to borrow money for investments and that those investments ultimately lead to more employment and consumption.
The other way in which central banks express power over money is through quantitative easing. These are expensive words that mean that the central bank buys government bonds and other securities from the market (mainly from banks) with money created from scratch.
This ensures that these banks have more money on their balance sheets that they can use to extend new loans. Both measures are essentially aimed at injecting more money into the economy to boost markets.
Supporters of the Austrian school believe in the self-regulating ability of markets and are against any form of government intervention. It is therefore not surprising that bitcoin and the Austrian school have found each other.
Bitcoin was conceived and designed to function as an independent form of money. Power in the network is decentralized, no single party can define the monetary policy of the digital currency on its own.
In fact, the total amount of bitcoin that will ever come into circulation and even the rate at which it will happen is virtually fixed. In a world with bitcoin as the standard, it is impossible for governments to interfere with monetary policy.
After all, the amount of money and the rate at which new money is added is fixed with bitcoin. According to Austrians, no monetary policy is the best monetary policy. According to them, playing with the money supply to steer the markets will only lead to inefficiencies, market disruption and, in the long run, less prosperity. Bitcoin's monetary policy is set in stone and is, in a way, part of nature. Bitcoin therefore fits perfectly with the Austrian philosophy.
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