moreconomics

[moreconomics]

"The Austrian School of Economics: A Solution to the World's Problems?"

The Austrian School of economics is a heterodox economic theory that emphasizes the role of individual subjective value, entrepreneurship, and the importance of markets in the allocation of resources. It is distinguished from other economic schools by its emphasis on the dynamic and entrepreneurial nature of economic activity, and its view that the economy is constantly evolving and adapting to changing circumstances. The Austrian School is also characterized by its commitment to methodological individualism, which is the idea that social phenomena can only be understood by examining the actions and motivations of individual actors. This emphasis on the subjective experiences and preferences of individual actors is also reflected in the Austrian School's commitment to the subjective theory of value, which holds that the value of a good or service is subjective and determined by the individual valuations of those who exchange it.

One key aspect of the Austrian School is the concept of the business cycle, which refers to the regular fluctuations in economic activity that occur over time. According to the Austrian theory of the business cycle, these fluctuations are caused by the expansion and contraction of credit by banks. When banks expand credit, they make it easier for individuals and businesses to borrow money, which can lead to an increase in investment and economic activity. However, this expansion of credit can also lead to an unsustainable increase in the demand for goods and services, which can result in a misallocation of resources and the emergence of malinvestments. When the credit expansion eventually comes to an end, the demand for goods and services can suddenly drop, leading to a contraction in economic activity and a corresponding drop in the supply of money and credit. This process of credit expansion and contraction can lead to the regular fluctuations in economic activity that are characteristic of the business cycle.

One important concept in the Austrian School of economics is that of economic calculation, which refers to the process by which individuals and businesses make decisions about how to allocate their resources in the face of scarcity. According to the Austrian School, market processes are the most efficient means of economic calculation because they allow individuals to make decisions based on their own subjective preferences and valuations, and provide information about the relative scarcity of different goods and services through the system of prices. When prices are allowed to adjust freely in response to changes in supply and demand, they provide a clear and accurate signal about the relative scarcity of different goods and services. This allows individuals to make informed decisions about how to allocate their resources and optimize their utility.

For example, if one good is experiencing a shortage and its price is higher than another good that is not experiencing a shortage, an individual may choose to purchase the good that is not experiencing a shortage even if they prefer the good that is in short supply. This is because the higher price of the good in short supply reflects its relative scarcity and the individual may be able to obtain more utility by purchasing a greater quantity of the good that is not experiencing a shortage. This process of resource allocation through market prices promotes the most efficient use of resources and contributes to economic growth and prosperity.

The Austrian School argues that subsidies and other forms of market intervention can distort prices and undermine the ability of the market to perform this crucial role in resource allocation. By distorting prices, subsidies can create artificial shortages or surpluses of goods and services, leading to misallocations of resources and inefficiencies in the economy. This can ultimately undermine the ability of the market to promote economic growth and prosperity.

Money is just another good among many in an economy, and like any other good, it is subject to the laws of supply and demand. When the supply of money is increased or decreased, this can have a significant impact on the relative prices of other goods and services in the economy, as well as on the level of economic activity. The Austrian School of economics argues that the state's control of money and its regulation of private alternatives can distort market processes and undermine economic prosperity. By monopolizing the supply of money or over-regulating private alternatives, the state can manipulate the money supply and interfere with the proper functioning of the market. This can lead to misallocations of resources, economic inefficiencies, and ultimately, a lower standard of living for individuals and businesses.

One way to promote economic stability and prosperity is through the denationalization of money, a concept posited by Friedrich Hayek and embraced by many Austrian economists. This idea refers to the proposal that money should be privately produced rather than issued by a central government or bank. The Austrian School argues that private money would be more stable and less subject to manipulation by governments and central banks, and would therefore be more effective at promoting economic stability and prosperity. One way in which private money could be implemented is through the concept of free banking, in which banks are free to issue their own private currencies while also subject to no special regulations beyond those applicable to most enterprises.

Free banking is a monetary system that has the potential to promote greater competition among banks, leading to better quality currencies and a more stable financial system. In a free banking system, banks have an incentive to issue currencies that are widely accepted and maintain their value, as this would increase the demand for their currency and their profits. To achieve this, banks must demonstrate the reliability and trustworthiness of their currency to the public. One way that banks can do this is through a practice called "note-dueling."

Note-dueling is a practice that occurs in a free banking system, in which banks attempt to gather up as much of their rivals' outstanding notes as possible in order to demonstrate the strength of their own currency. This process can be thought of as a form of market discipline, as it incentivizes banks to maintain reasonable reserve ratios in order to be able to honor their promise to redeem their notes for gold or other specie when requested. Competition among note issuers led each bank to try to demonstrate how solid and reliable it was relative to other banks, and this competition effectively regulated the specie reserves held in the banking system. If a bank has a large specie reserve relative to its outstanding note issue, it is better able to honor this promise and maintain the confidence of the public in its currency. On the other hand, if a bank has a small specie reserve relative to its outstanding note issue, it may be at risk of facing a liquidity problem if there is a high demand for note redemption. In this case, the bank may not have enough gold on hand to meet the demand, which could lead to a failure in the bank that did not have enough specie reserve relative to its outstanding note issue.

The Cantillon effect is a phenomenon in economics that refers to the way in which changes in the money supply can have unequal impacts on different parts of the economy. Named after the 18th-century economist Richard Cantillon, the effect suggests that the first recipients of new money tend to benefit the most, while those who receive the new money later on tend to be disadvantaged. This is because the first recipients of new money are able to use it to purchase goods and services before prices have had a chance to adjust to the increased demand, which can lead to higher prices for these goods and services. This can lead to a transfer of wealth from those who receive the new money later on to those who receive it earlier, contributing to economic inequality.

Many Austrian economists advocate for the denationalization of money and the implementation of free banking as a way to mitigate the potential for the Cantillon effect and promote economic stability and prosperity. In a system of free banking, banks are free to issue their own private currencies and compete with one another for customers. This competition can help to ensure that the supply of money and credit is more responsive to market forces and less subject to manipulation by governments and central banks. One aspect of this competition is the process of "note dueling," in which banks attempt to gather up as much of the outstanding note issue of their rivals as possible in order to demonstrate their own reliability and stability. By allowing the market to play a greater role in the supply and demand of money, the Austrian School argues that free banking can help to promote economic stability and reduce the potential for the Cantillon effect to contribute to economic inequality.

In conclusion, the Austrian School of economics offers a unique perspective on economic theory and policy that emphasizes the role of individual subjective value, entrepreneurship, and the importance of markets in the allocation of resources. The theory of the business cycle explains how the expansion and contraction of credit by banks can lead to fluctuations in economic activity, and the concept of denationalization of money proposes that money should be privately produced rather than controlled by the state. The idea of free banking, in which banks are free to issue their own private currencies, is one way in which this concept could be implemented. The Austrian School argues that these ideas have the potential to promote economic stability and prosperity by allowing the supply of money and credit to be more responsive to market forces and less subject to manipulation by governments and central banks. By respecting the role of the individual and the market in the allocation of resources, the Austrian School offers a unique and valuable perspective on economic policy.

[moreconomics]

In what will be a short livestream, I will watch the latest video from Economics Explained as it involves the Austrian School, and comment as the video goes on with praise and criticism where it's needed. It has already made the rounds in my Discord server and received grumbling reviews, but I haven't watched it before the livestream so I can try to give a fair assessment and provide input and additional information that might be left out of the presentation.

[See: Live Response to Economics Explained's video about Austrian and Keynesian schools]

[moreconomics]

"Liberty and Prosperity: A Cliodynamic Defense of Libertarianism"

Libertarianism is a political philosophy that advocates for individual liberty and the protection of individual rights, including the right to own private property and the freedom to engage in voluntary exchanges without interference from the state or other external authority. Proponents of libertarianism argue that this approach is best able to promote individual flourishing and social prosperity. In this essay, I will use cliodynamics – the study of long-term historical dynamics using statistical and mathematical models – to argue in favor of libertarianism.

One of the key arguments in favor of libertarianism is that free markets and individual liberty lead to greater economic prosperity and social well-being. Cliodynamics provides support for this view through its analysis of the long-term consequences of different economic and political systems. For example, a study by economist Peter Turchin and his colleagues used cliodynamic models to analyze the relationship between state intervention in the economy and social instability in pre-modern societies. They found that societies with greater levels of state intervention in the economy tended to be more unstable and prone to conflict, while societies with more limited government intervention and a greater reliance on market forces tended to be more stable and prosperous (Turchin et al., 2010).

Other research has similarly found that societies with greater economic freedom – as measured by indices such as the Heritage Foundation's Index of Economic Freedom – tend to experience higher levels of economic growth and development (Gwartney et al., 2020). This is likely due to the fact that free markets allow for the efficient allocation of resources and the creative destruction of old technologies and business models, leading to innovation and economic progress. In contrast, government intervention in the economy can distort prices and create inefficient resource allocation, leading to slower economic growth and development.

In addition to its economic benefits, libertarianism also promotes social harmony and cooperation. A study by sociologist Joseph Tainter and his colleagues used cliodynamic models to analyze the long-term consequences of different forms of governance on social cohesion and cooperation (Tainter et al., 2014). They found that societies with more decentralized and voluntary forms of governance – such as those found in traditional tribal societies – tend to be more cohesive and cooperative, while societies with more centralized and hierarchical forms of governance tend to be more hierarchical and prone to conflict. This suggests that libertarianism – which emphasizes decentralization and voluntary cooperation – may be more effective at promoting social harmony and cooperation than more centralized and hierarchical forms of governance.

In conclusion, cliodynamics provides strong support for the view that libertarianism – with its emphasis on individual liberty and free markets – is the best political philosophy for promoting economic prosperity and social harmony. While there may be other factors to consider in determining the appropriate balance of individual liberty and state power, cliodynamics suggests that a greater reliance on market forces and voluntary cooperation is likely to lead to better outcomes for both individuals and society as a whole.

References:

Gwartney, J., Lawson, R., & Hall, J. (2020). Economic freedom of the world: 2020 annual report. Fraser Institute.

Tainter, J., Turchin, P., & Turner, E. (2014). Sustainability and collapse: An integrated history and future of people on earth. University of California Press.

Turchin, P., Currie, T. E., Turner, E. A. L., Gavrilets, S., & Hall, S. J. (2010). War, space, and the evolution of Old World complex societies. Journal of Peace Research, 47(6), 719-726.