AUSTRIAN ECONOMICS AND ITS OPPOSITE – MARXISM, SOCIALISM OR COMMUNISM
by Dr. Lawrence Wilson
© March 2018, L.D. Wilson Consultants, Inc.
Economics is the study of the production, distribution and sale of goods and services in a community or nation.
Economics is one of the most critical areas of human society and human behavior because upon it depends the prosperity and often the physical and mental health and even the survival of the people and their nation. Also, good economics wins wars and often prevents wars, while bad economic situations create wars and chaos in society.
THE SCHOOLS OF ECONOMIC THINKING
There are only two basic “schools” or ways of thinking about economics today.
1. Keynesian or Marxist economics. This is government control of prices, wages, and many other aspects of the economy such as which goods will be produced and how much of each one will be produced.
Words used to describe this type of economy are command and control, collectivist, socialist, statist, Marxist or communist.
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 too stupid to understand what is best for society. If given economic freedom, they will abuse it leading to social unrest, war and the collapse of society.
B. Therefore, a powerful, interventionist and a 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.
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 taxation, regulations, subsidies, fines and even nationalization or takeover of entire industries, perhaps, to keep things running smoothly.
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 well, while those who oppose the goals of the government must be punished, perhaps even killed.
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”, which is whatever the rulers decide upon.
This is a supremely elitist and authoritarian view of economics, but one that is dominant on the world scene, and is occurring more 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. (This is the truth. Wherever socialist and communist economics has been tried, it has failed.)
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 goods 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 the best 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 and manipulate” society through economic restrictions of various types mentioned above.
In fact, the free market advocates point to government blunders that have led to poverty and other disasters for many nations. A recent example of this is Venezuela, which was a very prosperous nation until a socialist government ruined the economy.
Wars occur when economies are socialist and communist because the economy fails and the nation must 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. Free market economics is sadly not taught as much, today, even though it works much better. Thus, it is the subject of the rest of this brief introductory article.
AUSTRIAN ECONOMICS, ITS FOUNDERS
Modern free market economics dates back to the writings of authors such as Adam Smith (1723-1790), and before him British philosophers such as John Locke, and others. It is a current of thought 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 Ludwig Von Mises, who lived from 1881 to 1973. He is considered one of the most important economists 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 Murray Rothbard, Milton Friedman, Walter Williams, Thomas Sowell, and a number of other economists and philosophers of the twentieth 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 economists insist upon.
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.
Essentially, people reward those who produce goods cheaply and of good quality, and they ‘punish’ or do not patronize those who produce the wrong goods, or the wrong quantity, or who charge too much, or whose goods are of poor quality. 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 economic freedom would seem to be obvious, but, in fact, in most nations, including the United States and Europe, some 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.
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. For example, to read about the horror of regulation of automobile technology, read The Regulatory State.
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 Politics. An unusual article about the application of development science to economics is Development And Economics.