Hail the Austrians! (Do the math)

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July 21, 2009

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." ~ Mark Twain

The current economic collapse and financial system breakdown were forecast and explained by only one "school" of economic theory: the Austrian. The irony is that the other two "major schools" - the Keynesian and Chicago (Supply Side/Monetarist) - are fixated on empirical data yet incapable of recognizing that history refutes their theories. The two mainstream schools are really very similar with only a difference of opinion on the size of government and the amount of monetary inflation. But the continual failure of the ever elusive predictive mathematical models they both seek just doesn't provide the intellectual spark needed to look outside their statist boxes. The abandonment of logic for faith in fantastical assumptions has induced an ivory tower-delusion on a grand scale. Luckily for us the Austrian Economic Theory has survived the Dark Ages of Economics and we have the intellectual tools to be able to rebuild a healthy, productive and prosperous society.

Austrian Economic Theory is based on understanding that the human ability to act combined with the natural desire to survive leads to purposeful action. Humans act with purpose. Interfering with people acting towards those purposes perverts both the actions and the people. Third parties butting in between other people who have agreed to cooperate for their mutual benefit are superfluous at best and deal killers at worse. There may be compromises as individuals adapt to the force of those interventions allowing for diminished satisfaction, but the end results are inevitably spoiled. The Keynesian Cultists see humans as guinea pigs to be experimented on while the Chicago Schoolboys counsel some limits to those experiments. We have common sense being assaulted by arrogant madness and it's time to say stop.

Economic theory is just like any other type of theoretical study in that the discipline must be dominated by academics. Academia is not real life; it can't be, shouldn't be and never will be. It can foster clear thinking, it should promote realizing intellectual potential and it will go on in spite of any resistance to learning. Do not allow the mysticism associated with "halls of higher learning" going back to pointy hats with stars on them to put a spell on you or repulse you. The good news is that most Austrian School academics understand more clearly than their counterparts that the real world is what counts, not the fantasyland of ivory towers.

A defining difference between the statist economic theorists and free-market economic theorists is the use of mathematical models. The free-market Austrians rely on logical arguments stemming from human action. This point of view recognizes that the study of economics is more of a philosophical discipline than a scientific one. The statist economists believe the exact opposite. This line of thinking seeks to put the study of economics in the realm of physical scientific disciplines. This fallacy damns the statist economists to an eternity in purgatory because economics is about human relationships, not numerical relationships. Real science requires the use of the scientific method and reproducible results. I was fortunate to have been blindsided by this insight when still in college before ever even hearing of the Austrians.

Calculus was a 'weeder course' at the university I went to that is required to enter certain colleges. At the time those students wanting to enter the business college like me had to take classes with those students wanting to be mechanical engineers, chemists and physicists. Further, these classes were graded on a curve where a certain percentage of the class was going to fail which led to a very competitive atmosphere. After it became evident that most of the business student wannabes were getting their asses kicked by the more serious students, the rumbling began. The discussion one day in class was eye-opening.

A bold business student better suited for sales than calculating complained that the trouble was that all of the problems in the book we were asked to do as homework and also on the tests pertained to the physical sciences and not economics or business. Therefore, he said, we were at a disadvantage when interpreting a problem in order to solve it. The teacher pointed out that the subject of the problems did not affect the correct formulation and calculation of answers. Basically two plus two is always four whether or not it's apples or oranges. As one of the few business students that passed the course that semester, I agreed that this made sense and kept my mouth shut.

The mutineers pressed on, "But there are practice problems in the book that are based on economics problems like what we'll be doing and you never assign them." The teacher smiled and several A-students laughed.

One said, 'Yea well the rest of us don't want to waste our time jerking off.' This raised the emotional level of the conversation and the hair went up on the backs of several business students.

"What's that supposed to mean?" the ringleader responded indignantly.

"It means that economics is mathematical masturbation. If you're going to make up the inputs and pull the relationships out of your ass, then you might as well just make up the answers."

"What?"

"We can measure the temperature that water will boil and the speed of objects falling, because we can reproduce these experiments proving quantifiable results."

"So?"

"In physics, we can test our facts. Economics is bullshit in, bullshit out. It's a waste of time."

The professor made a comment about language and indicated that he would throw in an economics problem once in while if some students thought that it might help them understand the subject better. I didn't think calculus was all that hard, but also figured I'd never use it again out in the real business world. I got my B- and was right. I do still use algebra and geometry all the time, but passing calculus was just my ticket of admission to the next level of miseducation.

In spite of this slap in the face, when I took my first micro-economics course, I thought wow, now this is something that will be useful. Looking at prices, costs, profits, and other seemingly real stuff on graphs with curves was cool. If this or that happens then the curve shifts this way or that way according to apparently sensible mathematical formulas and assumptions. I thought, well maybe there is something useful to this economics thing. Then I took macro-economics and was introduced to the prevailing theory that depended on aggregates of totally unrelated items and a slew of assumptions of things like 'perfect markets.' This class led me to realize that it was all a scam and time to move on, get my degree as soon as possible, stop wasting time and start making money. You see, I was not from a wealthy family and paid my own way through college, so practical concerns dominated my thinking.

So if you ever thought that Paul Krugman, Ben Bernanke and the whole gaggle of Ivy League economists were jerk-offs spewing out unadulterated bullshit, you were right. Ludwig von Mises, Murray Rothbard and a whole bunch of underappreciated Austrian economists said as much and were marginalized by ignorant media whores. So what is the basic difference?

The biggest thing is recognizing the folly of central planning. The bigger is better, everybody line up, and one-size fits all, conformist type of thinking does not enhance the survival of individuals, much less promote prosperity in a society. Individual planning, however, typically leads to cooperation that requires collective planning on at least some small scale. The "I can do it," "let me help," and "'let's all do what we can do" type attitude is what gets things done. Not regulations, by-laws, bureaucrats, politics or queen bees. This principle also applies to money and banking, by the way.

Von Mises identified what he called the "calculation problem." That means that socialist/central planning has no metric, like profit and loss in the free market, to determine a price for goods and thus a rational allocation of resources. It is therefore impossible for the brainiest group of planners with the most powerful computers in the world to make the infinite number of decisions necessary to make an economy run smoothly. Their decisions will always cause shortages, lead to lower quality products and services, and eventually shut down any economy. It's just a matter of time. Ludwig von Mises predicted that the Soviet Union would collapse back in 1927, yet was scorned and then ignored by the "economics profession" because of it.

The Keynesian Pre-School adherents preach the gospel of central planning, which is why central planners/politicians subsidize their "work." Their argument stems from the fact that the free market does not always result in maximum satisfaction of needs and desires. Duh! That "welcome to the real world" insight is easily dealt with by most working individuals coping with survival on a daily basis, but for some reason, the calculus of this condition cries out for correction by self-styled supernatural beings with obviously too much time on their hands. If only all of us working saps would just follow the plans put forth by our masters then we would all be happy cogs in a well-oiled machine humming along at maximum efficiency! Of course, it doesn't take very long until the standard of perfect harmony that the free market was held up to is abandoned when judging the results of central planners.

The Chicago Boys believe the market is great, except for the most important thing, which is money and banking. What tools. Talk about hacking at branches while missing the root of the problem. They realize that the leg irons are holding back productivity, but the handcuffs must stay on. Only the Austrians assert that like liberty, free markets mean no chains at all. Of course, that doesn't mean that fraud, theft, and violent coercion are allowed. That's just a stupid red herring you hear a lot.

The elite fascination with central planning is stuck in an eternal feedback loop. The plan is forever changing, but the monopoly on planning must never be questioned. There can be arguments over how much central planning is optimal, like between the Keynesians (communists) and the Chicago Boys (fascists), but the efficacy of central planning is never allowed to be discussed. Ludwig von Mises gave us the insight that free market interventions by central planners inevitably leads to additional interventions meant to fix problems caused by previous interventions. This results in more and more interventions until the central planners exhaust the energy in the system chasing their tails. Somehow the obvious alternative to stop going in circles is shunned as too radical.

The fascist political operating system that burdens our society makes its number one priority survival. This is why court economists will tout absurd, discredited ideas long after they have been consumed in the burning flames of their crashed theories. This article is not a scholarly expose of economic theories right and wrong; it is a tip of the hat to those with the common sense to see what works and the courage to stand up to institutional bias. But the usual suspects deserve to be scolded for their silly posturing and counterproductive influence. People like Peter Schiff, Ron Paul, Lew Rockwell, Jim Rogers and others who saw this economic catastrophe coming have been marginalized by self-serving ignoramuses because they were right. The Wall Street, media, Ivy League and Washington, D.C. morons that didn't see what was coming, then denied the reality of the situation long after it was here and now are still clueless as to what really happened, are now the ones "in charge" of "fixing the economy." God help us.

As a real estate market analyst and lover of liberty interested in economics, I discovered long after college and my Libertarian infatuation with Milton Friedman the works of Leonard Reed and Murray Rothbard. This led down a path to Henry Hazlitt, Ludwig von Mises and a whole bunch of other people who are still living and writing stuff that makes sense about economics. While many of my colleagues stuck with their empirical data models that always miss turns in the market, I was inspired to use logic and consider other sources of knowledge. After being called a "gloom and doomer" among other more vulgar terms for killing multi-million dollar deals as economically unfeasible at the peak of the boom, I now have clients and friends calling me "Nostradamus" for saving them from making some pretty big mistakes. I tell them that my insight isn't due to superior intellect or crystal balls, but to my study of Austrian economics.

For a more skillful orientation and comprehensive explanation of economic theories, I suggest starting at the Ludwig von Mises Institute website at www.mises.org. Any person interested in understanding why we are in the current mess would be well served to study Austrian economics; but beware, it is like taking the red pill in The Matrix.

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Mark Davis's picture
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Mark Davis is a husband, father and real estate analyst/investor enjoying the freedoms we still have in Longwood, Florida.