The Con Job of Libertarian "Economics"

Capitalism 2

The rise of the so-called "tea party" movement has given a big boost to Libertarian economics, also known as "the Austrian School," a branch of thought that, although it calls itself economics, is better termed a Utopian philosophy. Ever since Paul Samuelson (and even Milton Friedman), academic economics have tried to define a more scientific framework for economics. In general this has meant applying statistical modeling, and formal definitions to various actors in the economy, including both public and private institutions as well as individuals and groups, that can then be applied to surveys and other data. You cannot ever make economics non-political since class and other interests of course also economic interests. But Samuelson hoped to move the economic debate from the realm of mostly ideology, to the realm of mostly evidence driven analysis.

"The Austrian School" is the opposite of a data or evidence driven framework. Texas Congressman Ron Paul is undoubtedly the most influential American advocate. Instead of paying any attention to data, it accepts as given from God (or nature) the transcendental "organizing" power of the market price mechanism. Its name derives from the identity of its founders and early supporters, Ludwig von Mises, and Nobel laureate Friedrich Hayek, both Austrians. the Ludwig von Mises Institute and Virginia based George Mason University are the principle US ideological centers of this trend.

Its principles are as follows:

1. The business cycle is a completely virtuous cycle. Slumps are the price we pay for booms. Recessions are the just punishment for the excesses of previous expansions. The fact that the rich reap the rewards regardless, and the poor are the ones punished regardless, is of no importance to the Austrian school. Every graph of the financial crises showing crashes and bubbles is just God's continuing morality play. Government intervention in this "virtuous" cycle prevents God and/or nature from rendering justice with the "tough love" everyone needs – and thus is evil. The Austrians are always in a state of continual frustration because no nation in the world seems to be willing to wait out financial crises and depressions trusting in the "magic of the market" to fix everything – that mirable dictu, keeps crashing and suffering from persistent instability. Instead of waiting for God's judgement, people – to the amazement of the "Austrians" – still resist walking calmly to the grave from starvation or homelessness!! They say: "if this is virtue, then the Devil has ascended Heaven." Nonetheless, the "virtuous business cycle of capitalism" has a certain seductive power. Not because it offers any solutions, but because it explicitly offers nothing: Welcome to God's Plan.

2.  The Austrian School rejects a scientific foundation to economics. The failure of any political regime to endorse the virtuous business cycle theory of the Libertarians gives rise to all sorts of political backwardness and numbness to reality in its supporters – listening to them frequently arouses a generous desire to help them with a wake-up "dope slap," after such tortured jewels as: "the people are too stupid to understand," or "the people are entitled to nothing," and other too-vulgar-or-racist-to-repeat sentiments. So few believe them, in fact, that they have become hostile to any group or government or institutional level of analysis at all. Instead they advocate strict adherence to "methodological individualism" – analyzing human action exclusively from the perspective of individual agents. Austrian economists also argue that mathematical models and statistics are an unreliable means of analyzing and testing economic theory, and advocate deriving economic theory logically from "basic principles" – read "divinely inspired principles" – of human action. They have even given their methodology a name, "praxeology." Additionally, renouncing science altogether, the Austrians reject experimental and empirical research altogether. They reject testability and falsification en toto. The great virtue (not!) of a theory that rejects testing and falsification is, of course, that it cannot be disproved!

3. The role of the state in Austrian and now Libertarian theory is more confused than its transparently false propositions on the business cycle. The first Austrian, von Hayek, was actually a social democrat and strongly supported standard social democratic policy on the key role of the state in providing services that were market failures. He differed only on whether the post office should be public or private. But latter day Austrians at the Von Mises Institute take this notion for a ride off the sanity cliff, calling for the end of public schools, roads, post offices, Internet, media of any kind, health care, retirement, fire stations, etc, etc, etc.

4. Like many cultish theories, libertarian economics rise in popularity reflects public dissatisfaction with the performance of large institutions in many areas of economic and public life. They often correctly identify corporate corruption as a source of the decay of these institutions, but rather than reform the corruption, they become captured by an attractive, but ultimately doomed, ideology that – due to its futility as a guide to leadership – strengthens the very corruption they decry.

Here is a "parable of the ship" from Mike Huben – a nearly perfect allegory of Libertarian and Austrian School Economics, that should serve you well in any debates:

The owner of a ship noticed that his ship was filling with water. Being an educated man (if not nautically trained) he knew there were many possible causes for water in a ship: leaks in the hull, the bilge pump being broken, waves washing over, condensation, and even the crew urinating in the hold. He heard the bilge pump running, he saw water from waves pouring in the open hatches, but worst of all he smelled urine in the hold! Being sensible, he ordered the crew to shut the hatches and then gave them a lengthy, stern harangue on hygienic use of the head. While he was lecturing the crew, his ship sank due to a combination of causes: large, unobserved leaks in the hull, a bilge pump that was running but not pumping correctly, and condensation that had shorted out warning circuitry.

Illustration by Alexei Talimonov

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  • Very weak article. It makes one serious argument, the long debated one about whether an analytic (as opposed to empirical) economic theory is useful. (To which it answers “not a bit” even though mainstream economics has accepted virtually all the main tenants of Austrian theory.)

    Point one is simply a straw man. I have never heard or read an Austrian economist who characterized the business cycle as “a completely virtuous cycle” - quite the contrary. The ABC theory considers some business cycles (the harmful disrupting ones) as artificially caused by monetary manipulation. When prices go up due to monetary inflation, firms (on the margin) respond by spending more on capital, machines and factories, responding to what appears as great demand for their product. When it turns out that there was no enhanced demand, only obfuscation of price information by central banks, there’s a recession until the malinvestment (unused machines, factories, labor) is reemployed elsewhere.

    Another straw man is the “God” thing. Austrian economics is value free. It has nothing to do with “God's continuing morality play.” Where did John Case get this shit?

    Some of his comments are hilarious. “The failure of any political regime to endorse the virtuous business cycle theory of the Libertarians gives rise to all sorts of political backwardness and numbness to reality in its supporters,” Case asserts. But the record of the Keynesians that did become the rulers’ economists is dismal - massive debt, debasement of currency, and booms and busts! Obviously we the people would have been better off with Austrian policy. However, which economist is a ruling politician going to hire? One that says “Spend, spend, spend on your cronies and constituents!” or the one that says “Be frugal, stay out of debt, don’t spend it until you have it?” There’s a praxeological reason that rulers love Keynesians.

    Posted by Hogeye Bill, 03/01/2014 3:38pm (4 years ago)

  • "The business cycle is a completely virtuous cycle"

    Austrians since Weber have adopted 'wertfrei' or value neutrality. There is no moral element to Austrian analysis.

    "Slumps are the price we pay for booms. Recessions are the just punishment for the excesses of previous expansions"

    The actual Austrian business cycle theory is about intertemporal discoordination in the structure of capital due to distortions originating from the banking system.

    "The first Austrian, von Hayek, was actually a social democrat"

    This is one of the most ignorant things written on the Austrian school ever. Several generations of Austrain economists had gone by before Hayek came along. The school began in 1871 with the publication of Carl Menger's Principles of Economics.

    I wonder why this hit piece has been written. It can't be just because it is a Marxist author. There have been far more intellegent Marxist writings on political economy & the Austrian school then this.

    The only possible reasons are that John Case is ether stupid. Lazy. Or dishonest & malicious.

    Posted by Malthus0, 08/07/2013 11:04am (4 years ago)

  • Leaving aside the pros and cons of Austrian Economics, John Case clearly does not know anything about the topic...and before you criticize or parody something effectively you have to actually understand it. For instance:

    1) The Austrian school do not see bubble economics as a good thing but rather blame major booms and busts on government intervention via money creation and artificially low interest rates. These, according to the Austrians, lead to a major misallocation of resources. This is why Ron Paul, Peter Schiff etc. predicted the US housing bubble and collapse of 2008 around the turn of the millennium whilst other economists (such as Reagenite Art Laffer) claimed that everything was going fine. Going back a bit, the Austrian Theory of the Business Cycle allowed Ludwig von Mises to predict the 1929 crash at a time when Milton Friedman's idol Irving Fischer said that the new 'prosperity' would be endless.

    2) The Austrian school is not against using data to illustrate axioms or study economic history. They are against using data to build an entire economic theory.

    3) Most Austrian economists do not believe that people should be allowed to starve to death. As this article points out, Hayek believed in state welfare, others (such as Lew Rockwell) argue that private charity is perfectly capable of performing the task. Whether you agree with them or not, it is not accurate to say that they generally advocate mass starvation.

    4) Von Hayek was NOT the first of the Austrian economists. That distinction goes to 19th century intellectual Carl Menger.

    5) Austrian economics has nothing to do with race one way or the other. Some Libertarians are/were racist (Charles Murray), other Libertarians are anti-racist (Richard Ward, H.L. Mencken). Either way, this is not about economic theory. On a related issue, John Maynard Keynes (a white supremacist), darling of many on the ultra-PC moderate left, wrote in the German introduction to his General Theory that his ideas would work far better under National Socialism than under democracy. Does this mean social democrats are all anti-semitic lunatics? Not really.

    6) Whilst Case dismisses the Austrian school as peddlers of pseudo-scientific nonsense, many on the far left would disagree. Socialist economist Robert Brenner (a UCLA professor) was highly impressed by the work of Richard Duncan. A scholar heavily influenced by Mises, Duncan has argued that the Austrian Business Cycle Theory is essentially correct and that leaving the gold standard was disastrous for America (See, Duncan, The Corruption of Capitalism)

    Conclusion: If you disagree with aspects of Austrian economics or certain theories put forth by members of the Austrian school, then that is perfectly reasonable. Yet to write Austrian Economics off as cultish tea party nonsense via an ill-informed, error strewn, polemical rant does your own opinions and intellectual standing no favours.

    Posted by Mike Jones, 06/11/2013 6:45pm (5 years ago)

  • The Austrian school is the DUMBEST economic philosophy in the world! These people ACTUALLY don't think empirical studies can PROVE OR DISPROVE what they say; they just ARGUE IT as though it IS true because, "It makes sense" or some sh*t.

    What morons... Is there a SINGLE credible study done that can even BEGIN to verify Austrian theory?? OF COURSE you can empirically test economics just like regular science. What kind of BS is it to say, as Mises once did, that basically, "People can't be studied like inanimate nature." OF COURSE THEY CAN! You can find statistically significant PATTERNS and figure it out, to some extent.

    I'll admit that we probably will NEVER quite fully understand how the economy works... but that's a far cry from saying, "Because of this fact, no one can ever prove anything in economics via studies, so we should just shun them altogether and 'use our heads' to 'figure out' the best system."

    Libertarians are attracted to the Austrian school NOT BECAUSE IT'S PROVEN IN ANY WAY, SHAPE OR FORM, but because it FITS THEIR ANTI-GOV'T IDEOLOGY. It JUSTIFIES it.

    Posted by Von Mises Was An Idiot, 04/03/2012 7:19am (6 years ago)

  • @Tylor who said "Deductive based reasoning is unscientific? Don't tell that to the mathematicians."

    Pure mathematics is not science mate. Science requires empiricism. Falsifiability. A testable hypothesis. All that jazz.

    Pure mathematicians, like some philosophers, begin from ASSUMED first premises and deduce. That's not science. Science employes inductive reasoning more than deductive reasoning.

    Posted by Graham, 02/03/2012 12:48am (6 years ago)

  • I think you have it backwards. Communism has ALWAYS destroyed peoples lives. It creates permanent poverty. The people under Communism lose rights, freedoms and liberties. It's a failed system. It hasn't created much of anything except, making the party rich. The leaders are elitist. They don't care about people. Never have, never will. My proof is, let's see if this gets posted.

    Posted by Thos Weatherby, 03/30/2011 9:12am (7 years ago)

  • Even worse... Praxeology postulates that only "entrepreneurs" are capable of "truly human action". All the others (suposedly "non-entrepreneurial"...) are mere "organic machines" that respond to some kind of "comsumption impulses"... No family ties, no culture, no national affiliations... In short, an analytical aberration.

    Posted by Guilherme da Fonseca-Statter, 03/25/2011 8:40am (7 years ago)

  • Funny we address them as "the Austrians" as Austria is a flourishing social democracy which, if not stranger to booms and busts in this globalized world, has a first class health care system, education etc. And its capital, Vienna, has been voted the best city in the world to live in for two years in a row.

    Posted by Daniel, 03/25/2011 8:24am (7 years ago)

  • Most of comments that seem to defend the "Austrian" School here also seem to be viewing economics as solely an individual affair, relying to heavily on microeconomics and disregarding macroeconomics.

    There is a lack of understanding of a simple observation Aristotle made 2000 years ago: that is, that the whole is greater than the just the sum of it's parts.

    The economy is something more than just a collection of the individuals involved in it. It is also a collection of institutions, based on a system made of policies, and exerts its own mode of thinking on those involved.

    Posted by Jean Paul Holmes, 03/24/2011 1:54pm (7 years ago)

  • Most of the comments that seem to defend the Austrians here seem to advocate a version of social darwinism that really only proves the analysis in the article to be correct - despite the protests that you have misunderstood the right-wing libertarian economic theories of that school.

    Posted by sinking ship, 03/24/2011 12:52pm (7 years ago)

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