As humans, we all have different needs, and our actions are always influenced by those needs. This idea lies at the heart of what we’d come to know as the Austrian school of economics.
Unlike the classical economists from last week’s episode, Austrian economists like Carl Menger believed that value is completely subjective; that a product’s value is based on its ability to satisfy human wants; and that if a product exists in abundance, it will be used in less-important ways.
In the second part of this three-part series, we take a look at the Austrian school of economics, the historical conditions in which it arose, its key ideas, and more.
- [04:13] Recap of classical economics
- [07:02] The context in which Austrian economist Carl Menger found himself in
- [09:43] The first foundational idea of the Austrian school of economics
- [11:21] The second foundational idea of the Austrian school of economics
- [16:36] The third foundational idea of the Austrian school of economics
- [24:17] The fourth foundational idea of the Austrian school of economics
- [25:29] The fifth foundational idea of the Austrian school of economics
- [30:23] Praxeology: the methodology of Austrian economics
- [35:39] Criticisms of the Austrian school of economics
- [44:38] The relevance of the Austrian school of economics today
Links & Resources
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[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.
[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. And Happy Friday, everybody. If you’re new here on these Friday shows, we always try to take one thing on the news and go a little bit deeper unless Dylan decides he’s going to talk about a whole bunch of things in a big series, which is what’s going on right now. So if you are new here, I would go back and look at last Friday’s episode on classical economic theory because our series is talking about various schools of economic thought, and today’s topic is going to be the Austrian school of economics, which I know sounds just absolutely riveting because most of us can find Austria on a map, right? But it’s important to understand that this school of economics, like classical economics from last week, has a huge impact on how we think about the economy, our political discourse as a country and as individuals, how different representatives think about their choices and what the role of government’s going to be. And like the point I made last week, it’s really hard to point to a section of life in a modern industrial economy that isn’t touched by some level of economic thinking. I mean, after all, if you have a job, you are participating in the economy, and the economy is organized according to some sort of idea, at least theoretically. And I think it’s really important for us to understand that at the end of the day, when we talk about different schools of economic thought, these are the marginal differences of opinion between different economists of a particular subset. The field of economics as a general whole agrees on more than they don’t. So even the most ardent economists on diametrically opposed philosophical standpoints will agree on the vast bulk of economic theory while quibbling about some of the more fundamental yet incredibly important details.
[00:02:14] And in brief, you know, I talked about this last week, but it’s worth reiterating here again, that economics isn’t so much of a science as it is a philosophy. And one of the reasons that we say this is the scientific method is the idea of studying cause and effect. You come up with a hypothesis. You then try to disprove that hypothesis. If you fail in disproving that hypothesis, then it continues on to be tested again. This is the whole rinse and repeat that is part and parcel of the scientific method. But it’s kind of important to point out that entire system really just kind of hinges on the idea that like, well, I didn’t prove that this was correct. I just proved that it’s not wrong under these conditions, so I can’t say it’s wrong and we’re going to continue to use it. If it survives enough that we can start establishing a potential causal relationship, it then becomes a capital T theory. But economics isn’t like that because you can’t run experiments. That is to say, if you had this idea for an economy, you then would have to take over a country and then organize that country that way. And then, if it doesn’t work, you just completely destroyed the lives of everyone in that economy. So economists have to look at a variety of different indirect data points and natural experiments to try to justify whether or not they think their hypothesis of how human behavior and the movement of goods and services work. But they fail frequently, and therefore it comes into the philosophical part of economic thinking, which the Austrian school is very much core to. And again, economics is looking at the fundamental question of how we allocate finite resources in the face of infinite human demand, which is another way to say that economics could be actually a study of human behavior in the faces of incentives — incentives, of course, in this case, being price signals, supply and demand, and those things.
[00:04:13] And so last week we talked about classical economics, which started in 1776 with the publication of The Wealth of Nations by Adam Smith and more or less had become a complete idea of thought by 1848 with John Stuart Mill. And during that time, there were several thinkers, you know, Thomas Malthus, David Ricardo, and others that had come up with this idea of looking at a society that was undergoing the process of industrialization, moving from an agrarian-focused economy to an industrial-focused economy. And there were lots of different changes, specifically around the division of labor and specialization. And that is what the classical economists were looking at. But it’s, again, important to note that the classical economists, if you had walked up to them and said, “Hey, you’re an economist of the classical school,” they would have been confused twice mostly because they have no idea what economics is nor the idea that they’re the classical school. And so these people were developing this idea of thought that they didn’t have a name for. They were just observing what they considered to be the moral behavior of people writing it up, and it’s only in retrospect do we understand this as the field of economics.
[00:05:29] Also, you might recognize the year 1848 with John Stuart Mill. That’s kind of a seminal year in western history because not only was it when John Stuart Mill was wrapping up his works on utilitarianism and, you know, making the observation that the industrial economic system actually fails sometimes with the idea that there is a market failure, but it’s also the year that The Communist Manifesto came out and was published, which, of course, was a critique looking at industrial societies and the misery that was caused by that. John Stuart Mill and Karl Marx were contemporaries, even if they didn’t really interface with each other’s work. It’s almost certain that they were aware that each other existed, but they weren’t friends or collaborators. But they were looking at the same thing, seeing the same misery, and then drawing different conclusions. Which is also important because the year 1848 is also the year that was also known as the Spring of Nations, which culminated in the political upheaval of most of Central Europe — Poland, Austria, Germany, or what we would think about as Germany today, all had these big revolutions that changed the political fabric of society. So if you’re ever in Milwaukee, Wisconsin, and you’re looking for, like, old buildings and when they’re founded, they’re all founded in like the 1850s because when you have a gigantic revolution of workers against an aristocracy and it fails, well, if you’re in Germany, you started thinking that Milwaukee sounds like a really great place to move to. And that, of course, is what actually happened.
[00:07:02] But it’s then into 1871 after the revolutions of 1848 that we have a man by the name of Carl Menger. It’s important to understand that Carl Menger is a person who’s studying something that we now think of as economics in a rapidly industrializing economy, and he is starting to think about it in a very specific way because society had reorganized itself around industrialization. People were starting to have the conversation with themselves from, “Can I afford this?” to “How much of it can I afford?” because industrialization was creating a surplus of goods in the economy. And so nobody had ever seen something where you could choose to have more than one kettle in your home or somebody could choose to have an outfit for every day of the week. Textiles were suddenly cheap and abundant and all over the place. So we as humans had never existed in this context before. To us today, we take it for granted that we can just go on Amazon and make a whole bunch of choices in terms of goods and services or we can go down to the local big box store or whatever. But all of that was brand new. And then, like, and it was in its very infant forms when Carl Menger was starting to look at this and going, “Well, what the heck’s going on here?”
[00:08:25] And so when he started looking at how people were making decisions and how that was driving the economy as a total whole, he had several students because this is also the period of time where formal universities are starting to come up. And so you have areas of study, you have wealthy patrons who are funding these studies. This is actually after the civil war in the United States, and so we have this rapidly globalizing, industrially-driven supply chain and economy that’s emerging at this time. And so one of the things that, you know, particularly the crown heads of Europe — that is, all the kings and queens who existed before World War I — were getting real wise to was that an industrialized economy required an educated workforce. This is John Stuart Mill 101 from classical economics — that the government, which in this case was the aristocracy, if they wished to have a vibrant market economy, had to invest in the population on an educational level. So what Carl Menger is looking at is the results of a lot of that stuff, because he’s writing in 1871, whereas John Stuart Mill was making his argument in 1848. So the passage of time in the context of history is super important to understanding what becomes the Austrian school of economics.
[00:09:43] So now that I’ve taken 10 minutes teeing this up, let’s actually answer the question. What is the Austrian school of economics? So the Austrian school of economics is a way of looking at the economy, and there’s basically five foundational ideas that go into it. The first is the idea of methodical individualism. So the Austrian school of economics is very focused on the individual actors on a microeconomic level making choices that in aggregate — together — create an emergent economy that’s not directed by any individual person. It is the collective of individuals acting as individuals that create this emergent thing. This sounds like a head trip. But on some level, stop and think about it and how that would work. If we all decided that we wanted to wear pink sandals, the economy would start producing more pink sandals because they would fly off the shelves. There is a demand signal by our individual choices for pink sandals that is going to then incentivize suppliers to supply us with more pink sandals. This is the idea, the foundations of the idea, that all economic phenomenon could be traced back to individual actions, and therefore the individual becomes the supreme economic agent in this. That individualistic supremacy is the core guiding principle that’s going to go through literally the rest of this school. And we’re going to talk about pros and cons here, but for right now, I’m just going to, like, outline their ideas.
[00:11:21] Okay. So we start off with methodical individualism. The second idea that the Austrian school really hit on is this idea of subjective value and marginal utility. So I want you to just stop and think for a second about a particular good. So let’s think for a moment about a stapler. Okay? So you have a stapler and it’s sitting there on your desk and you can say, “Well, like, what’s the value of that stapler?” And it might be subjective because if it’s a red Swingline stapler, you might say, “Well, this has a lot of value to me personally. So the price for me, as somebody who loves his red Swingline stapler, is going to be higher than the person who goes, ‘We live in a digital economy. What are you stapling?'” And so that subjective difference between my perspective of the red Swingline stapler and the other person who doesn’t understand this movie reference that I’m making right now is going to dictate, on an economic price level, the value of that thing. It’s subjective. And what they’re really saying here is that when we look at the end product of something, it’s really the value of that thing is going to be the sum of all inputs. So that’s the raw materials, the time, the energy, the location, the opportunity cost, which we’re going to get to here in a second because that’s also an Austrian idea. But all the different inputs that go to making that stapler create this. And then, I, as the consumer, have to make the subjective call as to what all those inputs together would actually be in terms of price. This is the imputation theory of value. That is that the value is assigned by the sum of the inputs and the value of those inputs are inherently subjective.
[00:13:10] Another way you can think about this is gold. People will tell you that gold has intrinsic value. These people do not understand that gold is, as money, is a made-up concept because money as an exchange of value is a made-up concept, and it is our agreed upon fiction that gives one ounce of gold bullion any value at all. For example, you might say, “Well, you know, that’s really valuable.” But if you go down to the grocery store, they’re not going to accept it because it doesn’t actually have any legal tender value — unless, of course, it’s a U.S. Mint one, but then it’s not going to be anywhere close to the cash you had to actually pay to get that one ounce of gold. And more to the point, if you work in an economy where gold is actually the medium of exchange, well, now, it’s really valuable. But if I drop you off in the middle of the Sahara Desert and offer you one ounce of gold or one bottle of water, you’re going to choose the bottle of water because your context and your subjective view of what’s valuable to you in that situation has changed. That is what the Austrians are looking at.
[00:14:14] The second part about this that comes into this is the idea of marginal utility. Now, I want you to think about your favorite dessert. For me, it’s like Boston cream doughnuts. Like, I can’t get enough of them. I should never be left alone in a room with a box of Boston cream doughnuts because all that’s going to happen is Dylan’s going to get diabetes. But when I eat the first one, I’m going to get a huge amount of value out of the sugar rush and just everything about it. All the memories flooding back to me — there’s that subjective thing — of going to Dunkin’ Donuts with my grandpa and my first sips of coffee and all those other things. But after I finish the first one, the second one, well, I’m still going to enjoy it, but it’s not going to be nearly as good, and the third one is going to be even less good than that. And by the time I get to the fourth one, like, I’m kind of committed to eating all six if that’s how many is in the box, but I kind of don’t want to anymore. And by the fifth one, oh God, oh God, please make it stop, and the sixth one, well, I will pay you to eat it, right?
[00:15:11] So what the Austrians are looking at are saying, well, the actual value of that Boston cream doughnut is decreasing marginally based upon how many you have. That is that the first unit had huge value, but the sixth unit had next to no value at all. And what they’re looking at is they’re saying, “Well, this is why economies on a macro scale will create their own demand.” But on a micro scale and an individual scale — on the scale that matters to an Austrian economist — they’re going to look at this and go, “They’re only going to buy so many shirts. And then after that, they’re going to stop buying shirts.” So the economy then, in order to allocate resources efficiently, is going to have to find something else to produce in addition to shirts in order to make that next to first unit be really, really valuable. And so now what you’re having is this idea that not only is there subjective values, but the quantity consumed inherently changes how much value a consumer places on that good as time goes on. And that was new, because before this, we would have just said, like, a doughnut’s a doughnut’s a doughnut. But we didn’t consider what happens when you eat multiple donuts because prior to industrialization, I didn’t have multiple doughnuts to eat. So like literally this was a brand new idea because they had never seen industrial levels of abundance before.
[00:16:36] Okay. So the third concept is the idea of time and uncertainty. And so what the Austrian school did that, you know, was new at the time was acknowledge the uncertainty of economic calculations. That is to say that if I’m trying to buy a house — now we all in the United States think about, well, I’m going to go get a mortgage and we’re going to get the 30-year fixed mortgage. Well, an Austrian would say that’s bonkers to have a 30-year fixed mortgage because you have no idea where you’re going to be in one year, let alone 30 years. And then on top of that, the interest rate is fixed, which means you have now isolated yourself from market forces, which should have an impact on your decision-making. And so their whole idea was that capital and interest — that is, the money you can borrow versus the interest you have to pay — will change how you think about that. To put it really simply, it’s always better to have something now than something later. And the how much better between now and later is entirely dependent on the interest rate you’re going to pay on the money required to buy it. Now, if you think about credit cards, this is a prime example of where the Austrian school might actually be off the rails, but I want to put a pin in that because we’re going to come back to that a little bit later. But the, again, the idea here is that time and money, like money’s value, is actually subjective to the time in the calculation, right? There’s a way to quantify this. There’s an actual equation called the time value of money. Well, nobody had the idea that money and time had any relationship at all until the Austrian school pointed out that, well, it changes how you think about things.
[00:18:14] The other thing about this was is the idea of opportunity cost. So I want you to think for a second — and I’m going to share with you. When I was graduating from high school, my parents invited me to apply to a lot of schools. And they, you know, so I applied to UW – Parkside in my hometown. I applied to a couple schools in Milwaukee. I applied to University of Wisconsin – Madison. But that was all I did. So even in that choice, what I’ve done is I’ve dedicated myself that if I’m going to go to college, I’m now going to have to go to college in my home state close to where my parents are. What I did is I took the convenience of being close to my parents as the thing that was valuable to me and forewent the opportunity to have other experiences with other people in other parts of the country. There’s an opportunity cost. And when I was choosing between schools, one of the things that kind of plagued me was, well, I’m a young man. I’m going to go to school. I’m gonna have a great time. I’m going to party hardy. And if all goes according to plan, I’ll meet a young lady, we’ll get married, we’ll have kids. Well, the school I choose is going to inherently dictate what pool of ladies I actually have access to. If I go to school in Boston, it’s gonna be very different than if I went to school in Milwaukee, which would be radically different than if I went to school, say, in Thailand, right? So there’s an opportunity cost because I have to give something up to make the choice for something else.
[00:19:41] Another way you could put this is that when you choose careers, it’s all about the opportunity cost. When I was done teaching, when I realized teaching was no longer going to serve me and I was leaving, I basically narrowed down the entire sphere of things that I could have done to two options: be a certified financial planner or go get my CPA. And I had to make a choice because I could do one, not both. And so there was an opportunity cost to choosing my CPA. That is, I had to sacrifice the idea of the CFP. And in retrospect, I look back at it and if I could turn back the clock and do it all over again, the right call was probably to go be like a lineman or something. And again, I forewent that opportunity to go into the professions.
[00:20:29] So the idea of opportunity cost because it’s an individual choice that is therefore impacting the economy. So for, you know, like, for example, I went to school in Milwaukee. That’s what I chose. I chose Marquette University. So I went to school in Milwaukee and it turns out I, in fact, did meet the woman I eventually married. And that’s great, but that has an economic effect. And then, when we chose to go overseas, that also had an economic effect. And would I have ever chose to go live abroad for a while during the Great Recession if it hadn’t been for my wife or the woman who would become my wife wanted to do that? So I chased her, right? If I had gone to Boston and met some other woman and she had been like, well, let’s live off the grid in Maine, I might just be some dude with a really long beard wandering around in the woods of Maine. And that would also have an economic impact. So the opportunity cost that I paid bought me a set of opportunities that then I then had to go look through that had a realistic impact on the economy as a general whole because I’m one economic agent within the whole thing.
[00:21:36] Okay. The other thing that we should talk about with time and uncertainty is the idea of the business cycle. So it’s called the boom and bust cycle. Some people call it the —. You know, it as recessions, okay? So the boom periods are when the economy’s growing, everything’s great. This is typically when you hear politicians going, “No, no, no. We can’t have any more regulations or taxes because that’ll just kill the good times,” right? And so the economy is going up and it’s overheating. And people, you know, everybody has a job. People are making money. We’re starting to see some more inflation. And then, something happens. People make different choices mostly because of the fear of recession although the Austrian economists would say something differently. And then, you know, they all freak out. Everyone stops spending money. The economy crashes. That’s the recession. And this is when you hear the politicians going, “No, no, no. We can’t have any more regulations or taxes because that’ll just make the bad times worse,” okay?
[00:22:26] This business cycle theory that I just outlined is pioneered by a man by the name of Friedrich Hayek. And he was writing a book called The Road to Serfdom in 1944, and The Road to Serfdom essentially was talking about this business cycle. And so what Friedrich Hayek was doing was actually creating a defense of capitalism versus socialism because he was looking at these boom-bust cycle. And he was saying, “Well, the reason that these boom-bust cycles happen is because of the damn central bankers.” Now, if you remember some of my historical lessons on central banking, you know that the Federal Reserve Bank of the United States is like a brand new thing at this time. It’s not that old because this is 1944, and that thing didn’t get off the ground until the 1900s. So now what he’s looking at, he’s saying almost, you know, 30 years later going, “No, no. See, that central bank is going to create all these problems because the boom-bust cycle is created by monetary policy and government interference. And if we just did nothing, then we wouldn’t have this cycle.” So that’s Hayek’s idea. And what he’s saying is is that when we hit into recession, there’s the impetus to want to move towards a centrally controlled economy in his mind, which is socialism and communism, and that inherently leads to authoritarianism. And this idea that he had from the Austrian school has profoundly influenced the political understanding and a lot of the political discussion in the United States and in Great Britain since. The idea that like, oh, there’s a socialism thing here and that’s what leads to authoritarianism, this, of course, completely ignores all the other places where different forms of government also ended up in authoritarianism. But he’s making the argument that no, no, this is a unique thing and they were all part of the same compost heap, essentially. Whether or not he was right, well, that’s a little bit above my pay grade for a podcast I’m trying to keep under 40 minutes.
[00:24:17] Alright, so let’s go on to number four. Number four is entrepreneurship. The Austrian economists view entrepreneurs as the key coordinators of economic activity. That is, that they’re responsible for what they called the discovery and exploitation of opportunities to profit. That is a fancy way to say entrepreneurship is the driver of innovation and coordination. Full stop. This idea that entrepreneurship is central to the innovative economy was pioneered in 1973. And so, again, if you’re looking at this, you’ll know that the United States put a man on the moon in 1969. Now, 1973 is — a man by the name of Israel Kirzner — and my pronunciation is going to be terrible here, okay? So like, just bear with me. But essentially, what he was saying was, “No, no, no, no. All of that public-private partnership that we just saw with NASA that put a man on the moon? That didn’t happen. It was the entrepreneurial spirit that actually put the man on the moon.” And that the entrepreneurship is what’s creating the innovation and creating the coordination. And on some levels, he has a lot to say about it. But again, I will get back to some of the criticisms.
[00:25:29] So this is where we start to see — so we started off way back in 1871. By 1944, we have The Road to Serfdom, which is now starting to say that like, no, no, the business cycle should just be ignored and it’s responsible, you know, it’s due to government distortions and that, you know, socialism, communism bad, capitalism is good. Now, we have the idea that the entrepreneur is really the thing that’s driving the entire economy, which means that they are now — the individual is supreme, but the entrepreneur is even more supreme, okay? Which all of this culminates in what really can be termed — and this is the fifth pillar of Austrian economics — the supremacy of the free market economy. So Austrian economists, at the end of the day, are the strongest advocates in the world for free markets and minimal government intervention to no government intervention at all. They believe that the entire thing is individually driven by voluntary exchange in free markets, and that is the most efficient way and just way. They make a moral judgment here, too — because remember economics started as moral philosophy, so here we are making moral judgments again — that free markets are the most efficient and just way to allocate the resources. They’re generally critical of anything that they think distorts market mechanisms, such as price controls or subsidies.
[00:26:50] So like, for example, an Austrian economist would look at the United States and say, “Well, this is weird because you guys claim you’re a free market, but you subsidize oil.” So that it’s, you know, that gasoline prices are a fraction of what they would be if they were actually market-driven, which then creates distortions with, you know, the expansion of the suburbs, people buying monstrous trucks to drive around, which then creates more just, you know, more and more distortion in the market because now, people, you know, then the people who wanted to drive cars, they’re buying SUVs, which is causing more gasoline, which needs more subsidies, which pushes prices further down. Now, we have all these monstrosities driving around. Now, we see debts coming up. All of that an Austrian economist would say is the result of the subsidies the United States government puts on oil and gas production. They would also point out that the entire idea of social welfare is also creating a distortion in the market. If you give people money, it’s going to change how they think about their jobs, which means it’s going to change how they show up in the economy and so on and so forth. So in both cases — and I deliberately chose fuel prices and pickup trucks versus things like food stamps because at one point, I did have a pickup truck. And at one point, I was on food stamps. But they’re also political footballs. So I chose both sides because the Austrian school of economics will generally say, when it comes to these types of pet projects, particularly, you know, massive subsidies through government spending on the military, “A pox on both your houses.” They’re not necessarily friendly to one side or the other.
[00:28:25] But the idea that the free market economy is the most efficient and just way to allocate your resources puts individual liberty as the main economic driver. That is, the more free people are, the more the economy will allocate resources in a way that is efficient and just. Again, there’s that moral thing — just. And this is what we started to get to some thinkers. Like, Hans-Hermann Hoppe in 1989 was advocating that the free market economy could create a stateless society, a utopian vision; that if we just removed the government entirely — or to put it in a term used by his contemporary Ronald Reagan, shrink it to the size we can put it in a bathtub and strangle it to death — then a utopian society driven by individual choices, individual liberty would arise from that because of individual people making individual choices that creates an efficient and just allocation of resources. This is the foundations of something that eventually started being called anarcho-capitalism — the idea that the economy could actually rule the people with no need for government interference at all. Hayek, like I said, was a huge proponent of the free market economy. He said that all collective economies inherently lead to authoritarianism and that the boom and bust cycles were due not to individual corporations making bad choices or individuals making bad choices, but due to the manipulation of the money supply by central banks.
[00:29:58] Now, if you’re sitting here and you’re like, “Huh. Wow! That sounds like a lot of like one side of the political spectrum’s entire political philosophy,” well, you’d be right because they funded a lot of it. Like, this isn’t a mistake. Like, none of these things, basically since the founding of the classical economics, they’ve been picked up and used by people to justify all sorts of things. I mean, this is why it’s a philosophy because you can squint at it and you can see whatever you want to see.
[00:30:23] But my question is: what was it that the Austrians were looking at if Adam Smith was walking around in his market and looking at the results of industrialization and John Stuart Mill was walking down the street looking at the results of industrialization and these are his data points? What were the data points that Austrians were looking at that helped them develop those five pillars? And the answer is — this is a unique kind of idea of the Austrian school of economics — and that is praxeology. And I’m probably pronouncing it wrong. It’s basically the study of praxis. Well, praxis is a big word, so what does that mean? Well, praxis is literally a word to define action. It’s defined as the exercise or practice of an art, science, or skill. The art, science, and skill in this particular case is making your own economic decisions. And so the idea of the study of human action is core to the idea of the Austrian school.
[00:31:26] So in praxeology, there’s basically three different things we can look at. The first is human action. What is it that humans are doing? And we make the assumption that — based on our understanding — that individuals make purposeful decisions. That is to say that every individual is completely rational at all times and makes decisions based solely on their self-interest with all available information to them. And so in that way, we can never really tell the individual that they should or should not do anything because they’re the rational economic actor. All economic phenomenon is traced back to the individuals making choices based upon their subjective values and preferences. Period.
[00:32:06] Okay. I guess I can get on board with that. Let’s go to the second one. It’s a deductive approach. So praxeology is saying we’re starting from the fundamental axiom, okay, or the fundamental assumption, also known as an axiom or an a priori assumption, that humans act purposefully to achieve their goals. Therefore, all other insights are derived logically from this primary principle without the need for any empirical testing or observation. Well, that’s a word salad. So what this is saying is is that they’re going to start off — that Austrian economists are going to start off with the idea that all individuals are perfectly rational and they’re making decisions in their own self-interest for themselves to achieve their goals at all times, okay, and that all insights you can just merely derive logically without actually having to look at any data to go to the market and see if they actually do it or look at the results of any of those actions. That is to say that we can entirely lock ourselves into an ivory tower and just think really hard about what we think the humans are going to do based upon the idea that they act purposely to achieve their goals from a completely rational and informed place.
[00:33:23] Okay. I’m a little spurious on this because, I mean, humans are messy and money is emotional but, okay. Let’s — maybe they’ll explain it in the third. So the third idea here is the economic understanding. Praxeology is considered by the Austrian economists as the proper method to understand all economic behavior, and it focuses on this qualitative analysis rather than anything quantitative and emphasizes that the economic laws are universally true and not dependent on any time or place, which is weird considering that the only reason Austrian economics is observing what they’re observing is because industrialization occurred. That is to say that the entire calculus would be different under a different time and place, okay? But the Austrian economists would say, “No, no, no. Those are all still individuals making their own individual choices, and that’s why we see what we see,” right? Again, it goes all the way back here. So it’s qualitative, not quantitative. They do not have data. This is kind of a fancy way to say Austrian economists are really scared of mathematics, okay? And this is one of the things that drives me nuts about economics, okay? I have a minor in mathematics. I love math. It’s like my — like one of my favorite things. Yes, I know I’m weird and like half my audience just tuned out. But the graphs should have labels and units and stuff on them, but economists never do it and they put the axes in the wrong place and they just kind of be like, well, this is what the graph would look like if we had any data, but we don’t have any data, so we’ll assume, which is funny. And I will probably talk about this later. But when you actually get data, those graphs are made up. They don’t look like that. We now have enough data. We can do a lot of stuff.
[00:35:05] So praxeology is the idea that we start off with the assumption that all humans are rational and acting in their own interest; that we can logically infer everything without the need to actually go look at anything; and that, at the end of the day, everything’s qualitative and but it’s also still universally true in all cases for all people across all time. Okay. Praxeology is the foundation of how Hayek and all the rest of these guys came up with their understanding of the economic landscape that they were attempting to describe.
[00:35:39] That should change how people think about this because this brings us in to the criticisms of the Austrian school of economics. And you can tell — I’ll just show my hand. I’m a data guy. Like, people tell me all the time when they come into my practice, well, I was doing this for this reason. Okay, well, let’s stop and think about that. At the time, did you really believe that? Well, no. Okay. So you weren’t acting necessarily rational, even if you thought you were acting in your own self-interest. My question isn’t what people say they want. My question is what do they actually do that reveals what they want. There’s empirical evidence. In Austrian economics, so the first criticism is they don’t have any. There’s no empirical evidence to show at all that any of their stuff makes any sense in the real world. That is to say, when Hayek says, well, we just — we have more free markets, then things will get better. Can we test that? Can we go out and look at the data? If there’s a law that is preventing people from being free, and if I remove this law, the theory goes that I will then increase individual liberty, which will then increase economic activity, and therefore everyone’s gonna be better off if we remove that law and we go look at it. Did it? Well, the Austrian economist would say, well, don’t look at it because it doesn’t matter, right? There’s no empirical evidence.
[00:36:56] Criticism number two is that there’s this overemphasis on free markets as the idea that they will provide everything completely efficiently and justly. And I want to point out two things to you. Number one: I want you to imagine that you’re going to go to a new restaurant. So you get in your car. And you do what to figure out where the restaurant is? Chances are good you pull out your smartphone, and you open up Google Maps or equivalent. You put in the address, and it tells you exactly where to go. That entire app is predicated on the existence of something called GPS, that is, the Global Positioning System — the satellites in orbit that are going around telling us their time — and then there’s a huge mathematical computation that has to, you know, calculate in the law of relativity to figure out your position and the position of the restaurant you just put in to go from point A to point B. This is what’s called a public good because everybody in the world literally can use the GPS system, and it’s maintained almost exclusively by the United States government to multiple millions of dollars a day to keep that satellite system functioning. The free market would never put it up there for the same reason the free market did not provide lighthouses when we were doing shipping on the Great Lakes and on the coastal United States. Because why would I put up a lighthouse when anyone could use it for free? There’s no way to mask these GPS satellites because at the end of the day, they’re going to chirp and I can figure out which ones they are, so I can always reverse-engineer my position just because the satellite is actually there. And so an Austrian economist would say, “Well, if the market wouldn’t provide GPS, then there’s clearly no benefit to it.” But like, stop and think about just how much of our economy is dependent on GPS continuing to function, never mind all of the stuff in the United States military from cruise missiles to aircraft carriers to commercial flights. Like my God. But GPS was created entirely by government fiat. They funded it. Like, and it’s government-run to this day. No free market solution has ever come in to challenge GPS’s supremacy in that market.
[00:39:04] But this is the other thing that I think is really interesting and people will rightly point this out and Austrian economists don’t have a response to it. Your app is on a smartphone. And if you look at that smartphone, like really look at that smartphone, almost every component in that smartphone, from the battery to the glass to the transmitter to the miniaturization technology required to shove it all in that small place, started its life off as government-funded research. It’s one of these things about Austrian economics that they don’t like to look at because they’re going to focus on globalization and supply chains and all the different wonders of being able to ship components all over the world to create the damn thing. But when you ask them, well, where did the Gorilla Glass for that be pioneered? Well, it was pioneered for a government-funded purpose that was then taken to the public-private partnership and commercialized. And I referenced this earlier in the show about putting a man on the moon in 1969 and the economic benefits of the NASA Space Race program were huge. Everything from computers to the ability to launch satellites into space, which then gave us the GPS system, started their life off as NASA projects. If you know anybody who’s ever had breast cancer, chances are good the imaging equipment and software that was used to analyze where the cancer was in their body, it all started off as technology for the Hubble Space Telescope.
[00:40:31] So this is the overemphasis on free markets that people will point to this and say, “What about GPS? What about smartphones? What about all this other stuff?” So the Austrians don’t have a response to it, and they’ll admit this. They will always find some way to throw a smoke bomb and run away.
[00:40:48] Another criticism is the business cycle. So if you remember in The Road to Serfdom, Hayek said that the boom-bust cycle was caused by manipulation of the money supply by central banks. And therefore, if we remove the central banks and just let the market figure out what we should be doing with money, then we wouldn’t have a boom-bust cycle. Now, again, if you’ve gone back to my previous episodes, you know that there’s this period of time called the era of free banking, where the United States didn’t have a central bank; that different private banks would issue their own currencies. I mean, it was exactly what Hayek was proposing that we do. So the question that I would have would be: were there — did we have that — was that period of time just the halcyon days of no recessions, no boom-bust cycle, like Hayek predicted? And the answer is absolutely fucking not. There was like a panic every seven years. People lost jobs. Entire states went into depressions. Like, it wasn’t great. And if you look at anywhere in history, central banks are a relatively new invention. We’ve been having boom-bust cycles eternally. And there are countries today that don’t have central banks who still have boom-bust cycles. Hayek had no empirical evidence for what he said, and he was close enough to that period of time that a couple of books would have explained to him why this is not exactly what he thinks it is.
[00:42:13] Now, this is not to say that the other extreme is true; that central banks are totally good and they don’t cause boom-bust cycles. No, that’s not true at all. Central banks do, in fact, influence boom-bust cycles. We actually have equations that we can actually look at to predict this, right? But Hayek didn’t. He only had his thought experiment through praxeology. And this also ignores that from 1933 with the passage of the Glass-Steagall Act and the establishment of the FDIC through the deregulation errors of Ronald Reagan in 1986, we had no major banking or financial crisis due to the regulations. And it’s only after we removed those regulations that we went back to what we’ve been seeing for the rest of the history of the United States, which is a financial crisis give or take every 10 years. And to list them off, it started in 1986, then we had 2001, then we had ’08, and now we have now. So you can do the math.
[00:43:15] Okay. Other criticisms — non-falsification. When the Austrian economists come up with an idea, well, they just posit the idea. I can’t test it because inherently, the idea is founded on the idea that we don’t look at; that we don’t test data. So like, I can never say it’s wrong because I’m making a philosophical argument, not an empirical argument.
[00:43:39] And last but not least is the role of government — their role in market failures, public goods, and stabilization efforts. Market failures happen. And what the Austrian economists would say was that market failures happen as a result of government interference without actually looking at all the other market failures that we have and how governments actually step in to correct market failures. The lighthouses are a great example of this. It is a market failure that lighthouses were not provided to make shipping commerce safer, more reliable, and quicker. And then, when the government stepped in, they corrected that market failure. GPS is fulfilling a very similar role. And the role in healthcare in most of the developed world is another example. Public goods is another great place to look at. And, you know, would you look at how do we manage our natural resources. Well, the government does a fairly decent job at that, and national defense is another part of that. So those are the criticisms of the economic school.
[00:44:38] I want to leave you with this idea. Yeah, I went way over my time and that happens. But for my money and what I’m attempting to do with this is to really illustrate all of the different pieces of how this thought is impacting your life because it’s pertinent to your financial situation. You might have heard me say a lot of things that sound like a lot of politicians, and you would be correct because a lot of these economic theories form, foundationally, political positions within the political spectrum. And that’s important to know because if you’re taking a political position based upon praxeology that says, “Well, I can just lock myself in an ivory tower and think my way there without ever needing to go look at how this was actually impacting humans,” you might be a little more suspicious of it than somebody who has rigorous data and real-world examples and people’s lives to tell you about how their theory or thought works.
[00:45:45] That’s my show for today, ladies and gentlemen. Thank you so much. If you made it this long, like, send me a note on Instagram and just tell me. I would really love to know how many people made it to the end. And if you’re like, man, I just learned a ton, do me a favor, leave me a rating and review, and share the content with somebody. I want to grow this. I’m going to be going through a rebranding effort here that I’m really excited about. I’ve got workshops coming. And if you’re looking for more Dylan, you would like some more of my opinion and maybe a female opinion at the same time, I have a lovely podcast that we just launched called Vikings and Muses. You can find it on Spotify. It’ll be coming to other platforms here very soon. That’s Vikings and Muses with the one and only Anya Shakh. And it’s amazing. I’d love if you’d listen to me there, too. Until next time, I’ll see you on Tuesday. Go out there, have yourselves a great weekend, be safe. I love every single one of you. Take control of your lives. Go live free.
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