Monday, November 1, 2010

The Fringe, Part III - The Austrians and the Pseudo-Austrians

Lastly, we come to my little neck of the woods -- the Austrian School.   What we have is a well developed and comprehensive theory of money and economics that contradicts a lot of what the other schools say, or at least, will acknowledge is true.  And based on that theory, we believe that the money system as it stands is illegitimate, or at least, a complete repudiation of what we would look for in a decent system of money.  It's not just a case of 'bad management.'  It seems to us that almost all of the problems we are seeing today are the result of our screwed up money system, and the fact that the whole thing is designed on the basis of theories that are completely wrong.  Nothing's gonna change so long as that system stays in place.  That's probably the most controversial thing that separates us from everybody else. 

The Idealists and the Philosophers

I find that there are two principle varieties of Austrians -- the ones who are mostly persuaded by it as an ideal, and the ones who are mostly persuaded by it as a philosophy.  That is to say, people usually either are attracted to the school principally because of what it has to say about 'how things oughta be' -- hard-money, extremely free market and libertarian, -- or because of its theoretical treatment of the subject of economics.  Of course, if you've bought into one, you've probably bought into the other at least a fair bit, but I find that most people are more committed to one side of it and tend to focus on that side of things.  Of the two approaches, most are in the first camp -- the ideals.  I'm in the second.

That's lucky for me in some ways, but not others.  You see, I didn't make it here easily.  I saw the 'ideals' of the place as rather frightening in their extreme, and like most, I took a sort of sneering, arrogant attitude to it at first as it was out of the mainstream.  But that's just one of the tools of the mainstream -- it plays on our natural evil, tries to use the tribal instinct of people and arrogance to keep them from looking at ideas outside of its dominion.  It was a long time before I could choke the thing down enough to give the theory half a chance.  And I am ashamed to admit that the reason I finally gave it a hearing was that I found out one of its theorists won a Nobel Prize -- making him at least partially mainstream.

Anyway, as for what this has to do with you, and the fringe, and everything else, is this.  Often as not, a person who is already quite libertarian leaning can look at the ideals of this school and come right on in naturally.  If he's already that libertarian leaning, he probably isn't bothered much by the fact that by identifying with the school, he identifies himself as part of the fringe.  As a libertarian, he was already part of the fringe, politically anyway.  Oftentimes these people do not have all that great an understanding of the theory itself, but they still identify with the school on ideological grounds.  He accepts the theory, even though he may not actually understand it all that well. 

You clearly are not one of those people, else you'd already be warm and comfy inside our little corner of the fringe.  You're most likely more of a mainstream sort who has become upset with how things have gone and are just poking around out here to see what you can find.  You may be a Tea Party sort, waffling between the 'bad management' and the 'bad system' hypothesis as to what's gone wrong and what to do about it.

The Money Instinct

I would tell you this -- if you start to really look at what you think about money and how it's supposed to work, you'll find out that the Austrian theory agrees with you, even if you can't agree with it's rather extreme libertarianism at first glance.  Now, I'm not talking about the highfalutin' nonsense they teach you about stable prices and unemployment and aggregate demand jibber jabber in school, but the deepest commonsense instincts you just know to be right or the universe won't make any sense.  And if you know that has to be right, you'll start looking at the rest of it, and you'll see that it must be right, too, even if it looks like it shouldn't be at first.  Before you know it, you'll be slapping yourself for not joining us sooner!

Now, this isn't the place for an exhaustive regurgitation of the Austrian school's whole philosophy.  I'm just showing you around, and besides, exhaustive regurgitation doesn't sound too appetizing anyway.  I'll just recall for you one little insight that happens to be one of the key arguments that persuaded me.

Autobiography of an Austrian

One of the key questions that had me baffled for years was how in the world it was that a country like China could continually export goods to the US without receiving much of anything in return, and could continually produce practically anything at a lower price than any other place on earth.  That naturally led me to try to understand how foreign exchange markets work, and from there to the central banks and their involvement in the currency markets.  Over and over I read how 'if country A does X, the effect will be Y, but also Z.  Naturally, the thing to do here is W...' and on and on, like a freakin' game of chess.  This, says the mainstream in ever-so-many words, is why it is perfectly legitimate and reasonable that all this is going on, and by extension, practically anything can go on and the associated transactions rendered legitimate so long as the central bank pulls the right levers and pushes the right buttons.  All possible transactions are legitimate -- it's just a matter of what other transactions are necessary to cough up that legitimacy and how the economic managers want things to look.

That didn't sit well with me at all, and I imagine that it wouldn't sit well with anybody who investigated the matter. It seemed to me that any particular transaction was either wealth-generating or it wasn't, independent of what accounting entries some distant third party was making on a ledger somewhere.  What did he have to do with it?  Exchange was a matter of the two parties involved and the mutual benefits that each expected the exchange to produce.  If a third party was pushing exchanges through that wouldn't have occurred otherwise, it must've been creating an artificial profit to incentivize those trades.  Therefore, says my nagging common sense, the trade and the transactions were illegitimate.  Based on the extent of the activity I had been reading about, there was an awful lot of illegitimate trade going on with China, and an awful lot of artificial profit changing hands. I figured there'd be hell to pay for it someday, and it turned out a few years down the road, I was right.  You can't account yourself to greater wealth.

Hard Money

My instinct proved to be correct, and I recommend that you trust yours and follow where they lead.  Think about this one for a minute.  When you say something like 'balance' sheet or cash 'flow' statement, you assume some very particular things about money. Turns out those assumptions make perfect sense and are supported by the facts.  'Flow' and 'balance' only apply usefully in an accounting sense to things that are of fixed and definite quantity over time.  Farmers don't talk about their crops 'balancing' in the field.  They talk about 'growth' and 'yield.'  A farmer might 'count' his crop for sure, but 'balance' has nothing to do with it.

Why use words like 'balance' and 'flow' on money if it has all the substance of pixie dust?  What useful information would pixie dust 'flow' tell you?  Yet it was pixie dust money that let China's trade relationships turn into a circus act and has snarled up the whole global economy.  A bureaucrat waves his magic wand and -- presto!  Instant profits!  Whatever cockamamie idea of a trade system you can dream up is just splendidly splendid. 

The world today operates on pixie dust money systems, and both your common sense and Austrian theory tells you it's a stupid idea.  Austrians object to the practice of lending against reserves that fraudulently increases the supply of money, and to the existence of central banks and their money-fudging accounting schemes.  We say that markets should determine what to use as money on their own, and trust that actors will choose something that will be as reliable as possible as the store of their precious wealth -- and therefore easily counted and not fudged. We certainly don't trust government with it, and we have some pretty solid theories about what happens when they do get it and start increasing the money supply.

Instinctively, you know just as well as us Austrians do that money should be hard and fixed and consistent, that it must be for accounting to be any kind of meaningful activity and not just a passtime for numerical masochists.  Why bother to do it at all if the money you do it with can disappear and reappear and multiply and divide itself with the stroke of a banker's pen?  Presto, chango!  Fungible reality!  Except that it isn't.  The fancy rhetoric about 'stable prices' and 'sufficient credit' is just the meddling bureaucrats incantation to convince people that a real, tangible gold coin in their hand is actually an unreliable thing and they should trust a fungible piece-of-trash paper dollar or some pixie dust in a bank account instead.  The bureaucrat's own trash dollar and pixie dust, no less.  People with their heads screwed on straight really ought to know better.  Anyway, that's who we are, and obviously I think this is the place to be with the answers you are looking for, or else I wouldn't be here.

The Pseudo-Austrians

One word of warning, though.  I told you that an awful lot of the adherents of the Austrian school are really mostly here because they are libertarian idealists, and not because they've necessarily taken the time to really look into the theory and understand what it says?  Well, if you decide to hang around, you'll find that a lot of the people out here are not always 100% straight on it all, or even maybe 50%, and have all kinds of other ideas knocking around between their ears that don't always make any sense.  I'd call them pseudo-Austrians.  More than a few are deflationists, and some of them are saying all kinds of weird things that have little or nothing to do with the actual theory or misunderstand it.  But that's okay, I'm glad to have them at least mostly in our camp, even if they do cause some confusion.  And all of us screw up every now and then, even me.  Best be careful where you pick up your ideas and check your sources is all I'm saying.  But I suppose that's always a good idea, especially out here on the fringe.


One last thing before you go.  Since the whole market-meltdown-end-of-the-world thing started, there's been a resurgence of interest in a really, really old debate -- the practice of lending at interest.  'Usury' is the fancy name for it.  This is a really, really old controversy, and most of the objections are traditionally religious or moral in nature, which means the thing is a really hot potato.  But with the mind boggling debt pyramids erected by the financial industry of recent years teetering on collapse, some are beginning to argue that the thing is also a practical problem as well.  Thought I'd take a moment to give you my two cents.

It seems to me that the practice of charging interest on a loan has its roots in a natural economic law -- what the Austrians call 'time preference,' and most others call things like 'delayed gratification,' though that's not quite the same thing.  If you offer a guy $100 today or $100 a year from now, it would seem universal that any guy you encountered would choose the $100 today.  That is a simple matter of time preference -- the value placed on having a good today rather than in the future.  If you want to put a money price on this value for any particular person, you'd have to find the minimal value X such that the same person would choose $100 + X dollars on that future date instead of $100 dollars today, given the choice.

Time preferences are the reason behind the charging of interest, as a potential creditor would like to have his money today rather than in the future and will want to be compensated for this if he's to make a loan.  Since time preference is such a fundamental aspect of economic behavior and would seem to be something of a 'natural law,' it would surprise me if it really were something that should be morally or practically forbidden.  Seems to me you'd have a heck of a time trying to stamp the practice out if you ever tried, kind of like banning sex, or gravity maybe.

As for the religious side of it, depending on just who you follow, there's at least a zillion opinions on the thing.  For those looking to the bible for guidance, there are several old testament verses that appear to condemn the practice, but there's also verses that appear to be okay with lending.  In the New Testament there's the parable of the talents, with Jesus' God-character reprimanding a certain servant for not lending out his money and at least collecting the interest on it.  C.S. Lewis seemed to think that lending at interest might have been responsible for a great many evils of his day, and appeared to tentatively frown on the practice.  I read a good bit of C.S. Lewis, but when it comes to the topic of economics, I think he didn't have things together quite as well as on other topics.  But that's understandable as he lived in very confusing times, economics wise. 

I tend to think Gary North has the most sensible opinion -- that lending at interest is generally okay, but interest should never be charged to 'a brother in need,' as in, somebody in actual trouble.  Somebody in trouble should just be helped and not viewed as an opportunity to tie the poor guy up in obligations to extract his wealth.  Many stories of such behavior can be found in the old testament, where some sorry SOB lends money at exuberant interest to somebody in real trouble, knowing full well the guy's desperate and won't be able to pay.  The SOB's really just interested in seizing his property, and maybe enslaving him, which was the accepted recourse of an unpaid creditor back in those days.  Seems to me that the behavior was probably common and likely the principle motivation for the passages condemning 'usury.'  But as for regular old investment, I don't think those passages apply, especially considering the parable of the talents.  But I could be wrong.

And as for the debt pyramid, I'm not sure what anyone expected to happen with the banks forcing interest rates down below the market rate, and using fractional reserve accounting to ensure that the supply of lendable funds was effectively limitless.  If money was being lent just one man to another, it would take awhile for the borrowed money to wind up relent once it'd been spent, because it would have to find a new owner with the inclination to lend.  Debt would only build up slowly, since money supplies would always be flat, and the debt pyramid would have to be built up 'linearly,' so to speak.  But with practically all money sitting as deposits in banks, primed and ready for lending and multiplication, it would seem quite logical for the thing to go exponential in nothing flat.  So, it seems to me the practical problem is the money, not the debt.  Fix the money, and the debt problem takes care of itself.

But what do I know?


Well, that's all I've got for ya'.  Covers just about all I know of these parts.  Hope you've had an interesting tour.  Yes, its a bit confusing.  Intimidating, that too.

But don't let it get your head spinnin'.  Just use your common sense -- don't listen to people who base their theories on trash money, pixie dust accounting, management by bureaucracy, and more power for the government.  You may not get that next Nobel Prize, but you'll most likely steer clear of the worst of it.

Take care now, and I hope to see you around!

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