The Sect of Austrian Economics

"[Sociologist Ernst] Troeltsch distinguished between church, sect, and mysticism as primary types of religious life. The church is more peremptorily inclusive and achieves greater accommodation to worldly institutions. The sect demands voluntary commitment from its members, is more perfectionistic in its aims, and often adopts a critical stance toward existing social arrangements..." -- Donald A. Nielsen

I recently took the long form of the Are You an Austrian? quiz, which is about whether I agree with economists like Ludwig von Mises and Friedrich Hayek, not about whether I have the same country of origin as the new governor of California. I scored a 78.

I would have scored higher had I been trying to answer according to what I understand the Austrian School to believe. There were only one or two questions where I was a little unsure, and depending on how well I guessed on those I would have gotten somewhere between 90 and 100.

The reason that I only scored a 78 is that I took the title of the quiz literally ("are you an Austrian"), so I answered with my own beliefs, knowing that they diverged in some cases with the Austrian School. For example, I subscribe to the quaint notion of national defense. When tyrants and would-be tyrants ask about our President, as Stalin once asked Churchill about the Pope, "How many divisions does he have?" I would like the answer to be "more than enough to smash you!" The Austrian School thinks that you do not need a government to provide national defense. The Mises.org weblog is as eager as any Dean Democrat to see the U.S. fail in Iraq.

I found it interesting that the "Are you an Austrian?" quiz does not distinguish between knowledge of doctrine and belief in doctrine. To me, this is symptomatic of a sect, which focuses on doctrinal purity above all else. For a sect, to know is to believe, and to believe is to know.

A church, in contrast, tries to be as inclusive as possible. You can be a member of a church if you only subscribe to some of its beliefs, but not all of them.

The Austrian School offers a perspective on property rights, markets, and economic growth which I find highly congenial. It emphasizes the incomplete information that any individual or organization has. It says that private ownership of property and free markets allow the sort of trial and error to take place that enables learning and economic growth. As businesses compete, efficient technologies survive and inefficient processes fall away.

This introduction by the economist Deborah Walker traces the origins of Austrian economics to 1871, and points out that the major works of Mises and Hayek were written from the 1920's to the 1940's. However, in today's information age, if the Austrian school did not exist it would have been invented. With our economy dominated by competitive innovation, in computers and consumer electronics, biotechnology and medicine, and other fields, the impossibility of central planning seems evident. Today, John Kenneth Galbraith's claim in his 1967 masterwork New Industrial State that "The modern large corporation and the modern apparatus of socialist planning are variant accommodations to the same need" sounds as though it could be the beginning of an indictment of large corporate dinosaurs, with an inability to tolerate decentralized innovation. For Galbraith, of course, it meant the opposite -- he was arguing for the inevitability of the convergence of socialism and capitalism.

Much of what I believe about economics is based on the concept of imperfect knowledge. Imperfect knowledge implies that as we gain knowledge, our standard of living improves. However, we still have much to learn. We know how to treat strep throat, but we do not have a cure for cancer.

As a process for learning, free markets and private property are extremely valuable. The market system provides an incentive to experiment and to adopt successful experiments. To me, this core insight is the key contribution of Austrian economics.

Given that Austrian economics focuses on The Knowledge Problem and Competition as a Discovery Procedure, which of the following would you guess would be a metaphor for an Austrian explanation of booms and busts in business investment?

(A) Imagine a restaurant in which the menu includes some items that can be cooked quickly, using stir-fry and microwave techniques, while other dishes such as stews and roasts require longer and more roundabout cooking methods. In a well-functioning restaurant, the extent to which consumers are hungry now or are willing to wait determines the mix of food that is prepared. The waiters deliver the right information to the chefs about how much of each type of meal to prepare. However, like a bad waiter, a central bank can enter the picture and deceive the chefs into thinking that people want more stews and roasts than they truly desire. This leads to a boom in long-term cooking, followed by a bust later on.

(B) Imagine a restaurant in which the chefs have many new recipes to try. Most of them will not be popular, but some will represent successful gastronomic progress. When the chefs become optimistic, they try many new recipes, which means a boom. When the chefs become risk-averse, there is a slump.

For reasons that baffle me, the Austrians prefer explanation (A). Explanation (B) is closer in spirit to Keynes, the arch-enemy of the Austrians.

My experience both in business and in economics leads me to prefer (B). I have never been in a business situation where a decision boiled down to a choice between two projects with known, predictable rates of return, with one project short-term and the other project long-term. Instead, the typical challenge has been to guess whether a new business idea will be successful or not, given uncertainties about feasibility, marketing, technology risk, and other factors.

As an economist, I believe that there are many competing explanations for booms and busts in business investment. There are too few real data points to provide conclusive evidence for one of these hypotheses. However, I saw the Internet Bubble developing, I predicted its demise, and I predicted its economic consequences, all without ever thinking of the problem as excess liquidity supplied by the Federal Reserve for which the Austrians blame the bubble. Today, the Austrians believe that monetary policy has been too expansionary and that another crash is imminent. Instead, I believe that monetary policy could have been more expansionary, and a vibrant economic recovery is under way. Time will tell.

The future of Austrianism is uncertain. As a sect, insisting on adherence to all of its beliefs, the Austrian school will remain a committed but eccentric group.

The real need today is for an Austrianism that is more like a church. This would be a movement of economists that shares many beliefs but differs on others. I believe that information-age economics with many Austrian features will emerge. I am not sure whether today's Austrian sect will be pleased or put off by that result.

I Thank God for anyone with such a compelling handle. I am rereading several bio's of Thomas More & also looking at many other things Medieval-some heads did once belong on spikes.

Thomas More's own father, John, was among those responsible for building & maintaining London Bridge. They boiled the heads so they might last longer. His daughter was finally allowed to retrieve her father's after, after about ten days.

Try the very useful text on the English Peasant's Revolt ( 1381 ) & the origins of the Freemasons-Born in Blood, by John J. Robinson ( they were the Knights Templer who escaped the 'roundup' by the Pope & the French King who both wanted their great wealth ). Interestingly, torture was not allowed in England-though very nasty execution was standard in many cases. The Knights Templer had advance warning of the sweep, in England, & they disappeared to evade the action of Church & Crown. Many had escaped from the Continent-they even had fleets of ships. Thus, they had to 'go underground' in England. Ancient French was a clue to some Masonic words & was a thread for the author to follow. The author of the book was an authentic medieval scholar, covered many other things-including the Crusades in fine & succinct detail-I had not understood several aspects & now may. The book was really very useful. The Masons all appreciate the work-I think he joined them, after doing the research ( he actually went to England for research on the text )! I would also join them if I had time. I am gone most weeks.

Your analysis of Austrian Economics is interesting, I guess I don't see the 'sect' part where people are excluded if they happen to disagree of a few points. They may be heatedly debated, but are still free to refer to themselves as 'Austrians'. All Austrians (economists not the state) do not agree with each other on every point - that makes them sound like a bunch of mind-washed idiots and would be an impossibility in addition.

BTW: I was proud of my 98% score.

In regard to your question regarding Booms and Busts, I can tell you why I would choose (A). First off the economy is made up of and extremely diverse population of producers (businesses) and consumers. the success or failure of one business in one sector has extremely minor effects on other businesses in other sectors. So to have 'recurring cycles of cross-industry booms and busts' tells me that there has to be a commonality between all businesses to be affected all at the same time. The only economic commonality I can see (with my limited intellectual and educational experience) is the core engine of the money. The fact that the money supply and all aspects of its use and creation is controlled by a single entity and this entity has definite political affiliations makes the central Bank/federal Reserve/entire Fiat Money System suspect in my mind.

Besides this one centralizing theme, I believe that economies can be influenced by large catasrophies that effect large areas and populations, this could be anything from extreme weather conditions, to a aberrent increase in tornados/hurricanes/wildfires, to a meteor impact, or war. Other things that could influence economies are sociological factors that influence purchasing decisions like fads, holidays, religious events, or anything else that can influence peoples thoughts across the board.

Yes, businesses will always be failing and succeeding, BUT to have such a large amount of businesses experience the same problems at the same time on a recurring basis is highly unlikely, in fact, without an outside influence, I would say that it would never occur 'naturally' to the degree that we experience and quantity we experience.

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