The Austrian School of Economics

oldfart

Older than dirt
Nov 5, 2009
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A poll of the delegation revealed enough interest to support a real discussion about the Austrian School. Most of those expressing an opinion are critics of the Austrians but I am sure that some adherents will want to join the discussion too. I'll start things off with a few comments which I encourage responses to.

First I believe we need to park current political ideology at the door. Most posters will admit to some good things and some bad things about the Austrian School. So apologetics, flame wars, and defenses of political ideology won't advance the discussion. This is about economics. That said, people get very passionate about their view of "homo economicus" and their view of the world. I anticipate some chiding (some of which will directed at me!) to keep things on track.

Second, we are going to have to agree on a working definition of the "Austrian School". As a first approximation, I think it starts with Carl Menger, Eugen von Böhm-Bawerk, Frank Fetter, and Frederich Wieser at the turn of the twentieth century. It includes the next generation taught by these individuals: Friedrich Hayek, Henry Hazlitt, Ludwig von Mises, & Joseph Schumpeter, continuing to Murray Rothbard and contemporary living authors.

Prominent areas of inquiry include: Austrian business cycle theory, creative destruction, the "Economic calculation problem", roundaboutness, the subjective theory of value, methodological individualism, and theories of interest, inflation, mal-investment, and depression; and of course the Marginal Revolution. Many of these ideas have merged into the neo-classical mainstream; so contrasting the Austrians as different in all respects from the mainstream neo-classical school is a fallacy committed by authors on both sides.

A controversy has arisen over Hayek, who many count among the Austrians because of his writings on the economic role of government, but others point to his acceptance of most of the neo-classical model. Today the Austrian School seems to have two branches, the Hayekians and the Rothbard/Mises branch.

So I invite everyone to tell me what I have missed and to answer the question: "Do Hayek and Rothbard/Mises represent the same school?"

NEXT POSTS: Origins, naming, and capital theory of the Austrian School.
Utility, demand, and the Marginal Revolution.
 
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Creative Destruction is the key concept for me:

Increased Productivity = lower cost per unit of output

Deflation = lower cost per unit of output.

With any new product productivity rates will increase until market saturation or more rarely physical limits are reached as in ICs are nearing the non-ionizing limits of lithography and when that point is reached either another technology or radically different design will be needed to lower the cost of circuitry.

As long as neither of the above conditions are met it is provably more profitable to borrow up to a self amortizing rate debtload that will be paid off at market saturation. Only saturation level has been underestimated in electronics since at least de Forest in the 1910s. So massive bubbles in radio, TVs , mainframes, minis, PCs, laptops, cellphones, smartphones and tablets have been the norm since the US allowed commercial radio in I believe 1921.

In contrast commercial aerospace saturation levels have been overestimated for just as long but that just leads to individual bankruptcies and very little destruction of capital in the rest of the economy.

The difference is that overestimation is discovered fast and early, underestimation is discovered when new breakthroughs create a bigger saturation point and either sink the sub-industry that is now dominant or expands it exponentially.

The stabilizers of Fisher, Keynes and Friedman ignore productivity driven deflation.
 
If the Stimulus had been in effect, we would still be making buggy whips.
 
If the Stimulus had been in effect, we would still be making buggy whips.
True but what is the relevance? Most economic policy is at heart military policy and vice versa.

Take for example nuclear disarmament policy:

Nuclear weapons are a series of expensive, interlocking, complex and failure prone systems.

The US is known to have developed two non-nuke but nuke comparable weapons systems with high reliability: Fuel Air Explosives and hypervelocity missiles.

US assurances to the contrary converting any US missiles to FAE or more likely the low maintenance low cost HV alternatives of the same or greater megatonneage is definitely possible. That is why we are stuck with high maintenance, high cost nukes.

The US could in fact produce at lower cost than today's nuke arsenal a first strike capability against the world. There ain't no missile defense against a sharp stick going mach 12 except maybe the sonic wave of another sharp stick going even faster in the other direction.

The US might have that capability of missile defense but no one else does. That capabilty is the result of a relatively free society.

So, there are very strong reasons for a Darwinian economy that have nothing to do with economics per se and is the reason why many otherwise authoritarian statists support a generally free market.
 
Creative Destruction is the key concept for me:

Increased Productivity = lower cost per unit of output

Deflation = lower cost per unit of output.

With any new product productivity rates will increase until market saturation or more rarely physical limits are reached as in ICs are nearing the non-ionizing limits of lithography and when that point is reached either another technology or radically different design will be needed to lower the cost of circuitry.

As long as neither of the above conditions are met it is provably more profitable to borrow up to a self amortizing rate debtload that will be paid off at market saturation. Only saturation level has been underestimated in electronics since at least de Forest in the 1910s. So massive bubbles in radio, TVs , mainframes, minis, PCs, laptops, cellphones, smartphones and tablets have been the norm since the US allowed commercial radio in I believe 1921.

In contrast commercial aerospace saturation levels have been overestimated for just as long but that just leads to individual bankruptcies and very little destruction of capital in the rest of the economy.

The difference is that overestimation is discovered fast and early, underestimation is discovered when new breakthroughs create a bigger saturation point and either sink the sub-industry that is now dominant or expands it exponentially.

The stabilizers of Fisher, Keynes and Friedman ignore productivity driven deflation.

I've always had a problem with "creative destruction". It has a great plausibility based on some engineering metaphors, but in practice it tends to be a very plastic concept. Start with the assumption of technological innovation. We produce trucks using a certain set of technologies with a certain cost structure. A new technology becomes available that cuts the cost of a truck by 10%. Creative destruction tells us (correctly) that given enough time, we destroy all of the equipment embodying the old technology and produce only the new technology of capital goods. So far so good.

But several peculiar things seem to happen. If the new technology is only marginally better, or if the anticipated advantages turn out to be problematic, the two technologies will co-exist for some time. If not there would be no need for an automotive aftermarket industry! Most businesses have the last 10-20% of capacity produced by older technology which has not yet been scrapped. This is why costs go up as they approach capacity limits. So at any one time we have layers of technology, and sometimes it is hard to to label the most recent as the best when consumer tastes, recognition of externalities, and newer types of technology change. None of these things is linear.

As a result, I have always regarded creative destruction and "roundaboutness" as second order concepts. The Austrian Business Cycle Theory has to get rooted in something else to remain relevant.
 

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