A Critique of Austrian Economic Theory

[Prinskaj]

I have been starting to look into the different schools of economic thought, and I therefore ask if anybody has a critique of the Austrian school, of course from a leftist perspective.

[Tim Cornelis]

By from a "leftist" perspective I presume you mean revolutionary leftist. This would be the same criticism of capitalism in general.

Post-Keynesianism tends to be most contrasting with Austrian school. But I don't know of any post-keynesian essay that attacks Austrian school (although I'm sure they exist).

The closest thing I know is An Anarchist FAQ, section C:

http://anarchism.pageabode.com/afaq/secCcon.html

[danyboy27]

It doesnt work.

Market have the tendency to blow themselves up in order to make more profit, they dont care about the structure on the long run, that why governements are for in a capitalist system, to protect the market from crashing down.

Even with the governements regulating the hell out of capitalism we got continuous economic bust and crashes threatening the livehood of millions of people everytime, could you imagine how hellish it would be without the governement?

[Tim Cornelis]

It doesnt work.

Market have the tendency to blow themselves up in order to make more profit, they dont care about the structure on the long run, that why governements are for in a capitalist system, to protect the market from crashing down.

Even with the governements regulating the hell out of capitalism we got continuous economic bust and crashes threatening the livehood of millions of people everytime, could you imagine how hellish it would be without the governement?

That is not really a compelling argument. If you were to tell this exactly to an Austrian schooler he would not be persuaded--if only it were that easy. In order to convince them you need to study their theory, and criticisms thereof, so you are accurately able to explain what the flaw in their theory is.

[Ocean Seal]

Well to begin with it's probably important to keep in mind that Mises is typically talking about the problem of allocating what he calls 'higher order goods', or the factors of production, not consumption goods, since he admits that it's not unfeasible for a socialist economy to work out whether it wants so many litres of wine, or so many barrels of oil, and indeed in small economic units (Mises cites the example of a small houselhold) where the process of production is not highly developed, rational economic calculation is not impossible without money. The problem which Mises' percieves emerges in societies with advanced processes of production, where there are many different uses to which different resources can be allocated in the process of production.

In such an advanced society it is necessary to make decisions about the allocation of productive resources in order to produce goods in the most economically efficient way. Within capitalist society, this is done through the mechanism of profit. Money acts as an objective unit which values goods in terms of prices, which are established through the free exchange of goods and the interplay of subjective evaluations, and economically efficient ventures will be those which yield a high profit and allow the business to keep running, whereas economically inefficient ventures will yield low profits and be driven out of business.

However, in the socialist economy, by contrast to the private economy, productive resources are owned and allocated to various uses by the community as a whole. Since there is no exchange of the productive resources, monetary relationships cannot arise in the sphere of production, and even if they did apear in small isolated instances in the sphere of consumption, Mises notes that the continued collectivisation of the means of production would safegard against the elevation of money back to the same status which it enjoys in capitalist society. Since money and the profit motive are gone however, the question is what new measure will be used to allocate resources in an economically efficient manner. Mises argument, in a nutshell, is that there is none. Without the profit motive, the socialist commonwealth will have no initiative to upgrade it's production methods to more resource efficient methods, economic rationality will dissapear and chaos will reign until the re-introduction of market mechanisms.

Of course in actual fact there is an objective unit which can be used for economic calculation in socialism, which Mises himself notes, although he dismisses it, which is labour time. Marx believed that in socialist society, all economy would be reduced to the economy of time, and society would organise production and innovate with the motive of decreasing labour time and expanding the sphere of free time. Mises' arguments against this mostly hinge on his theory of value and understanding of the nature of money in capitalist society, for Marx money is the objectification of human activity, a mechanism which apportions out socially necessary labour-time behind the backs of the producers, and socialism involves the removal of this mediator, with the apportionment now being effected directly, consciously and therefore more rationally, whereas for Mises money is an indicator of the subjective worth which is placed upon goods, and since this is inexpressible in units except through the development of a monetary system, the removal of the monetary system means the end of the possibility of rational economic calculation. I haven't read it yet but I'm going to go out on a wild guess and say that ZN's latest post in the weekly quotes thread on Value will probably give you more information on this topic than you can handle.

-Zanthorus

[Rafiq]

A criticism of socialism is not the only thing the Austrian school is known for. They have a whole collection of shit-stenched free market theory that needs to be crushed with some good old Left-economics

[Strannik]

My take:

Austrian economic theory is fundamentally idealistic. It presents a completely logical model of perfect economic interaction by equal individuals under equal circumstances. Therefore, it works perfectly - there's only the slight problem that it has almost nothing to do with reality.

For one thing, people on the market do not act exclusively in their rational (social?) self-interest. For the most part they act in quite ordinary instinctive, short-term self-interest. Decisions made in short-term interest build up and allocation of social resources becomes periodically irrational, resulting in crises and wars.

In practice, capitalism can postpone market irrationality crises in three ways.

1) People can leave the irrational economic space to other countries, empty lands, colonies etc. This is no longer practically possible.
2) Capitalism can try to innovate itself out of trouble by opening completely new technological and economic regions that lead to "natural" redistribution of wealth. This is a positive solution, but has a low probability. Innovation is risky and not always possible and these days its impossible without substantial investments - which
means that finance capital will come out on top and nothing changes.
2) Capitalism can redistribute the resources more rationally by governmental action. This has the problem that those with most money either try to block this politically or investors become scared for their profits and capitalist economy starts to stagnate - basically it stops moving.

Criticizing theories of perfect market is a bit like criticizing theories of Holy Trinity or divine right of the kings. Its useful as a thought experiment but one can never construct a logical argument that would disprove someone's faith - you either believe in this stuff or you don't. Look at Leibnitz' "proof of God" for example.

[Tim Cornelis]

My take:

Austrian economic theory is fundamentally idealistic. It presents a completely logical model of perfect economic interaction by equal individuals under equal circumstances. Therefore, it works perfectly - there's only the slight problem that it has almost nothing to do with reality.

For one thing, people on the market do not act exclusively in their rational (social?) self-interest. For the most part they act in quite ordinary instinctive, short-term self-interest. Decisions made in short-term interest build up and allocation of social resources becomes periodically irrational, resulting in crises and wars.

In practice, capitalism can postpone market irrationality crises in three ways.

1) People can leave the irrational economic space to other countries, empty lands, colonies etc. This is no longer practically possible.
2) Capitalism can try to innovate itself out of trouble by opening completely new technological and economic regions that lead to "natural" redistribution of wealth. This is a positive solution, but has a low probability. Innovation is risky and not always possible and these days its impossible without substantial investments - which
means that finance capital will come out on top and nothing changes.
2) Capitalism can redistribute the resources more rationally by governmental action. This has the problem that those with most money either try to block this politically or investors become scared for their profits and capitalist economy starts to stagnate - basically it stops moving.

Criticizing theories of perfect market is a bit like criticizing theories of Holy Trinity or divine right of the kings. Its useful as a thought experiment but one can never construct a logical argument that would disprove someone's faith - you either believe in this stuff or you don't. Look at Leibnitz' "proof of God" for example.

This is not an attack on the Austrian school of thought any more than attack any other capitalist school of thought.

For example, you argue that "Criticizing theories of perfect market is a bit like criticizing theories of Holy Trinity or divine right of the kings", thereby implying that the Austrian school believes in perfect competition and equilibrium-economics, it does not. You also argue that the Austrian school "presents a completely logical model of perfect economic interaction by equal individuals under equal circumstances. Therefore, it works perfectly". Which is also incorrect. You are, in fact, criticising neoclassical economics, which is a different school.

The Austrian school of economics correctly believes that there will always be a disequilibrium, but that nonetheless under conditions of free markets they will gravitate towards, but never achieving it. It also rejects notions of the homo economicus (http://en.wikipedia.org/wiki/Homo_economicus), the economic agent who is presumed to always act perfectly rational and is all-knowing and narrowly self-interested, and other neoclassical dogma.

The basic idea behind the Austrian school of thought is the notion that state monopoly, supply, and control of the money supply is the cause of business cycles. Because the Central Bank artificially injects money into the economy, entrepreneurs receive signals (in form of prices) that are not actually backed by markets. For example, the Central Bank injects money leading to an increase in prices, causing entrepreneurs to think that demand has increasing while in actuality it has not, leading to economic bubbles.

Or, "[a business cycle] is generated by monetary expansion and contraction . . . When new money is printed it appears as if the supply of savings has increased. Interest rates fall and businessmen are misled into borrowing additional funds to finance extra investment activity." This would be of "no consequence" if it had been the outcome of genuine saving "but the change was government induced . . . Capital goods industries will find their expansion has been in error and malinvestments have been incurred" and so there has been "wasteful mis-investment due to government interference with the market." [Markets, Entrepreneurs and Liberty, pp. 68-9] (source: an anarchist faq)

The solution would be the introducing of free markets in banking as these abide by the law of competition and supply and demand (or alternatively the gold standard as it is subject to markets as well, and cannot be artificially inflated or whatever).

That is my superficial understanding of the Austrian school of economic thought.

A basic understanding of the Austrian school is necessary if you want to criticise the Austrian school and not just attack capitalism in general.

And then we come back to the Anarchist FAQ:

"C.8 Is state control of money the cause of the business cycle? (http://anarchism.pageabode.com/afaq/secC8.html)"