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Austrian Economics Question

Recs

27

May 11, 2010 – Comments (24)

Mostly for David, but everyone can answer.

Within Austrian economic theory, should Government use incentives to guide people to save and invest rather than borrow and spend?

24 Comments – Post Your Own

#1) On May 11, 2010 at 7:33 AM, devoish (98.04) wrote:

My understanding from a variety of posts and discussions is that the Austrian annswer is no. Government should not incentivise either healthcare, home ownership, savings, borrowing, auto purchases, farming, or investing over any of the others. In a "free market" people choose based upon their own needs and values. 

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#2) On May 11, 2010 at 8:19 AM, whereaminow (29.72) wrote:

Strengthen the currency. 

Governments hate savers. I have yet to find a government that likes savers.  If they liked savers they would work to strengthen the currency.  That would help savers.  So there is an economic incentive the government can use to get people to save and invest.  Strengthen the currency.

For a strict Constitutionalist like Ron Paul, that makes perfect sense, since the Constitution gives Congress the authority to coin money.  I would prefer a free market in currency so that consumers could choose the currency that rewards their saving habits.  Hayek's essay Currency Competition is a good overview.

I don't like tax cuts for the rich.  Income and invenstment tax cuts for the rich benefit one portion of society at the expense of another.  Cutting spending benefits a wider net.  Eliminating income taxes, withholding taxes, and investment taxes completely would benefit all of society.  Governments can raise money in other ways.  Those other methods are not perfect either. 

Another problem with government incentives for investment is that they normally direct money to political connected businesses.  That's crony capitalism.  Nobody says they want that.  Except that everybody wants it for their pet project, like fuel efficiency/independence for example. 

So yeah, I could go on, but I have to stop.  I have a vacation coming up on Saturday and shit needs to get done before I head outta town.

All the best,

David in Qatar

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#3) On May 11, 2010 at 8:29 AM, Melaschasm (52.23) wrote:

From my understanding, the austrian school indicates that government intervention (incentives) distort free markets, resulting in less than optimal decisions.

I don't remember if they have exceptions for things like police, courts, and the military.

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#4) On May 11, 2010 at 8:52 AM, ChrisGraley (29.98) wrote:

The lack of inflation resulting from Austrian economics in contrast to the deliberate inflation caused by Keynesian economics is an incentive to save on it's own.

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#5) On May 11, 2010 at 9:31 AM, 4everlost (29.64) wrote:

Devo,

Could you give more precise definitions of:

The "Government"   Do you mean the President himself, his cabinet, his board of advisers, his Czars?  Or are you referring to the joint committee of the Senate and the House, some sub-committee, or perhaps the recently founded economic advisory board to which the President named the members?  There are many other options that could be included in this list. 

"people": Are you asking about all tax paying citizens?  Businesses are made up of people; are the businesses included?  The government is made up of people.  Does your question include governmental agencies?  What about non-profit organizations and universities and foundations?  

What is a "free market" that you mention in comment #1?  Do you mean the economic system as it is today or one that has had several incentive programs before this new incentive program?  

How will it be funded?  When will it end?  How will the effectiveness be measured, who will do the measuring and who will be accountable for the results?

Rec #6 from me.

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#6) On May 11, 2010 at 8:37 PM, devoish (98.04) wrote:

4everlost,

"The Government" is that entity that influences economics, and is commonly blamed for all ills, either by being corrupted or failing to stop corruption.

"People" is commonly descibed by Austrians as individuals and that is how I meant the question.

"free market" is commonly described by Austrians as a market without Government influence.

David,

Should the Government help savers by strengthening the currency at the expense of borrowers?

ChrisGraley,

Should the Government help savers at the expense of borrowers, for example, by adopting Austrian economics.

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#7) On May 11, 2010 at 11:00 PM, ChrisGraley (29.98) wrote:

devoish,

The answer to your question is absolutely!!!!

I should add more alstry like punctuation! 

Borrowed money does nothing to help the economy, and in fact it hinders it, if the borrowed money does not make a profit.  The government never makes a profit on any such pursuit and therefore never contributes anything to the economy. It's money that's borrowed because politicians that raise taxes don't get re-elected. Our government system follows the same path of most failing empires. We are more concerned about keeping the masses content than we are about a sound fiscal policy.

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#8) On May 11, 2010 at 11:24 PM, AvianFlu (35.74) wrote:

Devo:

I BEG you to read the classic tome "Free to Choose" by Milton Friedman. I think you'll find many of your critical questions addressed. You should be able to gain some additional insights that will help you make sound investment choices. In fact, I think when I get off work I'll go re-read the chapter about the great depression. Check back in a few years....maybe we'll be referring to it as the "2nd greatest depression".

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#9) On May 11, 2010 at 11:28 PM, whereaminow (29.72) wrote:

devo,

First, let me say that not every Austrian is an anarchist like me. It's about a 50-50 split.  And not every Libertarian is an Austrian, per se, either.  Most Libertarians believe that a Night Watchman state is perfectly legitimate as a necessary inconvenience.  I don't mind that, even though I disagree with it.  That's a whole notha-can-o-worms.

So for the majority of Libertarians, government control of currency is a perfectly legitimate function and it should promote a strong currency because savings and investment is the source of sustainable economic growth.

A strong currency doesn't hurt borrowers as much as it limits their ability to borrow, as interest rates would be higher.  That is also a benefit to borrowers by keeping them from getting into too much debt. 

But those are all ancilliary benefits.  The main thrust of the Austrian argument is that the goal of "moderate inflation to promote permanent prosperity" is flawed on four main points:

1. It's stealing.. .from everybody.
2  It's utopian.  There is no such thing as permanent prosperity.
3. It's inefficient central planning.  The gold standard, on the other hand, does not require planning.  The government merely has to keep the dollar to gold ratio, while market forces work out how much gold is produced. 
4. It exacerbates the business cycle and creates malinvestment.

Quick point of interest for Libertarian readers.  You will find modern Fed supporters take offense to the idea that they are promoting utopia (remember, they like to accuse us of being utopian... while at the same time accusing us of being cold hearted... confusing).

But the original intention of deliberate moderate inflation was to bring about "permanent prosperity."  They may have dropped that last part when they realized it wasn't going to happen, but they kept the inflation train goinng.

So we see that they dropped the justification as untenable but kept supporting the policy anyway.  Doesn't seem too bright...

David in Qatar

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#10) On May 12, 2010 at 2:40 AM, APJ4RealHoldings (33.36) wrote:

I had to rec this for the positive discussion value & educational curiousity factor.

thanks.

whereaminow  / David

Have you addressed the competition & antitrust issue in your blog yet? I'm still wiating on my question.  I know antitrust in practice in the past few decades have worked hte opposite way of the way we need it, but isn't an effective antitrust system needed? for courts to uphold antitrust cases & ensure competition remains healthy....instead of industries going nuts in consolidations by teh big players and the remaining big players acting like cartels once consolidated

 

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#11) On May 12, 2010 at 3:21 AM, whereaminow (29.72) wrote:

APJ4RealHoldings,

Hey man, I'm sorry that I haven't had time to offer up a complete analysis.  I did a primer for background that is required reading for when I do get around to it.  The manipulation of the definition of competition is really important to know.

I just have had other issues come to the front of my attention, and now I'm heading out on vacay for a few weeks.

One of the interesting things about Antitrust regs is that you can't find an economist of any ideological stripe that liked the legislation when it was being proposed back in the late 1800's.  I have some quotes from prominent Socialist economists even, that railed against it.  So there is some speculation as to why suddenly in the 1930's a group of economists came along and decided it was great.  Chicago School economist Joseph Stiglitz did a survey of the history of economic thought in this area and he decided, amusedly, that economists realized they could make a great deal of money as antitrust advisors to big business.  

But for an application of the policy breakdown, the best (and really only thorough) analysis comes Dominick Armentano's Anatomy of a Policy Failure. which shows conclusively that the law is tool used by business to crush competition or by government to carry out power grabs by preying on people's fear of "bigness."

So I don't want to put out a crappy post on this one. It's gotta be a good one. Sorry to make you wait.

David in Qatar 

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#12) On May 12, 2010 at 7:21 AM, devoish (98.04) wrote:

David,

I am not asking about Libertarians. Libertarians are all over the place in their opinions of what Gov't should or should not do.

I don't take offense to the idea that "Fed supporters are promoting utopia" especially since "utopia" probably cannot be achieved. So there will always be hardship. I am going to be very hard to convince to support any group that promotes hardship however, especially extreme hardship. Too much work has been done toward "utopia" in the last one thousand years to want to go backwards.

I disagree with all four of the points you make.

1) It is not stealing, because it is from everybody including themselves and it is part of the contract when you agree to continue to live here. Please understand I believe it is well within your "rights" to promote policys that you believe will benefit you.

2) Promoting "utopia" is not a bad thing, especially if it unachievable. It is certainly better than promoting hell and high water.

3) The gold standard is innefficient "central not planning", and comes with all the same problems. Mother Nature works out how much gold is produced - not "market forces". I understand that is something you consider good because it restricts the amount of money available and you hope "market forces" will distribute that money to best use, not to 'best friends' which is something you point out as inefficient when Government does it.

4) "It exacerbates the business cycle and creates malinvestment" is a belief in an "efficient market theory" that the market will respond to imbalances more quickly without Government intervention. Of course my question is 'where does that work?' What happens if we do not have a second great depression? Will you be able to give monetary manipulation credit for avoiding it just as you wish to blame manipulation for causing it? 

ChrisGraley,

"Absolutely" is a rare yes or no answer to a yes or no question. It surprises me that you want Gov't policy to promote any economic outcome over another. I thought all Government intervention was what you abhored.

I am going to offer you an opportunity to reconsider the second part of your answer and whether or not a more nuanced answer is needed. Years ago a railroad was built from the Florida mainland along the Keys to Key West. Building it lost money but created the opportunity for others to make money and contributed greatly to the economy.

APJ4,

Thanks for the rec, even if it was for the replies.

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#13) On May 12, 2010 at 10:59 AM, 4everlost (29.64) wrote:

Devo:

"It is not stealing, because it is from everybody including themselves..."  Do you have any facts to support that statement?

"...it is part of the contract when you agree to continue to live here."  Since when and who developed the contract?

"Promoting "utopia" is not a bad thing, especially if it unachievable."  What value does that provide?  If you don't promote utopia does it mean that you must promote hell and high water?  Why not promote reality?

"The gold standard is innefficient "central not planning", and comes with all the same problems."  While it's true that you could characterize the gold standard as central not planning it's false that it comes with all the same problems.  Check out this chart:

""It exacerbates the business cycle and creates malinvestment" is a belief in an "efficient market theory" that the market will respond to imbalances more quickly without Government intervention."  Your claim that the business cycle necessitates a belief in EMT is BS - Efficient market theory is an investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.  Government incentives cause malinvestment in many areas not associated with the stock market.

Just my .02; now you can whip it good.

 

 

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#14) On May 12, 2010 at 10:39 PM, ChrisGraley (29.98) wrote:

devoish, this is the kinder and gentler ChrisGraley. I'm trying to not get upset with someone that has a different opinion from now on, and I'm trying to explain rather than convince.

You are one of the biggest reasons that I've made that choice. I think that you are a very good person and you have very good intentions, but I think that you have a few flaws when it comes to the economy. I understand why. You've bought into an entire political platform and you are relying on economic advice from people that are economically flawed as well.

To quote your question "Should the Government help savers at the expense of borrowers, for example, by adopting Austrian economics." The answer is absolutely yes! The government is helping savers by the fact that they are not choosing to intervene. If the government chose to inflate dollars like they did when I was a child, my prosperity would be the burden of my children. I would prefer to die destitute then to have my children carry my burden.

Your example of the railroad in Florida is an investment. It didn't make money short term, but it made it long term. In a fiscally responsible country, the same investment could have been made without debt. Even in a fiscally mismanaged country like ours, it could be made with debt and a decent cost/benefit analysis.

Don't get me wrong, I certainly don't mind spending money for growth, but I don't like spending borrowed money and I certainly don't like spending it like water. The previous housing crisis was created by the consumer taking on too much debt and the same economic laws apply to governments taking on too much debt. The problem is that given the time that it takes for the bubbles to burst, my kids have to pay for my mistakes. I'd rather shoot myself in the head than to have that happen. Life is going to be tough enough on them already, without having the anchor of my debts.

So to reiterate the answer is absolutely yes! If it makes my life harder, it is still absolutely yes! I'd prefer my life to be harder, if the lives of my children are easier.

When I have to account to my children about what went wrong, I don't want to explain the Ford years, the Carter years or the Reagan years. Those Presidents aren't in charge of protecting my children. I'm in charge of that. No matter what you see on TV, there is no such thing as free money. The money looks like it's free, but your children are paying those inflationary dollars!

1 of 2 things is going to happen very shortly, the government in this country is going to suddenly become accountable, or my family and I are going to load up on a boat a float to a place that is accountable. I didn't agree to continue to live here, I was born here. My children made the same mistake of being born. I'll be damned if I allow them to become slaves to idiots for the simple fact that they were born here. I'd prefer for them to succeed on their own merits over being destined to fail at birth from my mistakes. 

 

 

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#15) On May 12, 2010 at 10:54 PM, topsecret09 (36.73) wrote:

ECONOMISTS AND DEFICITS

Economists are believers in the marginal decision. No decision short of suicide is final. No decision short of suicide is total. All decisions are trade-offs between a little of this for a little of that.

Economists are therefore advocates of marginal solutions for all economic problems. There is no such thing as cold turkey for economists. There is no moment of truth that offers a way out, but which, if it is ignored, leads to death. There are no life-and-death decisions for economists, other than suicide.

This is basic for properly understanding economists. If you do not understand this, you will not understand why economists, who should see the devastating cumulative effects of government debt, invariably say that things are not beyond the point of no return. For an economist, now is not the day of salvation. That day is always in the future. For an economist, there is always enough time for getting government debt under control. For an economist, there is no day of national judgment, no day of national reckoning. A business can go bankrupt. An individual can go bankrupt. But a government need not go bankrupt if it has a cooperative central bank or foreign central banks to buy its debt. Such is the teaching of economists, except for Austrian School economists, who know a government drunk when they see one.

For an economist, economic growth will enable government debt to be marketed at some rate of interest. At some rate, there will always be investors. But then, whenever interest rates climb so high as to create a recession, the vast majority of economists demand that the government sell debt to the central bank, which will create fiat money and thereby force down interest rates.

Economists – except for Austrians – hold this view of capital pricing: "The free market is all we need to estimate a return on investment, but whenever a major crisis hits, the government and the central bank must violate the free market principle of competitive bidding."

For the economist, the free market is what we need when government debt does not drive up interest rates, but whenever it does and the economy tanks, the solution is more government debt, higher deficits, and more fiat money. So, on this basis, government debt is not a threat, because the solution to the high interest rates created by government debt is not reduced government debt but rather increased government debt.

For all but the Austrian School economists, government debt must enjoy only positive feedback. No negative feedback is allowed to reduce the level of government debt. Why not? Because such negative feedback produces recessions, which are defined as reduced economic growth, and economic growth is the way that governments are enabled to continue to increase government debt.

Try to find a non-Austrian School economist who calls for the elimination of government debt. You cannot find one. The economist treats government as he treats the individual or business. Debt is seen as a way to gain benefits. People make cost-benefit analyses to decide whether debt will be an advantage. The economist pretends that a government is the same as an individual or a business. It – a collective it – makes cost-benefit analyses for the nation, another "it." But no such being exists. Politicians decide what is good for their careers, and then vote to spend or not to spend billions of dollars. No one can mentally calculate or imagine a billion dollars. No one has seen a billion dollars. But politicians vote to spend trillions each year. The estimated Federal deficit in fiscal 2010 is about $1,500 billion.

Politicians see immediate benefits: the purchase of votes at the next election. They discount future liabilities: the loss of votes, which will occur, if ever, only after they have retired on huge pensions that they have legislated for themselves. High personal benefits in the short run and highly discounted personal long-run costs: Here is how government budgeting works.

Economists believe that government budgeting is essentially the same as personal budgeting. If pressed, they may admit that a Congressman does not calculate costs and benefits as the economists (or their wives) do with their household budgets. Economists rely on the "bond vigilantes" to do this heavy lifting of assessing debt risk and putting limits on it. But bond vigilantes do not have a central bank on their side, which can reduce short-term interest rates and provide stimulus benefits. They have to take on the central bank on the other side of the futures contract – a bank with unlimited money and a government monopoly over money.

Then there are credit-rating firms. We know what kind of job they did with sub-prime mortgage risk, 2004–2008. They do just as good a job with government debt.

The economist spins a child's tale about risk assessment in the capital markets, and then, like a child when the tale turns out poorly, cries for his mother to kiss it and make it all well. The Federal Reserve is one big mother.
       TS

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#16) On May 12, 2010 at 11:05 PM, catoismymotor (< 20) wrote:

I'll be damned if I allow them to become slaves to idiots for the simple fact that they were born here.

I think that exact phrase is on a monument at Ellis Island.

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#17) On May 12, 2010 at 11:53 PM, ChrisGraley (29.98) wrote:

Thanks TS, I really needed that commentary right now. I'd really like to stay right here and fight, but the people selling stupid are much more powerful than I am right now and most people in this country are lemmings willing to buy stupid.

Cato, I'm seriously thinking about adopting you and exploiting you on television. I can call you Betty and Betty when you call me, you can call me Al.

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#18) On May 13, 2010 at 12:10 AM, catoismymotor (< 20) wrote:

Chris,

Do you mean like a Jolie-Pitt baby?! Yes!!!

On a serious note: I recently read, and tried to print, a PDF anonymously posted, can't recall where, on the subject of expatriotation. Have you produced such a piece of work on the subject? In the past you have entertained the idea of penning such a work.

Cato

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#19) On May 13, 2010 at 12:12 AM, catoismymotor (< 20) wrote:

I'll consent to the adoption if in turn I have diamonds on the souls of my shoes.

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#20) On May 13, 2010 at 12:42 AM, ChrisGraley (29.98) wrote:

I have actually penned 2 such works, but I doubt that you have came across them on the inter-tubes. Both were escape manuals designed for 2 specific people wanting to escape. I basically repeated to them for free some advice that I got from lawyers that were the opposite of free. 

 

BTW, if you know what Rat-a-tat-tat means, you can have diamonds on the soles of your shoes. If not, "No soup for you!"

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#21) On May 13, 2010 at 12:53 AM, whereaminow (29.72) wrote:

Cato,

Looking for this?

http://www.scribd.com/doc/30923462/American-Expatriation-Guide 

It was posted anonymously very recently.

David in Qatar

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#22) On June 01, 2010 at 12:27 PM, chk999 (99.97) wrote:

Devoish - even Canada is backing off on single payer health care.

http://news.yahoo.com/s/nm/20100531/hl_nm/us_health

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#23) On June 01, 2010 at 12:36 PM, dargus (80.49) wrote:

Aside from the economic arguments, I believe an Austrian would tell you that when the government attempts to incentivize anything, it creates conflict. There will always be winners and losers from these actions. We force individual sacrifice for the greater good, which is of course entirely subjective.

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#24) On June 06, 2010 at 6:49 AM, devoish (98.04) wrote:

chk999,

Do you think in Canada they are writing storys of how the USA is backing off on for profit health insurance coverage?

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