Austrian Economics

Based upon marginalist economics.

Leading advocates including Eugene Bohm-Bawerk (1851-1914), Ludwig von Mises (1881-1973), Frederick von Hayek (1899-1992),¬†Murray Rothbard (1926-1995), US Congressman Ron Paul (book called ‘End the Fed’).

They tend to see central bank & government intervention as the problem for capitalism’s crises.

Marginalism began in the 1870’s with the work of William Stanley Jevons, Leon Walras & Karl Menger.
About the same time as Volume I of Capital was becoming well-known.

Diamond-Water Paradox

Diamonds cost a huge amount of money, yet they are not necessary for life. Water, on the other hand, is very cheap yet is absolutely necessary for human life. So why do diamonds cost more?

The classical economists (& Marx) explain that this is because more labour time goes into the production of a polished diamond.
For marginalists the price is a subjective determination, as in a desert, dying of thirst, you will willingly pay a high price for a glass of water. But normally water is not as scarce as diamonds & so you do not usually have to pay a higher price. It is the utility at the margin they say determines the price.

Utility cannot be reduced to a homogenous substance, unlike the concept of socially necessary (abstract) labour time.

The Rate of Interest

Austrians argue that we are prepared to pay more for something immediately rather than have it in the future. Therefore, the difference is where the rate of interest comes from.

So rather than consuming now, the capitalists save & so permit investment, so they can consume more in the future. The interest they receive is the reward for not consuming now.

The interest rate ensures savings & investment are in equilibrium.
Any government interference can cause the market rate to differ from the natural rate.

Austrians fully support Say’s Law – supply creates its own demand.
Therefore, crises of overproduction are impossible.
Although Say’s Law does not prevent crises based upon disproportions between departments (means of production & means of consumption).
But so long as the interest rate is not distorted, Austrians argue this will not be the case.

If the central bank forces the interest rate below the natural rate, capitalists will be fooled into producing¬†too many capital goods and too little means of individual consumption. There is over-investment, or ‘lopsided production’.
In Marxist terms Dept I produces more relative to Dept II.

For Austrians the only solution is to raise interest rates & let the crisis do its work.

The Austrian concept of a ‘natural’ rate of interest comes lose to Marx’s concept of the rate of interest tending towards the level that equates the supply & demand of gold.

Difference With Monetarists

Milton Friedman advocated a steady rate of growth of the money supply created by the central monetary authority.
Austrians see this as a form of ‘socialist planning’ & that money should be produced for profit just like any other commodity.

Many Austrians argue capitalists should be allowed to mint gold coins without any particular gold coins declared legal tender. Banks should be allowed to issue their own banknotes & the gold standard should be restored.

Like the Monetarists they are against fractional reserve banking (credit money). They see credit money as lowering the interest rate below the natural rate.
But just how they would suppress credit money in a free market they do not say.


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