An Introduction Into The Free Market Divide: Austrian and Chicagoan

2 Posted by - February 14, 2011 - Commentary, Commentary - Guest, Economics, Literature

never forget the austrians hayek friedman mises poster p228272433928654668qzz0 4001 An Introduction Into The Free Market Divide: Austrian and Chicagoan*Written by Tho Bishop.

An Introduction Into The Free Market Divide: Austrian and Chicagoan:

The economic climate of the present has pushed Americans to bolster their understanding of the “dismal science”. Those on the right tend to turn to one of three men: Milton Friedman, F.A. Hayek and Ludwig von Mises. The three have many similarities: they were all highly respected intellectuals, prolific writers, all rejected the label of “conservative” in favor of classical liberal or libertarian, and were champions of free trade and free markets. If looking for arguments against government intervention into the economy, one would do well to quote from one or all of the three titans. This being said, there are some stark differences between them. Before I address those, perhaps it would be best to introduce these men.

Mises and Hayek and the Austrians:

Ludwig von Mises (1881-1973) attended the University of Vienna.  During this time, Mises learned and befriended the prominent Austrian economists Carl Menger and Eugen von Böhm-Bawerk. Mises would go on to surpass his mentors as the greatest mind of the Austrian School. An economist as well as a social philosopher, Mises demonstrated that socialism was economically disastrous, that mankind would best flourish in a free lassiez-faire economy and that government interventionist measures were counter productive. In 1929 Mises was offered a lucrative position with the Austrian Kreditanstalt bank. He turned it down. When asked by his wife why, he replied: “A great crash is coming, and I don’t want my name in any way connected with it.”

Mises economic philosophy would force him to flee to America from threat of Nazi imprisonment. Mises position on lassiez-faire and the gold standard would increasingly alienate him from academia both in Austria and, as he would learn upon arrival, America. The man, who as chief economic advisor to the Austrian government in the 20’s was able to successful combat inflation, found himself unable to find a University willing to pay him to teach. Mises would end up at NYU, his salary paid by the pro-free market Volker Fund. In America Mises would inspire a new generation of Austrian Economists (most notably Murray Rothbard) and, as such, the majority of Austrian Scholarship has come from this country.

Before fleeing Austria, however, Mises would change the life of a one collegiate socialist named Friedrich August von Hayek (1899-1992). A student of law, political science, psychology and philosophy along with economics, F.A. Hayek began attending a scholarly group hosted by Mises after he read his treatise Socialism before joining the London School of Economics. Armed with an understand of Austrian Economics, Hayek would become a rival of British economist John Maynard Keynes, among the most prominent advocates of government economic intervention in the world.

It was in Britain that Hayek wrote the book he is most remembered for today, the Road to Serfdom. Though initially intended specifically for a British audience, the book became tremendously successful in the United States, in part due to a consolidated version published by the Readers Digest. Hayek would follow Mises to America and wind up at the University of Chicago, his salary also provided by the Volker Fund. Relied upon by Old Right opponents of FDR’s New Deal, Hayek would go on to become the best known Austrian Economist in the world, culminating in his receiving the Nobel Prize in Economics in 1974. Hayek would spend most of his career after Serfdom writing on Social and Political Philosophy. Margaret Thatcher, it is said, slammed down Hayek’s book the Constitution of Liberty proclaiming, “This is what we believe!”

Though Mises was Hayek’s mentor and both came from Austria, the two have differences between them. Though both believed economic liberalism was the natural state of man, Mises’s passion for lassiez-faire was guided by his individualist morality; Hayek, on the other hand, more viewed lassiez-faire for it’s benefits to society. Some have noted that The Road to Serfdom is less an advocate of lassiez-faire economics and more a condemnation of economic planning. In fact Hayek would reject a “pure” hands off role of government, advocating a modest degree of labor laws. Such views would lead Ayn Rand, an admirer of Mises, to become a harsh critic.

In spite of their differences, Mises and Hayek worked together on developing many of the key tenants to Austrian Economics. Most notably is the Austrian Business Cycle, which contends that periods of “boom” and “bust” that seemed to hamper a capitalist economy were not the result of natural market failures but government monetary policy. The logic goes that moves by the Federal Reserve to encourage investment (be it by artificially lowering interest rates or increasing the money supply) served to promote malinvestment. A key tenant to Austrian Economics is an understanding of Time Preference – which understands individuals decide whether to consumer wealth now or in the future. In a complex market economy it was a natural interest rate that most effectively guided development in either consumption or investment areas of the economy. The more savings (demonstrating a later time preference), the more money goes into banks, the more money banks have to lend. Interest rates drop which leads to an emphasis on long-term projects (housing construction, plant construction, development of capital.) Alternatively, more consumption (an immediate time preference), the less money flowing into banks, the higher the interest rate and money is developed on producing goods rather than expanding capital. The Great Depression, as written by Rothbard in his book on the event, was caused by inflationary policy of the new Federal Reserve.

Friedman and the Chicago School:

Hayek would start a classical liberal intellectual group, the Mont Pelerin Society. Though, like Hayek, the group was formed around a philosophy of liberalism, the group’s tolerance for a role of government in certain aspects of the economy infuriated Mises and his followers. One member would recalled: “The story I remember best happened at the initial Mont Pelerin meeting when he got up and said, ‘You’re all a bunch of socialists.’ We were discussing the distribution of income, and whether you should have progressive income taxes. Some of the people there were expressing the view that there could be a justification for it.“ That man was Milton Friedman (1912-2006.)

Though Hayek is often described as an Austrian Economist, he also has roots in its largest free market rival, the Chicago School of Economics popularized by Friedman. Friedman began his economic career as a Keynesian, though came to reject the approach during the 50’s as he began his own original economic analysis. Friedman would come to reject interventionalist fiscal policy and became perhaps the most respected libertarian scholar. Friedman championed deregulation of industry, repeal of prohibition and ending conscription (he achieved this as a consultant for Nixon and believed this to be his greatest accomplishment). Friedman later in his career focused on school choice and voucher programs. His greatest regret became his work on income tax withholding, which he developed in the 40’s.

Perhaps more than anything, though, Friedman became renown for Monetarism. Monetarism is a macroeconomic philosophy that emphasizes the role of the money supply on domestic output and price. The role of a central bank for a monetarist (though Friedman opposed it in theory) is to manage the money supply. Freidman advocated increasing the money supply during times of economic stagnation and decreasing it during times of economic growth – the goal being to maintain equilibrium between the supply and demand of money. Friedman viewed the Great Depression as a failure of the Federal Reserve in not providing enough liquidity to banks.

This view differs dramatically from the Austrians. Where the Austrians believed that the government should only concern itself with stabilizing the money supply (by maintaining a gold standard), the Chicago School works from a similar foundation as Keynes in it’s view of the business cycle. Where Austrians see the market economy as naturally occuring and the science of economic a priori (independent of experience, stemming from reasoned deduction), in nature Chicagoans view economics as a man-made positive science (one requiring testing to be proven true or false). Capitalism, to the Chicago School, is not the natural state of man, but merely the most efficient means to create wealth. Where the Chicago School relies upon Keynesian notions of calculable “perfect competition” and a calculable “equilibrium”, Austrians dismissed these hypothetical notions entirely, preferring to focus on real individual human action and the consequences of artificial manipulation of natural markets.

The Practical Difference:

All of the above is fine and dandy, but what does it really mean? If one has not deduced as such from the above, Alan Greenspan’s Federal Reserve policy was monetarist. Facing the recession brought on by the dot-com bubble bursting, Greenspan sought to spur economic growth by lowering interest rates and promoting industries like the housing market. This increased the investment sector of the economy. The problem is that consumption remained the same. Consumers time preference hadn’t changed, only their access to inflated currency did. Money was going into projects with no demand to support them. Though this was coupled with Federal policy encouraging home ownership, placing individuals in homes that could not afford them, it was the actions of the Federal Reserve that caused the economic meltdown, not the failure of Fannie and Freddie.

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