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I love learning What do you know about Austrian School vs. Mainstream? I'm wondering in which ways they clash that is relevant to present day society. It's hard for me to swallow the notion that resources are limited, and yet, I don't want to jump to silly half-assed conclusions.
I am glad that you liked my reply, when the thread was stuck on 77 posts with my somewhat lengthy reply as the last entry, I though that those paragraphs wouldpretty much go unseen and sink down into the abyss of old topics. I am glad to see that you and others have read what I typed and I am pleased to see that youenjoyed reading it. I was very lucky to get to study economics at a university whose economics department is well stocked with professors who are good, greatand in many cases, outstanding. They showed me how important economics was to, how relevant it is, how exciting it can be and that it can be very fun to studyand debate.
As far as your questions are concerned, let me address them in reverse order of how you asked them. When it comes to limited resources, that notion is at thevery foundation of economics itself but the exact nature of that assumption is different than what most people would think. First, "resources" ineconomics does not mean natural resources, or manpower or even money. It includes all of those things and much more. It also includes skills that peopleposses, natural talents, education, training, interpersonal skills, managerial skills, artistic ability, the ability to communicate, the ability to designuseful things, the ability to teach others (all of those are human capital), machinery, computers, tools (all are physical capital), liquid assets (financialcapital), physical safety, time (we all have just 24 hours in a day), energy, clothing, food, knowledge and anything else that will be consumed or used if itwere to be at zero cost. The definition of "limited" or "scarce" in economics simply means that the collective desire on the part ofeveryone in the world, for a resource is greater than what can be used or consumed by all of those people.
Consumer goods are limited, capital goods are limited, every thing that can be consumed and all that can be used to produce is limited. This assumption, agreedupon by every single economist in the World is perhaps the primary reason that economics is called the dismal science. Luckily, in a world where most scholarscast the world in zero sum terms where every gain for one party must but proportionately off set by loses inflicted on one or several other parties. And in anage when many scholars also have advanced a neo-Malthusian view and sound the alarm against overpopulation and even advocate forced or secretive abortions andsterilization and tell us that a looming famine will require global triage system for distributing food, being an economist can be enjoyable because we cantell the world that such dire analysis and predictions are pretty much untrue.
The world is positive sum and having just said that scarce or limited resources are an inescapable fact of life, that statement might sound incongruous, it isnot and the reason is simply that wealth is created. Scarce resources are turned into wealth, some of which can be consumed and other that can allow even moregoods to be created with graeter ease. This is not theory but modern Western history, where by even 1600, the ordinary person in a few places in North WesternEurope equaled the standard of living of any society that had existed up to that point. By 1700, the standard of living in that same region of the World wasquite a bit higher than anything seen before and in any part of the World.
By 1800 and 1900 and 2000 it was evident that last four centuries or so have seen what is generally a satndard of living that has increased at an increasingrate. At same times populations have also grown very quickly so that disproves the fears of overpopulation causing poverty and the notion that the amount ofwealth in our World is fixed and every gain is offset by losses of equal magnitude. Today we live in a time of scarcity and of abundance. Our real wealth, percapita, is astronomically greater than the ordinary person who lived a few decades ago, let alone a few centuries or mellenia ago. It is estimated by those whostudy historical data and findings and compare the economic situation of the past with today, that we are roughly 50 to 300 times richer than the averageperson, who lived in the Middle Ages or in Antiquity.
So to answer your question, resources are limited, there is not enough to satisfy every want that exists nor will that ever be the case. The good news is thatour capacity for turning those resources into material wealth and therefore satisfying those wants more and more has been proven to have the ability toincrease expotentially in general we can expect it to continue to increase. One other note about resources, it is correct that some resources are fixed, thingslike fossil fuels for instance but one of the most amazing things about a vibrant, modern economy is how flexible it can be and that what was once vital suchas horse power for transportation, water power to run textile mills and whale oil to keep lamps alight is now economically insignificant. Resources are notjust what we happen to be using right now, everything from space down to the core of the Earth is potentially useful resource.
With that brief answer out of the way, let me answer the my favorite question of the two, how is Austrian Economics different from the mainstream. First, Imust note that in some respects Austrian Economics is mainstream, it was an Austrian Economist, Carl Menger who was the true father of modern Economics. Hegave economics profession the notion of subjective valuation, that price are detremined by ability and willingnes to pay and not by the amount of labor thatwent into producing it (that theory was called the labor theory of value). Menger also gave us Marginalism, the ability to look at discrete units of change andthose two ideas are integral for all Economic schools of though. Despite those contributions, Austrian economics, today, is sometimes written off as heterodoxor worse therefore, its critics say, it is contributing little to the body of Economic knowledge, that is debatable but Austrian Economics (AE) is outside ofthe mainstream in that it does not have the ear of presidents and most heads of State right now.
For the purposes of this explanation, I will call the Mainstream Economics (MSE) the schools of though that are Keynsian, Neo Keynsian, Neo Classical,Monetarist and Chicago School.
The heart and soul of Austrian Economics is an understanding of spontaneous orders. Spontaneous orders are found beyond Economcis and can be discussed in otherfields. It is not that the yare dicussed in academic fields that Spontaneous Order (SO) is so very important. AS gravity is to the functioning of the universe,SO is what binds our social universe. All human institutions including government and money and law were once the products of SO's. People self organize,people form societies, languages, laws, currencies, customs, cultures, markets, morals, norms, attitudes and shape every aspect of our lives and it is thoseprocesses that are SO's.
An Austrian Economist understands SO's better than other economists and knows that a better and better undersatnding of SO's will mean better andbetter undertsaidng of economics, particularly markets where new orders emerge every day, hour and minute. In AE, you are taught to see SO's at work allaround you, the way people form lines at a store, how peopel space themselves as an elevator fills up, how seats are taken up at a sushi bar, the way trafficworks in places where there are no traffic lights, the ettiquete that emerge in things like the black market for illegal drugs within a given community.
In AE, that emphasis has worked very well because during the last 130 years, Austrians economists have been correct, knowledge of SO can, among other things,allow us to see much more accurately into the cuture than other economists can. While so many now rely on various statistical methods (which is not bad at itand is in fact very useful and inetresting but overeliance on it, that distract from good solid economic reasoning is bad), our knowledge of SO's allow usto avoid certain problems that derail even the most advnaced statistical method. AE has predicted the Great DEpression, the stagflation of the 1970's, theventually and painful housing bubble burst the less painful dot com curst, the fall of communism and other events that man yeconomist simply could not seeapproaching. While we cannot see the future, our methods and the result that have been derived from them is clarevoyance compared to most other economist andother scholars who try to predict the future.
Flowing from this knowledge of SO's comes a few important assumptions. First, knowledge is probably better refrered to as data. I do not mean new ideas oracademic insights but simple facts related to all of the conditions which are relevant to economic activity. Things like a farmer knowing that some parts ofhis farm have very sandy soil and that other parts of his soil are poorly drained yet he is able to maximize his resources by responding to the market price ofvegetables that grow in sandy soil and poorly drained soil. A farm that whose decsions is made by a bearucrat, working hundreds of miles away would designateit as unsuitable for vegetables and may designate as land for grazing even though the country as surplus of sheep product. In a free system, the farmer knowsthat his lang can be used can be used to grow asparagues on the sady soi land rishes on the poorly drained soil, and those vegetables are in much higher deamndthan is mutton so the public benefits.
That farmer used his local knowledge to enrich himself and to improve the lot of life for mankind, it is modest contribution but hundres of millions of those,of economic decsion making being made by those with the most relevant information will make the country and the World rich and will out perform any centrallplanned or even government directed economy. The price system coordinates peopl who are seperated by far more than six degrees, it gets people who live onopposite sides of the world to unknowlingly collaborate with strangers who do not speak the same langauge or or is even aware of the other person'sexistance, yet they serve themslves and their fellow man and the world is better off as a result.
Second we are weary of bureaucrats, central planner is many capacities. The example of the farmer who is close to the action and is motivated by self interest,makinng wiser choices and better serving mankind than a distant bureaucrat is an easy sell. What is a bit tougher to advocate is that perhaps our currencyshould not be centrally planned. People usually see monetray policy as a science that can be perfected. The soundest argument against the Federal Reserve bankis not mentioning that it technically private, nor is it very helpful to tell fantastic tales of grand conspiracies that go back to the Free Masons or theKnight's Templar or beyond, no the soundest argument is that the Federal Reserve is a price setter and the Central Planner.
Most people will agree that most prices should not be set by fiat, by decree. Most educated people know about the misery in the Soviet Union that it was aresult of central planners setting every single price in the Country, it was impossile to get them right. It distorted productio nand consumption. Despite havefairly robust GDP, its lack of a price system meant that much of what was produced was not wanted so despite having a fairly high level of GDP per capita,their standard of living was at or less than countries which had much lower GDP's per capita. Despite seeing how fixing the price of bread, meat, cars andeverything manifested itself into extreme incovenience, distress and unhappiness for many Soviet citizens, we let the most important price in this country andone of the most important prices in the world be centrally planned, the price of the dollar. Money has a price and it is expressed in interest rates andexchange rates and because the price of money is arbitarily fixed it causes problems.
The problems of fixing the price of money are so great that Austrians generally want the Fed abolished or in my case, its monopoly on issuing bank notes ended.When you have the monopoly on producing currency, you can get away with printing so much that it causes inflation, even double digit (or in other countries farworse) inflation and you also can allow too little money to be printed. Austrians blame the nature of post WWI recessions/depressions and periods of inflationon the Fed. They call them credit cycles and when the Fed sets the price of money lower than what would prevail in a system of competing bank notes, the lowinterest rates entice consumers and businesses to demand more funds than are actually available on a sustainable basis and it causes consumers and businessesto become over extended and credit crunches follow and cause recession and depression. The process leading up to the credit crunch is called malinvestment, somuch easy money caused it to be tied up in failures that cannot pay back loans and that puts a strain on the whole financial system.
In other instances, the Fed will set the interest rate too high and that means that consumers and businesses are unable to get the credit needed to make theeconomy work. The needed liquidity is stuck in banks, when it could be out there, making money for the bank and letting consumers have flexbility in theirpurchases and allowing businesses to expand their capital stock and pay workers. In the Great Depression, Federal Reserve policies kept the liquidity trappedin the banks and gave us situation where there were unemployed workers, there were idle factories with unused machines (the capital stock) and there were brokepeople who could not afford shoes.
A competitive market for banks notes would have meant that there could have been lower sustainable interest rates and if banks could have been allowed to issuetheir own notes, without crippling restrictions imposed by State and Federal Government, they would have given businesses and consumers the credit needed tomake the depression much less severe. The Austrian position on the Fed is probably the biggest point of divergence between AE and the "conservative"side of MSE. The monetarist and Chicago school still sees role for the Fed as the disciplined guarantor of sound money. Obviously AE strogly disagrees with theKeynsian role of the Fed as an active participant and controller of the Economy.
The last major policy point I will mention is the Austrian view of market failures. In AE we know that market failures happen, usually due to a lack ofinformation on the part of one or both parties. Some in the a MSE school of though are quick to dispatch government to solve market failures, some MSE schoolsor thoug hare reluctant. While the AE does not rule out government intervention in market failures, we see many market failures, most of which are the resultof faulty informatio nas something that can be solved by markets that can emerge to address that very problem. They do exist, consumer review magazines,websites that let user give their opinion of local businesses, the apps on iPones that give us more information when we are in an unfamiliar city or part oftown, publications like the Wall Street Journal give us information on financial markets and other neutral providers of information are at the ready or areready to emerge to solve most market failures.
Even externalities can be managed privately and more effeiciently in certain situations. Externalities are consisted the example of government's role inthe economy. Many Austrians like the Coase Theorem, which states that given certain conditions, that regardless of a legal outcome regarding which party isresponsible for the negative externality. The Coase Theorem states that the party that can most cheaply deal with the externality, will do so because it willstrike a deal with the other parties involved in the externality and the least cost avoider of the externality will emerge if certain conditions are met.People from the Chicago school would agree with the Coase Theorem in many cases but most of MSE would want a court injunction as the remedy if an externalityis addressed on a case by case basis and they would want Pigouvian taxation, a tax that takes from the polluters (or the creator of any type of negativeexternality) and use the tax to compensate the "victims" of the pollution, or noise or bad smell or whatever negative externality is being created.
The final point I will make is on the more academic side. There are great differences between Austrians and even generally like minded monetarist and Chicagoschool economists. Non Austrians really like math and while math is indispensable in economics, it becomes almost a crutch if not a distraction from good solidand rigorous economic inquiry. We Austrians do use math but we approach economics more so as an art, a philosophy, a way of seeing the world. We borrow morereadily from other academic disciplines and we generally see culture and history and sociology as playing a major role in economic outcomes within a society.We will accept theory but we would rather use empirical evidence to make our case, we learn from history and tend to eschew mathematical models andprojections. Most importantly, we always remember Spontaneous Orders and we use that to do thought problems and we can systematically solve many problems andanalyze many things without doing any higher math or even needing to draw graphs or even see scratch paper, it all becomes intuition but rational intuition,powerful and rational intuition that comes from rigorous and clear thinking.
