Claudio Koller ยท 2/6/2023

What is the Austrian Economics?

The Austrian School or Viennese School, is an alternative liberal economic theory originating in Vienna in the second half of the 19th century. Carl Menger (1840 - 1921) is considered the founder of the Austrian School.

Austrian School as an Alternative

The Austrian School of Economics is a contrary school of thought to mainstream economics. The economist Friedrich August von Hayek (1899 - 1992) received a Nobel Prize in Economics with this school of thought.

Free trade in money seems to me both preferable and more practicable than the utopian plan to introduce a new European currency, which would ultimately only lead to entrenching even more deeply the source and root of all monetary evil, the state monopoly of the issuance and control of money.

Friedrich August von Hayek

Probably the most influential representative of the Vienna School was Ludwig von Mises (1881 - 1973). He further developed Carl Menger's theory of money and created a new theory of the business cycle. They argued that business cycles were a consequence of credit expansion by banks.

Focusing on the Individual and Human Agency

While mainstream economics believes it can control a society with mathematical models, the Austrian school is concerned with the subjective actions of the individual. The individual's subjective assessment of the extent to which a good can satisfy his or her needs at that point in time determines the value of a good.

Simple Example

The exact same good can fulfill a different utility depending on the situation. For example, a 1 liter of water in the desert is priceless after a few days, if you can make it to the next oasis through this water bottle. Accordingly, the 2nd liter of water is no longer as valuable.

The value of a good can vary depending on space and time and is subjective. 1 liter of water in the desert after a few days is probably more valuable to most individuals than 10 liters of water in an urban region somewhere in Europe.

Attention of the Austrian School is increasing

The fact that the Austrian school had predicted various financial crises and also sharply criticize the loose monetary policy of central banks since then, more attention is paid to them.

Moreover, the monetary properties of Bitcoin bring the principles of the alternative monetary theory of the old Austrians to a whole new generation.

Bitcoin and Austrian School

Because Bitcoin is the very idea that Hayek described back in the early 20th century, it has particular appeal to followers of the Austrian school.

I don't think we'll ever have good money again until we take this thing out of the hands of the government. We can't take it out of the hands of the government by force. All we can do is introduce in a clever way something that they can't stop.

Friedrich August von Hayek, 1984

The criticism of Bitcoin proponents like the Austrian school is the current government fiat money system. The monopolization of the money system by the central bank makes it possible to increase the money supply at will, especially in an unbacked fiat money system like we have at present. In the long run, this leads to what is known as the Cantillon Effect.

Cantillon Effect

Through the Cantillon Effect, this expansion of the money supply primarily benefits financial institutions, larger corporations, and governments. The broad mass of the population unfortunately goes out.

In the long run, this monetary policy leads to a redistribution from the bottom to the top. This effect was named after the Irish-French economist Richard Cantillon (1680 - 1734)

Inflation never hits everyone at the same time, and it never hits everyone equally hard. It starts at a certain point with a specific group. When the government puts more money into circulation, it may do so by putting more money into armaments, increasing subsidies for agriculture, or granting additional social benefits to certain groups. The incomes of the beneficiaries rise first. Those who spend their extra money first still pay the old prices.

Henry Hazlitt (1894-1993)

> Learn more about the Cantillon Effect.

Inflation v.s Deflation

The Austrian school believes that inflation is worse for society than deflation. On the grounds that inflation or increase in price represents impoverishment and deflation, on the other hand, represents growth in wealth.

They are opposed to inflationary policies because inflation is a hidden tax and thus punishes the thrifty people of the middle class.

All representatives of the Vienna School were hostile to inflationary policies because inflation is a hidden and thus particularly dishonest tax that punishes thrifty people and rewards policy favoritism. This is why inflation is so politically popular, and why people are deliberately made to fear deflation.

Rahim Taghizadegan

Bitcoin and Gold

What makes Bitcoin so interesting for representatives of the Austrian school is the fact that it has similar monetary properties as gold. It meets some criteria which a sound money must have.

According to the Austrian school, good money must fulfill three functions: the exchange function, the store of value function, and the value measurement function. Up to now, gold or silver have been the most suitable.

Since these precious metals have a physical scarcity due to nature and cannot be arbitrarily expanded and diluted by a higher central authority. The "scarcity" characteristic also applies to the digital asset Bitcoin.

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