The Austrian School

The web is replete with sites arguing for laissez-faire (Austrian) economics. The Austrian philosophy is simple: Government should not interfere with markets. Here are the major tenets of the Austrian School:

1. The Austrian school correctly points out that currency should be stable. This seems to contradict the first point because the raison d'etre of the Federal Reserve is to manage the money supply. If the money supply ceases to be managed, won't the currency become unstable? The Austrians point out that the dollar actually appreciated in value when it was pegged to gold, but afterwards began a sustained inflationary slide of 97% of its value. If the dollar is truly "monetized", then, theoretically, even if the currency were to deflate to a hundreth of its value overnight, there would be no adverse consequences to the economy. In reality, people would defect to other currencies and lose confidence in the dollar, making it worthless. Also, in reality, inflation is never the result of a even distribution of money in the society. Newly minted money starts at the Fed and is then loaned to the government and banks, which in turn, lend it to people. Obviously, if the Federal Reserve were a truly private agency, it would be quite skeptical of lending money to the government, which has horrible record keeping, is highly indebted to foreign creditors, and is extremely inefficient and unproductive.
   
   Furthermore, it should be obvious that the sort of hyper-liquidity necessary for a currency to survive hyper-inflation is far from realized even today: Every store would need to have electronic billboards connected to high-bandwidth networks, just to give the current price. All paper and coin money would lose or gain value so quickly as to be worthless as money (i.e., a medium of exchange). No doubt paper and coin currency would become a speculative investment, which would be even more detrimental to its intended purpose as a medium of exchange. Fixed-rate mortgages would have much higher rates and savings accounts would have much lower rates as a way of buffering against the higher risk of lenders and savers (investors). Indeed, if the value of the state fiat currency changed so quickly, society would almost certainly come up with an alternate currency, which would be exchangable for the fiat state currency at the instant of transaction. This solution to having to update prices constantly would breed a different set of problems: Hucksters would make great fortunes, by delaying transactions by seconds, rounding off conversion factors favorably, or by giving transaction rates above the true market value. So one can see that if money is not stable (i.e., has very high inflation or deflation).
   
   So they correctly point out that currency should be neither highly deflationary or inflationary and we can see that a lot of a labor (bankers, investors, financial advisors, brokers, and economists) that could be doing more productive work exists solely because of currency inflation/deflation risk. In fact, the worry about the hugely irresponsible credit bubble and "high" inflation rate of several percent (that most economists, including the Federal Reserve Board ("Fed") would consider "low" or even necessary to avoid the "specter" of deflation) is so large among the Austrians that there is also an implicit "bring back the gold standard" undercurrent or alternatively allowing alternative forms of currency, such as the Euro, to compete for credibility as a medium of exchange. The "Austrian School" notes that when the dollar was completely "monetized" (i.e., decoupled from any particular exchangable product) the inflation rate greatly increased.


2. Periods of deflation/recession are cathartic. This also seems to contradict Point #1; in a truly monetized, economy neither inflation nor deflation should matter. Remember: money is just a medium of exchange. The problem is of course that since fiat money can just be created via a printing press, those who are authorized to do that creation and spend their newly-minted money have essentially devalued "real" (read: deserved) savings and boosted the economy inequitably. It sure would be nice for me if the Fed would just print up some money and give it to me, but of course this is not fair to anyone else. I can purchase their goods/services despite having produced goods/services in return, whether directly or indirectly.
   
   Never has there been an equitable growth in the money supply, which would require giving everyone an amount of money proportional to the amount that they already have. Instead the Fed grows the money supply by "lending" money to banks at a rate below the natural rate (which may be assumed to be the rate at which banks lend money to each other on the money market); therefore, unfairly bolstering the banking sector. The Fed perceives this as being fair because virtually everyone uses banks in a modern economy, but since their rates to the banks are lower than the banks give to individuals, it really constitutes a banking industry subsidy.
   
   The Austrians correctly point out that during a growing economy, banks that lend money irresponsibly (There has been a surge in both the number of credit card offers and the number of personal bankruptcies.), investors that bought poorly-performing stocks, and financial analysts that recommend that everyone should invest in the "bullish" market need to lose their inflated money, so that capital can be properly allocated, according to value and not hyped value. In other words, certain sectors profit from inflating financial bubbles that are not justified by profits and these bubbles lead to overinvestment, which leads to overproduction that cannot be consumed, which leads to a crash in the market.
   
   The "Austrians" are one of the few groups to point this out. In fact, they claim that stagnant economies are the result of bolstering of sick banks that overlent by the Fed via its subnatural rates to "bolster the economy". In reality, of course what they are really bolstering are
   
   
   
   1. People who borrow money on weak credit. (Usually, to purchase a house.)
   
   
   2. Banks that have over-lent and will probably continue to overlend.
   
   
   This comes at the expense of devaluing real capital, by devaluing the currency.



3. Government interference with free markets impoverishes the economy. This is the only major point of the Austrian school with which I disagree. In fact it is quite rare for economists to rail against a totally free market despite the absurdity of the concept that if the government would just get out of the way, there would be a societal Eden. The "free market" is a sort of game that is produced by laws of governments that guarantee property rights and works in a macroscopic way only to the extent that the laws governing it are well constructed, not non-existant. This notion may not be obvious since no governments specifically write laws to the effect of
   
   
   
   1. You will maximize your profit by producing item x as efficiently as possible.
   2. You will sell things at the lowest possible price.
   
   
   Rather strong central government enables "free markets" through the following
   
   
   
   1. Laws the protect the "civil rights" of individuals and allows them to own property. Preventing competitors/individuals from literally killing each other.
   2. Definition and protection of property laws. (How can you maximize wealth if ownership is not defined???)
   3. Definition and enforcement of standarized weights and measures. (How can you trade with out standardized quantities?)
   4. Intellectual property laws in the form of patents, and trademarks.
   5. Environmental protection laws protecting people from having toxic waste disposed of in the homes.
   6. Consumer protection laws in the form of honest labeling or contents, and quantities.