(If you’d like to skip my set-up to two amusing and excellent economics rap video’s, please zip to the bottom for the links)
After graduating from the Air Force Academy in 1992, I went on a knowledge-gathering binge. I read philosophy, pop science, great quotes and great literature. I was eager to put my 17 years of learning to work, but I realized I still had much more still to learn.
After graduating from pilot training, I got back to work in my knowledge-gathering project, this time filling huge gaps in my knowledge of history, politics and economics. In that journey, I found out about the Austrian economists.
In college, I took Economics 101 and 201, which focused on micro-economics–the economics of supply and demand in individual markets–and macro-economics–economics at the aggregate level (national, regional, world).
Little did I know that an intellectual battle had been fought long ago, and that the Austrian economists had been essentially stricken from the record of academia. In almost any college in the nation, the focus of macro-economics courses was on Keynes and the Monetarists (Milton Friedman being the most prominent of the latter).
My problem, before reading the Austrians, was that Keynes and the Monetarists didn’t seem to very well describe reality as I saw it. Keynes, a British economist, saw the government having an active roll in the economy, smoothing out the bumps of free markets. But, my reading of history clearly showed this always ended in tears. The Monetarists, based especially out of Chicago and MIT, constructed complex mathematical models based on assumptions that were clearly false, so they too seemed off the mark.
When I read the Austrian economists, especially Carl Menger, everything seemed to fall into place. I felt like a physicist reading Newton for the first time–this was clearly a better description of reality. So, I was stunned that my college classes never mentioned the Austrians and that they were basically relegated to the back-woods of academia (much like Aristotle during the Dark Ages).
As time went by (I first read the Austrians 16 years ago), I realized the Austrians weren’t and wouldn’t get a hearing any time soon. The Austrians, including Hayek and Mises, were considered to be cranks and irrelevant (like those who believe in the gold standard–oh wait, that’s becoming fashionable again, too!).
The Austrians showed that economics was best left to individuals freely choosing their own economic destiny. Interest rates, prices, quantities produced, etc. set by the free market would fluctuate, but this would be infinitely better than bureaucrats setting them more disastrously.
In particular, they showed that bureaucrats setting interest rates would lead to gross mis-allocation of capital over time, leading to worse booms and busts than occur in free markets.
This discussion may seem academic, but it became clear to me that the Great Depression could be clearly understood in this framework. The Federal Reserve was created in 1913 to prevent financial panics. In the mid 1920’s, the Fed held interest rates artificially low so France and Britain could pay back their debts from World War I. This led first to a real estate and then a stock market bubble that crashed (sound familiar?).
The mis-allocation of capital for years before 1929 had caused the Great Depression, not animal spirits (Keynes) or inadequate money supply (the Monetarists). This seemed a more accurate description of reality than anything else I had read.
Not surprisingly, this meant the Austrians clearly saw the dot-com and housing bubbles building and bursting more recently–because they were focused on the mis-allocation of capital due to the Fed fiddling with interest rates! Keynes and the monetarists were oblivious and even responsible for the busts!
Despite all this supporting evidence, I still expected the Austrian economists to remain in the backwoods during my lifetime. I didn’t think they’d get their hearing.
I must admit, I was short-sighted and wrong. The Austrian economists are coming back. As proof, here are two links (Keynes and Hayek round 1, Keynes and Hayek round 2) to rap video’s featuring none other than Keynes and Hayek (not the real people–they are both dead–but actors playing economist rappers).
Perhaps the Austrians will get their hearing. Perhaps people will start demanding economic policies that conform to the facts of reality and human nature. I must admit, I would be all too happy to be wrong on this.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.