What is the Austrian school of economics?

1. What is the Austrian School of Economics?

The Austrian School of Economics (AES) is a branch of economic theory whose main postulate is the idea of the primacy of the self-organizing force of the market price mechanism.

2. What are the key points of the AES concept?

  • Value is subjective and does not exist outside human consciousness, and the labor spent on producing a good (a good or service) is neither a source nor a measure of its value.
  • Consumer behavior is difficult to predict, the nature of markets is constantly changing, so mathematical modeling in economics, as well as planned economics, is virtually impossible.
  • The only way to build a meaningful economic theory is to derive it from the basic principles of human activity.
  • The main principles of economic policy should be non-interference (or minimal intervention) in the economy by the state, economic liberalism, and libertarianism.

3. How did the Austrian school of economics originate and develop?

The AES takes its name from the origin of its founding father, the Austrian economist Carl Menger, whose seminal work, Foundations of Political Economy, was published in 1871.

His main pupils and followers were Eugene (Eugen) Behm-Bawerk, author of Foundations of the Theory of the Value of Economic Goods (1886), Friedrich von Wieser, author of The Theory of the Public Economy (1914), and Ludwig von Mises, whose major work, Human Action: A Treatise on Economics, was published in 1949.

Other prominent representatives of the AES are the economists Henry Hazlitt, Murray Rothbard and the Nobel laureate Friedrich von Hayek.

The Austrian school is classified as one of the national schools (along with Lausanne, Anglo-American or Cambridge), which developed such a direction of economic science as marginalism. Its other names are the “Psychological School” and the “Vienna School”.

The Austrian school was influential in the first half of the XX century, but the Keynesian school founded by John Maynard Keynes in the 1920s gradually gained more influence.

The essence of Keynes’s doctrine (state regulation of the economy by controlling interest rates and the money supply) was ideally suited to the existing state system. Keynesianism became the dominant economic doctrine in the West. In line with this ideology, the International Monetary Fund (IMF) was created in 1944 during the Bretton Woods Conference on Monetary and Financial Matters. This organization played a crucial role in shaping the post-war global monetary system by establishing gold and the U.S. dollar as the standard.

Another influential economic school in the twentieth century was Marxism, which argued that money as such, being an instrument of capitalism, was not viable, since the capitalist system itself was doomed.

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The West fell under the influence of Keynes’ ideas, while the USSR and socialist countries fell under the influence of Karl Marx’s ideas, and the Austrian school became rather marginal, but in the second half of the last century it began to restore its positions. Nowadays Ludwig von Mises Institute and the Society for the Development of Austrian Economic Theory are active; they publish new works of economists working in the Austrian tradition, reprint works of classics of this school, publish journals and hold scientific conferences.

The 21st century has seen a surge of interest in AES, not least due to the development of blockchain technology and cryptocurrencies.

4. How has the AES influenced the formation and development of cryptocurrencies?

Bitcoin has its roots in the cryptoanarchist movement, which draws heavily on the writings of economists of the Austrian school. Bitcoin’s Whitepaper was first published in an email newsletter (mailing list) by cryptographers and programmers seeking to ensure people’s privacy and financial independence through technological innovation.

The bitcoin genesis-block hash contains the headline of the article “Chancellor on brink of second bailout for banks” by the British edition of The Times. The article talks about government bailouts for banks during the 2008 economic crisis. Although the headline is quoted out of context, the quote may indicate that the creator of bitcoin, like AES, believed government intervention in the economy was unacceptable.

The bitcoin whitepaper also quotes the works of British cryptographer Adam Beck and computer engineer Wei Dai. According to Satoshi Nakamoto, bitcoin “is a realization of Wei Dai’s b-money proposal… and Nick Szabo’s Bitgold proposal. Sabo was directly influenced by AES representative F. Hayek. In turn, Way Day’s manifesto, in which he puts forward the idea of b-money, begins with the words: “I admire the crypto-anarchism of Tim May.

In “The Cryptoanarchist Manifesto,” Timothy May writes:

“Cryptoanarchy is the cybernetic embodiment of anarcho-capitalism that recognizes no state borders and allows citizens to engage in any consensual economic transactions.”

This ideal is close to the views of the American political philosopher Murray Rothbard, a follower of the AES. In Rothbard’s The Ethics of Liberty, libertarian anarcho-capitalism is presented as the natural and only possible embodiment of the ideas of an autonomous subject endowed with free will.

Rothbard suggests that an anarcho-capitalist society would be based on the rejection of violence per se. In his view, any aggression on the part of the individual or the state, including coercion by “rulers,” is morally indefensible.

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Bitcoin and other cryptocurrencies are purely voluntary and peaceful in nature. They involve a financial infrastructure based on voluntary cooperation. The purpose of cryptocurrencies is to endow people with financial tools to protect themselves from inflation and government oversight. The success of cryptocurrencies is possible because of their own effectiveness as a technology of economic exchange, rather than as a result of state coercion.

Satoshi Nakamoto’s ideological sympathies echo the views of AES representatives, and Vitalik Buterin, the creator of the second largest cryptocurrency Ethereum belongs to the words: “I believe that the Austrian economy was a whole world”.

The characteristics of the bitcoin protocol bring to mind Friedrich von Hayek’s book “Private Money”, in which this representative of the Austrian school points to the need to eliminate the government monopoly on the emission of means of payment and suggests creating a competitive system of means of payment between legal entities and individuals.

Even analysts at the European Central Bank (ECB) make a direct link between decentralized digital currency and the Austrian school in a report entitled “Virtual Currency Schemes. The document states that the roots of bitcoin’s philosophy are rooted in “direct criticism of existing fiat money and intervention by governments and other agencies,” which, according to Mises, Hayek and Bem-Bawerk, “led to deteriorating business cycles and significant inflation.”

5. How do modern AES officials view cryptocurrencies?

Decentralized digital currencies are more free from state control than fiat currencies. The mechanism by which new bitcoin units are created and transferred ensures its scarcity and respect for the independence of the individual user. These characteristics cannot help but be sympathetic to the AES.

In his book A Brief History of Money, Seifedin Ammus, a contemporary representative of the Austrian school, substantiates bitcoin’s claim to be the “hard money” of which the AES speaks. He explains that, according to AES theorists, the value of a currency is not determined by external collateral (in the form of gold or other assets), but by the supply-demand ratio – the level of trust. In the case of cryptocurrencies, the formation of their price is influenced by the psychology of behavior of market participants. As long as people see bitcoin and other cryptocurrencies as trustworthy, demand for them grows. A fall in the exchange rate is possible only in case of loss of public trust. Thus, maintaining a stable favorable environment in the cryptocurrency industry already serves as a guarantor of exchange rate stability.

Although some representatives of the modern AES (Konrad Graf, Daniel Kravitz, Robert Murphy, Seifedin Ammus) call themselves bitcoin-maximalists, others doubt that bitcoin and its analogues will be able to replace fiat currencies.

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For example, economist Joseph Salerno (other representatives of the Austrian school agree with him) supports the idea of currency free of state control, but doubts the rapid development and implementation of new financial technologies.

The Austrian school regards the free market as the highest value and believes that the market itself determines the best form of money, based on the efficiency factor. “Aggressive” promotion of bitcoin as money is seen by these AES representatives as contrary to the free market concept. Joseph Salerno says:

“What confuses me about bitcoin is the fact that no one is campaigning in favor of gold. Why impose bitcoin? Why not just let it come out the winner in the market fight? I’m not convinced of its viability. Right now it is viable, being an effective means of payment. However, I don’t think it has already become a medium of exchange.”

The fundamental works of Menger, Mises, Rothbard and Hayek define money as a “tangible object. This characteristic does not apply to cryptocurrencies, which gives skeptical AES followers a reason not to consider them as money.

Their opponents counter this by pointing out that the notion that commodities must be physical and tangible is outdated. According to them, there was no concept of a “scarce digital commodity” before bitcoin. While there was no technological basis for a digital commodity before, there is now, and the stereotype of the physical nature of value should be abandoned.

Many Austrian economists of the older generation consider gold to be the best form of money, while their younger counterparts lean toward cryptocurrencies. Perhaps this is because younger AES members are more familiar with the technological side of things and are able to understand how the principles outlined in the writings of the founding fathers apply in a world of advanced technology.

These days, AES followers can’t help but admit that their reliance on gold as “hard money” remains theoretical, while cryptocurrencies have become quite functional money with realistic usage scenarios.

Some AES representatives believe that gold-backed stabilecoin could become “hard money,” although they admit that such a model risks being subject to state control because the state could always confiscate the collateral.

All representatives of the AES agree that the free market will sooner or later determine the best form of money, especially if there is no government intervention. Until that happens, ideological pressure on the state must continue, they argue.

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