Insights from the Austrian school
“If you care about your own ****** g country, read Ludwig von Mises and the six lessons of the Austrian economic school, mother ****** !”. So said Renato Moicano, a mixed martial artist who competes in the Ultimate Fighting Championship (UFC), in a post-fight announcement last week. “Wise words!” says Kristian Niemietz. The Austrian school of economics, which emerged in Vienna in the 1870s, has today fallen out of favour with the mainstream, but we still have a lot to learn from it. Here are three vital insights.
1. Profits are not exploitative. Marxists see capitalists as parasitic exploiters, the equivalent of a feudal landowner who does nothing but collect rents. Eugen von Böhm-Bawerk, the leading figure of the second generation of the Austrian school, showed that the role of the capitalist in a market economy is nothing like that. If you are a salaried employee, you are, to a large extent, insulated from the ups and downs of the company you work for. When it goes through a rough patch, you collect your salary just the same. You get paid from the first day even if it takes the company years to generate any profit. The flip side of this is that when the profits do arrive, you are not automatically entitled to any. “Employment contracts are like an insurance contract between risk-takers and riskaverse people. There is nothing ‘exploitative’ about that.”
2. There can be no economic calculation without market prices. Without market exchange, there can be no market-exchange ratios, no market prices. And without knowing that good X is worth three or five or ten times as much as good Y, there can be no rational economic calculation. This turns on its head the Marxist assumption that a planned economy without markets would replace the chaos of capitalism with rational planning. Ludwig von Mises, the leading figure of the third generation of the Austrian school, turned this on its head and showed that a planned economy must in reality be chaotic and unplanned. In the absence of prices, “the planners simply would not know what to do”.
When I was last in Greece in 2018, the country was three years into its third bailout programme, growth was weak, unemployment “sky-high”, and the left-wing government “at loggerheads with its creditors”, says Simon Nixon. “What a difference five years makes.” Greece is forecast to grow by 2.3% this year, well above the eurozone average of 0.8%. Unemployment is down from a peak of 27.5% to 11%. Debt to GDP has come down from well above 200% to a forecast 152% this year.
Its cost of borrowing is now lower than Britain’s. This “remarkable renaissance is proof that there is life after populism”. But it also shows “there is no ducking hard choices”. Difficult reforms to the public sector, the social security and pensions systems, and to the labour market have been pushed through at a frenetic pace. The result is the biggest improvement in its business environment of any country over the past five years, according to the Economist Intelligence Unit. Foreign direct investment has soared. Exports have risen from below 20% of GDP in 2009 to above 50% last year. There are lessons here for the rest of Europe and Britain, too. Supply-side reforms are the key to delivering improvements in productivity. Without those, any country will “simply become poorer” – “as Britain is discovering”.
3. Low interest rates cause boom-and-bust cycles. If central banks manipulate rates downwards, it creates the impression of a society more willing to save than it really is. Previously unviable long-term investment projects go ahead. But the resulting boom is built on sand. Governments can’t do much about the bust that must follow. “The malinvestment has already taken place and needs to be liquidated. The economy has to go through a painful adjustment.”