The Austrian School is also known as the "school of thought". This means that it comprises various thinkers who hold similar views and have made similar basic assumptions. In addition to the Austrian School, there is also the Kenyan School, for example, which also follows different schools of thought.
The term "Austrian School" comes from the fact that it was mainly represented by economists who came from Austria, particularly Vienna. In the 19th century, Vienna was the cultural and economic center of Austria and played an important role in education and at universities.
The Austrian School is formulated in such a way that it is easy to understand even for people who are not intensively involved in the subject. The founder of this school of thought was Carl Menger, who formulated his theories in 1871. From there, there were other important economists who taught in Vienna. Over time, especially after the Second World War, many of these thinkers dispersed, including to the United States.
Can the Austrian School be divided into several waves?
By waves, we mean generations into which the economists can be divided. The first generation dealt intensively with the marginal revolution, which represents a significant development in economics. These early economists include figures such as Carl Menger and Eugen von Böhm-Bawerk.
Later, when the movement spread to America, the second generation emerged, including Ludwig von Mises. The third generation includes modern economists such as Saifedean Ammous, who wrote the book "The Bitcoin Standard". He is one of the modern economists who hold similar theses and principles, but apply them to modern times.
What approach does the Austrian School take?
The Austrian School differs from other schools of thought in its strong focus on the individual. When analyzing a theory or an economic phenomenon, the first step is to examine what incentives and needs the individual has and how they might behave. From this, economists draw conclusions that can be applied to larger groups of people or the economy as a whole.
In contrast, many other schools often take a more governmental or centralized approach. For example, a central bank analyzes how it can optimally control the money supply to have a positive impact on individuals. These schools look more at what laws can be enacted to achieve an optimal outcome.
Those who think more top-down often see themselves in the role of the government and ask how the money supply should be adjusted or what laws should be enacted to grow the economy and stimulate demand. In this way of thinking, the focus is placed on major issues such as gross domestic product.
An economist of the Austrian school, on the other hand, would ask: What incentives and needs do individuals have? How do people behave in certain situations and what reactions do they show to measures that have been taken?
This perspective makes it possible to better understand macroeconomic development. These different approaches can also be applied in many everyday situations by transferring the economic aspects to individual needs and behaviors.
Austrian school has a social science approach
In contrast to the mathematical approach often used today, the Austrian School takes a social science approach. It assumes that value is subjective. This means that there is no overriding value that anyone can prescribe or compare. You cannot simply say that it is optimal to give one person a certain amount while giving another person a different amount.
Value is only perceived by the individual. Everyone knows what is valuable to them, but cannot precisely quantify how much more something is worth compared to something else. Rather, there is a hierarchy of value: what is worth the most to you is at the top, followed by value further down.
For this reason, the Austrian School sees little benefit in purely mathematical models. They argue that such models are often unable to adequately reflect economic realities. Instead, they run the risk of running into problems because they attempt to control and optimize the economy on the basis of individual key figures. This can often cause more damage than actually achieving positive results.
Problems of the mathematical approach
The biggest problem with the mathematical approach is that you can't really measure people's needs. Let's take the example of the state, which wants more jobs to be created. However, if this leads to fewer products and services being produced in the future because efficiency decreases, a conflict arises. Of course, nobody wants to lose their job, but if unprofitable companies continue to operate, they are wasting resources and ultimately damaging the economy in the long term.
So a decision has to be made: Do you want to keep all jobs at all costs, even if it means negative long-term consequences? This trade-off cannot be solved mathematically. It is an individual decision that only the person concerned can make.
You should ask yourself: "Do I want to keep my job, even if I will probably earn less in the future, possibly because I have no opportunities for advancement and realize that I am at a dead end? Or am I prepared to take the plunge, resign and move to another company where I can earn more?"
These decisions are very personal and also depend on environmental factors. You can't make a blanket statement about what the "right" decision is based on mathematical models. Rather, individual preferences and external influences play a major role.
Further differences to the Austrian School and today's economics
The differences arise from the aforementioned principles. If one accepts that it is difficult to represent individual needs mathematically, it follows that the individual should be given much more freedom of choice. If value is subjective, then the person themselves is best placed to decide what is best for them.
Most economists of the Austrian School therefore reject coercion and argue for a minimal state that does not intervene heavily in people's lives. They argue that external intervention cannot be better than the decisions made by individuals themselves. This conviction leads to further conclusions, such as the need to have low taxes and to strive for as little regulation as possible.
They also believe that state money, which is centrally controlled and whose creation is decided arbitrarily, should be avoided. This relates to the questions of how money is created, who receives it and what decisions are made about it.
In relation to time, there is also the aspect of time preferences. Individuals have different preferences regarding the time allocation of consumption and savings, which further illustrates how subjective economic decisions are.
What are time preferences?
Time preferences refer to how you assess the value of something you get now compared to what you might get in the future. For example: If I get a new car tomorrow, I definitely prefer that to not getting one for ten years. However, if I was offered two cars in ten years' time instead of one today, I would reconsider the offer.
So there is a point at which you say: "This is of equal value to me." This principle can also be applied to money. Do you want 100 euros now or 200 euros in a year's time? People with high time preferences want to receive their rewards immediately. An example of this is drug addicts, who don't care whether they get 100,000 euros in a year - they need their money immediately for their substance.
In contrast, people with low time preferences have long-term thinking. They might say: "I don't need the 100 euros now. I'm fine if I get 105 euros for it in a year's time." These time preferences influence many economic effects, including consumption, the willingness to invest and the level of interest rates.
Unfortunately, our fiat money system means that people tend to have higher time preferences. The money they earn continually loses value, which prevents them from thinking long-term. They have to constantly make sure that their savings do not lose value, which forces them to make short-term decisions.
Such a short-term focus has far-reaching consequences for our society. One example is the inefficient use of resources: due to high time preferences, we tend to consume resources faster and put a strain on our planet by investing in things we may not need. It is important to be careful when discussing "deprivation" as this term is anthropomorphized. Rather, it is about inefficiency and waste, not actual deprivation.
Business cycles in the Austrian School
The Austrian School explains economic cycles differently from other schools of thought. It argues that these cycles arise primarily because the money supply or credit is expanded far beyond what is available on the free market.
Let's take an example: If I am prepared to give up 100 euros in order to receive 105 euros in the future, this reflects a realistic credit process. However, if a lot of money is printed, this creates a situation in which there is more money on the market than market participants are likely to need.
An abundance of money causes people to start investing because they believe that there will be a high demand in the future. This creates an economic boom. However, it is often not taken into account that prices also rise and resources become scarce.
Let's say someone is building a house: if materials become more expensive during the construction process and the project cannot be completed, there will be a backlog of half-finished construction projects. This is a phenomenon that was observed during the 2008 real estate crisis, for example. Such mismanagement leads to a massive waste of resources that are not optimally utilized.
However, when trade takes place on a voluntary basis between individuals, such major forms of waste occur less frequently. A more efficient use of resources would be possible, as market participants could respond better to actual needs and capacities.
Policy within the Austrian School
Within the Austrian School, there are different views on what role the state should play in economic activity. In general, the representatives of this school are not in favor of a large influence of the state. A strong state influence could be interpreted as a move towards socialism or communism, where many decisions are made by the state - for example regarding production, the allocation of jobs and even the allocation of housing.
The majority of Austrian School economists support a concept of a minimal state. This state could be limited to basic tasks such as the court system, national defense and other essential functions. All other aspects of life would be left to individuals. This would also mean lower taxes.
Some proponents of the school even advocate the idea of free private cities, which have even less centralized influence and control. In this model, residents enter into contracts with an operator who provides certain products and services. Alternatively, one could live outside civilization, where state influence is virtually non-existent.
However, this does not affect many people as most live in some form of community. The central idea of the Austrian School is a voluntary coexistence where the freedom of the individual is maximized. This freedom is jeopardized when there is a strong central influence and many decisions are made by a central authority.
How could a turnaround be achieved?
A turnaround is not an either/or, but a gradual process. For example, not everything in the GDR was completely state-controlled; there were also private companies, even if state control was very pronounced. So the pendulum is swinging strongly towards state control, and it is possible to move this pendulum back more towards the individual.
To achieve this, state regulations could be withdrawn or abolished. Taxes could be reduced and people could be given more personal freedom so that they can shape their lives according to their own ideas. Fewer laws would not dictate how we live together from above. These changes are perfectly feasible.
Of course, a radical approach that implements all these changes at once would probably not be supported by many. It therefore makes more sense to aim for a gradual or parallel structure of the system. For example, if someone wants more freedom and choice in life, they could move to a city where the laws promote personal freedom and lower tax burdens.
I think this model is the most likely to be sustainable and make sense for many. Change should be gradual to allow people to adapt to new conditions, rather than introducing radical changes overnight, which most people would reject.
What could Austrian School laws look like?
The Austrian School itself is mainly concerned with economic perspectives and philosophies, rather than concrete legal regulations. Nevertheless, it can be said that many proponents of this school place a stronger focus on decentralized systems.
An interesting point here is the concept of decentralized jury systems. In Germany, for example, it is mainly judges who decide on penalties and legal issues. In contrast, many in the USA are familiar with the model in which twelve jury members decide on the outcome of a case. Economists of the Austrian school tend to favor the decentralized approach, in which the law is not imposed from above, but is found through social consensus.
In such a system, someone who feels wronged could sue someone else. Let's assume that someone has caused material damage or bodily harm. In this case, the members of the community who live there decide on the appropriateness of the damage and the compensation to be paid. This process leads to the development of a legal framework over years and decades as similar cases are dealt with again and again.
This is also how the German Civil Code came into being. The laws that were established over generations were ultimately consolidated. In a centralized legislative system, on the other hand, there is often a requirement from above to achieve certain goals. In such cases, there is no longer any consideration of actual injured parties, but the state decides which law must be enacted.
A key criticism of this approach is that laws are often passed without any direct reference to individuals who have been harmed, which can lead to unfair results. Therefore, many in the Austrian School advocate a decentralized approach that ensures that there is always an aggrieved party involved in the decision-making process.
What does Bitcoin have to do with the Austrian School?
If you look at the above content, it quickly becomes clear how well Bitcoin fits in with the ideas of the Austrian School. Fiat money is centrally controlled and issued by certain institutions. It is de facto prescribed that you have to accept it and at least pay your taxes with it.
In contrast, Bitcoin is created on a free market where individuals decide to use it as a means of payment and trade with each other. Interestingly, it is often the economists of the Austrian School who are one of the few groups who foresaw Bitcoin's importance and can explain why it makes sense.
Many mainstream economists claimed that Bitcoin should have collapsed years ago, especially every four years when they talk about the so-called "debt bubble". They argue that Bitcoin cannot survive given the lack of centralized control. However, when you look at the opinions of these people, it often becomes clear that they don't really know anything well-founded about Bitcoin. This is because the existence of a centrally free currency does not fit into their way of thinking.
They believe that it is necessary to control from above in order to make society perfect. The economists of the Austrian School, on the other hand, are firmly against this approach and demand that economic interactions should be voluntary and decentralized. In this context, Bitcoin fits perfectly into their concept.
What other currency would have fitted into this Austrian School pattern?
Historically, many Austrian economists were proponents of the gold standard. Gold established itself as money on the free market and was accepted as currency in many regions, alongside silver and sometimes copper. These metals have stood the test of time due to their properties, and many liberal-minded people still recommend the use of gold.
Among the older generation, there are many who may not yet have studied Bitcoin in depth and who continue to back gold. Gold has stood the test of time as a store of value, but there is no guarantee that it will continue to do so in the future.
One problem with gold is that it can easily fall into government hands, allowing central banks to take control of it. Historically, this led to those who had a monopoly on minting coins - often kings or governments - issuing new coins with the same face value but worth less.
Originally, people used gold and silver in the form of lumps, but this was impractical as they were difficult to weigh and measure. Coins were therefore minted early on. Over time, however, the system became centralized: Banks stored gold and issued slips of paper representing ownership of gold. For example, a piece of paper read "20 dollars in gold", which meant that the owner of this piece of paper could redeem gold at the bank. In Germany, for example, you could go to the bank with your Reichsmark and collect your gold.
The problem with this was that if many people wanted to cash in their gold at the same time, only the notes were in circulation. Banks could print more notes than there was actually gold available. This shows the advantage of Bitcoin: it can be held directly and is not subject to the risks of centralization and manipulation associated with traditional currencies.
Criticism of the Austrian School
Economists often disagree and have different views, similar to other social debates, for example on the topic of nutrition. Critics of the Austrian School argue that too much freedom is granted to the individual and that a certain amount of state control and guidelines are necessary. These experts in the state could calculate what is best for society based on scientific knowledge and models. If they can control the money supply, they believe they can target businesses and help people in need to create a better society.
In practice, however, access to information is often centralized and decision-making power is in the hands of a small group of individuals who may have corrupt motives. Such dynamics often lead to problems. Another point of criticism is the need for social security, as without state intervention it cannot be ensured that everyone is helped. Even if the freedom of the individual is upheld, it is not certain that it will satisfy the needs of everyone.
Proponents of the Austrian School argue that most people are willing to donate to social causes - this is shown by history, when the state played a lesser role. Back then, donations were a significant part of life, not least because people had higher incomes due to lower taxes.
Today, when the state takes over many of these tasks, it makes little sense to provide additional money for the same things. For example, in Germany it is not necessary to donate money for access to hospitals. However, this centralized control can also lead to inefficiency, for example if services become too expensive or waiting times too long.
The question of how much control makes sense remains controversial. While most people do not want everything to be completely centrally controlled, as this could lead to totalitarian structures, there is also the conviction that a certain amount of regulation is necessary. Discussions take place along this spectrum, with everyone setting their own priorities: either too little freedom is guaranteed or there is too much control from above, resulting in inefficiencies.
Would the individual take on this responsibility under the Austrian School?
Before putting forward psychological theories, we can look at what has happened in the past. We often forget what happened in the 19th century with the gold standard, when we still had 5% income tax - or even 0%. For example in the USA, where income tax was introduced in 1913. Only much later did the size of the state grow; today the state's share of the total economy in Germany is 30 to 40%, and during the coronavirus crisis it was even over 50% of total economic output.
This was not the case in the past, and accordingly there was no state protection. What then happened was the formation of many voluntary organizations and insurance companies that you could pay into for little money in order to have health insurance. Of course, you also have to take into account that technology was not yet so advanced in the 19th century. Nevertheless, this system worked because people supported each other - especially if you knew the people concerned well and knew how needy they really were.
This meant that personal care for people could also work well. Above all, much less money would be wasted and bureaucracy could disappear. It is often overlooked that we have more homeless people and therefore have to spend more money. However, the real problem lies not only in the increased need for money, but above all in the excessive bureaucracy, which means that many funds are simply lost. This bureaucracy would not be necessary.
Value is subjective
The smaller the group you are involved in, the more likely it is that certain rules will develop that actually suit the members. We are certainly familiar with this: every family is different and there are certain rules in the household. These develop based on the preferences of the individual people, and it is simply more likely that rules will emerge that promote better coexistence than if they are decided from above.
This raises the question, for example, of certain national borders where rules are decided for everyone in Germany. But why don't we simply have a large democracy in which laws are made for the whole world? One quickly realizes that this would probably not be optimal, as different people have different needs and different cultures and ways of life exist. It simply doesn't make sense to make the same laws for all people. Instead, we should try to make the regulations as local and individual as possible.
That was my part of the Austrian School.
That was an insight into the subject area, including a corner of the rabbit hole.
The original works are written in Austrian German and can be consulted. For beginners, I recommend the book "The 24 most important laws of economics" by Henry Hazlitt. It explains the basics. Once you have finished it or want to get straight into it, I can recommend "Human Action" by Ludwig von Mises. If you want to understand the whole subject and build up sound knowledge, you should definitely take a look at this book.
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Important note
The opinions and information provided by us do not constitute financial advice. They are for informational and educational purposes only and are not intended as a substitute for individual advice from qualified professionals.
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