Book Excerpt: Austrian Economics & Public Policy: Restoring Freedom and Prosperity by Richard Ebeling

by | Sep 8, 2016

Austrian Economics is the most powerful explanation of why governments, no matter how well-intentioned, lack the knowledge, wisdom and ability to direct the lives of multitudes of people better than those people can do for themselves if left sufficiently at liberty to do so.

The following is the introduction to FFF’s newest ebook, Austrian Economics & Public Policy: Restoring Freedom and Prosperity by Richard Ebeling. (Buy it on Amazon for $4.99.) The ebook is being launched in conjunction with a new 9-part video series entitled An Introduction to Austrian Economics by Richard Ebeling. Watch part 1 here.

This book is on understanding Austrian Economics and essential economic policy issues. It might be asked, what is Austrian Economics and what makes it important to better understand the economic policy issues we face today?

In a nutshell, as I attempt to explain in the following chapters, Austrian Economics is the most powerful explanation of why governments, no matter how well-intentioned, lack the knowledge, wisdom and ability to direct the lives of multitudes of people better than those people can do for themselves if left sufficiently at liberty to do so.

Austrian Economics reminds us that human beings are reasoning and acting individuals who, nonetheless, are imperfect creatures with imperfect knowledge. We often make mistakes, but we have the unique ability to creatively devise ways to improve our lives and those of others in peaceful social interaction in the arena of open and competitive markets.

Over the last 100 years, governments have attempted to replace people’s own free actions for mutual betterment with systems of government regulation, planning, redistribution and control. These have gone under the names of socialism, communism, fascism, National Socialism (Nazism) interventionism, welfare statism, “progressivism,” the “third-way,” social democracy, Keynesianism and many others.

Their common premise is that those in political authority and power can micro- and macro-manage the social and economic affairs of human society in ways better and more socially just than the free market. Austrian Economics shows why and how it is that all these attempts at government social engineering have failed and often with disastrous consequences.

Both in the United States and in most other parts of the world, governments — whether democratic or authoritarian — impose spiders’ webs of controls, commands, prohibitions and restrictions on what goods may be produced, with what methods of production and employment conditions, and for what prices and wages.

International trade and commerce is no different. Participating governments hail occasional “free-trade” agreements under which goods and services may be imported or exported. But these agreements are filled with domestic-content rules, restrictions on methods of manufacture and sale, and either explicit or implicit rules on how many of those goods may be sold in another country, as well as remaining import duties and taxes meant to shield domestic producers from foreign rivals.

Government Fiscal and Monetary Irresponsibility

In addition, governments all over the world practice fiscal irresponsibility. High and targeted tax rates and levels often undermine the incentives for work, saving, and investment. Government spending frequently seems out of control, with expenditures not only far outside the bounds and purposes of a free-market society, but with annual rates of increase noticeably in excess of various countries’ rates of economic growth. The result is that the slices of the national economic pies absorbed by governments are expanding faster than the national economic pies are growing.

Furthermore, government deficit spending has become the rule rather than the exception in seemingly every major country around the globe. Rather than admit to the citizen-taxpayers what the true financial costs of government activities really are, the subterfuge of government borrowing hides from view the real full burden in terms of resource use from the activism, interventionism, and redistributivism of the political paternalism in our time.

Finally, the world is in the grip of an unrestrained monetary central planning through the institution of central banking, which in the United States takes the form of the Federal Reserve System. The monetary central planners who manage and direct central banks flood the world with the paper monies for which they are, respectively, responsible. The great open secret of our time is the extent to which this has been going on for decades, and especially since the recession of 2008–2009. This reckless policy has failed to fully grab the attention of the general public or the news media because of the relatively low rate of general price inflation as measured by various price indices.

But it remains nonetheless the case that this open spigot of monetary expansion has once again created the risk of another recession or even depression down the road through the distortion of interest rates, the misdirection of investment and capital formation, and the misallocations of labor and other resources. Prices, including interest rates, have not been allowed to tell the truth about underlying market conditions because of the monetary-induced distortion of prices and wages and relative market profitability.

Misguided Economic Theories about How Markets Work

Sorting all of this out in some reasonable and intelligible manner has been made more difficult for members of the general public because so many in the arena of economic policy decision-making continue to rely on economic theories and perspectives that provide wrong or misguided understandings of how and why markets really work.

Too many economists continue to speak about market failures or injustices because of their reliance on wrongly constructed conceptions of perfect competition or monopoly or negative externalities that suggest that the only way to overcome presumed imperfections and unfairness in the market economy is through government intervention and redistribution.

At the same time, whether calling it so or not, again too many economists think about and analyze economy-wide — or macroeconomic — problems within frameworks heavily influenced by the ideas of John Maynard Keynes and Keynesian economics. A false focus on macro-aggregates — total employment, total output, prices and wages in general — hides from view all the real microeconomic relationships and interactions between a complex of interconnected markets of diverse supplies and demands bound together by an intricate network of relative prices and wages, the interactive outcomes of which determine and result in the actual economy-wide market outcomes.

The Realism and Relevance of Austrian Economics

There is one economic school of thought that has attempted to reasonably and realistically ground our understanding of the workings of a free competitive market process and the consequences likely to follow from various forms of government intervention, regulation, and control. This is the Austrian school of economics.

Originating in the writings of the Austrian economist Carl Menger in the 1870s, the Austrian school blossomed into one of the most creative and innovative approaches to economic theory and policy in the late nineteenth century and through the first half of the twentieth century.

The two leading figures of the Austrian school in the middle decades of the twentieth century were Ludwig von Mises and Friedrich A. Hayek, who refined and developed the contributions of the founders of the Austrian approach and applied it to the theory of markets, prices, competition, and the institutional prerequisites for a society of individual freedom and coordinated prosperity.

The Austrian school fell into a hiatus for several decades after the Second World War under the avalanche of Keynesian economics and an economic mainstream approach to microeconomics (the theory of human choice and decision-making and market interaction) that was dominated by advocates of government regulation and redistribution.

The Austrian school was reborn in 1974 under the influence of two events: a unique conference that brought together those still interested in the Austrian economic tradition in June 1974 and the awarding of the Nobel Prize in Economics to Friedrich A. Hayek in October of that year. Those two events served as the catalysts for the revival of modern Austrian Economics.

The Content and Focus of This Book

The following chapters attempt to provide an overview of many of the core and essential ideas and policy applications of the Austrian school, and some of those who have been especially important in developing, refining, and popularizing those ideas over the last nearly 150 years.

The opening chapters (1–16) give a summary of the Austrian economists and their ideas, partly in the form of short intellectual biographies of such contributors to the tradition as Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, Friedrich A. Hayek, and Israel M. Kirzner and their distinct contributions on aspects of economic theory and policy.

The next group of chapters (17–26) discusses the general Austrian understanding of the nature and workings of the competitive market process and Austrian criticisms of socialist central planning and the interventionist and bureaucratic states. They include an explanation of the difference between a free-market economy and crony capitalism, and the origin of the modern welfare state. Also discussed are the underlying reasons and rationales behind the interventionist-welfare state, the danger in the pursuit of “great national purposes,” the arrogance of the social engineer, the errors in economic protectionism, and the false concerns for economic inequality in a free-market economy.

In a third group of chapters (27–38) the analysis turns to the Austrian critique of Keynesian economics and the general modern macroeconomic policy approach. This includes explanations of the essential and fundamental conceptual errors in the macroeconomic construction and focus on aggregates — aggregate demand, aggregate supply, total output, and total employment — in putting proper analysis of economy-wide fluctuations on the wrong track.

In the process of offering this critical view of the Keynesian and general macroeconomic approach, the alternative Austrian analysis of money and the business cycle is explained as a more reasonable and realistic framework. Austrian economics focuses on the microeconomic processes at work in an unhampered market economy, and thus makes it possible to more deeply and accurately understand savings, investment, capital formation, interest rates, and the market coordination of economic activities across time. That analysis also enables an explanation of how central-bank monetary expansion and interest-rate manipulation distort and imbalance savings and investment in such a way that a business cycle may be set in motion and eventually lead to an inescapable downturn, during which markets attempt to correct and rebalance to restore sustainable market coordination.

The last two chapters (39–40) reprint two lengthy interviews in which I participated that enabled me to present — in a way the other chapters do not — some of the core and essential concepts and ideas that underlie the Austrian approach. They also offer, for whatever it may be worth, an account of how I came to my own interest in Austrian economics as a young man, which included my good fortune in attending that first Austrian economics conference in June 1974 and the opportunity to spend a good part of two summers in the 1970s in close interaction with Friedrich A. Hayek, one of the truly great thinkers and economists of the twentieth century.

My general hope is that the chapters in this volume will give the interested reader a reasonable grasp of the theoretical and policy ideas of the economic tradition that, in my opinion, offers the clearest and most insightful framework for appreciating the nature of human action and choice, the workings of the market process, and the inherent and inescapable problems and contradictions in all attempts to impose various forms of socialism, interventionism, and the redistributive state.

The Objectivity and Value-Freedom of Austrian Economics

I feel that I should add one caveat. While the Austrian economists have become famous as critics of socialism and the interventionist-welfare state, it is important to emphasize that they have viewed themselves first and foremost as economic theorists attempting to understand how the world objectively works, that is, in a value-free manner.

The founder of the Austrian school, Carl Menger, stated that in 1889, when he said, “It is the task of [economic] science to be concerned solely with fact and not with value. Science has to teach us what has been, what is, and how what is has come to be; but not what ought to be.”

Ludwig von Mises expressed the same view, perhaps a bit more colorfully, in 1932 in a published exchange with an advocate of government intervention. He said,


I am an economist, not a preacher of morality who wishes to judge, avenge, and punish. I do not look for guilty parties but for causal connections. And if I speak of interventionism, I am not making accusations against the “state” or against “labor.” I only attempt to point out to what consequences a system, a policy, an ideology must necessarily lead. (Selected Writings of Ludwig von Mises, vol. 2, p. 201)

The strength of the Austrian economic approach is that it is concerned with the nature and reality of the logic of human choice and action, separate from and independent of what choices and which actions individual persons may decide to undertake in the concrete. It offers a general and universally applicable analytical template, if you will, for analyzing and interpreting any and all human action in which an individual person imagines preferred ends or goals, but for the attainment of which useful means to those ends are scarce, that is, insufficient in quantity or quality to serve all the ends for which he would want to apply them.

It attempts to dispassionately analyze the workings of the market process as it emerges through intentional human interactions from discovered potential mutual gains from trade, including its many and multifaceted spontaneous and unintended consequences in the form of economic outcomes and evolved social institutions. This last is a theme that has run through the writings of the Austrian economists from Carl Menger to Friedrich Hayek and up to the modern members of the Austrian school.

The Austrians apply their theoretical framework and its conclusions to interpreting the social and economic patterns of events in the past and in the present, that is, for purposes of applied social, political, and economic history. And they attempt to understand and conceptually anticipate the possible and likely outcomes and results from the introduction of various forms of government economic policies in the realms of what are generally called microeconomics and macroeconomics.

Strictly as economists, the Austrians merely try to explain the likely consequences from the introduction of alternative fiscal, monetary and regulatory and redistributive policies. They do not challenge the ends or goals of the advocate of such interventions, but merely attempt to analyze whether the policy tools and methods proposed or implemented will in fact bring about the desired outcome — or whether, in fact, the policy might make the situation the intervention is meant to solve even worse than if no intervention had been introduced at all.

In that sense, most of the Austrian economists have insisted that economics as a science of human action and its consequences is a study of the efficacy of the means proposed or applied to achieve stated or desired ends, and not a science of ethical judgment concerning the rightness, or goodness, or justice of the ends chosen as reflected in the policies proposed or implemented.

As the following chapters in many instances attempt to show, the collectivist and interventionist means chosen by the advocates of such policies are inconsistent or contrary to the attainment of most of the publicly stated goals that they insist their policies are meant to achieve; for instance, higher standards of living for more if not all the members of society, greater opportunities for personal achievement and betterment in everyday life, and enhanced respect for the dignity and diversity of humanity through greater equality and justice for all in the arenas of association and exchange.

By the benchmarks of those stated goals and desires, the Austrian economists, in my judgment, have effectively demonstrated that the open and competitive free-market process is the most successful institutional and policy setting.

It is for that reason, in my view, that as economists per se the Austrians have widely proposed that the free-market economy is the most desirable institutional framework for a society that values both freedom and prosperity in the widest sense.

Austrian Economists and the Case for Liberty

At the same time, it is also the case that most members of the Austrian school — with a few notable exceptions — have generally viewed themselves as “liberals” in the nineteenth-century sense of the term, meaning advocates of a political philosophy of individual liberty, economic freedom, and constitutionally limited government under the impartial rule of law. Some of them have philosophically justified their defense of human liberty and free markets on the basis of natural rights. Others have argued the case for personal freedom and the market economy on utilitarian or consequentialist grounds.

But as much as Austrians may personally value and cherish a society of free persons possessing the liberty to live their lives as they choose in peaceful and voluntary association with others, they argue — indeed, insist — that their economic theory and analysis of human action and the market process stands on its own, and still would even if the economic analyst held radically different social and political values. The laws of economics, rightly understood, are independent of personal judgment and desire.

Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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