Introduced Austrian Economics to my teacher..

[jbrace]

Hey Ms. Smith,

I asked you about the Austrian model of Economics because I find it
really interesting. Being a Economics teacher I figured you would too!
Here's a link to the site.. www.mises.org.

Some articles I like

http://mises.org/story/3637

http://mises.org/journals/scholar/Thornton13.pdf


This is was her reply...

Ahhhh...yes, the Psychological school! I just had not heard it called
the Austrian model before. Seems like I do remember the theories being
called the Vienna School of thought at one time though. The
Psychological school of thought of course has merit, and the model
clearly espouses a laissez faire approach to the economy, which was the
American way in our early days. However, since this model relies on
human behavior with all of its complexities, it makes it very hard to
apply mathematical models to help explain and understand economic
concepts. This is probably one reason why most textbooks and
principles-level courses shy away from much discussion of the model.
It is usually mentioned as a "school of thought proposed by some
economists," but not studied in so much detail. Most such courses and
texts stick to the classical model, which is mostly based on the
theories of economist Adam Smith and others of a similar vein.

The current administration does seem to espouse the Keynesian theory,
believing that heavy government involvement is needed to regulate the
economy and keep unemployment, interest rates, and whatnot under
control.

The main theme here is that all schools of thought are made up of
theories. There are very few "laws," or theories that have been proven
beyond a shadow of a doubt. I guess we are all still trying to make
sense of our economies and how they work! Discussion of all schools of
thought are always educational and welcome as far as I am concerned.

[dannno]

EDITED A FEW TIMES* (now done editing)

Ms. Smith -


What did you think about the Austrian School's definition of inflation? Generally economics students are taught that inflation is rising prices, but according to Austrian School inflation is an increase in the money supply (yes, Austrian School believes that rising prices is a result of inflation of the money supply, but that the increase in money supply is the true definition of inflation). Austrian Economists seem to believe that the current basket of goods that the government deems sufficient to calculate general price increases is flawed, as it does not account for energy and housing. It seems like these commodities are essential for everyone to live, I wonder why the government doesn't use them to calculate the CPI? Especially considering these sectors have had the highest rising prices over the last decade, wouldn't it be important to include these numbers?

Austrian Economists also say that our Federal Reserve artificially lowers interest rates in order to boost the economy temporarily. Apparently this causes more money to be created because it makes loans cheaper to obtain, and this causes true 'inflation', aka increasing the money supply. The other problem that I am reading about is how this "cheap credit" causes what is referred to as malinvestment, where investors take higher risks that they normally wouldn't take if interest on loans was priced to market rather than government decree. They say that our housing bubble was primarily comprised of this malinvestment and that is why it collapsed. Investors piled in to take advantage of the cheap credit, bidding up housing prices until they finally realized that it was unsustainable. The prices of homes were based on an influx of cheap credit rather than real demand for housing from rising wealth.

What do you think? Is this sort of meddling of our economy healthy? It seems like it is good for corporations who are on top of the credit chain and receive the most money, but when it causes inflation it seems to hurt the middle class and poor who have relatively static wages while prices rise due to inflation. Could this be the real cause of poverty in this country?

[MRoCkEd]

Ms. Smith, in the sake of fairness, can you spend as much time teaching us the Austrian school as the Keynesian one? Thanks!

[surf]

However, since this model relies on human behavior with all of its complexities, it makes it very hard to apply mathematical models to help explain and understand economic concepts. This is probably one reason why most textbooks and principles-level courses shy away from much discussion of the model.
bingo. give Ms. Smith credit for realizing this point.

edit: see the "money mulitplier" and the low level calculus built into tests to evaluate "understaning" of the concept

[Epic]

"However, since this model relies on human behavior with all of its complexities, it makes it very hard to apply mathematical models to help explain and understand economic concepts."

This is a methodological criticism.

Here are just a couple resources on the Austrian method.

http://mises.org/pdf/esam.pdf
http://mises.org/rothbard/praxeology.pdf

The complexity of human behavior and consciousness is a reason to not attempt to guess 'psychology' (as Keynesians do, with phrases such as "consumer confidence" and "animal spirits"), but rather to infer preference based on tangible, physical action.

In this way, the Austrian model is distinctly non-psychological.

[jbrace]

EDITED A FEW TIMES* (now done editing)

Ms. Smith -


What did you think about the Austrian School's definition of inflation? Generally economics students are taught that inflation is rising prices, but according to Austrian School inflation is an increase in the money supply (yes, Austrian School believes that rising prices is a result of inflation of the money supply, but that the increase in money supply is the true definition of inflation). Austrian Economists seem to believe that the current basket of goods that the government deems sufficient to calculate general price increases is flawed, as it does not account for energy and housing. It seems like these commodities are essential for everyone to live, I wonder why the government doesn't use them to calculate the CPI? Especially considering these sectors have had the highest rising prices over the last decade, wouldn't it be important to include these numbers?

Austrian Economists also say that our Federal Reserve artificially lowers interest rates in order to boost the economy temporarily. Apparently this causes more money to be created because it makes loans cheaper to obtain, and this causes true 'inflation', aka increasing the money supply. The other problem that I am reading about is how this "cheap credit" causes what is referred to as malinvestment, where investors take higher risks that they normally wouldn't take if interest on loans was priced to market rather than government decree. They say that our housing bubble was primarily comprised of this malinvestment and that is why it collapsed. Investors piled in to take advantage of the cheap credit, bidding up housing prices until they finally realized that it was unsustainable. The prices of homes were based on an influx of cheap credit rather than real demand for housing from rising wealth.

What do you think? Is this sort of meddling of our economy healthy? It seems like it is good for corporations who are on top of the credit chain and receive the most money, but when it causes inflation it seems to hurt the middle class and poor who have relatively static wages while prices rise due to inflation. Could this be the real cause of poverty in this country?

I responded in an email with what you said and this is what she said...
Jeremy,

I have long held the belief that a true market economy no longer exists
in America due to an overly involved government, and that this has, in
many ways, hurt our economy and our country. I do think that there is
some misunderstanding on the part of some Austrian scholars as to the
classical definition of inflation, however. It is true that inflation
is generally defined as an increase in prices, but classical economists
also list an increase in money supply as a cause of this inflation,
which in effect, makes the increase in money supply part of the
definition of inflation. I wholeheartedly agree that manipulation of
the money supply, via interest rate manipulation, has a damaging effect
on the economy. In fact, I have long believed that the extensive use of
credit in our country (thereby over-extending our money supply, which
is no longer truly based on the gold standard as was originally
intended) has caused many of the financial woes our country faces and
will ultimately lead to the downfall of our financial system as we know
it. Of course, I am a realist, so it is hard for me to understand a
financial system being so dependent on what basically amounts to
"imaginary" money, that has no real value, such as the gold standard,
behind it. It makes total sense to me that this artificially inflated
money supply leads to "bubbles," such as the one we recently
experienced in real estate. When large loans are too easily attainable
and interest rates are artificially low, thereby encouraging more
borrowing, over-buying, or over-investing, is inevitable given human
nature and the human tendency to always want more. This basically
leads to a "bubble" effect, which cannot last forever; and when the
bubble bursts, the result can be devastating on the economy as it seeks
to return itself to some type of equilibrium.

I am, at heart, a true laissez faire capitalist; I believe that the
government should keep its hands off of the economy and allow the
markets to work. (Obviously, this means that I do not think
Socialistic rationing of wealth is efficient and believe it only serves
to weaken an economy as well.) In teaching economics, or any subject,
however, one must put aside one's own opinions and beliefs to a large
degree and focus on the principles and concepts that guide or make up a
discipline. It is not the teacher's job to sway opinion, but rather to
assist students with the accumulation of knowledge to build their own
opinions. That being said, I would prefer to see textbooks give more
credence to the various schools of thought in various disciplines. It
seems that most of the academic world tends to "latch on" to one school
of thought and allow that to pervade our teaching. I appreciate the
fact that you have reminded me of the value of presenting other schools
of thought!

Finally, however, I must defend to some extent the classical school of
economics as largely presented in our textbooks for the teaching of
basic economics principles and concepts. One of the main criticisms of
the Austrian school, or psychological school, has been its lack of
scientific methodology and mathematically "provable" modeling. As the
psychological school places most of the burden of cause of economic
activity on the shoulders of human behavior, it is very hard for
anything to be mathematically modeled or proven using scientific
experimentation methods. As we know, human behavior is often quite
unpredictable, and the simple act of placing humans into a controlled
experimental process or model can alter the behavior unintentionally.
This lack of modeling and mathematical proof also makes it quite hard
to explain or "teach" to students of business and economics; hence the
focus on more classical schools of thought in most economics textbooks
and classrooms.

Again, I appreciate your interest and discussion and look forward to
your input in the classroom to spark much intelligent and beneficial
conversation!

[acptulsa]

So, one resists mathematical models, while the other welcomes them--but none of the mathematical models work. So, what does it come down to, then? Which is more transparent? Which one actually works?

Which one actually works--God forbid academia should come down to that!

[mczerone]

Perhaps email mises.org and ask what good textbooks you could recommend to her, so that she could teach a theory that works, instead of one where they make the math really easy.

In a former life I was a math guy - I can do all the 'discrete calculus' required to make subjective value theory applicable to many of the mainstream models - but that doesn't mean that the models are, at all, representative of the real world, where the knowledge of such 'future predicting' models must be accounted for in the minds of the actors you are trying to model, and thus the model must account for itself...

Long story short: we can do complicated math all day, but we aren't any closer to anything for the efforts. Looking at theory instead as a way to answer "what should I do" will stop this Keynesian spread (i.e. diffusion that uses the gov't to insist upon its own diffusion) of a eugenically inspried theory of "what you should do, and how can we incentivize it?"

[Young Paleocon]

So happy I have an Austrian professor. :D

[Elwar]

The one that works is hard to teach...thus we are taught the crappy ones that don't work that are easier to teach...

[Eroberer]

Maybe she should read Truth and History by Mises.