The Austrian School; Fear the Boom, not the Bust - Critique of Marxism

<blockquote>'It has become a popular trick among people who are unprepared to grapple with the actual economic arguments of the Austrian School to try to short-circuit the debate by groaning, zombie-like, "unscientific!" with hardly any familiarity, outside of what they were taught in grade school, of even the epistemological issues concerning the natural sciences, let alone the even more neglected epistemological issues concerning the social sciences.'

- Daniel James Sanchez, Mises on Mind and Method, April 21, 2011</blockquote>


'Because monetary expansion masks the true nature of the economy, it is advisable to rely upon an understanding of Austrian economic theory to guide our investment decisions .. the continued expansion of fiat money will mean the total collapse of the dollar and destruction of the American middle class, as happened to the mark and the German Middle Class in 1923.'

<blockquote>'Why Governments Destroy Sound Money

Governments destroy sound money because sound money forces every economic actor, including government itself, to practice fiscal discipline. But central-bank-created fiat money allows government to avoid the hard choices that are part and parcel of an economy ruled by scarcity and uncertainty, and it opens the floodgates for (temporarily) unlimited deficit spending by politicians.

Fiat money allows politicians to buy the votes of special-interest groups through money production, while avoiding the unpopular necessity of taxing the people or borrowing honestly in credit markets, which crowds out private investors. So expansion of fiat money is in government's self-interest but not the peoples' self-interest, although this fact is hidden and propagandized away — for example, by blaming the credit crisis on "greedy bankers."

Furthermore, we all receive or expect to receive expropriated property in some form — governments buy us off with retirement benefits and free healthcare services, for example. Under sound money, the people are the masters and government is their servant. But under fiat money, government is the master and the people are the servants. This is why Ludwig von Mises said that sound money is as important to human liberty as bills of rights and constitutions.

Inflating a New Bubble

Because monetary expansion masks the true nature of the economy, it is advisable to rely upon an understanding of Austrian economic theory to guide our investment decisions. Austrian economic theory tells us that new money will go somewhere, creating bubbles that cannot be sustained. Examples are the dotcom bubble of the late 1990s and the housing bubble of the first decade of the new millennium. Today's zero interest rates probably are inducing a stock-market and bond-market bubble right now.

Bubbles will appear also in commodities. The prices of corn, wheat, soybeans, iron ore, and oil have risen tremendously in the last year at the same time that production has risen. This phenomenon is possible only due to an increase in the supply of money.

There is a high probability of another bubble in farmland prices in America, so it is probably the same in Europe. High commodity prices and low interest rates drive up the capital value of farmland. But this is a mirage. When the bubble bursts and interest rates rise, the capital value of farmland will fall.

This has happened several times in my banking career. The last one in the 1980s was vicious — bankers in Iowa were murdered because they were forced to repossess family farms that were used as collateral for farmland purchases. Other bankers were driven from their professions after death threats. I witnessed this phenomenon firsthand.

A banker from Wisconsin, a prime American agricultural state, recently told me that a land bubble probably already exists — but it is hard to tell. Exactly. It is hard to tell, because the standard risk-analysis methods make farm loans appear to be sound — for now: crop prices are high and interest rates are low. This is the perfect storm for a bubble in farmland prices.

..

..the continued expansion of fiat money will mean the total collapse of the dollar and destruction of the American middle class, as happened to the mark and the German Middle Class in 1923.

Ludwig von Mises explained how a fiat currency collapses in his three phases of money destruction. In the first phase, the peoples' deflationary expectations (that prices will fall) lead to higher money demand (sometimes called hoarding), and deflation, or price stability, becomes self-fulfilling — for a while. Eventually price increases lead to a fall in the demand for money; people start spending before prices rise even further. This causes prices to rise even faster. Now we enter the "danger zone," the final phase of money destruction, in which the public expects prices to continue to rise forever, so demand for money collapses and the crackup boom occurs.

It is very likely that the United States is past phase one and well into phase two at the present time. Although Austrian economics is not a predictive science, be aware that currencies can collapse very quickly — in a whoosh! so to speak. Examples are Germany in 1923 and modern Zimbabwe in recent years.

In conclusion, do not be misled by all the illusions caused by increased monetary expansion, no matter how fashionable. The immutable laws of economics will prevail. They cannot be rescinded, no matter how much enticement, coercion, and even terror a government attempts. Do not be swayed by government propaganda that zero interest rates and deficit spending have cured the economy and that it is safe and even patriotic to "invest in the future."

This is a time for capital and wealth preservation, so that society has something upon which to build when economic intervention has run its course and the people are desperate enough to, once again, give freedom and liberty a chance.'

- Patrick Barron, Fear the Boom, Not the Bust, April 21, 2011</blockquote>


'Böhm-Bawerk foresaw, that the "belief in an authority, which has been rooted for thirty years" in Marxist apologetics "forms a bulwark against the incursion of critical knowledge"..'

<blockquote>'The dispute with the socialists was soon to become a permanent fixture of the Austrian School. It is an irony of history that it was this school of thought that first introduced academic discourse about socialism into the seminar rooms and libraries of established economics departments. Criticism was aimed primarily at the labor theory of value, whose contradictions and shortcomings were thought to have been overcome once and for all with the subjective theory of value. The socialist theory did not represent progress, but rather regression (cf. Zuckerkandl 1889, p. 296). Fierce controversy between Böhm-Bawerk (1890 and 1892a), Dietzel (1890 and 1891), and even Zuckerkandl (1890), among others, brought competition between the two doctrines to a head. Dietzel held to the labor theory of value, and held fast to the view that the principle of marginal utility was, in the end, nothing more than the good old law of supply and demand (Dietzel 1890, p. 570).

..

Disputes with socialism soon went beyond the labor theory of value and brought the "socialist state" into question in many respects. Böhm-Bawerk, for example, regarded interest as an economic category wholly independent of the social system; interest would exist even in the "socialist state" (Böhm-Bawerk 1891/1930, pp. 365–71). Wieser criticized socialist writers for their inadequate teaching of value's role in the socialist state. He came to the conclusion that "not for one day could the [socialist] economic state of the future be administered according to any such reading of value." For Wieser, "in the socialist theory of value pretty nearly everything is wrong" (cf. Wieser 1889/1893, pp. 64–66). Johann von Komorzynski extended the analysis to political science: he distinguished between a "true," "philanthropic socialism," and a "delusory socialism" aimed purely at class interests (Komorzynski 1893).

Böhm-Bawerk foresaw, that the "belief in an authority, which has been rooted for thirty years" in Marxist apologetics "forms a bulwark against the incursion of critical knowledge" that "will slowly but surely be broken down." And even then, "Socialism will certainly not be overthrown with the Marxian system — neither practical nor theoretical socialism" (ibid., p. 117).'

- Eugen-Maria Schulak & Herbert Unterköfler, The Austrian School's Critique of Marxism, April 12, 2011</blockquote>