Viennese Primer

The original of the following, somewhat edited statement was first posted on the Mises Institute website all of 10 years ago but, despite the somewhat archaic corporate references (and we have, of course, had many bigger and badder examples of misadventure since then), it still provides a useful frame of reference to the school of thought to which I belong.


As often in the wake of an episode of financial meltdown, the cosy complacency of the economic world has been shattered and reformed among more factional lines. For their part, the failure-of-capitalism school have shaken off a VERY brief interlude of introspection to come back, red in tooth and claw, to blame all the ills of the times on the mythical beast of ‘market fundamentalism’ rather than on the disastrous crony corporatism which had been engaged in by their hallowed public sector on the one hand and a motley crowd of strutting CEOs and Old Boy Network oligarchs on the other.

In reaction, those who are wholly unconvinced by the tendentious – but oh, so opportune – scribblings of a Piketty or who are infuriated by the daily ravings of that intellectual charlatan his opponents refer to as the ‘former economist’ Paul Krugman have been casting about once more for an opposing  banner under which to muster.

Many of the more vocal among them – especially when they have a fund to sell you, or a column to promote – have positioned themselves in the media as ‘Austrians’, even though their views are often little more than a precious metal, prepper-mentality parody of the School’s thinking. Because there is no trademark on the name, and since the Mises Institute issues no Seal of Austrian Approval, our only real hope is that these good people take time off from talking to the press, or trying to part you from your hard-earned cash, and spend more time reading instead.

If they do, they will find that Man, Economy, and State by Rothbard, and Human Action by Mises, are both online, but that the opportunity costs of such deep study are high. The same is true of the expansive Austrian Study Guide posted on There is a quiz to help, and 20,000 have taken it—all to the good. But even the quiz and audio content may prove too much to handle in our times of 140-character commentary and Instagram exegesis.

So in the interests of broad public understanding, I here present an admittedly imperfect Austrian Economics in one short article:

Philosophically, the idea is that Man is a rational actor insofar as he tries to increase his well-being, or to decrease his “unease,” through purposive Action.

However, each man’s individual motivation in Acting—his pleasure/pain scale, if you will—is wholly different to that of his neighbour’s and it is an ordinal one—with little scope for quantitative measurement and certainly none for aggregation.

In this focus on the subjective elements of a man’s choice, all value – and, hence, all utility—originates. These are constructs of the human mind and explicitly not some derived property of the physical world.

Value is thus a specific, not a generic, quality and varies according to time, place, and circumstance—e.g., a thirsty man in the desert is glad to exchange gold for water, while a visitor shivering in the rain at the English seaside may be willing to pay good money to be spared having to endure any greater supply of the stuff.

Developing this idea, Austrians were in the forefront of the Marginalist revolution; an advance which realized that choices are made (and hence valuations formed) “at the margin.” This alone was enough to correct errors which had long confounded both classicists and Marxists.

By marginalist, Austrians mean that a person makes an exchange only after making a favourable, subjective mental comparison of the cost of forgoing the most willingly surrendered (the most “marginal”) tradable quantum of his existing property with the benefit he expects to enjoy from the corresponding, first quantum of goods offered for it by his counterparty, as well as with those which might accrue from trading for another’s, different, goods instead, should this be an option.

Austrians know better than to believe in the sterile, zero-sum games of some schools, since exchange, though conducted at a single price, does not therefore preclude the derivation of mutual benefit from the act.

More emphatically, the very fact that there may exist an overlap between the two counterparties’ subjective valuation scales is what allows for the emergence of mutual benefit and so motivates the process of exchange itself.

This clearly refutes Marx’s crude exploitation theories by revealing that the costs which went into providing a good can have no influence on its subsequent circumstantial valuation and hence on the price these goods can command on the free market.

Indeed, it is the entrepreneur’s particular skill—as well as his essential service to society—that he has an enhanced ability to put temporarily underpriced combinations of resources to a more nearly optimal use than can other men.

These insights are said to be made a priori and Austrian reasoning is thus deductive, not inductive, or empirical. Economics is, then, evidently a discipline where mathematical abstraction can play little part.

Politically, Austrians are classic Manchester liberals, firmly behind a policy of laissez-faire and many today thus shade into Misesian minarchism or even what Rothbard proudly called anarcho-capitalism.

Mises himself single-handedly destroyed any attempts to construct a socialist rationale in the famous “calculation debate,” showing that, without private property and an unhindered price mechanism, production can never be properly coordinated to allocate scarce resources to their best and most urgent uses.

Hayek joined Mises in showing that there can be no room for compromise, that a “mixed” economy inevitably leads to an erosion of freedom and the growth of the state to the detriment of all those not in, or patronized by, the ruling classes (of whatever caste, creed, or form).

Menger and Boehm-Bawerk, et al, derived the most satisfying theory of the origins of interest—the so-called natural rate being, essentially, a measure of mortal man’s inherent impatience with any delay in the gratification of his wants and needs. This is greatly influenced by the degree of plenty and comfort which he already enjoys.

In turn, this implies that capital-rich economies with bounteous productive capabilities tend to have higher levels of present satisfaction and so lesser impatience, more saving, and hence lower natural rates of interest.

Therefore, the Austrian realizes that low interest rates naturally arise amid abundance—an abundance based upon a wide division of labor and a capital-rich layering of specialized productive means.

He also knows that abundance can never be entrained merely through forcing money market interest rates lower by fiat.

Austrians know something cannot be had for nothing, nor can the element of time be ignored—Bastiat’s fable of the “broken window” is often cited as a starting point for argument.

Hazlitt, developing this theme, wrote that the “One Lesson” of economics is that there is no such thing as a free lunch and that we must always look beyond the immediate results of an action to see its hidden and indirect influences before we pronounce it a success or a failure.

Mises developed a comprehensive “Theory of Money and Credit” which irrefutably showed that inflation always leads to ill effects and, together with Rothbard, campaigned for a system based on free-banking, meaning no FDIC, no Fed, no fiat, and – for some proponents of 100% commodity reserve, to boot – absolutely no fractional reserves, either!

Out of this arose the Austrian Theory of the Business Cycle which discusses in detail how an inflationary infusion distorts price signals—particularly intertemporal ones.

By lowering market rates below the natural one, credit expansion severs them from that which is compatible with the availability of real capital and with the concomitant willingness to save while more “roundabout”—slower amortizing, but potentially more productive—methods are employed.

Thus, the builders of plants and the makers of equipment base their return calculations on low rates, but are blinded to the fact that these do not signal the necessary limitation of end-consumer competition for the factors of production which they, or those downstream from them, will need to secure the required return on their efforts.

At some point these factors will be bid away to other, more urgent uses, more compatible with consumers’ time preferences—which may in fact have been increased (their demand for goods enhanced)—by the same lower rates which entrepreneurs have implicitly taken as meaning that such an appetite has diminished.

These distortions will lead to bottlenecks in skills, staff, resources, equipment. They will mean a consistent price path from high-order to consumer goods will not be possible. It will mean losses and the revelation of widespread “malinvestment”—not necessarily “over-investment,” but misdirected and sub-marginal investment, e.g. Global Crossing, Nortel, AT&T and many others in this past cycle! [Add whomsoever you like here – housebuilders and shipping lines, commodity producers, and half of China, perhaps, to illustrate the same phenomenon at work in the subsequent cycles]

Credit expansion will therefore sow the seeds of its own destruction as soon as any initial slack in the system is taken up and as soon as the rate of inflation (a monetary addition revealed to be in excess of people’s willingness to absorb it into their everyday holdings) ceases even to accelerate (a process needed to keep the producer borrowers surfing ever ahead of the breaking wave of the faulty price/preference matrix in the economy).

Developed in the earlier part of the century, the standard exposition implicitly assumes that most large scale borrowing is done by producers, not consumers—the former thus got the first, most beneficial use of the inflationary influx (spending the money before prices rose) and they could bid resources away from the latter as a result of this legalized fraud.

This has had to be modified somewhat to take account of today’s institutional framework where the consumer is a major borrowing force also and where a soft-budget Leviathan has grown ever more bloated, but the underlying principles have nonetheless not been challenged by this expanded scenario.

Again, modern expositions of the theory have to take into account the sweeping internationalization of the economy and recognize that Asian savers, for example, can substitute for US ones, for so long as they are willing to do it or, conversely, that an inflationary excess in, say, China, can induce a wave of malinvestment half way around the globe.

As part of this, unlike almost all opposing strains of opinion, Austrians have no irrational fear of gently falling prices – of ‘deflation’ as this blissful state is regrettably misnamed in the common usage – not where such a raising of real living standards arises from advances in productive technique, from the practice of well-founded entrepreneurship, or from the wider division of labour.

In contrast, in the aftermath of the recurrent historical misfortunes that befall us as a result of the interplay bad economics, flawed institutions, and irredeemably venal politics, it may just be acceptable for those eternal agents of our misfortune, the central banks, to act so as to arrest a self-fuelling destruction of values when the earlier, unsustainable, and thoroughly unnatural boomtime pathology to which they gave rise transmutates suddenly into its polar opposite, the ‘secondary depression’. Even this concession is highly contentious among real Austrians, many of whom credibly fear to encourage such a rescue’s subsequent abuse, as well as being chary of the demoralizing effect of knowing in advance that this is likely to be the response.

What no-one of the Austrian persuasion will ever endorse, however, is that it should be any part of subsequent policy to make the attempt to ‘unwind’ this genuine example of a money-driven ‘deflation’. As Mises pithily put it, you cannot help the subject of a traffic accident by reversing the car back over his prostrate form.

Austrians are thus typically lampooned as ‘bitter end liquidationists’ when all they want is for the rules of contract to be applied without exception, for all failures to be recognised swiftly – so minimizing the duration of economic pain as well as serving to visit it principally on those who have contributed to such failure and not on the community of their uninvolved neighbours – and for a cynical exploitation of our natural human compassion for our fellows in trouble not to hinder a rapid and necessary triage of the casualties.

Better a swift bankruptcy, a cleared market, and a leg-up into a new opportunity for those displaced than a wearisome period of ‘Fauxterity’ (i.e., of the strangulation of sharply higher taxes but rarely reduced state outlays), the mass Zombification of enterprise and of its lenders, and the pernicious victimisation – indeed, the creeping criminalisation – of those whose savings, property, and income may have survived the initial cataclysm.

Having viewed the sorry track record of the last six years’ denial of this prescription, can anyone honestly argue to the contrary?

Austrian theory is thus subjective, not objective; dynamic, not static; logical, not empirical; individualistic, not aggregative; libertarian, not statist; it does not confuse money with wealth; it knows that production delivers prosperity, not consumption.

It recognizes consumer sovereignty, places prime importance on the capital structure of the economy, apotheosizes the entrepreneur, despairs of government, and utterly disdains Marxists, Keynesians, Chicagoites, and all other Positivists, Historicists, and wannabe Natural Scientists.

In their ignorance, these latter, naturally, return the compliment and since these schools can all be used by the State as an excuse for its ever-widening interference in our lives—whereas Austrians demand the minimum possible intrusion upon private property and personal liberty, for solidly economic, as well as for ethical grounds – guess who gets most of the air time?


Sean Corrigan aka Wild Goose