Austrian School vs. itulip / FIRE

[Sharky]

Can anyone point me to a comparison of the Austrian School to the itulip / FIRE view of economics (or summarize it here)? After being here for more than two years now, I have a pretty good sense of it, but I'm looking for concise specifics, and Google has failed me.

[pianodoctor]

Re: Austrian School vs. itulip / FIRE

I'm not qualified to give the whole rundown, but I recall EJ writing that the Austrian School these days is an inadequate theory to deal with our 'borderless' money-world, and that proponents of the Austrian School are essentially ideologues rather than proponents of a workable theory.

[c1ue]

Re: Austrian School vs. itulip / FIRE

You need to be careful: the true direction of the Austrian school of economics is as a reaction to Marx's economic analysis using the value of labor - and is not to be confused with its most vocal and public adherents.

This school of thought argues that the economy does not operate via the value of labor (as does Marx), but rather as a function of consumption via price discovery. In other words, it isn't the value of labor necessary to produce or to produce value which is then spent to consume, it is prices which dictates wages.

However, the direction of such institutions as the Von Mises Institute is rather focused on gold - as in 100% gold standard.

The Von Mises institute and its adherents argue that fiat money distorts the price discovery process and destroys the equilibrium of the price discovery economy.

A very simplistic analogy: classic Austrian economics is top down or 'emergent' prices which govern the economy, Marx is value of labor that governs the economy, Von Mises Institute says hard asset backed currency permits the economy to function 'correctly' - a version of libertarian wishful thinking (if only 'X', then we'd all collectively through our individual actions achieve the greatest good).

In contrast iTulip doesn't per se advocate a gold standard, nor does iTulip per se advocate any specific economic theory.

iTulip is a set of recommendations in response to the economic world we are in today: how to preserve wealth via understanding the various dynamics going on including Peak Cheap Oil, The Fall of the fiat US dollar (other fiat is presumably included), and the worldwide debt crisis.

[Sharky]

Re: Austrian School vs. itulip / FIRE

I'm thinking about the aspects of the Austrian School that apply to the world today, rather than their ideal model. For example, they say that the business cycle is inevitable in the presence of a growing supply of fiat money. In addition to the prices being determined primarily by the money supply, they also claim that human behavior is largely unpredictable, and use that as the basis for arguing in favor of laissez-faire.

I consider itulip to be more than a set of recommendations. There is also a model, a world-view, behind those recommendations -- which is, by its nature, a form of economic theory. For example, itulip says that human economic behavior is at least somewhat predictable, particularly in the presence of government incentives -- hence bubbles, etc. There is also the thinking around the difference in asset prices vs. wages and consumable prices, and the nature of a reserve currency vs. other currencies when it comes to inflation, the effects of peak cheap oil, debt deflation, etc.

Having said that, I still feel like there are few pieces in between somewhere that I'm missing....

[lektrode]

Re: Austrian School vs. itulip / FIRE

I'm thinking about the aspects of the Austrian School that apply to the world today, ...
I consider itulip to be more than a set of recommendations. ...
Having said that, I still feel like there are few pieces in between somewhere that I'm missing....

whooo boy!
i hope you dont have this thing set to send email everytime theres a reply?

i'd imagine c1ue's response will set off a perty good chain reaction....

cuz this group is as close to 'fusion power' as any listserve/blog eye ever saw....

[c1ue]

Re: Austrian School vs. itulip / FIRE

I'm thinking about the aspects of the Austrian School that apply to the world today, rather than their ideal model. For example, they say that the business cycle is inevitable in the presence of a growing supply of fiat money. In addition to the prices being determined primarily by the money supply, they also claim that human behavior is largely unpredictable, and use that as the basis for arguing in favor of laissez-faire.

Again, I caution you against applying the Von Mises Institute views to what the actual Austrian school of economics is supposed to be.

Yes, the Austrian school of economics says the business cycle is inevitable. But then again, there is no credible school of economics which doesn't also recognize the business cycle (see neo-liberal economics for a counterexample).

The presence of fiat money per se isn't what causes the business cycle; this is inevitable as the emergent quality known as price isn't instantaneous.

Secondly the Austrian school of economics doesn't actually care about human behavior in a model sense: it specifically doesn't look at humans as either perfectly rational or perfectly irrational, or for that matter quantifiably rational/irrational. It just looks at prices.

I consider itulip to be more than a set of recommendations. There is also a model, a world-view, behind those recommendations -- which is, by its nature, a form of economic theory. For example, itulip says that human economic behavior is at least somewhat predictable, particularly in the presence of government incentives -- hence bubbles, etc. There is also the thinking around the difference in asset prices vs. wages and consumable prices, and the nature of a reserve currency vs. other currencies when it comes to inflation, the effects of peak cheap oil, debt deflation, etc.

Having said that, I still feel like there are few pieces in between somewhere that I'm missing....

Well, your opinion is your own.

There are some areas which EJ/iTulip have noted are historically beneficial: EJ has specifically talked to public education as an example where a government policy was used to reorient the population towards a future despite short term economic pain.

However, to my knowledge, EJ/iTulip has never actually said what any of these quantities/qualities should be.

The closest that I can see is the alternative energy bubble - and I personally am unclear as to whether this is a primary policy or simply a method to break out of the FIRE based bubbles.

If, on the other hand, you refer to the community, there are definitely some areas of congruence between many forum members views.

[Sharky]

Re: Austrian School vs. itulip / FIRE

Again, I caution you against applying the Von Mises Institute views to what the actual Austrian school of economics is supposed to be.

I'm not sure what you mean. I'm referring primarily to the writings of Von Mises, Rothbard and Hayek. I know very little about the Institute. Am I missing something?

Yes, the Austrian school of economics says the business cycle is inevitable. But then again, there is no credible school of economics which doesn't also recognize the business cycle (see neo-liberal economics for a counterexample).

Austrians say that inflation causes the business cycle; that without monetary expansion, the resulting cycles would be eliminated. For example, Rothbard says:

"A final indictment of inflation is that whenever the newly issued money is first used as loans to business, inflation causes the dread "business cycle.""

"As "Austrian" business cycle theory points out, any bank credit inflation creates a boom-and-bust cycle; there is no need for prices actually to rise. Prices did not rise because an increased product of goods and services offset the monetary expansion."

"Our plan would at long last separate money and banking from the State. Expansion of the money supply would be strictly limited to increases in the supply of gold, and there would no longer be any possibility of monetary deflation. Inflation would be virtually eliminated, and so therefore would inflationary expectations of the future. Interest rates would fall, while thrift, savings, and investment would be greatly stimulated. And the dread specter of the business cycle would be over and done with, once and for all."

The presence of fiat money per se isn't what causes the business cycle; this is inevitable as the emergent quality known as price isn't instantaneous.

I agree, but I don't think that's the Austrian view -- this is exactly the type of difference that I'm trying to clarify.

Secondly the Austrian school of economics doesn't actually care about human behavior in a model sense: it specifically doesn't look at humans as either perfectly rational or perfectly irrational, or for that matter quantifiably rational/irrational. It just looks at prices.

Yes, but the reason they only look at prices is because they think human behavior is unpredictable -- hence all of the writing about "praxeology," etc.

However, to my knowledge, EJ/iTulip has never actually said what any of these quantities/qualities should be.

Not saying what they should be is different from having a model for they work. I'm interested in perspectives on the latter, not the former. Do you not agree that itulip has a model?

[c1ue]

Re: Austrian School vs. itulip / FIRE

I'm not sure what you mean. I'm referring primarily to the writings of Von Mises, Rothbard and Hayek. I know very little about the Institute. Am I missing something?

The problem is that what the Von Mises Institute and many other so-called Austrian school types have is that the quotes they use are selective.

It is unclear to me from reading a wider selection of work whether this focus is accurate; an example I would use is the constant misuse of Keynes on deficit spending.

Austrians say that inflation causes the business cycle; that without monetary expansion, the resulting cycles would be eliminated. For example, Rothbard says:

Murray Rothbard is in fact a founder of the Von Mises Institute. It is unsurprising that you were able to find quotes attributing the business cycle to inflation, and in turn arguing a gold standard would fix this problem.

I would note that Rothbard had a clear political agenda as opposed to a academic one.

Secondly the notion that a gold standard fixes the business cycle is ludicrous; the United States was on a gold standard until WW II - yet suffered periodic panics every 15 years for a hundred years prior to the ending of the gold standard.

This is what I mean by differentiating between the Von Mises Institute and what the original Austrian school economists were writing about.

I agree, but I don't think that's the Austrian view -- this is exactly the type of difference that I'm trying to clarify.

The Austrian school never says 'emergent', but that is the quality they associate to price discovery.

As for what you are looking to clarify - I'm not sure what the question is!

Yes, but the reason they only look at prices is because they think human behavior is unpredictable -- hence all of the writing about "praxeology," etc.

That is indeed the reason, but of course one huge problem is that the Austrian school doesn't get into how panics and bubbles occur - there is no understanding of 'irrational exuberance', a huge problem for the Austrian school in the real world.

Not saying what they should be is different from having a model for they work. I'm interested in perspectives on the latter, not the former. Do you not agree that itulip has a model?

I can't speak for iTulip, but having a model for something doesn't mean the model applies to anything else.

For example: The Peak Cheap Oil cycle has an impact on Social Security funding, but Social Security funding has political and social components in addition to its economic/financial ones.

Similarly the US dollar losing world reserve currency status cycle has a fairly clear impact on US balance of trade, but how does this affect the internal US economy?

While I have the utmost respect for EJ, economist FRED(s), and many of the iTulip posters, it is the range of views and subject matter expertise which builds to the collective understanding of unfolding events.

To my understanding there is not the semi-mythical model which Martin Armstrong, for example, constantly talks about.

[DSpencer]

Re: Austrian School vs. itulip / FIRE

I generally subscribe to the Austrian School viewpoint. I'm not sure if itulip uses a formal economic framework or what it might be if so. To me, they are both valuable for different reasons. While it seems that EJ is not a proponent of the Austrian School, the ideas presented on itulip don't seem to be completely incongruent. Personally, following the Austrian School of thought does not lead me to much in the way of actionable investment ideas. Austrian economics provides a good background of how things work in a general, theoretical sense. Itulip provides details about how things are working right now in the real world.

For example:
Austrian economists say that a central bank controlling the interest rate and the money supply will lead to "malinvestment". That's great...but now what? Itulip identifies malinvestment in the form of specific bubbles with timely advice on how to invest accordingly.

Austrian economists say that the market does a better job of determining interest rates than a central bank. Unfortunately, believing that our interest rates are sub-optimal does not help much. Itulip attempts to predict what will actually happen with interest rates in the real world.

As a disclaimer, this is all just my perception.

[DSpencer]

Re: Austrian School vs. itulip / FIRE

Secondly the notion that a gold standard fixes the business cycle is ludicrous; the United States was on a gold standard until WW II - yet suffered periodic panics every 15 years for a hundred years prior to the ending of the gold standard.

This is what I mean by differentiating between the Von Mises Institute and what the original Austrian school economists were writing about.

Rothbard's quote says:"Our plan would at long last separate money and banking from the State."

To simplify that into "a gold standard fixes the business cycle" sounds like a straw man. I doubt he was simply asking for a return to pre-WWII monetary policy. Did they have 100% reserves or use fractional banking? Most of the panics involved bank runs which are a result of FRB. I haven't read the greater context of the quote, but I believe Rothbard was against fractional reserve banking.

It can definitely be challenging to nail down the position of a "school of thought" as it's made up of individuals who usually still have differing views. The fractional reserve issue is a good example as I believe that some Austrians are against it and others consider it a worthwhile practice despite its shortcomings. There are certainly those that believe the Von Mises Institute more closely resembles the ideas of Rothbard than Von Mises.

[cjppjc]

Re: Austrian School vs. itulip / FIRE

As a disclaimer, this is all just my perception.

We should all use that disclaimer. Thanks.

[Sharky]

Re: Austrian School vs. itulip / FIRE

As for what you are looking to clarify - I'm not sure what the question is!

OK, let's leave itulip out of it. Let me rephrase:

What are the most important differences between the Austrian School's view of the way the economy works (particularly their business cycle model) and the actual way the economy works?

You've pointed out several good examples already -- I'm hoping to flesh it out a little more.

[c1ue]

Re: Austrian School vs. itulip / FIRE

What are the most important differences between the Austrian School's view of the way the economy works (particularly their business cycle model) and the actual way the economy works?

That is indeed the $64,000 question.

I do not see any single school of economic thought which convincingly covers the fundamentals of how economies actually operate.

Minsky, for example, describes very well the differences between various levels of borrowing and bubbles, but I have not personally seen how Minsky describes how the 'unit level' operates.

In contrast Marx and his labor theory of value successors focus specifically on the 'unit level' while lumping all capital into a more or less generic bucket.

The Austrian school, as I mentioned previously, was a reaction to Marx's work (on economics for those who still lump Marx and Communism/Leninism/Engels). And the Austrian school's weaknesses are specific to its paradigm: the Austrian school espouses a completely unworkable belief in which concrete physical goods exchange will fix all problems. It believes that the 'market' will fix all when there are numerous examples of market failure.

Be that as it may, from my own view the economy operates on inertia at the unit level.

The prevailing view at any given time is a function of 'what was good enough for granny', which then gets changed periodically as the excesses of the past are forgotten and replaced by the guilty pleasures of the present. As the 'Sword of Damocles' of past excesses fails to drop, so then does guilty pleasure transform into everyday behavior.

The behavior of the US in the 50s, for example, can be clearly seen having at least some foundation in the experiences of the population in the Great Depression. As time went on, and as the advertisers and promoters continually gnawed away at the frankly overcompensating frugality of the 'Silent Generation', the paradigm of saving, frugality, and preparation for economic calamity which could occur at any time was replaced by spendthrift ways.

And just so the actions of the '60s could equally be seen as a combination of reaction to the continuing parade of good times exacerbated by pernicious marketing via television and radio.

You'll note, however, that while this is a generational phenomenon - it is not clearly the timing of specific generations. The Roaring Twenties saw a massive bubble and consumption binge; the subsequent crash led to significant widespread suffering, more importantly a sea change in public consciousness.

I see this in seniors that I have worked with in the recent past - those who grew up in the Great Depression era have radically frugal ways different than even their immediate successors, and likely shaped by personal experience (as opposed to second hand stories, etc).

In some ways this is like a person living through a terrifying car wreck entered into while drunk: the knowledge that their survival was entirely due to luck despite the circumstances entering into the situation is sometimes enough to completely change a person's direction and outlook in life.

The problem with straight generational cyclical prediction is that the generations used to be fairly consistent in time frame, but with modern lifespans this paradigm is broken. In strict terms, a generation today is twice as long as a generation 100 years ago, and more importantly a generation today has as many as 4 or 5 predecessor generations accompanying it whereas it used to be 2 or 3.

Going back to subject, one fundamental problem I see with all schools of theory then is their inability to take into account this 'sea change' of public behavior.

Marx no different than von Mises makes implicit assumptions on both individual and collective human behavior. Since both of these vary considerably, it is impossible for either theory to adequately explain how economies really work - and applies in spades to the newer schools.

Again in my opinion, it may be possible to create a new school which does a better job of this.

The new school would need to first be able to describe the individual's situation in societal terms: i.e. Are they enabled to gain economically or are they in a negative economic situation? Is their present situation comfortable, and is the near term outlook positive/negative/neutral? What are the major changes in the macro economy and how do these translate into their specific situation?

The idea is to try and gain an understanding via seeing where people are and where they're going, and what opportunities/dangers are extant.

As an example: in 2002, the individual situation was poor. Real wages had been stagnating for years; the previous bubble had popped leaving both individual investors and new entrants into the technology field with losses - capital/savings for the former and jobs for the latter. The overall economy was clearly stagnant.

Once the Fed cut interest rates and the government had started encouraging home purchases via lax regulation as well as direct subsidies, the housing bubble was obvious.

iTulip does a great job of understanding this.

But an economic theory must do more. In this previous example:

If, for example, real wages had been growing on pace with productivity as opposed to stagnant in real terms, would the housing bubble have been as large?

If China's opening of its labor markets, simultaneous with India and Eastern Europe/Russia, had been delayed or different, would real wages have been stagnant?

[Serge_Tomiko]

Re: Austrian School vs. itulip / FIRE

A good post c1ue.

I might add that the failure of modern economics is the same as the failure of liberalism: both incorrectly describe and predict human behavior. Without the enlightenment, we never would have gotten to this point. But by instituting that original incorrect new religion, i.e. promulgating the tabula rasa theory of man as fact and replacing the ancient gods with the god of reason, we never would have had this madness of assuming materialism and hedonism are the dominant inclinations of man.

Economics as a science is over. Their inhumanity has broken the people, and the only way to save civilization is to begin to understand the human soul again.

[llanlad2]

Re: Austrian School vs. itulip / FIRE

A good post c1ue.

I might add that the failure of modern economics is the same as the failure of liberalism: both incorrectly describe and predict human behavior. Without the enlightenment, we never would have gotten to this point. But by instituting that original incorrect new religion, i.e. promulgating the tabula rasa theory of man as fact and replacing the ancient gods with the god of reason, we never would have had this madness of assuming materialism and hedonism are the dominant inclinations of man.

Economics as a science is over. Their inhumanity has broken the people, and the only way to save civilization is to begin to understand the human soul again.

Without the enlightenment we wouldn't have got to which point exactly? I don't remember reading anywhere about the Dark Ages being a great period to hang out in.