Human activities are always influenced by the many demands that each person has. The study of human conduct as a means of predicting shifts in market dynamics forms the cornerstone of Austrian economics.
In contrast to Keynesian and neoclassical economics, which place more emphasis on statistics and mathematical equations, Austrian economics takes “practical actions” into account.
The idea of Austrian Economics was first put forth in the 19th century by Carl Menger, known as the “father of Austrian economics.” According to Carl Menger, the idea of a product’s value is arbitrary because each person has a unique set of needs and a varied level of purchasing power.
He claimed that a product’s value depended on its capacity to meet human wants. The concept of “diminishing marginal utility” was also created as a result of the introduction of “Austrian economics”.
Popular Austrian economists who contributed to the “Austrian theory” include Ludwig von Mises, Eugen von Böhm-Bawerk, and Friedrich Hayek, in addition to Carl Menger.
Neoclassical and Keynesian economists were rejected by Austrians, who held that “government interference” should not be allowed in the market. Austrians also emphasised that markets are “self-regulatory” and that if an increase in the money supply occurs without a corresponding increase in the output of products, prices may rise.
Austrians place a strong emphasis on the “utility of a product” because they believe that if a product has no use, consumers will not buy it. The “logic of priori thinking” is employed.
Austrians held that governmental intervention in a market results in distortion and upsets the established cycle of production and supply. Austrian economics holds that no one person manages or controls the market system; rather, an effective system is produced when a proper supply and demand chain are combined.
Austrian economics places more emphasis on equitable resource allocation than on the overall economy. Let’s continue discussing Austrian economic principles now that you must be familiar with their foundations.
The Beliefs of Austrian Economics
1. Austrians think credit cycles are what trigger recessions
The terms credit cycle and credit cycle contraction are used interchangeably. According to Austrian economics, central banks are to blame for the current economic downturn. They contend that the central bank’s low-interest lending to businesses ultimately causes a recession.
2. Austrians adhere to the free market capitalist philosophy
According to Austrian economics, free markets offer a better system. They also emphasise the importance of a system in which government intervention does not undermine the market’s inherent forces.
3. Austrians support keeping a constant gold standard for the circulation of fiat currency
In a gold standard system, nations base the value of their national currencies on the price of gold. A “fix price” is set for gold by nations that use a fixed gold standard. Currency value is determined using the “fix gold” standard.
Austrians think it’s critical to keep a stable gold standard because it restricts the government’s ability to manufacture and circulate fiat currency. The ever-increasing pace of inflation will continue to be under control after the precise amount of gold is set aside for money production.
4. Austrians reject the Keynesian Fiscal Policy and believe in their own fiscal measures.
Austrians think that any attempt by the government to accelerate the demand cycle results in wasteful resource use and inefficiency. At all costs, the government must refrain from market intervention and allow supply and demand factors to adapt on their own.
The Laws of Austrian Economics
According to Austrian economics, prices are typically influenced by a variety of factors, including consumer behaviour, market sentiment, and the level of demand for a particular commodity. Austrians think that subjective elements have a role in pricing determination. They emphasised once more that subjective considerations also play a role in determining “cost of production”.
Interest Rate Determination:
According to Austrian economists, the general sentiment of the populace determines interest rates. If most individuals are saving money, then customers can take advantage of rising interest rates.
Effect of Inflation:
Austrian economists hold that an increase in the money supply must be followed by an increase in the production of products; if this does not take place, then the prices of things will rise automatically.
Although inflation will affect each good differently, it will ultimately lead to market imbalance. For instance, after inflation, a loaf of bread might remain the same price, but a bottle of milk will increase in price.
The Business Cycle:
The expansionary and deflationary phases of the economy are characterised by business cycles. According to Austrians, the government’s interference in monetary policy is what causes the business cycle.
They contend that attempts by the government to restrict interest rates result in economic downturns. Austrians emphasise once more that unemployment is a result of government business changes made in the near term.
The Austrian School places a strong emphasis on a straightforward theory of human behaviour. Austrians hold the view that markets are created by people, in contrast to classical and neoclassical economists. It holds the opinion that interactions between various people facilitate the exchange process.
According to Austrian economists, each capital good is unique. Building materials, such as tools and machinery, have specific applications and cannot be switched. Austrians contend that producing the incorrect capital goods results in economic waste.
Austrian Economics VS Keynesian Economics
- Government control is the central tenet of Keynesian economics. Keynes thinks that economic intervention by the government is necessary to alter aggregate demand. To address the supply chain, the government should regulate demand. While Austrians reject the notion that government control of the market is necessary for an economy to function well, Keynes thinks that such control is essential. There is no active role for government because “individual’s actions” regulate the market.
- According to Keynes, the government controls all aspect of a given system, including the cycles of production and consumption. Austrians, on the other hand, hold that consumer behaviour influences the demand for a particular good. Individual consumer spending growth affects the market’s mood overall. According to Austrians, the shift in consumer behaviour is the result of their own activities rather than government intervention.
- Despite the fact that different capital products, including as tools, machines, and buildings, have varied uses, Keynes treats them as “homogenous” goods. Keynes lumps them all together, claiming that spending $10,000 on machinery is equivalent to spending $10,000 to buy a new structure. In contrast, Austrians make distinctions between various capital goods. Austrians hold that since each capital good has a unique function, they cannot all be treated equally.
The Austrian Economics’ Connection to Bitcoin
The next major market revolution that aims to offer a “decentralised system” that is unrestricted by the government is cryptocurrency. Austrian economics is frequently linked to bitcoin’s appeal.
The government has no control over bitcoins or other cryptocurrencies like dogecoin, ethereum, or litecoin; they are the “people’s currency” that benefits them. Even new additions to the blockchain networks are under human management, not governmental authority.
Austrian Economics likewise adheres to the principle of “people’s action and no government intervention,” therefore ever since the idea of bitcoin gained popularity, everyone has contrasted the traditional idea of Austrian Economics with the cutting-edge, new-age idea of “cryptocurrencies.”
Without people, an economy would not exist. An economy’s primary goal is to maximise the welfare of its citizens, and the foundation for any economic system’s successful operation is provided by the collective actions of its citizens.
Since an increase in people’s purchasing power will always be directly equal to an increase in production, “people’s behaviour” regulates the demand and supply chains.