It's Memorial Day weekend, 2011, and while most of the country just wants to shake off depressing news and hit the beach for a few months, skirmishes over debt ceilings, Medicare dismantling, and 'budget maturity' are still swirling around Washington and its mainstream media antechambers. Maybe it's just me, but lately I am drawn to the clash between Keynesian growth models and Austrian/austerian theories. I am certainly not a professional economist, or even a skilled novice, so I'll strive to not butcher things too badly.

In professional economic circles, from what I can gather, Austrian economics, after enjoying a heyday in the middle of the 20th century, has fallen out of mainstream economic discourse. Generally, the critics maintain that the Austrian school (Carl Menger, Ludwig von Mises, and Friedrich Hayek being the most famous figures) does not have a rigorous foundation with which to make predictions and test results. Austrian theorists tend to avoid the complex statistical models of the mainstream schools, preferring a quasi-philosophical approach that is more explicitly partisan with regard to human nature and political policy. And while most economists recognize that the Austrians have made some important contributions in areas like business cycles, monetary theory, and market pricing, the consensus is that the mainstream schools are much more relevant to the specific problems of the modern scene.

But still, some peculiarities of the moment are keeping Austrian ideas alive, perhaps beyond the level that they deserve -- but still, it's worth taking a look. Ron Paul, especially, is an avowed fan of the Austrian school, and he consistently draws heavy support from conservative ground troops, especially the Tea Party set. And of course, the austerity approaches to the current Great Recession are only going to gather momentum, as the job market contracts and the tax base for large centralized federal structures shrivels. Everything seems to be narrowing down to a Stimulus vs. Downsizing contest, and the outcome is not simply for wonks.

Okay, so what is this Austrian stuff all about? Again, I am not an economist, so please pardon any errors, and don't hesitate to email me at jeremy@postpeakliberal.com if I mess up too badly. My intention is to give a fair and concise summary of some of the main Austrian ideas; and as with much conservative thought, I find myself sympathetic to the overall approach, if not the policy particulars.

• Fiat Currency -- generally, Austrian disciples are in favor of a return to the gold standard (or any other 'hard' physical store of value). While this GoldBug stance at first seems like an example of how quaint and out of touch the Austrians are with modern conditions (how can you create a multi-tranche collateralized debt instrument with a bunch of yellow metal?), this is largely the point. When governments can simply create money out of thin air, which is called 'fiat currency,' then the overall drift is for the currency itself to become 'devalued,' and thus inflationary. Which brings us to....
• Inflation -- Austrians hold that mainstream economists purposely misrepresent what inflation is. The popular view is that inflation is the increase in prices of goods, services, and wages. But for the Austrian school, increased prices are actually the result of inflation, which should really be defined as the increase in the money supply itself. This seems like a strange point,  but I think I get it. By only looking at prices when talking about inflation, and by then defining a normal or acceptable rate of price increase, we're presupposing that the money supply should always grow in the background to facilitate the entire system's momentum towards more stuff. But if fiat currency was replaced by a hard standard like gold, prices would adjust to the overall set supply of the base commodity, which might increase, decrease, or stay the same, depending on the specific circumstances surrounding people moving the actual substance in and out of the physical territory. In other words, the gold standard would not presuppose growth as the natural background state of determining economic value itself (more on this later). I think of it as a kind of goldfish thing. A fish will only grow to the size of the tank it is in, and no further (this may actually be an urban legend, but you get the idea). Unless you want a big fish just for the sake of having a big fish, there is no intrinsic virtue in continually buying bigger tanks. The smaller tank, and economy, may actually be just as optimal with regards to allocation of resources and the condition of individual lives.    
• Deficit Spending -- related to fiat currencies, and the view of a natural rate of inflation which erodes the value of money, Austrians view central government deficit-spending as a vehicle for confiscating wealth from individuals. Because the bias is towards growth at all costs, modern governments are continually growing their tax-and-spend apparatus, which necessitates creating more money out of thin air to fund the budget shortfalls. The ensuing deficits thus erode the value of money itself, which penalizes those who have already earned their wealth when the currency was worth more. Again, the key here is that the centralized state, via a central bank like the Fed, is actually pursuing inflation as a matter of policy by expanding the money supply, while pretending that inflation is something mysterious and outside-the-system to which it is just responding.
• The Business Cycle -- aside from inflation, the devaluing of currency, and the confiscation of wealth via deficit spending, the Austrian school is known for its heterodox view on the business cycle. Unlike mainstream theories, which see the causes of boom and bust in production traits, technological shocks, or demand variables based on full or less-than-full employment, the Austrians view business cycles as credit bubbles created by the central government. In this view, when the central bank keeps interest rates artificially low for too long, then too much credit is created, which necessitates the creation of more money (remember that with fiat currencies, money is created by beng lent into existence). The subsequent credit glut results in asset bubbles, as investors prowl around the landscape looking for something to do with their cash. These credit-swelled malinvestments eventually come crashing down, as things overheat and the artificially-high prices come back to earth. This explanation looks particularly prescient in the recent housing collapse.

That's all we have time for, for now -- but it's a good enough start. You get the idea. These main concepts all fit into the overall Austrian worldview, which is that the free market is the best arbiter of value and allocator of resources. Centralized federal planning interferes with free individuals acting in their own interests via the marketplace. Fans of Austrian economics thus tend to embrace Libertarian politics and the shrinking of the state. Ron Paul is impressively consistent is his call for dismantling all aspects of the bloated imperial federal government, including the military.

If the Great Recession continues for regular working people (remember that the recession officially ended a few quarters ago, as businesses started growing again, sans increased payrolls), the Austrian/austerian argument will gain traction. The Keynesian idea that in times of sluggish demand and federal deficits, the government actually needs to spend a lot more on stimulus to pick up the slack, just seems wrong (even though it's probably correct). The false metaphor between government spending and a household (you can't spend more than you take in, right?) is just too easy and seductive, especially in our perennial election-season political landscape. It's much easier to convince people that the responsible thing for politicians to do is cut spending, as opposed to hiking taxes.

I don't think that austerity and spending cuts will work, in the sense that conservatives want them to. Shrinking government will not result in the private sphere rushing in to fill up all the available space. Businesses are actually awash in cash right now, and corporate profits have been surging for the last three quarters. As Krugman and other Keynesian suggest, we really are in a low-demand liquidity trap. Companies that are already doing well with trimmed payrolls are not going to sink huge sums into new projects and products when the demand forecast is so bleak. They will play it safe and put their profits into dividends and super-safe investments like treasuries. Why take huge gambles?

But one final point about the Austrians and growth, something which I think enhances their relevance. The point is that growth for growth's sake is not a worthy goal. Consider this quote:  

"The grand-scale interventions that are performed by monetary and fiscal policy in the name of growth and stability disrupt and misguide the plans for the individual, and they distort the decisions at the business level. The application of macroeconomic growth models has caused havoc when economic leaders naively adopted the interventionist creed and believe that it just takes the handling of a few economic policy instruments – like easy money or government expenditures -- to achieve the blissful state of economic plenty." (Anthony P Mueller, "What's Wrong with Economic Growth?", http://mises.org/daily/1877)

I read this to mean that the economy exists to serve deeper human needs, like freedom, fulfillment, self-reliance, and dignity. To make everything in a society serve the endgame of growth flips this equation on its head, and people become the economy's servants ('road to serfdom'). In this sense, the Austrians, who specifically deny that everything can be captured via mathematical models, hearken back to an older conception of economics as a part of social philosophy. Economists are thus less scientists and more public philosophers, with important things to say about what an economy is actually for. And I think that is a worthy idea.

Where I diverge from the Austrians is in their conception of human nature itself. Reading through some contemporary Austrians' stuff (I get the daily blog from mises.org), you get a sense of the kind of junk libertarian philosophy that, to me, represents a hopelessly outdated understanding of human motivation and human nature. A lot of this thinking comes out of the Robert Nozick social contract tradition, which hearkens back to Hobbes and even Aristotle. I have never found these theories to be particularly useful, as they have been rendered completely obsolete by actual discoveries in anthropology, archeology, and human ecology. In short, we are social primates whose brains and hearts still belong to the Pleistocene, and all social and political thought needs to proceed from those foundations. I know that this is not a particularly popular view, and will almost certainly prove impossible to integrate into contemporary politics. But without this understanding, all programs are destined for the dustbin anyway, and we will eventually taste nature's revenge for our lost self-knowledge. We'll be left to work out new modes of being throughout the Long Emergency.