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Since the financial crisis a number of groups have called for remaking or
restructuring economics
especially the way it's taught in colleges and universities
to make it more useful, more applicable, more relevant to the real world.
The Institute for New Economic Thinking funded by George Soros
and a group in the UK called the Post-Crash Economic Society
have been in the headlines in recent weeks for their calls
to change the economics curriculum. Now, their argument
is that economics is dominated by a kind a free-market orthodoxy
that cannot explain the financial crisis,
the recession, and other important economic phenomena
and they want to overturn mainstream economics with something else
built more to their liking relying heavily on
the writings of Karl Marx and John Maynard Keynes and other
interventionists.
Now, from my point of view, adding more Mark's and Cain's
is just sort of making a bad situation worse, certainly the mainstream of economics
is not at all dominated by any kind of a free market
orthodoxy. Nonetheless, I sympathize
with the frustration that these groups feel toward some of the economics they
getting in the text books and they see in the
on the nightly news and in the mainstream newspapers and so on.
Indeed there is in need to make contemporary or mainstream economics
more useful, more relevant or applicable
and I think the way to do that is to embrace the teachings and writings of
the Austrian economist.
Austrian economics is often described as a theoretical discipline
because Mises emphasized BR priori and because
austrians have spent a lot of time and effort developing
a well, coherent a nicely coherent body
of economic theory but it's sometimes forgotten the great
Austrian economists were very practical people. Carl Menger was a financial
journalist
before turning to economic theory. organ bonbon bobek was the Minister of Finance
on three separate occasions
in the austro-hungarian empire and Ludwig von Mises himself
spent most of his career not as a theoretician,
but as the staff economist for the Vienna Chamber of Commerce
where he spent most of his days working on very practical
business problems, policy problems, trade problems and so on.
So, Austrian economics is very
useful and relevant and applied.
Take for example the business cycle and the current economic crisis
some critics of Austrian economics like Paul Krugman, for example,
have offered a number very naive arguments
claiming, for example, that because we have not had hyper-inflation
since the expansionary monetary policy in quantitative easing and so forth,
were really put into full gear
in the last few years, therefore the Austrians
must be wrong and the notion that monetary expansion causes booms
which later become busts has to be thrown out the window.
But, if you look more carefully and Austrian business cycle theory,
it does not at all say that an increase in the money supply
immediately and automatically leads to a certain
rate of increase in prices, in the price level
there are a number of different ways in which malinvestment that the Austrians
talk about
can take place and we've seen a lot of that I just in the last few years
with the prices at other assets rising. land,
commodities, and so forth even if the consumer price level itself
has not gone up by very much. Now, my point in using that example
is simply to say that without some kind of theoretical lens,
without some theoretical understanding of how money effects
real economic variables we cannot simply stare at the data
we can't compile a bunch of charts and graphs and draw the kind of naive
conclusion
that Paul Krugman draws. However, if we're armed with that body of theory
we can make very good sense of what we see in the real data,
what we see real companies doing, how entrepreneurs are behaving,
why the stock market is doing what it's doing, how the economy as a whole
is performing. In other words a little bit of economic theory
goes a long way in understanding the real world.
Now does that mean but to be successful in the real world
one has to have an advanced degree in Austrian economics? Well, obviously not
there many successful business-people, investors, entrepreneurs,
managers who have a very solid intuitive understanding
about how markets work even if they haven't been formally trained.
At the same time thinking through Austrian economic principals
more systematically and a little bit more detail really helps us
to know what to look for in the data, it helps us to know what relationships
to examine what is cause and what is effect,
and it really helps us to understand the real world as in my business cycle
example. And that doesn't mean that studying Austrian economics will make
you rich,
it might help, but there's no guarantee. Nonetheless,
it's important that we always remind ourselves and our friends
that Austrian economics is a very practical science.
As it turns out I'm going to be teaching a course in our Mises Academy program,
starting just in a few weeks, on applications of Austrian economics for
business.
Specifically, for management for finance for Human Resources
and so forth. If you're interested in learning more, please sign up for the
course
or just look at Mises.org for many of our articles, books, lectures,
that deal with practical problems of business, of entrepreneurship,
of finance, and of course of public policy.