When the tide goes out you can see who’s been swimming naked
Warren Buffet
Economics affects almost every area of our lives. Like it or not, we are all economic beings: we all trade our time and skills for money, and exchange that money for the things we desire in life.
Most of us do not learn anything about money or economics at school, and it is a topic that can seem difficult to penetrate. This leaves us vulnerable to poor decision making in our personal finances and tempted to step back from trying to understand how economies work.
When you approach the field of economics you soon encounter a problem that you do not face when looking at Physics or Chemistry, for example. Physicists and Chemists argue with each other the whole time about certain interpretations of data but they broadly agree on what constitutes knowledge in their field and how to go about proving or disproving a theory.
Economists, on the other hand, do not agree on the fundamentals. They do not even agree what Economics is, and what status it has as knowledge. (It is also a profession where making wrong predictions does not seem to cause much career harm).
Economics is surely too important to leave solely to the experts, and so each of us needs to educate ourselves in the subject and start thinking for ourselves. As ever, I do not seek for you to think the same as me, as long as you think for yourself!
Mainstream Economics, in other words the kind you’d learn on a PPE course at a British University, has a number of broad assumptions. The most important of these are that, left to itself, the economy of a country does not run very well and so there is an essential role for a large and enabling state to ensure the economy serves the needs of the people.
Within this broad framework there are of course large variations on emphasis and recommendations, and in the amount of mathematical modeling used.
Followers of the massively influential John Maynard Keynes emphasise the need for the state to even out recessions by increasing government spending during economic downturns.
Followers of Milton Friedman and other ‘Monetarists’ focus on the need to control the money supply, usually by inflating the money supply by 2-3% a year to finance government spending and make the debts incurred affordable (by reducing them in real terms by inflation).
Followers of ‘Modern Monetary Theory ‘(MMT) take the work of Keynes and Friedman further by arguing that governments can continue to print money indefinitely without needing a strategy ever to pay back the ‘debts’ incurred.
Mainstream Economists argue that they stand in the tradition of the ‘Classical Economists’ like Adam Smith but have made essential changes to adapt to the needs of modern economies. Most importantly they see ‘Macroeconomics’ as being fundamentally different from ‘Microeconomics’.
In other words, what would be good advice for a family facing an economic challenge is fundamentally different from what a government should do. Whilst a family would be wise to reduce spending and ensure it lives within its means, for a government the opposite is true. It should increase spending when times are hard.
It is easy to see the appeal of such ideas to politicians and to professional economists themselves. Spending money will always make politicians popular with the immediate beneficiaries of the money spent, and there will always be a need for trained economists to advise how the money should be spent.
Mainstream Economists argue for a large role for state intervention but still accept the need for markets to determine the value of many things though not money itself. Traditionally, followers of Marx sought to extend the role of the state much further and eliminate the role of markets altogether.
As this led to economic disaster everywhere it was tried, accompanied by mass suffering and even starvation, the modern followers of Marx have taken his thought in new directions.
In China, the ruling Communist Party allows markets to work, particularly in the manufacture and sale of goods for export, but retains the power to interfere and ensure that only those showing allegiance to the Party can operate.
In the West the modern followers of Marx tend to favour some variation of Modern Monetary Theory with massive state intervention to redistribute wealth from bankers and speculators to ordinary people, alongside a ‘Green New Deal’.
Therefore while traditional Marxist Economics was radically different from the mainstream, there are now large continuities between the mainstream and modern Marxists.
In contrast, followers of the ‘Austrian school’ of economics differ from the mainstream in their core assumptions. They remain much closer to the Classical economists except for two significant innovations. First, the insight of Carl Menger that value is subjective, not objective, and secondly the philosophical understanding of Ludwig von Mises that all economic activity comes from human action, not impersonal forces.
Austrian economists, therefore, see the economy as a totally natural thing, that can only work properly in conditions of freedom. The only way to establish the value of anything, including money, is to let its price be discovered by a free market.
Businesses only succeed if they provide value to their customers: if they don’t, they fail. Economies can ‘overheat’ or ‘overcool’, but in time they will self correct without needing any help to do so. If the economy is allowed to work naturally people will grow in prosperity through hard work, ingenuity and entrepreneurialism.
By contrast, in the unnatural economy with highly politicised interventions from central banks and politicians, the way to personal wealth is not through entrepreneurship but through banking or speculation, ie extracting wealth from everyone else through handling money or betting on which industries will be favoured by the government.
With such a difference between the mainstream and the Austrian approach there is no space for a ‘middle ground’, and each of us needs to work out who is most useful to study and trustworthy.
We need to study the mainstream to understand the ‘rules of the game’; the world as it currently is. Austrian economics is not so helpful for this but it does provide a different lens through which to gain a perspective on what is going on. You are then better placed to decide if you find the mainstream approach to be trustworthy or not.
Finally there are thinkers on the so-called ‘left’ who focus on an area usually neglected by the Austrians, namely how to correct the injustices caused by the current mainstream policies. Even if you see the ideal as being a totally natural economy we are very far from there and the levels of state debt are so high that there is no easy way to get there.
It may well be that some ‘unnatural’ interventions are justifiable to reclaim and redistribute some of the wealth that has been sucked out of the economy by bankers and their friends. Sceptics of greater state power need to address these questions rather than leave them all to enthusiasts for greater state power.
Economic choices, like political ones, are often presented as a simple binary with two unsatisfactory options: either an efficient but unrestrained capitalism in which speculators can suck wealth out of the economy or a large and inefficient state which offers generous welfare arrangements.
But it could be that the option of a more natural economy, in which the value of money could not be manipulated by politicians and economists, would offer the best way for ordinary people to regain hope that a good life is possible through hard work and initiative.