It pains me to see Austrian economic followers repeating the same tired arguments over and over. Now they are trying to get in on Occupy Wall Street as evidenced by tons of comments on every article I’ve read, and quite a few youtube videos. I realize they think they have an answer to our financial problems, and they largely want to help, but their solutions are unrealistic, and misguided.
If you’ve never read Mises or any Austrian economic literature, I’ll summarize some of its basic beliefs. They believe gold is money, and fiat (paper currency backed by nothing other than “faith”) is not. They go on long-winded tangents about how gold has been money since the dawn of time, as if that means something.
They all claim that because a government can print money out of thin air with no tie to a physical good like gold, it means that the government will inevitably print too much and it will result in a hyperinflation.
They also argue that any inflation is bad because it is the government’s secret way of stealing from you.
Arguing with an Austrian believer is like arguing with someone who believes they’ve been abducted by aliens. You can’t convince them otherwise, so there is no point in arguing with them. It is like trying to convince an Evangelical Christian to become a Muslin, or a Muslim to become an Evangelical Christian. Sure, someone might convert, but when you “know” you are right because of your Book, few will even bother to read the other guy’s book, let alone agree.
But for you non-Austrians who just want to make sense of our economy, and what can be done to fix it, here is a primer to help you not fall into the Mises spell (a spell I was at least partially under for a couple of months while I read their literature, and hoped there were actual solutions).
First, all money is faith-based. So gold is fiat too. It requires faith by the people that it is money. Plus, if gold could suddenly be produced chemically to perfection, than gold would have the same issue that paper money has – an unlimited supply just by creating it.
An Austrian states that gold is money simply because gold has been used as money for centuries. But who cares. People ate with their hands for centuries. With forks and knives we’ve found a better way. Just because forks and knives have also been used to hurt others doesn’t make the fork or the knife the problem. Used properly they are superior to eating with your hands.
The argument that because a government can print money out of thin air means they will print so much that we will eventually have a hyperinflation. That is like saying if you go to a wedding with an open bar you will get so drunk you will throw up on the bride. Or that if you go to enough weddings with open bars it is inevitable that you will eventually get drunk and throw up on one of the brides. The truth – some won’t drink any alcohol even though it is free. Others will drink in moderation. Someone might start to get really drunk, but changes are others who don’t want the wedding to be ruined will cut off the drinker and/or escort him out. Just because you can get drunk, doesn’t mean you will. Just because the government can print money doesn’t mean it will puke on the country.
The more complex counter argument to the hyperinflation worry is that the government can and should print money in relation to the needs and productivity of the private sector. And this is why gold standard economies always end and move to pure fiat systems. As a population grows, and as they save, there is a greater and greater need for more and more money. If only gold is money then either more gold has to be dug up from the ground, or it has to be debased.
Of course everyone knows the US population has grown MUCH larger over time, the private sector has saved a ton of money, and we have become more productive and wealthier as a nation (also counter to Austrians who somehow think our standard of living is lower now than when we were on the gold standard – so false as to be laughable). With so much growth and savings, we REQUIRED more money be spent into existence by the government. And instead of continually debasing money vs. gold we simply left the gold standard in 1971 via the “Nixon Shock”. It was inevitable. It was going to happen sooner or later. It does to every gold standard economy that grows. Funny that Austrians say all fiat’s eventually collapse, but never grasp that all gold standard economies eventually move off of gold.
What about the inflation is bad for you argument? First, they misunderstand inflation and they misunderstand inflationary pressures. They think the Fed doing QE is “printing money”. Well, I can’t blame them because most people misunderstand Fed operations like QE, what real money “printing” is. But I digress….. the worst kind of inflation is when your standard of living goes down. They argue that a loaf of bread used to be 5 cents, and now it is 5 dollars. Proof that inflation is stealing from people. Except our wages went up too, and more people have wages, and more people have internet, flat screen TV’s, iPads, access to all kinds of public works like schools, libraries, cleaner water, cleaner air to breath, etc. If our standard of living had not improved in the last 100 years many of us would be living with candle light, no TV’s, no computers or internet. You may argue these things don’t make life better (then why are you reading this or anything else on the web?) but then you can simply not spend any money on any of those things. Give back your refrigerator. Only ride a bike. And what you will find is that your tiny wage goes a LOT further than it does now. All of a sudden the median income of $50,000 or so makes you rich because you can save to your heart’s content.
The fact is that we have better medical care – even those of us who don’t have health benefits because 100 years ago you also would not have had health care, going to a doctor would have been expensive, and they might have bled you if you were sick and didn’t know what else to do.
The argument that inflation is killing us is nonsense when you consider that our standard of living is significantly better than it used to be in almost any way you measure it. Our drinking water is cleaner, our environment is cleaner, we can travel further distances faster, cheaper and more safely. And on and on.
Second, the idea that the government is stealing from the population via inflation is nothing but conspiracy theory nonsense. The government is SPENDING money into the economy via deficits and the so-called “debt”. It might cause inflation by spending too much money in. But then there is more money to pay for the higher priced goods. And right now, we are in a deflationary period. And if inflation is so bad, then deflation must be good – except it isn’t, and that is how we are all getting poorer. Goods are become cheaper, but your wages are going down, and as people try to save due to deflation the economy contracts and more and more people lose jobs. If the government wanted to steal from the people they would do it via deflation, not inflation.
Finally, an Austrian believes a Federal government should either be non-existent, or tiny. Let the States run themselves. Except it was a miracle we won the Revolutionary War because we were just a bunch of individual States with individual militias. We need a large government because we are a large country. If we wanted a small government and individual States than there are plenty of options around the world where you can go live. And most of them do not enjoy the opportunities we have in the U.S., and don’t have the standard of living we have in the U.S. The dream of Austrian libertarians is one where your gun, and your gold is all you need. Me? I’d rather live in a large cooperative society where I can carry paper money and trust the police and the military to carry the guns. I’ll arm myself if there is tyranny, but there isn’t, there is just inept government and a populace who let them be inept – until now, I hope. If the government screws up, like it has been doing lately, then we take to the streets, vote the bums out, and fix the system. But fiat doesn’t need to be fixed. Money in politics does. If we suddenly went on the gold standard, they’d just pay politicians in gold and exert the same kind of economic pain on the rest of us. Fiat isn’t the problem and gold isn’t the solution.
Finally, Austrians keep saying hyperinflation is just around the corner. But time again nothing happens. The reason for the resurgence in Austrian thinking is because they rightly predicted that household debt and the housing bubble were problems. Austrians understand that private sector debt is a problem. Keynesian’s don’t get that (they seem to be getting that now, but that is how Greenspan and Bernanke missed the housing bubble until too late). But Austrian’s mistakenly think Government debt is the same thing as private sector debt. They aren’t. Keynesian’s know public sector debt is different, so despite the fact that Keynesians missed the brewing problem, they actually know how to fix it. Austrians predicted the problem, but don’t know how to fix it now that it is here. Only MMT understood and understands both, predicted the global financial crisis AND knows how to fix the economy. MMT understands the that public and private sector debt are not the same thing. Austrians think both are a problem. Keynesians seem to think neither is a problem. MMT knows private sector debt can be a problem, but that a fiat currency country that can print new money whenever it wants isn’t actual ever in debt because it does not borrow to spend.