Why Austrian Economics Matters

To the average man on the street, debates about which school of economics most accurately describes the world in which we live seem tedious and irrelevant. However, little does he realize that policy decisions, from government spending to taxes to monetary policy, which have an enormous impact on every aspect of his life are determined by the dominant school of economic thought. In an article titled “The Great Depression: Mises vs. Fisher“, Mark Thornton describes how Ludwig von Mises predicted an impending depression in 1928 while Irving Fisher not only failed to see the coming of the economic fiasco, he was bullish as the stock market was collapsing in the fall of 1929. Even more damning is that Fisher proclaimed “green shoots” heralding the end of the depression due to a typical bear market rally in 1932.

Irving Fisher was the champion of mathematical economics in the US during the progressive era. He was also the chief economists of the indexers, those who believe in the actual existence of a price level. This led him to believe that the business cycle could be eliminated by stabilizing the purchasing price of the currency via active monetary policy by the central bank, using the price level as a guide.

Von Mises pointed out that price levels are chimeras, as there are no fixed relationships between variables in economics as there are in physics. Thus, von Mises was able to recognize inflation in the US during the 1920s despite the absence of rising consumer prices. By applying the correct methodology of focusing on the increasing money supply, von Mises was able to foresee trouble for the US economy and publish his warnings before the crash.

I titled his blog post “Why Austrian Economics Matters” based on a thought that naturally came to mind while reading Thornton’s article: what would have happened if von Mises warnings had been heeded?

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