This book, at least partially, written to contradict the idea of Random Walk and Efficient Market. It based on the ideas of Austrian school of economics, which views market as representation of human actions and even if these are actions of multiple humans with different, often contradictory ideas, it still subject to human behavior including mob behavior and therefore is far from being completely unpredictable. Austrians and especially von Mises saw economy as the field of human actions susceptible to analysis, but way too complex for mathematical analysis. In short Skousen sees market as a dance – definitely not random movement along dance floor in accordance with some rules and esthetics. However it is quite fast dance: Viennese Waltz which is not easy to trace and difficult to predict.
1. What is the Austrian School?
This is a short 2 pages opening describing Austrian school as foremost defenders of free market economy and place of its birth – Habsburg’s Austro-Hungarian Empire. From this point follows the review of personalities and their input.
2. Carl Menger (1840-1921): Subjectivism and the Marginalist Revolution
Principle of Subjectivism – Prices defined by consumer’s subjective demand not by costs or labor value. There is no intrinsic value.
Marginal Revolution – Price defined by the utility of last (marginal) unit of profitable sale.
Time value – depending on amount of time from inception to final product and utility to consumer goods and services divided into lower (consumer) and higher (producer) order goods and services. Implies greater price volatility in lower order goods.
3. Eugene Bohm-Bawerk (1851-1914): Saving, Interest Rates, and the Theory of Capital
Importance of Savings – increase in level of roundabound method of production increases productivity and output. In other words savings directed into expansion of base of higher order (producer) goods and their quality.
4. Friedrich von Wieser (1851-1926): The “Great Man” theory
The Creative Entrepreneur – high importance of human individual who creates new sometimes break through products and services. In definitive text of “The Theory of Social Economy” he defined terms of “Marginal Utility”, Economic Planning”, and “Opportunity Cost”.
5. Ludwig von Mises (1881-1973): Human Action
Cause and Effect – Human actions are always purposeful and rational therefore if actors are known and understood, their actions and results could be predicted including future prices and market movement trends, but not details such as timing.
People are Different – Humans are too complex and understanding of their action requires completely different science – praxeology. That is science of purposeful actions different from science of purposeless processes of unanimated objects (Dualism). Overall humans are unpredictable and therefore quantitate methods could not possibly work. The economics as science is valid only at qualitative level.
Socialist Calculation Debate – Socialist planning is meaningless because without prices defined by competition efficient economy could not work. The market is process of discovery of what humans really want and what value they put on different goods and services. Without such rediscovery of constantly changing needs and values socialist economy is bound to overproduce some things and under produce others.
6. Friedrich von Hayek (1899-1992) The Austrian Theory, of the Business Cycle
Austrian Business Cycle Theory – Business cycle of boom and bust caused by government intervention into money supply via change in interest rates for credit. When government decreases cost of money below natural level it causes unhealthy expansion because cheap money encourage inefficient investment that will results in production of overpriced goods and services causing inflation. Eventually either government had to drastically decrease interest rates causing bust, or inflation will run out of control that would also lead to even more painful bust. The bust liquidates inefficient investment and businesses until money supply contracts to the level when only most efficient investment is justified causing start of next round of expansion.
7. Schumpeter (1883-1950): The Creative Destruction
The Creative Destruction – The great entrepreneur comes up with new revolutionary product or service that satisfies human needs much better then previously existing methods. The new product destroys existing businesses that use outdated methods or products.
8. Kirzner (1930- ): The Discovery Process
The Discovery Process – Entrepreneur as scientist discovering new products, services, processes, and even human needs those never existed or were latent before.
9. Murray Rothbard (1925-1995) and the Hard-Money Movement
The Cause of Stagflation: Price of consumer goods tend to rise faster then price of producer goods with prices realigned during recession caused deflation. With government pumping money into economy deflation is not occurring so prices could not be realigned causing stagnation and inflation at the same time.
The Origin of Banking and Money: Manifesto of hard money movement. Main idea is that government is inherently corrupt and therefore the only way to stable money is gold standard.
10. The 2008 Financial Crisis: Austrian Response to the Chicago School of Milton Friedman (1912-2006)
This is review of differences between Austrian school and Chicago school of economics. While both are supporting free market economy the Chicago school emphasize government monetary policy that it deems inevitable, while Austrian school insists that only gold could provide for good monetary policy.
The big work of Friedman was proving that government’s monetary policy caused the great depression.
Differences between Chicago and Austrian school in regard to crisis of 2008:
Chicago: 4 factors: 1.FDIC; 2. No gold standard; 3. Automatic stabilizers; 4.FED determination; combined prevent depression. In short – drastic monetary expansion prevents depression. This view puts Chicago monetarists on the same side as Keynesians.
Austrians: monetary expansion is inevitably leads to structural imbalances and eventually to inflation. Government manipulations with statistics such as not counting discouraged workers as unemployed or playing with inflation calculation method does not make depression disappear.
Austrian Alternative: Posit restricted money supply to M1 as only one true money supply measure – AMS (Austrian Money Supply). Also puts high importance on interest rates, but does not provides method of dealing with imbalances.
Part II – Various essays
11. Murray Rothbard As Investment Advisor
This is the review of overall ability of economists to forecast market movements with a reasonable conclusion that this ability is quite low.
12. What every Investor Should Know About Austrian Economics and the Hard-Money Movement
Philosophy of Hard-Money movement – circumvent effects of government monetary interventions by adhering to hard money (gold and silver) in their investment analysis and decisions. This essay is detailed description of hard money approach to investment.
13. The Economist as Investment Advisor
Another shot at economist as investor. The idea is that economics does not provide for valid investment advice in details, but it allows predict high level trends caused by government interference. This provide for imperfect knowledge of future that conceivably could be converted to decent returns.
14. Keynes As a Speculator
Review of Keynes performance as investor – overall very successful, but far from perfect with significant losses in some years. It is also unclear how much of his success could be attributed to insider knowledge.
15. Who Predicted the 1929 Crash?
The answer is very few and mainly sound money supporters based on their estimate of 20s as inflationary spiral. Austrian school Mises and Hayek anticipated the crash, but could not be precise on timing.
16. Financial Economics
Another essay on market predictability with the same conclusion: it is not predictable at the detailed mathematical level, but quite predictable on the high qualitative level where Austrian economics operates. Unfortunately this level highly dependable on political events those in turn are not very predictable at all.
17. A Tale of Two Dollars
The tale of inflation told via fate of two dollars in 1960: one silver and another paper. After 50 years the difference for silver was 18/1 while for paper 0.1/1. However the interesting thing is not inflation per se, but rather silver price variation. The silver dollar of 1960 went up to $5 and down back to $1 that kind of indicates that history commodity based money is far from perfect. The new technology of gold / silver extraction or production could cause crash in value any time.
Part Ill. – Information sources
18. Austrian Economics: Newsletters, Books, and Services
The final couple pages are reference to websites and newsletters that specialize in investment advice base on Austrian school of economics.
My Take on It:
I am an admirer of Austrian school and its thinkers. I believe that it is the most realistic approach to economics especially comparative to other schools such as Marxists or Keynesian. The only quarrel I have with this school is it’s over appreciation of commodity based money such as gold and silver. I think that money is construction of human action consistent of two equally important parts: government violence and human trust between individuals represented by credit. I also think that a missing part in analysis of Austrian school is analysis of property rights not just as necessary and mainly benevolent foundation of sound economy, but rather as another human construction based on government violence. Without proper attention to violent components of human society economic analysis of Austrian school while valid and useful, does not provide tools necessary to improve economic performance of society.
As to contest between Efficient Market theory with its Random walk and Market predictability to extent of predictability of human action, I am with Austrians. I believe that market could be predicted, but only to very limited extent when some human actions clearly go beyond economic rationality.
As far as Marxism and Keynesianism, I think that Marx’s theory of total government control as effective economic organization proved to be false by history and explained very well why it is false within framework of Austrian economy. The same pretty much applies to Keynesianism that was explained as mainly false by Austrians and currently is in process of final historical confirmation of its falsehood.
The only thing I would add is that typical Keynesian analysis of aggregate supply and demand misses one important thing – it is that artificial government-created demand in reality means that individuals who produce something valuable that other people are willing to pay for are bound to receive less and less in real terms for their effort and on the long run (however not that long – well before we are all dead) would respond to this by decreasing level of their effort and consequently level of production of valuable good and services. The abundance of bureaucratic goods and services of 0 value could not be a good substitute for this loss.