This summary was inspired by my conversations with Vijay Boyapati and others.

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The separation of money and state, a rallying cry of Bitcoin, is not a new idea. In fact, it was discussed under 100 yrs ago, and, thanks to Bitcoin, is having a resurgence.

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Indeed: If you’ve gotten into Bitcoin, you’ve probably heard the term “Austrian Economics.”

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Because The Austrian School underpins much of the sound money narrative, I want to give a short primer on Austrian Economics to help give newcomers some additional context.

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What Is Austrian Economics

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Austrian economics is the study of how humans act to achieve economic ends through scarce means--from a first principles perspective.

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It’s understanding economic phenomena as a result of actions and choices of individuals rather than looking at aggregate statistics and determining relationships between, say, CPI and employment. It’s first principles focused, rather than retroactively focused.

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The Austrian School is often compared with the other schools of economic thought, such as the Keynesian or Chicago School of Economics.

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Keynesians want to solve for recessions by deploying government spending. The Chicago School (or Monetarists, or Friedmanites) prefer monetary policy as a remedy.

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Austrian Economists want neither.

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Before diving into the differences, it’s worth zooming out to emphasize the peculiar fact that we have different schools of economic study in the first place — Marxist, Chicago, Keynesian, Austrian, etc. This bifurcation doesn’t exist in other disciplines. There this isn’t, say, a Chicago School of Chemistry or Marxist School of Physics.

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Isn’t this strange? Economics has splintered into different schools of thought - and these schools of thought are completely incompatible with each other. As in, If you believe in Marxist School of Economics, you believe everything about Austrian School is wrong, and vice versa.

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Why is this? Well. There didn’t used to be multiple schools of economics — Austrian economics was what mainstream economics was in 18th and 19th centuries, as popularized by Hayek, Mises, and Rothbard. That was it.

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In 19th and 20th centuries, however, the splintering began. People watched the scientific method -- when applied to natural sciences --- lead to all these new theories and insights, so the natural instinct was to apply that lens to economics.

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The Austrian Economics approach is the opposite of the scientific method.

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In other words, Austrian Economists use deductive science, meaning they start with axioms about how humans act, whereas other schools of economic thought are more inductive — like physics — where you do experiments, see what works out, and make laws from that.

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Trying to follow the approaches physics and chemistry, however, leads economics to be something that doesn’t hold up over time - you have these theories and then you find out a decade later that they aren’t true and then you’re doubting the whole enterprise in the first place.

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What makes economics fundamentally different, you ask, than inductive sciences physics or chemistry?

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Why doesn’t scientific method work in economics?

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Well….There’s a difference between how economic phenomena come about and physical phenomena come about. With physical phenomena you can do experiments to isolate variables and see what causal relationships they have to each other. With economic phenomena it's hard to isolate variables because economic phenomena (I.e people) are inherently complex.

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For example, you can try increasing minimum wage in one situation and in another and the effects might be completely different, because people are different. With physics you’re evaluating things that don’t have motivation of their own, whereas humans have complex motivations which stem from psychological phenomena which we can’t totally observe.

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So, Why Did The Austrian School Die Out?

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Austrian school is free market school — it attempts to explain limits of public policy.

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As society shifted away from the gold standard, and governments became the funding source for economics professors, The Austrian school became increasingly more unpopular. Which makes sense, when you think about it: The sad truth is that, since most of economics is government funded, there’s political incentive to fund economists who say things politicians want to hear.

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Indeed. The Keynesian schools are more a comforting thought if you’re a politician: You can just tweak one policy variable and you’ll solve social problems. For example, people don’t have enough money to live, so insert a minimum wage. That sounds great in theory, but in practice, if you increase minimum wage, you won’t lift people out of poverty, you’ll just make it illegal for people to work for less than that wage--so you’ll end up increasing unemployment among people who aren’t skilled enough to work for above that wage, compounding the problem.

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And that’s partly why, as Vijay said in our podcast interview (link) there’s something like 10 Keynesian for every 1 Chicago economist, and 10 Chicago economist for every 1 Austrian economist.

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Another reason is that the Austrian School is anti-empirical. It’s far more comforting to tell a great story with a definitive conclusion than to think from first principles and maintain more epistemological humility.

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Differences between Austrian and others:

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What’s the main difference between Austrian and Keynesian and Monetary schools of thought?

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Wouldn’t you think Chicago and Austrian schools were more aligned? After all, both the Chicago and Austrian economics school are for minimal government intervention. As it happens though, Keynesian and Chicago schools of thought, while they seem different, are two sides of the same coin. They both have empirical approaches (rather than first principles) approaches, and both aim to solve recessions with some form of intervention (Keynesians with gov’t spending, Chicago school with monetary policy).

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As Milton Friedman said, we are all Keynesians now — which means: we all believe governments should control the money supply.

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Why? Keynesians believe that that there’s a problem w / free market - periodic business cycles.

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If government doesn’t step in to intervene and act as major consumer in times of crisis, you’ll have massive unemployment, the theory goes and people will live in abject poverty.

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So the government has a role to step in and fix these crises …. by printing money. The logic is that people will have more money to spend, more money flows into the economy, which in turn produces more jobs and more wealth.

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Austrians reject the idea that there is anything at all the government can do to stabilize macroeconomic fluctuations. In fact they believe that governments are the cause of these macroeconomic fluctuations.

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This is the cause of major fluctuations and recessions: Creating money out of thin air. It causes people to consume, invest, and speculate much more than they would in a hard money standard.

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Austrians believed that the gold standard had big impact on how capital was accumulated in economy. Because it was hard to print money, there was an increase desire to save money, shift markets from consumptions towards saving.

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Keynesian want money supply to increase over time, because they believe growth happens through consumption.

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Austrians believe instead that the economy grows through investment, capital accumulation, and innovation. it’s not people consuming willy nilly that makes us rich , it’s people inventing new things and building new things that produces wealth.

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In the view of the Austrians, practically every economic policy pursued by the federal government and Federal Reserve is a mistake that distorts markets. Rather than curing recessions, claim Austrians, stimulative policies cause them by producing unsustainable bubbles.

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Austrians do not think governments or the Federal Reserve can rescue the economy; Austrians seek instead to rescue the economy from governments and the Fed.

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Author

Erik Torenberg
Co-founder @Villageglobal, @tokendaily https://t.co/NnuJs4N1hU