Students of the DIS Study Abroad program in Copenhagen visited the Hayek Hall, home of the Austrian Economics Center and the Hayek Institute, on October 19th for a lecture on Austrian Economics. Senior researcher Martin Gundinger and researcher Simon Sarevski welcomed the group and explained the institute´s mission: Bringing back Austrian Economics – both in discourse and action to Europe and the place of its origin, to Austria.
Martin opened up with a walk through memory lane, explaining how it all started with Carl Menger’s magnum opus, the Principles of Economics. He followed with the main contributions of the two major names of the 20th century, Ludwig von Mises and Friedrich A. von Hayek. The whole picture was only drawn when all the dots were connected when Martin explained what exactly meant to think like an Austrian economist and in what way it is different from the neoclassical hegemony. In a nutshell, methodological individualism distinguishes the Austrian from the neoclassical approach because it puts the individual at the center of its study, unlike the study in aggregate values. At the center of the study is the human and his action, accepting the non-perfect world that we live in and not an idealized model of the world.
The Austrian School considers people´s errors in acting and their incomplete knowledge before action. Humans are not completely rational as presumed in the models. That is why the models lead to an incomplete picture of the world and false conclusions. On top of that, the importance of the purely subjective nature of the price and its importance in understanding how we value goods couldn’t have been more emphasized.
Not to bore the students only with theory, Martin and Simon morphed the lecture with an in-formal debate, talking about the problems we are facing today, how to avoid making the same mistakes from the past, and our outlook on the future. Inflation being the core problem of the day, it is easy to point out the external shocks such as the break-in of the supply chain due to the pandemic and the energy crisis that unfolded as a consequence of the Russia-Ukraine war. And although those two play an important role, inflation wouldn’t have been anywhere near this level if the Central Banks around the world didn’t increase the money supply as much as they did. On top of that, governments around the globe continued with their reckless overspending, further increasing the rate of inflation. In essence, without government intervention, the inflation rate wouldn’t have been stubbornly as high as it is.
The discussion continued on the importance of economic growth. In recent years we have forgotten to put economic growth on the frontline of public policy and the sluggish growth that follows the post-great recession is to show. There are myriad reasons, but one that is looking straight in the eyes is the government intervention and overregulation of the economy. Taxes, which are already high, are not the only problem business face. The administrative state has grown dramatically, making it ever-harder for businesses to operate. The environmental policy is a great case in point. Politicians not only shy away from market-based solutions to the impending crisis but refuse to even think about the role of the individual. Solutions can be found only top-down, which in essence means that only the state knows how and if your approach is not in accordance with the plan, then the regulation is here stop you from even trying to find solutions.
To explain the misallocation of resources, the folly of central planning, and the role (natural) interest rate prices play in the economy the discussion focused on the financial crisis of 2007-8. It is true that credit default swaps, a relatively new financial instrument, played a big role. But unlike the causality dilemma of the chicken or the egg, cheap money came before the CDS.
The discussion moved back and forth, from causes of previous (and current) recessions to proper solutions on a macro level and an individual level as well; how to protect oneself from future crashes, market volatility, and inflation; what is proper money, whether crypto is the future and more. The students challenged Martin and Simon in the discussion, which was focused more on practice rather than theory.