Austrian Economics and why 'group think' is the most dangerous thing threatening your financial freedom

Finance & Fury Podcast

In today’s Furious Friday episode, we’re going to talk about one of the most dangerous things threatening our financial freedom – the notion that we are simply just groups of people.

It comes back to a lot of economic theory and the use of models based on aggregates. This crosses over with the politics of grouping – ‘The Poor’, ‘The Rich’, for example.

Tribalism and group preferences are dangerous – It’s a tool of distraction. The narrative that things aren’t going well because you are oppressed, or unlucky.

1. It breeds hate, encourages divisive tactics in politics.
2. It breeds helplessness – if someone tells you over and over again that you’re a part of a disenfranchised group it becomes a self-fulfilling prophecy
   • The danger comes in the solution which focuses on equal outcomes, and how to optimise society rather than people improving their own situation that make up that society.
     • Not based on equal opportunity. Where you start has little to do with where you end up
     • Individuals forms groups – SO my optimising individuals’ performance for individual benefit actually helps optimise society even better, rather than just taking from one group and giving it to the other.
   • Removes critical thinking and thinking for yourself
   • For example, how does a policy affect you rather than ‘groups’ as a whole?

What is the counter to this? Is there a theory that is based around individuality?

The Austrian School of Economics a fairly unknown school of economic thought, which is a shame – This school of thought is the bed rock of modern-day economics and has been absorbed into mainstream economics. Theories like;

• Marginal utility – The theory of gaining satisfaction from additional units of consumption
• Opportunity cost – The cost of foregone opportunities / the cost of the next best option
  • This is cornerstone to the economic problem of trying to solve unlimited wants with limited resources
• Theories on time preference, that is to say, we prefer the same size reward sooner rather than later

Austrian Economics – The choices of individuals causes all economic phenomena.

• Unlike Keynesian economics which focuses on group preferences plus governments having a large input into the economic prosperity of the individual

Core components of Austrian Economics

1. Individualism: To explain economic phenomena - we have to look at the actions (or inaction) of individuals
   • Argues that groups or "collectives" cannot act except through the actions of individual members.
   • Groups don't think; people think. Groups are formed by individuals!
     • Democracy (especially with compulsory voting) is built to cater to group preferences
     • Partisan politics works well with a two-party system – Us vs Them
     • Libertarian (where the state plays a minimal role) is obviously not popular with the Government itself – after all, once something has power it doesn’t want to give it up.
2. Subjectivism: economic phenomena goes back to judgments and choices made by individuals on the basis of whatever knowledge they have (or believe to have) and whatever expectations they have about external developments (events) and the perceived consequences of their own actions. Subjectivism is the theory that perception (or consciousness) is reality, and that there is no underlying, true reality that exists independent of perception.
   • Example: Someone living in a private gated community has a different view on how the world is compared to people in poor parts of India! The same thing occurs within our own country.
   • Example: Imagine that you have worked really hard your whole life, not wasted your money, put it away and invested well. By the time you go to retire you have a few million dollars and give to charity, spend time on causes – but… society tells you that you are evil. While you are a good person, people who aren’t in your position think the only way you are rich is that you stole it from others – that is their reality.

3. Tastes and preferences: subjective valuation of goods and services determines the demand for them so that their prices are influenced by (actual and potential) consumers.
   • This is the opposite to socialism where the State provides the value of goods to the population
     • Or, price fixing through governmental policies
     • Example: Beer – I like German dark beer – I would be willing to pay more for it than others
   • Tariffs and Taxes – leads to reduction in optimal utility
     • Example: Climate change taxes and carbon emission taxes – Penalties collected by the Government that effects the optimal choice of the individuals. This leads to economic waste and societal loss overall.
4. Opportunity costs: Reflects the alternative opportunities that must be foregone. It is one of the principles of main economic theory;
   • What is sacrificed in order to do what you are doing
     • Monetary or ‘utility’ – time spent listening to this could be spend doing something else – Thanks!
   • Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative foregone (that is not chosen).
     • It is the sacrifice related to the second-best choice available to someone, or group, who has picked among several mutually exclusive choices.
   • Opportunity cost is a key concept in mainstream economics and has been described as expressing "the basic relationship between scarcity and choice". The notion of opportunity cost plays a crucial part in ensuring that resources are used efficiently.
     • Aggregate models look at opportunity cost from a group perspective, rather than an individual view point. The opportunity cost of the Government not taxing the rich more is that they have less to distribute.
     • Placing an opportunity cost on a group will not satisfy each individuals’ preferences anyway.
5. Marginalism: in all economic designs there are ‘variables’ (the values, costs, revenues, productivity assigned) which are determined by the significance of the last unit added to, or subtracted from, the total.
   • For companies it makes sense for a business to produce one more unit of a good if its cost to do so is less than the amount the profit would be diminished by.
   • For individuals it makes sense for you to consume one more unit of a good until the cost outweighs the benefit.
     • You might spend $20 on a six pack but probably not $500 on 10 cartons if it is just for you to consume on your own – you can only drink so much!
     • Time structure of consumption: decisions to save reflect "time preferences" regarding consumption in the immediate, distant, or indefinite future. We each have a difference time preference.
     • Investments are made in view of larger outputs expected to be obtained if more time-taking production processes are undertaken.

What does it take for all this to work well for the Individual?

It requires individuals (the consumers) and the powers that be (government) to facilitate freedom.

1. Consumer sovereignty: the influence consumers have on the effective demand for goods and services through the prices. This is the basis of supply and demand in action.
   • Results in free competitive markets, on the production plans of producers and investors, is not merely a hard fact but also an important objective.
   • Attainable only by complete avoidance of governmental interference with the markets and of restrictions on the freedoms of sellers and buyers to follow their own judgment regarding quantities, qualities and prices of products and services.
     • Regulations interfere with this – Minimum wage employers would probably prefer to hire 2 employees at $12 per hour, rather than one for $24 per hour. Notice lately a string of news pieces about hospitality either failing to pay staff, or shutting down if they do?
2. Political individualism: only when individuals are given full economic freedom will it be possible to secure political and moral freedom.
   • Restrictions on economic freedom lead, sooner or later, to an extension of the coercive activities of the state into the political domain.
     • This undermines and eventually destroys the essential individual liberties which the capitalistic societies were able to attain in the 19th century.
   • There is a monopoly of force
     • Voting – You don’t have a choice to not vote and you have no real freedom to vote for who you want (only get to choose between two parties).

Why it isn’t this more popular?

Well, there are two reasons;

1. Economists - By the mid-1930s, most economists had embraced the important (in their opinion) contributions of Austrian Economics.
   • During the middle of the 20th century, Austrian economics became disregarded or derided by mainstream economists
   • Why? it rejected model building and mathematical and statistical methods in the study of economics (which is impossible for individuals). You can basket people into groups and get a best guess scenario of what to do, but there are always going to be individuals in that basket that don’t meet the model’s criteria.
     • Economist Paul Krugmanhas stated that because Austrians do not use "explicit models" they are unaware of holes in their own thinking. We will talk about Krugman at another time - he recently wrote an article: ‘What distinguished Trump voters was, instead, racial resentment. Furthermore, this resentment was and is driven not by actual economic losses at the hands of minority groups, but by fear of losing status in a changing country, one in which the privilege of being a white man isn’t what it used to be.”
   • If models were that good, economics would be the richest dudes in the world
   • I’ve joked about this in the past – meteorologists exist to make economists look good
     • Most accurate forecasts only are slightly accurate for about 7-14 days
     • SO, why do economists predict years into the future and believe it is accurate?
   • Austrian economics doesn’t have the same fancy models
     • Due to theories being based on individuals! It’s hard to model individual behaviours.
     • So, economists in their wisdom abandoned it.
2. Individualism comes with freedom – and freedom can be scary!
   • The relationship is between security and freedom
   • Having absolute freedom can be scary – we have all experienced this to some point.
     • Leaving school – you have freedom to choose what we want to do and this can be scary.
     • Working in a job – You are giving up your freedom for security and financial income
   • But if you know what to do, it isn’t too scary – It’s important to think for yourself and not sell your freedom just for security.
   • I won’t lie, I’m not a major fan of the mainstream schooling system
     • Teachers do a great job, but the system is set up for learning to repeat the same answers and just ‘getting the grade’.
     • It doesn’t give you the skills to deal with failure, or to explore what you really want to do, or even how to progress in life.

That is really why this theory isn’t taught – It is impossible to control a population of individuals if you tell them they’re all individuals

1. Much easier to work to a crowd – People will tend to prefer some security over total freedom
2. Just remember – the more you can do to improve your own situation the freer you become, and take back some of your time, freedom and preferences.

What you can do

• Focus on education yourselves and on learning as much as you can.
• Focus on what makes you happy. Put yourself into a situation where you are working towards your freedom.
• Have a picture in your mind about what your best situation and what freedom actually looks like to you.

I will do another episode about the Austrian Business Cycle and what a truly free economy looks like in another episode – today’s episode is already really long so thanks for sticking with me if you’ve made it this far.

As always, thanks for listening to the episode, if you have any questions, feedback or ideas for topics to discuss go to https://financeandfury.com.au/contact/