The Austrian Economics Of Growth: Understanding Economic Expansion

Austrian economics is a school of thought that focuses on the role of individuals and their choices in shaping economic outcomes. It emphasises the importance of free markets and competition, arguing that economic growth is driven by innovation and entrepreneurship. Economic growth, as measured by Gross Domestic Product (GDP), is often seen as an indicator of a country's overall economic health and development. In the context of Austrian economics, economic growth can be understood as the result of individuals pursuing their self-interest and engaging in voluntary exchanges that increase their standard of living. However, it is important to note that economic growth in Austrian economics does not necessarily imply an improvement in the social standard of living, as some individuals may be forced to save or invest, ultimately losing out.

Compulsory saving and investing

Austrian economics is a reference to the Austrian School of Economics, which is a heterodox school of economic thought that is based on methodological individualism, the concept of spontaneous order, and the idea that money has evolved as a freely-chosen medium of exchange.

Economic growth is often measured by the Gross domestic product (GDP). However, GDP does not represent production but overall spending and is dependent on the techniques that are applied to the calculation of the respective price indices. To calculate a "real GDP", the statistical offices create a basket of goods and compare the prices of the goods in this basket to the respective reference periods.

However, it is important to note that compulsory saving and investing can also have negative consequences. As mentioned earlier, economic growth measured by GDP does not always represent an increase in production but can also be a result of overall spending. This means that if individuals are forced to save and invest, they may have less disposable income to spend on goods and services, which could potentially lead to a decrease in economic growth. Additionally, as stated in the Austrian economics wiki, compulsory growth can lead to some people clearly losing out, as their savings are used to fund the investments and increased standard of living of others.

Government manipulation of money and credit

Austrian economics holds that government manipulation of money and credit in the banking system throws savings and investment out of balance. This leads to misdirected investment projects that are eventually found to be unsustainable. At this point, the economy has to rebalance itself through a period of corrective recession.

Entrepreneurs will realise that interest rates are artificially low and will adjust their investment decisions based on projected long-term interest rates. Austrian economists argue that the only prudent strategy for the government is to leave money and the financial system to the free market's competitive forces. This would eradicate the business cycle's inflationary booms and recessionary busts, allowing markets to keep people's saving and investment decisions in place for well-coordinated economic stability and growth.

Compulsory saving and investing means that investment can only come at the expense of the forced saving of some individuals. In other words, if A, B, and C "grow" because their standard of living rises from compulsory investment, they do so at the expense of D, E, and F, the ones who were forced to save. It can no longer be said that the social standard of living rises, or that "society" grows. Under compulsory growth, some people clearly and demonstrably lose.

Economic growth is often measured by the Gross Domestic Product (GDP). However, it does not represent production, but overall spending, and is dependent on the techniques that are applied to the calculation of the respective price indices. To calculate a "real GDP", the statistical offices create a basket of goods and compare the prices of the goods in this basket to the respective reference periods.

The role of interest rates

Austrian economics holds that interest rates are determined by the subjective decision of individuals to spend money now or in the future. In other words, interest rates are determined by the time preferences of individuals.

The Austrian school rejects the classical view of capital, which says that interest rates are determined by the supply and demand of capital. Instead, Austrians believe that interest rates are a reflection of individuals' time preferences. If individuals prefer to consume now rather than in the future, they will be willing to pay a premium to do so, resulting in higher interest rates. On the other hand, if individuals are willing to delay consumption and save for the future, interest rates will be lower.

The Austrian view of interest rates has important implications for economic policy. Austrians argue that government manipulation of money and credit in the banking system can throw savings and investment out of balance. Artificially low interest rates, for example, can lead to misdirected investment projects that are eventually found to be unsustainable. When this happens, the economy has to go through a period of corrective recession to rebalance itself.

Some central banks, such as the European Central Bank and the Swiss and Swedish national banks, have instituted negative interest rates for commercial bank deposits. The goal of such policies is to spur economic growth by encouraging lending and investment. However, zero interest rate policies carry not just economic but also political risks. While they may have been necessary to avoid a full-blown financial meltdown during the acute phase of the crisis, their effectiveness diminishes over time while their dangers increase.

The free market

Austrian economics is a school of thought that emphasises the role of the free market in economic growth. It argues that economic growth occurs when individuals are free to make their own choices about saving and investing, rather than being subject to compulsory saving and investing imposed by the government.

In the free market, individuals are free to allocate their resources as they see fit, based on their own preferences and judgments. This allows for the efficient allocation of resources, as individuals are best placed to know their own needs and desires.

Additionally, the free market promotes competition, which drives down prices and improves the quality of goods and services. This benefits consumers, who are able to purchase more for less, and it also encourages businesses to become more efficient and innovative in order to stay competitive.

However, the free market is not without its critics. Some argue that it can lead to income inequality, as those with more resources and power are able to exploit their position to the detriment of others. There are also concerns that the free market may not adequately provide for public goods, such as education and healthcare, which are essential for the well-being of society.

Despite these concerns, proponents of Austrian economics argue that the free market is the most effective way to promote economic growth and improve the standard of living for all individuals. They believe that government intervention, such as compulsory saving and investing, only serves to distort the market and create inefficiencies that hinder economic growth.

The business cycle

Austrian economist Ludwig von Mises believed that government interference in the economy through the manipulation of money and credit throws savings and investment out of balance. This leads to unsustainable investment projects that eventually collapse, requiring the economy to rebalance through a period of recession.

Austrian economics views monetary factors as the cause of the business cycle, with real phenomena constituting its effects. However, this view may be unrealistic as successful entrepreneurs will likely adjust their investment decisions based on projected long-term interest rates.

According to Austrian economics, the best strategy for the government is to leave money and the financial system to the free market's competitive forces. This approach would allow markets to keep people's saving and investment decisions in check, leading to well-coordinated economic stability and growth. By minimising inflationary booms and recessionary busts, the economy can maintain a healthy business cycle.

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