Twofish's Blog

March 25, 2007

Why I am an Austrian

Filed under: austrian economics, china, hayek — twofish @ 3:48 am

The history of Austrian economics in the United States was that because Austrian economists were “anti-New Deal” they formed an political marriage with the “old Right” in the United States.The reason I find Austrian economics interesting is because a lot of the analysis of Austrian economics fits nicely with Confucian social analysis. This creates a synthesis that is very different than what Murray Rothbard has come up with.

In particular, the three things that I find useful about Austrian economics is that conventional neo-classical economics assumes a pre-existing institutional structure, which may not exist in the case of a developing country like China. Neo-classical models can come up with a good theory that calculate equilibrium values if you do something with interest rates, but what happens if you don’t have a banking system or if you have an industral infrastructure that reacts in a non-conventional way to interest rates. The problems that China presents involve creating institutions, and neo-classical economics says nothing about the types of institutions you should create and how to create them.

By contrast, Austrian economics begins at the very core with “human desire”. You look at the individual and how he or she behaves, and then you zoom out and look at how collections of individuals behave. With this view, you can try to figure out what institutions need to be created and how to create them.  The big success of the Austrians was to figure out what the essential problem with central planning is, which is that central planning simply cannot handle all of the economic calculations necessary to run a national economy, and those calculations have to be done through some sort of market mechanism.

The second thing that then that I find useful about Austrian economics is that Austrian economics thinks about the process of wealth creation, whereas neo-classical economics really doesn’t have anything useful that I can see about the process of wealth creation. Neo-classical economics mainly concerns itself with how to efficiently redistribution wealth that is already existing, but it doesn’t have a theory about how to actually create wealth. Neither do Austrians, but they are thinking about the topic.

The final thing that I find useful about Austrian economics is that it concerns itself with imperfect information. What do you do if you don’t know what is going on? This is particularly important in Chinese economic reform because the process of Chinese economic reform has been a process of learning.

Within the framework, I’ve come up with different conclusions and views than von Mises and Rothbard. In particular, von Mises’s notion that private managers in large private corporations act differently than private managers in large socialist state corporations is in my empirical experience, wrong. This also fits with the experience in China. In the early-1980’s China was able to have huge bursts in agricultural production by making farmers individual entrepreneurs. These policies also worked very well with small companies, but in large companies, these policies failed miserably

One thing that I noticed is that I’m more concerned with institutions than the typical Austrian, and I  think figured out why.  It turns out that my thinking was very similar to the “Texas institutionists” which was odd because even though I live in Texas, I wasn’t aware of them.  So I was thinking about what we were seeing that caused us to see the world in the same way, and it hit me that it was because of the oil industry.  I worked in a major oil company for a number of years, and the bureaucracy and the culture within a private oil company is the same as within a state-owned oil company is the same as frankly within a large bureaucratic institution like the Communist Party of China.  The reason that big business gets along well with the Communist Party of China is that the people and the culture within them are pretty much the same.  The only difference is at the top where there is a need not to go bankrupt in private corporations which is not present in state enterprises.

So I while I agree with von Mises and Hayek’s ideas on the central nature of economic calculation, and I agree about the importance of entreprenurship in small companies, I just don’t think that their description of the difference between large state companies and large private companies is correct.


1 Comment »

  1. You are definately on to something with your analysis of large corporations and bureaucracies. Might I recommend Kevin Carsons article “Economic Calcuation in the Corporate Commonwealth”

    Also, if you don’t already know of it, Roderick Long’s “Austro-libertarian Themes in Early Confucianism”

    Comment by Ben Darrington — November 8, 2007 @ 7:16 am

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