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Article by dailystock_admin    (05-21-09 07:57 PM)

Austrian Economics
Copyright by DailyStocks.com 1997-2009

The origins of the Austrian economics theory date back to the 15th century. The Late Scholastics, as they are often referred to today, sought to explain the relentless forces of cause and effect that operate like any of the natural laws, and hold the sway over human action and social organization.

Essentially, Austrian economists are proponents of the laissez-faire or free-market approach, and decry any form of government intervention in the markets. Carl Menger, Ludwig Van Mises, and Freidrich Hayek are some of the noted economists who subscribed to this view.

Austrian economics also seeks to explain the forces that lead to recessionary conditions, and its proponents are critical of the role of Central Banks in propelling the economy toward a recession. Citing the credit bust of 2008 as a striking example of what should not be done, they fault the Central Banks for encouraging excessive credit growth by holding down interest rates for too long. Austrian economists have low regard for the ability of governments to overcome recessions. They strongly support the Gold Standard and are opposed to governmental interventions such as devaluation of exchange rates and the triggering of inflation through the use of fiat money, which ultimately results in erosion of savings.

Austrian economics advocates free markets and the control of money supply that is fundamental to the promotion of civil liberty and social progress. To arrive at logical deductions based on the pattern of economic actions of the people, is central to the Austrian school of thought. It eschews the use of statistics and empirical models in economic policy, and is regarded as a contrarian ideology.

Cons: There are many examples of market failure such as the growth of sub-prime mortgages / securitization that led to the 2008 credit crisis, which seem to repudiate a laissez-faire approach based on the total belief in the efficiency of markets. But Austrian economists say the existence of Freddie Mac and Fannie Mae, as well as the push to lend to low-income buyers who really could not afford the houses actually intervened in the "Free Markets" system.

Especially in a recession, the economy if left to market forces may take a very long time to return to normalcy. The consequences can be massive unemployment which causes people to stop going to school and have long term negative effects. (If one believes that education is the ultimate driving force of man's progress, nothing can be worse economically than to delay the education of the society.) Controlling Money Supply is much more difficult to achieve in practice than theory suggests.

Pros: Austrian economics bases its free market credo on the natural behavioral patterns of spending by people and the money supply and demand dynamics. Some intelligent investors say that Austrian Economics will never be accepted popularly because its prescription is just politically impossible to win popular votes. However, it is said that as far as making macro investing analysis, applying the principles of Austrian Economics leads to the right conclusions.

Noted investors who use Austrian Economics:

George Soros is the legendary investor who started Quantum Fund in the 1960s and is a multi-billionaire as a result of some winning macro trades. Soros' prescription for healing broken economies cannot be mistaken for Austrian Economics, but Soros' analysis of markets as expressed in his books seems to borrow a lot of influence from the Austrian Economists.

Jim Rogers is acknowledged as one of the most successful investors of all time. Making an early start when he was in his twenties, he was able to build a huge fortune with an initial investment of just $600 by the time he was 37. A firm believer in Austrian economics, he advocates investing in China, Uruguay and Mongolia.

Marc Faber was born in Switzerland and received his PhD in Economics from the University of Zurich at age 24. He was Managing Director at Drexel Burnham Lambert from 1978-1990, and continues to reside in Hong Kong. He is famed for his insights into the Asian markets, and his timely warning about market crashes earned him the name of Dr.Doom. In 1987 he warned his clients to cash out before Black Monday hit Wall Street. In 1990 he predicted the bursting of the Japanese bubble. In 1993 he anticipated the collapse of U.S. gaming stocks and foretold the Asia Pacific Crisis of 1997-98. A contrarian at heart, his credo has always been: “Follow the course opposite to custom and you will almost always be right.”

James Grant, a newsletter writer who publishes "Grant's Interest Rate Observer" is also a follower of Austrian Economics.

Ron Paul, a Republican Congressman for the Texas State, is also a believer of Austrian Economics.

Interestingly enough, Howard Buffett, the father of Warren Buffett is also an Austrian Economics follower. His son, Warren, however, seems to be more inclined to the Keynesian method of healing broken economies as opposed to the strict and rigid ones espoused by Austrian economists. Warren Buffett did acknowledge in a recent TV interview that one will have a hard time finding a paper based currency that appreciates in value over time.


Books:

Mises and Austrian economics: A personal View by Ron Paul

The Elgar Companion to Austrian Economics By PETER J EDITOR BOETTKE

Resources:
Austrian Economics Explained http://www.economicshelp.org/2009/01/austrian-econ ...

What is Austrian Economics? http://mises.org/etexts/austrian.asp

The Top Six Contrarian Investors of Our Time By Jay Livingston, Managing Editor, Investment U http://www.investmentu.com/research/contrarianin ve...

Videos: The Future of Austrian Economics

http://www.youtube.com/watch?v=KWdUIuID8ag
Mises and Austrian Economics: A Personal View

http://www.youtube.com/watch?v=CAPgFoJh9f8

References:

http://www.economicshelp.org/2009/01/austrian-econ ...


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