The phrase “old school economics” is often used positively or approvingly by many, but is rarely explained. What is this school and where is it located?
You can be sure that it is not what is taught in most college classrooms today. It’s definitely not Keynesian or Marxist economics. But what is it?
I often hear the phrase “old school economics” in response to, for example, a government bureaucrat who says we need to increase unemployment to fight inflation, or when some mainstream financial commentator says, “bad news is good news” where the bad news is for workers and taxpayers but is good news for Wall Street or government. Politicians and left-wing economists will often say “a weak dollar is good for the economy” or that “we” need to borrow and spend our way out of the economic mess “we” are in. That recipe is obviously completely foreign in the lives of workers, families, and businesses—that is, the students of the “old school.”
Calling this recipe into question really boils down to the issue of why workers, taxpayers, retirees, young people, and business owners should have to pay for the mistakes and indulgences of politicians and bureaucrats.
The common man’s call for some “old school economics” in response to these situations is also a plea for some common sense!
The common sense of “old school economics” clearly includes a willingness to work hard for what you want, prioritizing spending, prudence in terms of saving and borrowing, and being a good neighbor and citizen. Clearly the modern American elites come from a different school of economic thought! This is unfortunately also the case with US interventionist foreign policy.
It is interesting that while “conservative Americans” self-identify with the label “old school economics,” American liberals typically do not. However, I have found that many liberals do identify with the common sense that underlies the label. They believe in hard work, balanced budgets, saving and prudence, equal rights under the law, etc. Progressive Marxists are the true outsiders here.
As an economist of the Austrian school of economics, I would like to explain that old school economics can be linked to an actual school of economics—the Austrian school of economics—and explain what that school actually represents and offers, besides common sense.
The start of the school is marked in 1871 in Austria—hence its name—four years after the publication of Karl Marx’s book, Das Kapital. However, some of the ideas of the school date back centuries to places like Spain, Ireland, Italy, and Scotland. These ideas were particularly popular during the economic conditions leading up to the French Revolution. The ideas and theories were also already very popular in Colonial America, prior to the American Revolution! So don’t let the “Austrian” thing throw you.
Carl Menger—an economic journalist in Vienna—is credited with founding the Austrian school in 1871. He set out to correct some of the bad ideas of the Classical School, on which Karl Marx built his Communist system. These bad ideas included the “labor theory of value” where a good’s value depended on how much work took place. Of course, in the real world, there is only a loose correlation between the amount of work and price. Value and price ultimately depend on what the consumer thinks of the product. Thus, price is dependent on the consumer.
Nevertheless, you can see how it would be appealing to government bureaucrats who would like to think their “output” should be valued by what they are paid rather than what the consumer thinks.
Menger accomplished his goal and attracted some of Europe’s most brilliant minds as a result. Pro-government economists in Germany called Menger and his students the “Austrian School” as a pejorative term, similar to someone from the Big City today denigrating citizens from the suburbs and rural areas as unintelligent and unsophisticated, as in being a rube or country bumpkin.
How did Austrians improve on the Classical school of economists who were already advocates of the free market and limited government?
In economics, they showed that the labor theory of value was wrong, that each consumer and each purchase was the driver of value and price, and that capital goods and wage rates were ultimately driven by consumer choices for consumption goods. While generally “conservative” in the American sense, Austrians were also “liberal” in the European tradition that opposed slavery, colonialism and empire-building, they supported women’s legal and political rights, the free market, and free trade.
Even without its connections to the Classical school, now defunct, the Austrian school is the oldest school around. The Marxists did not become a school until after the Russian Revolution in 1917; the Keynesians during the Great Depression. The Austrian school is still tiny in academia and almost non-existent in government. The exceptions being those of the administrations of President Reagan, Prime Minister Margaret Thatcher, and now (possibly) President Javier Milei in Argentina, as well as some of the former Soviet Bloc countries of Eastern Europe.
It is, however, the fastest growing school. While there is an old guard still around, the Austrian school has attracted many young scholars and young people in general. If you asked a sample of young adults, “What school of economics do you study and adhere to?”, you would find the Austrian school as the number one answer unless you conducted your survey on a liberal arts university campus.
The school’s standard-bearer is Congressman Ron Paul. When he ran for President in 2008 and 2012, he received more donations from military service personnel than all the other presidential candidates from both parties combined, a fact hidden by the mainstream media.
Ludwig von Mises—the namesake of the Mises Institute—was a student of one of Menger’s best students, who was also the Finance Minister in Austria. Building on Menger’s discovery of money as a market phenomenon, Mises made the linkage between money and the economy that the Classicals could not connect. As an ultra-metallist, Mises advocated the gold standard as a basis for a sound economy. Mises also proved that socialism was economically impossible, and that entrepreneurship and free-market trade, in contrast to government trade agreements, was the goose that laid the golden eggs. He also created the theory that explained business cycles, showing how artificial money (inflation) was the cause of the business cycle, not capitalism, per se. One of his great students, F. A. Hayek, was awarded the Nobel Prize for his elaboration of that theory. Another of his greatest students, Murray Rothbard, showed how the Federal Reserve’s monetary policy of the 1920s caused the Great Depression and how New Dealism made it worse and longer lasting.
To show the contrast in results between the Austrian and socialist approaches, let’s start with two medium-sized countries, somewhat developed, with similar levels of income and prosperity. In 1998, Venezuela (an oil-rich country) had a somewhat higher GDP/capita than Poland. Venezuela was taken down the road to Marxism, while Poland took the tough medicine of capitalism after the downfall of Communism. A quarter century later, in 2022, GDP/capita (adjusted for inflation) in Poland had grown nearly 200%, but in Venezuela it had fallen by almost 2/3 of the former level, with the general population falling into abject poverty because of socialist policies.
Sometimes common sense is not enough. It’s easy to be biased when it appears that free-market policies might work against your personal interests in the short run, especially in our crazy world of crony capitalism. You need a theoretical backbone and that is where the Austrian school comes in strong in terms of free market choices versus government control, property rights versus government intervention, sound money versus bureaucratic paper money, and peace versus war and empire.
Old school economics does have an actual school—and its old, and its Austrian. Come take a look at www.Mises.org.
This is a transcript of the podcast Minor Issues, August 31, 2024.
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