Tag: Thomas Sowell

The Difference Between Austrian and Chicago Economics

By Jack Parkos | United States

When it comes to economics, libertarians tend to subscribe to one of two schools of thought: The Chicago School and Austrian School. Both of these ideologies are rooting in laissez-faire capitalism and believe in the power of the free market. Yet both have unique differences between them that can divide people who believe in free market capitalism. It is important to understand the differences between the two for one to decide which school they agree with.

“Mainstream” Recognition

The Chicago School, which is sometimes called the Monetarist School, belongs to the neoclassical school of thought. It tends to get more attention from “mainstream” economists and politicians. Milton Friedman, arguably the most famous and influential economist of the Chicago School, served as an unofficial advisor to President Ronald Reagan as well as winning many awards for his books. While many Austrians have won awards for their work, they are not nearly as “popular” as their Chicago counterparts. In a high school economics course, you’re more likely to learn about Milton Friedman and Chicago economics than Ludwig von Mises and Austrian economics. Austrians are seen as outside the mainstream, meaning it is “heterodox”. Perhaps someone may be asking why this occurs.

Difference in Methods

One reason that Austrians tend to be seen as economic “outcasts” is that they tend to use different methods to come to conclusions. As stated before, Austrians are not seen in the mainstream, unlike their Chicago counterparts.

This is mainly due to the fact that Chicago economists tend to use similar methods as most other economists. Monetarists tend to use mathematics to test their theories. Chicago economists believe economics is like a science with rules that cannot be broken. Meanwhile, the Austrians believe that since the economy is based on the actions of individuals, no mathematical formulas can accurately predict how people would act. Thus, Austrians base their work on philosophy, logic, and reasoning. Praxeology, the study of human nature, is an important part of the Austrian School of economics.

Monetary Policy

While both schools criticize the Federal Reserve, they have different reasoning for it. The Chicago school calls out the Federal Reserve’s failures but still believe it should exist and be used in the right way. Monetary policy is a big part of Chicago economics, hence sometimes being called the Monetarist School. For example, Milton Friedman criticized the federal reserve for not printing enough money during the Great Depression.  Friedman also believed the monetary supply should be increased by about 2.5-3.5% each year.

Meanwhile, the Austrians do not believe the government should print more money ever. They tend to believe in a fixed supply, typically a standard based off of precious metals. The Austrians do not want the government inflating the currency at all. They blame many economic problems on government creating inflation through printing money.

 

Famous Economists

Here are some famous economists from the Austrian and Chicago schools.

Austrians

Ludvig Von Mises- Big leader and teacher of the Austrian school of thought.

Murray Rothbard- A leading pioneer of both Anarcho-Capitalism and Paleo-Libertarianism.

Frédéric Bastiat- Developed the concept of opportunity cost.

Chicago

Milton Friedman- Won Presidential Award for Freedom, possibly most famous Chicago economist.

Thomas Sowell- National Humanities Award winner, theorist on welfare economics.

Gary Becker- Awarded Nobel Memorial Prize in Economic Sciences.

Friedrich Hayek (who also belonged to the Austrian School) – Award-winning economist who contributed to the Business Cycle Theory and The Economic Calculation Problem.


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We Must Privatize the Department of Veterans’ Affairs

By Isaiah Minter | United States

In the wake of former Veterans Affairs Secretary David Shulkin’s departure from his cabinet position, news writers across the country are losing their minds over the likelihood of VA privatization. While Shulkin, who insists that he was fired by Trump via Twitter, cites his opposition to VA privatization as the reason for losing his department job, I haven’t seen any evidence that provides validity to the claim. As a result, I will leave Shulkin’s claim as is, and instead address the media fear-mongering suggesting that thousands of veterans are going to die, should privatization actually occur.

One of the most important distinctions to make between public and private institutions is the accountability of the latter and the lack thereof of the former. Allow an example. When Congress members authorized the invasion of Iraq, they were fully aware of the immense obligation to provide health benefits to veterans with this move. Distinguished economist Joseph Stiglitz estimated the costs of benefits in Iraq and Afghanistan conflicts to be about $1 trillion on their own.

This enormous cost was largely irrelevant to Congress members as they weren’t funding the obligation, nor did they face any turmoil for increasing federal borrowing. They went on with their careers, wholly unconcerned with any future ails that such authorization could create. In other words, they paid no price for this decision, and our veterans certainly deserve more than a system which is rarely held accountable for its shortcomings. We need only consider the words of economist Tom Sowell:

It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.

Continuing on the trend of inaccountability, we cannot ignore the lengthy list of scandals that have plagued the VA in its history.

Apart from irresponsibility, wait times also plague the system. Over 200 veterans died waiting for care at the Phoenix VA in 2015. One report done by the VA Inspector General found that nearly 100 veterans died waiting for care at the Los Angeles VA. Perhaps the most worrisome figure comes from a VA OIG report, which found that thousands of vets may have died waiting for care.  The report also found a series of institutional problems, ranging from data limitations due to inadequate VHA procedures, to a faulty enrollment program, to employees incorrectly marking applications.

I do not doubt that VA employees are doing their very best at their jobs, but their department makes it very hard for them to do their job. Even if we assume that this department worked as its creators planned, its method of organization still harms our veterans. Veterans’ health benefits in this country are delayed costs, meaning they surface decades after the military conflict ends.

The Congress funds these delayed costs – through the VA – only when the obligation comes to fruition. This system allows the Congress to engage in military conflicts with ease, ignoring the burdens of foreign intervention for some time, only to then default on the burden of veterans’ healthcare when they need the obligation filled.

How this approach benefits the American people and our veterans alike remains unclear. Therefore, if we desire a political approach to this issue that would benefit our veterans and the American people alike, privatization of the VA is essential.

This alternative approach offers two main benefits: one, it improves the quality of medical care by introducing competition and innovation into the healthcare market, and two, it forces Congress to consider the enormous cost of war prior to intervening by pre-funding  veteran benefits.

In this manner,  the policy can garner support from both sides of the aisle by appealing to pro-market Republicans and non-interventionist Democrats.

Despite what the media is suggesting, this policy is an argument for competition and accountability, not greed and the exploitation of our men and women in uniform. Justification for the policy suggests, and rightfully so, that transferring the department’s physical capital to veterans is key to improving veterans’ healthcare.

In the end, continuing the current system is unlikely to benefit our veterans or the American taxpayer. In fact, government hands these taxpayers the bill for senseless military intervention. If we truly want to help both groups, privatizing the VA is crucial.

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How Tariff Policies Inhibit Man’s Economic Power and Encourage His Political Idiocy

Glenn Verasco | Thailand

I am not going to sugar-coat the stupidity of President Trump’s proposed aluminum and steel tariffs. There is no justification for taxing foreign products that Americans want to buy. It is complete and utter idiocy.

On economic grounds, tariffs cause prices to rise and competition to soften. That means fewer and lower-quality products at an inflated price for all.

On moral grounds, the argument that a steel tariff will save American jobs in the steel-producing industry is quickly squelched by the much larger number of steel-using industries that lose jobs and opportunity. This is not simply a theoretical law of economics either. President George W. Bush placed tariffs on steel imports too. He protected a handful of steel jobs, caused the loss of hundreds of thousands of others, and then wisely repealed the tariffs. This was less than 20 years ago.

(If one is bright enough to understand that tariffs kill more jobs than they create, and still supports tariffs, he is corrupt, and his opinions need not be taken seriously.)

On political grounds, however, tariffs might be brilliant. They stir the masses and often result in short-term gains for a few sympathetic people (like a steel mill in rural America reopening). Protectionism masquerades as Patriotism, claiming to be in the interest of American workers and American industry. And by the time tariffs take their imminent toll, voters have been fed so much propaganda that they are unable to construe the negative effects of tariffs on the overall economy from Wall Street to Main Street. Tariffs secretively punish everyone, and ostentatiously benefit a few.

When it comes to understanding the Global economy or even the American economy, President Trump is a complete moron. But this is nothing to be ashamed of, Mr. President! Obama is a moron on this issue too! So are Gary Johnson, Hillary Clinton, Paul Krugman, Alan Greenspan, Neil Cavuto, every economist who has ever lived, and me! We are all complete morons when it comes to understanding the economy!

This is because the economy is far too complicated for any one person or group of people to even begin to grasp.

As I type this essay, I am looking at scattered items all over my table. There is a glass, a plastic cup, some dental floss, a box cutter, two pairs of scissors, many pens and pencils, a notebook, a remote control for my air conditioner, my iPhone, a calendar, two chargers, a ruler, a stapler, my glasses, a sock, my laptop, a mouse and mouse pad, a platform with a fan that keeps my laptop from overheating, and some tissues.

I don’t know where any of this stuff was made. I don’t know who manufactured it. I don’t know how it was manufactured. I don’t know how it was shipped to wholesalers and retailers. I don’t know who arranged the shipments and wholesale purchases. I don’t know precisely what raw materials these items are made of. I don’t know how or where the raw materials they consist of were harvested. I don’t know what equipment was used to harvest those raw materials. I don’t know how or where or by whom or with what materials the equipment used to harvest or synthesize the materials that were manufactured into the products sitting on my desk was made either!

I only know that I purchased them, where I purchased them, how much I paid for them, and that I use them. And if I run out of one or it breaks or I become dissatisfied with it, I will go out and replace it to the best of my ability (or not if I don’t think it’s necessary).

The great economist Frederick Hayek, in his essay “The Use of Knowledge in Society,” referred to someone like me as “the man on the spot”. Hayek begins by explaining that “If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic.” This is a general idea that applies to all aspects of life. If it’s 10:00pm on Monday night, and you need to be in Reno by 11:30am on Tuesday, and it takes two hours to fly to Reno, and the red eye is sold out, and there are flights to Reno at 7:00am and 9:00am on Tuesday morning, and the 9:00am flight is out of your price range, you have to take the 7:00am flight. You and I can solve these problems by applying a smidgen of logic to the information at hand.

But when it comes to the world economy, possessing knowledge this concise is impossible for one individual or one group of people no matter how educated or informed they might be. As Hayek says:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

The “dispersed bits of knowledge” are possessed by people like you and me and every other idiot in the world. Hayek calls each one of us with our own unique and specialized collection of data “the man on the spot.” As dumb as we are in comprehending the “economic order,” we are ingenious at making economic decisions in our everyday lives. And it does not take much more than half a brain to be a genius as a man on the spot:

How much knowledge does he [the man on the spot] need to do so [make good economic decisions] successfully? Which of the events which happen beyond the horizon of his immediate knowledge are of relevance to his immediate decision, and how much of them need he know?

There is hardly anything that happens anywhere in the world that might not have an effect on the decision he ought to make. But he need not know of these events as such, nor of all their effects. It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more difficult to obtain. All that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses. It is always a question of the relative importance of the particular things with which he is concerned, and the causes which alter their relative importance are of no interest to him beyond the effect on those concrete things of his own environment.

If read in bad faith, one might come away with the impression that Hayek is an elitist snob talking down to a bunch of ants in a terrarium. “Those concrete things of his own environment” can come off as condescending. But Hayek is a man on the spot himself, and he knows it. Due to his profession as an economist, he is certainly slightly more informed than many of the other men on the spot around him. But when compared to the inconceivable number of events taking place around the world at all times, that extra information is largely insignificant.

It is often said that there are three kinds of knowledge. There is 1) what you know, 2) what you know that you don’t know, and 3) what you don’t know that you don’t know. You know that the Eagles won the Super Bowl. You know that you don’t know how nuclear power works. But did you know that there is a giant, mongoose-like creature in Madagascar called a fossa that hunts lemurs? See, you didn’t know that you didn’t know that (until I told you).

When Hayek explains that the man on the spot does not know and does not need to be aware of every event that takes place and its effect on the economy, he is not saying that he is the one who actually understands these things. Hayek is just like you! The only thing that makes his knowledge superior is his awareness that many events are taking place around the world that are beyond his knowledge. Hayek does not seek to assert himself as the arbiter of the global economic order. He is simply suggesting that a more humble approach is needed.

And this is where politics spoils everything.

Hayek’s approach to economics is to decentralize as much as possible. This runs counter to the ambitions of governments, bureaucrats, and special interest groups. Governments gain wealth and power by usurping controls of the means of production. Bureaucracies remain in demand only by setting up barriers between the man on the spot and his economic decisions. And special interest groups benefit from undermining their competition via legislative fiat because they can’t compete on an even playing field. All of this is incompatible with allowing the man on the spot to live and choose freely.

Ironically, the ingenious man on the spot is politically retarded, and is thereby encouraged to participate in politics as often as possible. His emotions and his ignorance are manipulated by politicians and activists to best serve their agendas. The man on the spot is told that we must take action, not that we must step aside and live our lives peacefully and reasonably. The unseen impacts of tariffs and rent-seeking are difficult to illustrate and conceptualize while a single steel mill hiring 500 new workers bedazzles and affirms mythical beliefs.

Thomas Sowell once said “the first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” President Trump and his populist base are disregarding all of the evidence and all of the facts. The country they claim to love will suffer as a result. We’ll have to wait and see if it pays of politically. My commitment to voting for the Libertarian candidate is growing stronger by the day.

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