What's happening with the economy and why? Is there no end to this? What can I do to protect my family and myself, to plan better for the future? Many of us have asked questions to this effect at one point. Running away from the madness of it all is impossible. In our search for answers, we look to economics to describe the workings of our world and to give us signposts. Economics concerns and affects us; we can't escape it, for we need to understand the underlying theoretical aspects before we can initiate a fruitful discussion of the practical side.
There are a number of schools of thought with varied economic theories and approaches. The main candidates include Classical economics, the mainstream Neo-classical and Keynesian concoction and Austrian economics. The question that follows is which one is most accurate? I submit that the Austrian School wins any day.
I can't provide you with an exposition of Austrian economics. (Murray Rothbard accomplishes this in about 1,441 pages in Man, Economy and State). Instead, I wish to present several reasons why I think Austrian economics scores higher than other schools. My hope isn't to convert you, but to simply convince you to engage in your personal study of the Austrian school and make your own decisions.
Earlier this year, I had the privilege of attending Mises University (Mises U) at the Mises Institute, the world-class Austrian School of Economics think tank. It was definitely not easy explaining to family and friends what I was about to embark upon. "Austrian what?" Even the U.S. immigration officer questioned me with seeming disbelief: "An economics conference in Alabama?!" Nevertheless, I arrived and began my journey of discovery. The faculty and staff were welcoming, professors excited to meet and teach and students from across the world ready to learn and engage in intellectual discourse.
Fast-forward to the end of the one-week crash course. What did I learn? Needless to say, an immense amount that, in order to grasp the intricacies fully, would require me to take 'repeater courses.' Mind you, I knew next to nothing about Austrian economics prior to Mises U. Broadly speaking, however, I can tell you this – Austrian economics is about the truth and, given common-sense moral values, indirectly about liberty.
Austrian economics is part of a general science called praxeology that studies human action by deducing principles from a priori knowledge of and relating to the nature of action. Human action is (i) conscious, purposeful actions we as individuals take (ii) to attain our goals (iii) under conditions of uncertainty and scarcity of resources (iv) in order to maximise satisfaction or minimise dissatisfaction. We face and attempt to address this "economic problem" of having unlimited wants but only limited resources.
We engage in production, more specifically in the transformation of elements through chosen means (starting with human labour and other nature-given primary factors of production) to reach desired ends. Each day we endeavour to increase our means, resources, abilities and skills in order for us to attain our wants. At the same time, we face uncertainties, interferences, failure, natural changes and the effect of other people's actions. In addition, our goals, wants, preferences and values also change over time. Because of these changes, we may adjust our plans and actions with the purpose of trying to achieve our wants.
Each action involves purely ordinal value judgments based on imperfect knowledge we possess at the time. For every choice and action we take, there is a foregone alternative or opportunity cost. Since our valuations of things are subjective and different, exchanges at a price (the rate of exchange) using money (the medium of exchange) becomes possible. We exchange what we least value based on the law of marginal utility. This is only conceivable under an institution of private property where we can own property, use it and trade it freely, so long as we do not interfere with the equal rights of others.
The market is a process where we interrelate and make exchanges by voluntary and interpersonal cooperation or agreement. We continuously work to relieve ourselves of the economic problem and, while doing so, we involve other individuals and their disparate goals. Other market properties such as the division of labour and more complex stages of production are outgrowths of this. The market economy and the price system are hence viewed as a catallaxy, defined by Friedrich Hayek in Law, Legislation and Liberty, as "the order brought about by the mutual adjustment of many individual economies in a market". The market is an extensive, interlocking structure that elegantly runs itself without a central controller, devoid of coercion, thanks to entrepreneurs.
Austrian economics has afforded entrepreneurs central role and importance. All purposeful human action is entrepreneurship. Mises also speaks of entrepreneurs in a business/market/more catallactic sense. Similar to Menger's description, Mises says that an entrepreneur is an economizing individual who acts under conditions of uncertainty and makes either a profit or a loss. Mises states in Human Action:
"…it is impossible to eliminate the entrepreneur from the picture of a market economy. The various complementary factors of production cannot come together spontaneously. They need to be combined by the purposive efforts of men aiming at certain ends and motivated by the urge to improve their state of satisfaction. In eliminating the entrepreneur one eliminates the driving force of the whole market system."
Therefore, in order to elucidate economic phenomena in a complex economy like ours (where numerous individuals with different values and imperfect knowledge are interconnected and interrelated in the market), Austrian economists stay true to Menger's law of cause and effect by trying to trace economic consequences back to the individual actor and his or her actions.
Although Austrian economics remains silent on policy and makes no value judgments, we can take the school's theories and make our own normative assessments. To illustrate, when we look at the Austrian description of production we'll see an extensive, interlocking structure that elegantly runs itself without a central controller. Adding a central controller only disrupts the process and introduces inefficiency. When applied to government regulation, we can argue the falsity of the proposition that without government regulation in economic activity, the economy itself would erupt into chaos. The markets, in reality, are self-regulating through the participatory behaviour of individuals involved in the process of production and exchange or even through private regulatory bodies.
In the recent past, one of my focus areas has been the Jumpstart Our Business Startups Act 2012 (the "Act") and its impacts. Touted as the biggest change to US securities laws since 1933, the Act is an eclectic group of provisions that:
(i) encourage emerging growth companies to go public through the IPO on ramp,
(ii) make it easier for private companies to raise capital while remaining private through Regulation A and D provisions,
(iii) increase liquidity for private companies by raising the shareholder limit from 500 to 2,000 before being required to go public, and
(iv) address the capital needs of early stage startups through crowdfunding.
Congress intends to accomplish these objectives primarily through deregulation. For instance, Section 201(a)(1) legislates the removal of the prohibition against general advertising and solicitation for private placements under Rule 506 subject to certain conditions. Some provisions took effect immediately, whilst others required the SEC to implement the Act by providing rules and operative guidance. In addition, it's not the most artfully drafted piece of legislation, leaving the SEC to iron out uncertainties.
Despite not being entirely enough to satisfy free-market proponents, Congress's act of deregulation is still a welcome change. President Obama and Congress has finally acknowledged that access to capital for new and existing ventures has been hampered in recent years. Investors' access to potential investment opportunities in private companies has equally been limited. One of the culprits is the ban on general advertising and solicitation by private companies desiring to raise funds beyond their immediate group of family and friends without having to go through costly regulatory hurdles and regular compliance requirements. The new Rule 506(c), that came into effect on September 23, 2013, lifts this ban subject to companies taking reasonable steps to verify that each potential investor is an accredited investor. An individual with current income of $200,000 including during the last two years ($300,000 with a spouse) or with a net worth of $1 million qualifies as an accredited investor. (More categories of accredited investors are defined in Rule 501(a) of Regulation D). This deregulatory move is colossal for private companies and accredited investors alike.
Preferably, investing in such companies should be open to all investors (not just accredited ones). Opponents of the act play the 'investor protection' card and shout that fraudulent activities will necessarily follow. Well, regulation is not the most effective method to prevent this. Scam artists will act regardless of whether or not a rule against advertising exists. Accredited investors can also be victims. But this is where the SEC decided to strike the balance between investor protection and capital formation and what we have to work with. The better means of prevention is teaching and equipping investors with knowledge and tools to separate the wheat from the chaff.
Another concern comes from investors hesitating to release personal financial information to every company they would like to invest in. Similarly, each company has the added burden of creating suitable verification systems and maintaining adequate records. Privacy is an expensive commodity, especially in an age where there is an increase in unscrupulous third parties stealing and using sensitive information. These issues are not to be taken lightly and can be mitigated by involving a trustworthy and independent third party verification service. Such third party must have the ability and proper systems in place to review and safeguard personal financial information and verify accredited investor status.
Therefore, reinforced by educational tools and strict standards and policies to protect accredited investors' privacy and maintain records for the companies, the new Rule 506(c) and the increase in shareholder limit can still be regarded as more than sufficient to fuel the growth of private equity financing and IPOs in the USA.
I have only provided a minuscule example of how to evaluate real world occurrences in light of Austrian economic theories. You, too, can view the world with new lenses. With gratitude to the Internet Reformation, we have an unlimited supply of resources. Start by surfing through the other materials within The Daily Bell, and visiting websites such as Mises.org, LibertyClassroom.com and LewRockwell.com. Let us take Ayn Rand's advice: "If you don't know, the thing to do is not to get scared, but to learn." Furthermore, living in liberty entails practical action. Take advantage of resources that provide guidance on how to act prudently and with integrity, such as in areas of growing and protecting one's wealth, providing for oneself in retirement and bequeathing wealth to one's children. Anthony Wile's new book Financial Freedom is an excellent resource to facilitate your efforts in finding the next potential tenbaggers.
At this point, allow me to end with a quotation from Mises: "As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake." I believe that this statement is as relevant to us now as it was in 1949 when Mises published his seminal work, Human Action. It beckons us to rid ourselves of passivity, to open our eyes to the truth by growing our knowledge and understanding of the free markets and to act accordingly.
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