Fracking

I was having a casual conversation with a friend of mine a few days ago whom suggested that the government should take control of all fracking operations that are currently or will ever be operating within the United States.  I was a little surprised to hear him say this since I knew that he had in the past tended to side with a more conservative view of government.  So I asked how government should do this and for what reason government should do this.  His answer was kind of astonishing to me.

He believed first off that government should enact eminent domain to gain control of all the known sources of oil where fracking was taking place.  He believed that the government should do this for a variety of reason, first off the owners of the land prior to big oil companies coming in were not being justly compensated and were being taken advantage of by the companies that performed the fracking.  Also there are apparently cases in which these fracking companies will find a source they could extract oil from but not actually extract any until the price per barrel reaches a certain level, I found this to be an odd claim in and of itself.

He believed that if the government were to enact eminent domain that the government could then justly compensate the landowners for the oil, which their property contained.  I do not believe that this would be the case at all.  There are several companies that perform fracking, these companies will make more profit if they have more sources of fracking.  So it is to each ones mutual benefit to try and outbid each other for the land up to the point were there is zero economic profit, if one company does not wish to pay a price were there is still economic profit to be made other companies will bid more.  When the government enacts eminent domain it has the force of the government behind it, so it does not need to bid up to the point of zero economic profit as the seller has no choice but to accept the offer.  Also if the government were to bid more than the oil companies who should already be paying the maximum price they can and still turn a profit, then the government would lose money, this money would have to come from taxing some other source.  This alone doesn’t make it a bad idea, necessarily, but I know this is not what my buddy had in mind when he made the suggestion.

The reason my friend was so troubled by the idea that there were known sources of oil which were not being exploited, due to the greed of the oil companies, was because of the prices he and everyone else were paying at the pumps.  He did make an attempt to make an emotionally based argument.  He told me that there were families who worked for minimum wage, and that these families were spending half of their earnings on gas to get back and forth from work.  As a result of gas being such a large expenditure these families could not afford food for their young children, and these children were starving because some oil companies refuse to make a profit if the profit isn’t big enough.  If the government controlled the fracking operations they could flood the market with cheap oil driving down the price.  This story he told me hardly makes any sense at all with my view of the world.

The first question I have is why would an oil company not produce as much oil as it could, as long as it made a profit on it?  This doesn’t fit with the models of micro economics or what I would consider good business sense, especially not in an industry were there are competing firms.  What seems a more likely scenario to me would be that fracking is an expensive way of extracting oil from the earth, as a result the price must be higher to make fracking profitable than is the case with conventional oil drilling.

I also don’t believe that if the government were to take over fracking and increase the supply of oil that we would see much long-term change in the price paid for fuel at the pumps.  As gasoline has increased in price over time, we have seen a change in people’s preferences in regards to its use.  People use to buy big “gas guzzling” cars, there has been a shift to more and more people buying more fuel-efficient cars.  There have also been other changes, but the point is that people have changed their preferences to consume less fuel.  If the market were to be flooded with oil, prices may decrease initially, but this would eventually be offset by people adapting to the new lower prices and demanding more gasoline, which would drive the price per gallon up once again.

Besides the fact that I don’t believe that government could ever run a business enterprise very successfully, for reasons that may take a great many pages to explain, the story my friend told me doesn’t make sense.  The motives the fracking companies sees in his story don’t fit with what I expect to see in real life.  Likewise the result of a government take over of fracking doesn’t seem to fit with what I expect to see in the real world.  He seems to be concerned with poor families, in a particular children of poor families, and has some how managed to link this issue with fracking.  I think it is thinking like this that drives a lot of public policies that result in government control in a sector that should be left up to the market process.

The rise and fall of bit coins and why it might leave a lasting legacy

            Friedrich A. Hayek believed that the world was emergent that through spontaneous order, things come to be and that the free market would weed out inefficiencies.  I recently read an article on bit coins on economist.com entitled “Mining digital gold.” The article referred to bit coins as a new craze where libertarians or fanatics are looking for an alternative to government fiat money. I tend to look at it through a different pair of lens than the author; I look at it as the market in search of a more stable and effective means of exchange. Recently we have seen the value of bit coins dramatically increase in price because of all troubles Europe and people are afraid that maybe the currency back by their local government’s may not be worth as much in the near future. Now the chance of bit coins becoming very successful is almost slim to none, this does not means that is hasn’t opened the door to a Pandora’s box of alternative means of exchange. If history has thought us anything is that entrepreneurs will come along and try to compete with different versions or forms of currencies and through the discovery process one or a few will even though take hold. For in the end not even the force of governments cannot extinguish the free market, the most they can do is just merely slow down the process.

Broken Window Fallacy

Its amazing the things I was taught to believe through out high school and even growing up. That wars help strengthen the economy and have been known to do that throughout America's history. But the fact is that there are only three ways to go about paying for a war. 1. Increase taxes 2. Decrease spending in other areas 3. Increasing the debt. Increasing taxes decreases consumer spending which does not lead to a good economy. By lowering the spending in other areas we eliminate social benefits from those programs and also those individuals will have less money to spend on other items which will shrink the economy. Increasing the debt means in the future we will either have to decrease spending or increase taxes but there are still all those interest payments we have to deal with. None of these three things leads to having a stronger economy.
Also another side effect of war is that your taxes are increased to ultimately destroy things. Your destroying things of the country which you are going to war with and you are also destroying your own property which your tax payers paid for. This cycle nobody wins and none of these activities are strengthening the economy. Why would increased taxes to destroy things strengthen the economy when the consumers could be using that money on other goods which would not be destroyed? Why are so many people lead to believe that the economy is better after war?
I believe the main reason that war is looked at as strengthening the economy is because shortly after wars the economy does start to do better. The reason I believe this is because we are moving away from bad polices. The economic situation is usually strengthened more from moving away from bad policies then from putting into place good policies. The bad policies are increasing taxes, decreasing spending in other areas, and increasing the debt. After all three of these things are eliminated after the war the economy starts to get better.
The broken window fallacy is complete nonsense. Why would a son destroying a window be able to kick start the economy? It doesn't because allow though the glazier is getting money that he wasn't expected and can spend it else where the family with the broken window now has less disposable income. This  leads to the family buying less goods in the economic market.

The Efficient Fallacy

For far too long historians, politicians and mainstream media espouse the ideas of an “efficient” economy. Economists themselves continue to perform such a disservice by espousing such ideas as “market failure,” “misallocation of resources” and “the socially optimal outcome.” The concept of efficiency within economics remains one of neo-classical economics’ greatest lethargies to academic economic advancement.

Efficiency, according to the traditional economist, often times associates itself with an idea of failure of competition, human action and information asymmetries. A market failure results when markets do not produce the pareto optimal outcome that will ensue with requirements of perfect competition. In short, government action justifiably prevents externalities, recession, monopolies, subpar perfection and bests allocates productive outcomes

Given that value is subjective based upon individual wants, needs and desires, it remains very difficult to state there is an optimal outcome within a society. Societies are comprised of individuals, who are led to their own ends. The concept of Efficiency implies equilibrium and equilibrium implies an evenly rotating economy, which lacks dynamic and complex social interactions among individual actors. Instead, an efficient economy must take into account a static unchanging view of the world.

The problem of specifying ends also persists. Whose ends are we to justify as the “correct” end or the “efficient” end? The given individual decides his or her own ends, and certainly may pursue the ends for which he or she deems “the best.” Despite this notion, the individual actor may never reach an “efficient” position because one must posses perfect knowledge in order to do so. This knowledge must consist of future decisions, future outcomes, future reactions, future events and future actions—all of which are impossible to know.

Therefore, if one may not possess the knowledge needed to predict the future, how can one reach “efficiency?” The only way to reach “efficiency” is to know which actions, outcomes and decisions remain “optimal.” Since such given information is impossible for any human being acting within the realms of modern day physics, each and every individual’s actions cannot be assumed to be “efficient.”

Let one not forget that as persons are left to pursue their own ends, they will—over time—begin to perfect their knowledge towards reactions, decisions and outcomes. Even then, one will never achieve perfect knowledge. During this decision-making process, individual ideas clash, compete and differ. It is here than one must ask themselves, “which end is best and which will rule?” If one were to retain perfect knowledge and become and economic God, then why would any such decision ever require deliberation since one already knows what is best?

Given that individuals comprise a society, billions of decisions pass through the minds of persons in any given day. These decisions include utility analysis—costs and benefits—in addition to social costs, transaction costs, and many other internal dynamics. These factors, among many others, are subjective, noncomparable and nonadditive. No external individual can measure these costs nor can they observe them. For one to reach the conclusion, that “society” comprises specific decisions or that “society” favors a particular outcome leads one to suspicion. To suggest an aggregate set of ideas reflects an extremely abstract and meaningless view of an economic system.

There is one individual or a small group of individuals who are deciding what they deem is best for the economy—based upon their own preferences not mine or yours— and what they deem as evil. Ideas and decisions do not fall from the sky. Instead, they originate within the human mind—where we are unable to measure them, feel them, see them, touch them or any of the above. This, in contrast to modern economic teaching, proves a fallible way to apply economic forecasting, estimate future events or apply objective probability.

In conclusion, efficiency remains a purely subjective concept that cannot be determined nor measured; therefore, for an individual to conclude they reached “efficiency” remains fallacious. For a society, or a government for that matter, to determine what is efficient and what is not efficient exemplifies a central authority not a “collective consciousness.” Market failure and economic optimal solutions, therefore, are both ways to state individual preferences of outcomes. An “efficient outcome,” according to government, is simply one in which they favor and an “outcome failure” is one in which they do not favor. This simply cannot, under any circumstance, actually represent whether we reached efficiency or not. An undesired outcome upon the market does not come from a failure of the market . . . it comes from a failure of economists. There is simply no way to tell the future. . . unless we are God of course.

"Education Is NOT The Same As Schooling"

      Around the time I entered high school, when I began to hear teachers increasingly discussing failing public education, I started to question how the modern structuring of K-12 education came about. At the time, I often credited the problems to whatever I was being told: teachers have no incentive to give quality instruction ("we need to be paid more!"), schools are not getting nearly enough government funding, students are too distracted or not given enough individual attention, the curriculum is not 'right', quality teachers are not being hired after college, or other similar reasons I'm sure you have all been exposed to. However, it was not until recent years I began to think about how these problems/solutions seemed to be far too specific to be valid.

I watched a video a few days ago that attempts to explain how modern schooling structure came about:

http://www.youtube.com/watch?v=Omx5KrRVkMc


    According to this video, there is a reason that the education system is so standardized: in short, government (I have no idea if their historical account regarding the Prussians is accurate, but it is interesting nonetheless). Many of the principles of Austrian economics clearly apply to these kinds of problems. According to the Austrians, ideas, systems, rules, and our general 'way of life' is emergent. Rules that work for the benefit of all will remain, while ideas that do not will disappear, or never emerge at all, simply by the nature of social interaction. While this is true in cases where liberty is present, it is not true in the case of coercion. As students of economics, I'm sure you have all heard the arguments for privatized education and market correction. However, these discussions often start and end with families having the right to choose where their children are educated (this was also discussed in Mises' Liberal Foreign Policy). What is often left out of the discussion is how children are educated. Even private and home-schooling are subject to government regulation, but I would also suggest that this type of system has become ingrained in society simply because it has existed for so long via government.
     Each generation must start school at a specific age and progress through roughly 12 years of primary education before a notable economic choice is even presented. Students who excel often carry the burden of their classmates, while the students who fall behind may often be working in an education system that does not suit them as individuals. Students attend school nine months out of the year, study a predetermined, state-mandated curriculum, and have relatively little choice in their teachers/classes. The fact of the matter is that education is as much an economic choice as any other type of exchange. Some students may want to study or excel in different subjects, certain schooling structures/schedules may fit individuals differently or not at all, and some people may be more 'fit' for education at different ages. State-run education has all the characteristics of any other interventionist market, and it likely leads to all of the problems people often associate with our public education system. The larger source of the problems is mostly ignored, and people tend to focus on the specific symptoms when attempting to 'fix' education. Individuals should not only have the choice of where they want to become educated, but how (if at all).  Perhaps this is the 'best' type of education structure, and it has emerged and remained because it works properly (if this were the case, the Austrians would have no problem with it). However, after giving it some thought, and watching this video, I find it hard to believe the state did not have a great amount of influence on how schooling operates today.

Equally unequal (Feb Posting)

Notable Austrian economist Ludwig von Mises writes in Economic Policy, “And people are different, they are unequal. They always will be.” Mises continues, “There are some people who are more gifted in one subject and less in another.”

It’s reasonable to believe that Mises would have had his throat jumped down by social psychologists because of this particular position. Today, we are told by professionals and academics that creating a separation between those who excel and those who can’t only hurt our society in the long run. The mantra “everybody is equal” and “everybody is special” has been promoted since I’ve been alive; perhaps it’s been promoted even longer.

Look, I’m not a gifted student. I’m not a gifted athlete. Hell, my wife tells me that I’m not a gifted lover, but I’m okay with these truths. I would rather know the truth or hear the truth than believe a lie that “we are all equal.”

I’m glad we’re not all equal. I’m glad we, as a society, have different gifts, talents, and abilities. I wouldn’t want to watch the Super Bowl with two teams with rosters full of people like me. That would be incredibly boring! I’m glad there are people smarter than me that conduct incredible research, write fascinating books, and create things for me to buy, wear, and drive.

According to Mises, it’s the people who don’t follow the status quo that perpetuate the success that is Capitalism. Mises writes, “If a man has an idea, he will try to find a few people who are clever enough to realize the value of his idea.” Many people have ideas. Some ideas will never materialize into products or goods. Other ideas become products or goods but really should have stayed in the idea phase of creativity (anybody remember the Vibrating Ab belt?)

The entrepreneur, because of his or gifts, talents, and abilities, makes use of the Capitalist economy for his or her benefit. He or she may see an avenue in which a current product or process can be perfected. Or he or she may invent a product, sell it, and reap a handsome profit. And all the while the entrepreneur may or may not pay others for their expertise and knowledge and insight.

Either way, society is better off because the entrepreneur did something other than follow the status quo. Society is better off because the entrepreneur took risk, assessed the future, analyzed the past, and made decisions. The entrepreneur is the driving force of change in the dynamic economic system. And, as was discussed in class, the role of the entrepreneur is constantly overlooked by neo-classical economists.

People are different and people are unequal in talents, abilities, and skills. The entrepreneur recognizes this and utilizes this truth to his or her advantage. The entrepreneur may have a vision, but he or she certainly surrounds themselves with qualified staff to execute that vision. In this case we how differing talents, abilities, and skills are orchestrated and implemented to build a business, sell a product, or provide a service.

People are different and people are unequal…it’s truth.

Profits for Peace

Many of us in the world of economics and economic education have, surely, read Leonard Read’s I-Pencil. While the obvious lessons are recognizable at first glance; there is a deeper, more significant message hidden within the story of the pencil’s creation. Most can agree with Read’s assertion of the countless individuals that come together to deliver a simple pencil to its user. What’s even more amazing, though, is his assertion that no mastermind is needed to organize the countless efforts of all of these individuals. Similar to Adam Smith’s claim regarding and “invisible hand,” Read addresses the fact that, throughout history, without the use of coercion or central planning, individuals have contributed to the well-being of people whom they may not even know, by simply pursuing their own self-interests. Through competition and a desire to achieve individual wants and desires, people are drawn together in a massive network of social cooperation.

Imperative to this system of social cooperation, are entrepreneurs, and the signals that guide them. Entrepreneurs are the individuals who take risks by estimating the demands of future consumers, and allocating means of production accordingly. The signals that allow the entrepreneur to know whether he is allocating resources to be used in areas that are most useful to consumers are profit and loss. Mises describes profit and loss as “ever-present features only on account of the fact that ceaseless change in the economic data makes again and again new discrepancies, and consequently the need for new adjustments originate.” In this sense, profit is only achieved because the world is constantly changing. Resources are constantly being reallocated, and adjustments are constantly being made. Without any change in state of the world around us, profit would never be had. 

The role that profit plays in our society is crucial to social cooperation, peace, and prosperity. Mises defines profit as “a prize for removing maladjustments” from our economy. Profits are not the result of capital or labor, as Marxists believe. Capital can lay idol for decades without removing any maladjustment from the economy. Profits are a product of human ideas; ideas that are put into action, alongside capital, by entrepreneurs. As profits for some individuals increase, they are receiving the market signals that tell them to continue to allocate resources to the respective use because consumers are being supplied with what they most urgently want or need. It is, unarguably, within the best interest of the entrepreneur to continue to serve these consumers in their demands. It is profit, therefore, that causes the entrepreneur (as well as other individuals that he employs as factors of production) to cooperate, and go out of their way to provide each other with what each individual desires. This network of exchange begets value, and this creation of value begets continued cooperation by an ever increasing amount of indivuals who enter the network to reap similar benefits.

Without the signals that profit and loss precipitate, entrepreneurs are left without a light to guide their attempts to allocate scare resources to their most highly valued uses, and consumers are left without the goods and services that they most urgently need. Why then, would anyone want to interrupt these signals that are so crucial to the peace and prosperity of individuals throughout the network? A puzzling question indeed; yet legislators throughout the world continue to pass laws that do just that. They actually tax the monetary profit that is received for succeeding in the market!! In an attempt to extract profits from the entrepreneur and give them to the “workers,” legislators enact countless pages of tax laws and regulations without achieving their desired ends.

With savings and capital accumulation being crucial to future production, innovation, and increased prosperity; these laws do not help the non-entrepreneurs at the expense of the entrepreneurs. The taxes that, for example, Bill Gates has received throughout the years of his career have had very little effect on Bill’s personal well-being alone. Perhaps he was to be without a third yacht or an extra vacation home. The difference, nonetheless, is marginal for him, individually. It is the rest of society who must suffer the greatest discourse. The owner of the yacht business lost a large sale, as well as the real estate agent. These businesses lost out on potential savings for future investments that would’ve benefited themselves, employees, customers, etc. Bill Gates himself was not able to invest more into his company. Perhaps he would’ve invested more into R&D, and created a very innovative device that helped businesses and individuals throughout the world prosper and thrive at an increased rate. His charity, imaginably, went without more contributions or infrastructure to perform more efficiently. All of the stake holders in these areas are the individuals who suffered the greatest from the heavy taxes placed upon Microsoft and Bill Gates.  

These are the inevitable consequences of punishing individuals for the success in their efforts to provide consumers with resources they demand. The most disconcerting thing about the punishment for profiting is that a large number of individuals throughout the network of knowledge and peaceful cooperation will become further away from their potential maximum level of prosperity. If enough profit is punishable, then many will see incentives to leave, or be forced out of the network, thus decreasing their well-being, as well as the incentive to cooperate peacefully in the market institutions that allow for peace to flourish. If we are to create a society with a maximum level of peace, prosperity, and social cooperation, then we must recognize the important role that profits play, and allow individuals to enjoy the fruits of their labor. Progress, towards these ends, would be inevitable.

 

Equilibrium 

Neo-classical economists present a variety of models that are meant to predict human behavior in a marketplace and, therefore, allocate resources accordingly. Unfortunately, most of these models assume that human beings will behave according to the assumptions within the models. The choices and predictions that are made are based on various variables that are presented in equations, which are represented by curves in the model. It is my understanding that the world does not quite operate in this way. Rather than human beings acting mechanically to fulfill assumptions and variables in an equation; I’m quite certain that human action is based on something more real. Humans do not act in order to maximize utility subject to a budget constraint, although this is what the consumer preference model is telling us. Humans act, rather, to change the world from what they perceive it is, into what they perceive it ought to be.

Why then, is so much market analysis based on these models that describe human action in a way that is not consistent with reality? The equilibrium form of economic analysis is fallacious and the assumptions broad. Equilibrium itself can never be achieved. Hayek, in his essay “Economics and Knowledge” describes the impracticality of equilibrium analysis. Hayek asserts that economic equilibrium analysis only has a use when applied to a single individual. Once other individuals and aspects are tied into the analysis, the method becomes flawed. This is because equilibrium analysis implies an absence of time and perfect knowledge of the future.

            The models that are used in modern equilibrium analysis act as tools; tools that economists use to understand how the world works. They have implicit truths within them. For example: a demand curve has to be downward sloping. As the price increases, the demand for the good or service decreases. However, economists have taken these tools and used them in an attempt to make objective quantitative measurements regarding the future state of the economy as a whole and the respective market resources. Because the world is dynamic and changing, the models include false assumptions, and to attempt to make such precise calculations based on such fallacious assumptions poses a potential threat to the future health of the most important economy: the economy of the individual.

Equilibrium itself can only be reached by an individual, and only for a moment in time. As soon as the expectations of the individual, or other individuals, change, then there can no longer be equilibrium. If the world wasn’t changing, and there was “perfect knowledge” and no passage of time as the model assumes, then the world would be in a constant state of equilibrium and no one would need to change their expectations. This, of course, is an absurd state that can never take place in our world. Our world is unpredictable, as are the choices that individuals make regarding the allocation of various resources.

While the tools that neo-classical models allow us can be useful in our understanding of how the world works, today’s economists should not put their focus on using them to make precise economic measurements and predictions. The role of economists should be; understanding the role of knowledge and how to use the division of knowledge so as to improve the well-being of both the individual, and society as a collective. This involves using common-sense analysis instead of complex, mathematical analysis. In this way, economists can use deductive reasoning subject to facts when applied to the real world problems that society is so desperate to solve.

“if the tendency toward equilibrium, which on empirical grounds we have reason to believe to exist, is only toward an equilibrium relative to that knowledge which people will acquire in the course of their economic activity, and if any other change of knowledge must be regarded as a "change in the data" in the usual sense of the term, which falls outside the sphere of equilibrium analysis, this would mean that equilibrium analysis can really tell us nothing about the significance of such changes in knowledge, and it would also go far to account for the fact that pure analysis seems to have so extraordinarily little to say about institutions, such as the press, the purpose of which is to communicate knowledge.” –F.A. Hayek “Economics and Knowledge”

Value is subjective (Macklemore & Ryan Lewis Thrift Shop Economics Remix / Parody)

On March 15, 2013, a student from Fayetteville State University produced a YouTube video entitled “Value is subjective (Macklemore & Ryan Lewis Thrift Shop Economics Remix / Parody).” The great concept this video refers to is the Austrian principle that value is subjective and exists within the minds of individuals. In the words of Ludwig Von Mises,  “All judgments of value are personal and subjective. There are no judgments of value other than those asserting I prefer, I like better, I wish.”

As quoted by the video:
“Value's what you think; it's not a black and white movie scene where cost of goods is linked to some predetermined utility Probably should've invested it, by now I would surely be Rich!!! But yo! I lack common sense! Value is subjective see Let's look of this objectively The cost of productivity Doesn't determine our utility It's our needs wants and abilities that we use as our guide Along with the diamond and water paradox that deals with supply”

This portion of the video is extremely correct. Given that value is subjective, it remains absurd to think that one can place a value on an object or thing (value is not intrinsic). It’s our needs, wants and abilities that we use as a guide. These are all interpersonal factors (within our minds) that are used to weight costs and benefits of ideas, products, services, and/or knowledge. All action employs scarce means to attain the most valued ends. The factors for which an actor decides to employ remain the highest valued factors relative to their preference. Individuals must determine subjectivity for his or herself whether she would benefit or suffer from an exchange. This preference can only be reflected in choices.

As the lyrics read, “$100 for a costume some may consider this senseless
I call that meeting a person's preference.
You call me back I'll give you a Menger reference”

The Menger reference he is speaking of is Carl Menger. Who first laid the groundwork for the Austrian principle of value. The satisfaction of a decision exists only in the mind of the actors. There is not a way to measure an increase or decrease in satisfaction; therefore, rendering any argument that goods have objective value void. If goods contained an intrinsic object value, then all goods would remain equal in value, thus eliminating the need for trade. When individuals exchange goods, the value of said good fails to transfer with the good. Individuals value objects not just by direct use, but by exchange value as well. This information may accurately be reflected in prices. 

The video accurately reflects this concept,
“The markets regarded for putting prices on target Matching people's needs with products at prices they should be bought at sucka You set the money right and they'd a bought that product from ya You charge too much and they'll stop buying products from ya”

Ludwig Von Mises states in Human Action, “In reality no food is valued solely for its nutritive power and no garment or house solely for the protection it affords against cold weather and rain…. the demand for goods is widely influenced by metaphysical, religious, and ethical considerations, by aesthetic value judgments, by customs, habits, prejudice, tradition, changing fashions, and many other things.” The curious task of economics is to reflect how little men really know. Value is simply a judgment, one that can only be measured by people. No external individual could possibly have enough economic knowledge to control the value of a good, let alone a government or group of people.

What's so Great about the Gold Standard?

In our age of Quantitative Easing (a.k.a. money printing) there is an ideological trend towards sound money.  These recent Inflationary policies enacted by the Federal Reserve have led a lot of conservative-minded people to vilify Fiat Currencies and call for a return to the Gold Standard.   So, what does the Austrian School of Economics have to say on the subject? 

Many laymen economists point to the “intrinsic value” of gold as a reason for the return to the Gold Standard.  The arguments go like this: “Fiat Currency is nothing but paper. Gold has an intrinsic value.” While this is a true statement and perhaps even a good argument in favor of the Gold Standard, this is not necessarily the Austrian view on the subject.    

In A Free-Market Monetary System, Fredrick Hayek argues in favor of the Gold Standard, but not for the reason many might expect.   In his mind, Fiat Currency is not the problem; government inflating the supply of Fiat Currencies is the problem.   Gold, on the other hand, has a fairly constant value because its quantity is limited to the amount of gold in existence.   But the same could be true of a Fiat Currency; if a paper currency has a constant supply, it could be a fairly consistent store of value just like gold.   

So if Fiat Currency isn't the problem, what is?  According to Hayek, unreasonable governments are the problem.  He writes, “Government will behave reasonably only if it is forced to do so”.   The problem with Fiat Currency is that it doesn’t force the government to act reasonably; they can print as much of it as they want.  The reason he advocates the Gold Standard is because, “The gold standard is the only method we have yet found to place a discipline on government” (pg.11). 

So is a government backed Gold Standard the best solution?   Not necessarily, according to Hayek.  It’s certainly better than the “Quantitatively Eased” US Dollar.  But the ultimate solution is the free-market.  If the government didn’t have a monopoly on money creation, free-enterprises would be able to make competitive Fiat Currencies.  They would have a competitive reason to keep the supply of their currencies constant, and thus solve the problem of unreasonable governments over-printing our money.