Given that Glint shares some aspects of the Austrian school of economics – above all a scepticism towards fiat currencies – the very briefest of expositions of the Austrian school might be appreciated. So here goes; if anyone objects that some point has been missed, my apologies; but even a remote acquaintance with this ‘school’ reveals that the number of pupils and their shades of opinion rival the number of tadpoles in a pond in spring.
For the original creative mind behind this ‘school’, Carl Menger von Wolfensgrün, the ultimate source of value is the human mind, the individual, and his/her choices. Carl Menger was born in 1840 in what is today the city of Nowy Sącz in southern Poland, then part of the Austrian empire. Menger started his career as a journalist; observing a discrepancy between what his school of theoretical economics had taught him about price determination and what he found in everyday life, he embarked on a study of political economy. Most people today know of the Austrian school of economics thanks to Friedrich Hayek, whose work was admired by the former British Prime Minister, Margaret Thatcher – which is one reason perhaps why his name is so reviled in some quarters.
In 1871, Menger published his Principles of Economics. This argued something that today seems fairly conventional, but which was radical in late 19th century economic theory – that the economic values of goods and services are subjective in nature; what is valuable to you may not be valuable to someone else. He also held that that with an increase in the number of goods their subjective value for an individual diminishes. Menger’s “marginal utility” theory held that utility, usefulness, is not constant but tends to diminish the more we have of something – the first piece of chocolate gives more utility than the 10th piece. This he called ‘diminishing marginal utility’.
Menger’s thought influenced many later thinkers, such as Ludwig von Mises, Eugen von Bohm-Bawerk, Hayek, and many others. The Austrian school – which was never a school but rather an agglomeration of individuals who shared ideas and views to a greater or lesser degree – is that economic laws of universal application are a priori, i.e. they do not depend on experience. It’s a matter of a priori knowledge that 2 + 2 always equals 4; it does not depend on anyone’s view or argument.
This belief in the centrality of a priori thinking is one of the key ways Austrian economics departs from classical and Keynesian (named after John Maynard Keynes) economics. These other schools of economic thought preferred inductive or empirical reasoning, the drawing of general conclusions from specific observations.
Followers of the Austrian school believe that markets should be free from government interference; they hold that value is determined by the importance an individual places on a good for the achievement of his/her desired ends. Value is not a function of how much labour has been spent on producing X, but on how important it is to an individual. “Menger argued that economic analysis is universally applicable and that the appropriate unit of analysis is man and his choices. These choices… are determined by individual subjective preferences and the margin on which decisions are made. The logic of choice…is the essential building block to the development of a universally valid economic theory”. For Austrian school economists, individualism rules.
Austrian economics and money
Since Menger, the Austrian school of economics has, like all schools, fragmented. Austrian economics today exists on a spectrum that ranges from extreme libertarianism (and a rejection of all government rules) to a form of libertarianism that espouses both individual freedom and social equality. While Ludwig von Mises was an early and consistent advocate of the gold standard, Hayek was lukewarm towards a gold standard; his prime concern was to see money supply removed from centralised control, as he saw such control as inevitably leading to inflation and bad investment decisions.
This is the one consistent thread running through all adherents to this school – a distrust of governments, central banks, and fiat money. Austrian school economists generally embrace the idea of free and unfettered markets, with only minimal government interference, although some founders, such as Friedrich von Wieser, advocated an extensive welfare state.
Austrian economics gained greater credibility when Friedrich Hayek, an ardent defender of free-market capitalism, an adherent of Austrian economic theories, and a major 20th century political theorist, became the joint winner of the Nobel Prize for Economics at the age of 75, in 1974.
Hayek is not to everyone’s taste, not least because of his hostility towards socialism (although he opposed all forms of totalitarianism). Hayek saw economic control as a form of totalitarianism: “Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends”, he wrote. Born in Vienna in 1899, Hayek fought in the First World War, survived the Spanish flu, and experienced the hyperinflation in Austria, which reached 1,426% in 1922. Hayek’s opposition to the economics propounded by J.M. Keynes – which essentially supports an expansionary fiscal policy, i.e. greater government spending, especially at times of crisis – was coloured by his personal experience of Austria’s hyperinflation. According to Nicholas Wapshott, who has written about both Keynes and Hayek, Hayek believed that “that those who advocated large-scale public spending programs to cure unemployment were inviting not just uncontrollable inflation but political tyranny”.
Probably Hayek’s most famous book is The Road to Serfdom, a sustained attack on central planning and totalitarianism. In his early life he supported the idea of the gold standard, the backing of a national currency with gold. He wrote that “with the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people”.
But his views evolved. In 1976, he published The Denationalization of Money, which advocated the establishment of competitively issued private moneys. He did not think this would lead to monetary chaos; in his view, markets would, of their own accord, converge on one or a limited number of monetary standards. And while Hayek preferred that most activities should be in private hands and kept well away from the state, he did nonetheless see the need for a limited role for government, to perform tasks that markets could not, such as banning poisonous substances and preventing crime, or providing a basic safety net through a comprehensive system of social insurance. He wrote: “there can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody… Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance, where, in short, we deal with genuinely insurable risks, the case for the state’s helping to organize a comprehensive system of social insurance is very strong”. Individualism rules – but society’s weak and sick should be taken care of.
From Hayek to Bitcoin
Ultimately Hayek came to regard his idea for the denationalisation of money – which, he posited, would take money supply into private hands and thus avoid the worst excesses of centralised control, such as increasing fiat money supply – as hopelessly utopian.
That did not mean however that he had fallen in love with governments. He said in an interview in 1984: “I don’t believe we shall ever have good money again before we take it out of the hands of government… We can’t take it violently out of the hands of government. All we can do is by some sly, roundabout way introduce something they can’t stop”.
Hayek’s words were prophetic. The sly, roundabout way had to wait for technological development, in the form of blockchain. Cryptocurrencies seem to be a logical extension of his idea of the privatisation of currencies, an idea he put into print in 1976 with his Choice in Currency: a way to stop inflation. Like many others, Hayek was conscious of how inflation over time drastically erodes the purchasing power of fiat currencies. Since 1913, the US Dollar has lost more than 96% of its value. Cryptocurrency supporters, like those of us who argue for the use of gold-as-money, have realised that the massive expansion of the supply of fiat money in recent years, since the Great Recession of 2008, has fuelled inflation and built up debts – the US national debt is now $30 trillion. The average lifespan of a fiat currency, according to one source, is about 35 years.
Love him or hate him, Hayek still has relevance today. His warnings about totalitarian powers and their control over what constitutes money will only resonate more, the more central bank digital currencies (CBDCs) enter our lives. In today’s fast-evolving financial world, where cryptocurrencies and gold are tussling with fiat currencies, Hayek is worth revisiting – and not reviling. At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.