018: Mark Thornton on Austrian Economics and Why the Nazi’s and the KGB Wanted Mises Papers

Dr. Mark Thornton is an economist who lives in Auburn, Alabama. Mark is Senior Fellow at the Ludwig von Mises Institute and serves as the Book Review Editor of the Quarterly Journal of Austrian Economics.

Mark’s publications include The Economics of Prohibition; Tariffs, Blockades, and  Inflation: The Economics of the Civil War (2004), The Quotable Mises (2005),The Bastiat Collection (2007), An Essay on Economic Theory (2010), and The Bastiat Reader (2014).

Dr. Thornton served as the editor of the Austrian Economics Newsletter and as a member of the Editorial Board of the Journal of Libertarian Studies. He has served as a member of the graduate faculties of Auburn University and Columbus State University. He has also taught economics at Auburn University at Montgomery and Trinity University in Texas.

Mark served as Assistant Superintendent of Banking and economic adviser to Governor Fob James of Alabama (1997-1999), and he was awarded the University Research Award at Columbus State University in 2002. Mark is a graduate of St. Bonaventure University and received his PhD in economics from Auburn University.

Economics Themes:

In this interview, Mark mentions and discusses: Competition, Entrepreneurship, comparative economic systems, economic history, business cycles, value theory, population policy, purchasing power, deflation, monetary policy and bitcoins.

Economists and Economic Schools:

In this interview, Mark mentions: Ludwig von Miss, Friedrich Hayek, David Hume, Israel Kirzner, Carl Menger, Richard Cantillon, Friedrich von Wieser, Eugen von Böhm-Bawerk, Joseph Schumpeter, Fritz Machlup, Adam Smith, Anne-Robert-Jacques Turgot, Irving Fischer, Milton Friedman, Ben Bernanke, Scott Sumner, George Soros, Nassim Nicholas Taleb, Jim Rogers, Paul Krugman, Austrian Economics, Merchantilists, Physiocrats, French Liberals and Classical Economists.

Influencers and Favorite Economists:

Scott Sumner, Richard Cantillon, Ludwig von Mises and Murray Rothbard.

Why Mark Read Economics:

As a teenager I could clearly see in the 1970s, the government was the problem and in college I discovered libertarianism. I was an economics major and I also discovered Austrian economics. I come from a family of entrepreneurs and there my perspective was developed. The small business person and the day-to-day interferences and interventions government introduced in the form of regulations, subsidies and taxes.

I came across economics outside of the classroom and outside of college – Dr. Mark Thornton

Mark’s Affirmation and Motto:

By going by this motto, it frees you up to take a stand you actually believe in rather than watering it down or covering it up – Dr. Mark Thornton.

In this episode, you will learn:

• about the Greek and Roman philosophical roots of Austrian Economics.

• about the importance of deduction and logic in Austrian thinking.

• the limitations to Austrian Economic thinking.

• about Irish economist Richard Cantillon, who remains quite elusive in economics.

• who Richard Cantillon influenced through his writings.

• why the Austrian School of Economics is given its name.

• how von Mises’ papers got in the hands of Nazi Germany and then the Soviets.

• whether von Mises or Irving Fischer was right about the 1929 Stock Market Crash and the subsequent Great Depression.

• who would support Bitcoins – von Mises or Fischer?

• why bitcoins were created.

• how similar bitcoins are with gold and the Gold Standard.

Austrian Economic Perspectives and Its Limitations

The Austrian Theory is based on logic and deduction and it tries to remain realistic. In other words, you don’t make false assumptions about humanity or the economy or the world we live in. You try to stick with realistic aspects of human behavior and you theorize, by deducing logically, what economic theory should be in order to help explain things in the real world.

The limitation for Austrian Economics is that it will never be able to have a complete theoretical understanding of the economy and it will never be able to make predictions about the future especially with respect to the magnitude of changes and the timing of actual real-world results. The Austrian School has limited predictive power about certain economic policies, regulation, subsidies, price controls, etc.

You can find Austrian insights going back to the Greeks and the Romans. It’s not until you get to the Scholastics where you see thinkers that have the same basis, realism, logic and deduction. The world works because of the ideology of the masses.

Richard Cantillon

Irish economist Richard Cantillon (1680s – 1734) is the precursor to Austrian Economics and he is the first person to put together a comprehensive treatise on economics along the lines of the Austrian School which would come after him. Cantillon was an influencer on people like Hayek, Karl Menger, the French Liberals and many of the Classical Economists and Physiocrats.

The Austrian School really starts with the publication of Cantillon’s essay ‘Essai sur la Nature du Commerce in Général’ (Essay on the Nature of Trade in General). Unfortunately, Cantillon fell out of favour with many investors that were caught up in the ‘Mississippi Bubble’ of which played a part and was subsequently ‘murdered’ when his house burnt down (there is speculation that he staged his own death to avoid the wrath of his debtors. His work was not published until 25 years after his murder. It influenced Adam Smith and Anne-Robert-Jacques Turgot. However, Cantillon’s work fell into obscurity at the time of the neo-classical school from the second half of the 19th Century to 1930 and has since been on a path of re-discovering and re-interpreting Cantillon – what he wrote, what it meant.

The Birth of Austrian Economics

Carl Menger wrote his book ‘Principles of Economics’ explaining his theoretical understanding of economics. His students von Wieser and von Böhm-Bawerk eventually became mentors to von Mises, Schumpeter and Hayek. They were known as Austrian economists simply because of their country of origin as they did not fit into any particular school of economics at that time. Hayek worked for von Mises at the Institute of Business Cycle Research. Hayek went on to work in the London School where he influenced many British economists to adopt the Austrian methods and theories.

Mises, the Nazi’s and the KGB

During World War II, Mises left Vienna due to the Nazi threat as he was both the arch-nemisis of all Socialists as well as being Jewish. On invading Vienna, the Nazi’s took von Mises works and were studied by the Nazi Intelligence Service. And when the Soviets invaded Germany, both Communists and National Socialists saw that von Mises was the main opponent of Socialism and saw that it was unviable. It was only because of the downfall of the Soviet Union was Mises’ papers rediscovered in Moscow in a KGB warehouse.

von Mises published a paper in 1920 and showed that  Socialism in its pure form was impossible and in any form was irrational. Socialism would not be efficient or productive when you have one person or one group of people making economic decisions on labor, resources and production. This would be an impossibility as they would have to come up with decisions as to what to produce, how to produce it, who to produce it for and how much to produce. They would then have to make those decisions on every good in the economy. It just can’t be done at this level, and the Soviet Union eventually realised this and they had to introduce money , wage rates and interest rates. They had to break up production by industry and introduce prices based on the West, and undergo the allocation of resources. In the end, no matter how many modifications they made, they still couldn’t produce enough food, clothing and shelter to keep their population growing.

Mises, Irving Fischer and the Fed

I ask Mark about Mises views of the economy in 1928 compared to that of Fischer’s. Fischer had been writing extensively in the public domain up to that point in time and Mises worried about the economy and the economic approach taken by government, which was largely influenced by Fischer. Fischer wrote that the US economy and investment in the stock market was safe. The 1929 Stock Market Crash and the subsequent Great Depression proved Mises correct and resulted in Fischer losing his wealth but not the use of his monetary economic perspective.

Irving Fischer was trained in Germany in modern economics with the use of statistics. The system he devised was based on a stable dollar, where the purchasing power of the dollar would remain the same. He developed price indexes to measure the purchasing power of the dollar and then suggested that monetary policy be implemented to maintain a stable dollar value. This type of mechanical economics and government bureaucracy to achieve this mechanistic view of the macro-economy resulted in Fischer being very influential in the US. He had a great influence on people like Milton Friedman and Ben Bernanke, and the modern economic policies of the US today are guided by his approach to a stable dollar and to the manipulation of monetary policy to keep a stable dollar. When the purchasing power of the dollar starts to increase the dollar – or deflation – then the monetary authorities have to throw in more dollars or credit in the system to try and dilute the value of that dollar.

Mises’ perspective and approach was different to Fischer’s and in 1928 he wrote a book outlining why Fischer’s approach was wrong and that it would cause considerable problems of size and magnitude. Mises approach was a more natural approach of the market economy that money was a weight of gold, silver or copper and the coins would remain the same weight, i.e. a silver dollar would be 25 grams of pure silver and these coins would be allowed to fluctuate in both the short-run and the long-run. This provides a shock absorber for the entire economy because the value of money is fluctuating, the value of domestic and foreign goods are fluctuating (in terms of domestic goods) and the system is not fragile. Everything can move in the economy.

However, Fischer’s approach, by guaranteeing a stable dollar and not allowing it to adjust vis-a-vis everything else in the economy creates ultimately a fragile system. Mises’ view was that you hold the metal content of the dollar constant and you allow them to fluctuate in market value, whereas Fischer believed you would essentially change the weight of the coins. He actually advocated this system but realised it to be unworkable and so retreated to making monetary policy maintain the market value of the US dollar or any currency.

Under Fischer’s approach, a bureaucracy has been created to be in charge of maintaining money and credit in the economy and giving the government the ability to increase the money supply to reduce interest rates. This has created a panacea for politicians to get out the ‘magic check book’ and make the economy ‘feel better’ in the short term.

The Central Bank is essentially a ‘legal’ counterfeiter, which is very valuable for both the political class as well as the big banks that it benefits – Dr. Mark Thornton

Bitcoins

The creator(s) of bitcoins did so in response to the financial crisis of 2008 – 2009 and they saw that central banks were responsible for that, as well as the banks who got a bailout. The average ordinary citizen ended up absorbing most of the losses.

Bitcoin is not controlled by politicians or anyone else. It’s part of an electronic marketplace and it mimics the Gold Standard in several ways:

Miners, or people who want to produce Bitcoins, have to expend real resources – their time, their money, their computing power, the purchase of special devices and a tremendous amount of electricity – just like the way gold miners expend resources on mining for gold.

The mining process becomes progressively more difficult overtime and there will be an end with production for bitcoin per se, whereas with gold, the process will go on indefinitely.

The way Bitcoin tries to alleviate the eventual deflationary pressure on bitcoins is that one Bitcoin can be broken up into a million different pieces in the same way a US dollar can be broken up into 100 pieces or cents.

Eventually people will stop allocating resources to the production of new Bitcoin. This can be a good thing because, at some point, resources will be wasted on producing valueless bitcoins from the social perspective.

Whoever invented Bitcoin did so on the Austrian perspective of the economy and on the perspective that the Gold Standard is a much better system and is decentralized in the market economy.

“Fischer was a ‘control-freak’ in many ways. He wanted to control everything, even the genetics of the American population. He would strongly disapprove of Bitcoin” – Dr. Mark Thornton

Recommended Books:

• The Theory of Money and Credit by Ludwig von Mises
• Principles of Economics by Carl Menger

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