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Minyan Mailbag: Austrian Economics


Don't be an economic girlie man!


Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

Hi Scott,

Just wanted to offer snaps for your evening column - definitely one for the MV Classics.

One question. You noted "Austrians believe that inflation is only a monetary phenomenon: that is, it can only take place when the state intervenes in markets and creates paper (fiat) currency."

I've been (slowly) scaling the Austrian School Alps. Do you really think the Austrians dismiss the psychology component? My sense is that the Austrians acknowledge the effect of herd behavior. The work of Rothbard et al points towards the 'certainty' of a business cycle even with no central bank. Where would such a cycle come from except for periods of excessive optimism and pessimism (in credit creation and purchase)?

Central banks seem to amplify human nature to make these mistakes.

By the way, the concept of 'amplification' reminds me of the stream of academic work aimed at explaining and modeling complex decision-making systems and the phenomenon of amplification from a system dynamics point of view. Not sure if you've seen it (or if you'd even want to), but one of the seminal pieces that triggered the stream is:

Forrester, J.W. (1958). Industrial dynamics: A major breakthrough for decision makers. Harvard Business Review, 36(4): 37-66.

Again, thx for a very instructive thread on the 'Ville.

Minyan Matt


As always thanks for taking time to reply and providing interesting links. Your question: "Do you really think the Austrians dismiss the psychology component?"

From my readings of Rothbard and Mises, whom I consider the standard bearers for the school, I can say that they largely do reject it insofar as they simply leave it unexamined. They have a few oblique references to psychology and impulses but by and large they focus mostly on individuals (action, time, etc.) and institutions (banks, markets, etc.) and not collective actions/judgments. They simply state that there is something like a business cycle (unexplained) but that it is a trivial characteristic in terms of understanding the dynamics of man and his actions within the auspices of the institutional frameworks set up by men (laws, courts, banks, governments, etc.) My point is that it is not trivial at all. And indeed, comes from some sort of shared collective mentation that cycles (Kondratieff) between optimism and pessimism.

Your statement that "Central banks seem to amplify human nature to make these mistakes" gets to the heart of the matter precisely.

Yes, I am familiar with the amplification thread but not its origination. I will look into this piece with curiosity.


Prof. Reamer

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