The
Mises branch is favoured by libertarians who reject government action
to various degrees, most notably in economic issues. A government is
a form of monopoly that has a tendency to expand its operations
beyond providing an optimal service to its citizens. Governments may
become oppressive as government implies authority. The state tends to
attract parasites that live off taxpayer money. Some libertarians
oppose political freedom because people can collectively decide to
restrict economic freedoms, for example the freedom to pollute water
in order to make money. Others fear that unproductive people may
elect officials that will take money away from hard working people in
order to give it to them.
The Austrian business cycle theory views business cycles as the consequence of excessive growth in bank credit, exacerbated by central bank policies which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings [24]. According to the theory, the boom-bust cycle is generated by credit expansion that is not backed by savings. Fractional reserve banking makes more funds available for lending. This lowers the interest rate and facilitates a boom.
Austrians argue that the monetary boom ends when no further investments can be found which provide adequate returns for speculative borrowers at prevailing interest rates and bank credit expansion stops. They further argue that the longer the artificial monetary boom goes on, the bigger and more speculative the borrowing, and the more wasteful the errors committed, the longer and more severe will be the necessary readjustment consisting of bankruptcies, foreclosures, and depression [24]. The influence of bank credit on the boom-bust cycle is not primarily caused by fractional reserve banking but by positive nominal interest rates.
The Austrian School of Economics rejects many of the findings of mainstream economics. Mainstream economists contend that Austrian School views are often not supported by empirical evidence [23]. Most economists think that financial innovations such as fractional reserve banking improve the efficiency of financial markets. Fractional reserve banking is inflationary as it implies that real money (M1) in current accounts can be used for lending, which expands the amount of real money (M1). If only money in savings accounts can be used for lending, only the amount of money substitutes (M2) would grow, and the effect would be less inflationary as money substitutes (M2) are less liquid than real money (M1).
Banks
have a maturity transformation function because savings and loans
tend to have different maturities. On average savings with a shorter
maturity are transformed into loans with a longer maturity, which is
inflationary insofar savings are liquid. In theory it is possible
move any positive balance on a current account to a savings account
and supplement any negative balance on this current account with
money from the same savings account. There is little difference
between such an arrangement and fractional reserve banking. The real
problem is that money in current accounts is subject to the same
risks as savings so putting money in a savings account is not
purposefully accepting the risks of banking and being rewarded for
this.
The boom-bust cycle would still exist when loans are made out of savings, simply because compound interest is infinite in the long run. During the boom phase there tends to be excessive optimism and high interest rates seem to be justified by future incomes, but those high interest rates also precipitate a bust. Lowering interest rates tends to extend the boom phase and possibly makes the bust worse. This is an important insight from the Austrian business cycle theory. The Austrian School also stresses the importance of purposeful action by individuals. Putting money in a savings account should imply accepting the risks of banking in order to receive a higher return, otherwise moral hazard may pervade the financial system.
Many proponents of the Austrian School of Economics favour a gold standard. The value of gold depends on its rarity, attraction and monetary qualities. Its value does not depend on the trustworthiness of an issuer. Over the ages gold has retained its value while other currencies did not. The problem with using gold as money is that it makes interest on money inevitable as gold does not depreciate. Gold is an excellent store of value and it is prudent to have a certain amount of gold and silver in case the currency system fails. Gold will always be a substitute for money. A possible introduction of Natural Money currencies will not change that.
Community currencies and National Socialism
The community currencies movement and National Socialism have remarkably similar views on the economy. The community currencies movement seeks to reassert local control over economic life and money using local interest free currencies. The movement alleges that the requirements of international markets, and most notably interest, cause economic suffering. National Socialism tries to do the same on the national level and also sees interest and international finance as the main culprits of economic suffering. Trade between nations is based on mutual exchange, otherwise capital controls may be needed to balance international trade.
The economies of scale and unrestrained international trade have downsides, such as the depopulation of the countryside, mom and pop stores being replaced by larger retail chains and Internet stores. By introducing closed circuits of money circulating on the local or regional level, the community currencies movement seeks to reduce the pressure of competition in order to help a middle class of smaller local and regional labourers and entrepreneurs.
Both ideologies try to curb the freedom of movement of capital and want to break free from the international financial system that is considered to be parasitic in order to make the community or nation more self-determined. The community currencies are backed by labour and often have a holding fee that provides a stimulus. The government of Germany in the 1930's issued a currency backed by labour and spent it on rearmament and public works to provide a stimulus. In the Austrian town of WÃ ¶rgl a community currency enjoyed a considerable success.
This approach can have merits during an economic crisis. It needs capital controls or an exchange fee to discourage external trades. The WÃ ¶rgl success was inflated by deferred tax payments. People that were unable to pay their taxes previously were able to pay them in the community currency, giving the town council money to provide an additional stimulus. This effect would be reduced after all taxes due had been paid off. The economic success of Germany in the 1930's was mostly caused by spending on rearmament. If all the money had been spend on public works instead, it may have resulted in the construction of useless roads and buildings.
Socialism and Marxism
According to Marxist analysis there is a class conflict within capitalism between labourers and wealthy businesspeople. Marxists contend that modern highly-productive production methods and private ownership leads to private appropriation of the surplus value of labour (profit) by a small minority of private business owners. It will lead to social unrest between the two classes, culminating in a social revolution. The outcome of this revolution would be the establishment of socialism, which is based on cooperative ownership of the means of production [25].
Profits tend to reflect the risk of doing business. Excess profits are likely to lead to more competition and a higher demand for labour, which lowers the prices of products or increases the price of labour. An unequal distribution of wealth can lead to discontent and revolution. Socialists argue that free markets without government intervention will lead to an unequal distribution of wealth, while proponents of free markets contend that government intervention creates profit opportunities for politically connected business owners. Poverty and the unequal distribution of wealth have multiple causes, for instance culture and education.
Insofar an unequal distribution of wealth is a reflection of differences in contributions to society, this may be desirable because it is beneficial overall. In certain situations acquired wealth does not reflect a contribution to society, for example with inheritance and financial innovation. People inheriting a large estate did not do so because of their economic value. Most financial innovations probably were mostly beneficial to a small group of informed people. They were often schemes to dupe less informed people or to exploit the consequences of interest on money such as financial instability.
The Austrian business cycle theory views business cycles as the consequence of excessive growth in bank credit, exacerbated by central bank policies which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings [24]. According to the theory, the boom-bust cycle is generated by credit expansion that is not backed by savings. Fractional reserve banking makes more funds available for lending. This lowers the interest rate and facilitates a boom.
Austrians argue that the monetary boom ends when no further investments can be found which provide adequate returns for speculative borrowers at prevailing interest rates and bank credit expansion stops. They further argue that the longer the artificial monetary boom goes on, the bigger and more speculative the borrowing, and the more wasteful the errors committed, the longer and more severe will be the necessary readjustment consisting of bankruptcies, foreclosures, and depression [24]. The influence of bank credit on the boom-bust cycle is not primarily caused by fractional reserve banking but by positive nominal interest rates.
The Austrian School of Economics rejects many of the findings of mainstream economics. Mainstream economists contend that Austrian School views are often not supported by empirical evidence [23]. Most economists think that financial innovations such as fractional reserve banking improve the efficiency of financial markets. Fractional reserve banking is inflationary as it implies that real money (M1) in current accounts can be used for lending, which expands the amount of real money (M1). If only money in savings accounts can be used for lending, only the amount of money substitutes (M2) would grow, and the effect would be less inflationary as money substitutes (M2) are less liquid than real money (M1).
The boom-bust cycle would still exist when loans are made out of savings, simply because compound interest is infinite in the long run. During the boom phase there tends to be excessive optimism and high interest rates seem to be justified by future incomes, but those high interest rates also precipitate a bust. Lowering interest rates tends to extend the boom phase and possibly makes the bust worse. This is an important insight from the Austrian business cycle theory. The Austrian School also stresses the importance of purposeful action by individuals. Putting money in a savings account should imply accepting the risks of banking in order to receive a higher return, otherwise moral hazard may pervade the financial system.
Many proponents of the Austrian School of Economics favour a gold standard. The value of gold depends on its rarity, attraction and monetary qualities. Its value does not depend on the trustworthiness of an issuer. Over the ages gold has retained its value while other currencies did not. The problem with using gold as money is that it makes interest on money inevitable as gold does not depreciate. Gold is an excellent store of value and it is prudent to have a certain amount of gold and silver in case the currency system fails. Gold will always be a substitute for money. A possible introduction of Natural Money currencies will not change that.
Community currencies and National Socialism
The community currencies movement and National Socialism have remarkably similar views on the economy. The community currencies movement seeks to reassert local control over economic life and money using local interest free currencies. The movement alleges that the requirements of international markets, and most notably interest, cause economic suffering. National Socialism tries to do the same on the national level and also sees interest and international finance as the main culprits of economic suffering. Trade between nations is based on mutual exchange, otherwise capital controls may be needed to balance international trade.
The economies of scale and unrestrained international trade have downsides, such as the depopulation of the countryside, mom and pop stores being replaced by larger retail chains and Internet stores. By introducing closed circuits of money circulating on the local or regional level, the community currencies movement seeks to reduce the pressure of competition in order to help a middle class of smaller local and regional labourers and entrepreneurs.
Both ideologies try to curb the freedom of movement of capital and want to break free from the international financial system that is considered to be parasitic in order to make the community or nation more self-determined. The community currencies are backed by labour and often have a holding fee that provides a stimulus. The government of Germany in the 1930's issued a currency backed by labour and spent it on rearmament and public works to provide a stimulus. In the Austrian town of WÃ ¶rgl a community currency enjoyed a considerable success.
This approach can have merits during an economic crisis. It needs capital controls or an exchange fee to discourage external trades. The WÃ ¶rgl success was inflated by deferred tax payments. People that were unable to pay their taxes previously were able to pay them in the community currency, giving the town council money to provide an additional stimulus. This effect would be reduced after all taxes due had been paid off. The economic success of Germany in the 1930's was mostly caused by spending on rearmament. If all the money had been spend on public works instead, it may have resulted in the construction of useless roads and buildings.
Socialism and Marxism
According to Marxist analysis there is a class conflict within capitalism between labourers and wealthy businesspeople. Marxists contend that modern highly-productive production methods and private ownership leads to private appropriation of the surplus value of labour (profit) by a small minority of private business owners. It will lead to social unrest between the two classes, culminating in a social revolution. The outcome of this revolution would be the establishment of socialism, which is based on cooperative ownership of the means of production [25].
Profits tend to reflect the risk of doing business. Excess profits are likely to lead to more competition and a higher demand for labour, which lowers the prices of products or increases the price of labour. An unequal distribution of wealth can lead to discontent and revolution. Socialists argue that free markets without government intervention will lead to an unequal distribution of wealth, while proponents of free markets contend that government intervention creates profit opportunities for politically connected business owners. Poverty and the unequal distribution of wealth have multiple causes, for instance culture and education.
Insofar an unequal distribution of wealth is a reflection of differences in contributions to society, this may be desirable because it is beneficial overall. In certain situations acquired wealth does not reflect a contribution to society, for example with inheritance and financial innovation. People inheriting a large estate did not do so because of their economic value. Most financial innovations probably were mostly beneficial to a small group of informed people. They were often schemes to dupe less informed people or to exploit the consequences of interest on money such as financial instability.
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