Interview: Austrian Economics With Dr. Paul Cwik

Instead of any Millennial Q and A this Friday, I recently had an exchange with Dr. Paul Cwik, an Austrian economist at Mount Olive College. He blogs at Tillman School of Business and provides some fascinating insights to our economy, for instance Economic Distress Index and Yield Curve Inversions. For further information on these, you can listen to free podcasts from The Foundation For Economic Education (FEE).

1. The prevailing C+I+G+(net exports) focuses on consumption as the main driver for economic growth and prosperity. What is the main driver in the Austrian view and how does that look in comparison.

The classic Keynesian formulation for measuring the Macroeconomy is National Income (Y) = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (X-M). In this formulation, Y = GDP and so it is true that C is the largest share of GDP. The rational conclusion is that GDP will move whenever C moves. In other words, C is the prime mover (main driver) of GDP.

The unfortunate part of the story above is that it is NOT a complete answer. GDP is a measure of final goods and services. It is constructed in the above manner so that double counting does not occur. While GDP does a fair job for what it was designed to do, it does not reflect the overall health of an economy. Just take a moment and think about what we mean with "the final goods sectors" of the economy. The final goods and services sectors are the "Do you want fries with that?" sort of jobs. Most jobs (and really most business activity) does not take place at the consumer level.

It is true that the only reason why we go to work is in order to consume later. We first enter the market place and sell (usually our labor services) to others before we can withdraw goods and services from society. Each dollar is a representation of service. We gain them by serving others. The way in which a market economy reflects the degree of service that we provide to others is through the accumulation of money.

A portion of these dollars are then used to consume, while the rest are saved. We defer consumption. When we choose not to run out to the store and blow the entire paycheck, we are deferring consumption. This suspension of consumption frees up resources to be used in other ways, namely used in the formation of capital.

Capital is absolutely essential for an economy to grow. Not only does it increase the productive power of the individual, it also allows individuals to create something new--products that would never come about otherwise.

And so we see the "Magic Formula" for economic growth: Savings leads to investment; investment is used to build capital equipment; and capital increases our productivity. As we become more productive, we become more valuable as workers. In other words, our real wages rise as a result. The increase in productivity also expands output, which increases our ability to consume. In short, this is how we raise our living standards.

So while the Keynesian economist focuses on the short-run aggregate of Consumption, the Austrian economist looks for the larger picture. When consumption falls, the Keynesian says that this is a calamity and must be reversed at all costs. It requires government to tax and spend in order to boost aggregate demand and supplant the drop in consumption.

Meanwhile, the Austrian economist sees that there is a trade-off between present and future consumption. A decrease in today's consumption is not the end of the world. We are deferring consumption and building up capital for future output expansions. In fact, the Austrian will see the government's attempts to prop up aggregate demand as not only delaying the inevitable, but it is a waste of resources, making a bad situation worse.

Want to know more?

Do you want more details about the Austrian Theory of the Business Cycle? Click here to watch Dr. Paul Cwik at FEE. He provides a great Power Point presentation and further details (you can pull up his Power Point slides directly as well to see a comprehensive view of the Austrian view of Business cycles).

2. How would an Austrian economist view a consumption tax as opposed to an income tax?

There is no real answer here except for personal preference. Murray Rothbard wrote an excellent article called, "The Myth of Neutral Taxation." It is a little long, but the short summary is that all taxes distort the economy somehow.

A tax on beer reduces beer consumption. Why? Because a tax is a disincentive for whatever is being taxed. So a tax on consumption discourages consumption and an income tax discourages earning an income. While it is true that people need to consume and earn an income, that idea misses the economic point. People will do less of the taxed activity. Government is putting its thumb down on the scales and tilting it in a particular direction.

The best that I, as a citizen, can hope for is a minimization of governmental distortions to the market place. In order to achieve that, taxes must be broad, not favoring one group over another, and light. Both consumption taxes and income taxes can be broad and light. The question isn't which tax is better, the question should be which is lighter?

I am in favor of the system that taxes in the least burdensome manner.

The devil is in the details when it comes to measuring burden, because we can't assume that people will voluntarily pay taxes, nor can we assume that the bureaucracy will be incorruptible and efficient. As a result, it comes.

3. This blog is concerned with the Millennial generation, many of whom have told me that they feel helpless about our current economy. However, are there ways in which Echo Boomers can help Austrian economics become an influential view point in public policy decisions? And if so, what would those be?

Leonard Read was the founder of the Foundation for Economic Education (FEE). He would talk about how when he golfed, no one took any notice of him. Then he observed that if Arnold Palmer showed up, he (Palmer) would be mobbed. Everyone would want to meet him, shake his hand and then ask him about his thoughts on their swing, form, grip, etc. Why would no one mob Read, but they would mob Palmer? The answer is obvious--Palmer was an acknowledged expert in the field of golf.

People seek answers to questions from those they think are knowledgeable in different fields. When it comes to the field of economics, each of us has to become more expert. We need to deepen our own understanding of the topic. If we don't, then we won't be able to answer questions.

The next thing that Read would do is turn off the lights in the lecture hall and turn on a single light bulb. The light bulb had an adjustable dial. He would set it at the lowest setting. In that dark room, even the lowest setting drew everyone's eye to it. We are the light bulbs. As we acquire more knowledge, we become brighter. People will find out where the bright bulbs are. They will seek them out. We cannot go out and attempt to bludgeon others with our ideas. People are attracted to the humble. They are turned off by the loud.

This creates a dilemma for us. If we are to be quiet and humble, how can we have our voice heard in the shouting match that we call civil discourse? Well, there is a world of difference between being quiet and not saying anything. We don't have to shout down our opponents. We have truth, reason and empirical evidence on our side.

Now that I am a parent, find it difficult to remember that I don't have to yell at the kids. I have all of the power. If don't do X, they don't get Y. It's really that simple. I don't have to yell.
Obviously, we are not the parents of the US and so we don't have that same power. Nevertheless, we don't have to yell. People are naturally attracted to positive, optimistic, good-natured individuals who can emote their concern with others. We, each, have the capacity to be nice. Be nice and really mean it.

What concrete steps can we take? Well, there is no single answer to this. THERE IS NO CENTRAL PLAN FOR FREEDOM. Each person is the author of his own life. Each must determine what is the best use of his individual talents, and then act.

However, I will give you one concrete example.

My suggestion is to go to one's Town Council meetings. These are usually small, local affairs. Very few people attend. As a result, you will stand out. Almost always there is an open forum for people to address the council. I suggest that you attend each meeting. For each meeting prepare a 5 minute talk on a specific topic that relates to the Free Market and a local issue. Educate. Be kind. Demonstrate that you are a light. Show that you are interested. The local newspapers will initially cover you. You can then build on that exposure.

The goal is to change the hearts and minds of those who are interested in the levers of power (i.e., the people at the council meetings). You must never lose your temper. Must always be above reproach. Must always be dressed nicely (but not over the top). Try to present alternative solutions to local problems. If such things are attainable in a small community, then the larger communities will start to notice. It takes persistence, but it does not take a genius. It takes you.

Awesome stuff. I appreciate Dr. Paul Cwik taking out the time and answering these questions, and I hope that it offers a good introduction to Austrian economics. I cannot recommend the FEE podcast enough. Also, be sure to check out Dr. Paul Cwik's blog, Tillman School of Business.

Update:

Lesson learned. Never copy and interview from Microsoft Word, as Word quotes kill links. All the links should work appropriately now.