Not for nothing is economics known as the dismal science. Having failed to foresee the global bubbles in credit, banking and housing, mainstream economists have compounded the problem by advocating entirely the wrong solutions. Like generals fighting the last war, most economists (and leftists who think they understand economics) continue to bang the drum of Keynesian stimulus, evidently un-able or unwilling to understand that countries, like their citizens, cannot borrow their way out of debt. Cue the world’s largest ever sovereign-debt crisis.
But not every economist got it lament-ably wrong. A number of financial thinkers anticipated both the bubble and the crash. Though few of them actually hail from Austria these days, they are known in financial circles as the Austrian school. Institutional investor Kevin Duffy is representative of this small group that foresaw problems ahead for the credit markets. Note, for example, the title of his 2005 essay, Panic Now and Beat the Rush.
The original (and authentic) Austrians were Ludwig von Mises and Friedrich von Hayek. Mises single-handedly demolished the case for socialism in ‘an economic and sociological analysis’ published as long ago as 1922; Hayek, whose The Road to Serfdom of 1944 did a similar job, influenced the free-market philosophies of both Margaret Thatcher and Ronald Reagan. As Mises and Hayek both explained, socialism can never work because sooner or later governments run out of our money.
At the risk of oversimplification, Austrians have three core beliefs: in the rights of the individual and the primacy of a free market; in small government as opposed to over-mighty bureaucracy; and in sound money as opposed to easy credit and essentially fraudulent money production courtesy of central banks. The Austrians hate central banks, in fact, and for good reason.
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