The Austrian school as a field of study in economics - truths and myths

The Mises-Hayek model is based on the disproportion between the supply of consumer and investment goods in relation to the demand for them. Money changes relative prices and the time structure of production, which shifts consumption spending to investment spending. Consumer preferences for the future remain unchanged. A gap is created, which leads to an economic crisis and then to equilibrium again (fig. 1).

Fig. 1. The Mises-Hayek model

According to this school, any artificial boom (e.g. keeping interest rates low for a long time or «pumping» a large amount of funds into the economy) must end in a collapse. According to Hayek, an increase in lending causes the interest rate to fall below the natural level. Entrepreneurs interpret this as a shift of resources from consumption, which somehow forces them to make savings. Producers receive new capital injections in the form of credit. This will continue until the market interest rate increases. Previous investments will no longer be profitable and a crisis will begin. The state should not intervene to stimulate consumption, as this would worsen the situation. The longer the boom period, the more severe the economic downturn will be and the more difficult it will be to recover from it. According to Hayek, preventing the crisis should start in the boom period. Monetary policy should be neutral so as to minimize the impact of monetary disruptions.

Austrians point out that one of the basic problems of the modern economic system and the source of instability is the nationalized money market with a strong tendency to inflation. Already in the 1970s, Friedrich Hayek pointed out that containing inflation is not an economic or technical problem, but a political problem. Hayek primarily emphasized the disastrous effects of inflation and argued that if we want to maintain a free society, we must stop inflation caused by governments and monetary authorities at all costs. He pointed out that inflation primarily worsens the situation of creditors. He believed that as a result of inflation, long-term creditors - holders of government bonds - were partially expropriated. However, he pointed out that inflation undermines the credibility of accounting practices and, as a result, companies obtain false profits. On an accounting basis, currency depreciation can possibly be taken into account as a factor affecting the replacement cost of capital, but the tax authorities will always insist on taxing such pseudo-profits. For Hayek, an extremely dangerous effect of inflation was the deformation of the price structure, as he emphasised that prices never rise at the same time. Ludwig von Mises, on the other hand, pointed out that, at the beginning of the business cycle initiated by credit expansion, everyone feels happy, living in the belief that, at last, humanity has finally overcome the grim state of scarcity, having achieved eternal prosperity. In reality, however, all this astonishing wealth is fragile. There is no way to replace banknotes and deposits with non-existent capital goods.

Inflation is initially well perceived by businesses, product prices turn out higher than expected, a state of euphoria and a sense of prosperity is created. However, maintaining such a state requires rising inflation. Hayek stressed that not all inflation necessarily leads to hyperinflation, but if we want to maintain prosperity then unfortunately, we have to systematically increase the level of inflation. Causing inflationary phenomena, i.e. printing «empty money», is likened by Austrians to counterfeiting. Monetary expansion is regarded by the Austrian school as a gigantic system of hidden taxation imposed on fixed-income groups far removed from government spending and subsidies and targets savers. Austrians do not believe in the effectiveness of central banks' anti-inflationary policies. In their view, the claim professed by monetarists that central banks can fulfil the role in reducing the money supply that gold once did is a dangerous naivety-

According to Mises, the cause of economic crises is excessive credit expansion [19, pp. 75-76]. Inflation, as a consequence of monetary expansion, should be ruthlessly eliminated even at the price of high (albeit temporary) unemployment. In times of crisis, a policy of stimulating consumer spending (including public works) is harmful. Austrians call for the removal of government power over the money supply and the abolition of central banking, since, as they point out, economic cycles emerged in the eighteenth century with the establishment of the first central banks and became widespread and intensified in parallel with the development of central banking.

According to the Austrians, if we want to preserve a free society and a market economy, and avoid recurring dramatic business cycles, we should abolish the central bank and introduce free banking, return to the gold standard and guarantee full respect for property rights. As Murray Rothbard used to say, what is needed is an economic system based on the inviolable right of private property, on the right of everyone to own acquired property and to exchange the products of their labour.

Conclusions

This article reviewed the positions presented in the Austrian school on the issue of prices and the function they perform. From the precursors and their theses on the importance of subjective utility in price formation, to the «Hayekists» applying equilibrium analysis and emphasising knowledge and coordination as the most important research problems for them, to the «misesists» pointing to private ownership of the means of production as the most important element of the economic order. There are differences between them not only in the views presented, but also in the research methods used. For example, Carl Mengerand Murray Rothbard were proponents of Aristotelian empiricism, Ludwig von Mises modelled himself on the apriorism of Immanuel Kant, and Friedrich von Hayek drew on broad positivism.

The output of the Austrian school is neglected by most Polish scholars. This seems to be a great loss whether one agrees with the positions of its representatives or not, because even when there is a difference of opinion, the parties to the discourse can learn a lot from each other. The Austrian school is on the rise today. In policy terms, it seems increasingly attractive given the continuing conundrum of business cycles, the collapse of socialism, the cost and failure of the regulatory welfare-warfare state and the public frustration caused by government overextension.

Familiarising oneself with the views of economists from the Austrian school, who are highly critical of contemporary institutional solutions in the area of economy and the actions of authorities in the area of economic policy, seems particularly valuable in the face of events such as the economic crisis currently experienced by most countries in the world. Despite the presentation of the ideas of the Austrian school in the courses at Polish and Ukrainian universities and the leading universities of the world, the study of the approaches of Austrian scientists has not received due attention for a long time. The Nobel Prize awarded in 1974 to a representative of the Austrian school led to a revival of interest in this strand of economics, which for decades had been treated marginally in Polish university economics textbooks as well as in textbooks of economic thought.

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