Mark Spitznagel: The Austrians And The Swan - Birds Of A Different Feather

Tyler Durden's picture

Submitted by Mark Spitznagel, CIO of Universa Investments LP: a white paper

The Austrians and the Swan:

Birds of a Different Feather

On Induction: If it looks like a swan, swims like a swan…

By now, everyone knows what a tail is. The concept has become rather ubiquitous, even to many for whom tails were considered inconsequential just over a few years ago. But do we really know one when we see one?

To review, a tail event—or, as it has come to be known, a black swan event—is an extreme event that happens with extreme infrequency (or, better yet, has never yet happened at all). The word “tail” refers to the outermost and relatively thin tail-like appendage of a frequency distribution (or probability density function). Stock market returns offer perhaps the best example: 

Over the past century-plus there have clearly been sizeable annual losses (of let’s say 20% or more) in the aggregate U.S. stock market, and they have occurred with exceedingly low frequency (in fact only a couple of times). So, by definition, we should be able to call such extreme stock market losses “tail events.”

But can we say this, just because of their visible depiction in an unconditional historical return distribution? Here is a twist on the induction problem (a.k.a. the black swan problem): one of vantage point, which Bertrand Russell famously described exactly one-hundred years ago with his wonderful parable (of yet another bird):

The man who has fed the chicken every day throughout its life at last wrings its neck instead, showing that more refined views as to the uniformity of nature would have been useful to the chicken…The mere fact that something has happened a certain number of times causes animals and men to expect that it will happen again.


Bertrand Russell, The Problems of Philosophy (1912)

My friend and colleague Nassim Taleb incorporates Russell’s chicken parable as the “turkey problem” very nicely in his important book The Black Swan. The other side of the coin, which Nassim also significantly points out, is that we tend to explain away black swans a posteriori, and our task in this paper is to avoid both sides of that coin The common epistemological problem is failing to account for a tail until we see it. But the problem at hand is something of the reverse: We account for visible tails unconditionally, and thus fail to account for when such a tail is not even a tail at all. Sometimes, like from the chicken’s less “refined views as to the uniformity of nature,” what is unexpected to us was, in fact, to be expected.

II. Not Just Bad Luck: The Austrian Case

Perhaps more refined views would be useful to us, as well.

This notion of a “uniform nature” is reminiscent of the neoclassical general equilibrium concept of economics, a static conception of the world devoid of capital and entrepreneurial competition. As also with theories of market efficiency, there is a definite cachet and envy of science and mathematics within economics and finance. The profound failure of this approach—of neoclassical economics in general and Keynesianism in particular—should need no argument here. But perhaps this methodology is also the very source of perceiving stock market tails as just “bad luck.”

Despite the tremendous uncertainty in stock returns, they are most certainly not randomly-generated numbers. Tails would be tricky matters even if they were, as we know from the small sample bias, made worse by the very non-Gaussian distributions which replicate historical return distributions so well. But stock markets are so much richer, grittier, and more complex than that.

The Austrian School of economics gave and still gives us the chief counterpoint to this naïve vew. This is the school of economic thought so-named for the Austrians who first created its principles3, starting with Carl Menger in the late 19th century and most fully developed by Ludwig von Mises in the early 20th century, whose students Friedrich von Hayek and Murray Rothbard continued to make great strides for the school.

To Mises, “What distinguishes the Austrian School and will lend it immortal fame is precisely the fact that it created a theory of economic action and not of economic equilibrium or non-action.”  The Austrian approach to the market process is just that: “The market is a process.” Moreover, the epistemological and methodological foundations of the Austrians are based on a priori, logic-based postulates about this process. Economics loses its position as a positivist, experimental science, as “economic statistics is a method of economic history, and not a method from which theoretical insight can be won.” Economic is distinct from noneconomic action—“here there are no constant relationships between quantities.” This approach of course cannot necessarily provide for precise predictions, but rather gives us a universal logical structure with which to understand the market process. Inductive knowledge takes a back seat to deductive knowledge, where general principles lead to specific conclusions (as opposed to specific instances leading to general principles), which are logically ensured by the validity of the principles. What matters most is distinguishing systematic propensities in the entrepreneurial-competitive market process, a structure which would be difficult to impossible to discern by a statistician or historian.

To the Austrians, the process is decidedly non-random, but operates (though in a non-deterministic way, of course) under the incentives of entrepreneurial “error-correction” in the economy. In a never ending series of steps, entrepreneurs homeostatically correct natural market “maladjustments” (as well as distinctly unnatural ones) back to what the Austrians call the evenly rotating economy (henceforth the ERE). This is the same idea as equilibrium, but, importantly, it is never considered reality, but rather merely an imaginary gedanken experiment through which we can understand the market process; it is actually a static point within the process itself, a state that we will never really see. Entrepreneurs continuously move the markets back to the ERE—though it never gets (or at least stays) there. Rothbard called the ERE “a static situation, outside of time,” and “the goal toward which the market moves. But the point at issue is that it is not observable, or real, as are actual market prices.”

Moreover, “a firm earns entrepreneurial profits when its return is more than interest, suffers entrepreneurial losses when its return is less…there are no entrepreneurial profits or losses in the ERE.” So “there is always competitive pressure, then, driving toward a uniform rate of interest in the economy.” Rents, as they are called, are driven by output prices and are capitalized in the price of capital—enforcing a tendency toward a mere interest return on invested capital. We must keep in mind that capitalists purchase capital goods in exchange for expected future goods, “the capital goods for which he pays are way stations on the route to the final product—the consumers’ good.” From initial investment to completion, production (including of higher order factors) requires time.

By about one hundred years ago, the Austrians gave us an a priori script for the process of boom and bust that would repeatedly follow from repeated inflationary credit expansions. Without this artificial credit, entrepreneurial profit and loss (“errors”) would remain a natural part of the process, except that, for the most part, they would naturally happen quite independently of one-another.

Central to the process is the “price of time": the interest rate market. This market conveys tremendous information to entrepreneurs due to the aggregate time preference (or the degree to which people prefer present versus future satisfaction) which determines it and is reflected in it. Interest rates are indeed the coordinating mechanism for capital investment in factors of production.

Non-Austrian economists typically depict capital as homogeneous, as opposed to the Austrians’ temporally heterogeneous and complex view of the capital structure. We see this in the impact of interest rate changes. Low rates entice entrepreneurs to engage in otherwise insufficiently profitable longer production periods, as consumers’ lower time preference means they prefer to wait for later consumption in the future, and thus their additional savings are what move rates lower; high rates tell entrepreneurs that consumers want to consume more now, and the dearth of savings and accompanying higher rates make longer-term production projects unattractive and should be ignored in order to attend to the consumers’ current wants. The present value of marginal higher order (longer production) goods is disproportionately impacted by changes in their discount rates, as more of their present value is due to their value further in the future.

Variability in time preferences changes interest and capital formation. If lower time preference and higher savings and lower interest rates created higher valuations in earlier-stage capital (factors of production) which initiates a capital investment boom, this newfound excess profitability would be neutralized by lower demand for present consumption goods and lower valuations in that later-stage capital. (John Maynard Keynes’ favored paradox of thrift is completely wrong, as it ignores the effect on capital investment of increased savings, and resulting productivity—and ignores the destructiveness of inflation, as well.)

But there is an enormous difference between changes in aggregate time preference and central bank interest rate manipulation. Where this is all heading: The Austrian theory of capital and interest leads to the logical explication of the boom and bust cycle. To the logic of the Austrians, extreme stock market loss, or busts—correlated entrepreneurial errors, as we say—are not a feature of natural free markets. Rather, it is entirely a result of central bank intervention. When a central bank lowers interest rates, what essentially happens is a dislocation in the market’s ability to coordinate production. The lower rates make otherwise marginal capital (having marginal return on capital) suddenly profitable, resulting in net capital investment in higher-order capital goods, and persistent market maladjustments.

Despite the signals given off by the lower interest rates, the balance between consumption and savings hasn’t changed, and the result is an across-the-board expansion—rather than just capital goods at the expense of consumption goods. What the new owners of capital will find is that savings are unavailable later in the production process. These economic cross currents—more hunger for investment by entrepreneurs seizing perceived capital investment opportunities, and consumers not feeding that hunger with savings, but rather actually consuming more—creates a situation of extreme unsustainable malinvestment that ultimately must be liquidated.

The only way out of the misallocated, malinvestment of capital, is a buildup of actual resources (wealth) in the economy in order to support it. This could result from lower time preferences (but as we know compressed interest rates actually inhibit savings)—or of course by accumulated reinvested profits over time (but of course time will not be on the side of marginal malinvested capital earning economic losses).

Credit expansion raises capital investment in the short run, only to see the broad inevitable collapse of the capital structure. Eventually the economic profit from capital investment and the lengthening of the production structure are disrupted, as the low interest rates that made such otherwise unprofitable, longer term investment attractive disappear. As reality sets in, and as time preferences dominate the interest rates again (even central banks cannot keep asset valuations rising forever), projects become untenable and must be abandoned. Despite the illusory signs from the interest rate market, the economy cannot support all of the central bank-distorted capital structure, and the boom becomes visibly unsustainable.

“In short,” wrote Rothbard, “and this is a highly important point to grasp, the depression is the ‘recovery’ process, and the end of the depression heralds the return to normal, and to optimum efficiency. The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the boom. The boom, then, requires a ‘bust.’”

Aggregate, correlated economic loss—the correlated entrepreneurial errors in the eyes of the Austrians—is not a random event, not bad luck, and not a tail. Rather, it is the result of distortions and imbalances in the aggregate capital structure which are untenable. When it comes to an end, by necessity, it does so ferociously due to the surprise by entrepreneurs across the economy as they discover that they have all committed investment errors. Rather than serving their homeostatic function of correcting market maladjustments back to the ERE, the market adjusts itself abruptly when they all liquidate.

What follows—to those who see only the “uniformity of nature”—is a dreaded tail event.


The paper continues - Read on below (full pdf)


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
ACP's picture

That's some serious tail.

Rahm's picture

Birds of a feather.... take dumps on Kensyians together!

gdogus erectus's picture

The collapse that is coming will not be a mislabled black swan. It is an inevitable Austrian predicted phenomenon. There. Saved you 20 minutes.

ACP's picture

Unfortunately, it'll be pushed on the public as "all Bush's fault."

Partly, but not the majority.

Spirit Of Truth's picture


What's remarkable is that everyone here is one of those chickens and they don't know it.

Do you really think Russia and China don't know about using systematic historical deception to herd the sheeple into the slaughterhouse so they can dominate the world?

The "GREAT TRANSFORMATION OF THE WORLD" has been underway right under your noses for the past 20 years and no one, except apparently myself, has noticed.

Now we're all about to have our necks wrung!

Oh regional Indian's picture

Now that was some serious writing with some amazing insights.

Monetary Policy as Static or Dynamic. 

Where is the key to turn to get this engine "going" again? I hate stasis. 

Stasis = Death or Deep Enlightenment

Dynamism = Thriving life

The Austrian School, It's real money and it's on the MOVE>



AssFire's picture

awesome link, can you leave more links??

love you site!

AlaricBalth's picture

The longer the party, the bigger the hangover. And a much larger mess to clean up afterwards.

ACP's picture

I just wish I had access to some of the spirits; everyone is going to pay for it anyway, whether you drink or not.

CuriousPasserby's picture

But if we can just change the meme to "It's all Obama's fault" then maybe we won't have another socialist in the white house for a generation.

ACP's picture

The problem is deprogramming all the Obama zombies. It'll take a generation or two to shake the commie out of Russia...& China when the govt finally falls. You can still buy a blue light special to put on your car and people will have to yield, in Russia. That will eventually pass, but the US is going to opposite direction. Several different forms of inequality are creeping (or have already crept) into this soon-to-be all-consuming US Federal Govt.

CynicLaureate's picture

To quote Upton Sinclair:  "It is difficult to get a man to understand something when his job depends on not understanding it."

Or in this case, why would those dependent on big government, central control and vast regulatory agencies with thousands of experts, welfare, healthcare, education and other entitlements vote against free money?

My belief is that the USA is past the "point of no return"; so many votes have been bought with government money that the productive members of society are now in the minority.  Prepare to be plucked.

A Nanny Moose's picture

pushed back on free marketeers..after all, they are witches....and what do we do with witches?

flacon's picture

It's even more than a prediction, it is a truism in the vein of Newton's law of universal gravitation.

cnhedge1's picture

Are concerns over a Greek Euro exit overdone ? Is the Euro area Credibly on Target?

Seasmoke's picture

the Depression..... is the necessary !!!!!!!!!!!!

TNTARG's picture

Old well known Karl Marx, The Capital

Part V, Chapter XXVII


IV. Aside from the stock company business, which represents an abolition of capitalist private industry on the basis of the capitalist system itself and destroys private industry in proportion as it expands and seizes new spheres of production, credit offers to the individual capitalist, or to him who is regarded as a capitalist, absolute command of the capital of others and the property of others, within certain limits, and thereby of the labor of others.*88 A command of social capital, not individual capital of his own gives him command of social labor. The capital itself, which a man really owns, or is supposed to own by public opinion, becomes purely a basis for the superstructure of credit. This is true particularly of wholesale commerce, through whose hands the greatest portion of the social product passes. All standards of measurement, all excuses which are more or less justified under capitalist production, disappear here. What the speculating wholesale merchant risks is social property, not his own. Equally stale becomes the phrase concerning the origin of capital from saving, for what he demands is precisely that others shall save for him. [In this way all France saved recently one and a half billion francs for the Panama Canal swindlers. In fact the entire Panama swindle is here correctly described, fully twenty years before it happened.—F. E.] The other phrase of the abstention is slapped in the face by his luxury, which now becomes a means of credit by itself. Conceptions, which still have some meaning on a less developed stage of capitalist production, become quite meaningless here. Both success and failure lead now simultaneously to a centralisation of capital, and thus to an expropriation on the most enormous scale. This expropriation extends here from the direct producers to the smaller and smallest capitalists themselves. It is first the point of departure of the capitalist mode of production; its complete accomplishment is the aim of this production. In the last instance it aims at the expropriation of all individuals from the means of production, which cease with the development of social production to be means of private production and products of private production, and which can henceforth be only means of production in the hands of associated producers, their social property, just as they are social products. However, this expropriation appears under the capitalist system in a contradictory form, as an appropriation of social property by a few; and credit gives to these few more and more the character of pure adventurers. Since property here exists in the form of shares of stock, its movements and transfer become purely a result of gambling at the stock exchange, where the little fish are swallowed by the sharks and the lambs by the wolves. In the stock companies the antagonism against the old form becomes apparent, in which social means of production are private property; but the conversion to the form of shares of stock still remains ensnared in the boundaries of capitalism; hence, instead of overcoming the antagonism between the character of wealth as a social one and as private wealth, the stock companies merely develop it in a new form.

island's picture

Nice.  Marx had a lot right in terms of his analysis.  His solution left something to be desired. 

hedgeless_horseman's picture



Why are we still talking about economics when we all are now just gamblers in a casino?  We really need to be talking about game theory.

17 Black is due, I can feel it.  

Has anyone seen that hot cocktail waitress?  I think she really likes me.

JustObserving's picture

We really need to be talking about game theory.

If it were an honest game, then game theory would be appropriate.  But it is a rigged game where the Fed makes the rules it wants.  In US markets, you just bow at the altar of the Fed.

The Fed trumps everything.

hedgeless_horseman's picture



But it is a rigged game where the Fed makes the rules it wants.

OK, yeah, but the room is still comped, right?  

DeadFred's picture

Remember this rigged game uses very fast algos to do the rigging, very fast but very stupid. This morning I tried to figure out what price to buy back into TZA after taking profits last week. I calculated $20.70 based on the range of the last dips and the 38.2% fibonacci level added to how long it's been since an up day and the general lack of rational for a big rise and the tendency to ramp at the end of the day on up days. The low for the day was 20.70 and closed at 20.71. I don't know enough about stocks to even try to evaluate fundamentals but I've noticed some of the rules the algos seem to play by. I should be unqualified to make such a guess because I barely know the makeup of the ETF or many of it's basic attributes yet this not the first time I've nailed a price to the cent. The algos are stupid and commonly predictable. It should be possible to make money in this casino because the distortions and predicability caused by the manipulation give an advantage when they are seen. Just stop thinking of it as a stock market, it's simply a mechanism for giving money to banks and propaganda for the politicians.

RockyRacoon's picture

Just at the very moment when you have it figured out, you'll have your ass handed to you.

I've had it happen enough times to know that I need to keep my ass to myself.

BalanceOrBust's picture

The Fed controls everything... until it doesn't.


Remember the chicken!

Prometheus418's picture

Game theory is appropriate here.

I don't pretend to be an expert- Nash's equations are hard for a layman to understand, but I do understand the general gist of it.  The QE on/off game is similar to the Prisoner's Dilemma, where the Fed alternately plays ball and then "betrays" the TBTFs.  If they always fired up the presses, it would have already lead to revolt and hyperinflation, and if they never did, we'd be in a much more visible depression.  Maintaining the right balance of trust and treason is what has allowed them to stretch this out as long as they have.

I'm not going to get into how it all works- mainly because I just don't believe that I adequate for that particular task, and am not interested in leading people in the wrong direction because I didn't understand some small aspect of the theory.  What I will say is that gleaning the intentions of TPTB in the current game should be done as it would when dealing with psychopaths, which in Nash's view meant those who dispense with the human factor and make decisions entirely on logic.  If you look at it from that perspective, game theory should be not only applicable, but an extremely useful tool.

Turin Turambar's picture

Game theory is NOT appropriate.  While at some level it may provide useful insights, its fundamental premeses are in contradiction with the Austrian view of economics via Praxeology.  Praxeology (Human Action) is the only appropriate way to DESCRIBE economic man and his actions - individuals voluntarily entering into transactions that result in each believing he is better off than before.  Keep in mind that Praxeology renders no value judgment regarding a transaction.  It is quite possible that, in hindsight, an individual may come to regret some decisions, but at the time the transaction is made, each individual believes that he is improving his lot; otherwise, the transaction would not have been made.

NewWorldOrange's picture

You are correct of course. The "complex variable" and all that.

NewWorldOrange's picture

" If they always fired up the presses, it would have already lead to revolt and hyperinflation, and if they never did, we'd be in a much more visible depression."

On the latter part, EXACTLY THE OPPOSITE IS TRUE. What Austrians (you know, all of us now ;) realize is that chasing bad money with good money just destroys the good money and makes the bad money worse. Had they not fired up the presses they would not have been able to prop up the bogus economic sideshow called malinvestment. That show, starved of capital, would have already disappeared to a great extent and we'd likely be in the midst of a raging recovery (the debt is another issue and eventually must be our ruin but that could still take quite a while.)

mikesswimn's picture

Game theory may one day be appropriate, but it certainly isn't now.

It's important to realize that Game theory is pure mathematics, not applied, and the applications extending from the theory are still in infancy.  Nash didn't create "equations" in the traditional sense, his famous "Nash Equilibrium" is a proof.  What you remember from college or wherever you learned about game theory is a simplified version (unless you have a Math M.S./Ph.D.)  Using Game theory as you propose makes as much sense as using differential topology or combinatorics.  There's probably some application within the theories (like Game theory), but that's a job applied mathematicians are far from being able to tackle adequately for problems in the real world.  Shit is hard.

I would also note that cooperative and non-cooperative games (e.g. "Prisoner's Dilemma") appears to be an awful choice to explain dynamics between a central bank and large private banks.  Ostensibly, since they're one and the same, it seems counterintuitive that one can either cooperate or betray oneself without having a horrible bout of schizophrenia.  That being said, if you wanted to posit that the Federal Reserve and the TBTF banks are all wacky schizophrenic nuttjobs, then you might be onto something...

JeffB's picture

But I think Austrian theory can even give us some insights into how the Fed and some of the other players may act and react in given situations. It certainly gives a much better framework than guessing at probabilities based on plotting past events.

Human Action even applies to the Fed. Well maybe quasi-Human Action.


SilverDoctors's picture

A hedge fund source has informed me that JPM's CIO desk has already lost over $100 BILLION..not $2, $4 or $7 as reported by the MSM so far. 

Perhaps even more intruiging is this theory regarding JPM's naked silver position:

Could JPM’s Silver Short Position be Backed by Massive Base Miners Forward Contracts?

Also, Tyler was on Capital Account tonight with the lovely Lauren Lyster for those who missed it:

lizzy36's picture

Your hedge fund source is a fucking idiot. 

If JPM had lost $100B, there would be gossip of the fed gifting them to Goldman for $2, the market would be in full panic mode, and bailout would be on everybodies lips.


SheepDog-One's picture

Whats to argue about? Like its a secret JPM is an insolvent banking front with $70 trillion in bad debt?  What do they have, 'assets' on their sheets? Yea right.

$100 billion?  Its chicken feed to the real numbers.

BlueCollaredOne's picture


I only have been researching finance for a few years now, but the main lessons I have learned is that reported numbers mean nothing, and the big 5 are all insolvent (if they had to account like the rest of us.)Anything that you read in an financial rag has been spun in a manner to benefit somebody.

hedgeless_horseman's picture



Maybe gross notional, not net loss?  $100 Billion is still a lot of money, or it was the last time I checked.

Kina's picture

In Zimbabwe its cheap toilet paper.

Cosimo de Medici's picture

Your comment, and the ones surrounding it, say a lot about this site.  People learn all the terms and buzzwords, but it is clear most do not really understand what they mean.  Personally, I think it is the same regarding the penchant many here have for "The Austrian School" and the gold standard.  They know all the terms and buzzwords, but ask someone to explain in detail how an economy can work, how capital is allocated under a gold standard, how and in return for what consideration ideas held by those lacking capital are funded, how any sort of growth is possible, and I doubt more than two or three commenters on this entire site can do it.  People have a general idea of theory, but their idea is so far from a workable system as to be useless.  They think they know, but they don't.  More often than not I suspect most people adopt a view or adhere to a theory merely to belong to a group and find comfort in an echo chamber.

I admit to not knowing, nor having any real idea of how economies work and what the real nature of wealth or money is.  I also have enough lack of faith in human nature (of which I am a part) to believe no matter what path society heads down, it will always and invariably end up back where it is now in both economy and governance.  What I do know is that if I follow through on the ideas espoused by so many of this site's virulent proponents of Austrian thought or gold standard mechanics, the system doesn't work and hits a wall.  I can also look back at history and see these same walls hit again and again, which is why humanity continually tries to re-invent the wheel.  I've read all the sites linked by these proponents, and every single one is flawed.  They think they found the answer, but instead have merely gotten lost in the weeds but are of the opinion they found enlightenment.  I believe part of the human condition is that all societies eventually find ways to trip themselves up.....and always will.  The system is merely window dressing to that relentless human propensity.

I suppose that is the nature of public websites, that people who know little and have even less authority or power come to the opinion they have all the answers.  They are lucky they never have to deliver on their ideas and will never be in a position to be responsible.  It's a luxury.  In fact, their certainty is emboldened by the very fact that they will never be responsible.

Yes, I've only been a member for a couple weeks, but I've read this site since the days of deadhead and Andy Dufresne, which is to say since the beginning.  Getting an account was motivated primarily by a desire to see what gets arrowed up and what gets arrowed down.  That is illuminating.

Now for my "hedge fund source":  JPM has lost somewhere between $7-8 far.  Also, forget about the JPM silver short.  Imagine this scenario as being illustrative:  you buy up a ton of warrants of a stock, and because of either mispricing or your spread (owing to a cost of funds advantage), you lock in a gain by shorting the common equity.  Somebody sees the massive short interest in the equity and thinks they can run the market against you.  You cash in your warrants.

By the way, a long term Lizzy36 fan.

AlaricBalth's picture

"no matter what path society heads down, it will always and invariably end up back where it is now in both economy and governance."

Interesting. So are you saying that dynamic economic systems are ultimately Poincareian?

Turin Turambar's picture

"I admit to not knowing, nor having any real idea of how economies work and what the real nature of wealth or money is. "

Wow, you sure have a lot of negative criticism about people who make comments and observations about a topic you profess to know nothing about.

"...ask someone to explain in detail how an economy can work, how capital is allocated under a gold standard, how and in return for what consideration ideas held by those lacking capital are funded, how any sort of growth is possible, and I doubt more than two or three commenters on this entire site can do it."

My first thought is that in your ignorance, you wouldn't recongize it if it slapped you in the face.

You appear to imply that if a person is incapable of producing a complete and thorough treatise on a subject that even a rudimentary understanding of the basic tenets of a subject is of little value.

Well, I've wasted enough of my life's energy on this post.  Methinks you just like to hear the sound of your own voice as you pretend to wax philosophically about nonsensical drivel.



Cosimo de Medici's picture

No.  One need not have the final explanation to know that all explanations so far given are incorrect.  And once it is clear the given explanations are incorrect, one knows those espousing those false explanations are simply wrong.  (Example:  I'm a surgeon.  A non-physician could give me his view of how to do a heart transplant, yet even before I was taught how to do one, I would have known that the man's idea was dead wrong.  I was ignorant of how to do a transplant, but I knew how NOT to do one.)

All we hear on this site is "Austrian" and "gold standard", but no one can explain in detail how things would all work out, while on countless occasions the few dissenting voices present have shown, from the historical record and logic, that the common view here does not work in the real world.

taraxias's picture

Do the words "pseudo-intellectual" mean anything to you?

You lost all credibility when you tried to gain acceptance, even sympathy, with your "I'm ignorant" line.

How's that saying go, the lady does protest too much or something like that. I think you get the idea........

NewWorldOrange's picture

"All we hear on this site is "Austrian" and "gold standard", but no one can explain in detail how things would all work out, while on countless occasions the few dissenting voices present have shown, from the historical record and logic, that the common view here does not work in the real world'

Cosimo, that post is so full of fail it is EPIC. Countless writers and observers have "explained in detail" for decades (and even centuries, though it wasn't CALLED "Austrian" yet.) The historical record shows irrefutably that "Austrian" economics and the gold standard work spectacularly (when allowed to, but TPTB generally prefer something more controlled, by THEM. Hence the assent of Keynesian lunacy.

Your comment with regard to historicial record and logic...hilarious! You'd probably have to fully understand the methodolgy of the Austrian school (a priori reasoning, i.e., logic, and NOT historicism) as opposed to the others to realize why it's ironic.

If you REALLY want to know what Austrian economics is about (if you did, you'd have TRIED already) I recommend starting off with "Economics in One Lesson" by Henry Hazlitt. I'll even give you a sort of intro to it, because it posits this riddle at the start:

Some kid throws a brick thru the Baker's shop window then runs off laughing. An observer sees it and thinks, "You know, that kid isn't just a public menace. The baker will now have to spend $100 on a new window. So the window installer makes $100 and spends that on a suit. The tailor makes a $100 and spends it at tbe butcher shop...and on and on. The kid is a public benefactor. He stimulated the economy!"

Where's the fallacy in that reasoning? Because it's the fundamental fallacy in the "thinking" that goes into most all Keynesian fantasy. The baker would have spent the $100 anyway. The only difference is that now, the economy has one fewer good windows.

This simple fallacy is at the heart of most every Keynesian thought (think about the Keynesian notion that a war helps an economy, for example. Absurd but many people have actually bought into that insanity. It may help WAR INDUSTRIES but destroys everything else.)

Sorry we don't have time or space to ellucidate on Austrian Economics (reality-based common sense economics) or the Gold Standard for you here. Tip: There are these things called "books" and you can order them easily here and they'll mysteriously show up in your mailbox, like some kind of Keynesian Kargo Kult thing.

Sean7k's picture

Well, there is an answer: reading. The Austrian school of economics has many proponents and their books are available at 

A good overall text is Rothbards, "Man, Economy and the State, with Power and Markets". Follow with "Human Action" by Mises  and then let your fingers do the walking. 

Opinions expressed from ignorance produce a similar fruit.

NewWorldOrange's picture

"Opinions expressed from ignorance produce a similar fruit."

Well stated. Reminds me of this that I memorized decades ago:

Watch your thoughts, for they become words.

Watch your words, for they become actions.

Watch your actions, for they become habits.

Watch your habits, for they become your character.

Watch your character, for it becomes your destiny.


It shouldn't surprise anyone in this age that their are countless people on the Internet (and everywhere else) spouting off on stuff they know nothing about. Yet it still kind of amazes me just how ignorant reasonably intelligent people can be when they do so. Part of the problem here is that people hear "Austrian Economics" and they think that must be somehow different from just ordinary everyday economics wherein people acting in their own interest come together in the market to make transactions. So they suspect it of being just a lot of hot air couched in equations and all sorts of fallacies and ideas that run contrary to common sense. Like most "schools" of economic thought are.

NewWorldOrange's picture

"What I do know is that if I follow through on the ideas espoused by so many of this site's virulent proponents of Austrian thought or gold standard mechanics, the system doesn't work and hits a wall. "

THAT is to be expected if you "admit to not knowing, nor having any real idea of how economies work and what the real nature of wealth or money is." It's awfully hard to "follow through" ideas when you admittedly don't understand them. GIGO.

As an "example" of a "system" that works to say, predict things (the best test of any theory is its predictive value), consider that the ideas of Austrian economics (of whatever you want to call the REALITY of millions of self-interested market participants doing what they do) is to a large degree the philosophical underpinning of this site, which is why it is uncannily accurate in its predictions and analysis whereas Keynesian-based sources like CNBC are almost always wrong.

For over a decade now, I've followed many sources of information in my investment and trading activities, which I've done full-time since last century. The Keynesians and Keynesian based analysis always turns out to be worse than worthless. It is anti-reality. Austrian sources turn out to be right almost without exception.

It would take a book to expound on how "Austrian calculations" go into my own trading and investment decisions but they definitely do in a way that is fundamental and thorough. For example, my own Austrian stance (and that of this site) led directly to my making trades as stated here beforehand:  Sun, 05/06/2012 - 19:54 | 2402010 NewWorldOrange

My forex account is up over 30% in three weeks. It's up over 900% since I began trading currencies in the late 90s. The abject failures of Keynesian lunacy provide the imbalances and distortions in the currency markets that provide me with ample opportunity to make a fortune. These past few years have taken that to a new level, and it's just going to get better until the bottom falls out of the world economy. Keynesian insanity is my Austrian Dream and I'm laughing all the way to the credit union.

I earned a Masters in Economics (heavy emphasis on the Austrian school) in the early 90s after having earned a B.S. Finance in the early 80s. What I found thru my career in finance was that most people who worked in that field were Keynesians and did not understand economics. After I completed my study of economics at Auburn, I became a full-time trader and gave up on employment by others. For 15 years now I've lived it day after day and constantly talk with other traders in person, on the phone and on blogs. I have watched countless traders reliant on the Keynesian framework lose everything time after time. They can't see reality. Many I've known for years or even worked with in the 80s and were adamant Keynesians are now Austrians and are doing great. Those who are stil Keynesian? Still failing, and still working for even bigger Keynesian idiots who would themselves be defunct if the gubmint hadn't bailed them out.

Sean7k's picture

What a load of crap. Well written crap, but crap all the same. A few opinions concerning historical results without a reference point, the acceptance of human misery as a condition both unchangable and set in stone. The disparaging of an economic school of thought, coupled with a monetary regime as if they are tied at the hip, then cast off as failures when they have never been tried outside of banker/ government regulation nor as policy anchors- since they fence the bankers in.

No argument on the merits of the article, no argument for or against the content of the article, just a random attempt to insult all the readers and posters as posers in economics and finance if they don't follow the standard Keynsian line- becuase what else is there?

I am not sure what led you to forego your silence, but do us all a favor and add to the conversation instead of subtracting from it.