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Mainstream vs. Austrian Economics

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QUESTION: Mr. Armstrong, I believe the difference between the Austrian school of economics and mainstream economics is that mainstream economists believe recessions are inherent to capitalism and can be controlled by manipulation where the Austrian school argues the causation is fiat money with or without central banking. You seem to ascribe to something in between. Can you explain?


ANSWER: Both schools are wrong for both assume that the business cycle began with the industrial revolution. The mainstream group follows Marx and Keynes and assumes the business cycle is a flaw within the modern industrial economy; the Austrian schools are fixated on assuming this is caused by paper money.

Both are DEAD WRONG. This is the same limited thinking as global warming where nobody looks at the data before 1900. Forest fires and volcanoes put up more CO2 than cars. Here the assumption is that the business cycle was somehow born with the Industrial Revolution and paper money. Sorry, any investigation of history reveals there has ALWAYS been a business cycle and its cause has nothing to do with the Industrial Revolution or fiat money. It is inherent within human nature, and we swing political systems left and right based upon the same inherent emotional tendencies of people. There will be people who flatly disagree with me that only gold is money. No matter what evidence I put forth, they will never change. The same is true of diehard republicans or democrats. Some just hate the other and they cannot even explain why they belong to those groups.

The problem with both camps is that their assumptions begin with the Industrial Age. Neither has done extensive research before this period nor have they ever bothered to look. They are fixed in their ideas and everything begins with that era. There is no testing their theories over thousands of years. It is like looking at the Dow Jones only since 2011 and concluding it always must rise.

The idea that fiat money is responsible for the business cycle is not very practical when paper-like monetary systems existed in ancient times, such as when Egypt issued coins after being conquered by Alexander the Great. Paper money was also in China, and in fact, China never issued precious metal coinage and their currency was always fiat since the emperor was God’s representative who declared what value money would be, which is precisely fiat. Fiat can be tangible coins that are debased. Gold would be fiat if government declared its value is fixed at whatever price. Fiat is the declaring of value irrespective of any commodity value.


Gold has NO real commodity value outside of demand nor does silver. Both were totally dependent upon demand, based upon desirability like art. Cattle and bronze had a tangible value for both served a consumption purpose as food or as plows and swords. Therefore, tangible money must have a “use” other than money.

Gold and silver were prized objects but had no utilitarian “use” value outside of jewelry. Gold was desirable but was not a vital commodity that served a purpose beyond its prized status like art. Therefore, numerous monetary systems have existed that were not gold based since the medium of exchange had to have a “use” value other than as money. That was the core of all barter systems – I give you this for that.

As far as mainstream economists assuming that government can manipulate demand, even Paul Volcker admitted in his Rediscovery of the Business Cycle that this idea of “new economics” has failed.


I believe more in Adam Smith and the invisible hand. Money is whatever people say it is. Dictating money shall be gold, seashells, cattle, paper, or slave girls as St. Patrick reported in Ireland, is still fiat – the dictating by government what shall be money. Money is not a store of value; it is a medium of exchange. In that case, it is merely an agreed upon medium to supplant barter. That’s all.

We have two camps arguing with each other and at the core of both is the assumption that government is in control one way or another. I disagree. The people are in control and those in power are there ONLY until they go too far. A revolution always takes place. There are no exceptions throughout history. In the end, the people must consent to be ruled and it must be a rule that is fair and equitable. Whenever politicians, dictators, or kings forget that they require the consent of the people to rule, that is when they fall.