The Influence of the Austrian School in Ron Paul’s Political Career

After finishing our study of Part 1, The Economics of a Free Society, let us now proceed to Part 2, Mises and Austrian Economics – A Personal View. Allow me to divide this topic under two main points: a brief narrative of Ron Paul’s entrance into politics and an overview of key ideas in Austrian economics.

Brief Narrative of Dr. Paul’s Entrance into Politics

President Nixon’s interventionist economic policy in 1971 was the occasion that prompted Ron Paul to enter into politics. From the outset of his career, he already realized the difficulty of developing statesmanship among politicians due to pressure groups. He believes that the only way to develop statesmanship among politicians is by educating the public with Austrian ideas of personal liberty and free market. He describes his political career as primarily dedicated to this task of informing the public about the real issues in our time.

Austrian Economics

Dr. Paul’s introduction to Austrian economics was a result of his reading of F. A. Hayek’s “Road to Serfdom.” After reading this book, he decided to dig into the great literatures of the Austrian school. His journey into his new discovery equips him to see the discrepancy between the teaching of Austrian economics and mainstream society. All the more he saw the need to implement Austrian ideas through political action.

In addition to the message of Austrian economics, the men surrounding the Austrian school also made a lasting influence on Dr. Paul. His acquaintance with Leonard Read inspired him to be firm in his economic reforms. His friendship with Hans Sennholz and Murray Rothbard gave him firsthand knowledge about basic operation of the free market. Acquaintances with other Austrian economists encouraged him in his political career. Among them, it was the character of Ludwig von Mises, the leading Austrian economist himself who left a lasting impression on the Congressman. Dr. Paul saw Mises as a man of strong will, but tempered by a quiet spirit. The man is patient and determined despite of the changing and worsening political and economic climate of the time. All these influences prepared Dr. Paul in his entrance to politics and gave him the ability “to tolerate the daily circus” (p. 51) in US Congress.

Key Ideas in Austrian Economics

Among numerous ideas shared by Dr. Paul in his book, I find understanding five of them very beneficial to equip someone to distinguish between illusory and real economics. These ideas include the subjective theory of value, understanding money, business cycle, international politics, and natural rights.

Subjective Theory of Value

Understanding the subjective theory of value brings several advantages with it. Unfortunately, as to the date of the writing of the book, Ron Paul claimed that most members of the US Congress never heard of this theory and none really cared to know the relevance of this theory to contemporary affairs. But for the Tea Party Congressman, understanding the theory is basic for true reform. One will be equipped to see the real color of interventionists’ excuses. Citizens will grasp the free nature in determining the prices of goods, which is essential for the healthy operation of the market.

Sound Theory of Money

In addition to the subjective theory of value, Dr. Paul believes that “understanding money is the key to restoring a sound economy” (p. 55). In fact, following Mises, for Dr. Paul the money issue is beyond economics and touches even the political issues of the time. This makes basic understanding of money a necessity for a correct diagnosis of existing problems and in finding the right solution. Sadly, politicians due to ignorance of genuine free market ideas struggle to provide adequate explanation to the pressing issues of the day.

I think that the claim of Congressman Paul that Ludwig von Mises’ Theory of Money and Credit published in 1913 had answered the perplexing questions of the 20th century is also applicable in our time. Unfortunately, Mises’ answer had been ignored resulting to indescribable human suffering; and if our generation fails to learn from the past, we will experience similar or even worst calamities in the future.

There is no need for us to repeat similar mistake. Our primary advantage in comparison to the previous generation is the accessibility of information through the web. Personally, I find that understanding Mises’ theory of money is beneficial in three ways:

  • It will train us to differentiate between fiat and commodity money
  • It will also help us to comprehend the debate between the quantity and quality concepts of money, and
  • It will enable us to see the economic advantages of the free market

1. Fiat and commodity money

In present day economics, the money we are using is not commodity money, but fiat money. The supplier of this money is none other than the state through the central bank. As history taught us well fiat money always self-destruct. The only remedy to avoid monetary destruction is to return to commodity money bringing back its control into the hands of the free market.

2. Quantity and quality concepts of money

Being aware of the issues surrounding the debate between the quantity and the quality concepts of money is another advantage that one could gain in studying Mises’ theory of money. Mainstream economists and politicians advocate the quantity theory of money. This theory teaches that economic growth is only possible through the increase in money supply. Studying Mises, Dr. Paul does not agree with this. Upholding the quantity concept of money is only appropriate for inflationist and those who do not understand Austrian concepts of value, price, and quality of money. Austrians argue that the government cannot enrich its citizens through inflating the money supply.

3. Economic advantages of free market

Finally, sound theory of money will enable us to appreciate the real nature of free market. Studying it, the charge that the free market harms the working class will be found baseless. Instead, one will see that genuine free market terminates the struggle between the bourgeois and the proletariat, increases the number of the middle class, and improves people’s standard of living. All of these economic advantages are consequential realities in a society established on the basic foundation of personal liberty.

Business Cycle

Another central idea in the Austrian school of economics is the concept that the business cycle is brought about by inflating the money supply through the central bank. Dr. Paul asserts that almost all Washington politicians are unaware about this Austrian concept. As a result of such ignorance, political and economic inconsistencies afflict the statist policies aiming to solve the crisis. This holds true both for Republicans and Democrats.

No politician would dare claim that intentional decision has been made resulting to unemployment, rising prices, and lower standard of living. And yet these are the things happening in the economy. Another inconsistency is that all politicians claim to know the solution to business cycle and yet at the same time, they all agree that the cycle is an inherent flaw in capitalism. The outcome of this blindness is a solution that intensifies the crisis all the more.

The solution offered by Washington politicians is nothing but a strategy of increase spending out of the crisis. This is a foolish remedy for it fails to deal with the root cause and instead signals a new entrance into a far deeper and greater business cycle. The final result of this solution is the destruction of the system itself.

Congressman Ron Paul acquired his education into this matter through the works of Murray Rothbard and Hans Sennholz on 1930 Great Depression. From Austrian point of view, the way to stop the business cycle is to abolish central banking and fiat money and return to an honest monetary system. Since most people are really concerned about the economic situation of the world, I think Ron Paul’s challenge is applicable not only to Americans, but to all citizens of other countries as well.

“All people concerned with the suffering and degradation of unemployment should study the Austrian explanation of how distorted interest rates, malinvestment, skewed economic calculation, and preferential treatment for favored business and government constituencies, cause the crime of the business cycle” (p. 59).

International Politics

The continued existence of central banking and fiat money does not only cause the business cycle, but also generates international crises and war. For the Tea Party Congressman, a faulty monetary system is inseparable from issues related to foreign relations. He explains the nature of this connection by analyzing the impacts of economic interventionism.

Dr. Paul believes that economic interventionism breeds “excessive nationalism, protectionism, economic isolationism, militarism, and war” (p. 60). In order to perpetuate interventionism, an unlimited supply of fiat money is necessary. Without it, interventionism collapses.

Seen from this point of view, interventionism is a serious threat to personal liberty and the survival of present civilization. According to Ron Paul, Mises has already foreseen the future of such type of interventionism, which is heading towards a fascist government similar to Nazi Germany. Ron Paul was alarmed witnessing the signs of Mises’ prediction in contemporary America. His only hope was to reverse the tide before its final fulfillment. And the way to do this is to return to sound money and free market economy.

Ron Paul quotes Mises to describe the contrast between interventionism and the free market:

“While laissez faire eliminates the causes of international conflict, government interference with business and socialism creates conflicts for which no peaceful solution can be found” (p. 61).

Dr. Paul describes further the seriousness of present international tensions:

“The magnitude of these tensions is even greater than in the 1930s. International debt is deeper; the degree of worldwide inflation is more ominous….Gold has been ‘discredited’ by all governments. The engines of inflation throughout the world are running at full throttle, struggling to keep the debt pyramid from collapsing. True capital formation diminishes yearly. Military build-ups continue at unprecedented rates….All this insanity, of course, is financed through massive taxation and inflation borne by our taxpayers. Without fiat money, these wild schemes would be impossible” (p. 62).

Natural Rights

In reading this topic, I intentionally skip the Congressman’s explanation on “utilitarianism” and “conscription” for I find it philosophically difficult at this time. It is sufficient for me to know about the essential idea of liberalism [“that all men are created equal and endowed by their creator with certain unalienable rights” (p. 63)] and the advantages in upholding natural rights. I understand that for Dr. Paul, the concept of natural rights provides a necessary moral argument not only to win the debate over the socialist, but also to realize a peaceful society.

Conclusion: Three Relevant Quotes

I want to end this article with three relevant quotes taken from Dr. Paul’s book. I already included these quotations in my earlier articles. I found them first from LewRockwell.com and Ludwig von Mises.com. Despite of their familiarity, I still consider it appropriate to end this summary and reflection with great ideas from Ludwig von Mises himself.

“Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping towards destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us” (p. 65).

“There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a self-appointed elite of supermen. In such vital matters blind reliance upon “experts” and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people’s domination. As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake” (pp. 65-66).

“The flowering of human society depends on two factors: the intellectual power of outstanding men to conceive sound social and economic theories, and the ability of these or other men to make these ideologies palatable to the majority” (p.67).

Personal Prayer

King of kings and Lord of lords, you hold the hearts of the rulers of this world, you direct them like a watercourse wherever you please (Proverbs 22:1). All our ways may seem right to us, but it is you who examine the hearts of men.

Let both the politicians and the public see the root cause of “booms” and “busts”. Abolish central banking and fiat money and help us learn the lessons of history about the economic benefits of returning to an honest monetary system. Restore the value of human labor. Let economic interventionism, international crises and war be stopped. Stop the attack on human dignity and freedom. You made man in your likeness, in your image. Let such likeness be restored through the Gospel of your Son. Let there be peace with you, peace within man, peace with those who differ from us, and peace with our environment.

Source: Paul, Ron. (2008). Pillars of Prosperity: Free Markets, Honest Money, Private Property. Auburn, Alabama: Ludwig von Mises Institute.

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1 Comment

  1. Pingback: US Congressman Ron Paul on Inflation | Studies in Economics

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