Austrian economics is a valuable tool in understanding the economy. There is a lot of bad information in the mainstream when it comes to economics. The establishment is made up of mostly Keynesians or some variation. The government school system is much the same way. That is why we have to hear these ridiculous claims that we need more spending to help our economy.
The policies instituted by the government and the Federal Reserve dramatically affect the economy as a whole. In turn, the economy dramatically affects your investments. Can understanding Austrian economics help you be a better investor?
I think the answer is “yes”, but in a very limited way. There are some good investors out there who do not understand Austrian economics and there are a lot of people who have a decent grasp of Austrian economics who are not good, or at least not above average, at investing. Warren Buffett is certainly no Austro-libertarian, but he has certainly done well with his money. Perhaps this is a bad example since his father, Howard Buffett, actually was a libertarian. Maybe Warren picked up a few things, even if he doesn’t admit it and sounds like a statist most of the time.
If you understand Austrian economics, then the most important thing you should understand is human action. I’m not talking about Mises’ book, but just the fact that humans act. The government constantly comes up with some new law or program that is supposed to achieve something and it turns out to be bad. Often, it turns out that it does the exact opposite of what it was supposed to achieve. Part of this is because of the nature of politics and the inherent corruption. But part of this is also because of human action.
The government can double a particular tax and expect to pay for some new program as the politicians expect that twice the amount of money will flow in. But that is in a static world where nothing changes. If you double the taxes on some good or service, people may find alternatives or buy it in the black market.
It is important to remember the concept of human action when you are investing. In fact, this should always be in your mind. If you think that a particular investment has to be a winner, you should think again. You may have done some great research and analysis. The so-called fundamentals may all look favorable for your investment. The problem is, your prized investment may still end up losing you money.
Just look at the bubbles that occur (primarily due to monetary policy). If you looked at the fundamentals, housing should not have continued to go up after 2004. Tech stocks should not have continued going up after 1997. Yet, these things kept going for a while longer.
At the same time, you might think that some stock just has to go up in the near future. But if few other people become as bullish as you, then it won’t go up. It all depends on the thoughts and actions of millions of other people. It really doesn’t matter what you think should happen. What matters is how others act.
Austrian economics can definitely help us with our investing. Most people, including investors, have little understanding of monetary issues. If the Fed is creating new money out of thin air and the government is running up massive deficits, we can take a good guess that commodities will probably do well. Again, there is no guarantee because it is all subject to human action. But we can make a reasonable prediction that most humans will act rationally and the additional money and debt will likely motivate others to buy gold and other commodities.
We should use our understanding of Austrian economics to our advantage in the investing world. Most others do not understand it or even know of it. Just remember the most important point that humans act and because of human action it is impossible to predict the future with certainty.