# Think Tank > Austrian Economics / Economic Theory >  Chicago school vs. Austrian school

## billyjoeallen

I am no economist, but I really don't see them as being incompatible.  The major difference seems to be that  Friedman is critiquing Keynes on Keynes' terms using data sets and Mises rejects Keynesism on moral grounds and fundemental priciples. Both of course reject Marxist labor theory of value and Hobbes, Malthus, etc.

I believe there are many monetarists whos writings support Paul's policy platforms as best as I understand them.

Examples:
Milton Friedman
Walter Williams
Thomas Sowell
Stephen Landsburg

There also seems to be a disproportionate number of economists on the official campaign's endorsements page. 

We should push this. It's the neocons who's fiscal policies are "kooky."

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## noztnac

Allowing politicians to run deficits and to print money out of thin air is about as "kooky" as it gets.

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## scooter

Both schools argue for free market approaches to the problem, so I think there is room for both ideas in the Ron Paul camp.

Personally, I'm not as ardent for moving to a gold standard as many people on this forum are.

I believe that a fiat currency could work quite well if it accurately represented the commodities and services to be exchanged in an economy.  Also, it would have to be restricted from being inflated and would have to be in a 100% reserve system.

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## ChristopherJ

> Both schools argue for free market approaches to the problem, so I think there is room for both ideas in the Ron Paul camp.
> 
> Personally, I'm not as ardent for moving to a gold standard as many people on this forum are.
> 
> I believe that a fiat currency could work quite well if it accurately represented the commodities and services to be exchanged in an economy.  Also, it would have to be restricted from being inflated and would have to be in a 100% reserve system.


Yes but the Federal Reserve system should still be abolished. There is no reason we should be paying interest on OUR money. If the government printed the money and held it in line with the GDP it would be much better than what we have now.

gold/silver backed is still preferable because even in the above situation there is a level of trust that the gov't won't over print the money. Anyone think the gov't can be trusted?

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## Truth Warrior

http://www.usagold.com/gildedopinion...span-gold.html

http://www.usagold.com/gildedopinion/greenspan.html

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## Fox McCloud

> I believe that a fiat currency could work quite well if it accurately represented the commodities and services to be exchanged in an economy.  Also, it would have to be restricted from being inflated and would have to be in a 100% reserve system.


the thing is, however, every single fiat currency in the history of mankind has failed, horribly, at some point...and thus the argument for a gold-backed currency.

that said, I understand where you're coming from.

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## slantedview

> I believe that a fiat currency could work quite well if it accurately represented the commodities and services to be exchanged in an economy.  Also, it would have to be restricted from being inflated and would have to be in a 100% reserve system.


Right, but restriction over money inflation is something that does not exist. As you know the Fed prints, prints prints prints prints prints, and then prints more. It prints loans to the government, private banks, the world bank, even other countries either directly or through the IMF or world bank. All it does is print, and all of this printing causes the value of the dollar to drop. 

There are no controls over the Fed. It has nearly ruined our currency.

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## scooter

> the thing is, however, every single fiat currency in the history of mankind has failed, horribly, at some point...and thus the argument for a gold-backed currency.
> 
> that said, I understand where you're coming from.


Every fiat currency has failed because of not being on 100% reserves or because over-printing.  Remember, the treasury printing bills creates less than 10% of our money.  The "virtual" money from fractional reserves is the rest.

Don't get me wrong.  I think the Fed must die and that major monetary reform must happen.  I just think a full-reserve fiat currency might work really well if handled properly.

I understand the concerns of keeping this power with the government.  It would have to be something that is very transparent where the people could keep a watchful eye over it.

In theory, a 100% reserve paper money is not technically fiat, because the money supply would just represent an exchance of goods that really exist.  Technically it would be backed by every commodity that exists in that economy, not just one or a basket.

There are many great ideas floating around, though.  And nearly ALL of them advocate removal of the Fed and fractional reserves.

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## diesirae

> the thing is, however, every single fiat currency in the history of mankind has failed, horribly, at some point...and thus the argument for a gold-backed currency.
> 
> that said, I understand where you're coming from.


I'm not sure what you mean by "failed" but the Canadian Dollar has never been reissued due to devaluation, nor have most non-European currencies.

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## jon_perez

> I believe that a fiat currency could work quite well if it accurately represented the commodities and services to be exchanged in an economy.  Also, it would have to be restricted from being inflated and would have to be in a 100% reserve system.


If, as Ron Paul has said, he would introduce legislation that mandates a balanced budget, then even if the currency remained as fiat, it would still go a long way towards preventing rampant injection of money into the system.

It was Keynesianism which gave governments all over the world license to engage in deficit spending.

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## jon_perez

Milton Friedman at one point proposed that the money supply be grown at a constant 4% per year, no matter what.  Might sound too simplistic and naive, but truth to say, that's probably as good a suggestion as anything the Fed ever did.

An alternative idea that came to mind:  How about pegging money supply growth to the percentage growth in population?

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## diesirae

> Milton Friedman at one point proposed that the money supply be grown at a constant 4% per year, no matter what.  Might sound too simplistic and naive, but truth to say, that's probably as good a suggestion as anything the Fed ever did.
> 
> An alternative idea that came to mind:  How about pegging money supply growth to the percentage growth in population?


That was mainly an exercise in "give me an example of how this would work"?

Your plan would probably increase the supply too slow -- you'd need a bundle of growth measures to properly track it.

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## Big Boss

Has anyone read both Friedman's _Monetary History of the US_ and Rothbard's _America's Great Depression_?

I haven't read either yet but I'm interested in hearing some comparisons.  I know both blame the Fed but for completely different reasons.  If I'm not mistaken, both make use of quantitative data as well.

Anyone?

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## Tom228

I do not believe in a gold standard and here's why.

http://www.uiowa.edu/ifdebook/faq/fa...standard.shtml

http://econ161.berkeley.edu/Politics...dstandard.html

Everyone believes that Gold is so great an infallible. With gold you have lapses of inflation and deflation. 



http://economics.about.com/cs/inflation/a/deflation.htm

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## diesirae

> Has anyone read both Friedman's _Monetary History of the US_ and Rothbard's _America's Great Depression_?
> 
> I haven't read either yet but I'm interested in hearing some comparisons.  I know both blame the Fed but for completely different reasons.  If I'm not mistaken, both make use of quantitative data as well.
> 
> Anyone?


It's hard to compare them since Rothbard fundamentally differs on basic underlying principles.  An earlier poster explained that Friedman using the modern, mainstream, approach basic on empirical observation modifying methodological individualism whereas Rothbard follows Austrian axiomatization theory -- which is not generally accept.

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## theczar1776

I think the fiat/whatever backed currency systems are both workable and corruptible, like the fiat system can easily be ran into the ground buy massive printing, also the gold backed can be totaled by govt./private hording. lets look into it some more:

Fiat, it seems to me that this system is shaky at best, i mean what currency that was just print out of thin air , at any time in history really worked well. (don't say colonial script, because well those were tied to Spanish dollars or pound sterlings) but you never have to deal with scarcity of money, just print more. but the main problem, i think is.that  the main backing is the "trust in the federal govt.", well i don't have any so the money is worthless to me.

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## Big Boss

> It's hard to compare them since Rothbard fundamentally differs on basic underlying principles.  An earlier poster explained that Friedman using the modern, mainstream, approach basic on empirical observation modifying methodological individualism whereas Rothbard follows Austrian axiomatization theory -- which is not generally accept.


I understand they differ on methodology, and that praxeology is dismissed within mainstream/neoclassical economics. I suppose that's what my question was trying to get at, an evaluation of the two schools based on their application to this one time period. I realize one event, and explanations taken from one member of each school proves nothing about the ultimate validity of either. I guess I'm only trying to gauge the opinions of Paul supporters on the matter. I was very surprised to hear so much about Friedman on an Austrian's fansite, you see.

If the same set of numbers can point to two separate answers, then at least one method must be wrong (or wrongly applied). BTW I'm assuming that Friedman arrived at his narrative by studying the data while Rothbard used data to demonstrate his narrative (arrived at from preexisting theory arrived at axiomatically as you said). In any case, both fit the numbers, right?. Given that the data fits both theories, what does this tell us?

I'm merely a novice, and thus very willing to admit I don't know everything about the subject. Judging from what little I know, wouldn't Paul and Friedman, if placed in control of the Fed during/before/after the Depression, do completely the opposite thing in terms of expanding/contracting the money supply?

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## diesirae

> I understand they differ on methodology, and that praxeology is dismissed within mainstream/neoclassical economics. I suppose that's what my question was trying to get at, an evaluation of the two schools based on their application to this one time period. I realize one event, and explanations taken from one member of each school proves nothing about the ultimate validity of either. I guess I'm only trying to gauge the opinions of Paul supporters on the matter. I was very surprised to hear so much about Friedman on an Austrian's fansite, you see.
> 
> If the same set of numbers can point to two separate answers, then at least one method must be wrong (or wrongly applied). BTW I'm assuming that Friedman arrived at his narrative by studying the data while Rothbard used data to demonstrate his narrative (arrived at from preexisting theory arrived at axiomatically as you said). In any case, both fit the numbers, right?. Given that the data fits both theories, what does this tell us?
> 
> I'm merely a novice, and thus very willing to admit I don't know everything about the subject. Judging from what little I know, wouldn't Paul and Friedman, if placed in control of the Fed during/before/after the Depression, do completely the opposite thing in terms of expanding/contracting the money supply?


Well, basically, the Austrian doctrine was that theory trumps evidence -- so the "one set of data, two answers" thing is misleading.  Austrians only consider data insofar as it supports their predictions; otherwise, they point out reasons why it does not, based on their underlying axioms for how people behave.  The theory-of-science rationale behind this is why it fell by the wayside -- you can probably see why.  I'm oversimplifying a fair amount, but this is the basic gist -- so, you're right here.

It's hard to say what the end result would be -- it's been an endless debate in economics over what would be right, and what should happen.  However, Lucas' Nobel Prize lecture a few years back basically sided with Friedman over Keynes or Austrians -- with a close emphasis on growth.  I found it a pretty compelling read, and you could probably find a copy at the library.  Anyone who can give a "definitive" answer is overstating the case, or needs to get published

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## Big Boss

Thanks for the response.  I wasn't looking for definitive, just opinions.  Now that you mention it, do you have any links to a good summary of the debates?  I'll be sure to look up Lucas.  Does he mention/dispute the Austrian case or just ignore it?

In any case, an amazon.com crate of Austrian material is headed my way.  I know I can research it mostly online but I hate not having books at hand.  

Would you mind listing some other discrepancies between the two schools, major ones other than the epistemological and methodological?  Is there anything other than the business cycle and fiat money theories that would result in a major difference in policy?

On the matter of opinion, I'll mark you down for the Chicago version.  Just a hunch.

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## diesirae

> Thanks for the response.  I wasn't looking for definitive, just opinions.  Now that you mention it, do you have any links to a good summary of the debates?  I'll be sure to look up Lucas.  Does he mention/dispute the Austrian case or just ignore it?
> 
> In any case, an amazon.com crate of Austrian material is headed my way.  I know I can research it mostly online but I hate not having books at hand.  
> 
> Would you mind listing some other discrepancies between the two schools, major ones other than the epistemological and methodological?  Is there anything other than the business cycle and fiat money theories that would result in a major difference in policy?
> 
> On the matter of opinion, I'll mark you down for the Chicago version.  Just a hunch.


Um, I'm honesty not all that well versed in Austrian theory outside of my narrow area of somewhat expertise -- I apologize for this, but I generally am only familiar with Austrian economics in a very general fashion, or where it has specific applications -- which are, admittedly, rather slim.

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## Big Boss

Well thanks anyway.

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## scooter

Mark me down as a supporter of Chicago School.  I am with Friendman on the fact that a fiat currency is not necessarily the problem.  It's rapid expansion beyond normal growth of the economy that creates the inflation.

Something like the constant growth rate or pegging the money supply to some mathematical or statistical analysis could work quite well and removes the ability for manipulation.

One thing I know for sure.  Both Austrians and Chicagoans couldn't stand the Fed system that was developed from Keynes' ideas.

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## Big Boss

So what would the ideal banking system be, completely decentralized, private, 100% reserve?  I was always under the impression the Friedmanites were supporters of Central Banks.  I guess they're just comfortable with the moderate position?

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## diesirae

> So what would the ideal banking system be, completely decentralized, private, 100% reserve?  I was always under the impression the Friedmanites were supporters of Central Banks.  I guess they're just comfortable with the moderate position?


Personally, I'm in favor of a centralized banking -- 100% reserve is silly, since that's an arbitrary restriction placed on the free market.  I just think that the best type of banking is one which privileges growth over stabilization -- and limits inflation in the process.

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## Big Boss

According to Rothbard, 100% isn't arbitrary at all, but the simple absence of fraud.  He believed that a deposit of money should be treated just like putting something in storage at a warehouse.  For example, if I put a tractor in storage, that doesn't give the warehouse owner the right to use my property for his gain.  There would be consequences if I went to retrieve it and it was gone, used, or replaced with another.  Since nobody cares about the form of money, or which individual bills one gets back, the situation appears different to us and thus, the idea that the same rules should apply seems silly.

Banks would still be able to profit by a) charging storage fees just like any warehouse and b) offering products like CDs, where money is specifically lent (not stored) to the bank for a fixed time period.  

Like I said, I'm a novice, so I don't have a definitive answer myself as to what I believe, but I can definitely follow Rothbard's argument.  Of course, I think Mises agreed with you, that any govt set reserve rate would be an arbitrary attack on the market.  Also I'm not sure that we can make the argument that property rights should deter this kind of behavior anymore, as people "know" their money isn't sitting in the bank.  Otherwise no one would have heard of FDIC.  It is at least implied that any money deposited in a bank is a loan, today anyway.

Apparently some English court (when it comes to economics, it seems we have tons of stuff to blame them for) decision a couple hundred years ago resulted in bank deposits losing their assumed but disputed status as private property.

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## angrydragon

This quiz will help.

http://www.mises.org/quiz.asp

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## diesirae

> According to Rothbard, 100% isn't arbitrary at all, but the simple absence of fraud.  He believed that a deposit of money should be treated just like putting something in storage at a warehouse.  For example, if I put a tractor in storage, that doesn't give the warehouse owner the right to use my property for his gain.  There would be consequences if I went to retrieve it and it was gone, used, or replaced with another.  Since nobody cares about the form of money, or which individual bills one gets back, the situation appears different to us and thus, the idea that the same rules should apply seems silly.
> 
> Banks would still be able to profit by a) charging storage fees just like any warehouse and b) offering products like CDs, where money is specifically lent (not stored) to the bank for a fixed time period.  
> 
> Like I said, I'm a novice, so I don't have a definitive answer myself as to what I believe, but I can definitely follow Rothbard's argument.  Of course, I think Mises agreed with you, that any govt set reserve rate would be an arbitrary attack on the market.  Also I'm not sure that we can make the argument that property rights should deter this kind of behavior anymore, as people "know" their money isn't sitting in the bank.  Otherwise no one would have heard of FDIC.  It is at least implied that any money deposited in a bank is a loan, today anyway.
> 
> Apparently some English court (when it comes to economics, it seems we have tons of stuff to blame them for) decision a couple hundred years ago resulted in bank deposits losing their assumed but disputed status as private property.


But that's different; you CAN do that right now.  It's called a deposit box.  Banks specifically offer different services, and 100% reserve is one of them.  However, the free market offers different forms of return for different contracts -- the ones you sign when you deposit at a bank.  Mandating that banks MUST only offer one service is an intrusion on the free market -- it doesn't prevent "fraud" since there is no fraud in correctly enforced and clearly written contracts; it's no more, or less, fraudulent then me borrowing 100$ dollars from you at 5% interest with a contract and everything.

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## Big Boss

> But that's different; you CAN do that right now.  It's called a deposit box.  Banks specifically offer different services, and 100% reserve is one of them.  However, the free market offers different forms of return for different contracts -- the ones you sign when you deposit at a bank.  Mandating that banks MUST only offer one service is an intrusion on the free market -- it doesn't prevent "fraud" since there is no fraud in correctly enforced and clearly written contracts; it's no more, or less, fraudulent then me borrowing 100$ dollars from you at 5% interest with a contract and everything.


Hmm . . . what the hell was I thinking? And for that matter, what was Rothbard? I must admit I'm embarrassed. I guess I assumed (I do a lot of that, unfortunately) that the "standard" bank deposit was guaranteed to be paid on demand (not just by FDIC, but by the bank itself), maintaining the "warehousish" nature of the situation, and that FDIC was the artificial cushion that removed the incentive to care where one's money is.

When did banks begin to design contracts that fully disclosed that deposited money is not backed by the bank itself? If I'm right in assuming this is not recent, it seems to be a pretty dishonest argument. I wonder if Rothbard simply dismissed the contracts because he believed they were rooted in bad court decisions from the past. I'll have to look this up when I have time. In the meantime I'll admit you've pushed me towards free banking.

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## diesirae

> Hmm . . . what the hell was I thinking? And for that matter, what was Rothbard? I must admit I'm embarrassed. I guess I assumed (I do a lot of that, unfortunately) that the "standard" bank deposit was guaranteed to be paid on demand (not just by FDIC, but by the bank itself), maintaining the "warehousish" nature of the situation, and that FDIC was the artificial cushion that removed the incentive to care where one's money is.
> 
> When did banks begin to design contracts that fully disclosed that deposited money is not backed by the bank itself? If I'm right in assuming this is not recent, it seems to be a pretty dishonest argument. I wonder if Rothbard simply dismissed the contracts because he believed they were rooted in bad court decisions from the past. I'll have to look this up when I have time. In the meantime I'll admit you've pushed me towards free banking.


Actually, it's more complicated; some banks guarantee return, some do not.  Nonetheless, it is always explained in the contract you sign when open an account.  I'm not 100% familiar with it, but I believe Rothbard's argument is based on deposit insurance; but I'm not sure.

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## jon_perez

> According to Rothbard, 100% isn't arbitrary at all, but the simple absence of fraud.  He believed that a deposit of money should be treated just like putting something in storage at a warehouse.


Isn't this part of what makes the difference between non-interest bearing current accounts and interest-bearing savings and time deposits?

You gain interest on money deposited with the bank under the assumption that the bank has some leeway to determine how to invest/lend your money out, whereas non-interest bearing accounts such as current accounts impose upon the bank much more rigid conditions on how to treat such money.

Also, if a bank were not allowed to do fractional reserve banking, you can bet that the bank *will charge you* for keeping your money with them instead of the other way around.

Isn't it the Fed (and other central banks) who create and enforce such regulations as part of their mandate _to protect depositors_?

I think this is the problem with people who go all foamy-mouthed over the Fed (Ron Paul is not one of them, but may of his supporters are), they simply forget all the positive things that the Fed has also brought to the table as well.

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## jon_perez

> This quiz will help.
> 
> http://www.mises.org/quiz.asp


I'm impressed with this questionnaire.  I find it quite difficult to give an answer to quite a few of the questions and I frankly believe that someone who thinks he's sure he has the "correct" answers to all of them is deluding himself.

I like the questionnaire because it manages to present several sophisticated economic points of view in a pretty unbiased manner.  Yes, as the extreme-left points of view in the questionnaire indicate, hardcore leftists are really more about whining and resentment than anything else.  ;-)

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## scooter

> Isn't this part of what makes the difference between non-interest bearing current accounts and interest-bearing savings and time deposits?
> 
> You gain interest on money deposited with the bank under the assumption that the bank has some leeway to determine how to invest/lend your money out, whereas non-interest bearing accounts such as current accounts impose upon the bank much more rigid conditions on how to treat such money.
> 
> Also, if a bank were not allowed to do fractional reserve banking, you can bet that the bank *will charge you* for keeping your money with them instead of the other way around.
> 
> Isn't it the Fed (and other central banks) who create and enforce such regulations as part of their mandate _to protect depositors_?
> 
> I think this is the problem with people who go all foamy-mouthed over the Fed (Ron Paul is not one of them, but may of his supporters are), they simply forget all the positive things that the Fed has also brought to the table as well.


The non-interest bearing accounts and current accounts are different in the conditions in which your money is treated, but neither one of them is very good.  A typical checking account is under restrictions of something like 10% reserves, where a savings account may not be in a reserve system at all.

I'd be interested in knowing what you think are the positive things the Fed does?  The biggest argument that Ron Paul has against them is that they are so secretive and do not answer to any elected officials.  And this whole boom/bust cycle is either created, or made worse, by their actions of moving interest rates or "injecting liquidity" into the markets.

Any institution that is able to buy up assets or provide "reserves" to the banking system merely by paying for the paper the money is printed is not doing a great service to the economy.

In a 100% reserve system banks could always have an "investment" division where customers can place their deposits into special accounts that pay interest and they would know that the money is not stored 100% like a regular account.  And as for paying for holding a checking account, I don't think anyone would have a problem with that if they knew their money wasn't losing value while sitting there.

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