Chatting with Xiong Yue: A Q&A about the Austrian School of Economics

This article was published on Mechanical Clock, authored by Li Hua.

If we carefully explore the meaning of various individual actions, we can certainly gain knowledge about the entire collective action.

------Ludwig von Mises

There are many logics behind cryptocurrency prices, but even if you know all the correct logics, it is still difficult to predict the price because you cannot obtain all the information needed to derive these logics. A missing or incorrect piece of information could lead to a vastly different outcome.

However, there is a parallel perspective to the above logic, which is "human action."

It seems to have two major benefits: one is its independence, which does not get entangled with other indicators, making reasoning impossible; the second is that it relies on knowledge rather than information. Information can be deceptive, but knowledge is honest. The knowledge about human action is something we inherently possess, and human actions are observable.

This reminds me of a conversation I had last year with Xiong Yue about the Austrian School of Economics. Xiong Yue is a researcher of the Austrian School, having studied under the contemporary representative of the Austrian School, Professor Jesús Huerta de Soto. For the past decade, he has translated, proofread, and introduced many Austrian works, including "An Introduction to Austrian Economics & The Essence of Mises' Thought," "Capital and Its Structure," "The Masters of the Austrian School," "The Theory of Pure Time Preference," and "The Question of Deflation." He is also one of the earliest Bitcoin evangelists in China.

Before that conversation, I deliberately did not prepare anything. I thought that if I asked questions from the perspective of an ignorant person, I might obtain the most effective knowledge for someone just beginning to understand this school.

The following is the content of our conversation. I approached Xiong Yue with a single question and then followed up on the parts I did not understand in his answers. It was a bit risky, but also interesting.

Liberalism and Free Markets

Q: Why is the Austrian School often mentioned in the blockchain field?

Xiong Yue: Because there are some commonalities between the two. We cannot determine whether Satoshi Nakamoto is a liberal, but it is highly probable that he is a liberal based on Austrian principles. His views on the quantity of money are entirely Austrian, even Misesian.

The quantity of money can be whatever it is, rather than needing to increase or decrease by 1% based on the state of the economy. For example, if the total money supply is 100 million, this bottle of water costs one dollar; if the total money supply is 200 million, this bottle of water costs two dollars. Therefore, the total amount is not very important.

Another point is that the background of Bitcoin's birth is actually the financial crisis of 2008. Satoshi Nakamoto may have designed a system for peer-to-peer value transfer that does not require third-party verification, but the financial crisis of 2008 significantly propelled Bitcoin, as people believed the current monetary system should be held accountable for the crisis.

The rise of Bitcoin and the initial support it received from so many people was largely related to this.

Q: You said Satoshi Nakamoto is likely a liberal based on Austrian principles. What does that mean?

Xiong Yue: Liberalism is a political philosophy, while the Austrian School is an economic theory. Many people support liberalism for various reasons, and one strong faction is the liberalists of the Austrian School.

They believe in figures like Mises, Hayek, and Rothbard, and they generally think that the free market is the best way to solve problems.

Q: Why is the free market the best way to solve problems?

Xiong Yue: The market is essentially an institution, a system through which people allocate resources through exchange. To understand the role of the free market, one must first understand "value." Free exchanges occur when both parties agree; since both agree, the value is enhanced for both.

For example, I am a singer, and singing is easy for me, but for you, listening to music is enjoyable. If you pay me five dollars to sing for five minutes, both of our values are enhanced in this process, which is why we need free exchange.

Austrian School, Chicago School, Philosophy

Q: Is it only the Austrian School that believes the free market is the best way, or do other economic schools share this view?

Xiong Yue: There are others, one of the larger factions being the Chicago School, represented by figures like Milton Friedman.

Milton is almost in agreement with the Austrian School on some policy issues, such as opposing high taxes. However, since Milton is a monetarist, he believes that the money supply should be adjusted according to the economy's fluctuations.

There is a book with a great title, "Friends or Foes: The Austrian School vs. The Chicago School," written by Mark Skousen. This book has been published in China and provides a detailed comparison of the two schools.

The Austrian School and the Chicago School are not mutually exclusive; rather, as scholars, one should distinguish between closely related concepts. So, while it seems there is much debate between them, that is precisely because they are quite close.

Q: What is the core point of contention between the Austrian School and the Chicago School?

Xiong Yue: It comes down to underlying logic, specifically the differences in starting points. The Austrian School's starting point is methodological individualism and subjective value theory.

Methodological individualism means you should start from the individual and not view things as a whole. You should not study economic concepts from a holistic perspective but rather from the actions and choices of individuals to grasp the essence.

Society is a highly complex entity, and any data you observe may not explain the causes of any issues. Such data cannot be replicated, making it unlike scientific experiments, which can have precise control groups.

Scientific experiments say: here are these conditions, and there are other conditions that are the same, but one condition is missing, allowing us to see its impact on the whole. However, in society, it is nearly impossible to conduct such experiments, and you cannot draw any valid conclusions. From the perspective of economic science, you cannot reach any theoretical conclusions.

On the contrary, Mises' theory is based on the idea that individuals act to improve their own living conditions. Starting from the individual, a series of deductions can be made. Because the starting point is correct and the logic of each deduction is sound, one can arrive at relatively accurate economic theories.

Mises' book "Human Action" is based on this logical origin.

Q: The Austrian School starts from individual choices and actions. Does it have more connections with philosophy?

Xiong Yue: Yes. If you look at Mises' books, you will find a significant philosophical connection. "Human Action" is heavily philosophical, and Mises was influenced by Kant. Thus, many people consider the Austrian School to be a very speculative school.

You can also look at a book I translated, written by Hoppe, called "Economic Science and the Methodology of the Austrian School," which shows that his methodology actually comes from philosophy.

If you examine the works of Adam Smith or early economists, you will find they are not filled with mathematics or symbols; they are discursive. You will see that the Austrian School has inherited this well. In academic institutions, it appears more classical compared to other economic schools.

Menger, Mises, Hayek

Q: You have mentioned Mises many times. Why does he hold such an important position in the Austrian School?

Xiong Yue: This goes back to the history of economic thought. The founder of the Austrian School is Carl Menger, one of the three founders of the marginal revolution. It can be said that from his time, we entered a more modern phase of economics.

The theoretical foundation of the Austrian School is built upon Menger's work, where he proposed a great concept: subjective value theory. However, he did not fully develop this concept from all angles.

His "Principles of Economics" can only be considered an introduction. He intended to write a larger book but never completed it, possibly due to the pessimistic social environment of the time, which diminished his motivation to finish it.

Menger had two main students: one was Wieser, and the other was Böhm-Bawerk. Mises was a student of Böhm-Bawerk.

Mises' significance lies in his scientific elaboration of Menger's ideas. He started from the premise that "humans act to improve their circumstances" and, from this starting point, applied logic to observe various aspects of the economy.

Because Mises' deductions were very comprehensive, it is now difficult for contemporary Austrian scholars to "escape" the framework Mises established. Mises inherited Menger's work and built the entire theoretical edifice.

Another reason Mises is considered important is that he revived the Austrian School in America.

After World War II, the Austrian School tradition in Europe was interrupted because Nazi Germany occupied many places, making it impossible for economists to establish themselves there. Everyone fled to America.

So, you see, economics originated in Europe, and the mainstream economists were all European. However, after World War II, American economics became roughly equivalent to European economics.

Mises cultivated a new generation of scholars in America, allowing some American scholars to accept the views of the Austrian School. He reestablished the Austrian School in America. Thus, Hayek once said: almost all Austrian scholars in America are Misesians because these people learned from him.

Q: Has Mises' influence permeated into American economic policy? Does the government have a mainstream economic school behind it?

Xiong Yue: The answer to the first question is yes. For example, President Reagan wrote several letters praising Mises' contributions.

The reason mainstream ideas are called mainstream is that they flow like a great river, absorbing many different elements.

Mainstream economics also absorbs Austrian ideas. You can see my translation of "Federal Reserve Board Member Talks Hayek and the Price System," a speech by Randal K. Quarles at the Berkeley Annual Meeting. He has become a member of the Federal Reserve Board and wrote an excellent article about Hayek, showing a deep understanding of him.

Moreover, there was a debate within the Austrian School about whether mainstream economics has absorbed the Austrian School, even questioning whether the Austrian School still exists.

You will find that during Menger's time, the Austrian School was the mainstream. The Austrian School actually inherited many ideas from Adam Smith, and going further back, Adam Smith was certainly the mainstream, right?

Menger reached a level of mainstream that later generations found hard to match. He was the teacher of Rudolf, the heir to the Austro-Hungarian Empire, and he taught the crown prince. He was also a professor at the University of Vienna.

If you go back to pre-World War I Europe, the Austro-Hungarian Empire was one of the most powerful empires in Europe, or at least among the top three, and the University of Vienna was also one of the top three universities in Europe. Later, after Rudolf died, there was no heir to continue.

Q: You have also mentioned Hayek many times. What is Hayek's significance?

Xiong Yue: Hayek has his charm. You will find that some people refer to him as Hayek 1 and Hayek 2. His greatest contribution to economics was made early on with Mises, particularly in the theory of business cycles, which is also why he won the Nobel Prize.

Then he suddenly shifted focus; starting around 1937, he basically stopped researching pure economic theory and turned to sociology and political philosophy. His work in these areas earned him some reputation.

Personally, I appreciate this richness and diversity; otherwise, one Mises would be enough.

Fame or influence is quite strange. You will find that Hayek's influence is very broad, while Mises is highly regarded within the Austrian School. Some later Nobel Prize winners may have been inspired by something they studied from Mises, but Mises is not the most well-known.

Q: If Rudolf had not died, and if there had been no World War I or II, the current economic policies and the status of the Austrian School might be very different, right?

Xiong Yue: It would be very different, but history does not allow for too many hypotheticals.

One point is that I recently finished translating a book, which are Menger's lecture notes for Rudolf. Rudolf essentially recorded everything Menger taught him, and you can see Menger's specific policy inclinations from his choices, indicating he was very supportive of the free market.

The Austrian School is a very resilient entity. To be honest, its status in academia may be hard to elevate again if you understand the ecology of academia. However, the Austrian School will definitely take root and flourish; this thought will always be passed down, and Mises' books will always be read.

Returning to your original question, why is the Austrian School mentioned more frequently in the blockchain industry than in other industries?

Because those initially attracted to Bitcoin are likely to be Austrian liberals, including figures like Fahai, Mikko, and Blue Collar. I actually got to know Blue Collar not because of Bitcoin, but because of the Austrian School. Initially, we learned about Kao Mao not because he made mining machines; we all got to know each other through the bond of liberalism.

Savings, Income Transfer, Prices

Q: I have some keywords related to the Austrian School that I want to ask about. The first word is "savings."

Xiong Yue: The Austrian School places great emphasis on savings. You will find that the Austrian School praises capital. Without savings, there can be no capital, and real savings are an important factor driving social progress.

Q: The second word is "income transfer."

Xiong Yue: Income transfer is essentially taking money from the rich and giving it to the poor, but this outcome does not benefit the poor; instead, it makes everyone poorer.

Where does all production in society come from? It comes from the savings of the rich. If you take money from the rich and distribute it to the poor, the ability to produce and create actually diminishes.

If you think of this as a cake, we should continuously make the cake together; only then will society become wealthy. If you are only obsessed with how to cut the cake, the total cake produced will become very small.

Q: The third word is "prices."

Xiong Yue: This is something Hayek emphasized, viewing prices as a signal of coordination in the free market.

For example, if I want to produce a certain amount of bottled water or soda, there is no other way to manage the various ideas in everyone's minds; this information can only be conveyed through prices. If you notice the price of bottled water is rising, it will encourage more people to participate in the production of bottled water.

Conclusion: Excerpts from "Human Action"

1. If we carefully explore the meaning of various individual actions, we can certainly gain knowledge about the entire collective action.

For a social group, nothing exists outside the actions of individual members. The way to understand the collective is to start with the analysis of individual actions. A collective is merely a special aspect of the actions of individuals.

2. The derivation of all theorems in the science of human action requires knowledge about the essence of human action. This knowledge is inherent to us because we are human; as long as one is human, one will not lack this knowledge. The knowledge of the science of human action is inherent to the human mind, not external.

3. People often say that when an actor arranges his actions, he always has a hierarchy of desires or values in mind. It is according to this hierarchy that he satisfies the higher-level values, that is, his most urgent desires, while giving up the satisfaction of lower-level values. This is an irrefutable statement of fact.

However, people must not forget that only through real action can the hierarchy of values or desires be automatically revealed. Without the real actions of individuals, these hierarchies cannot exist independently.

The only means we have of knowing these hierarchies is through observing people's actions. Each action usually corresponds perfectly with the hierarchy of values or desires because these hierarchies are merely a tool for explaining human actions.

4. In a society based on division of labor, monetary calculation is the "North Star" of action.

In a social structure based on private control of the means of production, monetary calculation is a method of calculation used by actors. It is a tool for individuals, designed to audit the private wealth and income of those seeking personal gain in a free enterprise society, as well as to calculate private profits and losses.

5. Market fluctuations are never-ending. Profits always favor certain individuals. These individuals, as speculators, are always encouraged by the expectation of profit.

6. All the prices we know are past prices. All discussions about future prices are based on understanding and insights about future events.

7. The ultimate factor determining prices is the value judgments of consumers. Prices are the result of people's different evaluations of substitutable goods. Prices are a social phenomenon, arising from the evaluations of participants in all market processes and their interactions with different goods.

Each person's decision to buy or not buy, and to sell or not sell, has a certain degree of influence on the formation of market prices. However, the larger the market, the smaller the impact.

8. Each party's evaluation of the goods they purchase is always higher than their evaluation of the goods they sell. The exchange rate, or price, is not the result of equal evaluations. On the contrary, it is the result of unequal evaluations.

9. Valuation must be clearly distinguished from evaluation. Valuation does not depend on the subjective evaluation of the valuer; it does not concern the subjective use value of the goods but rather the prediction of what will determine future market prices. The purpose of valuation is to determine the future market price of a certain good, or how much it can be sold for, or how much it will cost to buy it.

10. Generally, the final determinant of price formation is the individual's subjective value judgment. When exchange theory deals with the pricing process, it must inevitably trace back to the fundamental categories of action, namely preference and trade-offs.

11. There is currently a popular attempt to draw a clear line between pure speculation and truly sound investment. In fact, these two only differ in degree; there is no such thing as non-speculative investment.

In a fluctuating economy, action always involves speculation. Investment can be good or bad, but it is always speculative.

12. In a market economy, there is no conflict of interest between buyers and sellers. Disadvantageous positions arise from a lack of foresight about the future.

If every individual and all members of the market society can accurately and timely foresee the future and act accordingly, then everyone is in a state of pleasant cooperation. If that were the case, neither capital nor labor would be wasted on satisfying less urgent desires.