For many, Austrian school economics is theoretical nonsense. It’s nice to read about. It’s nice and logical. It’s common sense economics. But it really can’t apply to the real world. After all, with paper currency backed by nothing and central banks running the show, Austrian thinking is strictly theoretical.
Against the background of a severe economic crisis in the eurozone, one is surprised to find a member of the euro area that is actually showing good economic performance. This member is Estonia. In terms of so-called real gross domestic product (GDP) the average yearly rate of growth in Estonia stood at 8.4 percent in 2011 against overall eurozone performance of 1.5 percent. So far in 2012 the average yearly growth stood at 2.8 percent in Estonia versus -0.2 percent in the eurozone.
How about unemployment there?
Also note that the unemployment rate in Estonia displays a visible decline: it fell to 5.9 percent in August from 7.6 percent in January. In contrast, the unemployment rate in the eurozone climbed to lofty levels in August. After closing at 10.8 percent in January, the eurozone unemployment rate shot up to 11.4 percent in August.
One of the basic premises of Austrian economics is the “cleansing” process that must take place to remove and resolve the distortions in the economy caused by outside (i.e., government and central bank) interventions. Estonia allowed that necessary cleansing to take place:
Between Q3 2009 and Q1 2011 the average yearly rate of growth of government outlays stood at -7.4 percent. In short, government outlays were cut sharply. Note that this purged various false activities that emerged on the back of previous loose government spending. Additionally, Estonia’s government debt as a percentage of GDP is only 6 percent versus Germany’s 81 percent and Greece’s 165 percent. (my emphases)
Part of the cleansing process removes excessive money created by the central bank. This is called “withdrawal” in the case of a drug addict: painful, but necessary:
Another important factor that revitalized the Estonian economy is a fall in money supply during the period May 2008 to November 2009, i.e., money supply declined for 19 months. Note that the average of the yearly rate of growth of our monetary measure (AMS) during this period stood at minus 7.9 percent. A fall in money supply arrested the transfer of real wealth from wealth-generating activities to non-wealth-generating activities. This amounts to the strengthening of wealth generators and to a weakening of non-wealth-generating activities. (my emphasis)
Estonia is the poster child for Austrian thinking applied to the real world. Now if such a miracle would only happen here!