As I work to expand the content on my other blog, which I am finally getting to after all my compliance ducks were ensured to be in a row (working in the financial industry means being ever-aware of regulations), one of the themes I want to address is the importance that the Austrian school has on how to approach the idea of investing one’s money. The “Austrian approach” to economic theory has a great number of ramifications outside of its contributions to strict theory. Austrian-school economics does not tell one “where” to invest because the Austrian epistemology does not allow the economist to make knowledge claims about the specific wants and desires of the consumers, which are the true drivers of the market system.
Hence, it is the entrepreneur, not the economist, who works to discover where in the economy sits value that can be pursued in the hopes of making a profit. The Austrian school, especially in the work of Murray N. Rothbard, has produced a profound theory of the role of the entrepreneur in the economy and the better one understands the relationship that the entrepreneur has in relation to the market around him, the better equipped that person is to accurately understand his role as investor.
Of course, being a fine economist and well-trained in the Misesian approach does not at all make one able to master the art of investing anymore than knowing all the ins and outs of Misesian economics makes one a savvy businessman. One can know philosophy, but if he cannot please the consumer, he will fail in his business pursuits. And similarly, the theory buff does not have any inherent knowledge about where to put his money so that it provides him a maximum return.
And the reverse is true as well. The billionaire investor knows how to invest and make a profit (I will qualify this in a later post, as the Fed distorts the ability to calculate and makes winners out of decision makers who should be financial losers), but he does not necessarily understand the nature of economic science. Two cases in point: Murray Rothbard was awful at managing his own money and investing it for a solid return; but his knowledge of economic theory was perhaps the greatest there ever was. And Warren Buffet is the name that immediately comes to mind when one wants to consider an investing guru, but he has a relatively poor understanding of good economic theory.
What I am curious about, however, is whether there is insight in the approach to the world taken up by the Austrian school that can be helpful for the investor. In the coming days and coming posts over there on the blog, I hope to address this.