Food for Thought

Europe is not thriving. While numerous solutions are often proposed to boost economic growth, many of these recommendations risk leading to even greater troubles. What is truly needed is a return to liberal principles and a free-market economy. The Austrian School of Economics provides the best framework for reigniting Europe’s economic growth.

A recent European Commission report, The Future of European Competitiveness, produced by a team led by former ECB President Mario Draghi, highlights several troubling aspects of the European economy. In the introduction, it states: “Europe has been worrying about slowing growth since the start of this century. Various strategies to raise growth rates have come and gone, but the trend has remained unchanged.”

 It is evident that the Old Continent is not prospering as it once did or as much as it could. This raises the question: What is holding back European economic growth, and how can it finally break free from gradual stagnation? The insights of prominent economists from the Austrian School offer valuable answers, which we will now explore.

The Nature and Causes of Economic Growth

First, we need to take a glimpse at what determines economic growth. This question was already addressed by the father of economics himself, Adam Smith. It was Smith who, in his opus magnum entitled An Inquiry into the Nature and Causes of the Wealth of Nations, observed that “as it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market.” Since this recognition of his, economic theory has significantly advanced in understanding the phenomenon of economic growth.

The reason we should strive for economic growth is self-evident. Economic growth ultimately means a greater availability of goods and services that improve people’s lives. And as Adam Smith explicitly argued, the sole purpose and meaning of all production is consumption. It is the end goal of human action aimed at alleviating dissatisfaction, with production serving as the means to that end.

The first step towards improving material well-being is voluntary savings. It is the willingness of individuals to postpone some of their current consumption, i.e. the willingness to save a little now for greater abundance in the future, that is crucial Savings enable entrepreneurs to expand investments, leading to increased production of consumer goods. As the Austrian economist Ludwig von Mises writes in his The Anti-Capitalist Mentality, “saving, capital accumulation, is the agency that has transformed step by step the awkward search for food on the part of savage cave dwellers into the modern ways of industry”.

A crucial factor in capital accumulation is a country’s institutional framework. At this point, it should be mentioned that the term institution in the social sciences means something quite different from ordinary language. By institutions we do not mean any specific organizations, but much more generally the patterns of behaviour that are adopted to meet the needs of society. The core institutions are thus, for example, language, morality, law or money. According to the brilliant Austrian School economist F. A. Hayek, all of them arose spontaneously through a gradual evolutionary process.

One such institution that plays an indispensable role in society’s ability to flourish is that of private property. If we were to learn anything from history, it would be that civilization and private property are inextricably linked.

Every civilization that has developed so far has owed its rise to a government that saw its main purpose in the conscientious protection of property rights. As the reigning Prince of Liechtenstein, Hans-Adam II, astutely observed in The State in the Third Millennium, “if the state neglects the laws and regulations that protect these property rights, there can be no market.” The British Enlightenment philosopher John Locke echoed this sentiment: “Where there is no property, there is no justice.”

Freedom and Uncertainty

The desire for certainty, stability, and security is deeply ingrained in human nature. However, as Mises writes in his opus magnum called Human Action, “there are in this world no such things as stability and security and no human endeavors are powerful enough to bring them about.” The absence of change, which is a prerequisite for security and stability, is by definition incompatible with life. Everything that lives is subject to change, whereas rigidity and immutability are characteristic of the lifeless.

This seemingly philosophical observation is crucial in order to grasp a fundamental fact. The phenomenon of uncertainty is necessarily associated with the free market economy, and its thorough suppression would inevitably lead to the demise of the resulting prosperity. It is human ingenuity that is the source of all the various innovations and, consequently, of economic progress. But it can only be fully developed when all barriers to its realisation are removed, that is, only when men are allowed freedom in their actions.

Freedom of choice, however, does not come without risk. Humans are fallible, and some of their expectations will inevitably prove wrong—leading to negative consequences. One of the most influential philosophers of the 20th century, Ludwig Wittgenstein, explicitly asserts in his famous Tractatus logico-philosophicus that “the freedom of the will consists in the impossibility of knowing actions that still lie in the future.”

The only way to eliminate the risks inherent in ignorance of the consequences of one’s actions would be to strip individuals of their freedom to choose. The price of freedom, therefore, is the inability to predict all outcomes—both of one’s own actions and of the actions of others.

Innovation and Creative Destruction

While innovation is widely recognized as essential to economic progress, its costs are often overlooked. The free-market economy operates through a process economist Joseph Schumpeter termed creative destruction. It consists in innovators constantly disrupting the existing equilibrium and establishing a new one. Thus, the economist Israel Kirzner noted that “the existence of the entrepreneur is incompatible with a state of equilibrium.”

This process inevitably brings hardship to less innovative producers and outdated industries, as more efficient actors seize opportunities and displace them. But it is precisely this competition that drives economic growth—through the relentless efforts of pioneers seeking profit by better serving consumers.

Capitalism is, by its very nature, a dynamic environment that primarily rewards those who are most dedicated to fulfilling consumer demand. Those who, in a competitive environment, cease to strictly follow the orders of the buying public will suffer losses or fail and be replaced by someone who is better able to satisfy the needs and wants of consumers. No business is safe in the competitive market, for the mere hesitation and the slightest deviation of production from the trajectory set by consumer demand is enough to see its profits reduced or withdrawn altogether.

Economic historian Deirdre McCloskey describes this dynamic as a “bourgeois deal”, in which innovators are allowed to disrupt the status quo, bring new goods to market, and enrich themselves in the process. The free market economy’s fundamental principle is encapsulated in the Latin phrase do ut des—”I give that you may give.” Entrepreneurs innovate, society benefits, and in return, they make profits. McCloskey cites electricity, automobiles, and the telephone as prime examples of innovations that followed this principle.

Towards European Economic Growth

Having examined the foundations of economic growth, we shall now identify the primary obstacle preventing Europe’s economic revival. In a recent interview, economist Mojmír Hampl aptly stated that the most important step towards economic recovery would be to “reduce the general anxiety about the future that is altering investment and consumption behaviour.” Although he was speaking primarily about the economy of the Czech Republic, his insight equally applies to Europe as a whole.

While this may seem like a psychological factor, it has profound economic consequences. For if a man ceases to believe that he will be able to achieve greater prosperity in the future, his willingness to work towards that state through purposeful activity becomes muted. As a result, savings decline, businesses reduce investment, and resources are consumed rather than allocated for future growth.

As Austrain economist Eugen von Böhm-Bawerk taught us, all the capital available today, which we now use to produce consumption goods that increase our wealth, was not acquired by accident. It was the result of prudent restraint of consumption, increased by the accumulation of savings, and maintained by the moderation of its use in the past. We should be grateful to our ancestors for their actions, since it was their frugality (with the prospect of greater abundance in the future) that has to a great extent been behind the remarkable economic growth of recent decades.

Mises argues that “to content oneself with what one has already got or can easily get, and to abstain apathetically from any attempts to improve one’s own material conditions, is not a virtue.” If Europe is to regain prosperity, the change must begin at the individual level. It is crucial that we each regain the conviction that the future need not be as bleak as is often claimed, but can instead bring far greater well-being. By doing so, we can direct our consumption activity into the more distant future (in the language of economists, our time preference may decrease), which allows the spark of further economic growth to be ignited through the extension of production processes or the creation of entirely new investment projects.

Embracing this belief will make us more willing to take risks, drive innovation, and ultimately enhance prosperity. However, progress comes with a cost—we must be willing to adapt to the unpredictable changes that accompany the prosperity of a free-market economy. Even if this brings some hardship, sometimes it is simply necessary to reculer pour mieux sauter —“step back to jump further.” Without this willingness to adjust, there is no path to prosperity.