The Podcast of the Lotus Eaters - July 14, 2026


PREVIEW： Brokenomics ｜ Austrian Economics With Jonathan Newman


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Dr. Jonathan Newman of the Mises Institute joins me to talk about Austrian economics and why it is so good at seeing what basically nobody else can. We talk about how Austrian economics can see what no one else can, and how it can predict what no other economic school can.

Transcript

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00:00:00.000 Hello and welcome to Brokonomics. Now, I've talked about Austrian economics on a number
00:00:27.540 of occasions. You guys know I'm a bit of a fan of that. And many of you have asked if I can go a bit
00:00:32.500 deeper into it. And I have always been meaning to do that, but I've absolutely lucked out because
00:00:37.300 what I've got for you today is Dr. Jonathan Newman of the Mises Institute, who is abundantly
00:00:44.260 qualified to talk about these issues. So Jonathan, thank you so much for coming on.
00:00:48.960 Yeah, thanks for having me. It's a pleasure to be here.
00:00:50.760 Brilliant. No, thank you very much. Now, I'm of that generation where I just about remember
00:00:57.100 before the internet. It was only a few years for me, but I just about remember it. And the way we
00:01:03.740 sort of did politics and economics back in those days is sort of pamphlets and small booklets and
00:01:08.480 stuff like that. And the absolute masters of that was the Mises Institute. They put out the best
00:01:14.340 stuff. I immediately, it just makes sense to me. So I became an Austrian advocate really early on
00:01:22.660 for all the sense that it made. But I'm thinking for our audience, not all of them might know
00:01:28.740 exactly what it's more than just the preferred economic policy of Austria. You know, what is
00:01:35.080 actually going on with Austrian economics? Yeah, Austrian economics is a particular school
00:01:41.780 of thought in economics. So you might be aware that there are a variety of schools of thought
00:01:46.180 in economics, like there are the Keynesians, there's the neoclassicals, there's various
00:01:50.000 synthesis movements that resulted in new schools of thought. And then the Austrian school of
00:01:54.660 thought is its own school of thought among those other ones. And there are a few things that
00:01:59.980 make the Austrian school distinct. A lot of people, the most visible difference is the
00:02:06.260 policy conclusions. So a lot of people sort of equate or they see that Austrian economists are
00:02:13.200 typically advocating for laissez-faire policy. Governments shouldn't get too involved. There
00:02:18.160 are plenty of Austrian economists who advocate, you know, sort of outside of the boundaries of
00:02:22.440 economics, but the policy conclusions lead them to recommending like completely abolishing the
00:02:28.000 state. So they argue for anarcho-capitalism. And so a lot of times people sort of view those more
00:02:32.600 radical positions and equate it with Austrian economics. But in truth, what Austrian economics
00:02:36.920 is, is a body of economic theory. It's a way that we think about the way people interact in markets,
00:02:42.840 the way that we deal with scarcity, the way that we think about money and business cycles,
00:02:48.600 the effects of inflation. The Austrian School of Economics is really just the body of those ideas.
00:02:54.620 And the reason it's called Austrian economics is because it got started with this guy named
00:02:58.880 Karl Menger in Austria. And so that's why the name stuck. So I'm sure there are some Austrian
00:03:04.940 economists in Austria today, but now we're all over the world. We have Austrian economists in
00:03:10.220 many American universities, also in many European universities. And so it's much bigger than just
00:03:15.320 what can be found inside the country of Austria. And what do you think that Austrian economics
00:03:21.400 has got really right? I mean, I'll give you an anecdote. I don't know if you're familiar with
00:03:24.600 this anecdote, but after the 2008 financial crisis, the Queen famously asked, why did nobody
00:03:31.160 see this coming? And as an advocate of Austrian economics at the time, I found it very frustrating
00:03:38.940 because basically everybody who was into Austrian economics could see 2008 coming a mile off.
00:03:47.160 So, you know, what is it that Austrian economics get so right?
00:03:51.500 And why is it so good at seeing what basically nobody else can?
00:03:55.580 Yeah, you're absolutely right.
00:03:56.760 The 2008 crisis and the ensuing recession caught a lot of people off guard.
00:04:01.440 But if you look at what Austrian economists were saying in the lead up to that crisis,
00:04:05.060 especially my colleague who's in the office right next to me. His name is Mark Thornton.
00:04:10.200 He was writing about, and it was almost prophetic the way that he was describing exactly what was
00:04:16.340 going on in the housing market, how the Federal Reserve was fueling this bubble in the housing
00:04:21.300 market. And we had mortgages being sliced and diced and combined. And there was a bunch of
00:04:26.020 government involvement through Fannie Mae and Freddie Mac. And he was basically, he called it
00:04:30.880 as he saw it, and it came to pass. And the reason why he was able to do that is because he's equipped
00:04:36.240 with one of those little bits of economic theory that I was talking about before,
00:04:41.160 and it's Austrian business cycle theory. And so Austrian business cycle theory goes this way.
00:04:45.820 We would expect that in the normal course of the way the market operates, that we have profits and
00:04:52.740 losses. Profits indicate that entrepreneurs are taking low-valued factors of production and
00:04:59.240 turning it into consumer goods that people like, and they're willing to pay for it. And so the
00:05:02.840 entrepreneur earns profit as a result. However, if they make a mistake, if the entrepreneur
00:05:07.180 incorrectly guesses what consumers want, then they incur losses. And so throughout the normal
00:05:13.540 functioning of the market, we would expect there to be some profits. Hopefully entrepreneurs are
00:05:17.700 incentivized to earn profits, which means that they're making things that consumers want. And
00:05:22.280 they don't want to incur losses because they're the ones who have to pay up in that case.
00:05:28.520 So that's how the normal functioning of the market works. And so what we had to think about in a business cycle, why does it seem like all entrepreneurs are making the same sort of error? Why does it seem like all businesses are failing in the same sort of way and at the same time?
00:05:44.740 So that's really the question that a good business cycle theory would have to answer.
00:05:49.160 And the answer from the Austrian school is it must be the case that there's some bad
00:05:52.840 information.
00:05:53.320 There's some bad information that all entrepreneurs are getting at the same time that's leading
00:05:57.940 them to make this same sort of error.
00:06:00.760 And the culprit in the case of Austrian business cycle theory is in the realm of money and
00:06:06.520 credit.
00:06:07.080 And so if you have a central bank that's inflating the money supply, increasing the supply of
00:06:13.140 credit that pushes down interest rates. And entrepreneurs obviously are happy to take that
00:06:19.520 money, take those loans at the lower interest rates. But what they do with that is they start
00:06:23.800 these longer term projects. They start building new, in the case of the housing bubble, they start
00:06:28.720 building new neighborhoods with huge houses that there's not going to be consumer demand for.
00:06:34.100 But that was made possible because of the artificially low interest rates because of
00:06:38.820 the artificial credit. And so what happens is all these entrepreneurs, they start building things
00:06:43.200 that have, they're longer dated, they're riskier, but we actually don't have the resources around
00:06:48.660 to finish all of these projects. And there's not going to be the consumer demand for them once
00:06:53.160 they are completed. And so then all those projects have to be liquidated. And so we get
00:06:57.780 a huge spike in unemployment, we get a stock market crash, there's chaos, a lot of people
00:07:03.720 become reluctant to spend. And then we have this ensuing recession. Now, what's important about
00:07:10.320 Austrian business cycle theory is that the recession is actually the correction phase.
00:07:14.680 The recession is not something that we should try to paper over or try to fix with bank bailouts or
00:07:21.280 by a big increase in government spending. We actually need to go through the recession so
00:07:27.140 that we can fix the mistakes that were made in the preceding artificial boom phase. And so because
00:07:32.700 people like Mark Thornton and other Austrian economists were equipped with that. They
00:07:36.560 understood how business cycles are structured, how there's an artificial boom followed by
00:07:41.940 an inevitable bust. They were able to see what was going on and they were able to call it quite
00:07:46.380 correctly. Yes. I mean, I'm always reminded that we've all heard of the, was it the 1929 Great
00:07:54.100 Recession, the Great Depression and the crash that happened along with that. What people often forget
00:07:59.580 is there was another one a few years earlier.
00:08:02.380 And the distinction between the two
00:08:03.720 is that the first one got almost no political intervention involved in it.
00:08:09.980 And as a result, it self-corrected itself very quickly.
00:08:12.460 And nobody's ever heard of that recession ever since.
00:08:14.760 Whereas the 1921 one got a lot of government involvement
00:08:17.300 to manage the problem,
00:08:18.460 and they ended up exacerbating it and turning it into a huge problem.
00:08:22.420 So my question becomes,
00:08:24.140 would that have still been viable in 2008? 1.00
00:08:27.540 because if the governments had done nothing, then the boomers would have been wiped out and they're
00:08:33.360 the major voting bloc. So how on earth do you square that with a democratic system of which
00:08:38.800 the boomers are dominant? Yeah, I mean, that's the tough question is, how do we get to a point 1.00
00:08:44.680 where governments actually, they have a more hands-off sort of posture when there's a big
00:08:50.700 recession? There's a great book by Robert Higgs called Crisis and Leviathan, where he talks about
00:08:56.040 this very idea. And what he shows is he goes through US history in the 20th century. And he
00:09:03.560 shows that whenever there's a crisis episode, whether it's a war or an economic crisis, a
00:09:08.160 depression, then what happens is the people, they start, you know, clamoring, they start demanding
00:09:13.340 that the government do something about it, they start asking for handouts, they start asking for
00:09:18.240 the government to, you know, intervene in ways that would, that would save certain businesses,
00:09:22.960 and basically take much more control over the economy.
00:09:27.180 And then after the fact, even though the crisis has subsided,
00:09:31.400 the level of government intervention, the size and scope of government
00:09:34.280 never quite get back down to where it was before.
00:09:36.860 And so we have this ratcheting up effect of the size and scope of government.
00:09:39.840 And so it's through these crisis periods that we really see a huge expansion in government.
00:09:46.040 And as you mentioned, I mean, that's even though we should have learned the lesson
00:09:50.520 from that pre-1929 depression.
00:09:53.520 There's a great book by Jim Grant
00:09:55.340 called The Forgotten Depression
00:09:56.480 about that exact episode you were mentioning. 0.98
00:09:59.640 So we should have learned the lesson
00:10:00.680 that if we just have a more hands-off policy,
00:10:04.120 if we just allow the economy to heal,
00:10:06.120 if we allow entrepreneurs to find the productive
00:10:08.640 and profitable ways to use resources
00:10:11.500 to make things that consumers want,
00:10:13.400 then we can tidy this thing up very quickly.
00:10:16.020 However, if we take the course of Herbert Hoover and FDR,
00:10:19.960 which is what happened after 1929, and we have a huge amount of government regulation, price
00:10:25.740 controls, the government taking command over large swaths of the economy, especially under
00:10:32.780 the direction or at least the influence of big corporate interests. Well, then you're going to
00:10:37.860 have a much slower, much longer, much deeper depression because it's harder to make those
00:10:42.540 corrections. But I mean, that's the lesson that was learned. And unfortunately, there's a lot
00:10:50.200 of propaganda around the Great Depression episode, because a lot of people, they see that the Great
00:10:57.540 Depression dragged on for years and years. And then we had World War II, and there was this big
00:11:03.500 increase in GDP with World War II. But of course, the reason for that is not because the economy all
00:11:10.420 of a sudden was doing great. It's not big. All of a sudden we were producing tons and tons of
00:11:14.680 consumer goods that, that, that people want to need. What happened was there was a huge increase
00:11:19.160 in government spending. And so the, the lesson that people learned and the propaganda that came
00:11:23.980 out of that was that, Hey, World War II got us out of the great depression. What we need to get
00:11:27.920 out of a, of a depression is a huge increase in government spending when that's, you know,
00:11:32.800 exactly the wrong lesson to take. And unfortunately that's been applied in economic
00:11:37.460 crises ever since including the the covid crash and also the the 2008 crash yeah unfortunately
00:11:43.880 gdp only measures spending it would be a bit like in a business if anyone's familiar with this
00:11:48.340 analogy that if you've got a business you've got a pnl and you've also got a balance sheet and
00:11:52.020 actually both of them are really important for working out where you stand on something if we
00:11:55.320 analyze companies purely on the basis of how much money they spent it would give you about as an
00:11:59.880 accurate read as gdp does for for a country i mean to put it this way if if britain were to um you
00:12:07.040 know borrow a vast amount of money and put all of its and and massively increase its taxes to build
00:12:12.580 a bridge halfway to washington a literal bridge to nowhere that would spike gdp and if the following
00:12:19.460 year we we we disassembled it that again would spike gdp and and under traditional measures that
00:12:25.520 would look like we're doing really well was actually all we've done is destroy uh real
00:12:30.140 capital value so it just goes to show how the twist of this stuff is but i guess what i'm
00:12:34.580 driving at is is to what extent do austrian economists go over into politics because as far
00:12:40.320 as i can see and this so i've got a number of problems in in my more later years with austrian
00:12:45.200 economics because i i just wonder how can it actually how can it address the political side
00:12:51.140 of things when everything that austrian economics proposes is completely unviable in a democratic
00:12:57.160 system where people just want to vote for jam tomorrow and not you know a more productive
00:13:02.720 society. So how do you address the political problem? Or do you just kind of accept that
00:13:08.680 you're proposing a solution that might work, but actually it can't because of politics?
00:13:13.600 Well, I think that's really the goal and the mission of the Mises Institute.
00:13:19.180 The Mises Institute is not political. But of course, one of the implications or the
00:13:24.280 optimistic consequences of our work here is to teach people Austrian economics, to teach people
00:13:30.820 the way markets work, to teach people the negative consequences of government intervention so that
00:13:36.180 they're more informed, so that they can evaluate policy, they can evaluate, they can be a more
00:13:41.100 informed citizen. And so when they actually are participating in the political process or
00:13:47.080 the democratic process, then maybe we actually will see some change. But that has to happen
00:13:53.060 first. As you said, in a democracy, you're sort of beholden to the ideas and the ideology and
00:13:59.940 the worldview of the masses. And unfortunately, they've been brainwashed, they've been propagandized,
00:14:06.380 they've been inundated with state narratives about historical episodes through the public
00:14:12.040 education system. And of course, they see it in the mainstream media as well. And so we have to
00:14:18.140 counter that we have to, you know, correct their understanding, we have to show them, no, actually,
00:14:22.880 it isn't a good idea for the government to increase its spending during a crisis, we have to show
00:14:27.080 them the act, the actual cause of the crisis isn't capitalism. It's not, you know, free markets run
00:14:32.420 amok. The actual cause of the crisis is this artificial credit expansion that comes from
00:14:37.280 the banking system that's backed by a central bank. Um, and so we, we had to, we had to change
00:14:42.840 their ideas. And I mean, there are some periods where that's, that's happening on, on a larger
00:14:48.120 scale than, than in other periods. And so I can, I can point to, um, really my own origin story.
00:14:53.300 I was convinced by the likes of Ron Paul on the Republican debate stage. And so he was saying
00:14:59.300 things that were very different from the other Republican candidates. And so that actually
00:15:03.880 caused me to take a closer look at what he was saying. And he was recommending some books. And
00:15:08.480 one of the books that he recommended was Economics in One Lesson by Henry Hazlitt.
00:15:13.420 And so that led me down this path that eventually led me to me sitting here in this office in
00:15:18.820 Auburn, Alabama at the Mises Institute. But that's what it takes. We have to introduce
00:15:22.980 people to these ideas. We had to show them the correctness of these ideas. We had to counter
00:15:28.940 the state propaganda. And only then will we be able to see actual real world change in terms of
00:15:34.780 how policies are enacted. Yes. Another criticism I might have of Austrian economics is, and I might
00:15:40.640 well be out of date here because I really engaged with this stuff 20 years ago, but there's been a
00:15:45.540 bit of a gap in it. But certainly the impression that I got when I was reading the early stuff
00:15:50.840 is that austrians had a weak answer on immigration and that was because they were like well immigrate
00:15:59.180 because they're very hands-off because they're laissez-faire they're going to say this is an
00:16:02.680 issue actually what you need to do is get rid of the pull factors you need to get rid of welfare
00:16:06.620 and so on and then it's not really an issue and the best people can come over and all that kind
00:16:11.160 of stuff and i think the last 10 years have sort of rather disproven that sort of hands-off approach
00:16:18.120 because even if we were to get rid of all welfare in Western states, it is still attractive for 1.00
00:16:24.980 third worlders, Somali pirates and all the rest, to come over to rich Western countries just for 0.98
00:16:30.800 the crime opportunities. So am I out of date in my thinking about the Austrian answer on immigration 1.00
00:16:36.160 and what is it today? I think you are a bit out of date. I mean, my interpretation of the lay of
00:16:42.820 the land of Austrian economics and their Austrian economists and their views on immigration
00:16:48.020 is that they're very much in line with what you're saying. Ideally, the best case scenario
00:16:55.000 would be we just have privatized borders, like everybody owns their own private property. And so
00:16:59.960 people can only enter into that private property by invitation. And in the case of national borders,
00:17:05.860 then you have to start thinking about second best options. And the second best options that
00:17:10.060 are proposed is, well, it still needs to be based on invitation. We can't allow hundreds of thousands
00:17:16.220 of people, millions of people to just flow across the border because it's government-owned. It's
00:17:23.140 going to be mismanaged anyway, but there's got to be something to get us closer to what would
00:17:28.260 prevail in a private property sort of order. But I should also mention that these sorts of
00:17:33.760 questions are technically out of bounds for Austrian economics proper. The Austrian economics
00:17:39.560 proper is just a description of the way the economy works. It starts with the fact of human
00:17:45.280 action. We use means to attain ends. And so we deduce economic theory from there. And so we get
00:17:51.040 things like the law of supply, law of demand. We could talk about market prices and economic
00:17:54.860 calculation. It's all purely descriptive. And then based on those conclusions that you draw
00:18:01.300 from the theory, then you can step outside the boundaries of economics and start talking about
00:18:05.400 policy prescriptions. You could start thinking about, okay, if this is the way that the world
00:18:11.460 works and we want this sort of outcome, then we should pursue this sort of policy. So
00:18:16.780 the only reason I'm mentioning that is because I don't want people to get the idea that
00:18:22.240 being a part of the Austrian school of economics necessarily commits you to a certain slate of
00:18:27.420 policy prescriptions. I know Austrian economists who are open borders. I know Austrian economists
00:18:31.720 who are very, very anti-open borders.
00:18:35.020 They want closed borders.
00:18:36.480 I know Austrian economists who are on different sides
00:18:38.660 of various policy issues,
00:18:40.160 but what unites them is their shared understanding
00:18:42.740 of the way the market economy works.
00:18:45.180 Yes.
00:18:46.180 I mean, you mentioned earlier about these sort of advocacy,
00:18:48.280 what you're doing and so on.
00:18:49.300 And actually, just thinking back to our earlier conversation 0.97
00:18:52.520 about how nobody saw 2008 coming apart from the Austrians.
00:18:58.020 I mean, that was easily explained by the fact
00:18:59.900 that there were no austrians working in the treasury in the fed you know austrians don't
00:19:04.680 get anywhere near government because the austrian solution is less government and that's not really
00:19:09.160 what government wants to hear has that changed more recently you know with the fresh admin
00:19:13.640 with all the advocacy work that you're doing are you finding colleagues and students and now getting
00:19:19.940 hired in the fed the treasury whatever anything like that well definitely definitely not at the
00:19:26.120 Fed. I think the Fed would be very resistant to employing somebody who thinks that the whole
00:19:32.400 agency itself should be abolished. But yeah, there is a bit of a conundrum, which is that
00:19:38.900 the government is a large employer of trained economists. And unfortunately, the sorts of
00:19:46.140 trained economists that they want to hire are the ones who are going to give them some backing,
00:19:50.780 give them a warrant for more intervention, more government spending, more regulation.
00:19:56.020 That's the sort of economists that the government wants to hire, which means that they're not going
00:20:00.440 to be willing to hire that many Austrian economists who come to opposite policy conclusions.
00:20:05.940 In my experience, it's double-sided as well. So it's not just that the government doesn't want
00:20:11.300 to hire Austrian economists or the Fed doesn't want to hire Austrian economists, but also there's
00:20:16.600 sort of a distaste among Austrian economists to go work for the government. They'd rather,
00:20:21.540 you know, work in the private sector. They'd rather work for educational organizations where
00:20:26.080 they can say what they think without having to have to guard what they're teaching or what
00:20:30.980 they're writing about. And so there's sort of resistance on both sides for, say, like an
00:20:38.640 Austrian economist to be hired to work at the Fed or to work in the upper levels of the U.S.
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