What Coffee Can Teach Us About Austrian Economics
Forget the “hangover theory ,” cheap credit is more like caffeine than booze
I remember the period that started me on the path to caffeine dependency well: second semester, freshman year of college, 8 AM medieval history class.
Halfway through my large Peet’s dark roast, I developed tunnel vision, and my focus narrowed in on a subject that had seemed impossibly dry the week before.
I wasn’t addicted yet, but I was suddenly feeling strangely enthusiastic about Beowulf. Caffeine would soon become my go-to external source of motivation to power through boring or difficult tasks.
Sometimes it makes sense to temporarily alter your physical or mental state. Anesthesiology leaps to mind, as does the proverbial glass of wine with dinner. But few people consider it healthy to go through life in a constantly drunk or drugged state.
Coffee seems to be one of the biggest exceptions.
I’ve studied coffee’s history and physiological effects, and concluded that it is well suited to the tempo and work ethic of modern life. Coffee has changed the nature of the economy by making boring work more tolerable. Take caffeine away, and whole industries might collapse.
There are some striking parallels between the effects of coffee on society and the effects of cheap credit on the economy in the Austrian theory of the business cycle.
Inflation can boost economic activity in the short run when it arrives unexpectedly. Gold rushes, for example, would always lead to boom-and- bust cycles in the industries closest to gold mining. The euphoria of “found money” is much like the rush of that first sip of coffee after a long hiatus.
Once governments started to print money, they discovered that people eventually learn to expect inflation, and plan accordingly. When you constantly stimulate the economy, it builds a “tolerance” to inflation.
The Lucas critique observes that we have to factor changes in expectations of economic agents when considering policies like inflationary monetary policy. An economy in stagflation (i.e., inflation during a recession), can be compared to a person who drinks so much coffee that they need to chug it just to reach their old level of energy.
In the economy, you get hyperinflation and eventually a decline in overall output. In the body, you get cortisol spikes, and eventually a reduction in natural cortisol when you wake up in the morning, since the body anticipates the spike to come with your first cup of coffee. If you drink too much coffee, you can eventually overtax your adrenal glands and end up with permanent fatigue.
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Austrian economists have compared a recession to a “hangover,” an analogy which Paul Krugman derided in Slate back in 1998, but I think coffee provides a better analogy to cheap credit than alcohol. Austrian business cycle theory revolves around the time structure of production, which is distorted by an artificial reduction in the interest rate — making it appear that there are more savings than there really are. Entrepreneurs thus overcommit resources into fixed, long-term assets to produce final goods for which there is not enough future demand. [See “C is for Capital Theory” in the free PDF of The ABCs of the Austrian Business Cycle to understand this in more detail].
I can relate to the feeling of overcommitting resources to future projects while caffeinated, thinking that I will always have the energy and enthusiasm to get them done. However, these commitments always come at the expense of the equivalent of “capital maintenance” on my life.
When I drink coffee, I start to live more frenetically. Even if I fail to complete the projects that I start, it still feels like I’m getting things done. There’s less time for prayer, calling old friends, taking slow walks on sunny days, and so on.
I think this illuminates some of the confusion around the failures of the “hangover theory” to explain all of the dynamics of recessions. During the Great Depression, the most effective policy was a large devaluation of the dollar (the equivalent of a large dollop of inflation), which got us out of the rut for a time. Later, the increased spending of World War II ended the Depression completely. Inflation does work sometimes, especially when it can be justified as a one-off.
Unlike alcohol, caffeine can get people out of their ruts on a daily basis. It doesn’t necessarily lead to an inevitable future “bust” so much as it skews our behavior towards certain kinds of tasks. When I’m not caffeinated, I don’t tend to think of my life in terms of tasks, or “to do” lists, but when I am, suddenly it becomes a race against the clock to get as much done in the window of peak productivity as possible.
A great deal of economic activity seems to be undertaken just for the sake of it. I think the Austrians were right to link the tendency towards easy credit with the urge to go to war. It’s an easy excuse to mobilize a stalling economy. We might add stimulants and fossil fuels to the list of factors that increase the overall volatility and scale human enterprise. Just because we might be able to sustain these activities indefinitely doesn’t mean it is the best way to operate.
I’m not against the use of caffeine, and some people might find it to be an effective mood booster with very few downsides. However, too often we get into the habit of altering our psyches to better suit our environment, rather than trying to change our environment so that our natural state is one of contentedness.
Coffee makes it easy to ignore the fact that our work-obsessed priorities may be out of line. In the same vein, successive bouts of inflation make it easier not to question how much the stuff that we’re building is really worth.
Finally, this is not to deny that great work isn’t sometimes accomplished with the aid of caffeine (or easy credit for that matter). There may be some times when it makes sense for the government to take advantage of low interest rates to invest in a large infrastructure project that wouldn’t be undertaken by private actors. And there might be times when short bursts of creativity are necessary to reach the peaks of artistic expression, a la Balzac:
I don’t want to lead a life of frenetic intemperance, nor do I want a flattened existence without any highs or lows. We don’t need moderation as much as we need thoughtfulness and intentionality. I think coffee is best used for creative cultivation mode, where you are not trying to get things done so much as generate ideas that you will be able to work on enthusiastically in an un-caffeinated state.