Austrian economics and the good son, bad son story.

How the story of the prodigal son relates to modern day monetary and fiscal policies.

After finishing their education, a rich man’s sons started working in the private sector. They were both chugging along without the financial help of their rich father and all was good.

At some point, an economic recession struck and they both had to pay for their previous bad choices. Some of the bad things that happened were through no fault of their own, but regardless, they had to pay for it one way or another.

The good son realised that he had overextended himself and started to restructure his affairs to match the current state of the economy. He moved into a smaller home and started to cut back on his excess spending.

He cut back on some luxury items, a gym membership (he bought kettlebells to workout at home) and gave up on overpriced coffee from the local franchise coffee shop.

He also realised that the new economy wanted for higher skilled workers. He started to invest in his continuous education by taking online courses and reading more books. He had to borrow some money from his father for those courses, but the returns he would make from them more than covered for the initial cost.

The good son quickly turned his affairs around and even started saving a bit of money every month. He then started to look for intelligent ways to invest that money, because the interest rates the banks offered did not even cover for inflation.

The bad son also realised that he too had overextended himself, but did not move swiftly to restructure his affairs. He rushed to his father to protest about the bad economy and about all the others who were to blame for his dire financial situation.

He wept of this and cried for the other until his father put his prodigal son on a monthly allowance; just until the economy recovered and the son found himself on his feet once more.

The economy, as always, started to recover allowing the bad son to start making money again. The father called his son and asked if that was a good time to stop the monthly allowance. 

The son erupted! “You can’t cut my monthly allowance now, I have two kids in school and my wife is doing an MBA in New York City. I have a mortgage!” Secretly, the son was also spending money on expensive wines and on those two new cars that he bought that remain mostly unused. 

He just did not want to cut back on his “lifestyle”, he wanted to keep up appearances and show others that he was rich and successful. On top of that, he was servicing the debt payments for three overpriced properties that he bought during the boom as he was hopelessly waiting for them to recover so he could sell for a profit. 

The father, deep down knowing that he was corrupting his son and destroying his any hope of ever recovering as a productive and self-reliant member of society, relented and continued to send his bad son the monthly allowance. The father always wanted his sons to become successful and so he supported them any way he could.

All was seemingly well in the family until the good son, having elevated himself to the heights of the technology sector, found an amazing investment opportunity in a technology startup that needed fresh capital to grow its operations. The good son knew the founder and the business, and the company was already profitable in an interesting niche in enterprise software that had a lot of room to grow.

The good son did his research and realised that this was an amazing opportunity for the family to grow their wealth. So he called his father for some capital. 

The father, after a short pause, confessed to his good son that the money he had spent on the bad son’s allowance and emergency extras had seriously depleted his personal funds rendering him unable to invest in this opportunity.

The good son, distraught, realised that all his good work and effort all those years went to nothing. He understood that indirectly, the money he had been earning and saving all those years was basically being spent by his brother.

….pulling back to explain the parallel of the story

We can relate the rich father to the system of global central banks and their governments today. The two sons are stakeholders in an economy, anything from individuals to mega corporations.

The bad son is an economic stakeholder that is no longer productive. He is simply not carrying his own weight in the economy. The bad choices and investments of the past cannot be fixed with low interest rates or aggressive government spending. He keeps needing cheap lending and “one off” government assistance to continue in the same way he existed previously. 

The good son is an economic stakeholder that has reacted to the changing times in a thoughtful and realistic way. However, he is now carrying the weight for other bad economic stakeholders. He is well off financially but if government taxes were not that high, he would have been able to invest to grow his business further and put himself and his country in a much better place economically. 

He feels unfairly treated that he is paying for the mistakes of others, and he doesn’t like it.

The good stakeholder is being repressed because the bad stakeholder is burning capital while he is out there working to create value and build capital.

It is obvious that the malinvestments of the past must be liquidated, or else they risk taking the whole economy down with them, like a black hole in space.

Back to our story..

The anger grows and grows until one day he goes to his father, asking him why he continued to fund his bad son when he knew that he was taking all three of them down with him? After some pressure, the father says in as few words as possible, “Your brother and yourself own shares in the family business since you were young, and if I did not continue to prop him up, he would have sold out to our competitors which would then kick me out as head of the company.”

The good son then realised the political dynamics at play. That democracy is far from fair and those in power are not there to make the best decisions, they are there simply to be re-elected. In doing so, they focus on propping up the short-term while sacrificing the long-term. 

Most politicians do start their careers with good intentions, but soon they realise the conflict of democracy; that those who you must hurt in the short-term to make everyone better off in the long-term, are the ones who will vote you out in the next election.

Those that want to stay in politics and in power, realise that there is only one way forward. And that is to keep as many people happy as possible in the short-term, with no consideration or worry to what may come in the long-term.

At times, these policies make bad economic stakeholders look as good as others.

Over the long run however, there is always a reckoning and those bad actors will go bankrupt. 

The father will one day be forced to stop subsidising the bad son and the son will realise that he was simply magnifying his problems and not solving them. Likewise, governments and central banks will one day have to reverse their short-term policies - rendering those bad actors insolvent.

For the time being things are seemingly good, but on which of the two types of economic stakeholder would you bet your money on?