When a presidential candidate declares, as Ron Paul has, "We're all Austrians now," it's inevitable that his critics would try to discredit him"”whether they understand what he's talking about or not. That's what Matthew Yglesias does in his Slate piece "What Is "?Austrian Economics'?"
I recommend the piece because it's highly informative"”about what Austrian economics is not.
We're off to a rocky start with this: "The Austrian school originally referred to a set of classical liberal thinkers with diverse interests who came out of the Austro-Hungarian Empire."
The earliest Austrian economists did not make their mark by advocating free markets and other classical-liberal ideas. They did so by proffering a revolutionary positive (not normative) theoretical approach to understanding how markets work, focusing on value, price, and capital, theory. What Wikipedia says is consistent with my understanding of the matter: "When Carl Menger, Eugen von Böhm-Bawerk, and [Friedrich von] Wieser began their careers in science, they were not focused on economic policy issues, much less in the rejection of intervention promoted by classical liberalism. Their common vocation was to develop an economic theory on a firm basis."
Economics vs. Politics
Yglesias thus conflates Austrian economic theory with libertarian political theory. In fairness, he is not alone in committing this error. Many libertarians do the same, which is unfortunate. Austrian economic theory describes how purposive action by fallible human beings unintentionally generates a grand, complex, and orderly market process. An additional ethical step is required to pronounce the market process good. Economic theory per se cannot recommend but only explain markets. This is what Ludwig von Mises meant when he insisted that Austrian economics is value-free. Anyone of any persuasion ought to be able to acknowledge that economic logic indicates that imposing a price ceiling on milk will, other things equal, create a shortage of milk. But that in itself is not an argument against the policy. Mises assumed the policymaker would have thought that result bad, but the economist qua economist cannot declare it such. As Israel Kirzner likes to say, the economist's job in the policy realm is merely to point out that you cannot catch a northbound train from the southbound platform.
Yglesias writes: "Austrians reject the idea that there is anything at all the government can do to stabilize macroeconomic fluctuations." It's odd to say this without also pointing out that Austrians believe that government causes the instability of inflationary booms, recessions, and depressions. In light of that point, the suggestion that government is capable of stabilizing the economy may be seen in its proper light.
That said, Yglesias's statement is not quite right. Some prominent Austrian macroeconomists think that in a second-best world, the central bank (which of course wouldn't exist in a first-best world) should counteract a sudden and substantial monetary contraction. In other words, deflation is not necessarily a cure for inflation. Mises made the point metaphorically in 1938: "If a man has been hurt by being run over by an automobile, it is no remedy to let the car go back over him in the [opposite] direction." (See Steven Horwitz's "Deflation: The Good, the Bad, and the Ugly." )
Distorts Markets
"In the view of the Austrians," Yglesias goes on, "practically every economic policy pursued by the federal government and Federal Reserve is a mistake that distorts markets. Rather than curing recessions, claim Austrians, stimulative policies cause them by producing unsustainable bubbles." Well, yeah, and it's amply demonstrated by George Selgin, William D. Lastrapes, and Lawrence H. White in "Has the Fed Been a Failure?" (See my summary, ""?F' as in Fed." ) As they put it:
Drawing on a wide range of recent empirical research, we find the following: (1) The Fed's full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed's establishment. (2) While the Fed's performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.
Yglesias understands that the Austrian theory of the business cycle has something to do with artificially low interest rates breeding malinvestment, but he thinks it can't be right because "it's hard to understand why business people would be so easily duped in this way. If Ron Paul and Ludwig von Mises know that cheap money can't last forever, why don't private investors? Why wouldn't firms avoid making the supposedly dumb investments?"
Gerald P. O'Driscoll and Mario Rizzo addressed this long ago in The Economics of Time and Ignorance:
[T]here are profits to be made from exploiting temporary situations. . . . Though entrepreneurs understand [the macro-aspects of a cycle] they cannot predict the exact features of the next cyclical expansion and contraction. . . . They lack the ability to make micro-predictions, even though they can predict the general sequence of events that will occur. These entrepreneurs have no reason to foreswear the temporary profits to be garnered in an inflationary episode. . . . From an individual perspective, then, an entrepreneur fully informed of the Austrian theory of economic cycles will face essentially the same uncertain world he always faced. Not theoretical or abstract knowledge, but knowledge of the circumstances of time and place is the source of profits.
Spending Shifts
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If you don't respect people's desire to pursue a wide diversity of aims by purposeful action, it's very hard to take Austrian Economics seriously.
Yglessias strikes me as someone who thinks that there is one enlightened way to go about life, and that people who don't share those goals or methods must be erring due to ignorance or malevolence. He appears to filter what he hears or reads through this mindset, discarding any idea or fact that contradicts it. His filter is so strong it's a reality distortion field.
That's how most smart people are.
Surely you're not implying that Yglessias is smart.
What he meant to say was, thats how most "smart" people are.
I've had a mild obsession with Yglesias for years now. He strikes me as that typical "I'm so smart, I or someone of my same level of intelligence knows what's best for you" liberal.
Substitute 'close-minded' and the line works.
Yglessias strikes me as someone who thinks that there is one enlightened way to go about life,
Really? He just seems like a self-absorbed prick to me.
-jcr
Roderick Long once made Yglesias look like such an idiot that I'm surprised he tried to wade into waters too deep for him again.
Link, please? That sounds tasty.
this, maybe?
http://www.cato-unbound.org/ar.....e-markets/
And how many of Yglesias' readers double-check with Roderick Long?
Why bother? Long heald beliefs confirmed. Why risk possible cognitive dissonance.
Awesome porno name.
Yglessias actually cited Wiki as a source for his piece? Come on. Even college kids are told that's a no-go. You can't debate with people who think every situation demands a govt answer.
I've recently had conversations on Facebook with folks in the "government is the only answer" crowd. It's utterly mind numbing. A few have gone as far to claim that force against one group or individual (the rich!) is justified, so long as it enforces the greater good. The immorality of force never seems to occur to them. Nor does the possibility that they themselves (given an all powerful state) will probably be at the wrong end of it someday.
Violent redistribution is OK, so long as it's directed at people I don't like!
Oh, and not all of these folks are lefties. Plenty of righties make the same argument in defense of the "moral fabric of society."
Immorality is pandemic.
Nor does the possibility that they themselves (given an all powerful state) will probably be at the wrong end of it someday.
Unless they are at top of the crony heap, corner office at Goldman Sachs or a political appointee at an alphabet agency, for instance, they are on the wrong end of it this day.
Good article, Mr. Sheldon.
For those who can't get enough take downs of Yghead here is another:
http://hanseconomics.com/2012/.....-on-slate/
That Hans Economics piece is great. Definitely worth reading...even better than the above Reason article!
What part of the moral fabric, or what threat would justify the use of force in defense of the moral fabric to the right wing people you were talking to?
"Oh, and not all of these folks are lefties. Plenty of righties make the same argument in defense of the "moral fabric of society.""
Agreed, I think it's because Progressivism lives in both parties now.
I honestly don't understand what that means if it's coming from someone on the right. Do they mean at abortion clinics or to stop gay marriages?
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