Slate magazine mentions Austrian Economics!

Though the article does have some things wrong, the more Austrian Economics is mentioned the better.  This is because Austrian Economics makes such obvious sense that any mentioning of it might lead some of the public to start reading more about Austrian Economics.  Once they do, a whole new world will open before them. No longer will economics be a realm for super intelligent mathematicians with PHDs but, it will become instead something that an intelligent lay person can understand.  The more Austrian Economics is brought up in the national dialogue, the better for liberty and the human condition. Though this article takes some jabs at Austrian Economics, it in many ways inadvertently supports the Austrian view.  Let’s take a closer look at it.

The article starts off by mentioning Ron Paul’s announcement that “We are all Austrians Now!”.  This statement had much of the media confused as they were desperately researching economics trying to find out what the phrase meant.

 

Lucky for readers of Slate, Mathew Yglesias already has some understanding(kind of) of the topic!

Yglesias writes “The average Republican presidential candidate would sooner officiate a gay marriage than praise Europe, yet here was Paul pledging allegiance to Vienna. What did he mean? Why would we all be Austrians?  Paul’s statement was crystal clear to those familiar with the internecine controversies of the libertarian movement”

As one who is familiar with such “internecine controversies” the statement is very clear but to those who are not, let me expound.  Nixon in 1971 took the United Sates and by default, the whole world, off the Gold Standard.   He announced that “we are all Keynesians now”.  This was a watershed moment in American history.  John Maynard Keynes and his ideas had basically taken over both ideological spectrums.  Now both Left and Right had given into the Keynesian paradigm of deficit spending, inflation, and state control over money.   Remember this statement was so important because it was not Lyndon Johnson or Jimmy Carter that said this but, it was instead a “conservative” Republican that said this.  Even Milton Friedman and the Chicago School in general gave way to the Keynesian paradigm of central banking.  So what might be uncommon knowledge or “internecine controversies” among libertarians is becoming much more widely understood.  This is because the current monetary order is in the process of breaking down.   Nixon’s ending of the gold standard put the U.S.on a trajectory of inflation and money printing that has resulted in multiple bubbles, a much lower standard of living for the middle class and tens of trillions of mal-investments that will have to be liquidated.  Today’s current financial mess is part of this Keynesian/Nixonian legacy.  As the crisis deepens the quote “we are all Austrians now” will become much more common.

Yglesias writes: “The Austrian school originally referred to a set of classical liberal thinkers with diverse interests who came out of the Austro-Hungarian Empire. Many of these thinkers are obscure today, but the most distinguished member of the group, Friedrich Hayek, is anything but. By the same token, an appreciation for Hayek’s work by no means makes you an “Austrian.” 

 Yglesias goes on to say that Hayek is not “Austrian” the way Ron Paul means it.  Well, this point is certainly not true.  Ron Paul read Fredrick Hayek in college, from then on Ron Paul has been studying Austrian Economics ever since.  Hayek was Ron Paul’s whole inspiration.  It is true that Austrian economists today try to push Mises and Rothbard but this is by no means meant to take away from Hayek.  This is because these economists have been neglected by the mainstream and Austrian economists think they have something to offer.  Without a Mises, their never would have been a Hayek.  I would even argue that Ludwig Von Mises should have won a Nobel prize over Fredrick Hayek because Hayek’s work on the business cycle was just a further development of Mises’ writings on it.  Ludwig von Mises also contributed to many other areas as well but, this is beside the point.  A true understanding of Austrian economics requires reading from all three: Mises, Hayek, and Rothbard.  Whether one becomes a Misean, a Hayekian, or Rothbardian within the framework of the Austrian school is more of an obscure academic debate among libertarian philosophers.  The gulf between Austrian economics as a whole and Keynesianism is not obscure or academic but, critical to the understanding of the world.  Yglesias emphasis on Hayek on being mainstream and Rothbard and Mises being fringe is unnecessary when they are so similar to each other compared to every other school of thought.

Yglesias goes on to say ““Austrian economics,” in this sense, goes beyond standard-issue free market thinking in a number of ways. Most notably, it seeks to build a strong ethical case for strict libertarianism without admitting that this would lead to any practical problems whatsoever. “

I am not sure what Yglesias point is here, Austrian economics goes “beyond standard-issue free-market thinking.”  Austrians simply explains how government intervention creates distortions in the economy.  Beyond this, a free-market implies strict libertarianism, so how is Austrian Economics a more radical free-market? I would also like to point out to be an Austrian does not mean you have to be a libertarian.  Austrian economics simply explains how economics works and how interference in the free-market creates a poorer society.  Mises described economics as a “value free” science.  I could conceivably want a poorer society and push for government programs and be adherent to Austrian economics.  Austrian economics itself does not make value judgments.

Yglesias goes on to say “Therefore, along with rejecting the legitimacy of any intervention to protect the poor or regulate anything (a position much more extreme than even the Hayek of Road to Serfdom)”

I guess I am going to have to go into the weeds a little bit on this one.  It is true that Hayek was not strictly against welfare programs in a moral sense.  Hayek was a utilitarian and simply said that wealth redistribution reduced the overall productivity in society.  He also considered them dangerous because they could lead to socialism.  Any endorsements of such programs was given with a huge amount of skepticism as well.  It is true that many Austro-libertarians today are against state welfare because it is immoral.  Simply put, Austro-libertarians hold the state to the same moral standard as an individual, if it is immoral for a person to steal it is also immoral for the state to do so as well.  Wealth-redistribution is obvious theft because it takes from one group and gives to another.  This is in contrast to defense spending and road construction that benefit society as a whole.  Some Austrians are even against this as well because they think that roads and defense can be provided better by the free-market.  As far as regulation goes, there has not been one beneficial regulation in 100 years, so yes, they are against this as well.  This is not from some kind of free-market warship but, is instead because regulation itself never benefits the consumer but instead benefits big business.  Many liberals and socialists understand this as well, so this should not be considered some kind of ideologically driven view.

Yglesias “Austrians reject the idea that there is anything at all the government can do to stabilize macroeconomic fluctuations.”

Well, this is probally the most important (mis)statement about Austrian economics.  Austrians hold the view that all macroeconomic fluctuations are caused by interference in the financial system.  The most common is governemnt driven booms through artificially lowered interest rates and inflation.  This again is not just some kind of ideological prattel but is instead backed up by a huge amount of evidence.  This is why the Austrians have been able to predict every single boom and bust over the last one hundred years.  If “macroeconomic fluctiations” are simply random events, how have the Austrians been able to predict them so well?  The fact that the government caused the boom leads to totally different conclusions when considering what governments should do in the bust.  Yglesias, intentionally or not, would have the government keep the boom going.  The Austrians know this would create more misery down the road.  Some people like to say that the government should create a “a soft landing” but this is not even possible.  The misallocation of resources in the economy have already been created, they must be cleared out, and they will be because this is how markets work.  The government cannot do anything to prevent this, any effort to prevent this will keep the boom going and make the bust much worse down the road.  If Austrians thought that government intervention could “stabilize” the economy they would be all for it but, history proves otherwise.

Yglesias “This, to be clear, is different from the mainstream Republican view that the stimulus bill enacted by Congress in 2009 and signed into law by President Obama was wasteful or ineffective. Austrians also believe that cutting taxes to boost economic activity doesn’t work either. And they disagree with Milton Friedman that appropriate monetary stimulus by the Federal Reserve could have prevented the Great Depression. Indeed, they disagree with even the least controversial of all stabilization measures, the ordinary tweaking of short-term interest rates that all modern central banks use to try to prevent either inflation or deflation. In the view of the Austrians, 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.”

Yglesias has this exactly right.  The Austrian Economists think Republicans had it exactly wrong in 2009.  They even predicted that the Republicans would do exactly what they did years in advance before anyone had any clue that there was a bubble. They do disagree with Milton Friedman because Friedman was wrong on the Depression and is wrong on central banking.  And yes, they disagree with tweaking short-term interest rates because interest rates provide an actual real world market function and “tweaking” them destroys capital. Yes, every policy pusued by the Federal Reserve is a mistake because not only does this not help the economy but, it transfers wealth from the poor and the middle class to the Wall-street elite.

Yglesias continues:  “The way this works, according to the Austrians, is that artificially low interest rates spur “malinvestment” in unworkable enterprises that inevitably crash when the stimulus is withdrawn. This is an emotionally appealing idea, positing that the suffering of a bust is a kind of cosmic payback for the boom. But it doesn’t make much logical sense. For one thing, as GeorgeMasonUniversityeconomist Bryan Caplan, who’s ideologically sympathetic to the Austrians, points out, it’s hard to understand why businesspeople 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?”

Well this is pretty easy; they duped because they have been educated in public schools and Universities and have never heard of Austrian economics.  There are many firms that have invested in the Austrian approach and have made a lot of money by avoiding the housing boom as it was popping.

Yglesias: “Ironically, the Austrians have replicated an error from the crudest forms of postwar Keynesianism—the failure to consider the role of expectations feedback in macroeconomic policy”

The market is not the only thing creating the feedback loop, the central bank and the government is as well.  Austrians understand very well how feedback loops work but, they also understand that false information can distort the feedback loop.  Yglesias has it just the opposite, it is the Keynesians that fail to consider how false feedback loops that are created when interest rates are artificially moved.

Yglesias: ” More broadly, the Austrian story of investment booms and busts doesn’t actually explain recessions and unemployment. Spending patterns shift all the time without sparking a recession. People stop buying BlackBerrys and they buy iPhones instead. Or people stop buying boot-cut jeans and buy skinny jeans instead. Across sectors, maybe people go see fewer movies and with the money they save they eat out at nicer restaurants. A business that curtails its investment spending should have extra money to pay out as dividends. Or if they want to horde the cash, it sits in a bank for someone else to lend out.”

Actually, it is the Austrians and only the Austrians that do try to explain these things.  Unlike the Keynsians that try to blame it on “animal spirits” the Austrians give a very in depth answer for how booms and busts are created.  This is totally different than changes in consumer spending.  Ludwig Von Mises noticed that busts are not simple shifts of spending patterns but (1)happen across a nation’s economy as a whole.  (2) Affect longer stages of production like mines and car manufacturing more than near term goods like retail (3)  Are characterized by businessmen making a huge amount of errors in a small time frame. Mises then sought to explain how booms and busts happen.  This was why he was able to predict the Great Depression while the Keynesians did not.  Want a simple cure to Keynsianism, here it is.

 

Yeglesias: “It may seem “obvious” that the decline in housing activity caused the current recession, in line with the Austrian view, but in fact fixed residential investment turned negative in 2006. It stayed negative for more than a year before the recession began, and then continued negative for a couple more quarters before it turned severe. People spent less on home-building and renovation and more on other things. If investment spending in general declines, you would expect spending on consumer goods to rise to offset it. In practice, this doesn’t always happen and you get a recession. It’s this anomalous collapse in overall spending that needs explaining, and describing some of the past spending as “malinvestment” doesn’t help you understand it.”

Well, there are a couple things wrong with this but, the most obvious is that people thought that they were actually richer than they were because of Fed stimuli that went mostly into the housing sector.  When housing prices stopped going up they changed their spending patterns because they realized they needed to save and could not retire and use their house’s equity like an ATM.  This decline in spending fits perfectly within the Austrian paradigm.

 

Yeglesias : “The interesting question is what to do about it. Many of the original Austrians found their business cycle ideas discredited by the Great Depression, in which the bust was clearly not self-correcting and country after country stimulated real output by abandoning the gold standard and engaging in deficit spending. Then for a long time after World War II, policy elites more or less agreed on a combination of “automatic” fiscal stabilizers (the deficit naturally goes up during recessions as tax revenues fall and social service outlays rise) and interest rate cuts. And it worked, so nobody much cared about Austrian economics outside of crank circles. But when short-term rates hit zero and the Fed couldn’t push them any lower despite high unemployment, political consensus broke down.”

Here we go, the Great Depression myth! I don’t really blame Yeglesias though. This is widely believed by most mainstream economists as well, including the Chicago school.  The Austrians know what they are saying is unconventional but, this is precisely why they speak of it so loudly.  Conventional economics and the supposed cure for the Great Depression is precisely what the Austrians are trying to fight.  Yglesias is correct that policy elites with their Keynsian policies have dominated since World War II but, this does not make them correct.  A near flat standard of living since 1971 is nothing to brag about.  Let’s look at the Great Depression though.  A little common sense can shed some light on the errors of “conventional” economic thinking.   Why did the depression of 1921 last a year and the Great Depression last fifteen years when every other depression was one or two years?  Why was unemployment near 20% ten years later after government did tons of things to stimulate the economy?  Why was there never a Great Depression before the Federal Reserve?  Why was there never a Great Depression before the New Deal?  How does burning crops, pouring milk down sewers, slaughtering livestock help stimulate the economy when people are going hungry?   How do wage and price controls on every single level of the economy help an economy grow?  The Great Depression and the myths around it are precisely what the Austrians are trying to expose.

Yeglesias starts to wrap things up: “Unfortunately, however, it’s the Austrian school, which preaches despair and demands no action at all, that has the most effective political champion and the most dedicated followers.”

Despair?  I guess it depends on how you look at it?  If you want government intervention and largesse then I guess it is despair.  But, if Yeglesias generally wants people to be better off than the Austrian school preaches hope.  Is it not more inspiring that people can quickly turn around the economy if left to their own devices without government intervention?  Is it not inspiring to know that economics works like nature and has a natural order that is self correcting without paid bureaucrats?  Is it not inspiring that capital formation can happen at a much faster rate if individuals are left free?  Is it not inspiring that one day we can hope for an economy that does not have a boom bust cycle that wastes trillions in wealth and hurts the poor the worst?  Is it not inspiring that we can hope for an economy where people can hold real wealth in their hand instead of the empty promises of politicians in the form of Federal Reserve notes?  The Austrian School is the ultimate hope for the common man.

Yeglesias finally concludes “If I’m wrong, and the economy doesn’t recover in 2012, then these faddish views may gain more steam and perhaps we really all will be Austrians someday soon. But let’s hope not. The developed countries that have done best in the recession—places like Israel and Sweden—are the ones that have pursued the least “Austrian” courses of action, while the European Central Bank’s insistence on pursuing a somewhat Austrian-style course in Spain and Italy is creating a deepening crisis.”

Well I think that the Austrians would be the most surprised at learning that their economics is “faddish” but, Yeglesias makes a good point here.  What if the economy does not improve in 2012.  Will he finally give in to the Austrian world view? Probably not but hey, we can still hope right?  He mentions Europe but, Iceland followed an Austrian style course of action and let their banks fail and is doing much better than the continent.  If Yeglesias really wanted the betterment of mankind he should read a few works from the Austrian School. He would quickly learn the errors of his ways.  Let’s hope that Austrian economics does reach more people and that people like Mathew Yeglesias will become a little more open minded.  The world will be better for it.

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