What’s wrong with Austrian Economics

In my email today I got an invitation to a conference on Austrian Economics in the 21st century, to be held in Argentina. Details here for those interested. What struck me was the list of topics, namely

– Economics
– Epistemology
– Methodoly (sic)
– Political Philosophy
– Readings on the Austrian School of Economics

That is, 80 per cent of the conference is to be devoted to meta-economic issues of one kind or another, and only 20 per cent to the entire field of economics (much of which will probably also be taken up with meta-discussion). A focus on meta-issues is a characteristic problem for heterodox schools of all kinds, but Austrian economics takes it to an absurd extreme. At some point, surely, they need to stop worrying about methodology and history of thought and start actually doing some economics.

Leaving aside the obvious silliness of worrying about epistemology in the context of a massive financial crisis, there’s the irony of holding the conference in Argentina, something of a poster child for failed free-market policies (admittedly, before that it was a poster child for failed protectionist policies). Surely the conference could manage a theme on what went wrong in Argentina and how Austrians would do things better next time.

115 thoughts on “What’s wrong with Austrian Economics

  1. @Alice

    I am thinking if they got back in the would relaunch ‘Work Choices’ under the title ‘Work Sets You Free’.

  2. Alice,
    Hockey a libertarian? I di dnot realise you have developed a sideline as a comic. Now I do realise, though, it puts a lot of your comments in context.
    Freelander – congratulations. You have now lost the thread due to a Godwin’s Law violation.

  3. @Andrew Reynolds

    My comment was in support of the cash rate targeting regime inflation targeting itself. To my mind exchange rate targeting is inherently flawed because it is a monetary policy aimed at maintaining an often misaligned exchange rate.

    Monetary targeting has been tried and failed. The problem with inflation targeting is that it promotes a blinkered view of policy by central banks. To my mind this leads us back to a regime where central banks should perhaps keep their eye on a number of variables including money and credit growth. To my mind, as a rule of thumb the cash rate v nominal GDP growth is a reasonable indicator of the stance of monetary policy. If you plot the series of both, particlulary in the US, the policy mistakes stick out like dogs balls. Doing hte same with the Australian data shows the RBA kept the cash rate below neutrla for an extended period during the terms of trade boom. Monetary policy appears to be as much an art as science.

    Getting back to “digging holes” as a means of stimulus. From my reading of what Keynes said this appears to be a thought experiment and not to be taken literally. What always appears to be missed by the critics who focus on this line is that Keynes was building a theory from the ground up which is why the book is fairly impenetrable.

  4. Sorry Andrew very poor editing. The first line should be – support of cash rate targeting not a defence of inflation targeting.

  5. @Andrew Reynolds

    ‘Fraid you lost the thread long long ago. As for comic, you are an unintended comic.

    Still avoiding asking about your ‘south park’ avatar I note.

    sdfc makes a good point. Monetary targeting was tried and failed a long long time ago. The experiment was called the Volker recession.

  6. “sdfc makes a good point. Monetary targeting was tried and failed a long long time ago. The experiment was called the Volker recession.”

    Well for one thing failure is probably not the right word. It was horribly painful is what it was. The figures were more honest then, and we didn’t have as dramatic an increase in unemployment in the US as we do right now. Or if I’m wrong I’m probably not far wrong. Unofficial unemployment figures right now range from 17-20 per cent. Its a disaster right at the moment.

    The other thing is that some of us were surprised by the harshness of this sado-monetarism. And we dwelt on it. And we found out the three or four reasons why it was so very harsh and ore painful then it ought to have been.

    The nastiness of it, doesn’t mean the broad thrust of the theory of it all wasn’t right in terms of the general direction of the thinking.

  7. The cure was worse than the disease and it was a cure Volcker rapidly decided was not worth the pain and not worth repeating which is why interest rates are used now rather than monetary targeting. NZ now has a long history of keeping inflation in check by the frequent application of recession. Overly tight monetary policy can kill an economy; some might find that morally satisfying. You can also stop a car by running into a brick wall.

  8. You’re confusing two different issues, the failed monetary targeting regime and Volcker’s successful disinflation policy. Breaking high inflation is hugely costly however to say it is greater than the cost of persistently high inflation is ill informed. If it is a moral issue you should remember falling real wages means high inflation imparts the greatest costs on the most vulnerable members of society.

    The US economy did not hit a brick wall, it came out of the recession in better shape than when it went in.

  9. @sdfc

    Inflation could have been conquered without monetary targeting and an abrupt ten percent increase in interest rates.

  10. sdfc

    Going back to your premise that booms can be moderated by avoiding loose money – the issue (as Thatcher found out) is that we cannot usefully measure either “looseness” or “money”. The former relates to the available opportunities (every so often there actually is a large free lunch on offer – see mechanised weaving, railroads, steamships, Australia…), and the latter to any kind of negotiable claim on present or future earnings (cash, debt, shares, notes etc).

    The statement amounts to “when feeling optimistic, and seeing plentiful opportunities available, people tend to promise more than they can deliver”. Fiddling with currency arrangements does not prevent this tendency.

    Alicia – I take your point that people have a different stake in economic arrangements than in many other kinds of knowledge. My point is that, this being the case, it is misleading to pretend that there are neutral technical economic “facts” which we can all reasonably acknowledge as true. there may be some, but I have trouble finding them.

  11. Freelander,
    Your evident (and rather odd) fascination with my gravatar is not the subject here – Austrian Economics is. Having already lost the thread through a Godwin’s Law violation, though, you really should bow out.
    I have previously acknowledged the difficulties of targeting under a fiat system as there are many, many possible aggregates to target – everything from M0 through M3 to broad money and beyond. To me, this is the weakness at the core of this method of analysis. In this I agree with Peter T. Some (like Graeme Bird above – to the extent I have understood his sometimes difficult arguments) tend to want to deal with this by eliminating fiat (i.e. a return to a commodity money system) and effectively banning all other things that could be counted as money. While I understand the attraction of this approach I cannot agree with it for many reasons that we have previously argued at enormous length over.
    Others argue that it would work simply by returning to commodity money (for example gold is money and money is gold) or a commodity standard (i.e. the AUD is defined as being worth a given quantity of gold).
    The last of these I would regard as the most practical solution to this problem – but still a risky one as variations in the gold price then directly and by definition affect the price of the AUD, with the resulting inflow and outflow of currency that is likely to occur.
    The end result of this is that I normally plump for fiat as a least-worst solution, but I would much prefer that the issuing body was one that had the sole task of maintaining its value come what may. The problem then becomes how to define value – should it be measured (as currently) just against the CPI, which, as a measure of consumer price inflation, ignores a large number of prices in the economy (including asset prices and commodity prices) or should we be looking at a broader measure?
    As I am not an economist this is a question I find difficult to answer – but I believe that if we are to have fiat then the measure of value against which this is targeted should be broader than just consumer prices.

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