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.
John Quiggin 
Are we to assume you are not going?
Or does it sound like an unmissable opportunity for some stirring?
I’m still cacking myself thanks to Brad DeLong’s latest takedown of this stuff:
‘Is it your view’, he asked Hayek, ‘that if I went out tomorrow and bought a new overcoat, that would increase unemployment?’ ‘Yes,’ replied Hayek, turning to a blackboard full of triangles, ‘but it would take a very long mathematical argument to explain why.
Priceless…
Sad
Zardoz, I’m just impressed that DeLong quoted Joan Robinson. I have her delightful little primer ‘Economic Philosophy’ (Pelican reprint edition, 1974). Her first chapter heading is ‘Metaphysics, Morals and Science’. Beat that in an economics text.
So surely, ProfQ, since one can simply never have too much epistemology and methodology, should we not cheer their earnest effort to raise our sights from daily subsistence to higher themes and memes ?
Maybe, if we’d had more epistemology, methodology and history of thought, we’d have had fewer Chicago Schools.
But thats what is good about this school of thought. The problem with the other schools of thought are that they don’t see knowledge as holistic and methodology as important. Without getting the methodology right its just prejudice and flying blind.
Zardoz. Thats not a takedown. Its not even an argument. What do you possibly imagine Brads argument to be?
“something of a poster child for failed free-market policies”
Argentina? Are you absolutely serious that Argentina had ‘free-market policies’? This is truly a bizarre statement.
If as you see it ‘free-market policies’ (whatever you actually mean by this I can’t understand) are historically/empirically a recipe for ‘failure’ what about Singapore, early America, Hong Kong Vs Mainland China, East Vs West Germany, North Vs South Korea?
I think free market means: Smaller state, lower state taxes/borrowings/fiat money printing/expenditure, rule of contract law and non violation of individual property rights, less intervention into economic affairs over riding principals of property rights/contract by state decree.
Damian, are you claiming West Germany and South Korea as examples of free market economies. If so, it appears you include social democracies and dirigiste states in your classification, which makes it less than useful.
As regards your initial rhetorical question, here’s the WTO in 1998. They certainly seemed to think that Argentina had followed the path you describe, with great success.
http://www.wto.org/english/tratop_E/tpr_e/tp100_e.htm
Pr Q said:
The Austrian “focus on meta-issues” seems to have paid off scientifically for them, at least judged by recent predictive results. They have the best record of any economic school in predicting both the US housing bubble, the GFC and the recession. They beat the Marxists and Keysnians and Monetarists. Steve Keen, impossible to classify.
Shorter Strocchi on theoretical treatments of the GFC: Austrian’s were best in predicting the causes, Keynsians were best in prescribing the cure.
The Austrians have been totally ignored by the economic establishment, apart from Pr Q who at least has the decency to acknowledge their efforts. Ron Paul, the politician whose economic philosophy is largely Austrian, called the housing bubble in 2002. This is when US house price rises were relatively moderate compared with overseas markets. Paul is a little bit cranky on small government.
He is obviously a decent man in himself and his intellectual performances deserve more respect. Here he is in 2009 discussing Austrian v Keynsian economics getting a well-deserved pat on the back for his predictive triumph.
The real Austrian star is Peter Schiff who was calling the housing bubble way back in 2003. This clip (dated late 2006) titled “Peter Schiff was right” was exactly on the money. He correctly pointed to the Fed’s debt-fuelled asset-inflating credit expansion and federal agencies allowing a “collapse in lending standards” as the cause of the perfect financial storm. He also predicted the end of the bubble, “an enormous credit crunch” and the coming recession.
Its really shameful that this guy has not got more credit for his prescience. And by implication the Austrians should share that credit because their theories were the basis for his predictions. I can dimly remember reading Hayek on the business cycle arguing that bubbles in commercial real estate were the most likely cause of overall business flunctuations. Since all residential real estate is now securitised and rent-imputed it is more or less commercialised anyway.
Abstract theory will never be a perfect crystal ball. One always needs to know who owes favours to whom and where the bodies are buried. The best work done on the GFC has been done by historical journalista, rather than theoretical economists, whether Austrian or Keynsian. In no particular order of merit, Michael Lewis, Matt Taibbi and Steve Sailer, who have all followed the money trail from Washington to Wall Street.
Maybe it would be a good idea if Pr Q for a change tried to find out what was right on the Right rather than hunting down every last erroneous talking point on the internet.
Pr Q said:
I have trouble with visualising Argentina as a free-market paragon. We are talking about the legatees of Peronism here. Its main problem came from pegging its currency to the USD which is more an technical, rather than ideological, issue.
No doubt there is much to be learned from the various ebbs and flows in the tide of ideological sentiment. But these run across vast floors of anthropological sediment which are much harder to shift.
In my final year of economics I decided to study a history subject focusing on North East Asian economic development. It was a real eye opener since it showed that Japan and Asian Tigers industrial performance seemed to defy ideological classification according to orthodox political economy. They had relatively low rates of taxation and government ownership. But high levels of regulation and intervention. Classification? Too hard basket.
And the case of PRC only re-inforces my skepticism about unduly ideological approaches to different economies. For sure it has enjoyed immense economic progress since embracing market capitalism – the “enterprise zones” of southern China more nearly resemble Austrian free-market paragons than any where else.
But huge swathes of the economy come under the control of State Owned Enterprises. And they are doing pretty well in commercial and industrial markets. So how does that fit into the old state-market dichotomy?
The older I get the more weight I give to the quality of the individuals rather than the quantity of regulations as a decisive factor in economic success. That means looking at anthropological indices, particularly things like IQ. But we are advised “dont go there” by political correctors so the boring old debate goes round and round inconclusively.
@jquiggin
No, just clear examples of same people/culture adopting more free Vs less free. I can’t point to a model free market economy, just varying degrees of state activism.
Argentina had a currency printing/government spending/debt meltdown. Argentina made some changes in trade policy, each of which have to be examined as to how ‘free market’ they are, so what. That doesn’t equal: Argentina became a ‘free market’ economy in the late 90s and therefore that is why they had an economic collapse.
The whole picture (tax, money printing, regulations, industry policy, debt issuance etc) does not support your ‘free market created a collapse’ ideas.
Jack,
A quote from a recent “Daily Kos” piece sums up Austrian (Hayekian, not the Rothbardian) monetary policy quite well, I think: “Trying to cure a recession with more cheap credit is like trying to cure chemotherapy with more cancer.”
Jack
Keynes wrote extensively about financial market instability in the GT, in other words the GFC was a text book Keynesian financial crisis. That you say the Austrians beat the so-called Keynesians in predicting the credit crisis says more about the latter’s misunderstanding of what Keynes wrote than the man himself.
Andrew Reynolds@#10 said:
Well if you overdose on stimulants and your heart stops then you might appreciate it if the doctor administers a stimulant to get your heart started again. Just so long as he does not prolong and increase the dose.
Like I said, the Austrians had a reasonably good understanding of the (financial) cases of the crisis, the Keynsians were better at the (fiscal) cures.
Having said that I would largely agree with the spirit of Pr Q’s post, which is that ideological economists such as Austrians and Marxists are not real strong on either building rigorous theoretical models or subjecting hypotheses to econometric testing. I would defer to Chicago or Cambridge for that kind of action.
@sdfc
Read Peter Schiff’s (an Austrian) Crash Proof (penned 06) and all his articles
+ CNN, FOX, CNBC clips on YouTube. Compare this to a Keynesian like Krugman or Reich or monetarist like Friedman or Bernanke. Schiff and other Austrians give details and lay out how the GFC is going to go down.
A big problem with Austrians is that they tend to discuss contemporary economic activity in terms of vague abstract generalities which are hard to concretise as institutional operations. Which in turn makes them hard to empirically test.
But they are on the right track when they go the Fed for its loose money policies. And they are rightly suspicious of highly-leveraged firms.
Damien
The Austrians didn’t have a mortgage (ha ha) on forecasting the financial crisis. Anyone familiar with financial market instability, the dangers of inappropriate interest rate settings and high private debt levels would have been uneasy about the growing threat. Unfortunately the mainstream basically ignored the danger signals, because after all this time was different.
While I have a lot of sympathy with Austrian concerns of the dangers of credit booms, their prescription once the bubble burst is a recipe for disaster, deflation is a killer in economies with sophisticated financial markets and high levels of private debt.
“Jack,
A quote from a recent “Daily Kos” piece sums up Austrian (Hayekian, not the Rothbardian) monetary policy quite well, I think…”
Why this nonsense about “Hayekian not Rothbardian? Andrew? The comment applies to both.
@Jack Strocchi
For once I agree with Jack
“But they are on the right track when they go the Fed for its loose money policies. And they are rightly suspicious of highly-leveraged firms.”
I am deeply suspicious of the feds loose monetary policy in the build up to the GFC and the emphasis on keeping interest rates artificially low as well. Greenspans crime – overemphasis on artificial monetary values as policy.
“Steve Keen, impossible to classify.”
He is a very vocal post-Keynesian. He discusses “Austrian” economics in Debunking Economics and, rightly, rejects it in favour of, you guessed it, post-Keynesianism…
As Steve Keen notes, “Austrian” economics is “an alternative way to ideologically support a capitalist economy . . . If neoclassical economics becomes untenable for any reason, the Austrians are well placed to provide an alternative religion for believers in the primacy of the market over all other forms of social organisation.” (Debunking Economics, p. 304)
I think the best comment on “Austrian” economics has to be post-Keynesian Paul Davidson’s article “THE ECONOMICS OF IGNORANCE OR IGNORANCE OF ECONOMICS?”
http://archives.econ.utah.edu/archives/pkt/2001m02/msg00014.htm
Also, as another post-Keynesian economist notes, this, the “Austrian” theory of the business cycle, “not only proved to be vulnerable to the Cambridge capital critique . . . , but also appeared to reply upon concepts of equilibrium (the ‘natural rate of interest’, for example) that were inconsistent with the broader principles of Austrian economic theory.” (J.E. King, A history of post Keynesian economics since 1936, p. 230)
And that is very true, given that on-one forces banks to create credit! So the “Austrian” theory of crisis amounts to suggesting that everything would be fine if capitalist banks did not act like, well, capitalists! As if…
Interestingly, von Hayek admitted in response to Sraffa that his theory was based on equilibrium analysis (the “natural rate” of interest and all that). Sraffa replied:
“only under conditions of equilibrium would there be a single rate, and that when saving was in progress there would be at any one moment be many ‘natural’ rates, possibly as many as there are commodities; so that it would be not merely difficult in practice, but altogether inconceivable, that the money rate would be equal to ‘the’ natural rate . . . Dr. Hayek now acknowledges the multiplicity of the ‘natural’ rates, but he has nothing more to say on this specific point than that they ‘all would be equilibrium rates.’ The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates.” (“A Rejoinder,” pp. 249-251, Op. Cit., Vol. 42, No. 166, p. 251)
Now-a-days, “Austrians” like to present themselves as rejecting “equilibrium” as a meaningless concept — shame their business cycle theory is rooted in it! Nor do you see “Austrians” mention that von Hayek lost the debates of the 1930s, rarely mentioning how Sraffa and Kaldor (an ex-student) refuted his arguments (Kaldor did so twice, making von Hayek rewrite his theory twice as a result).
All in all, I would recommend post-Keynesian thought — much superior to “Austrian” pro-capitalist ideology and apologetics masquerading as economics.
Austrians dont hold exclusivity over suspicion of high leverage – it’s just common sense
“Trying to cure chemotherapy with more cancer.” Does this have any meaning?
The subtleties of East Asian economic policies are too much to fathom… low taxes and extensive intervention? How to deal with such a perplexing contradiction?? Time to reach for the Too Hard Basket? But Lo! the Pioneer Fund to the rescue. Now I understand, the policies don’t actually matter, it’s the racial superiority that explains it all! With a population full of wily orientals, how could any country fail to succeed? Armed with this discovery we can jettison development economics as an exercise in politically-correct futility. Obviously Africa’s wasting its time with a population full of low-IQ blacks and should just give up now.
So, here is the problem with judging a school of thought based on one conference. It clearly leads you to make hollow snap judgement that both miss the point, and attract the piling on of even greater fools. So, just to take one example: our friend who snickers at overcoats, would you please google “broken window fallacy” before you post elsewhere?
As for yourself, John, consider that those Keynsians who have been “do[ing] some real economics are fully convinced that what is common sense at the individual economic level must be totally inverted at the macro level. If a friend came to you with too much credit card debt and lousy assets, would you encourage him to go borrow and consume some more so that his flow (read GDP) metrics would perk up? Of course not. Yet thus is the very basis of Keynsianism.
To be frank, all Keynesianism has going for it is that it recommends to those who commandeer the whole economy from their lofty post in the halls of government that this approach is actually the best for all their subjects. A comfy, if self-serving, fantasy. And look where it has got us.
But one can. It’s no good having the best possible theory of knowledge if you don’t actually know anything.
But have you seen Steve Keens essays. I was reading one yesterday. Excellent epistemology, despite his anti-Austrian starting point. I think its pertinent to mention this essay because of the topic of epistemology. To me this essay is the scientific method at work. So I can let the leftist and anti-Austrian background slide. Because this is just great stuff.
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
“sad”
I think its very doubtful that I could get Nick to expand on this. But Keen is unorthodox enough to be comfortable arguing his case I would suspect.
“Austrian economics” will naturally be preoccupied with epistemology and methodology; it got its name during the “methodenstreit” of the late 19th century when Schmoller wanted to insult Menger by comparing him to the backwardness of Hapsburg Austria. Interestingly, at that time Menger’s “Austrian school” was notable for its insistence that economics could only be done by building mathematical theories based on a priori axioms. Today it has morphed away from its earlier preoccupation, replacing mathematical axioms with moralistic (“Natural Liberty”) axioms. it has basically transitioned from a semi-serious approach to social science to a quasi-religious approach to social ethics (Thou Shalt Not Payeth Taxes Without Whining Like a Baby), and has been taken over by political ideologues of the teabagging variety – to the consternation of the few remaining serious self-identifying Austrian economists.
Doesn’t Austrian economics suffer from the stopped clock syndrome: right twice a day but not much practical use at other times? Austrian predictions of financial crisis would need to reliably alternate with predictions of good economic conditions to mean a lot.
Goodness those are great posts Gerard. I disagree entirely. But there is no denying your posting quality.
Where do I disagree? Well I don’t know if there is anyone championing “natural liberty”. I think you would be after “natural law” and “natural justice”. Both of which I think are valid pre-occupations. In order to undermine them one has to throw a Hume-nuke at them. That is to say, lift the proof-bar beyond what anyone could plausibly jump over.
The problem with being flippant about epistemology and methodology is that what happens if there is a disagreement. Me and Nick disagree on just about everything? How do we sort it out what is right and what is wrong? I’m right and Nick is wrong, and I know why. But what about Nick? How does he sort it out?
Well it all comes down to epistemology/methodology. One cannot rely on resumes, qualifications, high-IQ and personal sharpness alone. Because when it comes down to it, without good methodology the smarter man is also smarter at stooging himself.
ProfQ,
Ah, my partner frequently tells me that I am misunderstood because people think I’m saying the opposite of what I mean. So I’ll just go a little feral and recall the definition of ‘expertise’: “knowing more and more about less and less until one knows everything about nothing”.
Indeed, perhaps if one does have just enough epistemology and methodology, one might come to the frightening conclusion that, in fact, one knows nothing at all. Is economics in any better epistemological state than string theory ?
However, I am unfazed, I know that if all else fails, I can go out and buy a new overcoat to replace the one that has worn out, and thereby ruin the world economy. Just don’t mention the new car that I may also have to purchase. But rest assured that I will never, ever replace my broken window.
Keynes hit the nail on head in saying that the master economist must touch the abstract and concrete in the same flight of thought. Theorising and meta-theorising are indiespensible, but pointless unless they have implications for some concrete diagnostic or policy problem. There’s nothing more tedious than a ‘methodology’ seminar where the speaker doesn’t trouble to give even one example of how we would ask or answer a concrete economic question differently on the basis of his elegantly defended methodological position.
Over-theorising is the curse of the “social sciences”. I think part of the cure is to recognise that we are dealing with things too complex and varying to be encompassed in any formal models we can yet build, and that therefore explanations have to well-grounded in particular circumstances – to do history rather than abstract science. There is no good reason to believe that this GFC necessarily had the same origins as previous GFCs. Or that the next will have the same origins. That some marxists predicted the GFC no more validates their general framework than similar predications validate their general framework.
Peter T
Financial crises across time are almost entirely due to the same underlying reasons. Easy money, sense of euphoria, facilitated by a profit seeking financial sector. This process pumps private sector debt to extreme levels.
Once the bubble ihas popped all these problems come home to roost, leaving financial sector balance sheets choked with bad debts. If there has been a financial crisis that has followed a different path I would be very interested to know when.
Freelander,
You seem to have a problem with similes. Perhaps some thought and checking a dictionary would assist.
@Graeme Bird
You need bybrids like me Birdie and Austrianism needs to be taken somewhat more seriously than it is for its focus on credit markets that are maladjusted….and the role of the central bank in that maladjustment…ask Greenspan who fuelled the GFC.
No he was not the cause…poor regulation and mad beliefs was the cause (where the hell were the revisionist economists in treasuries – it would really help if they actually employed people who could analyse the past and see where they went wrong – rather than zombies who follow their own current fad outlooks)
…but Greenspan had way too much power to add to the fire….and in this the Austrians are worth lisetning too.
And Greenspan exercised that power because he thought low interest rates was another word for god. He was wrong and he couldnt read the market (not really that good for an economist). Im sure he is feeling it now.
No-one wants to interview Greenspan. Not even Murdoch. Its as if he has disappeared.
sdfc
Only if you look at closely-defined bubbles (eg tulips, Law’s venture, the South Sea Company). There are other sorts of financial crisis.
Have a look at 13th and 17th century financial crises (resulting in state bankruptcies in England, France, Spain and elsewhere), which seem to have been driven by a mismatch between social expectations and administrative powers – I don’t think private sector debt was an issue, but public sector debt was.
I also don’t think the financial sector played as large a role in 19th century crises as in 20th/21st century ones.
Finally, does your paradigm apply to the Asian banking crisis? Or to the US S&L debacle?
sdfc,
That sounds like a doctrinaire Austrian explanation – add in that the “easy money” is government produced money and you are with Hayek. If you say it is bank-credit money you are there with Rothbard.
.
To be a little more helpful to Freelander above – that is why “curing” a bust with easy credit is like curing chemotherapy with more cancer – the bust is the natural cure for the easy money induced boom. The solution is not to stop the bust, but instead not to have the boom (financed by such things as government (fn1) produced money) in the first place.
.
(or, for the Rothbardians, bank-produced money)
What’s wrong with Austrian Economics?
Has morphed into a quasi-religious sect with one commandment:
“Thou Shalt Not Payeth Taxes Without Whining Like a Baby”
Gerard, March 2010,
Good one.
@Andrew Reynolds
“curing chemotherapy” Isn’t this meaningless? Isn’t chemotherapy something not in need of a cure and not capable of being ‘cured’ anyway?
“Trying to cure a recession with more cheap credit”
First, not all recessions are the result of cheap credit. Even when they are, the reversal and change in optimism (the bust following a cheap credit induced boom) reduces the willingness to lend and borrow. One way to counteract this is to respond with a loosening of monetary policy. [By analogy, while putting the brakes on when the vehicle is going too fast, putting the brakes on when the vehicle is going to slowly is not to be recommended.] Personally, I think monetary policy is overused as an instrument, and loosening (and tightening) can be over done. However, not having the responsibility of making those decisions that is easy to say. And staring at the downside of not loosening enough, deciding what is best can not be an easy task for those who do decide. (Except for someone like Greenspan who was a total looney who benefited from the peace of mind that comprehensive delusion provides.) The RBA does a very good job, when compared with the Reserve Bank of the miracle economy across the Tasman and the Fed Reserve in the USA.
Re: Austrian Economics. I’m afraid I have to agree with Ernestine and Gerard, and JQ.
We would have to know what you mean by “monetary policy”. This is what good methodology is about. Defining things really well. Myself I never use the phrase “monetary policy” to mean subsidies to the banks. To me monetary policy consists of new cash creation via debt retirement, and the use of an increasing reserve asset ratio. Its a fact that this is the quickest, easiest, and really the only effective way to boost business spending. Its not as if you have the choice of this or should you go fiscal. No evidence exists that deficit spending increases business-to-business spending, independent of monetary easing.
If anyone has a belief that fiscal splurging can increase business-to-business spending just keep repeating to yourself “Where is the money coming from?” until such time as this belief goes away.
“sdfc,
That sounds like a doctrinaire Austrian explanation – add in that the “easy money” is government produced money and you are with Hayek. If you say it is bank-credit money you are there with Rothbard.”
Completely erroneous distinction. Even if you were right in their original characterisation, the fact that these days reserves can get as low as 3% of M1, proves that the private banks are in the drivers seat. But the fact is that central bankers are themselves creatures of the banking industry. So this public private distinction has little validity now if it ever did have some.
@Ernestine Gross
Good one Ernestine (Gerard March 2010).
Perhaps the question should be “whats wrong with economics in private universities?”
The Department of Economics and Policy Studies at the University of Notre Dame has been officially dissolved.
So much for academic freedom in the modern private university. JQ – better start taking enrolments for Policy101 here. The future of economics and government policy may depend on it.
I find it hard to believe that most economists just didn’t see the GFC coming. It wouldn’t have been unreasonable to expect that they would have been aware that the financial system was on an unsustainable path leading to the GFC. Of course there are few exceptions including JQ, Roubini and just about the whole Austrian economic fraternity. I make this point not to claim the high ground but to point out that there are some positive aspects to the methodological and epistemological approach of the Austrians
So why did most of these economist not ring the alarm bells ? Perhaps the economists found it more beneficial financially and personally to encourage the boom rather than send out messages of economic doom.
This leads me to the view that all the financial geniuses, bankers, brokers etc. wanted to do all the deals and make a lot of money. They didn’t want governments and regulators to change “favorable regulations” that allowed them to do deals. So they spent a lot of money lobbying governments, being charitable and paying generous consultancy fees. The people were told everything was great and felt secure that the economist and government had achieved consensus. Life was good and big business was happy. The EMH had prevailed.
The economist had consulted their “mathematical” side and the EMH was the holy grail. The economist were seduced by the purity of the mathematical model and forgot to measure it against reality. Austrians (and perhaps a few others) are good at envisaging reality and realised the unrealistic assumptions made the maths work, but not the real world.
So, I am not saying that mathematics is not useful in economics. In fact mathematics in economics has a lot to do with internal competition amongst economists. It also is used IMHO to convert the ideology into “science” on occasion. The latter point is bought out in The General Theory, by Keynes. Keynes was a government man. His theory advocated more spending, inflation and deficits which was already being practiced by governments around the world to this day. Mr Keynes was human and had aspiration of his own self importance. His model was based on big government centered policy. The government is implicit in this models success. Keynes won the day…. sadly. He tapped into the needs of the government.
Perhaps the Austrians have failed to keep up with mainstream economics in regards to mathematics, but we shouldn’t forget that mathematical economics came to the defence of “Laissez faire” in the most un-Austrian sense of the word. It looks to me like the role mathematics in economics is poorly understood. The Austrians understand this. They may not have all the answers but should be given more credit for their meta-economics.
One further point; The Austrians don’t like big government. Given that in the case of the GFC the government had always had responsibility for regulation of the financail industry and failed in its duty of care to the people, to protect their money, the government should take responsibility for the GFC. Yes the “bad bankers” did it, but so did the huge army of crony/gullible politicians and under the watch of our great big bureaucracy . The Austrians understand the nature of big government and its faults thus advocating lesser government. Mathematics can never contribute to this idea. That of course is difficult to comprehend for those who see big goverment as the driver of our economy and central to the citizens life.
I was on Catallaxy pointing out as often as I could that our financial system resembled an elephant balancing on its trunk. Even after the fact the neoclassicals could not bring themselves to believe that there was something fundamentally wrong with our banking system and our capital markets. They seemed to want to put it all down to the banks being armtwisted into loaning poor people money.
But a thousand years of fractional reserve is just an endless catalogue of banking crises. And banking crisis induced recessions. The specifics of the regulations of the day don’t mean that much in the face of a monetary system set up for free-fall. The one regulation that matters more than all the others put together is the reserve asset ratio. Once we lose that we have a banking system totally different than what had been before. We have a different relationship between the finance sector and the public.
Ernestine,
That really is beneath you. To voice an opinion that too much of our spending is State directed and not enough is determined by the individual should not be something that attracts such an unreasoned response from someone with pretensions to being a serious economist – that should be left to the polemicists on this forum.
If there are people here who “whine like a baby” perhaps you can look at those who constantly carp about how generous they can be – as long as they use other people’s wealth to be generous with.
.
Freelander,
Perhaps you also need to acquire a sense of humour – it makes the meaning a lot clearer. To put it rhetorically – why would you “cure” chemotherapy? The answer is plain – you would not. As you seem determined not to even try to understand I will try to make it clearer for you, using the same analogy.
As an aside, perhaps you should work out that reading on this topic (Austrian Economics and the ABCT) may actually increase your understanding. Even if you do not agree with it, your arguments may actually then make some sense. At the moment, they do not.
.
In this analogy, the “disease” is the boom, not the bust. The cause of that disease is overly cheap money, driving over-spending in goods and investments that, but for the cheap money, would not have attracted funds. Poor long-term decisions are made by people because the “signals” being fed to the people making the decisions on expediture are that money is cheap and so spending and investment decsions can be made on poor bases – that money is going to continue to be cheap.
The bad investment decisions and over-purchasing that result diminish wealth – to the point where, once the easy money conditions revert to a more normal situation (or even past that, to make up for the previously easy money) a recession results. This exposes the poor decisions for what they were, sending people and businesses bankrupt, meaning those resources get re-allocated.
To try to “cure” this with easy money makes no sense – all it does is delay the “cure”, which is the re-allocation of those resources into actual productive purposes, delaying the recovery.
I hope that was plain enough for you, but if you need it in words of one syllable I might have time to do it one day.
@Andrew Reynolds
I’m new to Austrian economics. Has it been tried anywhere of note? Have it’s assumptions about “over-spending” been tested? I’m genuinely curious to know. It sounds logical that if money is too cheap then there could be wasteful spending, but the destruction that would ensue with the “cure” and resulting re-allocation is going to be painful for a lot of people who didn’t have any role in making these decisions. There seems to be a touch of sadistic puritanism in this idea.
@Andre
Andre
You say “I find it hard to believe that most economists just didn’t see the GFC coming. ”
You have not researched hard enough. It may not have been printed in Murdoch news but beleive me – quite a few saw it coming. But this is old ground and I dont want to revisit it – because they were howled down by the people who didnt want to see it coming and who were apparently eminently more newsworthy.
Just like 1929.
You try and caution a stampeding herd Andre and see how far you get. Its not the good economists at fault but the self interested groups and individuals for obscuring (quite deliberately) the cautions.
Michael,
I am not at PhD level on this school – I have an extensive background in banking and risk, not economics. I can only comment on what I have seen and, in recent years, read on this.
What is now called Austrian economics is, in many ways, a development of the “old” (pre_Keynes) classical school so to answer your question on whether it has been used, the answer is yes – extensively.
As for “sadistic puritanism” to me the sadism comes from ideas that perpetuate the idea that you can have people doing non-productive (i.e. useless) stuff when they would prefer to be doing something useful. The faster they can find useful employment the better. If a government is over-taxing productive activities to fund useless ones, then jobs will follow the money – meaning useful employment is hurt to fund useless stuff. Surely that is the real “sadistic puritanism” here.
If people choose to do whatever they want using their own funds and chasing their own dreams then I have no problem with that at all and would encourage them to do so. As soon as a government starts spending wealth that they have acquired on a compulsory basis then I expect that this should be spent for mutual benefit. I do not count digging a hole to fill it back in again as of any benefit whatsoever.
This is a simile: “He was like an accountant who couldn’t do basic arithmetic.”
This is not a simile: “Trying to cure chemotherapy with more cancer.” Nothing is being compared. “Cure chemotherapy” is simply an error; probably it was a selection error. Perhaps the person who wrote it was trying to be clever or profound (or you suggest trying to be funny)? Maybe all of these? When groping for a medically related word denoting something capable of being cured, they came up short.
When so frequently in error, I am amused by your propensity to ‘correct’ imagined mistakes of others.
Austrian economics, nowadays, whatever its origins, seems to be a refuge for those who wish to replace evidence and crisp argument with woolly platitudes and hand waving, and, apparently, meaningless strings of words.