There was a time not too long ago, when someone said the word “Austrian”, scenes of the Alps and “The Sound of Music” would come to mind. Maybe Arnold Schwarzenegger.
No longer. Today, many who follow the economy and markets understand when one mentions “Austrian” that one is speaking of the economics of Ludwig von Mises and Friedrich Hayek. They likely don’t understand much about Austrian economics, but at least they can find it on the map (so to speak).
In a Bloomberg editorial, Josh Barro does his best to denigrate Austrian economics. That his attempt is so feeble and misinformed suggests the worth of his critique. His own words damn him and his mainstream colleagues.
He states that conservatives have now embraced Austrian economics:
These days, [conservatives] especially love Austrian economists, such as Friedrich Hayek and Ludwig von Mises.
Other than Ron Paul, who I would hardly call a “conservative” by today’s definition of the term, I don’t know of any conservative politician, commentator, or pundit who self describes himself as Austrian and also embraces this school through all of its teachings and conclusions.
Who besides Ron Paul calls for an end to the Federal Reserve? Who calls for competition in currency and free markets in banking and credit? Who looks to get government out of the banking and credit system? Who else calls for allowing markets to clear in order that prices can properly settle and the economy can then build on a solid foundation? Who else suggests that the bust must take its course?
These are all actions that are advocated if one follows Austrian economic principles to conclusion.
Is it Romney? Rush Limbaugh? Sean Hannity? Newt Gingrich? Rick Santorum? Jeb Bush? Where are all of these “conservatives” lining up behind the Austrian flag, as Barro suggests?
There are two big reasons today's right loves the Austrians. One is that Austrian economists reject empirical analysis, and instead believe that you can reach conclusions about correct economic policies from a priori principles. It's philosophy dressed up as economics; with the Austrians, there is never any risk that real-world events will interfere with your ideology.
Even if you accept this point, why is it applicable to the right? Only the left conducts empirical analysis?
Austrian economists do not reject empirical analysis. They do reject mathematical models as being able to predict human action – action subject to countless individual subjective decisions. In any case, economics IS philosophy, in the sense that it is more based on human interaction than it is on mathematically provable science.
Finally, real world events can interfere with Austrian positions. The problem for Barro is that real world events have proven what many Austrians (and few others of any other school) predicted several years ago – the policies of the government and especially the Federal Reserve were creating a bubble in housing that would burst, and this one would be large enough that it would put the entire fractional-reserve monopoly banking system at risk. Real world events have only demonstrated the validity of this school of economics. No other school predicted this outcome in a manner consistent with the fundamental principles of the respective school.
The other big advantage is that the main Austrian thinkers, Friedrich Hayek and Ludwig von Mises, are dead, so they can't argue with your interpretation of their work.
As are Keynes and Friedman. However, in all cases, there are scholars today advancing the work of these pillars of their respective economic theories. Barro could attempt to stand up to anyone of many Austrian scholars – Salerno, North, Thornton, Wenzel, etc.
The Freidmanite monetarists have been silent since 2008 – there was nothing in their textbooks that suggested the possibility of the calamity we now live in. The Fed more than tripled its balance sheet in less than two years. Where in monetarist theory was it suggested that this was possible or would ever even be necessary in a world of centrally planned and managed money? Where are the monetarist solutions to the current problem? The best anyone can say is that Bernanke is flying blind, trying new and untested (and un-dreamt of) policies. The only solution is to print more or twist more.
The Keynesians can only offer that deficits of $1.3 trillion per year are not enough (remember when a $50 billion deficits was considered irresponsible?). The only solution they offer is ever larger deficits. Academicians and intellectuals may take comfort in such proposals, but people living in the real world realize the folly of such a lifestyle.
Meanwhile, Austrian economists continue to offer real world proposals to today’s real world problems. Prices must be allowed to settle, markets must be left free to clear, central banks and central governments must stop meddling in the economy. Until this occurs, we will continue from bust to bust, with each subsequent crisis more damaging than the last.
And that is how so many on the right have pulled off the remarkable feat of going through the 2008 crisis and its aftermath without revisiting any of their policy views.
Most on the right have NOT revisited their policy views, but then again most on the right are not Austrians. As for the Austrians, there is no need to revisit their policy views – everything has played out as the Austrians have predicted, and the policy prescriptions of the Austrians have been ignored. There is nothing for the Austrians to revisit.
Mine have certainly changed a lot -- I have a much different outlook on monetary policy and bank regulation than I did four years ago.
I have no idea what Barro’s views were four years ago, nor do I know what his views are today. Whatever they case, it is clear they were not Austrian then, and are not Austrian today. At least he admits that his views have changed in the last four years. For this he is further along than many other mainstream economists and commentators. However, he seems to have gone from one wrongheaded economic school to another. Change he can believe in, I guess.
But if you have Mises at your side, you "know" that empirical findings have no bearing on what policy should be.
Again, empirical findings have proven the Austrian theory of the business cycle. What more evidence does Barro require?
Leaning on Austrian thinkers is a great way to avoid further thinking.
When a theory works, is outlined beforehand, with events proving out as predicted…what should one who follows Austrian economics do? Throw out the theory?
That Austrians are even discussed in the mainstream is a significant improvement of the situation even five years ago. How can the mainstream ignore it? The power of the internet has offered the opportunity for anyone who desires it to get an understanding of the true picture of economics as opposed to the false view of the Keynesians and Monetarists. The internet offers many outlets to learn about Austrian economics. Too many people are discovering this truth via non-traditional outlets for the Austrian school to remain ignored by the mainstream.
However, it speaks to the pathetic nature of the preparedness of the critics of the Austrian school when it is columns such as this one that are paraded out as weapons of destruction. An ounce of understanding of the Austrian school is enough to realize the holes in the column. Two ounces of critical thinking will destroy the house of cards being built by critics such as Barro.
The Austrian school and the Austrian theory of the business cycle are making headway, else such nonsensical columns would not be written; the school would remain ignored. That such columns are written is a testimony to the effectiveness of the theory as well as to the efforts of the several vocal proponents of this school of economic thought.