John Aziz has thrown his hat into the ring of the recent spat prompted by Max Keiser’s stepping on the work of Ludwig von Mises. In his contribution, Aziz focuses on the Austrian’s lack of using empirical data to test and confirm theory, and he disagrees with this approach. This to me is reasonably well settled by Hayek’s lecture delivered on the occasion of his being awarded the Nobel Prize, and this issue is not the one I will address here.
Aziz uses as his main example of demonstrating this shortcoming is the fact that many Austrians predicted rapid and growing inflation in the aftermath of the Fed’s interventions, beginning especially in 2008, and yet this mass (or hyper) inflation has not yet occurred, and in fact inflation (as measured in prices) has stayed relatively benign:
…these predictive failures were symptomatic of deduction-oriented reasoning; Miseseans who forewarned of imminent hyperinflation over-focused on their deduction that a tripling of the monetary base would produce huge inflation, while ignoring the empirical reality of Japan, where a huge post-housing-bubble expansion of the monetary base produced no such huge inflation.
It is true, as Aziz points out – there were several prominent (and not so prominent) Austrians making this prediction – hyper-inflation is just around the corner. This is certainly not true of all of them – one example would be Dr. North. This critique of Aziz falls short – as some Austrians rightly recognized that inflation was not coming absent bank lending the fault cannot be in Austrians as a group or as a school.
The reason the Fed money printing has not resulted in inflation as some Austrians have warned has nothing to do with not looking at “the empirical reality of Japan”; instead, it has to do with not considering the reality of the banks holding this increased base money as excess reserves – the money created by the Fed has stayed with the Fed and has not been lent out by the banks. The significant monetary inflation actions taken by the Fed have certainly increased the supply of money; however the demand for money has fallen as well. Therefor the impact of prices as measured in dollars has stayed reasonably calm (this, of course, takes the government numbers as is – an assumption that many would consider not valid).
Many Austrians, Dr. North included, have regularly pointed this out. This “miss” by certain Austrians has nothing to do with ignoring empirical reality and everything to do with ignoring a factor in the deductive reasoning. The critique of Aziz misses the mark on this count as well – there is nothing in this “miss” that suggests a fault of Austrian Economics, but instead a fault of a complete application of factors in the analysis.
There is no shame in this – Human Action implies that we are, after all, only…human.