Let me first put some things out there. I have read two of Ron Paul's books. I have read a lot of Austrian literature and I am not ignorant to the points made in it. Let me also say that I respect Ron Paul. I do not think he is a racist, bigot, or anything some in the media have said. He is an honorable man that has stuck to his guns his entire life/career. That is honorable. He seems to be a good honest family man that has a great life.
However on economics he and his entire wing are wrong. Let me first sum up the two major points of Austrian economics and then I will begin with the rebuttal.
1. Math and statistics are useless in economics. According the Austrians we are all irrational creatures. We do not follow patterns. It is impossible to say what we are going to do and anyone who tries to predict human behaviors will fail. If bubbles do happen they are impossible to predict and if an economist gets this one right he might not get the next one right.
2. The government is the root of all evil in economics. When the government lowers interest rates, creates a stimulus, or really does anything it creates a bubble by raising investment.
Ok, now for the critiques:
1. These two views are hypocritical.
To accept that nobody else can make predictions using math and real world statistics, but you can say things using logic flies in the face of logic itself. Economic discoveries such as the Phillips Curve or recently the Leverage Cycle allow us to understand the underlying currents of economic activity and operate on the same principles as your logic, but unlike your logic it is based from trial in the real world and real markets.
2. The facts don't support the conclusions.
1. Math and statistics are useless in economics. According the Austrians we are all irrational creatures. We do not follow patterns. It is impossible to say what we are going to do and anyone who tries to predict human behaviors will fail. If bubbles do happen they are impossible to predict and if an economist gets this one right he might not get the next one right.
2. The government is the root of all evil in economics. When the government lowers interest rates, creates a stimulus, or really does anything it creates a bubble by raising investment.
Ok, now for the critiques:
1. These two views are hypocritical.
To accept that nobody else can make predictions using math and real world statistics, but you can say things using logic flies in the face of logic itself. Economic discoveries such as the Phillips Curve or recently the Leverage Cycle allow us to understand the underlying currents of economic activity and operate on the same principles as your logic, but unlike your logic it is based from trial in the real world and real markets.
2. The facts don't support the conclusions.
Now, if the data supported the conclusion that whenever interest rates are lowered a bubble is caused in a cyclical motion the Austrians would have something to brag about. Unfortunately, when we look at the data which to an Austrian is like light to a vampire we find something different. Milton Friedman, by far the biggest economist of the 20th century published a report that soundly showed the Austrian Business Cycle to be in correct. Crashes don't happen in a cyclical nature when the federal government eases up on the credit, but rather happens when a perfect storm of events produce the right atmosphere for a recession or a depression. During the recovery we've seen a tripling of the monetary base, but tiny inflation and a steady recovery.
3. Austrian Economics doesn't explain the fall off of demand during a recession. Krugman has a good article on this.
4. The government can act as a helping hand to the economy. Let me give you a metaphor for this one. Stimulus is like surgery. It can hurt to help create a crisis. I'm sure if you were healthy and were popped up on the table for a kidney transplant for no reason it would be no fun and could actually cause some major problems. In that way when Greenspan lowered the interest rate before the crash began the US economy underwent surgery when we were healthy which helped bring about the crisis. The Austrians are like skeptics who say that since medicine can hurt when used poorly it shouldn't be used at all. Today, Austrians have about as many real economists in their numbers in Universities as Marxists. I hope that proves a point.
5. One Neoclassical argument that I find tough to chew and can't really accept is their reason for why stimulus doesn't work. The Neoclassicals say that investors are rational and if they are given money by the government today they'll save it for when government takes it away tomorrow. I don't buy it, but I thought I'd mention it.
3. Austrian Economics doesn't explain the fall off of demand during a recession. Krugman has a good article on this.
4. The government can act as a helping hand to the economy. Let me give you a metaphor for this one. Stimulus is like surgery. It can hurt to help create a crisis. I'm sure if you were healthy and were popped up on the table for a kidney transplant for no reason it would be no fun and could actually cause some major problems. In that way when Greenspan lowered the interest rate before the crash began the US economy underwent surgery when we were healthy which helped bring about the crisis. The Austrians are like skeptics who say that since medicine can hurt when used poorly it shouldn't be used at all. Today, Austrians have about as many real economists in their numbers in Universities as Marxists. I hope that proves a point.
5. One Neoclassical argument that I find tough to chew and can't really accept is their reason for why stimulus doesn't work. The Neoclassicals say that investors are rational and if they are given money by the government today they'll save it for when government takes it away tomorrow. I don't buy it, but I thought I'd mention it.
"Math and statistics are useless in economics. According the Austrians we are all irrational creatures. We do not follow patterns. It is impossible to say what we are going to do and anyone who tries to predict human behaviors will fail. If bubbles do happen they are impossible to predict and if an economist gets this one right he might not get the next one right."
ReplyDeleteThis isn't the Austrian stance at all. It seems like you ignored what I said earlier.
Furthermore you defend yourself with Milton Friedman's disagreements with the Austrian Business Cycle Theory, and then go on to say "During the recovery we've seen a tripling of the monetary base, but tiny inflation and a steady recovery," yet this goes against Friedman's belief that "Inflation is always and everywhere a monetary phenomenon." Are you saying inflation isn't relative to money supply? Finally you back it up with Paul Krugman's argument - the same Krugman that pushed for a housing bubble to replace the dotcom bubble ten years ago. Krugman says there is only 1.5% annual inflation, and that is straight up bullshit. If we calculate inflation the way we did in the 1980s it would be close to 10%. Just look at food prices. And inflation would be even greater if the new cash wasn't sitting in the top banks' reserves. They aren't loaning it out. Additionally, they can take their 0.01% Fed funds and turn it around to buy treasury bonds instead of lending it out and make a bunch of money by doing absolutely nothing of benefit to society.
Government cannot help during a recession without interfering with the price system. Even non-Austrians admit Hayek's theories of price system revolutionized economics. Investment doesn't count for anything if it's artificial and there's no demand there.
I repeat from earlier, do some more reading. Check out "Human Action" by Mises first and we'll go from there. That will answer a lot of your questions on expectations, purposeful action, math, etc. and their relations to the Austrian school.
Let me go rebut:
ReplyDelete1. Austrians say that logic rather than numbers shows how economies work. Now, I have no problem with logic, but you must show that your logic AND your math work! If the theories you make don't apply to real life and the data then you are left in the lurch.
2. I do bounce between Keynesian and Neoclassical models quite often. I'd say that an answer lies between the two somewhere. Call me a hypocrite if you want to.
3. Austrian Economics was a great leap forward from Say's Law. It did show that depressions were possible and move away from that sort of wrong thinking. However, like Adam Smith, many of their ideas are now considered wrong by every right-minded economist. The only thing that has been taken away from Austrian Economics is that monetary stimulus CAN help in the creation of bubbles. It does not necessarily lead to a bubble. The facts show otherwise.
Some Austrians use math, all Austrians don't believe that aggregates and averages speak for mankind.
ReplyDeleteThe Chicago School and the Monetarists were birthed largely in opposition to the Keynesian school and as a reaction to the failures of Keynesian monetary policy to explain why expansionary monetary policy didn't lower unemployment in the long run and led to stagflation. The Monetarists and the Neoclassicals were both largely influenced by Hayek and Menger of the Austrian School. I don't see how you can be a Keynesian during recession time when these other schools saw Keynesian policy as antithetical to economic growth in the long-run. And every "right-minded" economist, huh? The Austrian School is considered heterodox thinking merely because it doesn't consider the study of human action to be empirically founded - the actions of humans are too complex for such a treatment because humans are not passive and non-adaptive subjects, and the scientific method of the natural sciences is not applicable to the social sciences. Contrary to your claims, the prominence of the Austrian School in academia and in the political sphere has only grown in the past few decades. I do believe that failures of Keynesianism and the Supply-Slide school have helped that. I do agree with you when you say other factors contribute to recessions and depressions. To deny so would be to stay ignorant of the natural world. But contrarily economic strain and fluctuations in prices can be traced back quite often to government policy, not only in the monetary sphere but regulatory, legal, and illegal!
Instead of just brushing Austrian economics aside when you've read a few Ron Paul books and some articles, I encourage you to read some of the landmark works - the ones that inspired Paul and Block but also a great deal of non-Austrians. I recommend starting from the beginning, with my three favorites. Carl Menger's "Principles of Economics" started it all, as well as Hayek's "The Road To Serfdom" and, again, Mises' "Human Action" - in that order.
Let me give you some numbers from a recent poll of economists done by Davis, Figgins, Hedengren, AND Klein. Here are some statistics:
ReplyDelete-Hayek gets a similar number of economists who respect him as Marx (216 to 225). Compare that to Friedman or Keynes (654 and 726) and you get the two main bodies of economics and the two minor ones. Oh, and Marx scored higher than Menger.
-None of the top Economic Journals are Austrian or feature Austrian writings.
-Only one of the blogs are Austrian.
Pat, you contradict yourself here for each point. You tell me that the Austrians are respected and then call them "hetrodox". You say that the picture is much wider than the Austrians say it is and "To deny so would be to stay ignorant of the natural world", but you then say it really is all the government's fault.
The reason I haven't read those texts themselves is that I've read books that sum up their work. I've read sections of the Road to Serfdom. I've read summaries of the points and I haven't accepted them. And having also read more modern texts I can see them as a stepping stone toward a grander more correct version of economic thought.
I agree with you that Keynes's work isn't a long term work, but it's not meant to be practiced in the long term. In the short term hi strategies can be used to bolster a sagging financial structure. Meanwhile I can agree with many of the things that the Monetarists say about long run monetary supplies.
Point to me where I said Austrians were respected. I said their gaining / growing in influence. Very different. You bring up Marx. I don't agree with Marx. But Marx changed the world. I own the Marx & Engels collection. I consistently see The Communist Manifesto and Road To Serfdom on lists of most influential works of all time. They both deserve it.
ReplyDeleteBut don't read texts that summarize the work of other texts. Don't read sections. That defeats the purpose. Go into it with a neutral standpoint; you seem all too eager to get swept up in mainstream thinking without opening up a whole bag of worms. I disagreed fervently with the Monetarists until I read their work. Now I base a chunk of my arguments on the Long Run Phillips Curve. I agreed fervently with Keynes until I understood the long-run consequences of monetary and fiscal injections. Now I oppose those stimulus, even if they do work on the short-run, because they make the economic foundation weaker in the long run. What's mainstream isn't always right. Slavery was once mainstream and anyone who wanted to abolish was deemed radical. On the flip side, I'm not a fan of the Austrian School because it's NOT mainstream. I'm a fan of it because I can't wrap my head around why anyone thinks we can measure happiness or choices or intentions and the complexity of the human mind within the complexity and diversity of the human race with aggregates and averages. It's dehumanizing and it ignores a century of psychology and sociology. I believe economic history can loosely be used to theorize trends, but not to precision. I believe math is useful in comparing and contrasting non-human utilities in the market, such as the relationships between interest rates and money supply and between unemployment and inflation. But measuring human satisfaction with cardinal utility ignores the very same psychological framework that has you and I arguing about this. I shop at Urban Outfitters, you don't. I buy hip hop music, you don't. We are so different in our make-up that we cannot even comprehend!
On a final note, you acknowledge Keynes' work isn't long-term work. Then you say short-term Keynesianism can still help the economy. Everything matters in the long-run! The Monetarists showed that Keynesian policy, albeit beneficial in the short-run, makes things worse in the long-run! And that's all that matters. If I have unprotected sex now, it's going to feel great in the short-run. Hormones will flow through my body in an awesome wave, and my confidence may get a boost as well. But in the long-run, I might have an STD or she might be pregnant. Suddenly, my short-term fix doesn't seem like such a good idea.