Wednesday, February 3, 2010

We're All Austrians Now...Or Not

When I linked the Keynes vs. Hayek rap video the other day, I mentioned that I wasn't convinced this was really an accurate description of the debate playing out in the country as a whole. In fact, I don't think this is an accurate description for the debate that is playing out in the United States Congress.

It is the case the Keynes has received a lot of attention lately due to the debate over the need for, and effectiveness of, fiscal stimulus in response to the economic crisis, but Hayek simply hasn't gotten the same visibility.

Freidrich August Hayek was an economist affiliated with what is now known as the Austrian School. Some of his major work was on business cycles, the booms and busts that economies experience. Here is a description of one of his insights (from the Library of Economics and Liberty):
One cause, he said, was increases in the money supply by the central bank. Such increases, he argued in Prices and Production, would drive down interest rates, making credit artificially cheap. Businessmen would then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market....he concluded, artificially low interest rates not only cause investment to be artificially high, but also cause “malinvestment”—too much investment in long-term projects relative to short-term ones, and the boom turns into a bust. Hayek saw the bust as a healthy and necessary readjustment. The way to avoid the busts, he argued, is to avoid the booms that cause them.
Sound familiar? You would think with an insight that so nearly describes our recent history, lawmakers, and everybody else, would be beating down the door to the Austrian School, and that this would show up in their decision making.

Well, the Senate recently had a chance to demonstrate whether or not they had made such a conversion with the confirmation vote on the guy who exerts an enormous amount of control on our money supply, Ben Bernanke. The result? Sean Scallon at the @TAC blog said it best:

Yes the two political parties may have bitter disagreements when it comes to abortion, or climate change, or health care reform, but when it comes to benefiting themselves and the establishment they serve they do know how to come together for a common purpose.

I mean you had Sen Thad Cochran, Republican of Mississippi and Charlie Schumer of New York, as different as two men can possibly be from two completely different places and backgrounds, and yet Ben Bernanke brought them together. Not only can he drop money from out of the sky, not only is he’s Time’s Man of the Year, he’s also a peacemaker as well. Perhaps he should nominated for a Nobel Peace Prize as well. Ain’t he swell?

So, rumors of a Hayekian awakening are, I fear, greatly exaggerated. We now return you to your regularly scheduled boom and bust cycle already in progress.


Anonymous said...

I saw and shared the video. EXCELLENT production. Concisely and accurately stated the arguments of both sides. Perhaps you expect too much too soon Jeremy. Politicians are natural born FOLLOWERS, not leaders for the most part. With the exception of guys like Ron Paul of course, who has been Hayekian/Misesian(Hayek's mentor)/Austrian in his economic point of view since before he came to Congress the first time, some 35 yrs ago.

However, there HAS been a great awakeing among the people. As a Mises/Hayek fan myself of almost 30 years, we find more books, more scholars, more institutions, including CATO, Mises Inst, and more that follow the Austrian school. And as the Keynesian debacle continues to unfold, more will come to see the bankruptcy of the Keynesian approach, and at least be receptive to the ideas that I, Ron Paul, and a whole host of others have been promoting for decades. The first revolution must occur in the hearts and minds of men and women. Political success by necessity will lag far behind, until a critical mass is achieved.

And THAT is what I have been working half my life for. Most encouraging is the number of young people who "get it," at least a decade sooner in their lives than I did in mine. An indication of how far we have come is the level of support in congress for HR1207, the Audit the FED bill, which had more than 317 sponsors. A few years ago, similar bills introduced by Ron Paul would often die for lack of sponsors. When the people lead, politicians will follow, or be replaced.

Ken Van Doren

Jeremy R. Shown said...


Thanks for the thoughtful comment. I am heartened by your optimism at the prospects for change.

Perhaps I do expect too much too soon, but is seems that most of the Austrians I know expect even more.

I do think Bernanke's reappointment is symptomatic of just how entrenched the current system is.

J. Strupp said...

I think Keynes' influence tends to be a bit overstated on this blog at times. While the teachings of Keynes have become popular in the last few years, Keynesians were pretty much left in the wilderness for almost the entirety of the 20th century (excluding the 30's and 40's)

Neoclassicals, who have preached lassie faire capitalism; efficient market hypothesis mumbo jumbo and deregulation of financial markets, have dominated the American economic landscape for the rest of the time.

Now, like the 1930's, the only advice neoclassicals and Austrians seem to have for the fallout in global demand is to allow M & V to collapse into a deflationary spiral. The same spiral that left ten of millions of Americans on the streets almost a century ago. Thankfully, this is not the policy we chose to adhere to over the last few years.

There's no question that we need to identify and limit boom cycles cycles, but liquidationism is not the answer, once a boom has busted. M matters. V matters, especially in a liquidity trap.

Guys like Ron Paul and Jim Bunning are only seeking to repeat the same mistakes Mellon and Hoover made over a century ago.

Jeremy R. Shown said...

Excellent comment, and a lot to unpack. I'll try to be brief.

I think it would be hard to overstate Keynes' influence int he 20th century. Even thinkers (economist or otherwise) that might not fit the exact definition of a Keynesian have been influenced by his thought (or at least the version that was popularized through IS-LM).

True Keynes fell out of fashion, but wasn't that more due to the stagflation of the 70's?

I do believe a Keynesian resurgence, of sorts, is underway. Both Bernanke and CEA Chair Romer are students of the response to the Great Depression, so that has to count for something. Also, the debate over stimulus seemed to be largely a discussion of Keynesian ideas, including how large a multiplier there is to government spending.

On a historical side note, I read somewhere recently that Mellon didn't actually utter that famous liquidationist quote.

J. Strupp said...

I think it was Larry White who contends Mellon never said the quote you (and I) refer to. I think White wrote that Hoover made Mellon a scape goat by pinning that quote on him. Regardless, their actions spoke volumes.

I agree that Keynes' influence has always been front and center. I just wanted to highlight that the teachings of Keynes were not always taken as seriously as now (mostly due to rise of neoclassical economics) as well as the stagflation of the 70's.

Ironically, the 70's stagflation episode was the ultimate vindication of Keynesian theory in my opinion. Proof positive that the vicious upward spiral of inflation expectations through the wage/price relationship can detach from the real rate of inflation. Volcker broke the back of inflation expectations in the early 80's and we haven't looked back.

Derek said...

J Strupp,

There is absolutely nothing about the American economy that can be described as laissez-faire, unregulated, or unhampered. The mere mention of those words in the context of the American System is absurd on its face.
There is ample empirical and logical evidence that points to deflationary spirals and liquidity traps being figments of the imagination.
It seems, incredibly, that you are describing an alternate universe in which the Hoover administration didn't take unprecedented and radical steps regarding bust policy. By their own account, and the account of all honest poeple afterwards, they were the first to implement Keynesian policies. So extreme were the interventions into the economy that FDR's running mate called Hoover a Socialist, indeed FDR ran on a platform of fiscal responsibility, less spending, less intervention, and less socialism in order to differentiate himself from his interventionist opponent. The myth of the 'free marketeer' Hoover has been dead for a long time. FDR's cohorts would later freely admit that all they did was institutionalize and expand Hoover's New Deal.
Keynesianism (and its better looking but still ugly cousin supply side-ism) has never left the scene. What has the government done during every recession besides the 1980 recession? (Coincidentally when the Reagan admin allowed the economy to return to health unhindered) What did Nixon do? What did Bush do? Bush 2? Blackbush?
Stagflation finally put a face on the absurdity of Keynesianism; the Keynesians could not account for high inflation and unemployment at the same time. There is no vindication, only the fact that monetary and fiscal trickery will never win its war against reality and economic law.
It's no accident that Keynes merely wrote down what governments were already doing and dared to call it a treatise. General theory was written a full 7 years after Hoover had already implemented every last one of his policy recommendations.
Keynesians are NOT economists. They are political operatives, period.

Derek said...

The fact of the matter is that only the Austrian school remains as a school of economic thought. The rest are compartmentalized, lacking any business cycle explanation, are utterly uncomprehensive, use absurd mathematical models that in no way account for human behavior, and incredibly, ignore capital.
In a capitalist economy, a school of thought that ignores capital and its structure does not 'count' as economics.
Rather, they are nothing more than justifications and rationalizations for ever increasing government power. When the government fails at something, the solution is inevitably to give it More power and More money. Hence why Keynesians, monetarists, and all other manner of statists ignore human action and exist only to justify the concentration of power into government hands, because the consumer and individual is always too stupid and thus must be forced to comply. For his own good, of course.