• Is Austrianism Serious?

    I am merely an incidental economist.  In my education and career as an antitrust and patent lawyer, I have been formally trained in and had occasion to apply as much microeconomics and econometrics as is required to understand applied theory of competition and property.  But in macroeconomics, I am as susceptible to enthusiasm and blindness as any autodidact.

    Knowing this, I tend to seek and and rely on the consensus of experts.  But unlike, say, in evolutionary biology and climatology, the fundamental controversies in macro do not seem to be largely manufactured by interests and cranks.  The efficient-markets hypothesis, for example, appears to be genuinely and increasingly contested among serious scholars.  Yet should not the recent success of monetary and fiscal intervention in staving off another Great Depression have cemented the Keynesian portion of the neoclassical synthesis?

    Lately, I’ve become aware of a number of self-styled “Austrians” who claim that Keynesian policies not only fail to ameliorate business cycles, but in fact, produce them.  It’s an audacious assertion, and one I might trouble myself to investigate if I were convinced that it reflected a serious vein of dissent among professional economists.

    Paul Krugman maintains that Austrian business cycle theory is “as worthy of serious study as the phlogiston theory of fire.”  Milton Friedman claimed, less colorfully but no less categorically: “The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false.”

    Am I right to interpret this concurrence of opinion by two Nobelists from opposite ends of the political spectrum as a strong evidence that the Austrian critique is misguided?  Are latter-day Austrians the economic equivalent of creation scientists and climate-change deniers?  Or are there mainstream economists who take them seriously?  And if they do, what does it say about macro as science that there should be basic disagreements about a fundamental object of study in the discipline?

    I ran these questions by three professional economists – two university professors and one at the Fed.  As to how many working economists take Austrians seriously, the answers were, respectively, “don’t know,” “don’t know,” and “maybe one percent.”  The one-percenter compared the stature of Austrians in the discipline to that of Marxists.  While the respected Austrian may not be a unicorn, he or she is definitely a snow leopard.

    But that doesn’t make the neo-Austrian a crank.  And in point of fact, one of my economists assured me that at least those few self-identified Austrians of whom he knew with jobs in their field accepted (if not loudly) the need for fiscal and monetary stimulus to spur aggregate demand in times of economic crisis.  The real lack of consensus in macro, it seems, is not how to respond to a downturn in the business cycle, but what causes the business cycle in the first place.  And if mainstream macroeconomists agree that the Austrian explanation of this phenomenon is demonstrably lacking, it is not because they have a well-supported alternative or viable research program of their own.

    Today’s Austrians may be a small and dubious minority.  But they have hardly opposed themselves to the edifice of a successful science.

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    • You say: “Yet should not the recent success of monetary and fiscal intervention in staving off another Great Depression have cemented the Keynesian portion of the neoclassical synthesis?”

      I think that you’re assuming only one possible counter-factual version of history. You assume that another great depression was coming, and that the Keynesian actions prevented it. But how do you know? What if the assumption were instead that a short term recession was coming, and the stimulus made it worse? This has a bit of credibility when you consider that Christina Romer said that without the stimulus inflation could get as high as 9.2%. Sitting, as we are, at over 10% it sure looks like the stimulus made it worse than what people thought would happen.

      That said, to your question of respected austrian economists, you might check out the faculty at George Mason University. Russell Roberts and Don Beaudroux blog at http://www.cafehayek.com. Then there are a bunch more at http://www.coordinationproblem.org, like Pete Boetke and Pete Leeson. Of course, I don’t know exactly what would constitute a respected Austrian economist. Must they have won a nobel prize?

    • Shorter Austrian: Everything wrong in the world is the result of government action.

      But if you believe that adopting a gold standard and 100% Reserve banking, while eliminating all minimum wage laws, unions, and the Fed, will result in the elimination of unemployment and produce stable, exponential growth, then Mises, Hayek, and Rothbard are the guys for you.

      PS Deflation is super-duper!!

    • You might also be interested in this week’s econtalk discussion. Larry White discusses the Hayekian view of the business cycle.

      http://econtalk.org/archives/2010/02/larry_white_on.html

    • @mike – Thanks for the link, very germane.

    • @Agjag06 – That’s certainly been my impression. My objective here is to get a sense of whether there might be something a little less nonsensical deeper down if I were to devote some time to learning about the thoughts of contemporary Austrians.

    • @dullgeek – I’m aware that there are a small number of working Austrians, though I sense that not all of them are as full-throated as many non-economists who claim to subscribe to Austrian economic beliefs. And I am a subscriber to Russ Roberts’ podcast. What I lack is the context to determine if I am wasting my time digging any deeper on these people, thus this post.
      As for your your counter-factual on the stimulus, are you aware of even an Austrian theory under which stimulus produces short term job losses and contraction? I thought the Austrians conceded that stimulus has the opposite short-term effect, but maintain that it comes at an equal or greater long term cost.

    • A branch of economics that :

      1) Rejects use of the scientific method
      2) Rejects the use of mathematics
      3) Rejects any empiricism

      And labels anyone who uses these as “anti-economists”…

      It is no wonder they such a huge minority.

    • “Yet should not the recent success of monetary and fiscal intervention in staving off another Great Depression have cemented the Keynesian portion of the neoclassical synthesis?”

      No, the solution to too much lower and middle class debt owed to the rich is NOT more gov’t debt owed to the rich.

    • “Paul Krugman maintains that Austrian business cycle theory is “as worthy of serious study as the phlogiston theory of fire.” Milton Friedman claimed, less colorfully but no less categorically: “The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false.””

      Paul Krugman can’t even tell you what a liquidity trap is let alone how to get out of one. See my comment above about debt.

      Friedman I believe has been wrong a lot too. I don’t have the references off hand.

    • “And if they do, what does it say about macro as science that there should be basic disagreements about a fundamental object of study in the discipline?”

      That there are political hacks disguised as economists who want to tell the right wing or the left wing what they want to hear.

    • “Am I right to interpret this concurrence of opinion by two Nobelists from opposite ends of the political spectrum as a strong evidence that the Austrian critique is misguided?”

      No, you just need to pin them down by what they actually mean.

      First, try assuming bernanke’s idea that supply shocks (positive productivity growth and/or cheap labor) almost never happen as garbage.

      Next, if positive productivity growth and/or cheap labor produce price deflation, what should happen?

      Austrians: let price deflation happen by doing nothing to the fungible money supply.

      fed/republicans/mankiw: wait for debt problems/price deflation to show up. Treat it as an aggregate demand problem. Lower interest rates to attempt to create more private debt increasing the fungible money supply, preferably on the lower and middle class to debt enslave them. Hope the economy goes back to being supply constrained so the debt can be paid back. mankiw will probably say cut taxes on the rich so they will spend more (wrong, they will probably just save it).

      fed when desperate/democrats/krugman: wait for debt problems/price deflation to show up. Treat it as an aggregate demand problem. Use lower interest rates to create more public debt increasing the fungible money supply. Hope the economy goes back to being supply constrained so the debt can be paid back.

      others hopefully someday soon: try something else that involves noting the difference between currency and debt.

      One of the big problems is price inflation targeting WITHOUT trageting the amount of debt, which can lead to excess savers and excess debtors.

    • I agree with Agjag06 at #2.

      The problem is that the people who run corporations exist to jack up the stock price. If price deflation happens in their products, will they cut back on supply to limit or even reverse the price decline attempting to jack up the stock price? If so, that could mean a smaller economy.

    • I don’t know anything about climate science other than that it’s colder in winter than it is in summer, and that anthropogenic global warming is real, but there are in fact important fundamental debates in evolutionary biology that divide the mainstream. What levels of selection (gene, organism, species…) are the important ones, and how do they interact? How much evolutionary change is due to adaptation as opposed to other mechanisms – genetic drift, “spandrels,” horizontal gene transfer, and so on? Is evolution smooth or punctuated. Like the various mainstream debates in economics, these had political overtones, and each side claimed they were defending pure scientific truth while their opponents were ideological hacks. (Looking at the major public participants in these debates – Lewontin, Gould, Dawkins, Dennet – it seems clear to me that they were all ideological beings who were simultaneously interested in pure truth, as most people who care about ideas are.)

      So to extend the metaphor, there’s a wide space between the equivalent of Creationism and the equivalent of (some forms of) adaptationism, with questions like “what is the elasticity of labor supply?” in the latter category. Veryfew things are as wacky or fringe as Creationism, even ABC. (Of course, I’m talking about academic opinion here, not public, where they’re both mainstream – consider how even Obama disingenuously said in the SOTU that as families tighten their belts, the government ought to as well.)

      I think perhaps a more apt analogy might be Creationism c. the Rennaisance – it’s not really falsifiable, given the available data, which hardly point to it either, bit the methodology is suspect. Austrianism rejects all empirical and mathematical analysis in favor of the deductions in “Human Action;” creationism in favor of the revelations in Genesis. This is just conspicuously crazy.

    • @ William – you discuss science but you are perplexed by the easily explained. Here, let me edit your post.

      Austrianism

      A branch of economics that :

      1) Rejects use of the scientific method
      2) Rejects the use of mathematics
      3) Rejects any empiricism
      [4) Supports the world view of wealthy people who fund economists for the specific purpose of arguing that high taxes are a greater evil than society-wide economic distress.
      5)] And labels anyone who uses these as “anti-economists”…

      It is no wonder they such a huge [and well -funded] minority.

      There. Fixed.

    • There are some good modern Austrians: Bill White and team from the BIS, Doug Noland, Kurt Richebächer / Rob Parenteau (Parenteau is maybe an Austrian / Post Keynesian hybrid), Larry White… having trouble thinking of more. It is largely uninteresting to me in terms of macro, though Bill White does seem to have done some good with Austrian capital theory. Still, I think the stereotypical Austrian position just doesn’t understand modern macro at all, and if that’s what you are interested in, there are much better uses of your time.

      But the real problem with Austrians, it seems to me, is that they are massively overrepresented in the internet geek and gold loon constituencies. You may have noticed.

    • @Matthias – You nicely illustrate the difference between those who are vigorously debating within a field according to its rules (e.g. gradualism vs. punctuated equilibrium in evolutionary biology) and those who mischaracterize as debate within a field what is really their debate with the field itself (creationists, etc.). Are the Austrians participants in the macro debate, or do they really just reject the whole project of scientifically investigating the macroeconomy. You suggest the latter, and nothing I’ve heard so far causes me to doubt it.

    • @All – This link to my post generated a whole ton of comments, many of them interesting. http://economistsview.typepad.com/economistsview/2010/02/is-austrianism-serious.html

    • Actually, I think Austrians can sometimes add something to the conversation: there are plenty of Austrians thinking creatively, in the same way as other economists do, about how the complex behaviour of self-interested agents can result in the sort of behavior we see in the real world. Because Austrians reject math, empiricism, and the even logical possibility of Pareto-improving government action, it would be a total disaster if Austrianism bacame dominant. But they can come up with useful theories which we can, in theory, test.

      (A very very big problem in macroeconomics, which I don’t think any theory can possibly dig us out of, is that the number of relevant variables exceeds the number of available observations. I think because of this having many different paradigms might be incredibly useful, because what explains one phenomenon might not explain another. Maybe the clearly financial nature of the current recession makes RBC a stupid explanation for it, but other recessions can be explained by RBC theories. Maybe the really long cycles are Marxian accumulation crises and the shorter ones happen for Keynesian or ABC reasons. The lack of degrees of freedom makes it very difficult to tell.)

      So in this sense your One Percent source was right: George Mason serves the same structural role as UMass-Amherst, providing theses that can later be incorporated into the mainstream. (There are brands of Marxian that reject and brands that accept math and open-ended empiricism, but there are obvius political reasons why Marxism will never dominate economics, so how disastrous an URPE takeover would be is kind of a moot point. Austrians are mostly just doomed because of the pride economcs takes in requiring heavy-duty math.)

      Shorter version: Tyler Cowen’s blog is fun to read, so Austrianism ain’t THAT bad.

    • Austrians are mostly just doomed because of the pride economcs takes in requiring heavy-duty math.)

      Well, no. It is philosophically outmoded by decades and similarly has provided no new innovations since.

      Shorter version: Tyler Cowen’s blog is fun to read, so Austrianism ain’t THAT bad.

      Tyler Cowen definitely does not follow “Austrianism”.

    • If you think Austrians aren’t taken seriously by serious economists, then you’ll have to explain why the most cited economist in the Nobel Prize addresses of the economics winners is F. A. Hayek.

      Yes, there are nutjobs who claim to be Austrians out there in the world. But there are serious economists doing serious work in the Austrian tradition. Yes, it’s different, but those of us who are serious don’t blithely dismiss the rest of the discipline as crazy. We can learn from economists of other schools and they might learn a thing or two from us. We even publish in non-Austrians journals from time to time and publish books with recognized publishers.

      If you want to be taken seriously as critics of Austrian economics, try reading some serious Austrians.

    • @Steven – I probably should have noted in my post that I am aware Hayek won the Nobel, and don’t think it settles the question whether Austrians by and large are taken seriously today within the discipline, if discipline it is. One thing that has emerged from this and other strings of comments that this post has generated is that there are many flavors of “Austrians,” who embrace or reject the major tenants of “mainstream” macro to greater and lesser degrees. Even so, you yourself seem to publish mostly in libertarian/objectivist/Austrian journals, which would appear to reinforce the notion that present-day Austrians are largely talking to (or at least mostly being listened to) by each other, rather than the community of economists at large. Can you point me to any modern Austrians who have published frequently in widely-read, peer-reviewed economics journals? If I were going to read some serious Austrians, that’s where I’d start.

    • I guess the Southern, HOPE, JHET, Journal of Labor Research, or the Cambridge Journal don’t count. If not, try here for one: http://www.peterleeson.com/Leeson_cv.pdf . If the standard is the AER, no you’re not going to find much. But you asked about being taken seriously. It seems to me that getting published in top field journals IS being taken seriously by mainstream economists. You might consider books by good publishers too. It is admittedly hard for Austrians to crack the top journals. I don’t blame it on prejudice, but a different definition of what economics is about and the fact that most Austrians haven’t always done a very good job of making really good arguments. Leeson is one exception right now.

    • Just to follow up: I think if you look carefully at my CV, you’ll see a mix of talking to other Austrians as well as talking to plenty of non-Austrians. Look at my professional memberships. Look at where I referee papers. Look at my having been on the History of Economics Society Exec. I think Austrians, or any other heterodox group, has to walk the line between trying to push forward their own paradigm and also finding ways to contribute to the profession at large. And you are quite right that there are differences among Austrians. The fact that our Austrian group holds its meetings at the Southern, one of the largest regional meetings, should tell you that we are very concerned about engaging the profession. One look at our sessions would reveal a mix of folks there, and certainly not all Austrians.

      If your definition of “take seriously” is “top 20 journals” then we will largely have failed. Instead, if your definition is something more along the lines of “do Austrians get published in mid-level mainstream journals and top field journals, and do major economics books publishers take Austrian titles, and are Austrians on editorial boards at non-Austrian journals and the like?” then the answer is “yes.”

      If you set the bar high enough, very few mainstream economists are “taken seriously.”

    • And the fact that the folks who run the Southerns love having us there because we fill 10 or 11 sessions that are among the highest attended there should also tell you that “people in the professions” take Austrians seriously. Why would they welcome us so much if we were some kind of professional joke akin to creationists? Surely their reputation matters. Or are they not serious economists either?

    • Austrian economist FA Hayek won the Nobel Prize for his work on Business Cycle Theory.

      Milton Friedman is not on the opposite end of the economic spectrum from Keynes. He was in the middle, with Keynes and Mises on the sides.

      Austrians argue that the very its the very fundamental disillusion of turning economics into a empirically testable science that misguides so many economists. Fascinated by the “hard sciences” they take for granted that human action is able to be studied the same way once can study a rock rolling down a hill.

      Austrians do a lot of work in looking at real world occurrences that demonstrate what they conclude through deduction, Bother to read America’s Great Depression, by Murray Rothbard. And while you’re at it try Jesus Huerta De Soto’s book; Money, Bank Credit, and Economic Cycles.

      Economics is a very young body of knowledge. Don’t think that we haven’t made many wrong turns in getting to where we are. To stop dismissing or ignoring Austrians might be the best thing the field of economics could do.

    • I have been wondering if Austrian Economics is the economic equivalent of the Libertarians in politics. They seem closely connected in that they both maintain that there is too much government and government is the problem. I know that Ron Paul, the most prominent libertarian is a believer in the Austrian School of Economics, and thus abolishing the Fed and the IRS. These positions seem very anachronistic to me.