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This is slick. A reporter who has clearly been briefed by the Rothbard-hating Kochanaks is out with a column on Ron Paul and Austrian economics. The reporter is Matthew Yglesias and the writing in its presentation of Austrian economics is just slick enough that it should be reviewed in its entirety. Let us begin:
As he declared quasi-victory in Iowa following a third-place finish, Ron Paul puzzled cable news watchers across the country by proudly proclaiming, “We are all Austrians now.” The average Republican presidential candidate would sooner officiate a gay marriage than praise Europe, yet here was Paul pledging allegiance to Vienna. What did he mean? Why would we all be Austrians? Cute mention of the third place finish, when it was merely 3 percentage points between first place and third place.
Buckle your seat belts, Yglesias is clearly a spinmeister.
Here’s more: Paul’s statement was crystal clear to those familiar with the internecine controversies of the libertarian movement. He was referring to so-called “Austrian economics,” an idiosyncratic passion of his and a set of beliefs that put him at odds with the vast majority of well-known economists of all ideological inclinations. Ah yes, the spinmeister at work. Notice the use of the word “belief”, implying an almost religious non-scientific view, when in fact Austrian economics is a theoretical construction based on deductive theory. So “theory” rather than “set of beliefs” would be more accurate.
Yglesias continues: For starters, it’s important to note that the term has something of a double meaning. The Austrian school originally referred to a set of classical liberal thinkers with diverse interests who came out of the Austro-Hungarian Empire. Many of these thinkers are obscure today, but the most distinguished member of the group, Friedrich Hayek, is anything but. By the same token, an appreciation for Hayek’s work by no means makes you an “Austrian.” Hayek, who died in 1992, won the Nobel Prize, and mainstream economists thoroughly embraced his important work explicating the role of the price system in conveying information. His ideas undergird everything from carbon taxes to wireless spectrum auctions and thoroughly permeate policy throughout the Western. world
Here’s the first clue that Yglesias is being briefed by a Kochanak. Only a Kochanak would link Hayek so closely to carbon taxes. Although Hayek was very important in teaching about prices as signals, he never dealt in such topics as carbon taxes. It’s a major stretch to bring him into that debate. But further, Yglesias fails to mention that one major area Hayek won his Nobel prize for was specifically his work in business cycle theory. From the Nobel committee: …von Hayek’s contributions in the field of economic theory are both profound and original. His scientific books and articles in the twenties and thirties aroused widespread and lively debate. Particularly, his theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion. He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929. The committee also understood that Hayek’s work on price signals was more about competing economic systems, rather than such topics as “carbon taxes”: The Academy is of the opinion that von Hayek’s analysis of the functional efficiency of different economic systems is one of his most significant contributions to economic research in the broader sense. From the mid-thirties he embarked on penetrating studies of the problems of centralized planning. As in all areas where von Hayek has carried out research, he gave a profound historical expos of the history of doctrines and opinions in this field. He presented new ideas with regard to basic difficulties in “socialistic calculating”, and investigated the possibilities of achieving effective results by decentralized “market socialism” in various forms. His guiding principle when comparing various systems is to study how efficiently all the knowledge and all the information dispersed among individuals and enterprises is utilized. His conclusion is that only by far-reaching decentralization in a market system with competition and free price-fixing is it possible to make full use of knowledge and information. Why does Yglesias fail to mention Hayek’s contribution to business cycle theory? Let us go on and see. Yglesias writes: But “Austrians” in Paul’s sense refers to something narrower, specifically the thought of Ludwig Von Mises and his student Murray Rothbard. It is a form of capitalism that is even more libertarian and anarchic than that espoused by many libertarians. Rothbard‘s followers, most prominently longtime Paul associate and founder of the Mises Institute Lew Rockwell, have been waging a decades-long war against the Koch brothers and the more mainstream form of libertarianism the Kochs represent. “Austrian economics,” in this sense, goes beyond standard-issue free market thinking in a number of ways. Most notably, it seeks to build a strong ethical case for strict libertarianism without admitting that this would lead to any practical problems whatsoever. Therefore, along with rejecting the legitimacy of any intervention to protect the poor or regulate anything (a position much more extreme than even the Hayek of Road to Serfdom), Austrians reject the idea that there is anything at all the government can do to stabilize macroeconomic fluctuations. This, to be clear, is different from the mainstream Republican view that the stimulus bill enacted by Congress in 2009 and signed into law by President Obama was wasteful or ineffective. Austrians also believe that cutting taxes to boost economic activity doesn’t work either. And they disagree with Milton Friedman that appropriate monetary stimulus by the Federal Reserve could have prevented the Great Depression. Indeed, they disagree with even the least controversial of all stabilization measures, the ordinary tweaking of short-term interest rates that all modern central banks use to try to prevent either inflation or deflation. In the view of the Austrians, practically every economic policy pursued by the federal government and Federal Reserve is a mistake that distorts markets. Rather than curing recessions, claim Austrians, stimulative policies cause them by producing unsustainable bubbles.
So we begin to see why Yglesias failed to mention that the Nobel committee specifically mentioned Hayek’s work in business cycle theory. Because the Kochonaks, want to keep Hayek in the mainstream “libertarian” camp, but paint the business cycle theory of Mises and Rothbard as yahoo stuff. Thus, Yglesias word gymnastics: Rothbard and Mises bad business cycle theorists. Hayek a saint pushing down the memory hole that Hayek one is Noble prize in part for business cycle theory
Let’s see where this, bend your Kochonak foot behind your head, writer will take us next:
The way this works, according to the Austrians, is that artificially low interest rates spur “malinvestment” in unworkable enterprises that inevitably crash when the stimulus is withdrawn. This is an emotionally appealing idea, positing that the suffering of a bust is a kind of cosmic payback for the boom. But it doesn’t make much logical sense. For one thing, as George Mason University economist Bryan Caplan, who’s ideologically sympathetic to the Austrians, points out, it’s hard to understand why businesspeople would be so easily duped in this way. If Ron Paul and Ludwig von Mises know that cheap money can’t last forever, why don’t private investors? Why wouldn’t firms avoid making the supposedly dumb investments?
Notice that the only economist Yglesias quotes in his entire commentary is Bryan Caplan, who teaches at the Koch funded, George Mason University. Caplan, according to Yglesias, is sympathetic to Austrians, but at the same time disses the core of Austrian Business Cycle Theory, when the cycle is playing out before him in just the way Austrian theorists said it would. Or does Caplan not think the housing market collapsed and fooled many home buyers by the millions?
Ironically, the Austrians have replicated an error from the crudest forms of postwar Keynesianism – the failure to consider the role of expectations feedback in macroeconomic policy. So I get Caplan’s theory. There is no cycle because there would be feedback against the cycle, which means no one has to worry about the cycle, which sounds to me why the cycle developed the way it did, because it was theorized out of the models. Caplan is following into the same type of error that McCarthy and Peach did when they stated there was no housing bubble just before it collapsed and I warned them that it would collapse.
Now, here comes a real whopper from Yglesias: More broadly, the Austrian story of investment booms and busts doesn’t actually explain recessions and unemployment. Spending patterns shift all the time without sparking a recession. People stop buying BlackBerrys and they buy iPhones instead. Or people stop buying boot-cut jeans and buy skinny jeans instead. Across sectors, maybe people go see fewer movies and with the money they save they eat out at nicer restaurants. A business that curtails its investment spending should have extra money to pay out as dividends. Or if they want to horde the cash, it sits in a bank for someone else to lend out. Here the Kochanaks are really leading Yglesias off the track. Austrians never say that there are no shifts in technology, consumer preferences. In fact, Austrians say you can’t build exact models of the economy because of these shifts. But, Austrians consider the boom bust cycle to occur only when there are a “cluster of errors” caused by central bank manipulation of the money supply.
It looks to me that the Kochanaks are going to require a deeper memory hole, not only do they want to stuff Mises and Rothbard, but it also appears they want to stuff Austrian business cycle theory down the hole and create an Austrian economics based only on carbon taxes and the like.
Here’s more from Yglesias: It may seem “obvious” that the decline in housing activity caused the current recession, in line with the Austrian view, but in fact fixed residential investment turned negative in 2006. It stayed negative for more than a year before the recession began, and then continued negative for a couple more quarters before it turned severe. People spent less on home-building and renovation and more on other things. If investment spending in general declines, you would expect spending on consumer goods to rise to offset it. In practice, this doesn’t always happen and you get a recession. It’s this anomalous collapse in overall spending that needs explaining, and describing some of the past spending as “malinvestment” doesn’t help you understand it. Uh, no kidding, Matt. When the “cluster of errors” hits. It scares people and they begin to hold more cash. That’s why “aggregate dollar-measured consumer spending” doesn’t go up. But Austrians have never denied this. Your Kochanak leader is misleading you.
Murray Rothbard in The Mystery of Banking wrote: The public’s demand for cash can be affected by many factors. Loss of confidence in the banks will, of course, intensify the demand for cash… Here’s more from Yglesias:
The interesting question is what to do about it. Many of the original Austrians found their business cycle ideas discredited by the Great Depression, in which the bust was clearly not self-correcting and country after country stimulated real output by abandoning the gold standard and engaging in deficit spending. Then for a long time after World War II, policy elites more or less agreed on a combination of “automatic” fiscal stabilizers (the deficit naturally goes up during recessions as tax revenues fall and social service outlays rise) and interest rate cuts. And it worked, so nobody much cared about Austrian economics outside of crank circles. But when short-term rates hit zero and the Fed couldn’t push them any lower despite high unemployment, political consensus broke down. Ever since, we’ve been fighting about fiscal stimulus and quantitative easing, and unusual economic theories have been coming to the fore. Some of them offer useful suggestions about possible fixes. Unfortunately, however, it’s the Austrian school, which preaches despair and demands no action at all, that has the most effective political champion and the most dedicated followers. Uh, Matt,
The Great Depression did not discredit Austrian theory. There was massive intervention in the economy starting with Hoover and continuing with Roosevelt. As Murray Rothbard wrote in America’s Great Depression, nothing was allowed to be laissez faire, that is self correcting, with regard to the downturn that started in 1929: Laissez-faire, then, was the policy dictated by sound theory and by historical precedent. But in 1929, the sound course was rudely brushed aside. Led by President Hoover, the government embarked on what [Dr. Benjamin] Anderson has accurately called the “Hoover New Deal.” For if we define “New deal” as an antidepression program marked by extensive government planning and intervention including bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increase government spending (e.g., subsidies to unemployment and public works) Herbert Clark Hoover must be considered the founder of the New Deal in America. Hoover, from the very start of the depression, set his course unerringly toward the violation of all the laissez-faire canons. Matt,
Your Kochonak advisers are misleading you.
Oh and Matt, as I have explained before, the Austrian school does not preach despair.
Yglesias continues: If I’m wrong, and the economy doesn’t recover in 2012, then these faddish views may gain more steam and perhaps we really all will be Austrians someday soon. But let’s hope not. The developed countries that have done best in the recession – places like Israel and Sweden – are the ones that have pursued the least “Austrian” courses of action, while the European Central Bank’s insistence on pursuing a somewhat Austrian-style course in Spain and Italy is creating a deepening crisis. And Matt, where the hell do you get the idea that you hold the patent on declaring a recovery in 2012? Based on Austrian theory, I have been saying that because of Bernanke money printing, a manipulated recovery is going to be on its way. A position, I might add. that is the exact opposite of what mainstream Keynesian economists have been forecasting.
And as for your thinking that the interventionists governments of Spain and Italy have anything to do with Austrian economics, then please give me a call. I have a fog making machine that I’d like to sell you. Let’s meet in San Francisco and I’ll demonstrate it anytime. Maybe you can get your Kochanak buddy to loan you a few million to help you purchase the machine.
Reprinted with permission from Economic Policy Journal.