The Right and Austrian Business Cycle Theory
It used to be that left-of-center politicians were mostly drawn toward neo-Keynesian ideas about economic policy whereas right-of-center politicians were more likely to follow Milton Friedman’s monetarist school. But in the depths of the current recession, while Keynesian and monetarist approaches still tell you somewhat different things, both approaches counsel fairly substantial policy interventions. As of November and December of 2008, that was leading some to predict that we might have a fair amount of bipartisan consensus over economic recovery efforts.
Hasn’t happened. And not only have conservatives been sharply critical of Barack Obama’s American Recovery and Reinvestment Act, but conservatives have been increasingly critical of Ben Bernanke who, as best one can tell, is a rock-ribbed right-winger appointed to office by George W. Bush.
Hand-in-hand with this trend is, as Dave Weigel reports, Ron Paul’s success in evangelizing among congressional Republicans for the economic thought of Thomas Woods, a figure who conservative congressmen weren’t prone to listen to when he was arguing against Bush’s wartime policies. Now, however, Woods is pushing a fringe economic doctrine that tells the right what it wants to hear so he’s gaining popularity. The doctrine in question is so-called “Austrian” business cycle theory, memorably lampooned by Tyler Cowen. You can see other brief criticism from a libertarian point of view from Bryan Caplan or read Paul Krugman’s 1998 takedown.
But perhaps the pest thing to read is this recent item from John Quiggin which lays out the ways in which Austrian Business Cycle theory was, at the time, a major advance but one that’s long since been superseded.
177 Responses to “The Right and Austrian Business Cycle Theory”
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May 5th, 2009 at 10:17 am
1) Economic theories — or , more accurately, their application to public policy — are often just con games designed to lend a veneer of rationality to a hidden agenda of naked self-interest.
2) It is best to focus on specific acts to deal with specific problems. In that regard, Roubini recently issued a rather scathing indictment of Obama’s coddling of the financial sector.
See http://online.wsj.com/article/SB124147831175584985.html#mod=djemEditorialPage
May 5th, 2009 at 10:20 am
I don’t keep track of Republican economic though outside of serious academic and policy circles, but Milton Friedmanesque ‘Monetarism’ hasn’t been a large part of this intellectual repertoire for quite some time, at least the early 1990s if not earlier. The core principles of Friedman’s thought either became mainstream or were discredited. Radical Austrian perspectives have a long history on the right and their presence today isn’t surprising.
I’ll need to look at the Quiggin link, but ‘Austrian Business Cycle theory was, at the time, a major advance but one that’s long since been superseded’ strikes me as wrongheaded. Austrian Business Cycle theory was in the past part of the mainstream discussion but got sidelined in the 1930s, but it was never a major advance nor was it superseded in the sense that the questions it raised were satisfactorily answered or found conclusively to be irrelevant (thought I don’t think doing capital theory ‘right’ by itself, part of the Austrian outlook, is going to provide much light on business cycles, but I do think that understanding capital costs, financing and sectoral capital potentially in conjunction with other issues, is important).
May 5th, 2009 at 10:27 am
don’t let the pest be the enemy of the pod
May 5th, 2009 at 10:32 am
There’s also the simple explanation for why we’re seeing radical Austrians here: a Monetarist would be pretty surprised/perplexed by the current downturn and the financial excess that lead up to it (see Greenspan), while Austrians are always finding seeds of destruction in unbalanced finance lead growth.
May 5th, 2009 at 10:39 am
As Quiggin points out, the “advance” of the early Austrians was providing any sort of theoretical explanation at all in support of the observed cyclical pattern of industrial economies. And their general description of the role of credit bubbles in driving the business cycle remains insightful.
In detail, though, the modern anti-interventionist version of Austrian theory has been empirically falsified. So of course today’s GOP loves it. Or as Quiggin puts it:
And these days, “intellectual and policy disaster and theoretical stagnation” is like a flame to the moth that is the modern GOP.
May 5th, 2009 at 10:44 am
Krugman “took down” a theory based on debt without mentioning the word debt. The hangover idea of the Austrians is that debt must be paid back plus servicing charges. The hangover is the decreased growth in the future to fund debt from the past.
I don’t really care what any mainstream economist thinks, at this point. I might as well throw my three econ degree in the trash at this point. We learned about snake oil, smoke and mirrors.
A 2 trillion deficit will give us a major hangover. But nobody important will have the balls to admit it.
May 5th, 2009 at 10:46 am
The Right/GOP has only one policy: say “No” to Obama. What else are they going to do? Admit that their policy of non-regulation is idiotic and almost bankrupted the country? Eventually, were they to scrape the barnacles (Limbaugh etc) off its hull, they might come up with actual new ideas. Now, they’re in the hands of the lazy, the stupid, and the vicious, and there doesn’t appear to be any change on the horizon. It isn’t inevitable that they change. Some people don’t. We’ll get by without them.
May 5th, 2009 at 11:05 am
Austrianism,monetarism,neoliberalism and the “automatic equilibrium” of classical theory have all been refuted in the past – often by their primary instigators.
These theories are kept alive by the financial support of a small number of plutocrats who want to preclude “government interference in their affairs”.
Many academic economists turn out to be whores just as much as the media.
May 5th, 2009 at 11:06 am
The relationships between economic orthodoxies and American politics is ever shifting. That is true of the elites but even more so among populists.
American citizens have always liked easy credit and easy money. Farmers and small businessmen at any rate. An ancient tradition that has a Christian roots, that is distrustful of debt,, always held sway as well among conservative, small ‘c’, people as well.
The most relevant populist uprising in American history was in the 1890’s through about 1910. It’s peak marked by Bryan’s famous Cross of Gold speech. What was that about. It was about the feeling among rural small town people that money and credit were being unfairly controlled and apportioned by East Coast elites. That there was not enough credit, and money, available to deserving non elites. The populist call for the Free Coining of Silver was based upon the idea that if the Treasury just made silver coins enmass it would flow out and inspire growth. The financial elites at the time were aghast. They wanted hard money backed by gold.
Note there are two threads here. The amount of money and credit and who controls it. Populists have forever been against East Coast/Wall Street control but now 100 years on the populists have become enamored with hard money while the elites are 1000% for easy money and easy credit. That’s because they discovered, finally and conclusively, in the 80s that since they controlled the money and credit they could continue to apportion it to themselves and get rich beyond the imaginaings of kings or JP Morgan. In Morgans day there could be only 1 Morgan. In Reagan’s day there could be hudreds of thousands of them. As long as the money and credit went to inflating their own assets.
Todays honest Austrian Schoolers acknowledge that the stock, credit derivative and real estate bubbles were the inflationary result of a distorted credit system. The fault lying primarily with the Fed. Not only for what it did in supressing interest rates but for what it did not do to keep bank balance sheets, their assets, full of high quality not crap.
It’s a political mine field howeve. Made more so by the fact that Democrats have sided absolutely with Wall Street.Making it easy for the GOP to pretend they aren’t. It is pure pretense.
May 5th, 2009 at 11:20 am
Brock
A 2 trillion deficit will give us a major hangover. But nobody important will have the balls to admit it.
This is why when things turn around you pay down the deficit. Communist Bill Clinton ran a surplus, so yes Democrats can do this.
I just haven’t read Krugman or DeLong provide a clear narrative on what happened in the 2000s, even though I agree with their take on the Austrian school.
You had the tech bubble (on the heels of the Asian crisis), then 9-11 which was an economic disaster also so they kept interest rates low to stave off the slump. Then what? The growth of a dysfunctional unregulated financial system with overleveraged undercapitalized banks, the development of a huge shadow banking system and “innovated” financial instruments which were designed to evade regulation. Glibertarians always ignore developments in the financial system b/c why, it’s rational and never has problems?
It seems to me the have a conclusion: government is bad and liberal techocratic elites love to spend money to buy votes and help non-whites, then they tailor their theories to those conclusions. Then Raimondo, Daniel Larison, Ron Paul and Thomas Wood and their ilk also conflate these technocratic elites with neocon warmongers like FDR who dragged us into WWII, to confuse matters even moer.
May 5th, 2009 at 11:34 am
I’m no Austrian, and I think that the criticisms you link to are mostly accurate, but the missing piece here is that, looking solely at the recent unpleasantness, the Austrians are the one school that has emerged unscathed. Mainstream economists, both the neo-Keynesians and the monetarists, have indeed been somewhat discredited. There has been a failure of both the market and the government.
The sophisicated Austrian would agree with that – Austrians who really understand their own theory are much more likely (than other right-leaning economists) to agree with critiques of the unregulated market – but their response is always “the government is worse.” You can disagree with this – and I do to an extent, though less so than I used to – but you can’t say that recent events have disproved it.
May 5th, 2009 at 11:43 am
There has been a failure of both the market and the government.
How did the government fail in the 2000s, by being too pro-market? I just think that if the govenment had raised rates earlier in the decade we would have gone through this then instead and probably got caught in a deflationary trap.
May 5th, 2009 at 11:51 am
This is a wierd post, in that you’re arguing like a lawyer – you obviously have your conclusion (Austrian Business Cycle Theory is bad) prepared beforehand, and you’re willing to use any argument against it despite the fact that some of them are mutually inconsistent.
If anyone wants to read a response to the so-called ‘takedown’ by Krugman, there is actually a pretty persuasive one (by my lights, anyway) by Bob Murphy here
And yes, I have to agree with #11 – the Austrians come out of this whole recent mess better than anyone else. As it happens, I wasn’t entirely convinced before it all kicked off (for primarily methodological reasons), but I think nobody who is open minded can read some of the Austrian predictions published as far back as 2002 and not be impressed.
May 5th, 2009 at 11:52 am
Sorry, I don’t speak ‘Austrian.’
May 5th, 2009 at 11:55 am
the Austrians are the one school that has emerged unscathed. Mainstream economists, both the neo-Keynesians and the monetarists
Well, the post- and paleo-Keynesians look pretty good, too. Most of the New Keynesians have mentioned Minsky like a magic charm, as if saying the name could make him disappear.
(Actually, DeLong did recently write a long wonk piece on Minsky that I keep meaning to read.)
May 5th, 2009 at 11:55 am
ron,
There is some truth to what you say (though the full picture is more complex), but doesn’t really apply to the Austrians. The changes that they would make would be opposed by the “plutocrats” who are very much reliant upon certain types of governmental interventions which the Austrians oppose.
Just one of many examples – the entire financial industry would not be able to exists in its current form if the Austrians had their way. Heck, if some Austrians had their way fractional reserve banking would even be discarded.
Again, I’m not advocating that, but I think that you, and a lot of peopel here, don’t really understand just how radical the Austrian critique is.
May 5th, 2009 at 11:59 am
the Austrians come out of this whole recent mess better than anyone else
Crikey. The Post-Keynesians have a business cycle theory and are pro-government intervention. Jamie Galbraith & Joe Stiglitz are both connected to the Levy Economics Institute.
But GMU gets mentioned ten times as often as Levy.
May 5th, 2009 at 12:09 pm
potarts,
How did the government fail? just to name 3, briefly:
(1) While people like Steve Sailer exaggerate the problem, and falsely tie it into issues of race, governmental policies that overly encouraged home ownership did contribute to the problem.
(2) Past bailouts encouraged reckless behavior on the part of the financial sector. Socialization of risk, privatization of profit.
(3) The Fed deserves a certain amount of criticism.
Now, personally, I also agree that certain “pro market” governmental actions probably contributed also – in many ways we have had the worst of both worlds, too much of certain types of governmental intervention, not enough of others. But one would have to be pretty myopic to deny that certain types of badly executed government interventions contributed to the problem.
May 5th, 2009 at 12:13 pm
the economic thought of Thomas Woods . . .
Huh? Woods has economic thought? He’s trained as a historian, not an economist, and as far as I can tell has published little in economics; he hangs out at the Ludwig von Mises Institute, but that’s as much a haven for neo-Confederate crazies as anything else.
May 5th, 2009 at 12:37 pm
Gunnar Myrdal(the Swedish economist who participated in Sweden’s very successful escape from the Great Depression) called for the elimination of the Nobel prize in economics (which he shared in 1974 with Hayek) because it was awarded to Hayek and Friedman and he thought that made the prize a farce.
May 5th, 2009 at 12:59 pm
I am not an Austrian disciple, but I do respect much of what they accomplished.
First, let’s separate Austrian economics from Republicans, since most politicians of any party are unable to understand it. And even if they were, they are not intellectually honest enough to correctly interpret or apply it.
Second, let’s review why Krugman’s critique of the Austrian Business Cycle is naive. Cowen’s critique is also naive because the Austrians don’t believe that it requires central banks to cause credit bubbles, although I do think that Minsky has some important ideas to layer onto the Austrian viewpoint.
Third, I won’t pretend that the Austrians have figured it all out. For instance, they suppose that as investment increases, consumption will fall, which is empirically incorrect. I think this is because they do not fully consider the wealth effect from rising asset prices or economic feedback loops that can lead to both increasing simultaneously. Also, while I think their descriptions of the economy were mostly well done, it does not follow that their prescriptions are necessarily the best policies.
In any case, the Austrians made a better attempt to understand how the economy functions from a bottoms up perspective than either the Keynesians (”New” or otherwise) or Monetarists. There are fewer abstractions of aggregates, and a more realistic and honest assessment of what is knowable among individuals, regulators, and policy makers.
May 5th, 2009 at 1:06 pm
The Austrians are unscathed because like the communists and conservatives their plans have never been enacted. They stand pure, above the fray.
Now being a crackpot I could live happily I suspect as a simple yeoman in a perpetually non inflating world. Funny thing is the leading Austrians now have already gotten theirs playing the markets. Very odd.
May 5th, 2009 at 1:48 pm
Just one of many examples – the entire financial industry would not be able to exists in its current form if the Austrians had their way. Heck, if some Austrians had their way fractional reserve banking would even be discarded.
Oh so they’re like Muslims who don’t believe in interest rates? Have to say without oil, the Muslim nations’ economies would be crap.
May 5th, 2009 at 3:31 pm
My favorite observation on neo Austrian theory is due to Brad DeLong. He was a co editor or something of The Journal of Economic Perspectives published by the American Economic Association. As such he had access to a survey in which membetrs were asked if they thought that, in the preceding n years (5 I think), the American Economic Review had published too many, too few or the right number of papers if various subfields. Many (most I think) checked to box for too many next to “neo Austrian theory”. This was odd since the AER had published zero articles on neo Austrian Theory in the period in question.
That is the most definitive proof I can imagine that a theory is on the ash heap of intellectual history.
The Republicans are really and truly desperate. Next they will try to find a Menshevik Economist*.
* I have the very greatest imaginable respect for a certain Menshevik economist and I hope the Republicans don’t insult his memory by adopting his theories.
May 5th, 2009 at 4:07 pm
MY,
If you think that Paul Krugman performed a takedown, you haven’t read any of the opposition’s responses. Krugman so clearly doesn’t understand the basics and these are laid out by Mike Shedlock.
Shedlock’s response is to Krugman’s:
1. It doesn’t explain why there isn’t mass unemployment when bubbles are growing as well as shrinking — why didn’t we need high unemployment elsewhere to get those people into the nail-pounding-in-Nevada business?
If you consider this idea for ten seconds, you will know the answer. Seriously. If you still don’t, Shedlock lays it out.
May 5th, 2009 at 4:08 pm
Let’s lay it on the table here. It isn’t only Austrian macro that has been discredited and proven to be empirically flawed, it is macroeconomics in general. Those of us on the other side of the field have long known this to be true.
- A Microeconomist
May 5th, 2009 at 4:15 pm
That is the most definitive proof I can imagine that a theory is on the ash heap of intellectual history.
Most neo-Keynesians and monetarists said a second great depression was impossible because of their understanding of the buttons that needed to be pushed. We’re not there yet, but it looks possible. If we do end up there, I’m sure you’ll be talking about ash heaps for them. Plus, neither of them can explain how we could have a GDP drop of 20% in a year and not go into a long recession without “stimulus.” The reasons are obvious to Austrians.
May 5th, 2009 at 4:36 pm
Oh so they’re like Muslims who don’t believe in interest rates? Have to say without oil, the Muslim nations’ economies would be crap.
They believe in interest rates. They just think they should reflect the desires of savers and borrowers instead of a panicky inflater like the FED. It would be much better for middle class savers if they could put their money in a normal bank for the funds to be lent (probably to a business) instead of them having to run to stock markets for returns that might beat inflation by even a little.
And LarryM was right about this
Just one of many examples – the entire financial industry would not be able to exists in its current form if the Austrians had their way. Heck, if some Austrians had their way fractional reserve banking would even be discarded.
There is no way that our financial industry could become so gigantic without the silly spigot of the FED. Inflation of the currency would be the result of some commodity being brought out of the ground instead of some 1s and 0s being funneled to a big bank account by Bernanke.
May 5th, 2009 at 4:55 pm
Just as a follow up to my other post. There have been many important contributions to understanding the larger economy from economists of various schools. One cannot possibly deny the contributions of people such as Marx, Mises, Schumpeter, Hayek, Keynes, Friedman and a thousand others. Good economists make contributions, regardless of their [i]school[/i]. Still, not one of these schools is able to present a reasonable picture that has terribly strong predictive powers or much to add as far as policy prescriptions. The current day Austrians are the worst, because they have banished the memory of their finest thinkers and branded them apostates in their Rothbardian search for intellectual purity. On top of that, the contradictions in their theories are laughable (outlawing partial reserves while screaming to allow all voluntary contracts, anybody?) Keynesianism runs into the same sort of us against them mentality some times, but the practitioners are generally a lot brighter, and it is often only the leading voices who like to play Grand Inquisitor. Monetarism was dead when I was still in school, so…
- A Microeconomist
May 5th, 2009 at 8:40 pm
With all due respect, Paul Krugman’s “takedown” of Austrian economics is crap.
I did a point-by-point rebuttal of that article on my blog.
As for J. Quiggin, well, I’ll try to write a more detailed rebuttal to him later, but I already see several problems in his article:
The Austrians were the first to offer a good reason for the non-neutrality of money. Expansion of the money supply will lower (short-term) interest rates and therefore make investments more attractive.
Actually, this overlooks one major point: the money supply does not increase evenly. We almost never get a simple doubling of the money supply, with everyone’s money increasing 100%. What happens is that some people get then new money first, and therefore get to buy at the old, lower prices (or closer to them), whereas others get it later and have to pay the higher prices before they get the money. Moreover, debts and credits are not necessarily doubled, meaning that even if wage and prices quickly reached equilibrium, anyone who owed or was owed money would grow richer or poorer.
If investors correctly anticipate that a decline in interest rates will be temporary, they won’t evaluate long-term investments on the basis of current rates.
This ignores the fact that over the short term, those who correctly anticipate that the decline will be temporary will stagnate relative to those who drink the Kool-Aid. Policies which reward bad decisions (artificially low interest rates) will cause more bad decisions, because even if their effects can be anticipated, the people who anticipate them won’t be able to be the ones running the show.
So, the Austrian story requires either a failure of rational expectations,
Only because policies are enacted that reward irrational expectations.
A closely related point is that, unless Say’s Law is violated, the Austrian model implies that consumption should be negatively correlated with investment over the business cycle, whereas in fact the opposite is true. To the extent that booms are driven by mistaken beliefs that investments have become more profitable, they are typically characterized by high, not low, consumption.
That’s a total misreading of Austrian theory. The problem is that investment increases without a reduction in consumption. The investment is funded primarily by using up uninvested savings, or reserves, that under rational expectations would have been held and invested later at later stages of production. Moreover, not all investments are the same. Some investments are at higher levels of production than others. The problem in the business cycle is that too much is invested at higher levels (earlier stages) of production, without enough being held in reserve to invest at the later stages. A negative correlation between consumption and investment will occur in a healthy economy. With artificially low interest rates, people invest more (with borrowed money) but save less, so they wind up using up reserves.
Finally, the Austrian theory didn’t say much about labour markets, but for most people, unemployment is what makes the business cycle such a problem. It was left to Keynes to produce a theory of how the non-neutrality of money could produce sustained unemployment.
The Austrian theory does not say much about labor markets largely because the Austrian theory explains the reason for the productivity decrease that defines the recession/depression phase of the cycle. How that producitvity decrease manifests is a separate issue.
Quite simply, during a time of economic downturn, there are two ways for it to manifest – lower wages or unemployment. Sustained unemplyment comes when wages are prevented from declining to a level appropriate to the level of productivity. Alternately, a depression or recession could manifest as low unemployment, but a decline in wages and working conditions.
Unfortunately, having put taken the first steps in the direction of a serious theory of the business cycle, Hayek and Mises spent the rest of their lives running hard in the opposite direction. As Laidler observes, they took a nihilistic ‘liquidationist’ view in the Great Depression, a position that is not entailed by the theory, but reflects an a priori commitment to laissez-faire.
Of course, the Austrian theory of the business cycle was not developed in a vacuum, but in the context of a laissez-faire theory, so Hayek’s and Mises’ positions were not somehow unrelated to the theory as Quiggin suggests. The Austrian School existed before Mises made his theory of the business cycle.
In any case, liquidationism does seem to me to be a much smarter prescription than simply taking the policies that caused the problem in the first place and implementing them twice as hard, which is what the general interventionist prescription is.
As for the talk about the 1800s, the fact of the matter is that economic growth during that period was astounding, and much of the “terrible recessions” that that era was prone to have been greatly exaggerrated, due to an inability to believe that prosperity can coexist with rapidly falling prices. Indeed, the economy gr hugely in 1870, despite the so-called “long depression” of that decade.
May 6th, 2009 at 2:57 am
Sounds like Minsky was on to something, I’m going to study the issue further and not concern myself with the sniping between the economic schools, I learned a long time ago that these feuds always stray into a form of fundamentalism that is characteristally shallow and unsound (often resorting to ridicule, when in fact the ridicule is wildly overstated and unfairly framed, and/or targeted at weaker proponents of the theory in question who really don’t have a grasp on it at all).
May 6th, 2009 at 3:00 am
I’m definitely going to have to reread Keynes much more thoroughly too, it’s been a long time, and when you’re younger, you tend to steer your reading instead of allowing the material to lead you where it intends to go.
May 6th, 2009 at 8:45 am
There is something about Krugman and the Austrians’ story that doesn’t seem to quite complete the circle. Krugman says just write all the debt off, but it just seems that real equity(but who saved and have money that they earned) will pull back when they start seeing all these write offs. This is just as contractionary as making people pay their loans back.
Krugman never seems to address the fact that in equilibrium debt wouldn’t be having to continually expand. But currently our system seems to need that expansion to work. Just look at a chart of total U.S. credit. Previous to the Great Depression, we would have expansions during wars and then credit would return to prewar amounts.
I guess I don’t understand, but I will say that I am a saver and I have no intention of participating in these shenanigans. I think its completely fake and every extra dollar of debt our nation (government, households, banks, corporates) the less secure I feel about investing in anything. I make a nice living and would like to do better, but I want to own a house next to people who put at least 20% down. They don’t make those neighborhoods anymore.
May 6th, 2009 at 9:36 am
Something is odd when the pure liberalism of Mises is referred to as “right wing.”
May 6th, 2009 at 11:15 am
I wonder if those claiming that Austrian Business Cycle Theory is empirically falsified have ever read anything about the theory. For example, do they know that F.A. Hayek won the Nobel Prize for his contribution to the theory when Krugman was still learning at the teet of Keynes.
As for “right-winger” it has been clearly said, again by Hayek, in his essay “Why I Am Not A Conservative.”
You can be a leftist and still acknowledge the truth. All Mises ever said – he was a wertfrei economist – is that if you choose a leftist policy option you will not get the outcome you set out for – that is simply the “truth” as hard as that is to believe.
May 6th, 2009 at 12:12 pm
A Microeconomist Says:
May 5th, 2009 at 4:08 pm
Let’s lay it on the table here. It isn’t only Austrian macro that has been discredited and proven to be empirically flawed, it is macroeconomics in general. Those of us on the other side of the field have long known this to be true.
There is no such thing as “Austrian macro”. It doesn’t exist. One of the points of Austrian economics is that MacroEconomics is a nonsense, a fraud, and government propaganda.
As far as Austrian economics is concerned, it was applied by president Harding in 1921 to fix the post WWI recession. That is he lowered government spending, taxes, and government interference in the economy. Though post WWI situation was pretty bad, much worse than some bubble stock market crash in 1929(…), Austrian fix worked, recession went away in 12-18 months, and we don’t read about it in the books.
But we do read in the books about Great Depression, when Austrians were set aside in favour of Keynesian fraud, and what was a stock market crash followed by a mild recession turned into a 16 year Great Depression.
Same Keynesian Fraud was applied to cause Internet bubble, and then reapplied to turn that bubble into yet bigger, more severe Real Estate and Financial bubble. But as Austrians teach us, every bubble is followed by recession, as scarce resources were missallocated to produce things that consumers didn’t need (wasting capital for more housing than what is economically feasible).
Keynesians, Monetarists, and Austrians ALL agree on what happened with Real Estate and Financials – economy got drunk.
Fine. But who provided the BOOZE? Austrians say – the booze was provided by Central Bank with low, artificial interest rates.
And now same people, who got us drunk, have a cure. More Booze!
May 6th, 2009 at 12:14 pm
The big government supporters’ reliance on the printing press to mask the debasing of the capital stock, as well as their extreme willingness to commit economic plunder without addressing the fact that government economic activity is plunder-based, are the double whammy’s to the movement towards big government.
All honest and moral people will see that the body of force in society cannot be the “problem solving” entity, it can only SHIFT the burden, HIDE serious economic imbalances, and DELAY the ultimate day of reckoning through brute force.
Until those on the economic left realize that the body of force is not the solution to their moral aims, they will continue to look more and more like the herds that allowed the 20th Century totalitarians to put huge black marks on humanity.
You cannot be a moral person while advocating broad economic redistribution at the point of a huge gun.
May 6th, 2009 at 12:17 pm
It is amazing to me to hear sooooooooo much about the “crazies” at the Austrian school and yet not hear ONE SINGLE argument that refutes their theory!!!
That is because it seems most of you here HATE the fact that it has been proven, ONCE AGAIN, to be accurate, and the ONLY school of economics to see this COMING…. AGAIN.
People like you make me wonder how on earth we have ever survived as a species. How do you people persist in ignoring your own EYES and disregard the OBVIOUS truth each and every day?
If the Austrians told you that playing with gasoline was dangerous and might cause a disaster, and everyone other school said that it was safe, and later you burned down your house and killed your family, I believe that people like you would STILL claim that playing with gasoline was NOT in fact dangerous, its only that the Austrians are ‘Right-wingers”!!
You people are NUTS! 1st they despise the right wing just as much as you do actually more because they actually understand what the modern right is about and its the same as the left, big government, and big business power and their own piece of it! Just like the left, only you, like the hopeless red stater’s were during BUSH are just as drone like and BLIND when it comes to the Saviour Obama.
These “radicals” which I can easily tell NONE of you have read or understand, have the EXTREEMIST ideas they try to shove down your throats, like LIBERTY, NON-VIOLENCE, FREE-MARKETS (which we have NEVER had) FREEDOM of CHOICE, and MUTUAL COOPERATION and CONSENT.
What a bunch of radical monsters huh?
If some of you are tired of listening to this pseudo-intellectual blather spewed by Keynes-Krugman and all the other nut cases who DID NOT see this mess coming and in fact said it was NOT coming, and you want to actually be able to understand what is happening in the world, just try Mises.org and be prepared to be amazed at how accurate these radicals have been.
Or you could keep looking to the frauds who told you everything was peachy, and to buy real estate, and invest in the stock market. Your choice.
May 6th, 2009 at 12:17 pm
Man, the view from the left must be myopic as hell…
“Ben Bernanke who, as best one can tell, is a rock-ribbed right-winger appointed to office by George W. Bush.”
I would not count either of them as right wing, they are both Big Government Liberals wearing “Conservative” clothing…
The Dems and Repubs are all tax-and-spend-big-get-bigger-government folks… there’s nary a real Conservative in town down there in D of C anymore…
Better to argue how many angels can dance on the head of a pin than the difference between the two so-called “Political Parties”.
That’s the view from here…
May 6th, 2009 at 12:19 pm
Krugeman advocated WWII & gov spending as the policy that got the US out of the great depression. He has argued time and time again that government spending ended the depression and fueled growth. GDP growth does not always equal prosperity. GDP numbers can be manipulated by the government. There are not many people left, but talk to someone who was home during WWII and ask them how proserously they lived with all of the government rationing of goods. Following WWII, the US had a massive productive capacity, lots of soldiers now free from conscription, the rest of the world in rubble (only Pearl Harbor was fought on US soil), and the reserve currency of the world. The prosperity that followed could have been maintained by a 5 yr old dealt that hand. Krugeman ignores this context and simply affiliates the post war boom to government spending is amazingly short sighted. Now the US is the largest debtor nation in the world because of our mismanaged paper currency and government subsidies and tax laws that moved our nation’s productive capacity over seas.
May 6th, 2009 at 12:32 pm
10 years ago I have found Mises.org and never look back.
To understand what is happening read Meltdown by T. Woods.
After that – the sky is a limit. I suggest you read EVERYTHING written by Ludvig von Mises, EVERYTHING.
also
Econonomics in One Lesson – by H.Hazlitt.
Man, Economy & State by M. Rothbard.
books by Jesus Huerta de Soto & Jorg Hullsman.
May 6th, 2009 at 12:36 pm
The ONLY theory that allowed the inventor to avoid taking a post at the soon to implode Creditalschtalt [sic], for fear of linking his name to the State Bank failure?
The ONLY theory that criticized the interventionist policies of both Hoover and FDR before the worst of the Depression set in?
The ONLY theory that can satisfactorily explain why the Depression only ended after WWII was over, and govt. spending was cut by 66%?
The ONLY theory that can satisfactorily explain the stagflation of the 1970s?
The ONLY theory that predicted the current market downturn, and was being *laughed at* by media pundits through 2007, while they were encouraging buying more Goldman Sachs and Lehman Bros?
The ONLY theory that is founded on real, axiomatic, philosophical, ethical, grounds, instead of “animal spirits” or trying to replace the “invisible hand” with the hand of the State?
I’m sorry that anyone still thinks Krugman or Quiggin can, from the outside, give a complete analysis of this “hangover theory.”
Whatever you do, don’t read Tom Woods’ new book, instead, stick to the same writers you read everyday that insist that everything about the current models is fine (despite not seeing the crash), those that are consistently wrong about what is coming in the future, and those that advocate the theft by government to better spend your money, when all you really need is to replenish your savings.
May 6th, 2009 at 12:46 pm
1. Friedrich Hayek, the most famous Austrian theory economist, won the Nobel Prize in Economics in 1974. One would think that with Hayek winning the Nobel Prize that this would require his opponents to AT LEAST ONCE fairly state the Austrian theory and fairly attempt to refute it.
2. I’ve been an advocate of the Austrian theory since 1973. In that time, I have yet to see any attempt at a fair refutation of the theory. This blog post and these comments contain nothing but ad hominem attacks, demonstrate a total unfamiliarity with the theory, and make no attempt at refutation whatsoever.
3. Hayek has stated that Keynes told him in the 1940s that the sole purpose of Keynes’ “General Theory” was as a ruse to lower British wages in the 1930s by having the central bank dilute the money supply. There’s the totality of your Keynesian stimulus for you:
http://consultingbyrpm.com/blog/2008/12/hayek-tells-bill-buckley-that-even.html
4. Krugman’s “takedown” of the Austrian theory in 1998 is a bunch of nonsense. He’s either a liar or a brilliant propagandist. Economic analysis is not his strong suit.
May 6th, 2009 at 1:02 pm
Of course Matt Yglesias likes central banking and hates Austrian economics.
Matt has no area of expertise except the state. Naturally he and people like him should make economic decisions for everyone else in the country and indeed the world.
But Austrain economics has one huge advantage: it is 100% true, and Keynesianism is 100% false. Changes are coming.
May 6th, 2009 at 1:07 pm
My favorite observation on neo Austrian theory is due to Brad DeLong. He was a co editor or something of The Journal of Economic Perspectives published by the American Economic Association. As such he had access to a survey in which membetrs were asked if they thought that, in the preceding n years (5 I think), the American Economic Review had published too many, too few or the right number of papers if various subfields. Many (most I think) checked to box for too many next to “neo Austrian theory”. This was odd since the AER had published zero articles on neo Austrian Theory in the period in question.
That is the most definitive proof I can imagine that a theory is on the ash heap of intellectual history.
Other conclusions are also possible to draw, such as the entire field of Keynesian economics being a sham, and all its practitioners brainwashed fools.
May 6th, 2009 at 1:20 pm
Yeah! I see a few well read people have joined the discussion. You know, people who have actually READ Austrian Business Cycle Theory, and seem to understand it.
All I can tell you is this, I stumbled on the Austrians in the late 80’s and THANK HEAVEN I DID!
I saw the dot.com bubble coming and profited from it, I saw the stock market bubble, and yes I saw THIS RE bubble coming back in 2003! I bought gold and silver like the Austrians said to and I have tripled my money while all the “expert economists” and TV pundits ran around screaming the sky is falling!
It must be hard for you Keynesian’s to go through life, crisis after crisis, bust after bust with no IDEA HOW ITS HAPPENING!
It must seem like the wrath of God to you, seemingly coming out of the blue, from no where and with NO CAUSE?
Keynes was a fraud, a huckster, a snake oil salesman, and the vast majority of “modern” economists have been taught this con-game of smoke and mirrors.
They have no idea how to account for what is happening and keep throwing out idiotic suggestions that have been tried and proven failures throughout history….. But maybe THIS TIME it will work! …….not likely.
Take off your blinders, come over to the side of truth, morality, justice, freedom, liberty, and REALITY.
Stay away from Krugman, Keynes, Obama and all the rest on the Dark Side.
Walk into the light of the Austrian School!
lol.
May 6th, 2009 at 1:22 pm
The fact that Yglesias has done a hit piece on a school of thought that preaches justice, liberty and peace says a lot more about his principles and morals than it does the validity of any economic theory.
There is a reason why the mainstream pundits are losing ground, even if they blog, it’s not the medium but the message that people are rejecting.
People are tired of apologists and propagandists for the state, and indirectly for financial oligarchy. And Yglesias plays the part of courtier well, ostensibly because he is on the left, and it is important to keep kicking the right while it is down.
But the larger picture is that the gatekeeper bloggers who protect the left-right paradigm are ultimately going to end up the losers when the masses embrace that it is not about red team and blue team, it is about truth and fiction, justice and criminality, freedom and tyranny.
Mr. Yglesias, can you mount one serious challenge to the ideas in Austrian theory? Better yet, will you?
May 6th, 2009 at 1:35 pm
The most passionate takedown of Krugman was done by Robert Wenzel here.
As for Bernanke being a rock-ribbed right winger, then I’m a ballerina.
May 6th, 2009 at 1:49 pm
I must ask, if the Austrian Business Cycle is so non-predictive, why was everyone else saying that the realestate bubble was never going to crash, that the perpetual good times were here, and when Peter Schiff and other people using the Business Cycle warned of financial instability, unsustainable prices and a looming depression, the “mainstream” economists called them “fools”?
A quick search of YouTube for “Peter Schiff Was Right” turns up example after example.
Yet in the face of very successful prediction, the Austrian insights are called “non predictive”?
Sounds like Sour Grapes to me.
When the Austrians were nay-saying Bush and the Conservatives, they were “left wing”. Now that Obama and the Liberals are following exactly the same policies, and the Austrians are nay-saying them, they’re called “right wing”.
Funny funny.
Economic intervention doesn’t work. Get over the attachment to “doing something to fix the economy” and face simple reality.
Once you do that, the fact that the Mises Institute has a professional Historian there begins to make a lot more sense. Not because they’re fools, but because having an historian is a good thing when you WANT people to remember what has happened in the past, the policies that worked and didn’t, and what predictions have come true and which have failed.
Keynesians don’t want anyone to remember the past, they want to focus on the model of the moment and forget all the failed models that went before it. They want people to forget that it was interventionist policies that caused the booms and busts, in order to rationalize today’s interventions.
May 6th, 2009 at 1:54 pm
I missed Mr. Waldmann’s silly comment earlier. He proved my point. The AER has NEVER analyzed Austrian theory. And never will. Conformists and cowards, I submit.
The other comments suggesting that the Austrian advocates are “Republicans” is ludicrous. The Republicans are just as Keynesian as are the Democrats. Look at who Obama appointed to run the magic Keynesian stimulus machine. Further, the Republicans did everything they could to suppress the message of Austrian advocate Ron Paul.
Come on, all you Keynesians. Surprise me. Show me that you have a slight shred of integrity and courage.
May 6th, 2009 at 1:59 pm
Re-read Keynes all you like, it won’t make sense. The man was erudite, but the General Theory is unreadable because it never made sense, even to him.
May 6th, 2009 at 2:04 pm
Actually, if the theory was on the ash-heap of history, it would be forgotten and no one would speak about it. That public economists go through the trouble of denouncing that it was too important in their work despite the fact that they actively tried to suppress any publication of it shows just how scary Austrian economics remains to the cult of government power, which public economists are paid to defend by inventing nonsensical theories for why it is necessary for the government to have unlimited power.
May 6th, 2009 at 2:08 pm
The essence of capitalism is the lending of money (capital) at a rate of interest. Usury is most often handled by banks. Capitalism is not synonymous with free enterprise. A society can have private exchange of goods and services without using money (e.g., barter system). Most forms of capitalism are not laissez-faire. In the United States, private business is heavily regulated and subsidized. Also, government–the dispenser of monopoly–charters banks and corporations. Under a system of finance capitalism, “high finance” (banking) controls “big business” (industry). American finance capitalism is geographically and ideologically centered on Wall Street in New York City.
Thomas Jefferson, John Taylor, Andrew Jackson, Martin Van Buren, and other early American liberals were especially opposed to centralized banking, but they also objected to banking per se. They were opponents of capitalism, viewing it as a linchpin of aristocracy and considering bankers, stockjobbers, and speculators to be members of the pernicious idle class. The People’s (Populist) Party and the Democratic Party under Bryan’s leadership extended this anti-banking, anti-capitalism legacy into the twentieth century. In the mid 1890s, “free silver” meant a policy of bimetallism, with silver being coined at a 16:1 ratio with gold. It was not a crackpot scheme. It had a sound historic and economic basis, but it stirred up heated opposition on the part of President Grover Cleveland (Democratic Party), soon-to-be President William McKinley (Republican Party), the metropolitan press, and other elements of society beholden to the financial establishment. The demonetization of silver in 1873, resumption of gold specie payments in 1879, and repeal of the purchasing clause of the Sherman Silver Purchase Act in 1893 were opposed by agrarian liberals not only because the new financial policy depreciated the value of farm products, but because it symbolized domination of the U.S. government by an Anglo-American banking syndicate headed by J.P. Morgan, August Belmont, and the House of Rothschild. Bryanites believed that the provision of the Gold Standard Act (1900) turning the U.S. currency supply over to the national banks was a violation of the constitutional clause empowering Congress to coin money and regulate its value, and a repudiation of the Jefferson-Jackson tradition of opposing private control of the nation’s finances.
As early as 1900, Bryan condemned the idea of a central bank for the United States because he believed the major New York bankers would monopolize the system. In 1908, a National Monetary Commission was created to devise a plan for a central bank. Bryan was a leading opponent of the Aldrich-Vreeland Act, which created the Commission. The currency reform recommended by the Commission was the Aldrich Plan, a centralized banking system which could easily be controlled by Wall Street. In 1912, Bryan strongly opposed the Aldrich Plan and presidential hopeful Woodrow Wilson came out against it as part of his strategy to gain Bryan’s support for the Democratic nomination. Ironically, Bryan played a key role in passage of the Federal Reserve Act (1913), which was essentially the Aldrich Plan in disguise (see Gabriel Kolko’s The Triumph of Conservatism). In 1921, Bryan privately condemned Wilson for “turning over the Reserve Bank to the control of Wall Street” and publicly accused the Federal Reserve of being “the tool of Wall Street.” Throughout his career, Bryan opposed the influence of international bankers such as August P. Belmont and J.P. Morgan within the Democratic Party. He opposed a national debt partly because it was largely owed to private bankers.
(Source: J.L. Taylor, Where Did the Party Go?: William Jennings Bryan, Hubert Humphrey, and the Jeffersonian Legacy, University of Missouri Press, 2006, pp. 191-93).
rapier is right. Ron Paul has more in common with William Jennings Bryan than he does with William McKinley. The same could be said for Russ Feingold. The true heirs of McKinley-TR-and-Wilson are Obama Democrats and McCain Republicans. In other words, the Center of wealth and power. Austrian economics and libertarianism in general may not be right about everything, but they serve as a nice corrective to a status quo that is bankrupt in every way–financially, intellectually, and morally.
May 6th, 2009 at 2:10 pm
I laugh at the myth that the Republicans were all about DE-REGULATION and that the FREE Market is to blame for this (or the Great) depression.
If this was truly a free-market economy then two things would be true:
1) NO Federal Reserve or Central Bank (a Marxist plank) would set any interest rates or manipulate money (or print it for that matter!)
2) NO Lobbyists would exist. ZERO! The word “Lobbyist” was coined during the Grant administration. Because there is an intrusive Federal Government meddling with markets then big corporations can afford to lobby for preferential treatment from the Federal beast that taxes, regulates, subsidizes, imposes tariffs, restrictions and even licenses for conducting business.
Until then the market is and ALWAYS WAS REGULATED! The market can regulate itself. If you don’t believe that, then have your Emperor Obama regulate Political Blogs and see how well they do. DailyKos became an internet phenomenon DESPITE the goverment, they fulfilled a void in the market and provided a service to an undeserved internet audience.
Both Democrats and Republicans visited this pain on us with their meddling of the economy.
May 6th, 2009 at 2:11 pm
Got any thought on it of your own ? .
The Austrian theory is based on common sense and sound reasoning, if Krugman and the Keynsesians were correct then zimbabwe would be the world’s blue print on how to create wealth for everyone, you may say that’s hyperbole but that is the logical conclusion of the policy which they advocate .
The central bank and it’s fiat currency creates the boom and bust cycle .
May 6th, 2009 at 2:12 pm
Pascal Salin, professor at the Université Paris-Dauphine and a specialist in public finance
May 6th, 2009 at 2:12 pm
Keynes had this right: Often, if not always, “it is ideas, not vested interests, that are dangerous for good or evil.”
Neokeynesian Krugman, who together with also monetarists, never saw the current financial problems (recession since more than a year) coming, only the Austrians and you have to ask yourself how one school of economic thought can get it right and the others not, what merit there is. The Austrian school in the tradition of Mises, Hayek, Rothbard et. al. is an international school (being taught in Europe, South America etc. in several countries). Several hedge fund managers uses its analysis, including the short sellers and prudent bear fund etc. Obviously the Keynesian and Austrian school see the cause of the depression in the 1930’s till 1945 differently. Krugman described the war industry and industrialization during as the reason why the US came out of recession, thus he is in effect advising war as a way to get out of the recession by implication! Bad ideas are indeed evil and have evil consequences.
Consider that all in the Austrian school, including currently Peter Schiff, Jim Rogers, Marc Faber, Bill Fleckenstein, Murray Sabrin etc. were consistently against Greenspan lowering interest rates too much a few years ago and keeping them there for too long and also with Bernanke last year and this year, all against the Iraq and the current Afghanistan war/invasion and Pakistan attack. They are also strongly pro-civil liberties and have a high degree of knowledge in philosophy and interdisciplinary intellectual discussion.
One wonders which country Mr. Krugman and co. favors invading?
Mr. Yglesias, is the US Fed really without any blame and should they be without any real oversight and auditing? (Note that they are a group of private bankers that can never loose money…they just print more. As Marc Faber has recently said, Dr. Bernanke is actually following the new economic school of thought, called the Zimbabwean model under pres. Mugabe. He has been to Zimbabwe and has thus first hand-experience).
One wonders how the non-regulation of the fed logical consistent with la iberal interventionist and utter regulation of the market? Both political leftwingers and rightwingers should be critical of the fed. This is also an issue which truly brings people together, the real change you can believe in. (BTW Austrian theory has in effect been successfully implemented in the past in the US after Jefferson and other presidents abolished (or tried to abolish, like JFK) the national bank and the currency was back by a commodity: gold, as it has also been in the 1930’s.
Gerald Celente – an economist with trend research, has predicted many crisis corrected, Marc Faber and Jim Rogers saw the Japanese and Asian crisis. In 1983 Ron Paul predicted a stock market crisis in 1986 or 1987 and in 2003 he predicted one in 2007 or 2008. How right he was (Everyone can research the youtube with interviews with Paul to verify this) and is.
As the saying goes, it makes one think (or rethink/reconsider)……
May 6th, 2009 at 2:16 pm
The Austrians have responded to the criticisms of Krugman and Cowen, rather effectively IMO.
http://mises.org/story/3155
May 6th, 2009 at 2:17 pm
I’m reading a lot of extremely ignorant and illogical comments here, e.g.
“Oh so they’re like Muslims who don’t believe in interest rates? Have to say without oil, the Muslim nations’ economies would be crap.”
Austrian economics is constructed with logic on a foundation of axioms of human behavior. It is because of this solid basis for Austrian theory and conclusions that they were able to predict the current crisis.
Some of you should actually read Austrian economists before running off at the mouth repeating ridiculous straw-man arguments.
You’re in a huge economic pickle. Your livelihood and your security are at stake. Now choose – to get out of this pickle will you take the advice of the same people who told you that there was no crisis looming (Keynes, Krugman, Bernanke, Paulson, Greenspan, et al.), or will you try to learn something from the people who tried to tell you that things were going very, very badly, and who did so even when superficially it appeared that the entire inflationary regime was running like a champ?
May 6th, 2009 at 2:18 pm
You forgot to mention that the Austrians were the one group of economic thinkers who had the foresight to see this crisis coming, years before it hit the fan.
May 6th, 2009 at 2:22 pm
Most schools of economics claim to be science, akin to the physical sciences. This allows for more academic respectability, and more jobs in academia and government, and to a degree in business. Physical science through its self-correcting methodology involves prediction. Whatever theoretical attractions Keynsians, neo-classicals, monetarists, etc. may have, their ability to predict is abysmal. When presented with that fact, the best answers amount to something like: weathermen don’t have perfect track records either.
In order for them to improve on their track records, greater macroeconomic controls would be necessary. And administrations from FDR on have been accommodating them, at an accelerating pace. While that may be good news for the economists, the rest of humanity hasn’t fared too well under command economies.
Whatever it’s weaknesses, as I understand Austrian economics at is base is individual freedom. The other schools ultimately require the state to override basic property rights, to wit, transfer wealth through coercion. Not to recognize and admit that is to obscure the debate, with designations like party, economic school, “liberal” v “conservative” becoming worthless.
May 6th, 2009 at 2:24 pm
theZRC Says:
You forgot to mention that the Austrians were the one group of economic thinkers who had the foresight to see this crisis coming, years before it hit the fan.
Matt Yglesias didn’t forget. It didn’t fit into his hit piece. He wasn’t trying to make an informed statement.
Not too many Republicans in this thread, which shows that Matt Yglesias’ paranoia unfounded.
Which was silly anyway, because Yglesias should be happy to see the Republicans embracing a philosophy of peace, liberty and justice.
May 6th, 2009 at 3:14 pm
How long must we accept the snakeoil belief that “deficits don’t matter” and “money can and should be printed at will to stimulate the economy”?
All “mainstream” ( translation: government-approved ) economists were totally wrong about this crisis, and their policy prescriptions ( “create lots of faith-backed fiat currency and debt out of thin air” ) are going to make things worse, not better.
Politicians oppose honest money based upon tangible commodities such as gold or silver because such limits on the creation of funny money would keep them honest; they’d have to “live with their means”, just as normal people without access to their own money-printing-machines must.
Warren Buffet recently predicted the likely consequences: massive inflation. Welcome aboard, a lot of us have been saying that for a long time.
May 6th, 2009 at 3:31 pm
It amazes me how people keep defending and following the Keynesian model that has so thoroughly trashed our economy because it fits their big government has the answers philosophy. If we could find somewhere, anywhere, where a big government run economy produced wealth and freedom for the citizens, it may be worth looking at. But Keynesian thinking only benefits the government and gives them cover for further intrusions into people’s lives. To put it bluntly, the Fed runs the economy as effectively and efficiently as the US Postal Service delivers mail.
May 6th, 2009 at 3:51 pm
It makes me almost teary eyed to hear so many logical rational Austrians sound off like they got a pair!
Austrians RULE! Keynesians suck eggs!
Sound logic and reason trumps horse pucky, yet again!
Rock on Austrians, the world is hearing you and this makes the powers that be VERY nervous!!
Their lies are crumbling and are harder to sell every day!
Keep telling the truth!
Thank You Von Mises, Rothbard, Hazlet, Schiff, Ron Paul, Jefferson, and all the other true heros of Liberty and Morality who have defied LEVIATHON and the conformity, propaganda, ignorance, and cruelty of our masters, and their apologists like the Blogger who spawned this fraudulent hit piece of garbage! Your shallow and pathetic attempt to discredit the Austrians will fail, just as all the Keynesian nonsense eventually does!
AUSTRIANS RULE!
May 6th, 2009 at 4:07 pm
It fascinates me that you would belittle an economic theory that defends Sound money, and Honest monetary policy. You called austrian economist “fringe” but for years they have foreseen the financial debacle we have now endured by both the right and the left. Such “fringe” economist as Mises, Rothbard, and more recently Peter Schiff have warned us for years about the inflationary policies of Govt. and the Federal Reserve, and the dire consequence of govt. intervention into the markets.
You may have a degree in economy, but that does not mean you know what your talking about.
1)You support Keynesian Theory. That the best way to wealth is through debt. That is like me saying The best way for me to become rich is to max out my credit card. What happens when the creditors call in the debt???
2) You embrace the Fed.-Since 1913 the dollar has lost about 97% of it’s value. Not only that, but because of their inflationary policy. They have reaked havoc on savings. Anyone with a fixed income will tell you how they truly feel about inflation….
3) You believe in fiat currencies. In which the fed dictates the value of the currency by the supply of it. Honest money has a stable value, hence making it more reliable as opposed to Fiat money that changes in value according to what the Fed. says.
As a progressive, how can you support any of the policies of this adminstration or the fed. Inflation wipes out the middle class. More spending and borrowing and credit creation does not lead to prosperity. Only hard work and savings does….
Read Tom Wood’s Book before you decide to spread your insedious lies. Dont try to push your agenda of blind faith in the adminstration and the status quo. Just because you buy that crap doesn’t mean that regular people aren’t waking up to the fraud that is Central Economic Planning and Keynesian Thinking.
May 6th, 2009 at 4:10 pm
@#9 rapier,
Notice that a mere 100 years ago the free coinage of silver was considered radical and inflationary. But silver coinage would be considered downright reactionary by progressives today, because while not gold it is still “hard” money. From the Austrian standpoint silver money is far superior to the fiat Fed Monopoly money we have today. But you keep on believing that the Fed can keep counterfeiting without repercussions. Only a child or an overly educated economist would believe such patent nonsense.
May 6th, 2009 at 4:15 pm
On top of that, the contradictions in their theories are laughable (outlawing partial reserves while screaming to allow all voluntary contracts, anybody?)
Oh dear, that’s quite the laughable straw man, Mr. Micro. Just how would Austrians “outlaw” partial reserves? With the heavy handed state, I’m betting! A big Homer Simpson “Doooo!” on that one. Actually Austrians believe in free competition, where any bank could offer partial reserves. They’d just be at a competitive disadvantage in a system where they weren’t subsidized by a state.
Keynesianism runs into the same sort of us against them mentality some times, but the practitioners are generally a lot brighter, and it is often only the leading voices who like to play Grand Inquisitor.
LOL!! Boy, yah had me all da way until dat, Pooh Bear. Now we see that the objective, triangulating Mr. Micro isn’t so objective after all. All these comments above just so well demonstrate that it’s not that the socialists can’t or don’t understand Austrian theory, they love the state more than anything else, and certainly more than the truth.
May 6th, 2009 at 4:18 pm
It would be nice if Mr. Yglesias actually read Mr. Woods’s book.
May 6th, 2009 at 4:35 pm
Apparently, no one has to work anymore, we can simply print more money. Wow, who would have thought it was that easy?
Mr. Yglesias, I highly recommend you buy some gold and silver just in case. No one will have to know.
May 6th, 2009 at 4:45 pm
I’m a new reader to the Austrian thought but to summarize the simplistic view…
Human nature is to strive for liberty and the Austrian Economic thought gives us the best chance at it.
May 6th, 2009 at 4:51 pm
Indeed, the wacky ideas of sound money, free economics, and the take down of government waste and theft via interest rate manipulation and inflation is undoubtedly ridiculous.
The Republicans are gasping for breath and they are temporarily allying with classically liberal ideas. Economically speaking, Republicans Democrats are Keyensians, they are jointly fascist and classically conservative — FDR and Hoover were not that different.
Without central economic planning they would have no wars, welfare, or power.
May 6th, 2009 at 5:01 pm
I’ve read all the critiques (except Cowen’s book, “Risk and Business Cycles”, b/c it’s $200) open-mindedly, and have yet to see any good refutation of the theory. Those who have tried (Krugman, Cowen, etc) are usually missing a crucial point in the theory that holds the whole thing together.
So don’t knock it until you’ve read Woods’ book. In fact, even then you should probably wait until you’ve read it from several sources, including Mises, Hayek, Rothbard, and Garrison — just to be sure you actually understand it.
Here’s a good telling from Garrison to get you started…
http://fee.org/Audio/AES/FINALAustrian-RogerGarrison-TheContinuingRelevanceofAustrianBusinessCycleTheory.mp3
And the accompanying slides…
http://www.auburn.edu/~garriro/macro.htm
May 6th, 2009 at 5:01 pm
[...] on the Austrian Business Cycle. I suspect he will end up regretting this. The Austrian defenders that Woods can rouse will disrupt Yglesias’ normally group think [...]
May 6th, 2009 at 5:08 pm
When I took macroeconomics in college, our (Keynesian) professor gave us a matter-of-fact explanation of the way electoral politics drives monetary policy. If sub-par economic growth becomes a political problem for the president, he calls up the Fed chairman and says “Hey man, if you’d like to get re-appointed next term, I could really use some help over here.” The Fed invariably responds by loosening monetary policy to goose the economy, often just in time for the November elections.
At the time, my Econ professor had no special name for this phenomenon, but in the years since it has come to be known as the “Greenspan Put” aka “rescue inflation”. As this behavior was repeated over and over, it gradually became conventional wisdom that the Fed would always ride to the rescue with easy money if slow economic growth became politically inconvenient.
Once it became conventional wisdom, the Greenspan Put was routinely factored into decision-making processes of investors and policy-makers throughout the economy. The net effect was a reduction in perceived downside risk, and a corresponding increase in risk appetite, which greatly contributed to the current system of privatized profits and socialized losses.
Caplan seems to argue that such Fed interventions were transient and minor, so rational investors would ignore them and base decisions on the “real” — i.e. sustainable — rate of interest. But in the decades since the Nixon Shock, those interventions have been virtually continuous, and they have become a critically important part of the economic landscape that investors ignore at their own peril.
So please enlighten us, Matthew — is the “Greenspan Put” (google it) merely a figment of the fevered imagination of evil Austrians? Or did easy money policies at the Fed cause investors to take on more risk, and more leverage, than they otherwise would?
May 6th, 2009 at 5:09 pm
“and classically conservative”
Mr. DeWind, I support Woods vs. Yglesias in this debate, but whatever the modern Democrats, Republicans and Keyensians may be, they are not conservatives and they are certainly not classical conservatives. All of these clowns wouldn’t know Burke and Kirk from Herk and Jerk.
May 6th, 2009 at 5:11 pm
Also, I am an admitted layman. If ABCT is not a good theory, it would be helpful if Cowen, Krugman or DeLong (or whoever) would actually provide an in-depth critique, allowing for real back and forth debate with an Austrian school scholar. Bob Murphy actively sought a discourse with Cowen over ABCT, and Cowen ignored his pleas. I’d like being vindicated, but more than anything I’d like to be informed. In order for that to happen, someone has to provide a solid critique…not some sloppy, dismissive write-up on Salon based on a perception rather than a reading! Until then, I’ll stick with the ones who have best expounded and defended their ideas.
May 6th, 2009 at 5:17 pm
I’d like to echo Justin DeWind’s assertion that “FDR and Hoover were not that different.” There’s a reason FDR supported Hoover for President in 1920. Yes, FDR favored Hoover for the Democratic presidential nomination, declaring, “He is certainly a wonder, and I wish we could make him President of the United States. There could not be a better one.” At the time, W.J. Bryan was dismissing the fence-straddling Hoover as someone only “the reactionary element” of the party could support and liberal Senator Hiram Johnson (R-CA) was condemning Hoover as a front man for J.P. Morgan & Co.
The straw-man myth of Roosevelt and Hoover as opposites is akin to that of Kennedy and Nixon as antithetical. JFK and RMN had different personalities but similar ideologies. In 1960, CBS commentator Eric Sevareid noted that Nixon and Kennedy were both “sharp, opportunistic, devoid of strong convictions and deep passions, with no commitment except to personal advancement.” Another piece of history relegated to the memory hole of mainstream history.
May 6th, 2009 at 5:28 pm
Forgot to mention, several Austrians have tried to actively engage DeLong directly on his blog, and he shamefully started editing and selectively deleting polite, well-reasoned arguments. Can I say it again? Shameful!
See Horwitz’s post (this was about the 3rd instance of this I was aware of — the first time I saw the comments come and get pruned in near real-time).
http://austrianeconomists.typepad.com/weblog/2009/03/ol-brad-is-at-it-again.html
May 6th, 2009 at 5:52 pm
‘Tis an interesting situation. Mainstream economists, like Krugman, Cowen and Quiggin, utterly failed to predict this crisis, or any crisis before it. Crises always take mainstream economist completely by surprise, because in their fevered imaginations, everyone already knows everything there is to know. So how can they get it so wrong?!!
But instead of analyzing their own failed theories and improving them, they try to divert attention from their failures by attacking the only school of economics that explains business cycles and predicted this crisis.
Whatever happened to intellectual honesty?
May 6th, 2009 at 5:54 pm
What is this drivel? Mr. Yglesias, you might consider actually learning about the Austrian School before drawing any conclusions about it. Your vague and dismissive language demonstrates your willful ignorance of the subject.
If Thomas Woods were telling “the right” (more dissembling: I assume you mean “Republicans”) what they had wanted to hear, why have they waited until now to start pretending to listen? Woods has been “pushing” Austrian economics for years, and only now do we see Republicans feigning opposition to more government spending, budget deficits, economic interventions, etc. after eight years of supporting those same policies under Bush.
If you have any regard for truth, you would do well to give Austrian economics another look.
May 6th, 2009 at 5:56 pm
“Austrian Business Cycle theory was, at the time, a major advance but one that’s long since been superseded. ”
Superseded by…. socialism?… I have lived with the socialists here in Canada for all of my life and I will take Von Mises and the austrian economists over them any day.
May 6th, 2009 at 5:57 pm
Any critic that tries to “refute” the theory always mis-states it first, making it much easier to take down–Which is what every critic has done.
They tend to leave out one thing, either the structure of production, the supply of money or the level of interest rates. Leave on thing out and the entire logical structure of it is useless. The Austrian Business Cycle Theory is joined at the hip with Austrian Capital Theory– Without the Capital Theory, the Cycle Theory bombs, which is the usual way critics try to go about discrediting it.
The bottom line is, when banks corrupt money, everything else gets corrupted with it. The corrupted money travels through the economy causing a boom which will lead to a bust because the corrupt money does not reflect the realities of materials and production in the economy. The cycles happen more severely when you have central banking, which is what the US has in the form of the Federal Reserve.
Presented in its complete form, the Austrian Business Cycle Theory is hands down, the best theory to explain business cycles, past or present.
May 6th, 2009 at 6:04 pm
This article, and many of the comments made in support of it, are a sad demonstration of the fact that few people today know how to reason correctly.
For example, the results of a poll — even a poll of tenured economics professors — cannot establish anything more about a theory than its popularity amongst the group that was polled. It certainly does not constitute a *refutation* of the theory. Many ideas that were unpopular at one time were later seen to be correct, when examined in the light of reason rather than politics or other self-serving expedience.
May 6th, 2009 at 6:06 pm
“Gunnar Myrdal(the Swedish economist who participated in Sweden’s very successful escape from the Great Depression) called for the elimination of the Nobel prize in economics (which he shared in 1974 with Hayek) because it was awarded to Hayek and Friedman and he thought that made the prize a farce.”
Well they did give a prize to Arafat and even one to Al Gore so yea I would say it is a farce.
May 6th, 2009 at 6:13 pm
Krugman’s “takedown” is mostly just sad.
He actually asked why there isn’t unemployment during the boom period, even though investment had to shift… Seriously, an 8th grader could answer that.
http://mises.org/misesreview_detail.aspx?control=53
Caplan on the other hand thinks entrepreneurs have crystal balls. The observations and predictions necessary for Caplan’s theory to work are impossible to make.
May 6th, 2009 at 6:14 pm
Neither Krugman nor Keynes are economists. Economics is the study of why people do what they do, not the practice of inventing byzantine rationalizations for power-grabbing.
May 6th, 2009 at 6:15 pm
they did give a prize to Arafat and even one to Al Gore so yea I would say it is a farce
There’s also the little detail that there is no Nobel prize in economics. There’s a prize that a bunch of bankers have tried to associate with Nobel.
May 6th, 2009 at 6:24 pm
Thanks for these links that critique Austrian business cycle theory. As a fan of Dr. Paul and Dr. Woods and someone that sees a great deal of logic in the theory, I’m always seeking good falsification of it. After all, any idea worth keeping is one worth trying to prove wrong.
It’s very important to note that Paul and Woods are both principled people who have been outspoken critics of Bush and his policies. That hypocritical partisan hacks are now coming to the party shouldn’t be held against these two men.
A couple thoughts.
#1. Krugman’s 1998 “takedown” is built on a strawman characterization of the theory. Krugman is also a rapidly ideological keynesian who misunderstands the broken window fallacy and literally advocates digging wholes and filling them back in as a way to generate wealth. David Gordon rebuts it here: http://mises.org/misesreview_detail.aspx?control=53
Take it or leave it.
#2. I love George Mason University’s scholars, but I’m not very convinced Bryan Caplan’s rebuttal of the theory either. In his case, he believes that entrepreneurs are able to forecast government/fed policy changes and adjust their expectations to compensate for the incentives brought about by the price fixed interest rates.
Anecdotally, I’m not sure this criticism holds water. Monetary policy, interest rates and their causal relationship to inflation and asset prices are not widely understood by anyone, let alone particular widget makers. The time periods for their impact are also not known. Even if you believe inflation and higher rates are coming, one may still jump in anyway hoping to time the peak of the market before the credit burst. The fact that “housing always goes up” became a pervasive cultural meme pretty successfully falsifies this idea that entrepreneurial foresight compensates.
or maybe not. It’s a very interesting debate. What isn’t interesting is any attempt to marginalize debate and narrow the scope of discussion through ad hominem argument. Keynesianism has been proven wrong too many times to continue adhering to it (1920’s depression, Post WWII boom despite massive drop in G, Japan, Ireland, Stagflation, etc). It’s time to broaden the mainstream discourse.
May 6th, 2009 at 6:32 pm
Gunnar Myrdal is only half-right. They should abolish the Nobel prize for economy, but not because Hayek won it. They should abolish it because Paul Krugman won it. Not it really is a farce
May 6th, 2009 at 7:18 pm
Can all the Keynesians on this board explain why we are not all wealthy beyond belief right now? I mean Bush just borrowed 5 trillion over 8 years and now the economy is collapsing. Do Keynesians really believe that printing money is what brings wealth? Maybe we should ask the poor souls in Zimbabwe.
If you ask me, the cranks our the one who think Paul Krugman and the likes are serious economists. Krugman has no credibility. I stand with the austrians and the founding fathers…sound money and balanced budgets.
May 6th, 2009 at 7:33 pm
Dignan said:
Oh dear, that’s quite the laughable straw man, Mr. Micro. Just how would Austrians “outlaw” partial reserves? With the heavy handed state, I’m betting! A big Homer Simpson “Doooo!” on that one. Actually Austrians believe in free competition, where any bank could offer partial reserves.
That was not my understanding, though if it is the case that Austrians feel this way, then it is at least less internally inconsistent. Still, my understanding is that they believe that fractional reserve banking is fraud and should be outlawed. Also, understand that Austrianism is a “school” of economics, and not a political philosophy. You seem to confuse the two.
Also said:
LOL!! Boy, yah had me all da way until dat, Pooh Bear. Now we see that the objective, triangulating Mr. Micro isn’t so objective after all. All these comments above just so well demonstrate that it’s not that the socialists can’t or don’t understand Austrian theory, they love the state more than anything else, and certainly more than the truth.
I regret to say that I haven’t the first idea what this means. Keynesianism has some important insights to give. So does Austrianism. Neither, from my way of seeing things, approximate “the truth” to any great degree. As I said, the high priests of Keynesianism, the Krugmans and Delongs, often display a need for ideological purity which rivals the Rothbard cult, but there are a lot of sensible Keynesians with whom I have had experience, and they are not always so dogmatic. Anent intellectual purity, it should once again be noted that perhaps one of the three the finest economists of the 20th century, and certainly the finest Austrian, von Hayek, is left off most of the lists above of Austrian heroes. Why is that? Not pure enough for you guys?
A bit O/T, but one of the most frustrating things about the “Austrian” school is that it was historically so important in micro with the work of Menger and B-Bawerk, but even looking at basic micro the Austrians are stuck in the past like a semi-Neanderthal clan that never passed basic calculus, and only wants to use infinitesimal numbers when drawing an unbroken curve, and never when old Murray wants to prove that all other theories are bunk, or when somebody might have to take the derivative of a function (the horror!!!)
- A Microeonomist
May 6th, 2009 at 7:47 pm
1. Don’t argue about schools. Authors write books, not schools.
2. Don’t read Keynes. It doesn’t make sense even after third reading. That’s why it’s a religion today as it’s been for 50 years.
3. Take Human Action from Mises and read it. Give it a try; you will be pleased by the book although it takes weeks or months to have it done.
4. Use logic in your arguments. Economics is not law.
May 6th, 2009 at 8:24 pm
Read this.
http://www.mises.org/store/Product.aspx?ProductId=119
May 6th, 2009 at 8:32 pm
Microeconomist, please tell me what you thought of Adam Smiths Wealth of Nations. And have you read anything by Richard Cantillon?
May 6th, 2009 at 8:54 pm
Wealth of Nations is a fantastic book, though, as you know, many of Smith’s theories about pricing were pretty far off. Still, it is one of the classics. One should note that Smith probably considered himself a philosopher rather than economist, so his books should be read with that in mind. Also, I think Smith is better understood by reading Moral Sentiments as well. One of his greatest insights, I think, comes in the first hundred pages when he talks about wages in a progressing versus steady economy. It is still something that is little understood in the political arena, as people assume that you can choose stability and income versus growth, but so much of the economy is forward looking that any plans to halt growth imperil those parts of the economy, and lead to a lack of stability as well as a lack of growth. Just a rant, I don’t think people touch on it enough.
I am familiar with Cantillon as a name and as somebody who is cited a lot, but if I have read his work, it was not closely, and I do not remember it well enough. Sorry.
As to an above comment, I really don’t think Human Action was a very good book. It was basically a polemical work about how wrong everybody else was. I do think Theory of Money and Credit was good, especially the first part on the history of money and the regression theorem of currency.
- AM
May 6th, 2009 at 9:05 pm
Dave,
Saying “For instance, they suppose that as investment increases, consumption will fall, which is empirically incorrect” is extremely confusing and possibly misleading, since you have neglected time. If I invest $100 in a company or a house or car or anything I have $100 less to consume with, consequently my consumption must decrease. I can’t spend $100 I don’t have. That’s instanteously. However, over time, that investment can lead to increased consumption because the next $100 I earn I don’t have to use on savings or investings and can use it for consumption.
Microeconomist,
I have never known an orthodox Austrian to advocate the outlawing of fractional-reserve banking in the form you assume–a coercive intervention. The Rothbardian position is that fractional-reserve banking is a coercive action in and of itself and can be met with an appropriate reply (see Rothbard, The Ethics of Liberty. The other position I have seen is that in a true free-market fractional reserve banking becomes impossible because not only will people stop using that bank for anything (the people who run the bank might even be personally boycotted and denied goods and services), but other banks will take advantage of the situation and it will fail either way.
May 6th, 2009 at 9:21 pm
I think the more relevant question is, “what if the Austrians are correct?”. Well, as it turns out I’ve got bad news.
Nearly all Austrians are predicting a collapse of the fiat U.S. Dollar. But hey, maybe we’re just crazy?
O that’s right, we’ve actually been right about the 87 crash, the stagflation of the seventies, the dot-com bubble burst of 1999, the market sell-off in the fourth quarter of 2008 and we are correct about this.
How are you going to protect your loved ones, Mr. Yglesias, when the U.S. Dollar collapses and your paper notes will not buy you anything?
I hope you reconsider your critique of the Austrian school and particularly your equating of Austrian school principles with the Republican Party. PWAH! Garbage.
Pat
May 6th, 2009 at 9:24 pm
Scarlet,
You will have to forgive me, as I haven’t read Rothbard’s work in a long time, and frankly, it never really impressed me. I will attempt to speak to your point in two ways. First, your say that Rothbard considered it coercive. I think what he actually said was that man has a right to property, therefore theft was not permitted, and fraud was theft. Since he believed that the act of entering into a fractional reserve contract was inherently fraudulent, fractional reserve banking was theft, and therefore violated the rights of one of the parties. Now, in a fantastical Rothbardian world of no public police and courts, you could say he didn’t support government stopping fractional reserves, but that doesn’t preclude private courts stopping them, which I believe he did support. Either way, he wanted it gone. In the real world we do have public courts, legislation and police, so the only possible way to pursue his goal would be through the system. Again, it should be pointed out that Austrianism is an economic theory, and it has to be separated from anarcho-capitalism or whatever the kids are calling it nowadays. Also, I don’t buy the argument that it would disappear. People would choose fractional reserve banks at some price (interest rate) at which the risk adjusted return would be better than a vault bank. That is pretty basic price theory.
Second, it always struck me that Rothbard reasoned the wrong way around. He believed, through Mises, that fractional reserve banking was the root of all business cycle problems. Perhaps they were right, perhaps not. From there, he looked for a way to paint FRB as a moral/legal problem, when in fact it simply has the same characteristics of most voluntary contracts.
Sorry if I am wrong on my facts, that is how I remember it.
- AM
May 6th, 2009 at 9:52 pm
I have always found this post to be just about the finest application of the predictive power of ABCT. It is also hilarious. Take note of the author and the date:
http://www.marginalrevolution.com/marginalrevolution/2005/01/if_i_believed_i.html
May 6th, 2009 at 10:14 pm
I’m glad that was only 4 paragraphs long. It was very painful to read.
And yes, Krugman’s article is quite the takedown of Austrian theory–if you trust his representation of Austrian theory, that is.
The easy solution to all of our problems: Have the government set up a massive public works project where we all build massive pyramids to praise our overlords. Right, Krugman?
May 6th, 2009 at 10:43 pm
http://www.marginalrevolution.com/marginalrevolution/2005/01/if_i_believed_i.html
This is one of the funniest things I’ve ever seen…
After making that prediction and seeing the results, how could that person not become Austrian?
May 6th, 2009 at 11:03 pm
Given a free market in banking, would you rather put your money in a bank that has fully reserved deposits, or to a bank that does not. The answer is obvious, and thus a banking cartel was developed that institutionalized fractional reserves, and in which fully reserved banks are deprecated within the economy – fully supported and backed by the government
May 7th, 2009 at 12:07 am
Phil says: Given a free market in banking, would you rather put your money in a bank that has fully reserved deposits, or to a bank that does not. The answer is obvious
What makes you say this? I think it is an extremely naive look at the situation, since the costs of holding your money in the two institutions are not the same. By your logic, nobody would ever choose a money market account over a FDIC insured account, but we know that isn’t the case. Is there not some risk people will take on for a slightly higher yield?
- AM
May 7th, 2009 at 12:42 am
Too bad the author is not aware that Austrian Economic theory is not part of the GOP or the “right” whatever that is. Seems like the statists on the Left are only aware of themselves and the statists on the Right. Austrian theory is not statist and therefore not part of the Right, conservatives, the Republican party, etc. It is libertarian, what was considered classical liberal in the 18th and 19th centuries before statists coopted the label “liberal” for themselves. Ever wonder why they did that. Kind of like naming prison camps “re-education camps” or renaming the “we are taking away your right to a secret ballot election act” to the “employee free choice act.” It just sounds so much nicer and matbe it won’t hurt as much.
Also, Mr. Yglesias mentions that John Quiggin states that the Austrian Theory of the Business Cycle has been superceded. I’m wondering by what? That’s a very interesting claim since the Business Cycle “boom-bust” cycle appears to still be with us the last time I checked. Didn’t Chrysler just file Chapter 11 last week? Or was that because things are going so well for them? Oh, and didn’t Hank Paulson tell us if we did not give him $700 billion big ones last October, to shore up the banks, the world would cease as we know it? Some one needs to tell John Quiggin the business cycle is still alive and well and is being constantly nourished by our wise leaders in D.C. It would appear Mr. Quiggin knows as much about economics as….well you get my drift.
May 7th, 2009 at 12:58 am
I have to agree about reserve ratios, but I think banks will lose the definition of “banks” when they start to structure their assets with <100% reserve ratios and be much less fungible when it comes to daily transactions. Lending out the value in assets multiple times will be more like a stock or bond, and there will be much more complex conditions on collecting that money.
One theory of free banking points back to a provisions in England in the early 1800’s banks. Under free banking some banks were subject to a competitor amassing many bills and running to a bank to collect what ever those bills were backed by. The first “bank runs”. How to solve this problem? Include a small part of the bank contract that says banks may delay payment for a period of time but be forced to pay an agreed upon amount of extra interest(on top of what was already being paid). This provision prevented virtually all major bank runs during the free banking periods.
May 7th, 2009 at 1:28 am
Raw Materials Economics derived from the study of actual economies and not ivory tower pseudo-intellectualism proved its assumptions correct but has been discarded because of its threats to political economics and the banksters who profit from it. None of this other stuff, so-called economics, makes any sense as indicated by the discussion here.
When leaders start talking parity for raw materials producers then our money will stabilize and as long as raw materials producers must borrow for the next round of production nothing will change except for the worse.
May 7th, 2009 at 1:30 am
The following almost burned out the circuit in my sophistry detector…
You will have to forgive me, as I haven’t read Rothbard’s work in a long time, and frankly, it never really impressed me. I will attempt to speak to your point in two ways. First, your say that Rothbard considered it coercive. I think what he actually said was that man has a right to property, therefore theft was not permitted, and fraud was theft. Since he believed that the act of entering into a fractional reserve contract was inherently fraudulent, fractional reserve banking was theft, and therefore violated the rights of one of the parties.
In other words, since theft is always a form of coercion, it is coercive! What part of this formulation do you not understand?
You will have to forgive me, but I never read your stuff before, and frankly, it doesn’t impress me.
Now, in a fantastical Rothbardian world of no public police and courts, you could say he didn’t support government stopping fractional reserves, but that doesn’t preclude private courts stopping them, which I believe he did support. Either way, he wanted it gone. In the real world we do have public courts, legislation and police, so the only possible way to pursue his goal would be through the system.
Rothbard assumed, as all Austrian economists do, that fractional reserve banking would succeed or fail on its own merits in a free market. “He wanted it gone” only in the sense that he thought it would fail, but he did NOT propose that it be eliminated coercively. Rothbard did indeed propose and advocate the elimination of the state, or anarcho-capitalism, as we “kids” call it, as the real-world solution we should strive for, but he would never seek to impose his ideas within your “system”.
Also, I don’t buy the argument that it would disappear. People would choose fractional reserve banks at some price (interest rate) at which the risk adjusted return would be better than a vault bank. That is pretty basic price theory.
Who made that argument, or ever argued against it? Certainly not Rothbard. People should be free to enter into any and all contracts, wise or unwise, that don’t violate others’ property rights. Pretty basic libertarian stuff.
Second, it always struck me that Rothbard reasoned the wrong way around. He believed, through Mises, that fractional reserve banking was the root of all business cycle problems. Perhaps they were right, perhaps not. From there, he looked for a way to paint FRB as a moral/legal problem, when in fact it simply has the same characteristics of most voluntary contracts.
Nonsense. Rothbard went to great lengths to expose the history of FRB, which was indeed immoral and illegal at its inception. In more modern times, although FRB was made legal, governments and bank cartels, in concert with the deliberate dumbing-down of the general population through public “education”, endeavoured mightily to make sure the average citizen had no clue about the true nature of FRB. Today, I doubt if one Congressman in 100 could explain it, if ever pressed to do so by an honest reporter.
The victims of FRB never signed a contract. And to expect them to understand something that was never honestly explained to them is at least unethical. I defy you to show me a contract presented to any depositor that tells him, forthrightly, that his deposit will be diluted through the FRB process and may not be refunded to him if the bank fails.
May 7th, 2009 at 2:05 am
Glen L.,
I quote from Rothbard
It is perhaps a “second-best” solution to the ideal
of treating fractional-reserve bankers as embezzlers, but it
would suffice at least as an excellent solution for the time
being, that is, until people are ready to press on to full 100
percent banking. p. 150, The Case Against the Fed.
Unless you are to presume that embezzling would not be “illegal” in a Rothbardian fantasy world, consider the first two of your arguments refuted.
As to the genesis of the argument against the Fed, we will never know. True, he did a lot of research, and made some good points, along with proposing a lot of conspiracy theories. Personally, I am no fan of the Fed, and would not be upset to see it gone.
As to the argument that FRB would disappear, I don’t know if Rothbard made it (really doesn’t matter since he proposed to outlaw it) but a few people in this thread did.
Deposit contract is a standard, implicit one.
BTW, I put “illegal” in quotations because I have no clue what you people want to call the treatment of theft, murder, fraud and embezzlement in a anarcho-capitalist world. Is there a new word you use?
- AM
May 7th, 2009 at 2:08 am
Sorry, an idiot can figure this one out.
You can’t spend your way out of bankruptcy or debt – not even if you are the government.
Further the govt. only gets money by taxing, borrowing or printing it. But money isn’t wealth per se, it is a means of exchange and shoveling out the door like the prez and congress are doing, will only boost the stock for companies that make toilet paper – to print the money on – and wheelbarrows – that’s what we’ll need to carry our lunch money to the grocery store.
You can call it what you will, Austrian economics or whatever. Common sense will do. (If you think it’s a right/left Repub/Dem thing, you’re still drinking the koolaid. They got you where they want you, bamboozled and soon to be flat broke.)
Unless you prefer Zimbawean economics. This adminstration and this writer seems to.
It’s almost enough to make you wish for mandatory blogger drug testing.
May 7th, 2009 at 3:00 am
The article the author quotes is from 1998 and in the time since then Alan Greenspan has followed Krugmans advice to the letter and has been doing so since 1987 so where are we now?
We are now 191 out of 191 in current account balances.
In the late 80’s we were #1 on this list.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html
We are up to our necks in debt, the government is printing trillions of dollars, China, India, Russia and many other countries are calling for the US dollar to be replaced as the worlds reserve currency because we are doing quantitative easing like some banana republic and the answer is of course to “spend” more, the answer is “we need to free up credit” the answer is we need to take on more “debt”
Commodity prices and the stock markets are rammping as I write this and soon inflation will start to be felt and we cannot raise rates due to the damage it would due to our insolvent banks and even more insolvent “homeowners” and the answer is of course we need to “spend more” the answer is we need to “increase the money supply” and lower interest rates so people will “buy more.”
When the markets rally bonds sell off but we cant have that so now the government is in a viscous circle of having to buy back our own treasuries which at the same time causes inflation which is usually combated by raising rates but we cant….its a catch 22….foreign governments are becoming unwilling to buy any more treasuries as they know they will be paid back in increasingly less valuable money….and the answer is we need to free up the “credit markets”….we need to “spend more” always and ever “spend more”
WE SPENT IT ALL!!!!
When will Krugman et al’s nonsensical ideas finally be refuted, when the US dollar collapses and we DEFAULT on our debt!!!!?
May 7th, 2009 at 3:12 am
Wes Says:
May 6th, 2009 at 12:17 pm
“It is amazing to me to hear sooooooooo much about the “crazies” at the Austrian school and yet not hear ONE SINGLE argument that refutes their theory!!!
That is because it seems most of you here HATE the fact that it has been proven, ONCE AGAIN, to be accurate, and the ONLY school of economics to see this COMING…. AGAIN.
People like you make me wonder how on earth we have ever survived as a species. How do you people persist in ignoring your own EYES and disregard the OBVIOUS truth each and every day?”…………………..
WHAT HE SAID!!!
Good post Wes
May 7th, 2009 at 3:27 am
# anders Says:
May 6th, 2009 at 2:11 pm
Got any thought on it of your own ? .
The Austrian theory is based on common sense and sound reasoning, if Krugman and the Keynsesians were correct then zimbabwe would be the world’s blue print on how to create wealth for everyone, you may say that’s hyperbole but that is the logical conclusion of the policy which they advocate .
The central bank and it’s fiat currency creates the boom and bust cycle.”
Short sweet and to the point!
From Weimar Germany to Argentina to Zimbabwe…the results have always been the same….stock market booms…asset booms..commodity booms…..real estate booms..inflation..then the bust out where the previously private profits are miraculously transformed into public debt and the savers and pensioners and people of thrift are wiped out to the benefit of the government, the bankers and the spendthrifts.
SAME AS NOW
May 7th, 2009 at 4:06 am
Rothbard assumed, as all Austrian economists do, that fractional reserve banking would succeed or fail on its own merits in a free market. “He wanted it gone” only in the sense that he thought it would fail, but he did NOT propose that it be eliminated coercively.
Actually, no. He advocated making a 100% reserve a legal requirement, as defined in his (monopoly) “libertarian law code”. This was because Fractional reserve banking as a “sort of swindling or counterfeiting” and “activities such as fraud, embezzlement, or counterfeiting should not be ‘privatized’; they should be abolished.” (Taking Money Back).
Apparently the “Austrian” economists, based on their deductive logic from a few axioms, know better how to run the banking industry better than the capitalist entrepreneurs who have done so for centuries. They seek to regulate them, ironically. Of course, if this were any other industry they would denounce this “statism” and “socialism”…
Rothbard did indeed propose and advocate the elimination of the state, or anarcho-capitalism, as we “kids” call it
“Anarcho”-capitalism is an oxymoron — anarchism is a libertarian socialist theory and movement. As Rothbard once put it in a rare moment of clarity, “all” forms of anarchism, including individualist anarchism, had “socialistic elements in their doctrines” and
so we “are not anarchists, and that those who call us anarchists are not on firm etymological ground, and are being completely unhistorical”
The Austrian theory is based on common sense and sound reasoning
Far from it. “Austrian” theory on the business cycle is deeply flawed (like the rest of the ideology). As one post-Keynesian economist notes, it “not only proved to be vulnerable to the Cambridge capital critique . . . , but also appeared to reply upon concepts of equilibrium (the ‘natural rate of interest’, for example) that were inconsistent with the broader principles of Austrian economic theory.”
(J.E. King, A history of post Keynesian economics since 1936, p. 230)
Ultimately, the “Austrian” theory suggests that unlike every other industry, banking can be in constant equilibrium (at the “natural” rate of interest). They also suggest that capitalist banks will stop being profit-seeking capitalist entrepreneurs (presumably, with the appropriate laws and regulations). All of which seems flawed and somewhat unrealistic.
All in all, post-Keynesian analysis (based on Minsky) is far better — it understands how banking actually works in the real world
I should note that von Hayek lost of the theoretical battles of the 1930s. First Sraffa, then Kaldor refuted his ideas — the latter twice, after Hayek rewrote his ideas after the first devastating critique. Not that the “Austrians” like to mention this awkward fact…
May 7th, 2009 at 4:13 am
Austrian theory . . . is libertarian, what was considered classical liberal in the 18th and 19th centuries before statists coopted the label “liberal” for themselves.
Actually, “libertarian” was first used by a communist-anarchist as an alternative name for our anti-capitalist ideas in 1858. By the 1890s, it was a common alternative for anarchist across the globe.
The so-called American “libertarian” is better described as a propertarian, with the free-market right having coopted the label “libertarian” for their pro-capitalist ideology only since the 1950s. That is, over 100 years after anarchists first coined the term!
May 7th, 2009 at 5:33 am
Anarcho, (sigh)
““Austrian” theory on the business cycle is deeply flawed (like the rest of the ideology).”
That is a stupid statement, seeing as the Austrians predicted the housing bust. How many post-Keynesians predicted it? A large majority didn’t see the biggest housing bubble when it was right in front of their faces!
The only flawed ideology that is around is this Keynesian dogma that doesn’t seem to want to die. Pumping priming, deficit spending, lowering interest rates, QE, creating credit out of thin air not backed by real savings and thus distorting the economy.
The economy is not a car, you can’t just give it a jump start. One day, we will look back at Keynes’s absurd teachings when The General Theory has its rightful place in (after all the damage that crackpot’s theories has done) the bottom of the bin!
May 7th, 2009 at 6:14 am
“A large majority didn’t see the biggest housing bubble when it was right in front of their faces”
Umm, not exactly right.
Here’s
Krugman
And here’s
me
If the purpose of this comments thread was to demonstrate that Austrians are dogmatic and delusional in equal measure, it’s done a pretty good job. The idea that no one but Austrians noticed the housing bubble, or predicted that it would end badly, is a prime example.
Actually, from the comments at my blog, I’ve discovered some quite reasonable Austrian work I’d missed in the noise generated by people like the commenters above. But they are definitely in the minority.
May 7th, 2009 at 7:06 am
Look, there is no way around some facts.
1. Government does not create wealth. It consumes it.
2. Government has no money of its own. It all comes from the governed.
3. Government cannot fix an economy. It can only screw it up by taxing and regulating too much.
So government can in a sense help the economy back to health by getting out of the way. Any money it tries to throw around came out of the economy (or will eventually) so it is circular and unhelpful.
So all this talk about economic theories of the right and left are smoke screens. Economic theories are mainly used to justify meddling by governments.
May 7th, 2009 at 7:57 am
“read Paul Krugman’s 1998 takedown”
Or, even better, listen to his C-Span apparition:
Maybe something about the role GSEs, Fed or CRA had in the curent disaster, Mr. Krugman?
Cap & trade just happens, too. Yet, global warming is man-made. Read on …
Not regulated? With Fed setting interest rates at will? With FDIC fraud laying squarely on taxpayer’s back? Check the facts, Mr. Krugman.
“Austrian Business Cycle theory was, at the time, a major advance but one that’s long since been superseded.”
Sure, that’s why it is the only school of economic thought that has been consistently and persistently warning about the current calamity:
http://www.youtube.com/watch?v=2I0QN-FYkpw
http://mises.org/story/3128
As Ben Richards puts it:
’nuff said.
May 7th, 2009 at 8:00 am
The C-Span video I mentioned is here
May 7th, 2009 at 8:10 am
Quiggin:
I believe the quote you have in your post says “a large majority didn’t see the biggest housing bubble when it was right in front of their faces”. And I think it’s safe to say that 2 examples don’t refute the quote.
And I really enjoy your portrayal of Austrians as dogmatic and delusional. I too agree that insulting is a lot easier than putting effort into a detailed argument.
May 7th, 2009 at 8:39 am
John Quiggin:
The problem is not whether anyone noticed it. It was hard not to notice. The problem is that bubbles are symptoms. Wherever there is a symptom, there also must be a cause. Austrians see the root cause, point at it and offer the alternative way of (not) doing things. Keynesians offer more of the same. And, if it doesn’t work, then they conclude that it was not enough and even more of the same should have been done. Here’s more from Thomas Woods:
History shows clearly which approach works and which does not:
“1819: America’s First Housing Bubble”
“The Harding Way”
May 7th, 2009 at 9:05 am
austrian63:
Because otherwise they’d have to call themselves their real name. Imagine if Krugman’s blog was titled “The Conscience of a Socialist”.
From the “Liberalism” preface by Bettina Bien Greaves:
-Chinese Proverb
May 7th, 2009 at 9:42 am
A reply to John Quiggan.
Mr. Quiggan has written probably the fairest criticism of Austrian Theory that I have seen in 36 years (see the link in Mr. Yglisias’ post supra). I think he’s caught on to a few of the weaknesses in the usual Austrian explanation of the theory and has misconceived a few other points.
a. Rothbard emphasized that FRACTIONAL RESERVE BANKING is fraudulent and he claimed that this was the primary cause of the artificial boom/bust cycles occurring prior to the creation of central banking. Basically, malinvestment will result whenever money is created out of thin air. The borrowers of the new money are, in effect, stealing the purchasing power of others. The people getting the new money tend to think that they are richer than they really are and tend to act like fools.
b. Money is NOT NEUTRAL, especially money created out of thin air. MARK THORNTON , a senior fellow at the Ludwig von Mises Institute, in his article “CANTILLON ON THE CAUSE OF THE BUSINESS CYCLE” (THE QUARTERLY JOURNAL OF AUSTRIAN ECONOMICS VOL. 9, NO. 3 (FALL 2006): 45–60, 48) wrote:
“…Cantillon showed that changes in the quantity of money were not neutral in terms of production and consumption nor was there any dependable numerical relationship between the quantity of money and its purchasing power. Anticipating the Misesian critique of the helicopter theory of money, he stated, ‘by doubling the quantity of money in a state the prices of products and merchandise are not always doubled’ (Cantillon, pp. 235/177/73). The impact depends on where money is injected into the economy and how the new money would give a ‘new turn to consumption and even a new speed to circulation. But it is not possible to say exactly to what extent’ (pp. 239/181/74). A proportional, quantitative relationship between money and prices might not hold. In fact, according to Cantillon, it almost never did…”
http://mises.org/journals/qjae/pdf/qjae9_3_3.pdf
All that the central bank can do and all that it does is dilute the money supply (or shrink it every century or so). As stated above, people getting the new money are, in essence, stealing the purchasing power of people holding the old money. Ultimately, purchasing power of money is diluted across the board (although not evenly). Money creation is not neutral and fiat money creation is not some neutral “tool” of experts. The entire process is dishonest, corrupt, criminal. Perhaps these forms of theft “stimulate” additional economic activity in the short run and increase GDP in the short run (as would stealing the life savings from Granny‘s cookie jar by thieves who spend it all on booze, drugs and women), but at what cost?
I do not think one can predict with absolute certainty whether a particular set of people will use the new fiat money to malinvest in large capital enterprises or simply waste the new money on booze, drugs and women. Also, it is possible to imagine a group of people so tuned into what the central bank is doing that they act in ways to counteract any possible malinvestment and foolish change in behavior. But that is not very likely.
Hopefully, the rest of the Austrian theory is more easily understood once these undeniable features of central and fractional reserve banking are understood.
b. Regarding the alleged nature of booms and busts before and after the creation of the Fed, Thomas Woods has written how DOING NOTHING to cure the 1921 depression quickly cured the 1921 depression:
amconmag.com/article/2009/may/04/00024/
Also here is a video of Woods on the same topic:
consultingbyrpm.com/blog/2009/04/tom-woods-only-threat-to-my.html
Further, everyone MUST read “The Politically Incorrect Guide to the Great Depression and the New Deal” by Robert P.Murphy:
tinyurl.com/ck6fxa
c. Regarding the hostile tone of the Austrian commentators, Mr. Yglesias’ post was ignorant, condescending and contemptuous, as were most of the first thirty comments. After decades of reading and hearing such ignorance, one becomes slightly hostile and jaded in return.
May 7th, 2009 at 9:52 am
TYPOS: Regarding my reply to John Quiggan, my second point “b” was added after the rest of the post, clearly a typo. Further, the topic is in error because the 1921 depression came AFTER the creation of the FED in 1913. The topic should have been about doing nothing (1921) and Hoover’s and FDR’s New Deal style programs.
May 7th, 2009 at 9:58 am
Microeconomist,
I haven’t closely followed all your back-and-forth with people here, and I apologize if you are already aware, but there are many Austrians who are not hostile to fractional reserve banking. I can see Rothbard’s reason for disdain of the practice, since initially is was inherently fraudulent. However, it is certainly not fraudulent if terms and conditions of deposit are laid out and understood up front. I’m no expert on the subject; I just wanted to point out that Rothbard was not the end-all-be-all of the Austrian school on banking. Have a look at George Selgin or Larry White, for instance. Selgin discusses his take on free banking on EconTalk here.
May 7th, 2009 at 10:18 am
On a broader scale, not all Austrians were/are anarcho-capitalists. Mises, who originated ABCT, as far as I can tell so far in my reading was certainly not an anarchist. For that matter, I don’t consider myself one either, though I do find Rothbard’s work intriguing as a thought exercise…not that my opinion means anything. I just wanted to point out that they are not a homogeneous group. Austrians are not (or at least should not be) defined by their conclusions, and/or social and political paradigms, but by their method.
May 7th, 2009 at 10:27 am
To add to Bob Roddis references about money:
Jesús Huerta de Soto “Money, Bank Credit, and Economic Cycles”
Jörg Guido Hülsmann “The Ethics of Money Production”
Both are excellent scholarly resources that expose the illegal and immoral nature of the contemporary financial and monetary system.
May 7th, 2009 at 10:59 am
@ Eric H:
Of course, Austrians differ on issues (I’d be worried if they did not). There are some who subscribe to FRB and there are some who are anarchists. But the crux of the matter in this discussion is whether the Austrian school of economics has anything of value to contribute to the solution of the boom-bust pains we are repeatedly experiencing. Mr Yglesias and people in power (i.e. mainstream media and government) think Austrians are obsolete, an antique-shop item, so to speak. And then, they go about addressing the symptoms and applying the same remedies that have caused the painful symptoms – an equivalent of applying a band-aid to skin cancer in need of a surgery. And when that does not do it, they do some more of it. But we are rapidly nearing the end of the madness. You can almost see it coming – 1913 Fed, 1944 Bretton-Woods, 1971 Nixon’s shock … we have been completely off gold for less than 40 years and look where we are. Nobody has a crystal ball to say how long, but this clearly can not go on forever. This is much more different than anything we’ve ever seen before – our production capability has been significantly diminished while our debt has increased enormously (remember, in 1930s we were the world’s #1 creditor). But not only are we the world’s largest debtor now, this time the debt was not spent on railroads or steel mills. It was spent on big-screen TVs and iPods – things that produce no wealth. So how are we to get out of it? Borrow some more and spend more, they say. Austrians say, sorry it won’t work. It’s an equivalent of a person having a mountain of credit-card debt losing her job and deciding to borrow some more money and start a home-improvement project in order to get employed. Of course, the house improvement would provide better living conditions. But it can not provide the food on the table. But, it’s even worse that that – we have a president that tells us how ordinary folks are sitting around the kitchen table worrying how to pay off the debt bills and then goes about preaching that credit must flow again so people can get car loans (which, I suppose, government will figure out how to produce at home in such a way that people suddenly start prefering them to the Asian ones).
May 7th, 2009 at 11:00 am
TYPOS Part II
John QUIGGIN, not Quiggan.
May 7th, 2009 at 12:17 pm
19. David in Nashville Says: “Woods…hangs out at the Ludwig von Mises Institute, but that’s as much a haven for neo-Confederate crazies as anything else.”
As an occasional reader of Mises web site, I need to be wary, but as I don’t know how to spot one, could you define the term “neo-Confederate crazies” and give some examples?
May 7th, 2009 at 12:58 pm
It’s interesting to see so many people trying to trash Austrian economics. Is it because they’re desperate for something to fill their daily blog? Or is it because they’re trying to keep people from looking behind the curtain and seeing the flaws in mainstream economics?
You want to supercede Austrian economics? Come with a new and better economic theory than anything that exists now.
If economics is to truly be a science, it has to be right, and not merely have majority support. I’d be happy to stay on the fringe, but wrong-headed theories and the interests of politicians and bureaucrats keep wanting to interfere with my well-being by messing up the economy.
May 7th, 2009 at 1:03 pm
rapier:
Look at my answer above for links to examples how Austrian recipe of economic non-intervention worked when it was applied.
As for communism never being enacted, I can personally witness from nearly three decades of life in a communist system that it was enacted with full force. And it has failed dismally, just as Mises predicted. I suggest you take some 20th century history lessons with emphahsis on the 1918-1980 period in Europe, Russia and China. Alternatively, you could move to Cuba and experience the never-enacted doctrine yourself.
I suspect you are referring to Greenspan here – I can think of nobody else who had any power to speak of and could be even remotely associated with Austrians. Greenspan is neither Austrian, nor Objectivist (although he called himself so and had close ties to Ayn Rand). See Larry Sechrest’s “Alan Greenspan: Rand, Republicans and Austrian Critics“:
May 7th, 2009 at 1:10 pm
Michael A. Clem:
Amen, Michael:
-Giordano Bruno
May 7th, 2009 at 2:04 pm
The fake anti-war people in the democratic party are showing their true colors now as they back Bushamas wars. It is amazing to see people who supposedly care about the poor now standing up to defend the Federal Reserve which functions as a mechanism for rich people to steal from the poor.
The Austrian business cycle theory has been more useful at explaining what would happen than the Keynsians. We predicted this crisis. The artificially boosted economy from 1995-2007 cause a lot of malinvestment. We are now suffering from the excess malinvestment that would be impossible without the Fed.
Friedman himself talked about how the Fed’s powers should not be granted to humans, but he knew it was politically tough to fight the corrupt people in charge. The Republicans ignored Milton on this topic.
May 7th, 2009 at 2:08 pm
If you want to actually know something about Austrians instead of just reading what hacks have to say about Austrians then try reading some of the free online texts:
The Case Against The Fed
May 7th, 2009 at 2:11 pm
Case Against The Fed
May 7th, 2009 at 2:49 pm
Poptart:
Man, one could go all day debunking the looney tunes here. Check some facts about Clinton’s surplus. Nilly Willie raided the Social Security (a.k.a. “The Largest Ponzi scheme known to Human Kind”).
Ahem, let’s see. Fed, GSEs (ex, now GOEs), FDIC, SEC, … etc etc. Unregulated? Maybe if you compare it to Soviet Union system. And those “overleveraged undercapitalized banks”, I suppose, have no connections and/or protection from the government bureaucracy (at – who else’s – taxpayer’s expense), but are all ran by looney Austrians?
This is not a left-right issue because Austrians are neither. And left-right illusion you’re sold by the media is just a smoke-and-mirrors show to distract you while your pockets are being picked.
May 7th, 2009 at 2:52 pm
To Microeconomist:
The problem with discussions of fractional reserve banking is that people think of money as something very special. From a legal viewpoint it isn’t anything special.
Let’s talk about land since that is less special. Let’s say I manage 10 acres of land. I don’t own this land, the owners are all elsewhere. I keep the land for them, there are 10 of them and each own an acre. Mostly though the owners never come and look at it. Even when they do visit only a couple come at once.
So, this means I could sell part of the 10 acres. I could for example draw up a title for 2 acres and sell it to someone else. Is this fraud? Yes, it is indisputably fraud. I have sold what I don’t own. I doesn’t matter if I get away with it for years because the owners never check.
However, consider a different scenario. I borrow 10 acres of land from various people. I promise to pay these individuals back in land in the future. I make a contract with them about the terms and conditions. In this case I can clearly lend out the land to someone else once I take possession of it.
What I have described with land applies directly to money. The first paragraph refers to deposit banking, the latter to savings and loans.
The problem that Austrian economist have with modern fractional reserve banking is that it claims to be a deposit system. The bank claim it can pay you your money at any given time. This is dishonest.
So, what should be illegal is dishonest deposit banking. A bank should not claim to be warehousing money for someone when is not doing so in fact. It should not be able to claim that is can “pay the bearer on demand” unless it can in all cases.
However it should be perfectly legal to make agreements about credit or debt. However “fractional reserves” don’t matter to credit or debt.
May 7th, 2009 at 3:07 pm
Anarcho:
“Far from it. “Austrian” theory on the business cycle is deeply flawed (like the rest of the ideology). As one post-Keynesian economist notes, it “not only proved to be vulnerable to the Cambridge capital critique . . . , but also appeared to reply upon concepts of equilibrium (the ‘natural rate of interest’, for example) that were inconsistent with the broader principles of Austrian economic theory.”
(J.E. King, A history of post Keynesian economics since 1936, p. 230)
Ultimately, the “Austrian” theory suggests that unlike every other industry, banking can be in constant equilibrium (at the “natural” rate of interest). They also suggest that capitalist banks will stop being profit-seeking capitalist entrepreneurs (presumably, with the appropriate laws and regulations). All of which seems flawed and somewhat unrealistic.
All in all, post-Keynesian analysis (based on Minsky) is far better — it understands how banking actually works in the real world”
It is true that ABCT is false if there is “capital reswitching”. However, there is no evidence this actually happens in practice. The argument that it does relies on implausibly high rates of interest that do not occur in the real economy.
There is no contradiction between the idea that bankers are normal capitalists and ABCT. The “Natural rate of interest” in a hypothetical evenly-rotating-economy has a particular value. That hypothetical equilibrium though is used to illustrate the idea. We do not think that it is representative of real life. In practice it is a constantly moving price, just like any other price.
It must be noted that in Austrian economics the interest rate is not a “special” as some think it is. The situation is analogous to a subsidy.
When the state subsidise some particular industry then this has consequences. Prices no longer represent scarcity as well as they did previously. ABCT simply describes the consequences of this when the subsidy in question is an expansion of the money supply.
Hayek amended his theories to take care of the early objections of Sraffa and Kaldor. Other austrian economists have take care of the later ones.
Minsky is interesting. I agree that “animal spirits” could cause booms and busts. However, I feel no need to grasp for that explanation when a much simpler one is at hand. In a similar way, lung cancer can spontaneously appear due to genetic mutation in some people. However, it is not likely that this is the explanation in the case of a heavy smoker. That is my view on Post-Keynesian economics too.
May 7th, 2009 at 3:14 pm
Current:
What you’re talking about is the difference between e.g. checking account and a certificate of deposit (aka CD). You can ask your checking money at any time, but CD money you can get only after it matures.
The fundamental problem with FRB is that it is an equivalent of land created out of nothing, or lending a single piece of land to multiple persons. Clearly impossible and fraudulent with land, but not with money. But just because it is possible and legal, does not mean it is moral. It is even less moral if you take into account that taxpayers carry the risk (fancily named FDIC) of the bank customers showing up all at once and asking for their money (aka “bank run”). Not to mention that FDIC really has money to cover very small percentage of insured amount (1-2%), so if the bank run does happen, it’ll be either money borrowed or printed. Check these books for more detailed explanation. Rothbard also wrote a lot about it.
May 7th, 2009 at 4:03 pm
“David in Nashville Says: “Woods…hangs out at the Ludwig von Mises Institute, but that’s as much a haven for neo-Confederate crazies as anything else.”
As an occasional reader of Mises web site, I need to be wary, but as I don’t know how to spot one, could you define the term “neo-Confederate crazies” and give some examples?”
Will, the LvM Institute supports the historical legal right of States to secede and the philosophical right of secession. So according to SPLC logic that means they want to reinstitute slavery. It is a very typical PC slur. You need not be concerned.
May 7th, 2009 at 4:25 pm
Dan Phillips:
Even if this were true, it actually is not as bad as it sounds.Writes Paul Craig Roberts:S
The idea is anything but new – ancient Romans figured it out long time ago:
May 7th, 2009 at 6:21 pm
I must re-post since this great economist Yglesias has cited Tyler as his proof on ABCT. Tyler, in an attempt to mock Austrian Business Cycle Theory, applied its principles systematically as follows in January of 2005 about 1-year ahead of the beginning of the housing demise:
“If I believed in Austrian business cycle theory
1. I would think that Asian central banks, by buying U.S. dollars, have been driving a massive distortion of real exchange and interest rates.
2. I would think that the U.S. economy is overinvested in non-export durables, most of all residential housing.
3. I would think that we have piled on far too much debt, in both the private and public sectors.
4. I would think these trends cannot possibly continue. Asian central banks may come to their senses. Furthermore the U.S. would be like an addict who needs an ever-increasing dose of the monetary fix. This, of course, would eventually prove impossible.
5. I would think that the U.S. economy is due for a dollar plunge, and a massive sectoral shift toward exports. Furthermore I would think it will not handle such an unexpected shock very well.
6. I would buy puts on T-Bond futures and become rich.
7. I would think that Hayek’s Monetary Nationalism and International Stability, now priced at $70 a copy, is the secret tract for our times.
Of course that is not me. But at least someone appears to believe in Austrian business cycle theory. By the way, here is one summary of the theory, although I do not agree with the characterization in all respects.”
Does anyone see this? He applied ABCT principles methodically and objectively (in order to mock) and by mistake made the most perfect forecast of the bubble crash we are in that I have seen!
http://www.marginalrevolution.com/marginalrevolution/2005/01/if_i_believed_i.html
May 7th, 2009 at 8:04 pm
Eric H.: Selgin is an impressive economist. I am not uncomfortable with free banking, though it has its instabilities like all other forms of banking.
Current: Your assertion that money and other commodities are not different in kind is correct. However, that in no way implies that FRB is fraudulent. People can have different types of contracts for different sorts of similar goods. Grain warehousing is a good example in which the storer gets back the same amount of grain but different actual grain than he put in. This would be unthinkable with art. You see, we already accept various types of warehousing, and FRB is just another version, one which entails a bit of risk for a certain return. You could always rent a vault, if you were uncomfortable with it.
Von Pepe: I am consistently unimpressed with Tyler Cowen. His “takedown” is laughable, to say the least. Thank you for posting. I am not sure, however, that it implies that the cause for all recession is credit expansion, though it is certainly a cause. Again, as I have said repeatedly, I think there is good information in the ABCT. It is most compelling in its Hayekian form which deals with relative price problems, and difficulties with information and price transparency. It is its least compelling when presented as absolute truth. My other critiques of Austrian methodology stand.
May 7th, 2009 at 8:58 pm
The Austrians weren’t the only school to predict what would happen. Most American School economists and even Marxist predicted what would happen.
What is wrong with the Austrian school is also what is wrong with Keynes i.e. a static view of the nature of man based on unproven assumptions.
Boom and Bust happened long before the invention of central banks and even so-called fiat money (all money is actually fiat). It has nothing to do with credit but with physical condition underlining the level of consumption versus the market speculation based on rents taken from a decreasing productive labor and capital output.
That’s what causing boom and burst and was explained many year before the Austrian ago by Friedrick List and other American economists who refuted both Adam Smith, where attacked by Marx, by Keynes, by Anarchists, the Austrians and everyone else who didn’t actually produce an Industrial system that worked as well as the American System.
If you have a free market then feudal Lords can speculate and charge what ever interest and rent they feel like from the peasants who rent land and have to do that the feudal Lord says because it’s “his property and therefore his rules.”
According the Austrian the only rights that exist are property right and therefore the ones without much property therefore don’t matter and can die according.
Now does that sound like a freedom loving philosophy of America or the philosophy of Austrian Aristocrats defending the feudal of the Austrian Empire?
Now all Glibertarians who are saying all Objectivists and Austrians were all predicting the current you are wrong.
Here’s a UCLA debate between Austrian/Objectivists and American System advocates from 2005 and notice it the American system guys warning people and the Austrians basically defending deregulation and business usual.
May 7th, 2009 at 9:05 pm
In an amazing coincidence, Tom Woods has just issued a White Paper entitled “Beware of Obamanomics”:
http://www.europac.net/whitepapers/BewareOfObamanomics.pdf
May 7th, 2009 at 9:23 pm
The title of this blog contradicts itself. The “Right” has been trying to avoid and suppress Austrian thought for a century. Only recently have certain members of the conservative movement coined our literature and ideologies to support their fight against Obamah. When their own party is in power they are just as bad or worse.
The “right” does NOT co-allign with ABCT. Putting “Right” or “Republican” with Austrian School of thought is just as idiotic is borderline oxymoron and makes no sense whatsoever.
Right wingers are not Austrians. I don’t have to read the rest of this article to see it’s already severely flawed and un-informative.
Furthermore. In regarding economics. Comparing the Left with the Right over the past 2 decades I think it’s safe to say both Left and Right share the same ideological beliefs in regards to monetary policy. Henceforth this whole blog post is ridiculous or a desperate consolidation of googling making a poor attempt at sounding like the poster knows what he is talking about.
May 7th, 2009 at 9:24 pm
Microeconomist:
FRB is fraudulent. de Soto elaborates on it in detail, with plenty of proof. Please advise me how exactly am I to shield myself from FRB?
May 7th, 2009 at 9:28 pm
Septeus7
“Boom and Bust happened long before the invention of central banks”
Citation/Examle?
FYI do us all a favor. Read a book.
May 7th, 2009 at 9:59 pm
Alex F:
You are confusing property and contract rights. If both parties know that the standard banking agreement includes fractional reserves, then there is no fraud. Fraud would be present only if the depositor was led to believe that the money would be held safe. Shield yourself by using your mattress, buying diamonds and storing them in a safe deposit box, or by any number of things. You are not forced to deposit money into a bank, are you?
- AM
May 7th, 2009 at 10:36 pm
From there, he looked for a way to paint FRB as a moral/legal problem, when in fact it simply has the same characteristics of most voluntary contracts.
And does your “reasoning” apply to, say, murder or slavery “contracts”, too? After all, they’re just “voluntary contracts” (never mind how they affect other people; don’t look behind the curtain!)
May 7th, 2009 at 10:37 pm
“Left and Right share the same ideological beliefs in regards to monetary policy.”
Yes, they both believe in the government screwing up the economy.
May 7th, 2009 at 10:40 pm
Scott Sumner has been having a fairly balanced discussion of these issues.
May 7th, 2009 at 10:55 pm
Read Human Action. Find the logical fallacies. Report back.
The Keynesian tower is crumbling underneath their feet and they know not why.
May 7th, 2009 at 11:19 pm
Microeconomist,
If a depositor writes a check for more than is in his accout, that is fraudulent, and can land the check writer in jail. That depositor has a contractual and moral obligation to not withdraw money that is not his or hers.
By the same token, the bank has a contractual obligation with every depositor to have his or her money on demand. If the bank lived up to its contractual and moral obligations, there would never be the phenomenon of massive bank runs. Banks that don’t have money on hand when their demand depositors demand it have proven that they defaulted on their contract, in the same way the the depositor overdrew its account.
The bank should be held to as high a standard as the depositor when it comes to living up to its contracts. A bank that knowingly lends money that needs to be available for redeeming deposits has committed fraud. It is pretty straight forward.
May 7th, 2009 at 11:32 pm
Microeconomist,
One further thought on depositors. I don’t know any hard statistics, but I would be willing to bet that most, in the area of 99%, of depositors have no clue of what fractional reserve banking is. I have talked with people who actually think that the dollar is still backed by gold.
People are not forced to deposit money in banks, but they are lied to that the money will always be there. That is what their contract with the bank said.
May 8th, 2009 at 7:16 am
Micoreconomist:
The depositor is led to believe excatly that. Does your bank tell you: there may be no money available to you, eventhough your checking account has a positive balance? No, they tell you the money will be there. And the government tells you, if it’s not, then FDIC will take care of it. As if there is some sugar-daddy somewhere sitting and waiting for a bank run to occur so he can dole out some cash. When you labor all the way thru, you figure out the sugar-daddy is you and me. “But we are the ones who have no money,” we complain. “Well, not now. But you can work hard and make some”, they say. If that is not fraud, I don’t know how to define one. FRB is a Ponzi-scheme variation.
Thanks for advice. Please look out your window – I’m responding with smoke signals.
May 8th, 2009 at 7:50 am
Microeconomist:
“Grain warehousing is a good example in which the storer gets back the same amount of grain but different actual grain than he put in. This would be unthinkable with art. You see, we already accept various types of warehousing, and FRB is just another version, one which entails a bit of risk for a certain return. You could always rent a vault, if you were uncomfortable with it.”
You don’t understand the situation.
Certainly a farmer may agree to use a grain warehouse as you describe. If he does so he and the grain warehouse owner must make an agreement. They could agree that the farmer is lending grain to the owner of the grain warehouse. At a later date the owner will return an equal amount of equivalent grain.
Alternatively, they could agree that the farmer continues to own the stored grain – it is never lent. However, the owner may return an equal amount of equivalent grain.
None of this though makes fractional reserve banking defensible. To describe the situation again perhaps more clearly:
A bank owner may agree to warehouse money. In that case the money is owned by the depositors. It may agree to lend and borrow. In that case possession changes and contracts define the loans and savings contracts.
Fractional reserve banking is based upon a confusion. That confusing is a mixture of deposit and debt. This mixture is inherently fraudulent as anyone who thinks about it carefully enough will see.
If a person agrees to hand over money to the bank, to loan it to them, then that is a loan. It is governed by the loan contract. In that case “fractional reserves” don’t come into the question. Laws governing priority of debt in bankruptcy and time each party has to pay come into play.
However, if a person does not surrender their property but rather requests that it be warehoused. In that case it must be warehoused, not loaned.
Microeconomist: “My other critiques of Austrian methodology stand.”
Do they? What is your argument for that?
May 8th, 2009 at 8:32 am
This just in:
For the “not enough regulation” crowd, I submit DiLorenzo’s fresh post “The Malicious Myth of the ‘Libertarian’ Fed“. He spells out 37 (thirty seven) regulatory functions of the Federal Reserve System. In spite of that, according to Paul Krugman:
I’d be curious to learn the theory specifying either the amount or the nature of government-enacted regulation that would put the banking system under control. In the meantime, as an alternative, I offer a single regulation (an obsolete Austrian one, mind you) – if you run out of cash, the game is over.
May 8th, 2009 at 12:46 pm
Alex:
I await your smoke signal. Are you arguing that you have the positive right to have some sort of banking system of your preference available to you? That seems not all that libertarian.
Current:
Assuming, arguendo, that your description of FRB is correct, it still doesn’t prove anything. You keep arguing a point which shows why somebody should not want to enter into a FRB contract, or why we should prefer 100% reserves, but you don’t even address the fact that different sorts of contracts exist. As long as they do, a voluntary contract should be permitted with any terms whatsoever.
The critique of the Austrian methodology that stands is the fact that they fail to use necessary, basic mathematics and that is limiting in their micro work. I am not arguing that you need to be math heavy, but the general rejection of calculus is pretty laughable. I do believe that some concepts are better explained using Austrian logic than standard economic theory, but that is generally at a low lever, which might explain why it is so appealing to internet economists.
-AM
May 8th, 2009 at 1:31 pm
I am arguing that Fed, FRB, FDIC and the rest of the financial machinery has been put in place in order to pick my pockets. Current has a point about writing bad checks. If I do it, I go to jail. Banks do it all day long and, when they get caught, they get my money from government. If you qualify that kind of setup as freedom of contract, then I have no further comments. Your logic is the same one communists used – you had a choice of either being or not a member of the communist party. But if you tried to start a party of your own, you were jailed (or worse). Try starting private money today and see how far you get.
May 8th, 2009 at 1:46 pm
Comparing banks to writing bad checks is pure sophistry. I will agree with you that they shouldn’t have been bailed out, and also that the FDIC is a big problem creating perverse incentives. I will even agree with you that people ought to be able to use private money. Where I disagree, and believe you are crossing the line, is when you assert that FRB is legalized fraud.
Also, your reductio al Stalinarium is laughable. You cannot, in good conscience, compare oultawed political parties to legal banks that simply don’t exist. I believe you could go out and start a 100% reserve bank today, if you wanted. You wouldn’t need an FDIC charter, it would be like a storage company. If you think the market demands one, there is probably a lot of money in it for you.
- AM
May 8th, 2009 at 2:06 pm
I have compared the logic, not the severity of the consequences. The problem, though, is more complex than simple existence of banks. It has to do with monetary policies and monopoly.
True. You don’t even have to be the member of the Fed unless you are nation-wide. But in the toxic inflationary and interventionalist environment of our day that, of course, would not make much sense.
May 8th, 2009 at 2:33 pm
One more thing to add: given what I mentioned above, 100% reserve banks, while de iure could exist, de facto can not. So, your point of legality is moot.
May 8th, 2009 at 5:00 pm
Alex F,
Regarding your comments to me above — believe me, I get all that. I know what little I know because of some of the current events that have re-triggered my interest in economics that started in college (with an Austrian school professor). Since then I have just been trying to listen to those more educated than I am, and, to some extent, teach those who are less educated (informally, that is, as we all learn through our social interaction). I wasn’t trying to critique any subset of the school; I was just trying to show that there are subsets of the school.
I was trying to point out that it is not legitimate to single out individual economists and their point of view on certain issues in order to try to dismiss an entire school of thought, especially when, as I understand it, the differentiating factor of the school of thought is not any specific conclusions or “dogma”, as some would say, but rather their methodology. Am I not understanding this correctly? Should I not be arguing that this is the decisive attribute of Austrian economics? This is not a rhetorical question; I’m still relatively limited in my reading.
May 8th, 2009 at 7:21 pm
@ # 23
You say the Muslim economies would be junk if they had no oil. So the production and export of a product is what makes a strong economy? Trade surpluses, you say?
Hmmm… I think the next point was just on the tip of your tongue, too. Oil is to the middle east what CHINESE CREDIT is to your country, the United States of America. Both have an expiration date – but one will continue to go up as your government expands like a pandemic, the other is held very thinly by uncertainty alone.
Because, believe me. If the Chinese thought they had another out as opposed to loaning to the US so they can repay the interest on their debts… They would.
As to the Austrian school – most who would call them crackpots have most definitely never taken the time to actually read the works published by its members. Reading Keynesian doctrine feels like an abstract dream that would come to fruition “if ONLY” that damned market and its damned profit-minded participants would just sacrifice their well being and let their lives be planned from cradle on.
There is a certain ring of truth to the Austrian thought that exists in no other school of economics. You need a masters in Keynesian just to process enough of the drivel to decide to might agree with it. A layman can read Austian works and say “yes, that makes sense.”
Economics is simple. It’s people and money. The Austrians have nailed that from day one.
May 9th, 2009 at 10:33 am
Microeconomist:
“Assuming, arguendo, that your description of FRB is correct, it still doesn’t prove anything. You keep arguing a point which shows why somebody should not want to enter into a FRB contract, or why we should prefer 100% reserves, but you don’t even address the fact that different sorts of contracts exist. As long as they do, a voluntary contract should be permitted with any terms whatsoever.”
I think you are still missing my point. Contracts are agreements on how property is divided and what rules apply to it. Contracts that don’t do this, or are self-contradictory are invalid.
This is the situation in banking. A credit or debt contract is, of course, perfectly valid and acceptable. In that case no “fractional reserve” is needed. It may be wise to organize for one though if the credit contract is short term.
A warehousing contract – a bailment – is acceptable. However the fractional reserve equivalent of that is not. Suppose, for example, that four drunk men meet in a pub. They write a contract:
“Terrence owns one acre of land. Fred owns one acres of land. Terrence and Fred agree to give this land to Phil and Bob. The land will be dibursed thus, Phil shall have two acres and the other two acres shall belong to Bob.”
This contract is invalid, and it’s invalid when you do it with money too. A court must make a decision based on the circumstances not the contract.
Microeconomist: “The critique of the Austrian methodology that stands is the fact that they fail to use necessary, basic mathematics and that is limiting in their micro work. I am not arguing that you need to be math heavy, but the general rejection of calculus is pretty laughable. I do believe that some concepts are better explained using Austrian logic than standard economic theory, but that is generally at a low lever, which might explain why it is so appealing to internet economists.”
I know calculus very well since I’m an engineer (and so do many Austrian economists). But, I don’t see how it can be particularly useful for economics.
What do you think it is useful for?
May 9th, 2009 at 5:12 pm
DerekB:
Don’t forget they are commies. One can only imagine what kind of economic hodge-podge is going on in those heads. But they have been looking into commodities and fussing about new world currency, so none of those things are off the table.
Of course, but that is precisely what governments do not want – ordinary folks knowing what’s going on. Think for example when presidents sells $100 million “cuts” or $17 billion budget trimming as something newsworthy. Never mind that you are “cutting” (really just shuffling around) measly 0.5%. Just keep on pounding the figure – 17 (billion) sure sounds much more than 3.4 (trillion).
Do you think they want you to see it for what it really is? If not even Krugman is buying it, you know it’s over the top.
May 12th, 2009 at 1:11 am
Thomas Woods responds: http://lewrockwell.com/woods/woods113.html
May 12th, 2009 at 1:40 am
you’re a joke. live your life knowing that your life’s work is worth nothing.
May 12th, 2009 at 4:14 am
My good man, when you view Republicans and Democrats (or liberals and conservatives if you prefer) on the grander spectrum they are shown to be as alike as day and day. Both support some level of regulation and nationalization, both support one unjustified war or another. Really, the debate there is about details and not the devil therein.
It seems that the more serious threat, if that term is justified, comes from the unrequited, unreconstructed Austrians and anarchists who see all Keynesians and monetarists as statists. Democrats and Republicans seek consensus when ideas fail to persuade, they bandy for cooperation when competition proves inconclusive. You should count them as friends, not enemies.
I would say that your beef should be exclusively with those who would lure Republicans from the state run flock. The people who preach that warfare and welfare aren’t really that different. You know, the ones who condemn the warmonger Bush as much as the warmonger Obama, the welfare-monger Bush as much as the welfare-monger Obama.
We aren’t as keen on consensus.
May 12th, 2009 at 5:21 am
Microeconomist:
I think the following is the essence of the line of reasoning you keep responding too to no avail (you seem to be making genuine efforts, but I think this issue has not been adequately framed).
When dealing with property rights, Anglo-Law quite reasonably holds one who is liable for damaging another’s property and must compensate the other for the damage or dimunition in value. If my smokestacks rain pollution on my neighbor’s farm, then I am liable for damages, since I made the farm worth less. What is questioned here is why should money and banking be any different?
You accept that fractional reserve banking creates new money that benefits the immediate recipients (and especially the creditor) at the expense of everyone else. That means when this practice is applied, it certainly benefits the parties to the contract, but only at the expense of everyone else. Where is my remedy for the loss of purchasing power of my notes when I am not a party to the contract, but am guaranteed to suffer injury to my property (issued notes) as a result of that contract.
Freedom to contract is not impaired by upholding legal remedies. One does not need a law that says FRB is illegal, but the law certainly should compensate me (and you) when FRB is practiced. Just so, we do not need a law that says, I cannot contract with Neighbor A to siphon the water from Neighbor B’s lake? We don’t need such a law, because it is clearly a diminition in value that must be remedied by me and Neighbor A, paid to Neighbor B.
May 12th, 2009 at 7:51 am
Tom Woods is Libertarian, and not part of the Right / Left political deception.
May 12th, 2009 at 9:50 am
“fringe economic doctrine” ??? Man are you way off base. Try looking up the Economics Nobel prize winner (F.A. Hayek) from 1974 and the discussion as to how the central bank manipulation of the lending rate necessarily leads to the boom/bust cycle. BTW, it also has nothing to do with the right wing. Supporters of this theory tend to be libertarians and strict constitutionalists, not right wingers. But don’t let the facts get in the way of your blathering about “tells the right what it wants to hear”.
May 12th, 2009 at 1:36 pm
Matt clearly has not bothered even to read Woods’ book, “Meltdown.”
May 12th, 2009 at 1:43 pm
I will just quote Tom Woods here:
“Yglesias’ reaction to growth of the Austrian school isn’t surprising – naturally he’d like nothing more than to see the debate on the economy confined to Keynesian drones versus monetarist drones. Anyone who dares to question authority, to propose that these false alternatives are intellectually bankrupt, is on the “fringe,” you see. These are the approved alternatives, citizen. Choose from among them. The experts know what is best.
Citizen: But the experts have been all wrong! Shouldn’t we question them? Shouldn’t we listen to the people who had a clue?
Commissar: Let us hear no more of this anti-social talk about your betters. Stay away from the fringe, citizen. Listen to the experts.”
The average American, once introduced to the truth, will call a liar on thier lies, but you people tune out economic truth or at best bend it to fit your political agenda. Austrian economics is the only theory that predicted this crisis, has a theory to explain the crisis, and offers real solutions to the crisis.