Yes, another post on the Austrian School. The catalyst is an initial post on what's wrong with Austrian economics by Martin Wolf, with responses by Brad DeLong and Paul Krugman.
Martin Wolf essentially solicits reactions to the Austrian School - it looks like there's been a lively exchange in the comment section, but I haven't reviewed it yet. DeLong gives eight alleged tenets of the Austrian School, and ends up giving the thumbs up to one of them but a thumbs down to all the others. I think he could probably qualify a few of his thumbs downs, but he's largely on target. Krugman, as usual, has some very prescient insights.
The first is the fundamental asymmetry of the Austrian argument about the business cycle:
"In practice, Austrians seem to be Keynesians during booms without knowing it; they realize that high demand produces a boom, but don’t realize that this contradicts their own theory of slumps."
His point is that if Austrians had a more consistent position on human action, they'd recognize that the very processes that they abhor in an artificial, sub-optimal boom can also cause an artificial, sub-optimal depression. Simply recognizing that would bring the Austrians considerably closer to reality. So why don't they recognize it? Krugman suggests:
"And the key to all this, I believe, is that the Austrian abhorrence of explicit models, even for the purposes of clarifying thought, leaves them unaware of the holes in their account."
Austrians actually take pride in their methodological dogmatism and backwardness, but it prevents them from really scrutinizing their own ideas. The result is that you still have Austrians today quoting Hayek and von Mises. There is very little (some, but little) innovation, precisely because there is no introspection. And where innovation does occur, it's largely political/philosophical/ideological innovation. Austrians are happy to highlight the disagreements between "left Rothbardians", "minarchists", or denizens of the anti-democratic Hans-Hermann Hoppe. If you throw the more traditional libertarians and Randians into the mix, it is a quite interesting intellectual stew. But the point is, it's mostly political philosophy: their economics is stagnant pond water. One of the few exceptions to this is Roger Garrison's macroeconomics, but even he simply formalizes Hayek. I don't know him too well, so I want to be careful about passing judgement too harshly, but he doesn't really seem to add anything new to Hayek's Pure Theory of Capital. Moreover, there's nothing in Hayek or Garrison that really refutes Keynesian macroeconomics - it simply presents another view. And I think that view is valuable. Austrian ideas on capital structure are interesting. But it's not really a response to what other people are saying - it's just sort of floating out there on its own.
Anyway, I've been thinking about this "Austrian problem" for awhile now. There's a lot of energy there. There are a couple genuinely interesting insights that would be useful to incorporate into more mainstream econoimcs. But as a whole, it doesn't really measure up because it isn't really introspective in any meaningful way, and it habitually caricatures and distorts what the other side of the argument is saying. A good example is Jonathan Finegold Catalan, who writes for Economic Thought, and occassionally the Mises Institute. Catalan is a student at San Diego State University, and I've really enjoyed following his blogging because I identify a lot with him - a young guy, trying to strike out on his own on a blog, deeply interested in economics and the history of economic thought. But it's been getting hard to maintain interest. Post after post after post has been degenerating into an imputation of ideas to people he disagrees with - almost always Paul Krugman. I don't always agree with Krugman either, but I get frustrated with this scripted version of "what Krugman said" that the Austrian School works from. One of the things that they like to talk about is this "consumption myth" - that Krugman and Keynesians think all consumption is good and savings is always bad. They make off the cuff remarks about government always being a solution. Barney Frank said arguing with the LaRouche crowd is like arguing with a kitchen table. I would give somewhat more credit to the Austrian School: it's like arguing with a broken record for them.
Sorry if this bores everyone - it's sort of a niche interest of mine. As I said in a recent post I do think that the very insularity that has made the Austrian School so off-base and bizarre in many respects has also facilitated the development of a few very interesting ideas that we should capitalize on. Any other thoughts and suggestions are welcome.
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Jonathan Catalan, referenced in the post, comments on DeLong's post here: http://www.economicthought.net/2010/04/bradford-delong-on-austrian-economics/
ReplyDeleteI don't have time to review it in detail now, but I think he's half right and half nit-picking. The fact is, a lot of Austrians do promote the positions that DeLong summarizes. The fact that all Austrians don't is really beside the point. In some instances Jonathan contradicts himself - I'm thinking of #4 specifically.
An interesting, although wrong point of view. The reason we see “progress” in mainstream economics is mostly because they have so many things wrong, they have to revise all their assumptions every ten years.
ReplyDeleteThere is a lot of introspection in Austrian economics and they do pay attention to mainstream economics. But their theory is much more anchored in the real world, so they can’t allow themselves wandering and dreaming about strange models that work if you assume half of reality away.
As a matter of fact, it is the only school that has a working, coherent and complete system.
By the way, the so called “methodological dogmatism” can be imputed to mainstream too. And the Austrians also quote Menger a lot, sometimes Adam Smith and David Hume, Say, Cantillon and Cairnes, Walras, Condillac (a very good economist by the way) and even Aristotle (and Plato). Should I understand that in order to be modern, one has to quote only works written in the last 20 years? Lucas started his Nobel lecture with David Hume, Krugman still references Ricardo … So there is little innovation everywhere is seams.
And the Austrian theory of capital is not a response to anyone, it is a theory … The others don’t have a theory of capital.
"The reason we see “progress” in mainstream economics is mostly because they have so many things wrong, they have to revise all their assumptions every ten years."
ReplyDeleteI would agree with this entirely. That's also why we see progress in physics or in any other science. However, I would emphasize the way in which they are found out to be wrong. Usually it's because there is some level of nuance that has not been properly theorized yet, and properly theorizing that leads to new innovations. Marshall didn't reject the Classics, he addded to them. Keynes didn't reject the Neoclassics or Marshall and Pigou - he added to them. Phelps, Mankiw, and Stiglitz didn't reject Keynes - they added to him. So yes, some of the theory is "wrong", but it's primarily an error of omission, and that gets remedied over time. That is what we call science. So yes - a lot is "wrong" in mainstream economics. That's the whole point of innovation. The difference with the Austrians isn't that they're right. They're also wrong - and in a similar way I think (namely, primarily errors of omission rather than comission). The problem is - as you so ably demonstrate - they won't admit to those errors, so they rarely address it.
"But their theory is much more anchored in the real world, so they can’t allow themselves wandering and dreaming about strange models that work if you assume half of reality away."
While I would agree with your first statement, I completely disagree with this. You have it exactly backwards. I won't go as far as saying that Austrians aren't anchored in the real world. But I will say that they are much less anchored in the real world than mainstream economists. And this is primarily derived from their rejection of empiricism. I think they often conflate empiricism with induction - I think that's the source of a lot of their hesitation on the empirical front. But how can you say that you're anchored to the real world and keep a straight face if you don't consult the real world to check your theories? It's ludicrous. The only difference between your models and ours is that ours has math in it. The model itself is no stranger or more divorced from reality than you. Math or English - it doesn't matter what language you put the model in. I like mathematical models because they are more precisely laid out - so you know what it is you're dealing with. Either way, if you don't compare them to the real world you're not going to be able to fix them, and you certainly can't claim to be "more anchored" to the real world.
As for your comment on citing older sources - you completely, completely, completely missed my point.
ReplyDeleteThere's nothing WRONG with citing older sources. I like to as well. What's wrong is when the vast majority of your sources are old. Citing old sources is a very good practice - it demonstrates an intellectual depth and an understanding of how your ideas fit into the broader scheme of intellectual history. Citing older sources to the exclusion of the plethora of newer sources is a bad practice - it demonstrates an intellectual shallowness and a lack of understanding about how your ideas fit into the broader scheme of intellectual history.
And I want to be clear - not all Austrians rely exclusively on older texts. But they do so more regularly than mainstream economists.
I have yet to see a renowned mainstream economist that has anything to do with reality. And it is a mistake to think that they “add”, no they just fish around, try to bend reality to their models. That’s what passes “progress” in mainstream. Just my two cents.
ReplyDeleteAnyway, the Austrians were able to describe better than anyone how socialism would fail, and it did. Everybody else was taken by surprise, even a free market economist like Coase. Of course socialism was a failure even before the political regime fell. The welfare state, the Swedish model are cracking and so on. Where is reality contradicting Mises or Hayek? It is the mainstream that it is taken by surprise all the time, even in areas that they are supposedly experts in (LTCM anyone?). If they keep on adding and correcting, why is it they never get it right for once?
Anyway, you should pay more attention on how progress happens in the hard sciences. Because it is not as you’ve described at all. Economists love to be compared with those “hard” scientists. “Look at us, we use hard math too!!” So what? Where is the precision it was supposed to bring?
"I have yet to see a renowned mainstream economist that has anything to do with reality."
ReplyDeleteHave you considered the prospect that you wouldn't know one if you see one?
I mean seriously, Anonymous, this is getting old. If you're going to make bland, general, vague accusations like this can you provide any example. How is Phelps "just fishing around"? How is Stiglitz "just fishing around"? They're responding to very concrete, reality-based issues. What exactly do you mean by "just fishing around" anyway? Your two cents consists of a pre-scripted Austrian response that not all of you guys rely on, but many of you do. If you're going to keep up the pontification, could you provide some examples at least? That shouldn't be too hard for someone as "anchored in reality" as you are.
As for socialism - in Keynes's concluding chapter in the General Theory, he makes more or less the same point the Austrians do. He criticized socialist experiments because they abandoned the allocative efficiency of market prices. The thing is, he did it in ONE PARAGRAPH and then moved on to other issues, because the point is so damned obvious. The welfare state is a different issue entirely from the socialist state. It has its own problems, but that's a different set of issues. But again - you're quite simply wrong if you think "mainstream" economists don't have criticisms of the welfare state!
Reality is contradicting Mises and Hayek right now, in this depression. Monetary policy is helping, the lack of rigorous fiscal policy is hurting us, and the malinvestment story is not playing out how its supposed to. You know what is playing out how its supposed to? The aggregate demand story. Here's the thing - when the 70s roled around Keynesians realized "oh - we should probably tweak a few things... Keynes never really got around to telling us about a situation where inflation and interest rates are high". Austrians are resistant to making that same adjustment. Even when they're obviously wrong they insist they're right. So of course you don't get surprised. People with delusions of grandeur generally don't get surprised. That's why it's called a delusion.
As for your sciences point - I don't distinguish between hard/soft sciences. It's a bad distinction. What exactly don't you think I'm paying attention to? Could you flesh that out a little more? I'm guessing you're going to throw a dogmatic version of Kuhn at me. I like Kuhn and I do think science progresses that way - but not always. Just like I like the Austrians and I think the credit cycle and maladjustment can explain the business cycle - but not always.
I'm not an Austrian, not even an economist, but I do trade stocks (and other legal things) :). I've read your blog sometime ago and I thought it was funny, not in a good way. And you should be more relaxed. If you want to be a good economist these kind of discussions, and those will be with economists, are bound to be frequent.
ReplyDelete"Have you considered the prospect that you wouldn't know one if you see one?"
Yes and I concluded that I would. Marc Faber is a guy that knows economy. The ones that you listed are economists, but don’t know economy. The only parts they get right are the obvious ones, like the situation with the banks. And no, I wasn’t referring to Kuhn, whoever he is, or was.
What I really don’t understand is your interest in a dead school of thought. The reason those guys quote Hayek and Mises is because, well, there are very few of them, and even less contributed anything new, except probably Rothbard. The Austrian school is dead for a good reason and will remain dead. By the time there will appear some new school similar with them, no one will remember them. There is nothing that you can find there that you cannot find in the mainstream, only better. By the way, there are many self proclaimed Austrians that never read Hayek’s articles on knowledge.
Just saying, don’t waste your time, go and learn something.
I’m interested in them because their theory helped hedge some bets, but I found their model so obvious I was surprised very few knew about it. It must have to do with the fact I’m working in the real world. It would be a shame they would get thought in school.
I think very few know about them for three reasons, one of which you've already stated:
ReplyDelete1. They don't really offer anything right that can't be found elsewhere. The one possible exception to this might be their thoughts on capital structure, but even this is fairly intuitive, as you point out.
2. Their own insularity and bunker mentality. They're too quick to accuse everyone else of being socialists. They're too enamored with their own school of thought. It's hard to get broader recognition when that's your mindset.
3. Their very odd methodology and visceral reaction to mathematical models and empirical science.
I'm not sure about your conclusion. I work in the real world too and I feel like they have something to offer. I just probably have a different idea of what they have to offer than they do.
I should say, they're also not a "dead school" because of their emphasis on human liberty. Now, I think the broader libertarian philosophy that's associated with the Austrian school botches up a lot of their understanding of human liberty, but they're still in the liberal tradition, and in that sense they're still relevant and an ally of sorts.
Not sure why you don't think I'm relaxed - I'm not the one that came out with guns blazing telling people they're wrong and not anchored to reality. But regardless, being more relaxed is always good advice no matter what position you're in.
I'm assuming I'm never going to get concrete examples of points I requested concrete examples for, am I? Anyway - if you ever feel like furnishing them, always feel free to come back and comment.
No, not really, I don't have time for that, but most of their work, especially Stiglitz can be taken as an example. Phelps is promising too. And they do tend to be more like engineers than scientist. I don't have time to go into details about the difference between those two branches.
ReplyDeleteKrugman is a nice guy. I like him, he is funny.
I believe that you took my statement as guns blazing, but I was just stating facts, from my point of view. None of their theories were helpful.
In order to clarify:
I’ve read your theory about flat/round earth. The problem with the flat earth theory is when you start to make use of it, like contruct an entire system on top of it, or a device, or a business. For a sailor at see the earth is just as flat as if he was on land. Unfortunately what he has build in order to help him based on the flat earth theory won’t help much. Maybe the example with the sailor is not very good, but I think I've made myself clear. I believe this is the state of mainstream economics today.
That's all. I'll be back in an year or so. Good luck with your synthesis. If you manage it, could be a Nobel prize ...
The problem with Austrian economics, in my opinion, is Murray Rothbard. Everything that is uniquely Rothbardian about Austrian economics is also almost everything that is wrong with Austrian economics. In terms of both style and content, Rothbard's arguments have had an enduring impact on modern Austrian economics and are particularly influential among young Austrian economists. Fortunately, in my opinion, his appeal (similar to Ayn Rand's) seems to wane with age.
ReplyDeleteI qualify this comment with the admition that I have not read much of Rothbard's work, and am more familiar with his views as presented by third-parties. That said, economics is my hobby, not a profession: I have limited resources for its study and so direct them to what I believe will be profitable, and an extensive reading of Rothbard does not strike me as conducive toward that end.