And you all thought Krugman was bad. Matt Yglesias opines:
"Something I ponder every once in a while is the strange ideological positioning of “real business cycle” or “recalculation” or “structural” or “Austrian” analyses of the current recession, or recessions more generally. These notions are usually put forward by people on the right, very strict libertarians most typically. And the idea of how the proposition fits together with the larger ideology is that the structural analysis serves as a bullwark against government intervention to stabilize the economy.
This all seems to me to suffer from a paucity of ideological imagination. The problem, as Jim Henley points out, is that the “Recalculation Story,” if true, implies radical underlying flaws in the capitalist economic model that call not for small-bore government intervention but for wholesale rethinking of the way the economy functions. I others would look at this differently if they, like me, had been raised in a family that contained various Marxists. From inside a “left” point of view, real business cycle theory is a radical theory that rears its head in any downturn as evidence of the systemic crises of capitalism and perhaps the need for revolutionary change. New Keynesian insistence that timely public policy can, if implemented correctly, stabilize the situation is a very status quo pro-market point of view. The point of the New Keynesian analysis is that mass unemployment, where it exists, reflects a failure of the political system—exactly the kind of thing a libertarian should expect will happen now and again—rather than a failure of market exchange.
John Maynard Keynes understood himself to be a liberal trying to preserve a free enterprise system threatened by communists and fascists. Milton Friedman, I think, also understood that the grinding misery of the Great Depression only led to unhealthy politics and was an advocate of bank bailouts, helicopter drops, and all the rest to prevent disaster.
In 2010, of course, we’re not going to go communist. Which is nice. But if you tell people that high unemployment is going to exist for a long long time, and there’s nothing the government can or will do about it, then of course people are going to support policies that make the economy less flexible and less open to imports and foreigners. If laid-off workers can’t find new jobs, then protecting incumbent sites of employment from competition becomes priority number one."
Where to begin. Well, first I think he gets New Keynesianism and Friedman roughly right. They're classical liberals who understand the way the market works and want to save the free market and liberalism by proper application of standard social institutions. It's the "use the right tool for the right job" view of markets and the state; the "don't use a hammer to drive in a screw" view of the world. I think he gets Real Business Cycle Theory wrong in that (1.) it is nothing like and has nothing to do with the Austrian School, and (2.) it's not really an indictment of the market at all to say that real supply shocks caused by material considerations or policies have real consequences. No market conditions break down in Real Business Cycle Theory which is why it's odd for him to say it's radical and a failure of the market.
On the Austrian School I'm not even sure how to approach this. He's right that many in the Austrian school identify an implicit instability in capitalism (although of course there are disagreements among Austrians on the extent to which free banking would solve this - I personally can't see how free banking would change anything at all). A few who think it's all attributable to central banks alone (many of whom, to be fair, are "crude Austrians") might differ with Yglesias on this, but I think it's a fair assessment. How he thinks this justifies severe government intervention I can't make heads or tails of. The last two paragraphs are simply unintelligible.
I think Yglesias makes the mistake of making too much of the Austrian school. I accept most of what they have to say about malinvestments and the capital structure. I accept that this introduces cyclical oscillations as the credit cycle interacts with the capital structure. I simply see no reason to believe that this dynamic dominates the business cycle. Maybe in the earlier stages of capitalism I could see it as being more important, but I simply see no evidence for it now. And the fact that Austrians for the most part won't produce any empirical evidence to convince me doesn't help matters! That's just the macroeconomics of the capital structure. The Austrian school offers more than that but as a business cycle theory that's what we're dealing with primarily.
Anyway, I've penned more than a few critiques of the Austrian school so that's not what I have a problem with here. Yglesias simply does a terrible job at it. It's not the first time I've gotten frustrated with Yglesias acting like he knows about things that he doesn't know a thing about. He gives away his relative ignorance of questions of monetary economics with the way that he parrots Scott Sumner and Paul Krugman talking points. It's obvious that's the only place he derives any insights on the subject. And he gives away his ignorance of the Austrian school here by calling it "recalculation" - suggesting that he basically gets what he knows about it from EconLog (who knows how he attaches "structural" and "real business cycle theory" ideas to all that - I assume it's because he knows they're all "conservative"). I know sometimes people get frustrated with my take on the Austrians and I know Mattheus thinks I should read more Mises - but at the end of the day I think its fair to say I'm about as broadly aware of the Austrian position as just about any Keynesian in the blogosphere. And I didn't start opining on it until I was at least decently well informed.