Empirical Austrian Economics, Part 4

Another good example of how to approach it from Matt Yglesias - and he calls it "Austrian" which is very good. (I previously blogged on empirical Austrian economics here, here, here and I'm sure some other places).

One thing I've harped on is that you can't just point out what everybody knows - that investment spending and prices are more cyclical than consumption spending and prices - and call that "empirical evidence for the Austrian school". Why? Because any business cycle theory worth its salt predicts this or can accomodate this.

To offer empirical evidence for Austrian business cycle theory what you really need to do is break out the structure of production by its time structure, demonstrate that investment and employment over that time structure is sensitive to the interest rate, and demonstrate that unsustainable roundabout investments are a result of money creation and drive the bust. Showing that "cheap money causes asset bubbles" doesn't cut it. That's just common sense and its really not the central point of ABCT as Hayek or Garrison espouse it anyway.

Yglesias offers a start, simply by breaking employment losses out by industry (well, he shares a guy at NPR that did this). He is by no means the first to do this and this is by no means sufficient but it seems to me to be a hell of a lot better than a lot of what's out there. It's an industry-based approach at least, which is bizarrely rare in the empirical Austrian literature. Here is his chart:

What is wrong with approach this as Austrian? Well, first and foremost I would have liked to see job loss rates rather than total job losses. The point of ABCT is that more roundabout processes have to contract to a greater extent, not that the total number of people employed in more roundabout processes has to be the highest. To call this "Austrian" I would also like to actually identify a time structure to the production process. Retail seems to be very close to the consumer. Finance seems much farther away except for consumer finance. Leisure and hospitality are very close to the consumer, but a lot of professional services are much farther away (although some, like legal services, may be closer). Transportation and administration are interspersed all throughout the time structure of production. Yglesias titles this "Austrian", and people see construction and manufacturing way over on the left hand side, and I think that gives the illusion that we have something like a time structure of production here. We don't.

I also think we oughta take into account secular trends in these industries. Health care is indeed close to the consumer, and manufacturing is indeed farther from the consumer on the Hayekian triangle. But health care has been growing before, during, and after the downturn, and manufacturing has been shrinking (in employment at least) before, during, and after the downturn. We need to differentiate secular from cyclical trends here and not attribute this to the business cycle.

This may seem like much ado about nothing from me. But I think it's very significant and extremely encouraging that a liberal blogger like Matt Yglesias even knows enough about "the Austrian School" to connect sectoral trends with this "Austrain School", and map it out in an effort to roughly empirically verify the theoretical insights. The Austrian school is on the upswing, guys. This is good. But it has to withstand scrutiny and empirical verification. I have taken great personal interest in seeing that that gets done right. I think if you want this upswing to last and not just be a footnote to the Tea Party fad, one important shift is going to have to occur: you are going to have to abandon knee jerk praxeology that rejects empiricism and the scientific method or you are going to stay wallowed in heterodox irrelevancy. Keep your affiliated praxeologists and rebrand them as "social epistemologists" or something. Let them make their case if they can on their own. But for God's sake don't tie the millstone of praxeology or libertarian politics around the neck of a quite interesting, quite plausible business cycle theory that is just starting to pierce through to the mainstream.

UPDATE: The comment section on that Yglesias post is utterly pointless. Nobody is taking a cue from the title or talking about ABCT. There was very little of it in Yglesias's post to discuss, granted. But nobody took the bait from the title. Still got a lot of work to do on ABCT education.