Wednesday, June 6, 2012

Some thoughts on Austrian economics

Sam Grove is pestering me in the comment section of Russ Roberts's post on Keynesian willingness to argue with skeptics. I thought my most recent response would be of some interest to readers here.

[This initiation was somewhat out of the blue... it really is as abrupt as this] Sam Grove: "Daniel, how much effort have you put into studying the Austrian perspective on economics?"

Me: "Quite a bit Sam"

Sam Grove: "Did you learn anything?"

Me: "Yes"

Sam Grove: "Did you find any substantive criticism of Keynesian economics?"

Me: "To be honest there is not much to find in the Austrian literature, Sam. There are good criticisms of the early Keynesians in Friedman, Modigliani, and Phelps. Lucas has some great criticisms that Keynesians have laudably and thoroughly incorporated into their understanding of the world. I think most Austrian critiques of Keynesianism are of low quality. For some it's through no particular negligence on their part - just poor argument. For other Austrians its because they have an obviously weak grasp of the material.

I don't value Austrian economics for what it has to say about Keynes.

I value Austrian economics for:

1. It's elaboration of how interest rate fluctuations affect the capital structure, which is a point mentioned by Wicksell, Keynes, and others but not nearly pursued with the detail that Hayek and others have pursued it. That is real value added.

2. A nice restatement of the price mechanism and market order. This one is obviously nothing new to the Austrian school, but it's still an important literature they've contributed to.

3. Often they have good treatment of value theory. I think the work on ordinal utility is quite weak and misunderstands the claims of cardinal utility theory. I am mostly referring to their work on intersubjective utility comparisons, which is quite good.

4. Austrian history of thought and economic history - while some of it is highly polemical and absurdist - is also often quite good. Rothbard is particularly good on this actually (that is not a sentence you'll hear me say very often).

One more thing Austrians do not do well at all is methodology. Most of that work is not of very high quality as far as I can tell. The other frustrating thing is that Austrians constantly make claims about what "the mainstream" thinks that isn't true at all. I'm not even just talking about the rowdier blogs. I mean things like the Companions to Austrian Economics and the Handbooks and things like that. Canonical, vetted stuff. That sort of hyperbole isn't really appropriate and turns a lot of people off, which is unfortunate for all parties I think.

That's what I do and don't appreciate about the Austrian school at least. What about you?"

Don't let anyone tell you Daniel Kuehn doesn't give the Austrian school a fair shake. I've got no interest in being belligerent just for the hell of it. If I like something I'll tell you I like it, and if I don't I'll tell you I don't and if I'm not sure I'll tell you I'm not sure. And if you're not sure, just ask.


  1. I can see how that first paragraph of mine might be worded somewhat unclearly. Obviously I know Frieman, Modigliani, Phelps, and Lucas are not Austrians. I meant to communicate that I do think there are good critiques of Keynes out there - I'm not saying this about the Austrian school just because I think you can't critique Keynes. You can. I just don't think Austrians have done a very noteworthy job of it.

    Perhaps there is one valid critique - MAYBE one could say that Hayek's response to the Treatise on Money got Keynes to clear up his definitions a little in the General Theory. But I've never read the Treatise so I can't really say if that's fair or not.

    1. I wouldn't worry about people misreading that Daniel. Its pretty clear, unless someone is willfully misreading you, that your clarifying that you do think there are very substantial criticisms of Keynesian economics outside of the Austrian school.

  2. Here's a section of Mises which I think is interesting when thinking about whether Austrian Economists have criticized Keynesian's in an valuable way....

    " expansion is tied in with certain anticipations. If the entrepreneurs expect low interest rates to continue, they will use the low interest rates as a basis for their computations. Only then will entrepreneurs allow themselves to be tempted, by the offer of more ample and cheaper credit, to consider business enterprises
    which would not appear profitable at the higher interest rates that would prevail on the unaltered loan market.
    If it is publicly proclaimed that care will be taken to stop the creation of additional credit in time, then the hoped-for gains must fail to appear. No entrepreneur will want to embark on a new business if it is clear to him in advance that the business cannot be carried through to completion successfully. The failure of recent pump-priming attempts and statements of the authorities responsible for banking policy make it evident that the time of cheap money will very soon come to an end. If there is talk of restriction in the future, one cannot continue to 'prime the pump' with credit expansion."
    - "The Cause of Economic Crises" p.188.

    1. The problem is the criteria for what the 'proper' amount of credit is. Austrians have broadly conceded the flaws in the natural rate of interest but seem to stick by the rest of the analysis that follows it.

      If you have a government then what it accepts as taxes will surely affect the monetary system. If you don't then history shows any number of things from shells to rocks would qualify as money. I just can't see where this 'correct' level of credit comes from - any proposition that it comes from the market is simply circular, based on the assertion that 'the market' is always right.

    2. What Austrians have "broadly acknowledged the flaw in the natural rate of interest"? What is the flaw?

      There is no "proper" amount of credit. Credit comes from savings and whenever its manipulated through artificial creation/contraction, it will distort economic calculations.

    3. Bob Murphy. It was his PhD thesis.

    4. The "natural rate of interest" is a dicey subject. I don't agree with Hayek, Mises or Garrison on it, and I don't agree with Bob Murphy either. In fact, I don't agree with anyone else, I should write about it some time.

      My point here though wasn't too get too far into it, it was to point out that the idea that expectations can reduce the effect of stimulus didn't first come from "Friedman, Modigliani, and Phelps. Lucas". Mises at least had already made the point here. It may have been made by others too, and he may have made it at an earlier time (the quote I give is from the 30s).

    5. This is great stuff. Thanks Current.

    6. Current:

      Well read Americans knew that expectations can reduce the effect of stimulous at the time that Franklin printed money in Philadelphia before the American Revolution. And, at least since Mark Twain's Life on on the Mississippi, Chap. 24, (his famous story about the Government Alligator Boat) such has been a part of our literary life as well.

      My point. Writing or saying the obvious is useless.

      As for someone statement that "Credit comes from savings," Did anyone here ever borrow money from a Bank that just created the money it lent to you?

    7. Anonymous,

      I didn't claim that I knew for certain Mises was being original, I specifically said the point may have been made by others even earlier. I didn't know about Franklin or Twain, that's interesting.

  3. Just so you know, Daniel, I tried to get your back and tell that guy Sam that you try to understand the Austrian view. But CafeHayek wanted me to log into Facebook to leave a comment?! Is that normal?

    1. My knight in shining armor :)

      jk - I appreciate it.

      A while back Cafe Hayek - because its comment section was like the Wild West that gun control advocates imagine existed - switched its comment platform to facebook. It's buggy, it's dumb - I guess its meant to maintain more control over comments, but I don't know how. You just have to friend the Cafe Hayek page then you can comment freely.

    2. tell the Truth Dan

      Cafe Hayek is a fraud

      Don was constantly confronted with his racism, lies, bullshit and mendacity, and especially his claim that he stood for free speech

      he shut off comments to silence his overwhelming number of critics, admitting to all the world what a fraud he is

      Volokh was forced to do the same thing.

      Libertarians loose in any intellectual gunfight

    3. Volokh had legit reasons for changing their comment system, it was very buggy before. Unfortunately, their first choice of a new platform was Facebook, which everybody hated. So very shortly afterward they switched again, to Disqus. Some bloggers (Randy Barnett comes to mind) don't allow comments, but most (including Eugene himself) do and if an important post has comments off then Orin will often start a thread just to host comments.

      And of course you want to be loosened up in a fight to the death! That's why I pull a Belushi before any duel and expect the gentleman opposite to do the same.

  4. Daniel,

    have you read Henry Hazlitt's extensive criticisms of Keynes?

    As for the willingness to debate "skeptics", you never explained to me why you thought Krugman was right in his alien-claim. Instead, you suggested you had never held that position, which you clearly had by giving your unqualified support to Krugman's claim.

    From what I've read, I don't think you have anywhere near as good a grasp on Austrian economics as you claim you have, and the Austrians tend to know and understand Keynes a lot better than you care to admit.

    After all, it is impossible to get an economics education or even partake in the economic policy debate without suffering a massive exposure to Keynes.

    1. "have you read Henry Hazlitt's extensive criticisms of Keynes?"

      I told a leading Austrian macroeconomist that I wanted to understand Keynes, and so I was planning on reading Hazlitt. He said, "Oooh, no, I wouldn't bother: Hazlitt doesn't really get Keynes."

    2. I think the alien claim is basically right. I don't think I suggested otherwise. I'm sure we've talked a lot about this in the past, Kaj. If I remember you were suggesting a lot of other things that I think and that was what I was denying.

      re: "From what I've read, I don't think you have anywhere near as good a grasp on Austrian economics as you claim you have, and the Austrians tend to know and understand Keynes a lot better than you care to admit."

      I am by no means any kind of Austrian scholar, and I do think I've got a more Hayekian Austrian school in my noggin than a Misesian Austrian school. But often Austrians who tell me I don't understand it seem to have a fairly weak grasp of the finer points themselves. I would never claim to be any kind of expert and I never will be, but I think I can claim to be conversant. Now - if it makes you feel better, I don't think a lot of people who associate with Keynesianism really understand "the economics of Keynes" either, although they probably have a better grasp of "Keynesian economics".

  5. As I remember it, I create the original Wikipedia entries on the Austrian School and on Joseph Schumpeter, back when you could create articles without having created an account.

    Hazlitt was a fool ( Austrian fanboys cite him out of tribal loyalty. The failure of their academic leaders to be clear on the worthlessness of much of Hazlitt's two most well-known books is the kind of behavior that validates their low repute among other academics.

  6. Dan,

    Having 10 seconds I clicked through to the Grove comment. You do the world a disservice when you reply to someone so disingenuous. He comment is bullshit, for Keynes never advocated ongoing government debt. To the opposite, he advocated paying off debt in appropriate circumstances.


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