Economics

"Ignoring the Austrians Got Us in This Mess"

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Barron's columnist Randall Forsyth tips his hat to the Austrian school–shaped by libertarian luminaries Ludwig von Mises and F.A. Hayek–for providing a set of useful ideas about the Current Crisis that have been largely ignored:

What definitely is ignored in academe is the Austrian school of economics, especially for baby boomers brought up on Samuelson's economics text, which was pure Keynesian orthodoxy. I did not learn the names von Mises and Hayek or their ideas until a decade or more after graduation (with a degree in economics, by the way.)

…..The economy, if left alone, is self-correcting, say the Austrians. But central banks' inflationary expansion of credit produces booms and malinvestments, which inevitably lead to a crashes and depressions.

The only prevention for boom and busts are sound money, which is impossible with government-controlled central banks. Once the bust comes, the only cure is to let it run its course; allow the malinvestments go bankrupt and let the market reallocate the capital to productive uses……

The Austrian prescription, of course, was rejected first by the New Deal of Franklin D. Roosevelt, and now by massive response by both the purportedly conservative Bush administration and now the Obama administration. First came the $700 billion TARP last year to stabilize the financial system, followed by the $787 billion fiscal stimulus enacted last month. Across party lines, it's accepted that government's role is to prevent the economic pain that would come of "liquidate, liquidate, liquidate."

And while Alan Greenspan had his own, different, libertarian movement bona fides with his Ayn Rand connection, his monetary policy was a big part of the problem, in Austrians' eyes:

Austrians were the ones who could see the seeds of collapse in the successive credit booms, aided and abetted by Fed policies, especially under former chairman Alan Greenspan. While he disavows (again) the responsibility for the boom and bust, most recently on Wednesday's Wall Street Journal Op-Ed page ("Fed Policy Didn't Cause the Housing Bubble," March 11), monetary policy played a key role in creating successive bubbles and busts during his tenure from 1987 to 2006.

Greenspan always contended that monetary policymakers can neither predict nor prevent bubbles in asset markets. They can, however, clean up the after-effects of the bust—which meant reflating a new bubble, he argued.

That had a profound effect on risk-taking. Knowing that the Greenspan Fed would bail out the markets after any bust, they went from one excess to another. So, the Long-Term Capital Management collapse in 1998 begat the easy credit that led to the dot-com bubble and bust, which in turn led to the extreme ease and the housing bubble.

Austrian economists assert the current crisis is the inevitable result of the Fed's successive efforts to counter each previous bust. As the credit expansion pumped up asset values to unsustainable levels, the eventual collapse would result in a contraction of credit as losses decimate banks' balance sheets and render them unable to lend. That sounds like an accurate diagnosis of the current problems.

The Austrian economists' and their historical connection to the libertarian movement are explained at great length in my book Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement.

A variety of voices assessed the Greenspan legacy for Reason magazine in this November 2006 roundtable, addressing the question: Was Greenspan a bubble blower?

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  1. It’s hard to imagine a word with gold money and reserve requirements dictated by a bank’s own directors rather than the government. How valuable our money would be! It would gain value under the mattress. Which is exactly where I would keep it for fear of my bank mismanaging it. Who trusts the word of some Wall Street asshole?

    Gold hoarding WAS a major problem during the Depression. Not as major as protectionism/interventionism but still…

    1. Gold hoarding was likely a problem because of fears that a rapid increase in government spending would result in a devaluation of the dollar, which it did. That and there were confiscatory measures passed regarding gold.

  2. This is probably one of the worst things the media and Democratic Party is doing: they’re blaming the most extreme free marketers for causing the recession when they were the ones warning about the coming bubble collapse for years.

  3. Gold “hoarding” is never a problem. Is it a problem that trees in the cotton fields are withholding dollars? or is a problem that the andes mountains are “hoarding” millions of tons of gold and silver?

    No, when you hoard gold or dolalrs under a mattress you are merely reducing the amount of curency bidding up prices on real resources bulldozers, commodities, labor etc.

    This reduction in prices makes resoruces more affordable for other people who have inventive ideas for combining resouces to make people happy.

  4. Spending in the economy is dropping. Hayek argued that it should be maintained. And with a central bank, the central bank should create enough money to offset in decrease in velocity.

    On the other hand, reallocation of resoruces, including labor, for areas that over expanded in the boom, should not be hindered.

    In other words, home construction needs to contract. Trying to use monetary policy to incrase the demand for new homes so that new home production can return to 2005 levels would be a mistake.

    On the other hand, allowing a drop in total spending throughout the economy (as happened during the 4th quarter of last year) is a mistake. According to Hayek, anyway, total spending should, ideally, be maintainted.

    Bubbles pull resources out of the rest of the economy to the bubble sector. Other things being equal, they should go where they would have gone. There is no need for a new bubble.

  5. Gold hoarding WAS a major problem during the Depression. Not as major as protectionism/interventionism but still…

    Gold hoarding was a “problem” during the Depression because the price of gold was unrealistically low. That is, the Fed had inflated paper money throughout the 20’s to such an extent that the $20.67 government-decreed price of gold was no longer the true price of gold.

  6. Even if Bushama had a copy of all their works and had read them in the last year and understood it and agreed would have still done the same thing. He acts politically, not economically.

  7. We ignored an Austrian once.

  8. I haven’t even posted on this thread yet, wingnuts!

  9. You know its true when their only response is “the debate is over” and “no other options”.

    By those phrases they mean they know their basic theory has failed and they want to make the debate about anything but theory.

  10. Has anyone seen my cousin Wing?

  11. The more I read of Austrian economics, the more it makes sense.

    Unfortunately, some of the personalities in that world are grating. To follow the Austrian school, one has to endure obnoxions like Lew Rockwell and wade through a lot of rants comparing Bush and/or Obama to Hitler and/or Stalin. If they would STFU and just discuss economics they would probably gain a lot more converts.

    1. Uncompromising personalities tend to be grating, and the Hitler-Bush-Obama-Stalin comparisons I’ve heard through their videos have been sound. Comparing individuals is not the same as saying they’re the same.

  12. Alan Greenspan had his own, different, libertarian movement bona fides
    with his Ayn Rand connection

    I would quibble that neither Greenspan nor Rand were part of the libertarian “movement.” Nor were von Mises or Hayek for that matter. The “movement”, such as it is, came later, and borrowed (some would say “stole”) only those principles and ideas of Rand’s that they agreed with, ignoring or even condemning those that they didn’t. This divergence with Rand and Objectivism (and Greenspan, at least the Greenspan of the 60s) exists to the present.

  13. Yup, the Randian / Austrian leaders do tend to be obnoxious at times. The flow goes like this.

    We should view life in a reasonable way.
    Austrian economics is the most reasonable.
    Other theorey’s are not reasonable.
    All the believers in other theoreies must not be reasonable.
    I am in the minority.
    The majority must all be sheep and stupid or evil and like Hitler.

    Vote Ron Paul.

  14. “To follow the Austrian school, one has to endure obnoxions like Lew Rockwell”

    Give Lew Rockwell the credit he deserves. I don’t think it’s an exaggeration to say that there’s no one alive at present who’s done more to bring Austrian ideas and literature to a larger number of people than ever before. Where would Austrian economics be without the Mises Institute, or all the books and articles(many of them very difficult to find otherwise) that Lew Rockwell has uploaded – and all available free of charge.

    If we’re following Austrian economics, to a great extent it’s because of the path that Rockwell has helped to set out.

  15. ….The economy, if left alone, is self-correcting, say the Austrians. But central banks’ inflationary expansion of credit produces booms and malinvestments, which inevitably lead to a crashes and depressions.

    But according to the history books, there were massive and frequent booms and bust before central banks existed. In fact since WWII things have been petty mellow, until now thanks to deregulation mania that happened after Reagan. (actually it started with Carter)

    Granted Keynesianism ran into a quandry with stagflation in the 1970s.

    “…monetary policy played a key role in creating successive bubbles and busts during his tenure from 1987 to 2006.”

    The Austrian narrative is seductive but the busts of the early 90s and earlys 00s (thanks to 9/11) would have been much worse had there not been easing by the Fed, and we might been caught up in a deflationary trap. We still might yet if the stimuli of various governments’ don’t provide escape velocity. Then the Austrians can experience what we’ve been avoiding by central planning at the Fed.

    1. You’re ignoring several points about the Austrian position:

      a) They’re not gold bugs per se; they’re believe in a free market monetary system. Governments have manipulated money for a long long time; there was government induced inflation pre central banks. Think of diluting silver coins with tin, coin clipping etc.

      b) The Austrians, for the most part, are opposed to fractional reserve banking.

      c) There have been central banks in the US and elsewhere prior to the fed

  16. Where would Austrian economics be without the Mises Institute…that Lew Rockwell has uploaded

    Maybe ignored by the guy who wrote that article, and still ignored by everyone else.

    Or maybe it woudl have been promoted without the nuttiness associated with Rockwell, hence making it more credible as an alternative explanation for things. Maybe by people like those at the GMU econ dept.

  17. Sorry, it has to be said: You know who else thought Austrians had some interesting ideas?

  18. “Or maybe it woudl have been promoted without the nuttiness associated with Rockwell”

    Well the barriers to entry of this particular market are low. But it’s Lew Rockwell that’s had the skill and motivation to build an institute, upload and publish hundreds of books and articles, organise conferences and summer schools, provide scholarships etc.

    Others have been free to do all of this too. But it’s Rockwell that’s done it – no-one else.

  19. Promotion of austrian economics by the Mises institute does not crowd out promotion by Pete Boetke and the people at GMU. If anything the econ students at GMU that heavily cross polinate with the Mises Institute are forces for good, while those who don’t, generally go on to promote socialism throughout the world like any other econ grad student.

  20. Sorry, it has to be said: You know who else thought Austrians had some interesting ideas?

    Marge Schott? (not sure of spelling)

  21. following the keynsians can be tiresome too.

    1. We know government spending helps the economy, all the arguments have been settled by the consensus.

    2. We know the federal reserve is saving us from poverty, if we went back to before 1913 we’d all be riding horses. Do you want that?

    3. I thought so.

    4. Then it follows that anyone who doubts the 2 trillion dollar defcits are good is not to be taken seriously.

    5. No we cannot have transparency of where the bailout money goes. Don’t ask. We had to save AIG, it was very important they pay their clients.

  22. Yeah, stick to the old ideas. When new ideas pop up, wrap a rosery around your hand and keep repeating:

    Hail Market,
    Full of grace,
    Prosperity is with thee.
    Blessed art thou among systems,
    and blessed is the fruit
    of thy womb, Capital.
    Holy Market,
    Mother of Goods,
    pray for us consumers now,
    and at the hour of our bankruptcy.
    Amen.

  23. Yeah, stick to the old ideas. When new ideas pop up, wrap a rosery around your hand and keep repeating…

    Huh? What new ideas are being discussed here? The post mentions Mises, Hayek and Keynes. Their ideas are new?

  24. Captain Smartass,

    Fans of Apfelstrudel?

  25. Nobody’s ignoring the Austrian school, it’s just that nobody really thinks the Austrian school has much to offer in this situation.

    Does anyone in either party with actual power want to liquidate, liquidate, liquidate, purge all the rottenness from the system and start over? Is there any reason to think that approach would work?

    Moreover, how could our democratic system make that policy stick? If the president tried it, he’d make himself and his party radioactive, lose power eventually and the opposition would do something else. That’s what happened to Herbert Hoover.

  26. That’s what happened to Herbert Hoover.

    Herbert Hoover tried everything but allowing the liquidation of malinvestments and the falling of prices.

    Hoover was John the Baptist to Roosevelt just as much as Bush was John the Baptist to Obama.

  27. Gabe wrote:

    If anything the econ students at GMU that heavily cross polinate with the Mises Institute are forces for good, while those who don’t, generally go on to promote socialism throughout the world like any other econ grad student.

    Good to see a Mises Institute fanboy who has no clue whatsoever about the empirical reality that utterly contradicts his claim.

  28. Looks like Danny K could use to read some actual economic history, wherein it becomes clear that neither the Austrians, nor Hoover, nor Mellon believed in “liquidate, liquidate, liquidate.” See the article by Larry White here.

  29. “Spending in the economy is dropping. Hayek argued that it should be maintained. And with a central bank, the central bank should create enough money to offset in decrease in velocity.”

    What if the spending was inflated? Spending needs some way to return to its normal level if there was previously too much spending and debt.

  30. BREAKING NEWS!

    Obama abolishes bust and boom cycles!

    He just said, in what must be his ninth speech of the day, that we cannot return to the “bubble and bust” cycles of the past. He assures us that his plan will end this phenomenon forever.
    Happy days are here again!

  31. Unfortunately, some of the personalities in that world are grating. To follow the Austrian school, one has to endure obnoxions like Lew Rockwell and wade through a lot of rants comparing Bush and/or Obama to Hitler and/or Stalin. If they would STFU and just discuss economics they would probably gain a lot more converts.

    Then get the hell out of the LRC swamp! They are hardly the only Austrians out there. Go to FEE.org. Just as anarcho as Lew, just as dedicated to Mises, but with twenty times the manners and civility. The writers of the LvMI find it nearly impossible to put forth a libertarian message that doesn’t include an obnoxious jibe. I’m currently listening to some podcasts by DiLorenzo, and his use of the phrase “Lincoln Idolaters” every three minutes is really starting to grate on my nerves.

    http://www.fee.org. They’re the guys who financially supported Ludwig von Mises, and put his books into print, back when Rockwell was still whining to his mom for more porridge. Unlike the LvMI, FEE doesn’t find it necessary to call Milton Friedman names during economic debates.

    Despite Lew’s protestations to the contrary, Austrian Economics is NOT about expanding the definition of “neo-con” until it encompasses every single political label except paleo-libertarianism.

  32. I don’t agree with your view of Hoover (it parallels the recent move of some conservative Republicans to suddenly realize that George W. Bush wasn’t one of them this whole time! Don’t blame us! Bush was some kind of crazy socialist-Republican hybrid thing!).

    But that’s not really relevant to my point. My point is, any policy that involves returning to the gold standard and letting the market “work things out” would be incredibly painful for huge numbers of Americans. Anybody trying such a policy would be Hooverized and replaced at the next election.

  33. Three economist, a Keynesian, a Moneterist and an Austrian walk in to the bar.

    The Moneterist ask for a beer and he pays cash for it.

    The Keynesian ask for a beer, and he adds, ‘can you put it on my tab’, and given his long, tortured history with the bar, the bartender refuses service.

    The Austrian ask for a beer, and he pulls out an eight Moneterist nugget of gold, and he asks, ‘can you convert this?’

    The bartender asks, ‘with what?’

    The Austrian, ‘how ’bout with the title of your bar?’

  34. bleh! Messed up my own joke, replace that ‘ eight Moneterist nugget’ with ‘eight oz. nugget’

  35. Obama abolishes bust and boom cycles!

    To be fair, there are two ways to address boom and bust cycles. You can either moderate money supply using Austrian- or Monetarist-style mechanisms. Or you can so burden new investment that there is no way that it could become irrationally exuberant.

    Seriously, if the corporate tax rate were 80%, do you think there would have been a tech boom? No way! And if you had to wait 2 years for a federal license to buy a house — with the requisite subsidies for the poor — do you think there would have been a housing boom? Of course not!

  36. Others have been free to do all of this too. But it’s Rockwell that’s done it – no-one else.

    Leonard Read did it first. Decades before Rockwell. And the organization he started is still going strong, still number one.

  37. Nobody shills for his own work quite like Doherty. He’s the only guy around here who never misses a chance to pimp his books. I can’t wait until the next LP presidential cycle comes around and we get to hear about all the cool anarchos supporting his wife.

  38. To be fair, there are two ways to address boom and bust cycles

    Only two? I can think of many more. Emulate the Soviets, for one. You never heard of a downturn under Stalin. It was always down! Stability! The peasants weep for its return.

  39. “Leonard Read did it first. Decades before Rockwell. And the organization he started is still going strong, still number one.”

    Number one in what sense?

    I don’t underestimate the work of FEE, or it’s heritage, but it’s the Mises Institute which has brought back into print, and uploaded, a vast library that would otherwise have been virtually inaccessible to most people.

    That anyone in the world with internet access can download Human Action or any of the other vast literature any time they want, free of charge, is down to Rockwell.

    Before people level cheap criticism at him, why don’t they spend the next three decades trying to exceed what he’s achieved, then they might be in a position to judge.

  40. Only two? I can think of many more. Emulate the Soviets, for one. You never heard of a downturn under Stalin. It was always down! Stability! The peasants weep for its return.

    Didn’t WWII pull the capitalist west out of the Great Depression? Isn’t that what they teach? All of that military spending turned things around and hence the golden 50s with Fonzie, etc.

    With Stalin, it was like Saddam and his 99% of the vote in the last election before regime change. There were record outputs every year and bumper crops.

  41. There were record outputs every year and bumper crops.

    Indeed. And those 35 million dead?
    They all had accidents!

  42. You said that “no-one else” has done this. I gave you an example that had. But instead of admitting you were wrong, you try to change the subject by comparing the number of books each man had his subordinates reprint.

  43. DannyK:

    “I don’t agree with your view of Hoover (it parallels the recent move of some conservative Republicans to suddenly realize that George W. Bush wasn’t one of them this whole time! Don’t blame us! Bush was some kind of crazy socialist-Republican hybrid thing!).”

    Don’t mean to offend here, but you should maybe brush up on your history of Hoover. He did a *TON* of Keynesian manipulations before Roosevelt came in… Roosevelt campaigned against deficits & intervention because Hoover’s meddling failed so badly.

    From wiki:

    Economist Marriner Eccles observed that “given later developments, the campaign speeches often read like a giant misprint, in which Roosevelt and Hoover speak each other’s lines.”[32] Roosevelt denounced Hoover’s failures to restore prosperity or even halt the downward slide, and he ridiculed Hoover’s huge deficits. Roosevelt campaigned on the Democratic platform advocating “immediate and drastic reductions of all public expenditures,” “abolishing useless commissions and offices, consolidating bureaus and eliminating extravagances reductions in bureaucracy,” and for a “sound currency to be maintained at all hazards.”

    So anyway, first off… Your understanding of Hoover & FDR is pretty off-base. But that’s a pretty common misconception, so that’s cool… BUT…

    There’s NO way you can possibly look back on the Bush administration and not view him as having always been a HUGE government guy. The size, scope & powers of government, along with regulation and economic meddling increased immensely under Bush!

    I guess it’s too easy to forget that though too with how much most of the media is denying it and trying to pretend he was a “free marketer”.

    Anyway… Check your facts.

  44. OK, I’m more than happy to recognise that I was incorrect to say no-one else. I should have been more specific in saying that I don’t believe there is any one else who has done more to make Austrian literature and ideas accessible, than Rockwell. Even Leonard Read, even FEE as a whole.

    And getting the rights to publish certain books and articles can be painstaking work. I wouldn’t breezily dismiss it as getting subordinates to run reprints…

    As for FEE.org being “just as anarcho as Lew”. Really? Leonard Read must be spinning, given his opposition to anarchism.

    But I’m still really keen to know in what sense FEE is “still number one”. Please enlighten me.

  45. Spending in the economy is dropping. Hayek argued that it should be maintained.

    Looks like you said Hayek when you meant to say Keynes.

    -jcr

  46. Didn’t WWII pull the capitalist west out of the Great Depression?

    I used to believe that too, but it turns out not to be the case. What got us out of the depression was the lifting of most wartime economic regulations and a 2/3 reduction in government spending. The depression ended in 1946.

    -jcr

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