Ron Paul’s comment that “… we’re all Austrians now” might seem odd to those unfamiliar with a school of economics that reached its peak around the 1930s and has since remained largely outside of mainstream thought. Cue Slate’s attempt to explain – and discredit – a system of economic thought that has helped explain the role of prices in economic calculation, discredited socialism and put forward powerful tools for analysing human action.
The article is here.
Here are a few quotes, and thoughts.
Most notably, it seeks to build a strong ethical case for strict libertarianism without admitting that this would lead to any practical problems whatsoever.
I think this point demonstrates that the author has ignored entirely a tenant of Austrian economics – namely, that it’s value free. Austrian economics is based on a priori reasoning (specifically, the action axiom).
The business cycle theory of Mises, Hayek and Rothbard argues that entrepreneurs engage in unsound investments as a result of artificially low interest rates. Slate counters:
[I]t’s hard to understand why businesspeople would be so easily duped in this way. If Ron Paul and Ludwig von Mises know that cheap money can’t last forever, why don’t private investors? Why wouldn’t firms avoid making the supposedly dumb investments?
The difficulty for the entrepreneur comes in determining which interest rate fluctuations are driven by the changing time preferences of market participants, and which are driven by central bank manipulations. Investment in longer production processes certainly makes sense in the first case given the increase in total available savings, but evidently not in the second case. This is true particularly in longer periods of “cheap credit” where entrepreneurs who did make investments are able to make greater profits than those who were more cautious, encouraging a greater number of firms to make investment decisions that will eventually be demonstrated as unsound.
Many of the original Austrians found their business cycle ideas discredited by the Great Depression, in which the bust was clearly not self-correcting and country after country stimulated real output by abandoning the gold standard and engaging in deficit spending.
The idea that the Great Depression was an example of the failure of the free market has been tackled time and time again. Mr Hoover’s presidency was one of unprecedented deficit spending and debt expansion, and his policies of protectionism preventing the necessary decline in real wages continued under Roosevelt. If the author of the Slate article wants an example of a recession dealt with according to a largely Austrian prescription, he would do well to look at the recession that hit the United States in 1920-21.
As a final point:
Unfortunately, however, it’s the Austrian school, which preaches despair and demands no action at all, that has the most effective political champion and the most dedicated followers.
The Austrian school does not preach despair. If anything, it does the reverse – it says the way that a society can be returned to prosperity is by getting government out of the way. Yes, recessions are evil, but they are a necessary evil. If government allowed them to occur, instead of artificially maintaining factor prices and bailing out bad business, the despair would be mitigated and the economy could return to growth on secure foundations.
Most Western economies have been subject to massive stimulus spending and monetary “easing”, more often than not without success. The proponents of this economic activism seem to be blind to its failures, and in response demand more and more intervention. I’m forever curious as to what they would view as discrediting their economic outlook – just how much money must be confiscated by taxation or the printing press before they realise borrowing your way out of debt and spending your way out of recession doesn’t work?