by
Robert Wenzel
Economic
Policy Journal

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This is slick.
A reporter who has clearly been briefed by the Rothbard-hating Kochanaks
is out with a column on Ron Paul and Austrian economics. The reporter
is Matthew Yglesias and the writing in its presentation of Austrian
economics is just slick enough that it should be reviewed in its
entirety. Let us begin:

Yglesias
writes:

As
he declared quasi-victory in Iowa following a third-place finish,
Ron Paul puzzled cable news watchers across the country by proudly
proclaiming, “We are all Austrians now.” The average Republican
presidential candidate would sooner officiate a gay marriage than
praise Europe, yet here was Paul pledging allegiance to Vienna.
What did he mean? Why would we all be Austrians?

Cute mention of
the third place finish, when it was merely 3 percentage points between
first place and third place.

Buckle your
seat belts, Yglesias is clearly a spinmeister.

Here’s more:

Paul’s
statement was crystal clear to those familiar with the internecine
controversies of the libertarian movement. He was referring to so-called
“Austrian economics,” an idiosyncratic passion of his and a set
of beliefs that put him at odds with the vast majority of well-known
economists of all ideological inclinations.

Ah yes, the spinmeister
at work. Notice the use of the word “belief”, implying an almost religious
non-scientific view, when in fact Austrian economics is a theoretical
construction based on deductive theory. So “theory” rather than “set
of beliefs” would be more accurate.

Yglesias continues:

For
starters, it’s important to note that the term has something of
a double meaning. The Austrian school originally referred to a set
of classical liberal thinkers with diverse interests who came out
of the Austro-Hungarian Empire. Many of these thinkers are obscure
today, but the most distinguished member of the group, Friedrich
Hayek, is anything but. By the same token, an appreciation for Hayek’s
work by no means makes you an “Austrian.” Hayek, who died in 1992,
won the Nobel Prize, and mainstream economists thoroughly embraced
his important work explicating the role of the price system in conveying
information. His ideas undergird everything from carbon taxes to
wireless spectrum auctions and thoroughly permeate policy throughout
the Western. world

Here’s the first
clue that Yglesias is being briefed by a Kochanak. Only
a Kochanak would link Hayek so closely to carbon taxes. Although
Hayek was very important in teaching about prices as signals, he never
dealt in such topics as carbon taxes. It’s a major stretch to bring
him into that debate. But further, Yglesias fails to mention that
one major area Hayek won his Nobel prize for was specifically his
work in business cycle theory. From
the Nobel committee:

…von Hayek’s
contributions in the field of economic theory are both profound
and original. His scientific books and articles in the twenties
and thirties aroused widespread and lively debate. Particularly,
his theory of business cycles and his conception of the effects
of monetary and credit policies attracted attention and evoked animated
discussion. He tried to penetrate more deeply into the business
cycle mechanism than was usual at that time. Perhaps, partly due
to this more profound analysis, he was one of the few economists
who gave warning of the possibility of a major economic crisis before
the great crash came in the autumn of 1929.

The committee
also understood that Hayek’s work on price signals was more about
competing economic systems, rather than such topics as “carbon taxes”:

The
Academy is of the opinion that von Hayek’s analysis of the functional
efficiency of different economic systems is one of his most significant
contributions to economic research in the broader sense. From the
mid-thirties he embarked on penetrating studies of the problems
of centralized planning. As in all areas where von Hayek has carried
out research, he gave a profound historical exposé of the history
of doctrines and opinions in this field. He presented new ideas
with regard to basic difficulties in “socialistic calculating”,
and investigated the possibilities of achieving effective results
by decentralized “market socialism” in various forms. His guiding
principle when comparing various systems is to study how efficiently
all the knowledge and all the information dispersed among individuals
and enterprises is utilized. His conclusion is that only by far-reaching
decentralization in a market system with competition and free price-fixing
is it possible to make full use of knowledge and information.

Why does Yglesias
fail to mention Hayek’s contribution to business cycle theory? Let
us go on and see. Yglesias writes:

But
“Austrians” in Paul’s sense refers to something narrower, specifically
the thought of Ludwig Von Mises and his student Murray Rothbard.
It is a form of capitalism that is even more libertarian and anarchic
than that espoused by many libertarians. Rothbard‘s followers,
most prominently longtime Paul associate and founder of the Mises
Institute
Lew Rockwell, have been waging a decades-long war against the Koch
brothers and the more mainstream form of libertarianism the
Kochs represent.

“Austrian
economics,” in this sense, goes beyond standard-issue free market
thinking in a number of ways. Most notably, it seeks to build a
strong ethical case for strict libertarianism without admitting
that this would lead to any practical problems whatsoever. Therefore,
along with rejecting the legitimacy of any intervention to protect
the poor or regulate anything (a position much more extreme than
even the Hayek of Road
to Serfdom), Austrians reject the idea that there is anything
at all the government can do to stabilize macroeconomic fluctuations.
This, to be clear, is different from the mainstream Republican view
that the stimulus bill enacted by Congress in 2009 and signed into
law by President Obama was wasteful or ineffective. Austrians also
believe that cutting taxes to boost economic activity doesn’t work
either. And they disagree with Milton Friedman that appropriate
monetary stimulus by the Federal Reserve could have prevented the
Great Depression. Indeed, they disagree with even the least controversial
of all stabilization measures, the ordinary tweaking of short-term
interest rates that all modern central banks use to try to prevent
either inflation or deflation. In the view of the Austrians, practically
every economic policy pursued by the federal government and Federal
Reserve is a mistake that distorts markets. Rather than curing recessions,
claim Austrians, stimulative policies cause them by producing unsustainable
bubbles.

So we begin to
see why Yglesias failed to mention that the Nobel committee specifically
mentioned Hayek’s work in business cycle theory. Because the Kochonaks,
want to keep Hayek in the mainstream “libertarian” camp, but paint
the business cycle theory of Mises and Rothbard as yahoo stuff. Thus,
Yglesias word gymnastics: Rothbard and Mises bad business cycle theorists.
Hayek a saint – pushing down the memory hole that Hayek one is
Noble prize in part for business cycle theory

Let’s see
where this, bend your Kochonak foot behind your head, writer will
take us next:

The
way this works, according to the Austrians, is that artificially
low interest rates spur “malinvestment” in unworkable enterprises
that inevitably crash when the stimulus is withdrawn. This is an
emotionally appealing idea, positing that the suffering of a bust
is a kind of cosmic payback for the boom. But it doesn’t make much
logical sense. For one thing, as George Mason University economist
Bryan Caplan, who’s ideologically sympathetic to the Austrians,
points out, it’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?

Notice that
the only economist Yglesias quotes in his entire commentary is Bryan
Caplan, who teaches at the Koch funded, George Mason University.
Caplan, according to Yglesias, is sympathetic to Austrians, but
at the same time disses the core of Austrian Business Cycle Theory,
when the cycle is playing out before him in just the way Austrian
theorists said it would. Or does Caplan not think the housing
market collapsed and fooled many home buyers – by the millions?

Here’s more:

Ironically,
the Austrians have replicated an error from the crudest forms of
postwar Keynesianism – the failure to consider the role of expectations
feedback in macroeconomic policy.

So I get Caplan’s
theory. There is no cycle because there would be feedback against
the cycle, which means no one has to worry about the cycle, which
sounds to me why the cycle developed the way it did, because it was
theorized out of the models. Caplan is following into the same type
of error that McCarthy and Peach did when they stated there was no
housing bubble just before it collapsed and
I warned them that it would collapse.

Now, here comes
a real whopper from Yglesias:

More
broadly, the Austrian story of investment booms and busts doesn’t
actually explain recessions and unemployment. Spending patterns
shift all the time without sparking a recession. People stop buying
BlackBerrys and they buy iPhones instead. Or people stop buying
boot-cut jeans and buy skinny jeans instead. Across sectors, maybe
people go see fewer movies and with the money they save they eat
out at nicer restaurants. A business that curtails its investment
spending should have extra money to pay out as dividends. Or if
they want to horde the cash, it sits in a bank for someone else
to lend out.

Here the Kochanaks
are really leading Yglesias off the track. Austrians never say that
there are no shifts in technology, consumer preferences. In fact,
Austrians say you can’t build exact models of the economy because
of these shifts. But, Austrians consider the boom bust cycle to occur
only when there are a “cluster of errors” caused by central bank manipulation
of the money supply.

It looks to
me that the Kochanaks are going to require a deeper memory hole,
not only do they want to stuff Mises and Rothbard, but it also appears
they want to stuff Austrian business cycle theory down the hole
and create an Austrian economics based only on carbon taxes and
the like.

Here’s more
from Yglesias:

It
may seem “obvious” that the decline in housing activity caused the
current recession, in line with the Austrian view, but in fact fixed
residential investment turned negative in 2006. It stayed negative
for more than a year before the recession began, and then continued
negative for a couple more quarters before it turned severe. People
spent less on home-building and renovation and more on other things.
If investment spending in general declines, you would expect spending
on consumer goods to rise to offset it. In practice, this doesn’t
always happen and you get a recession. It’s this anomalous collapse
in overall spending that needs explaining, and describing some of
the past spending as “malinvestment” doesn’t help you understand
it.

Uh, no kidding,
Matt. When the “cluster of errors” hits. It scares people and they
begin to hold more cash. That’s why “aggregate dollar-measured consumer
spending” doesn’t go up. But Austrians have never denied this. Your
Kochanak leader is misleading you.

Murray Rothbard
in The
Mystery of Banking wrote:

The
public’s demand for cash can be affected by many factors. Loss of
confidence in the banks will, of course, intensify the demand for
cash…

Here’s more from
Yglesias:

The interesting question is what to do about it. 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. Then for a
long time after World War II, policy elites more or less agreed
on a combination of “automatic” fiscal stabilizers (the deficit
naturally goes up during recessions as tax revenues fall and social
service outlays rise) and interest rate cuts. And it worked, so
nobody much cared about Austrian economics outside of crank circles.
But when short-term rates hit zero and the Fed couldn’t push them
any lower despite high unemployment, political consensus broke
down.

Ever since, we’ve been fighting about fiscal stimulus and quantitative
easing, and unusual economic theories have been coming to the
fore. Some of them offer useful suggestions about possible fixes.
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.

Uh, Matt,

The Great
Depression did not discredit Austrian theory. There was massive
intervention in the economy starting with Hoover and continuing
with Roosevelt. As Murray Rothbard wrote
in America’s
Great Depression, nothing was allowed to be laissez faire,
that is self correcting, with regard to the downturn that started
in 1929:

Laissez-faire,
then, was the policy dictated by sound theory and by historical
precedent. But in 1929, the sound course was rudely brushed aside.
Led by President Hoover, the government embarked on what [Dr. Benjamin]
Anderson has accurately called the “Hoover New Deal.” For if we
define “New deal” as an antidepression program marked by extensive
government planning and intervention – including bolstering
of wage rates and prices, expansion of credit, propping up of weak
firms, and increase government spending (e.g., subsidies to unemployment
and public works) – Herbert Clark Hoover must be considered
the founder of the New Deal in America. Hoover, from the very start
of the depression, set his course unerringly toward the violation
of all the laissez-faire canons.

Matt,

Your Kochonak
advisers are misleading you.

Oh and Matt,
as I have explained before,
the Austrian school does not preach despair.

Yglesias continues:

If
I’m wrong, and the economy doesn’t recover in 2012, then these faddish
views may gain more steam and perhaps we really all will be Austrians
someday soon. But let’s hope not. The developed countries that have
done best in the recession – places like Israel and Sweden – are
the ones that have pursued the least “Austrian” courses of action,
while the European Central Bank’s insistence on pursuing a somewhat
Austrian-style course in Spain and Italy is creating a deepening
crisis.

And Matt, where
the hell do you get the idea that you hold the patent on declaring
a recovery in 2012? Based on Austrian theory, I have been saying that
because of Bernanke money printing, a manipulated recovery is going
to be on its way. A position, I might add. that is
the exact opposite of what mainstream Keynesian economists have been
forecasting.

And as for
your thinking that the interventionists governments of Spain and
Italy have anything to do with Austrian economics, then please give
me a call. I have a fog making machine that I’d like to sell you.
Let’s meet in San Francisco and I’ll demonstrate it anytime. Maybe
you can get your Kochanak buddy to loan you a few million to help
you purchase the machine.

Reprinted
with permission from Economic
Policy Journal.

January
9, 2012

©2012
Economic Policy Journal

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