08 Apr 2010

Progressive Pile-Up On the Austrians!!

Economics 9 Comments

Good thing we have truth on our side; otherwise I might be nervous. Here’s Yglesias (HT2 Bob Roddis):

The great failure of the Obama administration, on domestic policy, has been an inability to communicate at either a mass or an elite level what its diagnosis of the situation is. Are there things that should be done but that Congress or the FOMC won’t agree to? Have they turned Austrian and think we need to suffer 3-4 years of post-trough elevated unemployment as punishment for our sins? [Bold added.]

I cut him some slack, because sometimes people on “our side” are a little sloppy in how we discuss this; I’ve done it myself. For example, I’ve probably said, “The Austrians agree with the Friedmanites that the Fed caused the Great Depression…” and I think Arnold Kling, in his “Recalculation” story, has said things like, “We are in recession because it takes a long time to shift resources to their new lines” (not exact quote).

So let me clarify: In my view, as a card-carrying Austrian, the Fed caused the late 1920s boom, which made a crash inevitable. But if the federal government had sat back and done NOTHING at all, just as the dreaded Mellon had recommended, and if the Fed had jacked up its lending rates, just as old-school central banking wisdom dictated, then the US would have had a really bad depression for about a year.

Note that when Tom Woods and I cite our favorite counterexample to the monetarists and Keynesians, it is the 1920-1921 depression. Not the 1920-1924 depression.

Same thing today. If instead of Secretary Paulson we had had Secretary Paul, then the feds would have sat back and let a few big investment banks collapse in September 2008. It would have been absolutely awful…for about 6 months. But by then I think we’d have hit rock bottom, and the genuine, sustainable recovery would have begun (with stock prices, housing prices, and many types of wages all a lot lower than in September 2008).

The reason the Great Depression lasted a decade (or more, depending on how you count it), and the reason we are still mired in (what I predict will become known as) the Second Great Depression, is that central banks and governments are not allowing the reconfiguration of the economy. They are doing everything in their power to freeze workers and other resources into the old, bubble-economy configuration. That won’t work, because that configuration was nonsense and didn’t accord with consumer preferences and the supplies of various capital goods.

9 Responses to “Progressive Pile-Up On the Austrians!!”

  1. Yancey Ward says:

    I don’t know if the Austrians have the absolute best explanations for what has occurred, but it is clear the other major macroeconomic schools have demonstrated their massive failures. I strongly suspect the attacks we are seeing now are the death throes of those schools. Note how Yglesias is trying to paint The Administration’s failures as Austrian. They are truly lost.

  2. J Cortez says:

    I like how these critics either don’t understand or misrepresent the Austrian perspective, then lampoon and criticize it, and applaud themselves for being more learned.

    Where’s Bryan Caplan when you need him? You can disagree with him, but at least that guy is intellectually honest and actually understands what the hell he’s criticizing.

  3. Jinto says:

    “Where’s Bryan Caplan when you need him? You can disagree with him, but at least that guy is intellectually honest and actually understands what the hell he’s criticizing.”

    Kind of like he understands Wicksellian Framework: not at all.


  4. Downunder says:

    Gee Robert, its a tough argument to sell. I’ve had conversations with people about this, and they say that a shallow and prolonged recession is better than a really sharp but short contraction.

    Partly because they worry the economy may not be able to recover after a really steep decline; and partly because of concerns about unemployment. Obviously, under the liquidationist model, far more people are going to lose their jobs, many of whom may never be re-employed (due to ‘scarring’). From my experience, most people strongly believe that it is the legitimate role of government to “smooth out the business cycle.”

  5. Jeremy says:

    “I like how these critics either don’t understand or misrepresent the Austrian perspective, then lampoon and criticize it, and applaud themselves for being more learned.”

    Its the basic straw man fallacy. It works wonders on the masses.

  6. Brian Shelley says:

    The dramatic rise of the Austrian school amazes me. I spent 6 1/2 years of college studying economics, and had one professor who brought it up occassionally. For the most part, I knew nothing about it. Now, it has become so well known that Krugman and Yglesias spend their time attacking it 3 times in a week. Why, oh Krugman, must you devote so much time to disparage a fringe? I suspect because it has become your rival.

  7. TGGP says:

    “which made a crash inevitable”
    Could it have been a crash that occurred a thousand years in the future? Markets go up and markets go down, anyone predicting a crash can wait forever to be vindicated. Some Austrians also claim that the longer the boom goes on, the bigger the ensuing necessary correction, but from what I’ve heard the size/duration of busts is correlated with subsequent rather than preceding booms.

    “just as the dreaded Mellon had recommended”
    The imaginary Mellon, but most probably not the real one.

    Yancey Ward, for any date in the near-to-medium-term future you care to offer, I bet Keynesian economics (even if just in some “bastard” New Keynesian form) will be thriving and Austrian economics will still be about where it is now.

    Brian Shelley, Krugman was mocking Austrians back when he was writing for Slate rather than the NYT. My guess (and I have no training in economics or experience with grad school) is that grad students are still not being told about Austrian economics.

  8. Yancey Ward says:


    I still expect to die before the present financial regime collapses totally, and I wouldn’t bet against the proposition that the proponents of that system don’t find a way to blame “that guy over there” for causing the collapse with his impertinent predictions.

    However, on a purely empirical basis, Keynesianism is being shown to be folly once again. And note, inflationism is an old ideology, Keynes just dressed it in new clothing.

  9. TGGP says:

    So are you in your death-throes, or are mainstream macro schools?