Consulting by RPM || Free Advice Blog

Slight Correction to DeLong on the Austrians

Two things about this Brad DeLong post. First, I like the quote from a P.J. Grigg that DeLong disparages[actually I’m not sure if DeLong is for it or agin it] reproduces:

I distrust utterly those economists who have with great but deplorable ingenuity taught that it is not only possible but praiseworthy for a whole country to live beyond its [means] on its wits and who in Mr. Shaw’s description tech that it is possible to make a community rich by calling a penny two pence, in short who have sought to make economics a vade mecum for political spivs…

Then DeLong goes on to describe various economic schools of thought and their views on recessions / depressions. As you may have guessed, I don’t find his take on the Austrians flattering:

Austrianism, the doctrine that because of past irrational exuberance and over- or malinvestment, that there is nothing of social value a large chunk of the labor force can do other than sit on its hands unemployed and wait for circumstances to change and profitable employment opportunities to open up.

So just to clarify here: I don’t think that the unemployed worker has nothing of social value to do, and must sit on his/her hands and wait.

No, the socially valuable thing for the worker to do–who has been thankfully laid off from the wrong sector into which s/he was drawn during the misallocations of the boom–is to search for the right place to go. The worker has to find a new niche in the economy, and the “efficient” place for him/her to go, depends a lot on the worker’s own preferences. S/he doesn’t have to wait around for the right job to appear, but rather needs to go find it.

If we are dealing with a simple model where there’s one big firm (or millions of identical firms) who have the same production function F(K,L) then yeah, it’s pointless for people to be unemployed. But in the real world the economy is very complex and we can’t just survey the scene and say, “Ah, you sir need to report to 100 Downing Street at 8 am Monday morning, that’s where your labor will be the most useful. Carry on.”

Last point: I am NOT NOT NOT saying that the people who have been unemployed for the last two years should just suck it up and go find their perfect job. They are unemployed because of all the “help” the Fed and government have been providing since the crisis began. If the government/Fed had truly done nothing and “let everything collapse” back in 2008, then I believe unemployment would be lower now than it currently is.

DeLong of course would disagree with that claim quite strongly, but it is simply not true to say (or imply) that an Austrian thinks the current batch of unemployed people somehow deserve their lot, or are fulfilling an important social function by sitting on the sideline for two years.