Free Markets, Free People

Austrian economics – "It ain’t rocket science"

I‘ll never forget Dale telling me during a phone conversation, "the more I look at the economy and what the Austrians have been saying about it, the more I find their arguments compelling".

He’s not the only one.

"The Austrians", of course, are those economists from the "Austrian school", which is a true free market school. Probably the most famous of the Austrians is Frederic Hayek. Hayek wrote "The Road to Serfdom" and the "Constitution of Liberty". If you don’t mind my saying so, they’re "must have books".

Another "must have" is "Human Action" by Luwig von Mises.

The point, however, is their writings seem more and more valid each day as we watch the policies that are driving this economic debacle play out.

Anyway, the article tells about Prof. Pete Boettke at George Mason University who is leading the charge for the Austrian brand of economics. And, as you might imagine, there’s a increasingly bigger demand for information pertaining to it.

From the article about the concerns of the Austrians:

Economics, they [the Austrians -ed.] feared, was increasingly narrow and technical but not necessarily wise. They also remained skeptical of the Fed’s approach to targeting stability in consumer prices.

That shouldn’t be the Fed’s goal, says Mr. Boettke, who a friend lured back to George Mason a year after he was denied tenure. The Fed, he says, should be to make money "as neutral as possible, like the rule of law, which never favors one party over the other."

That sometimes means letting prices fall. There’s little to fear in deflation, he adds, when it accompanies periods of strong productivity growth. However, "anytime you saw the price level starting to fall, the Fed flooded the economy with cash," he says. "And that resulted in asset-price inflation, which set us up for these crises."

It wasn’t a lack of government oversight that led to the crisis, as some economists argue, but too much of it, Mr. Boettke says. Specifically, low interest rates and policies that subsidized homeownership "gave people the crazy juice," he says.

Boettke also participates in a group blog about Austrian economics if you’re interested.  One of the posts is about the fact that in most cases, economics isn’t “rocket science”. That’s something I’ve been saying for years in various ways – human nature 101, common sense 101, economics 101.

All economics action is based deeply in individual actions of human beings driven by  human nature.  One of the reasons that von Mises named his book “Human Action” is he and the other Austrians recognize that fundamentally all economics is based in just that – human action.  In other words, grassroots up.  Not the other way – top down. 

That’s precisely why you’ll constantly see Austrians claim “it ain’t rocket science” when they explain why central planning never works.  And what we’re going through now is no exception.  Boettke:

I don’t possess a crystal ball, so I cannot forecast the economic future. But I do know that it is not good to expand the monetary base 140% or to run deficits the size we have, or accumulate public debt as we have. See Laurence Kotlikoff in The Economist.  This "ain’t rocket science"!  There will be a day of reckoning due to the monetary mischief and fiscal irresponsibility.

I also know that the problems we are facing are not "market problems" — it is not that actors are all of a sudden ‘irrational’, and it is not that markets are inherently ‘unstable’.  Everything we are seeing in market behavior is a rational response to the environment created by public policy.  This is not a psychological problem we are dealing with, it is a public policy problem.  Bad public policy produce bad incentives which in turn produce bad results.  Ultimately, this is a problem of bad ideas which result in bad public policies.  Again, this ain’t rocket science.  The role of the economists in all of this should be like my Dad when I was a teenager (and truth be told an adult), and grab policy makers by the shoulders star them squarely in the face and state clearly "this isn’t rocket science" and explain clearly the Econ 101 basics of why the decisions we have made so far have not been correct.

Gerald O’Driscoll over at ThinkMarkets does precisely this today.  Nothing that has gone on so far with the housing market would be unpredictable with a little return to the lessons of Econ 101 about incentives and information, and how markets work to coordinate plans through time via relative price adjustments and profit and loss accounting.  Policies produce incentives, when individuals in the system follow the path those incentives lead them to pursue, we should not be surprised (and certainly not disappointed). The policies adopted produced the results we see, not individuals behaving badly or behaving ‘irrationally’.  Unfortunately, in our efforts to be ‘sophisticated’ we often confuse simple economics with simple-minded economics.  But there is nothing simple-minded about returning to simple basics of economic science.  This ain’t rocket science, but individuals respond rationally to incentives and demand curves slope downward and supply curves slope upward.

Read through that carefully and recall how many times here we’ve discussed how humans respond to incentives and why a certain policy seems to ignore that and the "experts" seem "surprised" by the "unexpected" outcome.

It ain’t rocket science, for heaven sake, but like Boettke and the Austrians claim, we’ve decided mathematical models and technical arguments are more persuasive – in the policy making arena – than are human nature and common sense.

I mean, look around you at the shambles the other schools of economics have made this place.

If I had to give the Austrian school of economics another name it would be the common sense school. It is based exactly at the level it should be based, recognizes the fundamental role that individuals play in economics and economies, and the realize, from that fundamental truth – common sense – that top down, central planning is the wrong place to start when devising economic policy.

Unfortunately that’s precisely where our present economic policy is formulated and the result is fairly easy to predict.

The article ends with:

But as much as the Austrian diagnosis may resonate now, it doesn’t provide a playbook for what to do next, which could limit its current resurgence.

Mr. Hayek rightly warned of the dangers of central planning, Mr. Boettke says, but "he didn’t give a prescription for how to move from ‘serfdom’ back."

I disagree.  If “serfdom” is found at the end of the policy road we’re traveling right now, then the prescription for how to move from “serfdom’ back is to reverse the route we’ve traveled.

It ain’t rocket science folks.  We may not like the prescription, and it may include quite a bit of hardship, but there is a road back from the economic serfdom we’re destined for if we don’t do something and do it fairly quickly.



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21 Responses to Austrian economics – "It ain’t rocket science"

  • The Austrian School is given short shrift in all the major economics textbooks, so most people who take econ don’t get exposed to it. That’s unfortunate.

    If you want a relatively painless and comprehensive introduction to economics that is based in the Austrian school, or if you know a young adult (high school/college) you wish to get started on it, I recommend Mark Skoussen’s Economic Logic. It’s designed and structured as a textbook for an economics course, but it’s sufficiently well-written to read stand-alone.

    • It is given short shrift because i contemplates very little for the government or for the intellectuals to actually do.  How boring for those who want to make a name for themselves, stir the pot, and maybe grow wealthy.
      On other threads, I have said to Erb that Keynesian economics is the political version of a free lunch.  We all remember Pelosi running around crying “stimulus” as she got ready to give away free money to her friends and supporters.  If we come back today and remind her both Heinlein and Friedman asserted TANSTAAFL, she would not understand.
      Keynesian economics has never worked.  It has not worked in Japan.  It did not work for FDR.  It has not worked for Obama, Pelosi, and Reid.  It appears to work for mild recessions, but that is only because the recession is over before the “stimulus” ever gets into the economy.

      • It appears to work for mild recessions, but that is only because the recession is over before the “stimulus” ever gets into the economy.

        And that is exactly what the democrats were banking on.  Go back and read or revisit the discussions that were going on at the time of the debate over the Stimulus Bill.  Every recession since WWII was revisited and virtually all of them showed an average duration of 18 months and then a rapid recovery.  There were exceptions but for the most part the mean held true.

        The Democrats passed the Stimulus Bill full knowing that most of the effect of the bill would not get into the economy until the 2nd year – the lead up to the midterm elections – Now.  And they were convinced we would be on a fast recovery and they could then pat themsleves on the back to show the American Public how they not only had save America from destruction brought on by those evil Republicans (which they are still trying to do today) but the economy was back because of their efforts.

        (Note:  I remember predictions from MSNBC shills [Matthews & Olbermann to name two] right after the Stimulus Bill passed that the Democrats would virtually sweep the midterm elections when the economy came roaring back.)

  • We move out of serfdom the why it has ALWAYS happened.
    Market capitalism.
    It was the development and application of market capitalism that led our ancestors…and anyone’s ancestors who are not serfs now…out of bondage.
    Markets innovate, and raise the standard of living.

    • The situation has left American fortunes pinned to an uncertain remedy: hoping that things somehow get better.

      … so this November will reveal the real meaning of “Hope and Change”

  • Their model of mal-investment describes the current situation very well. Too many houses, too many people with skills revolving around housing, etc.
    If its true, you can also predict China will be having some rough times as they have mal-invested in too many factories and too many luxury villas.

    • But…but…Krugman (former Enron advisor and god of economics for Collectivists) says we should be MORE like China.  Yearns for it, in fact….
      Of course, a few years ago, Krugman was ARGUING FOR the housing bubble…

      • We should be more like China: kids wanting to learn, work hard, good business environment, etc.
        Just not be like China in the Communist, seize your land to build a highway, sort of way.

      • Krugman wouldn’t have lasted through the Cultural Revolution in China (1966–1976). A simple charge of “ill thoughts” would have gotten him sent to the labor camps, where economists and other bourgeoisie were treated with equal contempt.

        • His ability to change his position depending on who is in power suggest he would have done well.

  • The policies adopted produced the results we see, not individuals behaving badly or behaving ‘irrationally’.

    It pissed me off royally to hear pols…including GOP types…bloviating about “greedy house flippers” and the like.
    People, including people who devised derivatives for weak-assed loans, were doing EXACTLY  what they were expected to do given the PERVERSE incentives in the market created by BIG GOVERNMENT.

  • The way back starts with the the first step.

    I believe that the American people are desperate to hear  just one idea that makes sense to them. Something they can grab a hold of and say “Yes. Let’s do it. And let’s do it right now.”

    In my opinion, that first step, that one idea might be Kitlikoff’s idea of Limited Purpose Banking. For those that are unfamiliar with Limited Purpose Banking, a good place to start is It’s simple and easy to understand, there would never be another bank failure, fractional reserve banking would no longer exist, and the Fed would have a fewer ways to screw things up.

  • When I got my Economics degree, many many moons ago, All my professors were of the Chicago School, close enough to the Austrians except for the whole monetarism thing. 

    One of the economists I read who had great insight was Murry Rothbard. Unfortunately he kinda went crazy and alienated most of his colleagues. 

    As for our current delima, it will have to get worse before it gets better.  Let’s see if some gridlock after November does any good.

  • The austrian school is nothing like the chicago school kyle – epistemologically especially. The fact that both think government is ‘bad’ for markets does not mean they are anything alike.

    • I suppose so when you get into the higher realms of theory. But in the nuts and bolts application of macroeconomics they are very similar, in fact Milton Freidman evolved his economics from some Austrian influences as well as classical economics.

      My professors had me reading Von Mises and Rothbard as well As Freidman. And Freidman considered himself a libertarian. 

      They certainly had a lot more in common than they did with the other prevailing school at the time which was John Kenneth Galbraith style dour Keynesianism.

      • “…in the nuts and bolts application of macroeconomics they are very similar…”

        That is simply not true.  Austrian theory sharply deprecates — if not outright condemns (which some authors do) macroeconomics in concept.  Austrian theory generally understands macroeconomics to be bloody nonsense.

  • “All economics action is based deeply in individual actions of human beings driven by  human nature.”

    I used to say to some of my economics professors that economics was just a branch of psychology.  They were not amused.

    • I used to say to some of my economics professors that economics was just a branch of psychology.

      In fact, psychology, sociology, neurobiology, economics, and political science are all just different facets of the same subject, namely human behavior. You could even add some more branches, such as game theory and evolutionary biology as it applies to human beings.   

      That’s why virtually all political scientists, most psychologists, and many economists seem so lost. They view their subjects in terms that are entirely too narrow. They often lack the mathematical tools to add the other facets to their perspective. 

      It’s particularly galling to me that it’s called “political science”, when it has no science in it to speak of. Of all the things I named above, political science actually has the least science. 

  • McQ[T]heir writings seem more and more valid each day as we watch the policies that are driving this economic debacle play out.

    To you and many of the readers of this blog, yes.  However, to other people (you know who they are!), the policies that are driving this economic debacle* are those of Bush prior to 2009 and the obstructionist Republicans of today.  Had Bush not run us so far into the ditch and were not McConnell, Boehner, Sarah Palin, Rush, Beck, et al. absolutely determined to block and obstruct every policy that would make our economy recover, we wouldn’t be in this fix.

    Rick Caird[Austrian School economics] is given short shrift because it contemplates very little for the government or for the intellectuals to actually do.  How boring for those who want to make a name for themselves, stir the pot, and maybe grow wealthy.

    Superb point.  Who among us, if we were in positions of power, would like to admit that the best thing we could do is shut up and get out of the way?


    (*) That is, if one ADMITS that we’re in an economic debacle.  According to The Dear Golfer, other regime members, and their mouthpieces in MiniTru, the Summer of Recovery is roaring along, and prosperity is just around the corner.

    • Conversly, Keynesian economics is respected because it tells politicians and intellectuals what they want to hear.