Free Markets, Free People

Austrian school


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.

~McQ