The Explanatory Power of the Austrian School
It's interesting how during a bust, the Austrian School suddenly gains greater prominence and people act as if the Austrians are just another player in the mainstream (which isn't really true as much as we might like it to be). Here is a recent case of this: Andy Laperreire in the WSJ:
The Fed's loose monetary policy has hurt the average American. Here's how:
- Rolling asset bubbles have depressed wages by spurring unproductive investment, first in the tech and telecom sectors and more recently in housing. This has reduced the funds available for other, more productive investment that could have increased real economic output and raised wages and living standards. Austrian school economists call this "malinvestment," and it is an inevitable byproduct of credit bubbles.
- The stock market and housing bubbles created windfall gains for some (who sold at the right time) and windfall losses for others (who bought at the peak). Many speculated or acted irresponsibly during both bubbles, and have reaped what they sowed. But others were innocent victims of the boom-bust dynamics. For example, young families who bought their first home in Florida or California during the past few years will suffer for years to come the economic consequences of buying at the peak of a historic bubble. (Proposals in Congress to offer temporary tax credits for purchasing homes would create more arbitrary windfall gains for a few at taxpayer expense, while doing little to alter the fundamentals of the housing market.)
- The boom-busts have caused massive and unnecessary employment dislocation. Responding to market signals, many workers flocked to the tech and telecom sectors in the late 1990s and the housing-related sectors in recent years, only to earn a pink slip during the bust. Not only does this cause financial and emotional hardship, the waste of human capital hurts the economy overall. A flexible labor force is one of the great strengths of the U.S. economy, but policies that cause unnecessary dislocation are economically destructive.
- The Fed's loose monetary policy is causing inflation and reducing the purchasing power of Americans' paychecks. Headline inflation is well above the Fed's target, and the reduced purchasing power is readily seen in the declining value of the dollar, and rising food and energy prices
Comments (11)
Too bad we don't see the legislators taking up the Austrian mantle, save Ron Paul. We might even see a greater grab for power by and for the FED than we've ever seen. While Austrians may be quoted more currently I fear the socialists will actually gain in real power. We all know this will bring about our slow death as our standard of living declines further.
Published: April 3, 2008 1:05 PM
I thought the Austrian school couldn't have explanatory because it claims not to be revisable in light of observations, and thus, that everything is consistent with it, and thus, that nothing is more or less likely than anything else?
Published: April 3, 2008 2:13 PM
Person,
Where was this said? I only ask for my own curiosity. Thanks.
Published: April 3, 2008 2:21 PM
Jeffrey, there was another example of this "Austrian Acceptance Syndrome" three weeks ago, in the Telegraph, by Ambrose Evans-Pritchard, their International Business Editor. Most of the time he is a composite Monetarist/Keynesian, but he went all Hayekian in the following paragraph:
Like many, Peloton thought Fed rate cuts from 5.25pc to 3pc (with more to come) would end the panic. But this is not a normal downturn, subject to normal recovery. Leverage is too extreme. Bank capital is too eroded. Monetary traction eludes the Fed. An "Austrian" purge is under way.
Here's the link to the article, which was entitled 'The Federal Reserve's rescue has failed':
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccview103.xml
Published: April 3, 2008 3:56 PM
What Person is referring to is Mises' metholodogical apriorism, though I wonder how well Person has understood it, particularly if he thinks Austrians claim that theories should not have explanatory power...
Published: April 3, 2008 4:58 PM
Person is an idiot, as demonstrated unendingly. Please ignore it.
Published: April 3, 2008 6:35 PM
Wow! That's the first time I've seen almost straight Austrian theory in the WSJ, even if it was an opinion piece.
Didn't think they would even let such a thing be published.
Of course, need to disagree with these points:
"intelligent and well-intentioned officials at the Federal Reserve" right...
Also, the focus on low interest rates instead of expansion of the money supply muddies the issue. What causes low interest rates? Right, expansion of the money supply.
And "The Fed has a very difficult job. Tight monetary policy risks recession, while loose monetary policy risks inflation and asset bubbles."
Hmm... 'tight' monetary policy only risks recession when there has been a previous expansion of the money supply. How about 100% reserves and no boom and bust cycle, period?
Published: April 3, 2008 9:18 PM
Jeremy wrote
'Also, the focus on low interest rates instead of expansion of the money supply muddies the issue. What causes low interest rates? Right, expansion of the money supply.'
I have to demur. these variables are related, but their causality is not exclusively unidirectional.
IN a 'normal' central banking regime , it is the central bank's control over rates ( which are always pitched lower than what would otherwise be a bona fide 'market' rate), which primarily drives the perpetual (over)expansion of the money supply. the latter emerges from the actions of the private banking sector, who are both responding to distorted pricing in the money market , and who are less prudent in risk-taking than they would otherwise be in the knowledge that they have the possibility of getting bnailed out .
Of course, this is not to say that the central bankers never use other more direct methods of increasing the money supply - they can and they do.
But the 'baseline' fractional reserve model begins the expansion process with an over-generous central bank lending rate. So the Fed ( or in my country, 'repo') rate drags all the other market rates down in the same sort of proportion. And with 'too cheap' borrowings available to all potential borrowers, voila! Bigger money supply.
Published: April 4, 2008 7:10 AM
There is a downside to widespread Fed bashing, and the downside is now playing itself out well in Washington. Far too many people are able to speak the anti-Fed rhetoric, but couple it with pro-Fed proposals. See, for instance, Chuck Schumer's harsh criticism of the Fed's policy - in the context of arguing that the Paulson plan is hopelessly weak, and not enough is being done to bail out bad loans. The best example is Milton Friedman, of course, who wrote about the evils of the Fed - and claimed that the Depression could have been averted had the Bank of the US been bailed out, and had there been a strong inflationary policy in place.
I wonder if selective quoting of the Austrians is not part of this strategy. They disarm critics of their policy by adopting their rhetoric. Presently, the Austrian school is enjoying a new prominence in the culture, not usually enjoyed by schools of economic thought. So they adopt Austrian rhetoric, but in the end, argue that it shows the need for interventionist policies and a stronger Fed.
Published: April 4, 2008 10:04 AM
"IN a 'normal' central banking regime , it is the central bank's control over rates ( which are always pitched lower than what would otherwise be a bona fide 'market' rate), which primarily drives the perpetual (over)expansion of the money supply. the latter emerges from the actions of the private banking sector, who are both responding to distorted pricing in the money market , and who are less prudent in risk-taking than they would otherwise be in the knowledge that they have the possibility of getting bnailed out .
Of course, this is not to say that the central bankers never use other more direct methods of increasing the money supply - they can and they do.
But the 'baseline' fractional reserve model begins the expansion process with an over-generous central bank lending rate. So the Fed ( or in my country, 'repo') rate drags all the other market rates down in the same sort of proportion. And with 'too cheap' borrowings available to all potential borrowers, voila! Bigger money supply.
Functionally, that is precisely backwards. Central banks manipulate interest rates through changes in the money supply, not the other way around.
Published: April 4, 2008 12:30 PM
Maybe Austrians can go by the nickname of "bubble-busters"! ;-)
Published: April 4, 2008 8:25 PM