Archive for macroeconomics

From Noahpinion to No Clue?

Over at The Week, Noah Smith, an economics professor at Stony Brook University and of online “Noahpinion” fame, attempts a dismissal of the Austrian school of economics. His critique is intended to show that “the Austrian School’s demise came not because its ideas were rejected and marginalized, but because most of them were co-opted by mainstream macroeconomics.” But Smith is obviously far from an expert on Austrian theory (or the history of it).

The argument that Austrian ideas have already been incorporated in mainstream economics has already been repeated by mainstreamers so many times that it would be strange if they don’t believe it by now. It is easy to see where Smith got the “idea” to add to the myth-building. But there was perhaps some truth to it, at least in the 1930s, as Pete Boettke noted in 2002:

By the mid-30′s … the idea of a distinct Austrian program, even in the minds of the Austrians themselves, was seriously waning, in part because the mainstream more or less absorbed the important points the Austrians were making. Mises (1933, 214) had argued that while it is commonplace in modern economics to distinguish between the Austrian, Anglo-American, and Lausanne School, “these three schools of thought differ only in their mode of expressing the same fundamental idea and that they are divided more by their terminology and by peculiarities of presentation than by the substance of their teachings.”

But since then several things have happened and the Austrian and mainstream/neoclassical schools have drifted apart. Not only has the Austrian school further developed and strengthened its theory (by such “minor” works as Human Action and Man, Economy, and State) and seen a resurgence, mainstream economics has stumbled down a very non- (anti-?) Austrian path of unreal assumptions hidden in layers of excessive mathematization, and, thanks to their adherence to Whig theory, lost most of its economic heritage and sound grounding. Read More→

Audio: Misesian Insights for Modern Macroeconomics

In this talk (Mp3 format), J. Huston McCulloch discusses a variety of insights that Mises’s works offer to macroeconomics. From 2014′s Austrian Economics Research Conference.

Sound Advice for Janet Yellen

126px-US-FederalReserveSystem-Seal.svgSound Advice for Janet Yellen

Adam Ferguson (Jan 27 Weekly Standard) advice to Janet Yellen is highlighted in “Notable & Quotable” in today’s Wall Street Journal. Ferguson suggests that future Fed Chair Yellen should follow John Cowperthwaite whose introduction of free market economic policies are widely credited with turning postwar Hong Kong into a thriving global financial centre and “banish statisticians from her cold marble temple on Constitution Avenue.” Ferguson credits Cowperthwaite with such insights as:

Stripped of his numbers an economist would have to resort to the old home truths about how the world works: If you tax something you get less of it; as a general rule an individual manages his own affairs better than his neighbor can; it’s rude to be bossy; the number of problems that resolve themselves if only you wait long enough is far larger than the number of problems solved by mucking around in them. And the cure is often worse than the disease:

In the long run, the aggregate of the decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is likely to do less harm than the centralized decisions of a Government; and certainly the harm is likely to be counteracted faster.

Ferguson concludes, “Somehow the most successful practical economist of the twentieth century knew this was true, and he didn’t have to work out a single equation.”

The focus of Cowperthwaite  economic policy was positive non-interventionism and his management of the Hong Kong economy is often cited as a leading example of how small government encourages economic development and growth. [Sidebar: For a discussion of Hong Kong’s monetary system during this time see Kurt Schuler here and here.]

Even better advice for Yellen comes from Vedder’s and Gallaway’s The Fraud of Macroeconomic Stabilization Policy. Their major conclusions are 1. “Ex post attempts at implementing stabilization policy are destabilizing, not stabilizing”; and 2. Therefore, the notion of short-run contracyclical macroeconomic policymaking is an exercise in futility” [emphasis added]. Per Vedder and Gallaway policy makers would do much better following Bastiat, not John M. Keynes:

This does not mean that economists have nothing to offer in the way of advice. However, their role should be conditioned by the sentiments espoused by Frédéric Bastiat and not those of John Maynard Keynes. It was Keynes who glibly pontificated, “In the long run, we are all dead.” But it was Bastiat, some 150 years ago, who commented: “There is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. Yet, this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present gain that will be followed by a great evil to come, while the good economist pursues a great good to come, at the cost of a small present evil.”

Janet Yellen’s task would now be much less formidable and the economy would be in much better shape if Bernanke and Obama’s policy advisors had heeded Vedder and Gallaway, who in the spirit of Cowperthwaite, describe the best response to a macro shock:

The best they [entrepreneurs and workers] can hope for from government policymakers is, in the spirit of Hippocrates advising future doctors, that they do no harm. Given that the phenomena that policymakers confront in the short-run are essentially unpredictable and given that even their best efforts are the equivalent of medieval doctors bleeding their patients, the most appropriate short-run macroeconomic stabilization policy is to give the aforementioned  entrepreneurs and workers maximum freedom to adjust to potentially discoordinating shocks to the macroeconomy.

While such following such advice would improve Fed policy, it, like the even better suggestion to reform monetary institutions toward a market chosen commodity-based money coupled with  Misean banking freedom, is unlikely to be adopted anytime.