Mini-Me
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- Jan 9, 2008
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Paul Krugman was owned so badly by comments on his blog - complete with scholarly references to other mainstream economists even - that he had to disable comments and later reenable them, while restricting them to extremely short ones that couldn't contain any real substance. He's a smart guy, and he had the chance to become a good economist, but he's nothing more than an egotistical propagandist nowadays. If you want to learn from mainstream economists, you should probably pay more attention to the new classical school than the new Keynesian school, and pay more attention to practically ANYONE than Krugman.
Austrian economics are not "shit." People call them a "pseudoscience" because Austrians use logic instead of empiricism, but that's a hazard of the "scientistic prejudice" that has incentivized nearly every field to try to foolishly refashion itself as a science, simply to remain respectable (say hello to religion/philosophy masquerading as science in the form of intelligent design). Mathematics and computer science aren't empirical sciences either, but you thankfully don't hear people calling them "pseudoscience" as a pejorative, because those fields don't contradict academic dogma.
If you look back in history, you'll find that Mises and the Austrians were very well regarded in the early 30's or so, and Mises generated a lot of intellectual excitement...but he lost steam after Keynes created his General Theory and was pushed hard by moneyed interests. After all, FDR NEEDED Keynesianism to retroactively justify his actions, and academia was eager to accept theories which made economists into economic policy gods instead of mere theorists; statist economic theories indulge the urge to experiment and play God, and they appeal to the urge of economists to hold important bureaucratic and advisory positions outside of academia. As always, institutional inertia is a prevalent force in universities and academic publications: For starters, research grant money isn't exactly issued nondiscriminately, and libertarians who would refuse it on principle are inherently at a further disadvantage. Status quo professors determine who gets tenure, who gets published in academic journals, and who even receives a doctorate at all. Very few have the personal integrity to aid someone who might discredit their entire life's work, and ego demands the short-sighted marginalization of anyone who would dare try. That's why it takes a long time before prevailing views change in any field, even the sciences...or perhaps especially the sciences, because of the esteem that prestigious academics are held in, and because of their sheer intelligence defending their work, even if it rests on fundamentally erroneous assumptions.
The truth is, using empiricism with complex data is not well-suited to developing the backbone of an economic theory, because economists frequently draw fundamental relationships from correlated variables without properly isolating the variables they're dealing with. In short, they overfit to their sample data, without respect to the millions of underlying variables that may be more important, and which may take on incidentally correlated values among the data sets they're studying. The classic example is the Phillips curve, which posits a fundamental inverse relationship between the rate of inflation and the rate of unemployment. It was used as the bedrock of Keynesian policies for decades, until stagflation totally stumped practically EVERY economist (except the Austrians). The reason is, these economists foolishly study very specific phenomena in isolation from one another, when they aren't actually isolating their variables, and their different theories in various branches of economics aren't even necessarily self-consistent.
In contrast, the Austrians study the economy as a unified system, where each aspect of their theories is consistent with the rest, and particularly consistent with the theories of supply and demand and price theory. Those theories should be the basic foundation of nearly ALL economics, but even the most brilliant mainstream economists are too deeply indoctrinated by the "scientistic prejudice" (coined by F.A. Hayek) to give this approach a chance. Instead, these economists who have been CONSISTENTLY WRONG choose to ignore and dismiss Austrians wherever they disagree. Meanwhile, their pea-brained followers on the Internet rely on appeals to authority and arrogantly spew unsubstantiated vitriol at the Austrian economists, who have been consistently right about everything but timing. "Oh, a broken clock is right twice a day, blah blah." In reality, it's more like: When the policy is always the same, a wise oracle will always predict the same disastrous outcome.
Establishment economists were wrong about the Federal Reserve preventing further depressions. They were wrong about the inflation/unemployment relationship. They were wrong when they said gold would plummet after Bretton Woods failed. They were wrong about the housing bubble...oh, no, wait. There's one exception: Nouriel Roubini was able to predict the collapse of the housing bubble, because (if I recall correctly) he was able to cite the completely obvious overleveraging of the banking system in the mid 2000's...but considering that's a totally shallow - and totally OBVIOUS - symptom of the problem, I'm not going to give him too much credit. (EDIT: Actually, I take that back: I must be conflating his views with the post-meltdown silliness of his contemporaries. Roubini was able to recognize the bubble based on the supply/demand/price fundamentals of the housing market alone, so he does deserve credit for seeing that at least.)
Actually, it's all too common for mainstream economists to mistake the symptoms of a problem for the actual problem, because their basic methodology routinely demands shallow thinking...which doesn't help to understand a complex system. For instance, Keynes believed the Great Depression was caused by oversaving, when everyone spent like crazy in the 20's. After the economy started to slow, of COURSE people were saving en masse. Mainstream economists believe our problem in the Great Depression and the current depression was a lack of liquidity and aggregate demand...yet government spending to stimulate aggregate demand DIDN'T WORK. It shouldn't be surprising, because low aggregate demand is only a shallow symptom of the real problem! If you ask these guys to cite more fundamental factors that lead to depressions and the problems they cite (e.g. low aggregate demand), most of them will handwave about "animal spirits" or "irrational exuberance." I guess they just don't have the tools to dig beneath the surface, and they don't have the intuition to recognize the way government can uniquely distort market signals over an extended period of time (since it can uniquely use regulatory force and employ "unlimited" resources to manipulate the price of credit or practically anything else). If you had a stomach virus and diarrhea, and you went to Dr. Krugman for a cure, he'd put some duct tape over your butt to fix the diarrhea and tell you you're good to go! Once it failed, well...guess he didn't use enough duct tape!
In contrast, Mises predicted the Great Depression a couple years before it happened, and he spelled out exactly why. He predicted the ultimate failure of the Soviet system in his book "Socialism," and he spelled out why. The Austrians predicted the collapse of the Bretton Woods agreement, and they predicted that gold prices and demand would increase rather than decrease. The Austrians predicted the current depression and financial meltdown, and they were able to cite factors much more fundamental than "animal spirits" or "overleveraging." They can tell you exactly WHY every major corporate bank was overextending themselves at once, without any of them recognizing each other's fragility and calling for shipments of physical cash reserves or following a different policy.
Now, I don't necessarily think Austrians are perfect either: They're awesome at qualitatively analyzing the circumstances of any economy, the incentives therein, and the ultimate consequences of given economic policies...but they make little to no attempt at determining timing, and I think they could learn something here from their more empirical counterparts. Empirical economic data is very tricky to analyze and base entire theories off of, without respect to logic or common sense - which is where I think mainstream economists fail - but using empirical data and econometrics and running a "sanity check" against the logical Austrian model might allow them to make tentative predictions about timing. I'm no expert though, so what do I know?
In addition, mainstream economists occasionally make rational criticisms of the Austrian Business Cycle Theory. I'm not yet knowledgeable enough to discern whether the Austrian response to these criticisms is sufficient to fully defend the theory or whether the theory needs some manner of adjustment, but they do in fact provide defenses. Unless and until I become knowledgeable enough to debate the specifics at the level of professional economists, I believe the Austrians have earned the benefit of the doubt. After all, I AM knowledgeable enough to realize the vast gulf between the predictive power of the various schools, as well as the complete irrationality of Keynesianism and the empirical failure of mainstream policy prescriptions. If nothing else, I think we should be taking the mainstream economists' superiority complex and their occupation of the most prestigious universities with a huge grain of salt, considering the way they have been consistently - and gravely - wrong. Instead, I think we should be paying much more attention to the guys who have been warning about those same mistakes all along.
All that said: I DO agree with ericthethe that people should learn a bit about mainstream economic theories as well (e.g. neoclassical economics). The smarter economists actually ARE right about a lot of things, and they [IMO correctly] state that the Austrians overstate their differences with them. You can learn a lot from mainstream economics, but just remember to take their macroeconomic theories with a grain of salt. Resist internalizing them too deeply until you've had the chance to examine the opposing Austrian viewpoint...which, to deliberately misquote Milton Friedman and say the opposite of what he said, "The Hayek-Mises explanation of the business cycle is consistent with the evidence. It is, I believe, true."
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The committed Marxists referenced in the OP aren't likely to come around anytime soon, but other observers just might.
