Austrian Econ: Priors
This weekend I’m going to an Institute for Humane Studies seminar on Austrian economics. I want to record my priors, what I think I know now about the subject.
First, the very existence of different ‘schools’ of economics such as Austrian or freshwater vs saltwater makes it seem that economics is not a science. Art, architecture, and philosophy have many such schools, but chemistry and physics do not. Most especially the “schools” that do exist in science quickly (say by a decade after the death of their founder) either become orthodoxy or die out. Austrian economics has persisted long after the death of its founders, yet most of it is not orthodox, making economics seem less scientific. Whether economics should aim to be a science is of course an open question and I think Austrians would say not.
Austrians have been called the “crazy uncles of economics”. This widespread perception is somewhat odd since circa the 1920’s Austrians were orthodox and respected, and much of their work is part of the core of mainstream economics. Menger’s role in the marginal revolution is well known, and marginal utility is now at the core of economics. Hayek’s work on information seems like an important part of modern information economics. I believe the Austrians were not so keen on math (though I know Hayek used it extensively), and this could explain the divergence; I know even less about old-school “Institutional economics” but I do know that they were marginalized around the same time as the Austrians despite having different ideas and policy conclusions, but sharing the Austrian distrust of math. Nowadays Austrians have a much bigger popular following than Institutionalists, but this is a mixed blessing. There is nothing like a legion of internet autodidacts to make orthodox economists (or orthodox anyone) skeptical; even “the Austrian economists’ blog” felt compelled to change its name in the face of their supposed compatriots.
The other parts of Austrian econ I know about (besides opinions on math and empiricism and work on marginalism and information) are money, business cycle theory, and entrepreneurship. Schumpeter came up with the idea of studying “entrepreneurs” as a distinct or at least extreme class of innovators. This idea obviously bore much fruit in academic sociology and business, and in politics and the popular imagination. Innovation is a supremely important topic and entrepreneurship was a good way to study it, but now I wonder if entrepreneurship has been studied so much that diminishing returns leave little to be gained by more study. I also don’t know how much Schumpeter is considered part of the Austrian school.
I think the Austrian business cycle theory is that central banks set interest rates artificially low, creating a boom in which people invest in the wrong things (things they would not invest in were interest rates at the natural level e.g. subprime mortgage backed securities). What cannot go on forever must stop, and when it does everyone realizes that much capital (including human capital) is not as productive as we thought, and the economy must reorganize. This has been a very common narrative in the recent recession, both within economics and outside of it. Many people, including John Taylor (one of the most prominent living monetary economists) blame the recession at least partly on the Fed keeping rates too low in 03-04. There have also been widespread claims, overlapping heavily with the interest rate story, that the recession and resulting unemployment are “structural” so that aggregate demand stimulus (fiscal and monetary policy) will be impotent or even counterproductive in fighting the recession. This is a very intuitive story of recessions with a nice moral, though I don’t believe it explains much of our recent recession.
One question I have is what the ideal Austrian monetary system is. There seems to be a large overlap between people who like Austrianism and those who like the gold standard, but I thought that Hayek at least preferred free banking. Another question is what Austrians think caused recessions before there were central banks- are there other causes of malinvestment? Finally, I have heard Austrians say that a problem of monetary policy is that central banks do not pump money into the economy evenly, but instead in a distortionary way that will favor some kinds of production over others. This seems like a concern monetary and macroeconomists should take very seriously and I don’t know that they have, though Ben’s money helicopters are one solution I suspect Austrians have other reasons to dislike.