Monday, July 7, 2014

Government Professor Attacks Austrian Economics

I get that Noah Smith's gig at Bloomberg View is to bring a light touch to economics and business.  And as an assistant professor of finance at a government university, it doesn't hurt your career to take a swing at Austrian economics, the brain-child of Austrians Carl Menger and Ludwig von Mises, and call its supporters 9/11 truthers with brain worms.

Back in the good old days, it was Immanuel Kant that decided that philosophy needed a critique.  That's why he called his great works The Critique of Pure Reason, The Critique of Practical Reason, etc.  Ever since, inquiring minds have buzzed around the flame of "critical theory."

Now the point of so-called Austrian economics is that it is a critique of modern government and its interventionist economy.  The point of so-called Keynesian economics is that it is an apology for interventionist economics.

You can see where professors at government universities would come down on that.

When the classic economists first developed economics as a system it was a critique of mercantilism, the theory that government needed to supervise the economy to encourage exports and the inflow of gold.  National wealth, it was thought, was founded on a big hoard of gold; imports were a drain on national strength.  Nonsense, said the Adam Smiths and David Ricardos.  What matters is to encourage the markets and trade.  Leave off promoting exports and penalizing imports: all you are doing is cutting off your nose to spite your face.

But the rise of government programs in the late 19th century created a problem.  The new government programs interfered with the normal operation of the economy.  In broad terms they represented government spending that had to be maintained through good times and bad.  In the Great Depression of 1929-33 this created a huge problem.  "Orthodox" economics said that you should let the markets find a new equilibrium.  But meanwhile people were suffering, and that included big special interests.  So the government raised taxes and spending to keep things going, only they didn't.

Keynesian economics was hailed as the answer to the problem of the Great Depression, because the raising of taxes and spending didn't get the US out of the Depression.  A new approach was needed to get the government out of the jam.  The solution was to increase the money supply and use it to pay for the increased spending.  If that meant a little inflation, so much the better because it would float investments that the market collapse had put underwater.

In the aftermath of the Great Recession of 2007-09 Keynesian economics has actually worked pretty well from the Democrats' point of view.  They have maintained benefits for their supporters and the economy has not crashed like it did in 1929-33.  But the downside is that growth has been pitiful.  Of course it has.  Huge amounts of money have gone to maintaining people in their current situation with welfare payments and bailouts of banks and auto companies; that means that people have not adjusted to the post-crash reality as fast as they could have.

Austrian economics says that all this is rubbish.  It says that the first problem is cheap money to get out of a recession: all that does is ignite a new unsustainable boom and an inevitable crash.  What is needed is to liquidate the malinvestments of the previous boom as quickly as possible so that growth may resume on the basis of a balanced credit system not a credit system artificially boosted by cheap money.  But the Keynesians say that liquidation is cruel and hurts the vulnerable.

Since Austrian economics is a critique of our current authoritarian welfare state and its interventionist economics it is not surprising that everyone from mild conservative-libertarians to wild-eyed radicals have piled on.  It is these wild-eyed radicals that Noah Smith is sneering at.

In my view some kind of Keynesian economics is inevitable so long as we maintain a big-government state.  The fact is that big government is stupid and unable to adjust to changing conditions.  So it needs the manipulations of the Keynesians to keep it going and to get out of jams.  The fact is that devaluation or inflation is the easiest way for government to get out of a jam without having to deal with riots in the streets.

But Keynesian economics is cruel and unjust and the Obama economy proves it.  Who is benefitting right now? Rich guys like me that are 100% invested in the bubble stock market and poor people chugging along on EBT and disability.  Oh and don't forget the federal government that is paying $225 billion a year in net interest instead of $1 billion a year that it would have to pay if interest rates were allowed to rise to a normal level.  Who is being screwed? The average worker that is afraid to quit their job, the young people that can't find a job, and the mom-and-pop investor with money in the bank or the bond market that's earning zero interest.

Meanwhile, let's have a laugh at the crazies on the right.  Good call, Noah Smith

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