Gonzalo Lira on zero hedge has published an article Gonzalo Lira On The Identity Of The False Religion Behind The Mask Of Economic “Science” about the generally poor record of macro-economic forecasting. Lira’s view is that macro-economic forecasting is a false religion masquerading as a science. Along the way he takes a few shots at the Austrian school. After reading the article it is pretty clear that he didn’t bother to inform himself even at a basic level about Austrian economics.
Consider the following:
Very few people have been asking why economics has failed so spectacularly at predicting the Global Financial Crisis, and very few people have asked why economics cannot seem to solve the Global Depression we are currently experiencing.
While Lira is correct that the mainstream of economics has largely failed to inquire into its failure to see the collapse, a large fraction of the very few people who have been asking exactly that question write for this web site or otherwise use the Austrian macro-economic framework in their thinking.
As for whether “economics” cannot solve the current depression, it is not fair to blame the Austrian school when the Austrian recommendations have not been tried. Whether cutting taxes and spending, raising interest rates (or allowing the market to set interest rates), standing aside as insolvent banks fail, not bailing out over-indebted firms, and putting the banking system on a 100% gold reserve system would work better than what we are doing is a counter-factual proposition and one that Austrians can advance arguments in favor of; but no one can reasonably assert that these things have been tried.
Next, let’s move on to the following:
What does [macro] economics do, as a discipline?
The answer is obvious: [macro] Economics tries to predict the future.
I agree with Lira on the following points: that prediction as such cannot be science, at least not in the same way that economics is a science; and, that we have seen a lot of really inaccurate forecasting leading up to the crash and that most of the post-mortem analysis hasn’t been very useful either.
But is forecasting the defining property of Austrian macro-economics as a discipline? I don’t believe that Austrians would accept that. For Austrians economics is a single unified theory. The theory aims to provide an understanding of the laws of cause and effect in the domain of production and exchange.
Economic science can provide us with true statements about the qualitative relationship between a single cause and its effects. While we can use economics to make predictions, predictions will not be accurate all of the time because predictions have as their domain the real world, in which there are multiple past causes and multiple unknown future causes that will occur within the time frame of the prediction.
Whenever there are multiple causes, combining their influence is a matter of judgment because economics as such does not provide us with any tools for quantifying the effects of each cause. The forecaster must bring into play his own experience and opinions about which causes are most important in any given historical situation. This task falls under Mises’ term thymology.
Neither micro nor macro-economics for Austrians is about forecasting; macro is that part of the theory which deals with the entire economic system. Yet while Lira rips economists for their failure to forecast the collapse, in the several years before 2008, Austrians were above-average at seeing the train heading down the tunnel. See for example Mark Thorton’s article Who Predicted the Bubble? Who Predicted the Crash? in which he provides evidence that a disproportionate number of the economists and financial analysts who did see something coming were using Austrian concepts to reach their conclusion.
I will finish with Lira’s most ludicrous and blatantly inaccurate slur against Austrians:
Austrians argue that the government should cut spending and raise taxes, so as to balance the budget—and magically, the economy will improve, with no loss of GDP.
I challenge Lira to find even a single example of an Austrian economist who has advocated raising taxes as a solution to the bust or to anything else. I did a google search of the Mises.org site on the keyword “taxes” and opened the first page of links. Every one of the had a negative view of taxes or reported on a tax without comment. On top of that, most Austrians don’t like GDP as a measure of economic output. Even the form of the prediction – if spending is cut and taxes are raised then GDP will not fall is a quantitative prediction of the type that Austrian economics cannot make.
While I agree with a lot of the points that Lira makes against mainstream economics, it is clear that he didn’t bother to learn some basic things about the Austrian school before making false and innaccurate criticisms of it.
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On the issue of prediction, why don’t you catalog the hordes of hapless Austrians predicting hyperinflation in 2009 or for 2010?? – all of them utterly and embarrassingly wrong. And as for predictions of the housing bubble and financial crisis Post Keynesians or even New Keynesians were just as good as predicting it:
(1) The Post Keynesian Dean Baker called the bubble in August 2002,
http://www.cepr.net/index.php/publications/reports/the-run-up-in-home-prices-is-it-real-or-is-it-another-bubble
(2) The New Keynesian Robert Shiller, US, Professor, Yale University, calls the housing bubble in a co-authored 2003 Brookings paper, “Is There a Bubble in the Housing Market?”
http://ideas.repec.org/a/bin/bpeajo/v34y2003i2003-2p299-362.html
(3) Post Keynesian Michael Hudson called bubble and collapse in “The new road to serfdom: An illustrated guide to the coming real estate collapse” written in 2005 and published in
April 2006 in Harpers
http://www.harpers.org/archive/2006/05/0081029
(4) The Post Keynesian Steve Keen called the bubble and a severe recession in his Debtwatch reports from 2006:
http://www.debtdeflation.com/blogs/pre-blog-debtwatch-reports/
And furthermore even Marxists correctly called the housing bubble and a bust that would lead to a crisis:
2004:
http://www.wsws.org/articles/2004/feb2004/gpan-f16.shtml
http://www.wsws.org/articles/2004/sep2004/hous-s27.shtml
2005:
http://www.wsws.org/articles/2005/aug2005/hous-a06.shtml
2007:
http://www.wsws.org/articles/2007/sep2007/econ-s03.shtml
Just because certain economists called the bubble or predicted a recession, it does NOT necessarily vindicate their economics. Do you think the Marxist predictions above *vindicate* Marxist theory??
@Lord Keynes
Definitely the economists of whatever school who called attention to the problems and forecasted a crisis all deserve credit for seeing something that the majority of economists and all of the central bankers did not see. In particular I have a lot of respect for Schiller, Nouriel Roubini (not on your list) and Dean Baker on that count.
My point though is not that no one other than Austrians forecasted the crisis. My point is that Austrians were over-represented among those who did. By some estimates around 1% of professional economists are Austrian school. Far more than 1% of the people who predicted the crisis were Austrian.
I agree that because members of a particular school made a good forecast that does not vindicate the school….that was not my point either. Nor was I trying to say that all forecasts by Austrian economists have turned out to be accurate. If you want to criticize Austrians who predicted hyperinflation this year for being wrong, that is totally fair. My point is that Gonzalo Lira was criticizing Austrians for being part of the “economists” who failed to see the bubble coming and for wanting to raise taxes. If you’re going to criticize someone or some group for being wrong, at least pick something that they were actually wrong about.
My point is that Austrians were over-represented among those who did.
One can say the same thing about Post Keynesian economists, also heterodox economists.
My point is that Gonzalo Lira was criticizing Austrians for being part of the “economists” who failed to see the bubble coming
Fair enough. He’s wrong.
You may have seen some video’s or something that I haven’t but which major Austrians have declared that there would be hyperinflation in 2009/2010? I’ve heard predictions of high inflation but any hyperinflation is generally expected years down the road from now and the timing is contingent on a lot of factors.
Hyperinflation requires a huge loss of faith that we expect may occur but one can never really predict the timing of something like that.
Marc Faber with Peter Schiff – Hyperinflation In The United States A 100% Certainty
http://www.youtube.com/watch?v=6zwe9VpiKck
The context strongly suggests that Marc Faber thinks it was within two years – if not then a prediction without any timing is useless.
A prediction without timing is not useless unless you are doing medium-term investing and banking on huge gains or losses in 2 years on X or Y. I don’t recall any Austrian (or other economist) who declared back in 2002 or 3 the exact month or even year that we would experience the bubble. That doesn’t make the prediction worthless. Those who listened to them would avoid housing over that term, and while they could have made significant money if they got out at the very end.. the timing is impossible to know.
Recently I recall hearing about that managed investment funds don’t do better than index funds, and it makes sense, because the market is not innately predictable. And this is one of the core Austrian arguments for why they cannot say when Y will happen.
It’s also one of the arguments for why central management doesn’t work, that economic knowledge cannot be centralized to the extent necessary to allow someone to guide the economy better than individuals can do on their own.
@ Lord Keynes
1) Many of the so called “hyperinflationists” that you may be referring to have been misquoted – Peter Schiff is one example of that. Most Austrian’s have been stating that based on certain policies etc that hyperinflation would happen. We’ve merely discussed the principles of cause and effect – not that it was a given!
2) In regards to the housing bubble, i’d argue that although “some” keynesians had predicted it, the Austrian’s provide the best explanations for it. One can predict something, but needs to back this up with sound economics, science or whatever the topic may relate to.
I advice you to look at Marc Faber’s predictions:
Marc Faber with Peter Schiff – Hyperinflation In The United States A 100% Certainty
http://www.youtube.com/watch?v=6zwe9VpiKck
Saying it is 100% certain seems pretty clear to me!! Meanwhile Schiff predicts stagflation – and he is utterly wrong.
Most Austrian’s have been stating that based on certain policies etc that hyperinflation would happen. We’ve merely discussed the principles of cause and effect – not that it was a given!
What a bizarre contradiction. You say:
(1) Most Austrians have been stating … that hyperinflation would happen.
but
(2) not that it was a given.
You are aware that asserting and denying a proposition at the same time is a gross violation of the laws of logic?
“Hyperinflation In The United States A 100% Certainty”
Even on a cash basis, the US government has about $2.1 trillion coming in and $3.8 trillion going out. Where is the extra money coming from – we are either borrowing it or printing fiat money. What happens when nobody want to bankroll our bar tab any more? Pretty quickly, people will realize that the dollar is a worthless piece of paper. Will this happen over the next 2 years with 100% certainty? Hard to say, but if it does it will happen very quickly and mainstream economists will not give you any advanced warning. It will be remarkably similar to the housing bubble collapse.
Where is the extra money coming from
It’s being borrowed.
What happens when nobody want to bankroll our bar tab any more?
Deficits will not persist if the economy is properly stimulated back to full employment. When a strong expansion happens and inflationary pressures rise you run a budget surplus, and destroy money, reducing demand. Keynesian economics 101.
“Deficits will not persist if the economy is properly stimulated back to full employment. When a strong expansion happens and inflationary pressures rise you run a budget surplus, and destroy money, reducing demand. Keynesian economics 101.”
And the probability of this happening in the next 2 years is close to zero. I assume you are joking. ROFL
I’m not denying that they said there will be hyperinflation – rather people have been misquoting/taken things out of context saying Schiff and Faber are wrong because we haven’t seen hyperinflation. They did not say there would be hyperinflation in 2010 or give an exact time frame unless you can point out in your video where they said this. They’re basing future predictions on current policies of pumping money etc which relates to cause and effect.
“What a bizarre contradiction. You say:(1) Most Austrians have been stating … that hyperinflation would happen. but (2) not that it was a given.”
Yes, most have said it would happen because we don’t see governments changing course on monetary affairs, however, we don’t have a crystal ball and can’t tell 100% whether the government will continue to print and spend until we’re using US currency as toilet paper.
They did not say there would be hyperinflation in 2010 or give an exact time frame unless you can point out in your video where they said this.
And if they gave no date or time frame, they are utterly worthless predictions.
I might as well make a similar prediction to you now: the US will reach full employment.
But I am not saying when or how many years I will take.
Would you accept this as a prediction??
Of course you woundn’t – it would be utterly idiotic.
One big difference between your prediction re full employment and what they’re saying is they provide reasons/explanations, furthermore, i know Peter has previously implied it would be in the next 5 years. As you are aware there are so many variables and we don’t have crystal balls as to what governments will do, hence why they say hyperinflation will be based on a, b & c, i.e. Bernanke sends everyone $5,000 or we have QE3, 4 & 5 etc. I think most would agree that it is fair and resonable to have a prediction with no exact time frame – it helps to prepare and protest govt/fed actions, regardless if it were 2 or 5 years or 10 years away. To say their predictions are useless is nonsense.
I think most would agree that it is fair and resonable to have a prediction with no exact time frame
It is isn’t. Prediction without time frames, and that are just open-ended are worthless.
Anyway, you say Peter Schiff in 5 years? So he does give a time frame.
As yet he is totally wrong.
“Austrians argue that the government should cut spending and raise taxes, so as to balance the budget—and magically, the economy will improve, with no loss of GDP.”
LOL. WOW. This guy apparently didn’t even bother to spend 5 seconds perusing the Austrian School of Economics page on Wikipedia, for crying out loud.
What’s sad, strange and kind of funny is that his tirade about how unfathomably complex and innately unpredictable economic systems closely resembles the thoughts I had years ago in an introductory macro course- thoughts that led me, eventually, to Hayek and through Hayek to Mises.
Mr. Blumen is too charitable to this weasle. I bet this guy has read just enough Austrian econ to make a statement about the unpredictableness of human action and- like a snake- attribute it to himself while insinuating that it is where Austrians get it wrong. This is a an old trick deployed by scoundrels when they assume their audience ignorant of the subject, having no idea that they are being victimized.
Or maybe he is just an idiot.
Mr. Blumen is too charitable to this weasle. I bet this guy has read just enough Austrian econ to make a statement about the unpredictableness of human action and- like a snake- attribute it to himself while insinuating that this is where Austrians get it wrong. This is a an old trick deployed by scoundrels when they assume their audience ignorant of the subject, having no idea that they are being victimized.
Or maybe he is just an idiot.
How does someone so clueless get an audience in the first place? Have we devolved back to the Dramatic Gopher in economics?
Here are some WTFs from his September post at http://www.zerohedge.com/article/guest-post-how-hyperinflation-will-happen
“Inflation is when the economy overheats” ?
“It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth” ??
“It is essentially a demand-driven phenomena” ???
Why would anyone give credibility to someone so clueless as to publish an article on inflation and hyperinflation that doesn’t even mention money supply????
Sure Gonzalo often pulls better style than facts. The strange thing is, how comes it was not mises.org posts but his article which spelled this out: hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. Maybe it was just me missing it?
Poster above asks how we can talk about hyperinflation and not mention money supply. That’s the point – that would be inflation. In hyperinflation the main driver is on the other side of the equation: loss of faith. Beyond the breaking point, as demand to hold currency goes to zero, any existing money supply is enough for prices to shoot sky-high.
If one looks at the actual hyperinflations that have happened, they ALL start with and are continued by high increases in the money supply.
One cannot throw away the historical causes, and pretend that the hyperinflation story starts elsewhere.
If the central bank stops increasing the money supply, the result is only inflation. The central bank gambles every step along the way that their next high increase in the money supply will be less economically damaging than the political damage incurred by stopping.
If the central bank stops increasing the money supply, the result is only inflation.
which money supply? The broad or base money supply?
You have clearly never heard of Japan’s experiences with QE. Base money supply exploded and yet deflation occurred.
Some may argue that prices should’ve fallen further – which was needed – if it weren’t for the extra money.
Not really. The money was mainly just hoarded by the banks at the Bank of Japan – precisely what is happening in the US.
Austrians fail to realise that base money supply increases do NOT necessarily cause price inflation unless the money is spent into the economy.
This is why predictions of hyperinflation are all absurd – there is no reason why all this money will be injected into the economy by banks at all.
“Strolling along the shores of mainstream” ignorance about the philosophy of classical liberalism and sinking in the ocean of weak reasoning Gonzalo Lira makes it known to anyone who runs across his article that he is a pretender.
“Hyperinflation In The United States A 100% Certainty”
This also depends on what is meant by hyperinflation. This can range from 100% price inflation over three years, to 50% per month price inflation. IMHO the former is more likely to occur – this happened in the UK in the 70′s – it only takes a 2% per month increase in prices.
Austrians normally define inflation with respect to the money supply and view price inflation as an effect of monetary inflation.
Could someone give me the Austrian definition of hyperinflation?
I just saw the following headline – Gold hits record high, tops $1,400 an ounce
The Austrian headline should be – Dollar hits record low, gold tops $1,400 an ounce
Lira’s latest intellectual gem blames the years of plunder by the military-industrial complex since 1989 on the failure of leftist academics to accept that conscription and the Vietnam conflict had in fact been necessary in order to win the Cold War.
http://gonzalolira.blogspot.com/2010/12/falling-forward-americas-loss-of.html
Lira is at it again. Here he explicitly disowns Austrian economics again — because its exposition of moral hazard supposedly explains nothing about how governments come to be so indebted — and then proceeds to make up his own misspelled and weakly reasoned version of public choice theory and Hoppean democratic theory.
http://gonzalolira.blogspot.com/2011/01/why-democracies-will-always-go-bankrupt.html
Why this guy can’t just focus on his clear strength, power elite analysis, and stop embarrassing himself in other areas is a mystery to me.
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