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Source link: http://archive.mises.org/9227/incredible-question-to-bernanke/

Incredible question to Bernanke

January 13, 2009 by

In this press conference on video, Bernanke is asked about the Austrian theory of Mises, Hayek, and Rothbard, namely that the crisis itself is caused by FEd and by the same means that the Fed is using to supposedly cure the crisis.

Bernanke is a bit long-winded but claims to understand the Austrian perspective of all of this.

I would suggest that he understands it most likely. The problem is his time horizon. He is concerned about the short run regardless of the long run. As he puts it, he wants to put out the fire rather than worrying about the fire code. But what if there is a worse fire later because of the means used to put out the first fire? That’s the critical issue.

Thanks Robert Murphy and LRC.

{ 35 comments }

(8?» January 13, 2009 at 1:22 pm

To paraphrase your question, why didn’t he notice that he is putting out the fire with gasoline?

Or should I say, why aren’t his eyes watering from the heat and the smoke?

The best part though, was getting to hear the question, on CNBC of all places, where I would’ve bet the farm I’d never hear the names von Mises, Hayek and Rothbard mentioned in a positive light.

Of course it took an outsider to do so. As soon as he mentioned an alternative to Keynesian Cult, I expected him to be wrestled to the ground and tazed.

Just kidding, it’s the LSE after all. I was really expecting the satellite feed to suddenly “drop.”

Pete January 13, 2009 at 1:42 pm

Jeff, I think you give Ben too much credit. No pun intended.

His “virtually every economist” comment is telling to me. Virtually every non-Austrian economist thinks the Fed helps prevent boom and bust cycles. I would suggest his only reading of Austrian works would likely limited to “The Use of Knowlege in Society” and maybe the _The Road to Serfdom_. It would seem Ben is more interested in doing to paving than getting off at the next exit.

Sukrit January 13, 2009 at 1:53 pm

Even if Ben does understand the Austrian theory of the business cycle, he certainly can’t let that understanding get in the way of all the crazy stuff the Fed has been doing lately. In spite of the aura of “independence” surrouding the Fed, the pressure on it is political – i.e. from the federal government – and it necessitates ignoring all economic theories that focus on the long-term consequences of monetary policy.

knldgskr January 13, 2009 at 2:12 pm

Mr. Bernake is like the city driver who backs into a snowdrift and instead of slowly rocking the car back and forth, he presses harder on the accelerator and succeeds in sinking the car up to the axle. He finally has to call a tow truck to get himself out of the rut he made. My questions are; 1. Who is going to be the tow truck operator who gets us out of the mess he is creating? and 2. Is there a tow truck big enough?

Justin January 13, 2009 at 2:14 pm

I think pride and desperation are driving Bernanke’s actions more than ignorance. He will never admit that the Fed is powerless to solve this crisis. After all, conceding the Austrian perspective would mean acknowledging that not only is his function unnecessary, it is destructive to economy. I do not think Bernanke is humble or principled enough to consider his own ineptitude or the long-term effects of the Fed’s actions. I also doubt he has the intellectual honesty required to evaluate the Austrian claims.

Christopher Hightower January 13, 2009 at 2:32 pm

Ben doesn’t own the Federal Reserve. Someone writes his checks, no?

Alexander January 13, 2009 at 2:39 pm

I doubt he does understand or even gives much credit to the Austrian school. If he did, would he have even accepted the Fed job to begin with?

I don’t really believe that Bernanke is as arrogant as what Justin describes him as. In my view from studying economics as an undergrad, most of my professors firmly percieve the economy as a car engine rather than a dynamic interplay of individual relationships. If one sees the economy as a car engine, then they see it as something that can be fixed. They’re wrong of course, but I think that they are more misguided and ignorant than they are arrogant.

Jim O'Connor January 13, 2009 at 2:45 pm

The fire analogy is sort of like how the Department of the Interior manages the forests: any time a small fire starts which might clear out the undergrowth and dead wood it is smothered with pine needles. If it works you’ve delayed the clearing out, when it doesn’t work you’ve created a massively bigger problem.

BigHands January 13, 2009 at 3:09 pm

I though Helicopter Ben ran from the question.

Bernanke’s extended answer did not address the question except to say “put the fire out then look at the code” – which of course is an explicit rejection of the Austrian paradigm which argues the intervention will not correct problems caused by intervention.

In particular, his comment about “tendency to boom and bust” revealed a determined unwillingness to discuss the alternative structure detailed by Austrian theory since Austrian theory holds that new money creation via bank credit causes the boom bust cycle in the first place….no “tendency” about it.

His comment that Austrian theory allows “aggregate information” is uninformed, willfully misleading, or just an incredibly poor choice of words.

The Austrian view is that continuous subjective change at the consumer level creates a vast, extremely decentralized, world wide array of good and services whose prices are dynamic affected by supply, demand, perceived value of money, expectations, etc that cannot possibly be meaningfully aggregated…….the polar opposite of mainstream beliefs.

The questioner asked him to go back “90 years and philosophize,” to which Bernanke replied that the system “did not perform well in this case”….as if the bubble of the 1920′s, the depression of 1929-1939, the breakdown of Bretton Woods (1957-1971), the near hyperinflation of 1971-1980, the savings and loan bubble of 1987, the recession of 1990-1991 and the dot.com bubble of the late 1990s were also not cases of the system “not performing well.”

Hats off to Terry Easton for getting the question in.

DD January 13, 2009 at 3:09 pm

If you believe his response is candid, then he is clearly not familiar with the Austrian theory of the business cycle.

Lucas M. Engelhardt January 13, 2009 at 3:53 pm

Actually, I doubt that Bernanke really understands the Austrian theory. If he did, he’d know that part of the Austrian criticism is, to use his analogy, that “putting the fire out now will create fires in the future”. But, he doesn’t mention that at all. He seems to believe that putting the fire out now is something that can be completely disconnected from creating (or preventing) future fires… which he could only believe if either didn’t understand or didn’t agree with the Austrian theory.

ADR January 13, 2009 at 4:41 pm

I am sorry, I know this is not the place to ask this question but I just dont know were to post these…

What do Marxist mean when they say that the Marginal Theory of Value is based on a circular reasoning? How can I refute that?

Thank you so much

Inquisitor January 13, 2009 at 4:52 pm

I wish I knew. What would they base the LTV on then, I wonder?

Bruce Koerber January 13, 2009 at 4:53 pm

This is the person in charge of micromanaging the economy!!!

First of all, his compartmentalization of the economy into long term and short term is revealing. He thinks in terms of data without understanding that human action is causing all things that end up being recorded as data.

Second, he has to be pathologically ego-driven to pretend that he can intervene with justice in the economy.

It’s obvious, he enjoys hearing himself speak and quip and he loves his meaningless ‘contributions’ to economics. It appears that one of the requirements necessary for the selection of the Fed Chairman by the unConstitutional coup is to be a narcissist. That way both are served by the lack of ethics.

Caveman January 13, 2009 at 5:24 pm

As others have said, Bernanke didn’t really address Austrian theory at all. Frankly, the question wasn’t “incredible.” Asking Bernanke to “philosophize” on the last 90 years of government economic policy vis-a-vis Austrian theory is a nice thought but also leaves the door wide open to say nothing and that’s precisely what Bernanke did. A better question would have been, “Why are you confident that you know more about the market than the market, itself?” or “Would you explain why markets can’t function efficiently without state intervention?” Force the guy to answer a specific question which requires him to defend his position vis-a-vis the Austrian position.

Bruce Koerber January 13, 2009 at 5:28 pm

This is the person in charge of micromanaging the economy!!!

First of all, his compartmentalization of the economy into long term and short term is revealing. He thinks in terms of data, without understanding that human action is the cause of all things that end up being recorded as data.

Second, he has to be pathologically ego-driven to pretend that he can intervene with justice in the economy.

It’s obvious, he enjoys hearing himself speak and quip and he loves his meaningless ‘contributions’ to economics. It appears that one of the requirements necessary for the selection of the Fed Chairman by the unConstitutional coup is to be a narcissist. That way both are served by the lack of ethics.

newson January 13, 2009 at 6:03 pm
(8?» January 13, 2009 at 6:08 pm

ADR, Marxists note that the Marginal Theory of Value tries to explain prices, but also note that prices are necessary to explain marginal value, hence the claim of circular reasoning.

IMO, that would only be valid if MToV tried to calculate actual price levels, which of course, it doesn’t. It deals with price discovery at the margins by changes in marginal unit value.

If memory serves, Mises debunked this claim with the theory that money is also an economic good, having its own demand, breaking the alleged circle.

BigHands January 13, 2009 at 6:33 pm

ADR -

This seems to be the basis for their claim:

“The first problem within marginal utility is that it leads to circular reasoning. Prices are supposed to measure the “marginal utility” of the commodity. However, prices are required by the consumer in order to make the evaluations on how best to maximize their satisfaction. Hence subjective value “obviously rested on circular reasoning. Although it tries to explain prices, prices were necessary to explain marginal utility” [Paul Mattick, Economics, Politics and the Age of Inflation, p.58]”

But marginal utility is not based on prices. It is based on individual preferences, ranked top to bottom, of goods and services that a consumer values.

The price of a good or service is determined by a range of economic factors of which marginal utility certainly plays a role. But prices are not needed for marginal utility to exist. Marginal utility helps EXLAIN prices but is not dependent on them.

If someone offers me 2 out of a potential a 3 books at no cost (no prices). Let say those 3 books are America’s Great Depression (2 copies) and Milton Friedman’s Monetary History of the United States (1 copy). I will first select the Rothbard book because I value it more. But the utility to me of a second copy of Rothbard’s book is lower than Friedman’s book; so my second choice is his even though I consider it less reliable in regard to the Great Depression.

Marginal utility is clearly at work without the necessity of prices.

Caveman January 13, 2009 at 6:40 pm

BigHands, I’d take both copies of America’s Great Depression and send one to Ben Bernanke. ;)

newson January 13, 2009 at 6:55 pm

great question. i actually felt sorry for bernanke; he seems genuinely befuddled. i’d say he’s only got a superficial acquaintance with the austrian school. but why should that be surprising for someone steeped in keynesianism?

greenspan, i believe, actually was one of those who understood the immorality of the system and made evil his friend. bernanke strikes me as a true-believer.

StatusQuoJoe January 13, 2009 at 7:05 pm

I don’t know if Bernanke understands the fundamentals of the Austrian School or not. I came to the Austrian School completely ignorant of economics (and perhaps I still am) but I AGREED with the principles, they just sounded like common sense to me. It’s like an opinion, if you favor the opinion and fundamentally think the same way you GET IT. If you don’t fundamentally think the same way, (if you are a statist) then you DON’T GET IT.

mark z January 13, 2009 at 7:57 pm

I think Bernanke answered the question like a politician.

Paul January 13, 2009 at 8:25 pm

For someone who appears to know how Austrian economics goes, he seems to treat the economic laws as a mere option. This thus brings about yet a bigger fire in the future.

Maybe Ben doesn’t think he’ll be Fed chairman for much longer, and that he’ll be long gone by the time the worse and long-term consequences are felt.

Andrew Shuman January 13, 2009 at 9:09 pm

Either he does not understand the Mises/Hayek theory of the business cycle or he simply wanted to avoid the question because he knew that an honest answer would expose the flaws in his economics. The first part of the interview, when he talks about Adam Smith is particularly troubling; when talking about individual vice being channeled into public virtue, how does he not realize that his employer, a federal bank acting as a cartel, creates the very moral hazard that ruins the process by which that occurs? Someone pointed it out earlier as well, but if he really understood the ABCT he wouldn’t so readily claim that the banking system is prone to booms and busts. I think it the central flaw of all Keynesian type economists that they never examine any situation using logic- its always a matter of mathematics, statistics, observable phenomenon, etc. In short, because they lack an economic foundation built upon logic, they are never able to get away from making sorry excuses for failed government stimulus packages that claim ‘it wasn’t enough’ (Paul Krugman i mean you). But they lack the framework to realize that a stimulus, no matter how big or small, is a bad idea in the first place. I think the same holds true for Bernanke- if the financial system doesn’t spring back to life right away, it’s because he didn’t inject enough capital into the banks, not because it was a foolish thing to do from the start. Poor Mises must be rolling in his grave. Perhaps the institute should send Bernanke and Krugman Human Action as a belated Christmas gift.

danny January 13, 2009 at 9:40 pm

The best part is that the questions was asked on MSM. I couldn’t have imagined this a few years ago. There are more and more references on MSM to positions that a few years ago were 100% taboo (vs. 90% taboo today). For example, questioning FDR as to his “solving” the depression, question the idea that Hoover was a “do nothing” President, wondering about the long term impacts of printing money, etc.

These things were not even discussed on MSM until recently. I believe for this we have to thank Ron Paul and his run for the President — with one result being a much broader exposure of mises.org as a result. Additionally, Peter Schiff is communicating the message, and is on TV more often in this role.

Alexander January 13, 2009 at 11:09 pm

I love what Andrew pointed out- it’s all about historical inference and mathematical modelling with these guys. They see numbers, we see human action!

Also, does it really matter if he is “truly” arrogant or ignorant or just an intellectual ant? I noticed there were several comments (including my own) speculating on Bernanke’s ignorance and arrogance. Does that really serve any purpose what-so-ever?

Agent Dale Cooper January 14, 2009 at 1:11 am

Good comments. I would just like to add the simple follow up to Bernanke: OK, fine, you *might* admit that the Fed is fundamentally immoral and incompetent, but if we let you finish “putting out the fire,” then will you finally tender yours and your organization’s resignation in an orderly fashion?

geoih January 14, 2009 at 7:52 am

It’s like watching Ptolemiac astonomers who can’t accept the insights and logic of Copernicus, Kepler and Newton because it destroys their perfect crystal spheres. The Keynesians cannot let go of the crystal spheres of government intervention. Depending on the market is simply too messy and chaotic for them to contemplate.

Plus, there’s no political power to be wielded in markets.

Inquisitor January 14, 2009 at 4:31 pm

@bighands: Wow, THAT’S their basis for saying it’s circular? It’s hard to be charitable to individuals who make such silly claims… did they not read Menger?

Kevin January 14, 2009 at 5:03 pm

Ben gave no answer at all. It is typical Keynesian; they are fully aware that any sort of acknowledgement, let alone a full blown retort to the Austrian school is tantamount to letting the cat out of the bag; the Keynesian ideas and policies lead to predictable outcomes…ALWAYS! The general public is oblivious to this reality and exposing it risks too much, so it is far more sensible to side-step any discussion of the Austrian theory.

observer January 14, 2009 at 8:23 pm

I am not an economist and until few weeks back I did not know that something called ‘the Austrian school’ exists. Yet it was perfectly obvious to me that the current problems were caused by years of the ‘cheap money’ monetary policy. However, no mainstream economist or analyst (those that you can see on CNBC) ever stated that the ‘cheap money’ would eventually cause a big disaster even if there was no inflation.

Few weeks ago, I came across Austrian explanation of the current troubles. It was a revelation. It was a full, perfectly consistent and logical explanation of the problem. Furthermore, they predicted correctly the crash in 1929. I could not believe my eyes.

My ignorance can be explained but Bernanke’s cannot. He evaded the question. Did he have any choice? Not really. He could neither claim ignorance, nor give Austrians any credit, nor dismiss them as incompetent or irrelevant.

Luke January 14, 2009 at 10:22 pm

Of course Bernanke wasn’t going to address ABCT with any real clarity, though – how many times have we seen him evade Ron Paul’s pointed questions on these matters?

I’m sure most of the readers here have seen those clips, but just in case for the newcomers, just do a quick search on YouTube for “ron paul bernanke”

David Ch January 15, 2009 at 5:19 am

geoih said:
The Keynesians cannot let go of the crystal spheres of government intervention. Depending on the market is simply too messy and chaotic for them to contemplate.

too right: this is the root of the Keynesian fallacy: Implicit in the central Keynesian claim (that unemployment is caused by ‘insufficient demand’) is the arrogant assumption that people who choose not to buy what is being, or has been, produced, are both stupid and wrong.

the spirit of this assumption is made explicit elsewhere in Keynes’s Big Book: His acid reference to ‘animal spirits’ motivating market decisions. This dismissal of the assumed irrationality of market participants ignores the fact that people making decisions in market transactions always have their reasons for doing so, and those reasons make sense to them at the time, however irrational they might seem to any third party observer.

And with this arrogance, Keynes sidestepped the very heart of economics, and proposed a backward solution. If there is ‘insufficient demand’, it is not because the consumers are wrong, its because the producers are wrong and need a signal to motivate them to produce less of what is ‘insufficiently’ demanded, and more of whatever the consumers DO want. The keynesian ‘solutions’, in all their forms, actively silenced this fundamentally important signal, for it rested on letting the producers continue to chuirn out useless stuff, while bamboozling consumers into buying more of that useless stuff through expansionary monetary policy ( which monetarists* favoured), or failing that, getting government to buy it up instead through aggressive fiscal policy (which vanilla Keynesians favoured). Both flavours missed the point, being that nobody is better qualified to decide what any consumer should buy than that consumer himself, and anything that interferes with their signals reaching the ears of producers, always does harm not good.

70- plus years later, and hardly anyone out there has yet learnt that this simply doesn’t work.

* Here, I classify monetarism as a mere flavour of Keynesianism, the long-running fiscal vs monetary policy debate being a technical detailed argument within the broad Keynesian/interventionist church. I guess the late Milton Friedman would disagree. But even he was on record as saying ‘we are all keynesians now’ (a quote often misattributed to Nixon, who actually said that HE himself was a Keynesian ‘now’.

The Unrepentant Iconoclast September 22, 2010 at 11:37 am

BigHands

“If someone offers me 2 out of a potential a 3 books at [$100]. Let say those 3 books are America’s Great Depression (2 copies) and Milton Friedman’s Monetary History of the United States (1 copy). I will first select the Rothbard book because I value it more. But the utility to me of a second copy of Rothbard’s book is lower than Friedman’s book; so my second choice is his even though I consider it less reliable in regard to the Great Depression.”

I substitute your “no cost (no prices)” with [$100]. Could you explain WHY the $100 price arose at first hand? From “marginal utility?”

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