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Source link: http://archive.mises.org/9995/austrian-recipe-vs-keynesian-fantasy/

Austrian Recipe vs. Keynesian Fantasy

May 21, 2009 by

The current crisis has revealed the Keynesian roots of mainstream economics. The only debate has been the type and size of bailouts and stimulus packages. The Keynesian fantasy is really a monomania because ultimately it is a fixation on a single panacea — more government spending. Meanwhile, the Austrians have the opposite set of policy guidelines and have heroically held to their recipe of liquidation. FULL ARTICLE


Harry Valentine May 21, 2009 at 9:53 am

Yes, we have eminent mainstream economists advising the US president in guiding the economy. This is indeed a market test for mainstream economists . . . just as there was a test for Marxist economists at the Soviet Politburo during the post USSR-Afghan war. The emniment mainstream pro-Keynesian economists may outdo Alan Greenspan of absolving themselves of responsibility in the event of a protracted economic slowdown . . . or worse (heaven forbid) another economic depression.

Matt R. May 21, 2009 at 10:10 am

This is an excerpt from an interview with Thomas Sowell in “Reason Magazine.”

reason: How much weight do you place on the notion that Federal Reserve expansionary money and credit policies primed the bubble, and bust, in housing?

Sowell: I find it hard to accept. I’m sure if the interest rates had been at 8 percent the boom would not have gone as far and the bust would not have been as big. I’m not saying monetary policy had no effect. But I am struck by the fact that Federal Reserve policy is nationwide, and in places like Dallas the increase in housing prices was in single digits and the decrease has been in single digits. So while Fed policy undoubtedly aggravated circumstances, it can’t be the fundamental cause because the defaults were so heavily concentrated. 60 percent of all defaults nationwide were in five states, and I suspect if you broke down the data even more you’d find specific regions in those five states very heavily implicated in defaults.

A.Viirlaid May 21, 2009 at 10:13 am

Harry Valentine makes draws a justifiable parallel between the old Soviet system commissars and our unelected neo-Keynesian officials at the Treasury and the FED who are trying to ‘save’ our Western economies.

Both the former Soviet officials and our current Western central bankers have mindsets that convince them that a Command Economy can work — that centralized manipulation of money can somehow compensate for the prior destruction they have wrought with their easy-money policies.

But there are differences.

One difference is that we will be slower to arrive at the same collapse that the old USSR lived through.

Another is that the old Soviet Union’s command structures actually allocated capital and other resources directly into various malinvestments.

Our authorities had been doing this indirectly, up until recently. Our esteemed money manipulators (“Moneypulators”) released the easy money upon us — and then waited while we did most of the misallocation of resources ourselves — since we were getting incorrect pricing signals as to the value of money and the value of investments.

Our authorities have now caught up to the old Soviet manipulators — they are now doing this misallocation directly in the marketplace.

Why? Because we, the public, are not doing it anymore, to the extent and liking of our neo-Keynesian leaders.

Mark Thornton May 21, 2009 at 10:16 am

I guess Thomas Sowell doesn’t know much about Dallas, Texas either.

Robert Groot May 21, 2009 at 10:35 am

I have an idea that might get Austrian economics into the mainstream:

Think of a misunderstood problem that appeals to most people’s bias and prejudice.

Create a theory that can solve this problem, and make sure that it contains government intervention.

While creating the theory, do not explain it clearly. Just use out of context, isolated ideas, and make sure that if you do decide to be brave and connect them, make sure that the connections you make are between the recently explained ideas, and ideas that you never actually stated before, because hey, who can remember the 5th playing card shown if your task is to remember the full deck? As long as the statements leading up to “we must use the government’s force” conclusion are plausible, that is good enough.

Now, seeing as how this mismash will inevitably lead to economic destruction, make sure you come armed with arguments designed to counter any complaints. One that almost always works is to deny that your program is doing any damage at all to the economy once it is enacted, and that the havoc occurring around us all simply must be proof that your program is not being used enough. In fact, you can really rub more into people’s faces too, because they love it: You can tell people that if it wasn’t for your program, which *obviously* is helping, then the economy would have been in even worse shape than it is now. I mean come on, look at how bad the economy is *even as we are helping it”!!

To secure your hegomic, theory as greater than relativity, politicize it. Hire economists to say in the media “The programs can’t do their job well because there are too many ____-wingers against the program! We are trying to fix the economy and you are making things worse! Look at how bad the economy is! Stop hating the poor! If you keep this up, if we don’t spend $100 bajillion bubbillion dollars, on SOMETHING, NOW, we are going to go down the road that Japan went through in the 1990s!”

Why aren’t we Austrians doing this? Seems totally logical to me.

Joe Stoutenburg May 21, 2009 at 11:57 am

I like characterizing the bail-outs and stimulus as “back door protectionism”. That analogy had never occurred to me.

Barry Loberfeld May 21, 2009 at 12:11 pm

“[A] justifiable parallel between the old Soviet system commissars and our unelected neo-Keynesian officials at the Treasury and the FED who are trying to ‘save’ our Western economies.”

From “Modern Liberalism at Wit’s End”:

Recall how he spoke of an ideology that “resembles that of communism.” Indeed: a crafted mythology as official history; government growth as a declared inevitability; administration of the masses economically (professedly to benefit the lower classes, really to establish a political elite); the use of the term socialization to denote usurpation by the State of the institutions of society; the invocation of “wrecker” saboteurs (“reactionaries” and “conservatives”) to prove that statism never fails, but is only failed; militarism in the service of “pacification.” Corporate socialism and Communist socialism are of course not twin totalitarianisms, but they are kindred Orwellianisms: Fantasy is Reality — reality, fantasy.


2nd Amendment May 21, 2009 at 12:29 pm

Who is “the” economy ? How can we “help” the economy ?

It’s up to the people to help themselves. It’s up to the individual to help himself.

There is no “economy”. If it was not for the nation-state and for fiat money, there would only be individuals and their capital and ability to create wealth.

There would be no “economy” to “help” or “save”.

This “economy” is a false entity derived from the single money system called fiat money and from the single payer system called the government.

Remove the government and fiat money and the concept of the economy as a whole will vanish. Left will be only individuals and their private capital.

Robbie Clark May 21, 2009 at 2:23 pm

Very eye-opening article. I have a great many things I feel I need to read in a short time.

J Cortez May 21, 2009 at 2:38 pm

Regarding the comment above, I think Thomas Sowell has a lot of good things to say in general, but here, as he sometimes is in other places, he is totally wrong.

Where does he think all the money came from to finance the five states in question? And because those states are the most problematic doesn’t mean the rest of the country isn’t in turmoil either.

This was a perfect storm of bad policy, but the center of it is the Fed. Large scale trillion dollar programs and agencies like Fannie Mae, Freddie Mac, the CRA, the FHA, as well as idiotic Wall Street firms leveraged 40 to 1 can only exist when you have a interventionist central bank like the Fed.

The Greenspan/Bernanke era is one that will go down in history as the worst. How many times have they intervened in the market to prop up a party that can only go bust? “Here guys, here’s some more PCP, heroin, crack and methamphetamine, keep everything going.”

Matt R. May 21, 2009 at 3:10 pm

J Cortez,

I agree. I generally enjoy his columns, but he clearly misses the mark here. I posted that to show a key disagreement between the Austrian and Friednman camps.

S Andrews May 21, 2009 at 6:14 pm

THis is an excellent article. I really liked the PPR examples.

On Sowell, he was recently listed on hayekcenter.org as a prominent Hayekian. How so?

Coury Ditch May 21, 2009 at 6:56 pm

This is a truly wonderful article Mark! You’re revision and analysis of business cycle statistics is very insightful. Bravo! Keep them coming.

Mark Thornton May 21, 2009 at 7:00 pm

Sowell has a new book out on the housing bubble and he does list the Fed as one of the villains and I agree there is plenty of blame to go around, but if you don’t understand this theoretically you don’t figure it out and come up with the right remedies. Does anyone know of a Sowell statement on the housing bubble while it was happening? He is clearly not a Hayekian on macro-cycle issues. He is more of an historian/free market guy, which is great, but that just doesn’t cut it in a crisis.

flix May 22, 2009 at 6:44 am

It’s a pity that even its proponents characterize the Austrian recipee as passive. It’s only passive as far as government is concerned… private actors actually have to DO a lot of stuff to restructure, adapt, invest, liquidate and rebuild.

No entrepreneur ever made money doing nothing, “laissez faire” is an admonition to government… but the rest of us actually have to “faire” a lot.

Joe Stoutenburg May 22, 2009 at 10:59 am

I enjoyed reading the study, linked in the article, compiling PPR through 1983. Is anyone aware of more recent figures?

Bruce Koerber May 22, 2009 at 11:46 pm

Economic Wisdom
Friday, May 22, 2009

Powerful Empirical Tools Of The Austrian Economists!

The Austrians have extremely powerful ‘empirical’ tools even though they approach economics using subjectivism. An excellent example of this is the tool referred to as ‘private product remaining.’

“Murray Rothbard addressed the problem of measuring a big government economy with the concept of private product remaining (with producers), or PPR, which basically takes GDP and subtracts from it twice the amount of government spending. Government spending is subtracted once to obtain gross private product and it is subtracted again to account for all the resources that government has siphoned off from the private sector.”

What makes these tools (another example is the ‘True Money Supply’) so powerful is that they are true to the real world which is what makes them empirical!

There is no smoke and mirrors in contrast to the Keynesians and the empiricists.

The exponents of Austrian economics work within the framework of classical liberalism and use reason and logic to the minutest detail to connect human action to economics and ethics, whereas the exponents of empiricism and Keynesianism make normative interpretations that are nothing more than quackery.

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