(!)

English isn't my native language, so bear with me here. Finnish is spoken by only about 5 million people and since my topics are rather universal, I felt like I should make an effort and write my posts in English. Comments and questions are welcome.

2010-12-30

History of ASE [Continued]

Lionel Robbins(1898-1984), the head of the economics department at LSE knew german and had read the works of Böhm-Bawerk, Mises and others. He was probably one of the main reasons for LSE's Austrianism. In 1931 he invites Hayek to LSE and the intensity of Hayek's intellectual battle with Cambridge and other schools reaches its height.

For some reason Hayek encourages John Hicks to read Vilfredo Pareto(Hicks eventually becomes one of the fathers of modern neoclassical economics). Robbins is influenced by those around him and he starts forgetting his Mengerian microeconomics, which can be easily seen by the changes in the reading list for the general economic theory course at LSE. Robbins' macroeconomics remains Hayekian until he becomes Keynesian when everyone else seems to do the same.

In the US the hole in economic theory is filled by the works of Alfred Marshall, who was one of the most influential economists of all time.

In the summer of 1929 Mises was offered a job at Kreditanstalt Bank, but he refused it. His fiancé asked why he'd refuse such an important job, and Mises answered:
A great crash is coming, and I don't want my name in any way connected with it[1].

That bank was one of the first to collapse.

Hayek on the other hand in February of the same year wrote:
...the boom will collapse within the next few months[1].
In the mid-1920s Felix Somary, a Swiss banker, wouldn't give John M. Keynes stock recommendations, because Somary believed that a speculative bubble was emerging. Keynes replied:
There will be no more crashes in our lifetime[1].
Irving Fisher, the "the greatest economist the United States has ever produced" (according to Milton Friedman) a few days before the crash:
Stock prices have reached what looks like a permanently high plateau[2].
Mises moves to Switzerland in 1934 to work at the Graduate Institute of International Studies(the Nazi threat made the move that much easier). He had a full-time job and a private seminar, he taught courses and wrote books and articles when he was in Vienna, but while in Switzerland he does very little. He realizes that the Mengerian branch is dead. Hayek on the other hand thinks that ASE has been a success, as it's been incorporated to the general field of economics with Marshall, Walras and others. In Switzerland Mises in fact started reconstructing economic theory from the ground up along the Mengerian line and he writes a general treatise.

Nationalökonomie comes out in 1940. It's in german, Mises is Jewish and the book makes a case for laissez-faire. Not exactly great selling points with the Nazis in power.

WW II prevents the distribution of the book. The Swiss publisher goes bankrupt and the book practically disappears. Mises moves to the US in 1940 because of the Nazi threat. The man is in his late 50s and hardly speaks english. He then rewrites the book in english and Human Action comes out in 1949.

By then it was too late, however. Marshallian and Walrasian economics had already become dominant and no one really cared about Mises' price theory.

ASE in the 1950s is dead in all of its forms. After The Pure Theory of Capital (1941) Hayek stops contributing to economics as it became clear that even the business cycle theory had shifted in favor of Keynes. Both branches of ASE were essentially gone. Keynesianism only replaced one aspect of Austrian Economics, the reasons for the overall decline are what I've discussed so far.

Then Rothbard happened. Man, Economy, and State (1962), America's Great Depression (1963), What Has Government Done To Our Money (1963), Economic Depressions: Causes and Cures (1969) and Power and Market (1970) were what revived ASE. Why did those people show up for the Royalton Conference in 1974? Because they had read Rothbard.

Hayek's Nobel Prize certainly surprised many and it did help, but it wasn't behind the revival.

[1] Gerard Jackson Safehaven Article January 6 2008
[2] Wikipedia Irving Fisher

Critique of Austrian Economics: A Critique [Part 9]

This is part 9 of my critique of the Critique of Austrian Economics by AustrianCritique.

History

You can go and read what AC says and see where we disagree. I won't concentrate on AC's claims, I'll simply write the real history here. Until the 1990s there was an orthodox history of the Austrian school(that was largely believed by Austrians themselves) that was revealed to be factually inaccurate and illogical(see Joseph T. Salerno's talks and Jörg Guido Hülsmann[1]). In its short form the story goes like this:

ASE(Austrian School of Economics) was mainstream and doing well after its birth in 1871, until the Keynesian revolution came and replaced it in 1936. ASE was almost dead, until the Royalton Conference and Hayek's Nobel Prize of 1974, after which ASE was revived. This is the simplified version anyway.

Most of the information in this post will be from Salerno's talks on the history of thought.

These are the important historical figures in what became the current Austrian School of Economics:
1st generation: Carl Menger (1840-1921)
2nd generation: Eugene von Böhm-Bawerk (1851-1914)
3rd generation: Ludwig von Mises (1881-1973)
5th generation: Murray N. Rothbard (1926-1995)

Almost from the very start ASE had two branches. The first branch presented above is the Mengerian branch and it is the foundation of the current school of thought.

The "general equilibrium branch" is presented here:
2nd generation: Friedrich von Wieser (1851-1926)
3rd generation: Joseph A. Schumpeter (1883-1950)
4th generation: Friedrich A. von Hayek (1899-1992)

I'm obviously simplifying here. The 4th generation for example had a lot of people in it(Machlup, Haberler, Morgenstern etc...). They were all mainly influenced by Wieser and Schumpeter.

Carl Menger was the founder of the Austrian School and one of the three discoverers of marginal utility[2]. Ludwig von Mises has said that Menger's Principles of Economics(1871) is what made an economist out of Mises. Böhm-Bawerk's phenomenal work on capital theory laid the foundation for Mises' business cycle theory and in the late 19th and very early 20th century ASE was indeed recognized worldwide as a serious school of thought.

There were still serious problems with ASE. Many thought ASE could be represented through general equilibrium and that there was no reason to not simply use math. Early Austrians also couldn't incorporate money into their system(until 1912 came along[3]). Some other problems persisted, but they were dealt with in Human Action(1949).

Böhm-Bawerk left academia in 1889 after writing his 3 volume treatise on capital and interest and didn't return until 1905, at which point he was physically in such bad shape that he would no longer contribute to economics. Menger stopped contributing to economics in the 1890s and he refused to have Principles of Economics reprinted(the book would start disappearing from libraries and commanded a high price because it was in such high demand). Menger's chair at the University of Vienna was given to Wieser(since Böhm-Bawerk was in government service at the time, not in academia), which further promoted the general equilibrium approach instead of the Menger/Böhm-Bawerk line of thought.

Schumpeter, who was Wieser's student but was heavily influenced by Léon Walras, published two books at a young age and became to be seen as the star of the 3rd generation. So before Mises' first book, The Theory of Money and Credit, Schumpeter had already published The Nature and Essence of Theoretical Economics(1908) and The Theory of Economic Development: An inquiry into profits, capital, credit, interest and the business cycle (1911) and thus Schumpeter came to be seen as a system-builder, while Mises was seen as perhaps a brilliant economist, but also as someone who had a narrower scope.

In the US the American Psychological School(actually a praxeological or Mengerian school would be a more appropriate name) failed to make an impact, as Herbert J. Davenport and Frank Fetter spent more time on personal disputes than teaching students. They did contribute to interest theory by correcting some of Böhm-Bawerk's mistakes, but they failed to leave any disciples.

As the 4th generation became influencial during the 1920s, the Mengerian tradition was essentially dead. By the early 1930s ASE no longer existed, with The London School of Economics being the only exception and even there general equilibrium dominated. Mises had influenced them with his two books(the second being Socialism(1922)). Most Austrians became much more liberal(in the classical sense) as a direct result of that book. But Mises' books weren't on general economic theory, they were on specialized subjects(money and economic calculation).

[1]

2010-12-29

Critique of Austrian Economics: A Critique [Part 8]

This is part 8 of my critique of the Critique of Austrian Economics by AustrianCritique.

Gold Standard

AC: "...virtually all economists agree... If there is too much money, then inflation rises. If there is too little money, then unemployment rises. Under the current system, the government fights inflation by contracting the money supply, and fights unemployment by expanding it. This achieves the optimum level of money, and minimizes our economic problems."

Really: Then virtually all economists are wrong. The Philips Curve has been empirically refuted so many times that it's unbelievable anyone would bring it up. It's nonsense pure and simple. In practice the current system is perpetual inflation, so even if this theory was sound on paper(which it isn't), it wouldn't work.

AC: "Austrians call for a 100-percent gold standard (that is, without even fractional reserve banking)..."

Really: Yes and no. Austrians usually want market money(historically it's been gold, but it doesn't have to be) and some Austrians belong to the free-banking school, so they wouldn't oppose fractional reserve banking. But most Austrians oppose fractional reserves and want to return to a gold standard at least initially.

AC: "Under a gold standard, the total amount or value of money would be fixed, determined only by the size of the nation's gold reserves. Sure, unemployment and inflation may rise, but eventually prices will readjust themselves through natural inflation or deflation and solve the problem."

Really: The amount of gold and the amount of money would indeed correlate closely(after being industrially used, gold would probably no longer be regarded as money, so it wouldn't be a 1:1 correlation). However, to say that the value of money would be fixed is fallacious. The price of gold isn't fixed right now. If gold became money, it wouldn't be any more fixed than now. It would simply be money.

Unemployment and inflation may rise? Ok so you're telling me that when we get a relatively stable money supply, then inflation will rise? Utter nonsense obviously. Historically(e.g. the US in 1880s) and theoretically prices should steadily fall, as the growth in the supply of goods outstrips the growth in the money supply. Unemployment shouldn't rise either.

AC: "Austrians believe that this readjustment, painful or prolonged though it may be, is a self-cleansing exercise that rids the economy of malinvestment. That is, it eliminates weak firms that shouldn't have been created in the first place."

Really: AC is no longer talking about going back to a gold standard. Austrians believe that the phony boom brought about by credit expansion should be stopped and the malinvestments should be liquidated. This falls into "business cycle" category.

AC: "But although money inflates easily, it suffers from "price stickiness" when trying to deflate. Often, deflation barely occurs, and the result is high unemployment, recession or even depression instead. In other words, money doesn't adjust itself to the level of economic activity; the level of economic activity adjusts itself to the money. History bears this out: the U.S. suffered eight depressions while on commodity money; in the 60s years since, it has suffered none."

Really: There isn't a single proposition in here that is factually correct. And I don't know if this is ignorance or dishonesty, but normal recessions were called depressions back in the 19th century and early 20th. Not only that, but the "theory" behind this "history" is just as absurd.

AC: "Second, gold standards based on a fractional reserve allow the phenomenon of bank panics or bank runs, which leave depositors holding worthless money. This only exacerbates recessions and depressions."

Really: Historically bank panics have resulted in very small losses on the part of depositors. Besides, they're a good thing. They put limits on credit expansion, the source of the business cycle. Removing bank runs from the picture was one of the greatest policy mistakes of the 20th century.

AC: "The solution to this would be to adopt a pure gold standard. But there is not enough gold in the world to cover the phenomenal amount of economic activity currently in it, without an equally phenomenal revaluation of gold. Furthermore, industry is making increasing demands on gold; a change in dentistry or electronics could deflate an entire economy."

Really: Any amount of money will suffice. The amount of money is irrelevant. I do agree that going back to the gold standard would be difficult, but that's hardly the question here. Gold's industrial uses are such a tiny part of the global supply of gold that I doubt anyone would notice even a major change in technology(not to mention the supply of gold could change to meet this new demand). AC is simply making stuff up here.

Business Cycle

AC: "The theory that the Fed's monetary expansion and easing of credit restrictions results in "malinvestment" is an unsupported claim. It is backed up only by the Austrian's faith and deductive "logic" that such malinvestment occurs."

Really: There are so many ways to answer this, I don't know where to start. Just go read my blog post about the business cycle.

AC: "Austrians often repeat that since the Federal Reserve System was created in 1913, our currency has devalued 98 percent, due to the printing of money. But this is a meaningless statistic. Suppose you need $2,000 a month to buy the necessities of life, but you earn $2,000 a month as well. You're making ends meet. Now suppose that your bills climb to $10,000 a month -- but so does your income. Has anything real changed? Of course not."

Really: The Fed's mandate is to keep the dollar stable, so from that perspective it's a meaningful statistic. Also what about the inflation tax? Every time the money supply grows, those who get the new money first benefit. They get to go into the market and spend that money before prices have risen. Those who get the new money last will have to pay higher prices for a long time before their income rises. And it isn't the poor or the middle class who gets the new money first, I can tell you that.

AC: "At low levels, inflation under fiat money is relatively harmless. However, the deflation caused by the gold standard is truly destructive. If dollars have inflated to 2 percent of their original value, and the price of gold has risen 20 times, then maintaining the gold standard would have deflated the dollar to 2.5 times its original value. That's a lot of unemployment."

Really: 19th century and the classical gold standard. Full employment pretty much. Not to mention AC still has no theory behind his claims.

AC: "No, the real question is not how much money has inflated, but whether or not your absolute standard of living has risen. And in this regard, the current system of fiat money has been a clear success. Between the end of World War II and the early 70s, the U.S. standard of living (adjusted for inflation) doubled -- the fastest rate of prolonged growth in U.S. history."

Really: Bretton-Woods is the same as "the current system of fiat money..." Except that it isn't. Bretton-Woods was bad, but pure fiat money is worse. Oh yeah, correlation is not causation.

AC: "And, of course, there has not been a single depression since World War II, not in this or any other country following Keynesian monetary policies."

Really: Keynesian monetary policy is to always push the rate of interest lower by printing money, so I guess hyperinflation would count as a Keynesian depression?

2010-12-08

Critique of Austrian Economics: A Critique [Part 7]

This is part 7 of my critique of the Critique of Austrian Economics by AustrianCritique.

Monopolies

So far this is the most enjoyable part of the critique. Simply the idea that I know the history of the US better than AC(who presumably is a US citizen) is on its own funny. Austrians claim that monopolies in a free market are either not a problem at all or a very small problem at most. AC disagrees:
"The claim that governments cause monopolies defies the historical evidence. History actually shows the opposite: the more unregulated the market is, the worse the problem of monopolies."

That right there is incorrect even on its own terms. Even if we accepted the idea of natural monopoly as a given, state-granted monopolies still far outnumber natural monopolies.

AC:
"However, the Austrian claim is not wholly without merit. Utilities are examples of monopolies run or regulated by the government (although they are natural monopolies, and privatizing them doesn't work, as Britain found out in the 80s)."

Really: Here AC has the perfect opportunity to engage in a theoretical exposition of what natural monopoly is and how it emerges on the market. He doesn't do it and simply states something as a fact, even though it's the subject he's arguing about. It's like arguing that democracy doesn't work by saying: "But democracy doesn't work, as we saw in [-insert country and year here-] . In fact let me use this same tactic right now to refute AC. Utilities are not natural monopolies, as we saw with several US cities during the 19th century:

Six electric light companies were organized in the one year of 1887 in New York City. Forty-five electric light enterprises had the legal right to operate in Chicago in 1907. Prior to 1895, Duluth, Minnesota, was served by five electric lighting companies, and Scranton, Pennsylvania, had four in 1906. ... During the latter part of the nineteenth century, competition was the usual situation in the gas industry in this country. Before 1884, six competing companies were operating in New York City . . . competition was common and especially persistent in the telephone industry . . . Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among the larger cities, had at least two telephone services in 1905[1].

I'm not familiar with Britain and the 80s, but if it's the kind of "privatization" I've seen in other cases, then I'd rather call it corporatism. Usually they sell the assets to a company and give some kind of privileges on top of it. After all, the company was probably selected because of its lobbying efforts. Not to mention if there hasn't been any market process in that particular industry for years or decades, then it's no surprise that there is no competition when the industry is "privatized".

AC: "Often companies persuade governments to erect barriers of market entry to potential competitors. Sometimes government subsidies allow one company to overpower its competitors. But such cases are usually the result of money-based lobbying, which is a corruption of the system. Corruption in the public sector no more "refutes" its central principle than does corruption in the private sector. The solution to corruption is to eliminate it by enforcing better laws. European democracies offer broad practical evidence that this sort of corruption can be greatly reduced."

Really: Corruption in the public sector is a perfect rationale for not giving the public sector so much power. After all, without power there's no incentive to corrupt. Corruption in the public sector is vastly different from other kinds of corruption. For starters, politicians don't use their own money. The last phrase is obvious BS. AC apparently idolizes Europe out of ignorance.

AC: "But this Austrian critique completely ignores another, more common type of monopoly: that which forms naturally on the unregulated market. There are many reasons for this tendency, ranging from "it takes money to make money" to the greater efficiency of large corporations. Without antitrust laws or some other countervailing market force, growing companies will not stop until they become monopolies or oligopolies."

Really: Even if natural monopolies did emerge on a free market, it still wouldn't be a "...more common type of monopoly...", that's simply false. Also I'm not sure if I read this correctly, but I think AC is saying that antitrust laws are a "countervailing market force", which I find rather hilarious(market forces are born within the market, not out of legislation). Also of note is the complete lack of theoretical substance here. AC instead tries to back his claims up with rewritten history.

AC: "The height of monopoly growth and abuse in the U.S. coincided with its greatest period of laissez-faire, or government nonintervention in the market. Known as the Gilded Age (the period between the Civil War and World War I), this period saw the phenomenal rise of the Robber Barons and their great trusts (monopolies). John D. Rockefeller monopolized oil under his Standard Oil Company; J.P. Morgan dominated finance; Andrew Carnegie, steel; James Hill, railroads. Historians have well chronicled the ruthlessness of these men..."

Really: It is slightly problematic that AC doesn't list a single monopoly here. He doesn't offer any proof either. To mention Hill is especially hilarious, since Hill was competing against government rail roads(and Hill was far better at it, even though he got no subsidies or land grants). How many domestic competitors did Standard Oil have when it was finally brought to court by the state in 1907? Was it 47? Couldn't quite remember, so I checked it and it was actually 147[2].

Did any of these companies restrict production to drive prices up? No, they expanded production faster than their competitors and slashed prices continuously. Hell, the state eventually outlawed Hill's price cutting in the name of consumer production(Interstate Commerce Act of 1887 & Hepburn Act of 1906).

These men were innovative workaholics who improved the lives of pretty much everyone. To promote state intervention to stop the actions of these people is equivalent to declaring war on human civilization and progress.

AC: "In the late 19th century, trusts formed also in wheat, fruit, meat, salt, sugar refining, lumber, electrical power, rubber, nickel, paper, lead, gypsum, iron, cottonseed oil, linseed oil, whiskey distilling, cord manufacture -- and many others."

Really: Seriously what? Wheat? Salt? Electrical power is the only one that could qualify for a natural monopoly, but the rest is ridiculous.

AC: "Once a trust emerged, it would raise its prices and drop its quality of service, as well as engage in unfair trading practices that drove other firms out of business. The abuses of these monopolies became so great that they became a national scandal. So deep was antitrust sentiment that when both houses of Congress passed the Sherman Antitrust Act in 1890, there was only a single dissenting vote!"

Really: AC has yet to name a single trust that raised its prices by restricting production. The Sherman Act was nothing but a beautiful display of political entrepreneurship by less efficient firms. They wanted to break bigger and better companies up, so they got a law passed. What about the experts at the time? What were economists saying about monopolies? They were saying large-scale production and mergers were not a threat to competition or the consumer. Even self-descrived socialists said this[3].

The theory of monopoly was an ex post rationale for a
policy that was created for special interests. The idea that there was some little get-together of experts who then carefully crafted a wise piece of legislation with the public in mind is preporterous.

Why don't we see what Congress said and what actually happened? When the Sherman Act was being passed(1890) Congress claimed that the following industries among others were being monopolized: salt, petroleum, zinc, steel, bituminous coal, steel rails, sugar, lead, liquor, twine, iron nuts and washers, jute, castor oil, cotton seed oil, leather, linseed oil, and matches(that's 17 industries). Let's see some nominal data:
As a general rule, output in these industries expanded more rapidly than GNP during the 10 years preceding the Sherman Act. In the nine industries for which nominal output data are available, output increased on average by 62 percent; nominal GNP increased by 16 percent over the same period. Several of the industries expanded output by more than 10 times the increase in nominal GNP. Among the more rapidly expanding industries were cottonseed oil (151 percent), leather goods (133 percent), cordage and twine (166 percent), and jute (57 percent)[4].
What about real output?
Real GNP increased by approximately 24 percent from 1880 to 1890. Meanwhile, the allegedly monopolized industries for which a measure of real output is available grew on average by 175 percent. The more rapidly expanding industries in real terms included steel (258 percent)[remember the evil Andrew Carnegie?], zinc (156 percent), coal (153 percent), steel rails (142 percent), petroleum (79 percent), and sugar (75 percent)[4].
AC: "The worst period of monopoly formation was between 1898 and 1902. Prior to this, there was an average of 46 major industrial mergers a year. But after 1898, this soared to 531 a year. (3) By 1904, the top 4 percent of American businesses produced 57 percent of America's total industrial production, and a single firm would dominate at least 60 percent of production in 50 different industries."

Really: Yes, exploiting economies of scale is beneficial to us all. Sometimes production should be concentrated. There is absolutely no proof of monopolization in what AC is telling us, even though AC probably thinks otherwise.

AC: "The power of these monopolies easily dwarfed the governments that oversaw them. As early as 1888, a Boston railroad company had gross receipts of $40 million, whereas the entire Commonwealth of Massachusetts had receipts of only $7 million."

Really: It would be very helpful, if you actually told us what company that would be! Google didn't help. But seriously, what's with the phony comparison? The Commonwealth of Massachusetts has a monopoly on the use of legalized force and they have the power to legislate. Besides, what do gross receipts have to do with power? If this railroad company was private and operated on a free market, then it had no power at all. They were at the mercy of their customers and the whims of politicians.

AC: " It wasn't until Teddy Roosevelt launched his great "trust-busting" campaign in 1902 that this process was reversed. Actual enforcement of the Sherman Act reduced monopolies until the Roaring 20s, when laissez-faire policies again returned to Washington. Over that decade, about 1,200 mergers swallowed up more than 6,000 previously independent companies; by 1929, only 200 corporations controlled over half of all American industry."

Really: Yet again, there isn't a single example offered. AC tells us that when the state isn't actively preventing mergers, there are more mergers. Proof of monopolization? No, not at all in fact.

AC: "The New Deal era ushered in yet another era of antitrust policy, again reducing the percentage of monopolies. This was followed by the Reagan era, a period which saw both massive deregulation and another frenzy of mergers and takeovers."

Really: At least the first part of the New Deal(1933-34) was a huge cartelization program and competition was actively restricted by the state. Not suprisingly it was also a time of economic misery. Basically AC has his history as wrong as it can get. The "deregulation" was in fact started by Carter and I still don't see how more mergers equals monopoly.

AC: "...the periods of government trust-busting show the proper role of government, and its effectiveness in restoring market competition."

Really: How so? I'd like to remind everyone that AC here still hasn't managed to prove that trust-busting helps the economy. He didn't even try. He's like Keynes; he has hunches and simply tells it to us as fact. On the other hand I presented the reader with statistics that back my statements up.

AC: "Two objections are possible here ... The second objection is that a wave of mergers may result in a more natural and efficient equilibrium of larger players, and this could be beneficial for the economy."

Really: Well yes. Without mergers we'd all live in personal autarky.

AC: "The result doesn't have to be a monopoly -- perhaps just an oligopoly."

Really: A situation where there are only a few sellers can be competitive. In fact even a monopoly can operate in a competitive environment.

AC: "The problem is that at the top end, mergers become increasingly harmful to the economy, with monopolies merely representing the worst result. Even oligopolies engage in price-gouging and collaboration."

Really: Why do mergers become increasingly harmful? Do mergers keep automatically happening until there is an uncompetitive situation? If so, then why? Why do you equate the number of firms with how competitive the market is? Do we have anything but your hunches?

AC: "A natural equilibrium hardly represents the best equilibrium -- as recessions and depressions show."

Really: To show us how natural equilibrium is bad, you give us two examples of disequilibrium? Besides, to use equilibrium analysis to examine competition is in my opinion misguided.

AC: "How do Austrians deal with the historical correlation between laissez-faire and monopolies?"

Really: By shredding your arguments to pieces one by one.

[1] Burton N. Behling, Competition and Monopoly in Public Utility Industries
(1938), in Harold Demsetz, ed., Efficiency, Competition, and Policy (Cambridge, Mass.:
Blackwell, 1989), p. 78.
[2] Dominick T. Armentano Freedom Daily, May 1992: Monopoly
[3] Thomas J. DiLorenzo The Review of Austrian Economics Vol. 9, No. 2(pp. 44-46): The Myth of Natural Monopoly
[4] Thomas J. DiLorenzo Austrian Economics Newsletter(Summer 1991, pp 1-6): The Antitrust Economists' Paradox

Critique of Austrian Economics: A Critique [Part 6]

This is part 6 of my critique of the Critique of Austrian Economics by AustrianCritique.

The Market Process

AC here starts with the most epic strawman yet.

AC: "According to Austrians, only individuals "on the scene" know what's going on in the market, and any attempt to manage it centrally is bound to fail.

Perhaps the best way to highlight the error of market process theory is by analogy. Suppose you are the chief of a tribe of wandering nomads, and you wander into a region that is unfamiliar to everyone. Soon the tribe becomes thirsty, and everyone agrees to start searching for water.

In the first version of this example, suppose you are an "anarchist" chief, and allow the tribe to conduct its own search without organization, coordination or planning. A lot of effort will be wasted and duplicated in the chaos that follows."

Really: Basically AC is trying to argue that Austrians oppose cooperation. Well they don't, so I guess that's that... FYI "laissez-faire" does not equal "chaos." He later gives examples of a "mixed economy" chief and a "central-planning" chief, but I don't need to go into that.

AC: "All the subjectivism, individualism and market process that exists in the private sector should exist in the public sector as well. Both companies and governments provide goods and services in exchange for money. Customers vote with their dollars; voters vote with their ballots. Both customers and voters are self-interested, seeking the best goods and services for the least money."

Really: AC chooses to completely ignore all that Austrians have written on this and makes the claim that the public sector is really no different from the private one. But they are different. Mises wrote about this already in 1920 in his Economic Calculation in the Socialist Commonwealth[1]. And there's also the works of Thomas DiLorenzo[2].

AC: "Companies and politicians that do not perform well go bankrupt or are voted out of office. And if society should reduce government that has grown too centralized and inefficient, then it should do no less for monopolies, which share the same shortcomings."

Really: Governments are monopolies, but that doesn't mean monopolies are like the government. That's a complete non sequitur. They do share some of the same problems, but I doubt AC would even know what they are.

[1] The Debate on the Socialist Calculation Debate
[2] The Theory of Political Entrepreneurship

Critique of Austrian Economics: A Critique [Part 5]

This is part 5 of my critique of the Critique of Austrian Economics by AustrianCritique. I found the written version online, so there might be slight differences between the YouTube version and the one I will be quoting from now on.

Starting Assumptions

AC: "When mainstream economists build a theoretical model to understand an economic activity, they often -- but hardly always -- make assumptions of perfect conditions. For example, they will assume that consumers have perfect information about the market, that market competition is perfect, that all products are perfectly homogenous, or that there are zero costs to firms entering the market. Austrians point out, however, that these conditions do not exist in the real world, so the results of these models' calculations are worthless. It is even more short-sighted to use these unrealistic results to guide national economic policy. There is a mainstream rebuttal to this argument, but for the moment, let's continue."

Really: Fair enough, but these models also try to measure and quantify things that can't be measured or quantified.

AC: "Austrians call for economic assumptions to reflect the real world -- warts and all."

Really: As we will soon see, this is untrue. In fact AC himself will give us a quote that proves him wrong. Here he is quoting Ken Gaillot, an Austrian:

AC:
Market process theory assumes that there is no force and fraud. Force includes force by individuals in the form of theft and so forth, and force by the government in the form of taxation, regulation, and so forth. Austrians recognize that force by both individuals and governments exists, and that market theory does not completely explain reality. Instead, market theory allow economists to understand the processes at work in a market society and to isolate the effects of force. Attempts to analyze real-world markets must account for government and individual force. Austrian analysis of government policies thus includes not only the direct effects of the policies, but also the effect of the policy on the functioning of the market process.
Really: AC says Austrians do not use false assumptions. Then he quotes an Austrian who says they do use false assumptions... AC fails to realize that false assumptions can be used as a mental tool to understand the market economy. This is completely different from what mainstream economists do with their false assumptions. For example there probably isn't any Robinson Crusoe on an island by himself at the moment. Yet the "Robinson Crusoe Economy" is a very helpful mental tool that many economists use. What about the evenly rotating economy in interest rate analysis?

I'd also like to point out that Ken Gaillot is a nobody and the link AC gives for this quote is broken. I did manage to find Gaillot's text in another place, though[1].

AC: "This remarkable paragraph essentially calls for the utopian perfection of the human race before the Austrian model can be applied or even criticized! All market failures today can be blamed on the fact that we have a government, regardless of the actual level of government involvement in the failure."

Really: This paragraph isn't remarkable at all and it doesn't "call for" anything. That's like saying the Robinson Crusoe Economy is "calling for" us to all live on separate islands by ourselves.


AC: "But what if the U.S. decided to become libertarian, and adopt an Austrian economic policy? Then they would still be protected from accusations of failure, because they can always blame criminals for wrecking the market process. This theory therefore serves to justify a heightened War on Crime. Considering the economic and demographic groups popularly associated with crime, one can easily see the possibilities for demagoguery and scapegoating in the event the new economic system turned out to be inherently flawed."

Really: I'm quoting this simply because AC clearly tries to imply that Austrians are right-wingers who favor the War on Crime. Very deep economic analysis here, guys!

AC: "First, we should note that economists are primarily concerned with how the real world can be modeled, and the accuracy of their models is continually improving."

Really: Too bad they aren't interested in how the real world actually works. I don't know what planet AC exists on, but you'd have to be blind not to realize how completely lost mainstream economics is.

AC: "Studying how assumptions are violated is a major part of economics. For example, William Vickrey and James Mirrlees won the 1996 Nobel Prize for their theories of asymmetric information (unequal information between buyers and sellers). The rise of New Keynesianism in the last 10 years has been based on George Akerlof's fundamental point that human beings are not perfectly rational, but nearly rational. Another liberal school of economics, institutionalism, doesn't even subscribe to static equilibrium models at all, but agree (ironically) with Austrians that the economy is one of constant change. It is really the neoclassical (conservative) economists who rely so heavily on perfect starting assumptions. If Austrians want to criticize their allies, then liberal economists are perfectly happy to let them."

Really: Reading this might leave you with the impression that economics has been going somewhere these last few decades. Let's see... Analysis on asymmetric information hasn't changed since the 60s. Rationality is a subjective term, but in its common sense meaning it was probably dealt with before Akerlof was even born. Ok so Austrians are now right-wingers, libertarians and conservatives? Why are neoclassicals conservatives? AC, you're not making any sense. And Oliver Williamson is an institutionalist and also probably the most "Austrian" nobel laureate in a while[2].

AC: "A neoclassical defense for using perfect assumptions is that countless factors affect activities taking place in the real world, so economists must simplify their starting assumptions if they are to quantify the economy at all. Even so, economists have numerous tools to get around this problem, tools that have been improving with time. They can start by isolating the most important factors. They can also focus the model on a highly specific industry, product or individual, which greatly reduces the complicating factors. Another method is to establish broad groupings or taxonomies with similar characteristics that yield variables that can be applied to smaller categories. The claim that these models do not have applications for the real world betrays the Austrian's own unfamiliarity with statistics."

Really: I suggest listening to Roderick T Long[3]. Even if a model had predicted 100% of past events right, all Austrian criticisms of that model would still hold. In the real world we're not even faced with such a situation, since most models are in fact worthless. Some do have applications and Austrians do not deny this(I mean hell, even private firms employ econometricians to give ball-park figures of possible future events).

[1] The Theory of Market Process
[2] Williamson and the Austrians
[3] Friedman and Mises on Method