The widespread failure of mainstream economics to predict the global financial crisis has led to a number of heterodox schools of economics making attempts to take over as the dominant way of thinking. Chief among these are the Modern Monetary Theory (MMT), the post-Keynesians, and the Austrian School. Austrian economists, though, shouldn’t expect the financial crisis or the recession to rescue them from their marginal status.
The Austrian School had its roots in Vienna, but its current center is in mainly US universities such as George Mason and New York University. It has played a substantial role in helping to develop the modern mainstream tradition. For example, the insights of Marshall’s utility theory were influenced by ideas from the Austrian school, such as Carl Menger’s idea of marginal utility and Eugen Böhm von Bawerk’s theory of the firm. Indeed, Ludwig von Mises, one of the most important figures of the Austrian school, saw his own work and that of his teachers and students as being part of a united front against the German Historicists such as Hildebrand and, later, von Schmoller.
The bitter methodological contest these two schools fought, known as the Methodenstreit, surpassed the intensity of any disagreement the Austrians have with any other modern school. The differences between most Austrians and others, though, aren’t as deep as they are made out to be by more ‘radical subjectivist’ Austrians, often those affiliated with the Mises Institute. Indeed, economists such as Peter Boettke, who self-identifies as Austrian, and Bryan Caplan, who emphatically does not, can come to very similar policy conclusions.
That said, one distinctive aspect of the Austrian method which is usually contrasted with ‘mainstream’ economics is that they often eschew the use of statistical data. Their view is that data does not confirm or refute theory, and certainly does not give them cause to come up with new theory to justify statistical trends that are identified. The Austrians were sometimes called the ‘psychological school’, for their introspective and agent-focused (as opposed to statistical or historical) methodology. That is, the Austrian would not consider any insight valid unless it could be linked back to original economic axioms. Primary among these is the axiom of human action, which is stated in various ways, one of which is ‘human action is purposeful behaviour’.
This is not to say that Austrians are against any engagement with data. If statistical data clash with a claim such as ‘all other things being equal, an increase in the minimum wage will lead to an increase in unemployment’, the Austrians will explain that in statistical data, the ‘all else being equal’ assumption is not valid.
One common criticism of this view is that it leads Austrians to claim that any explanation that might explain such a statistical result is necessarily not one of economic theory, but of some other kind of theory, perhaps psychological. Thus, the Austrians are claimed to impoverish themselves by putting aside arguments with real explanatory value. Perhaps if Austrians want to be more relevant to policy discussions in the modern day, they will have to accept that it is not merely ‘purely economic’ theory that must be considered when deciding on the effects of a change. Given that ‘ceteris paribus’ claims tell us nothing about the real world, they must incorporate other, often less certain truths from other disciplines.
Of course, the Austrians would say that the purported failure of the short-run Phillips Curve to translate into the long run, and the resultant Stagflation of the 1970s, was predictable according to their own theories. Further, in their view it was evidence of the failure of statistical inference where human action is concerned. Even if they are right about this, what appears to them to be another vindication of their theory doesn’t make them any more likely to become popular.
Part of the reason they didn’t take over as the dominant economic paradigm in the 1970s was that one could count the number of self-identified ‘Austrian economists’ on one hand.
By contrast, the close links, both historical and modern, between Austrian economics and classical liberalism finally seem to be some good to the Austrians as an economic school. The same can be said about connections between the Austrian School and radical libertarianism, in the tradition of Murray Rothbard and others. The recent Ron Paul movement in the United States, along with the earliest incarnation of the Tea Party, has meant a resurgence of interest in the Austrian school.
Austrian ideas, spread by groups such as Learn Liberty, Reason Magazine and particularly the Mises Institute, have attracted many people who previously didn’t know anything about economics. The rise of the economics blog as a means of communication with the public is nowhere more apparent than in MMT and the Austrian school, in particular by Bob Murphy, Lew Rockwell and the Circle Bastiat.
Few mainstream economists have changed their minds, but there has been a huge increase in the number of ‘consumers of economic thought’, that is, laypeople who have been brought into a broadly Austrian way of thinking. Some of these are in positions of power, but many are simply ordinary voters.
This hasn’t yet meant a great rise in the number of Austrian school economists. It’s been 5 years since 2008, so it will still be at least half a decade until the first in a new wave of Austrian thinkers get their PhDs and begin to publish.
Presently, the view of Austrians among non-Austrian economists is that they are crazy, and even members of a cult. A glance through recent comments from mainstream economists such as Paul Krugman will hold up this claim. Krugman claims that “Austrian economics very much has the psychology of a cult.”
By contrast, other heterodox views and schools are seen as unconventional, yet at least worthy of respectful analysis. Krugman comments on the MMT school that ‘I wish I could agree with that view… But for the record, it’s just not right.’
Now, Krugman is no longer considered as mainstream of an economist as he once was, as his rhetoric and economics continue to slide leftwards as of the start of the crisis. But ask most proponents of the neoclassical synthesis and they will likely express a similar attitude. This may be a contributing factor to the shortage of Austrian economists.
More than merely spurring the rise of a political ideology, the crisis has apparently vindicated one important part of Austrian doctrine, the business cycle theory or ABCT. This states that keeeping the market interest rate below the ‘natural’ interest rate1 leads to a malinvestment of resources to both immediate consumption and long-term capital. There is a corresponding decline in investment in ‘middle goods’. If the crisis was indeed a necessary liquidation of long-term malinvestments in housing, as well as those firms and jobs which are not satisfying consumer ends well enough to stay afloat at the natural interest rate, then present monetary policy, which keeps house prices high and unemployment low, is the opposite of what the economy needs.
This offer of an alternative explanation of the continued stagnation is unappealing both to politicians and progressives. For politicians, relinquishing control of monetary policy to free banking is hardly likely for public choice reasons. By this I mean not only that politicians seek to hold onto power they already have, but also that it would imply dissolving existing government departments and agencies, and there are vested interests involved. Even if people employed at the Fed and related departments could be convinced, against their years of training to the contrary, that central banks were harmful to the economy, it would be harder to convince them that removing them isn’t harmful to their job prospects.
For progressives, the response would be incredulity that the Austrians would have ‘us’ do nothing while people are suffering.
Once, I might have hoped that the Austrians would come to sufficient prominence as to warrant a synthesis of their views and the orthodox. The unwillingness, in particular of Mises Institute economists and ‘hangover theorists’-averse mainstreamers, to ‘pollute’ their ideas with those of the other traditions seems to make that unlikely, though. Still, Peter Boettke claims that while the Austrians might not be ‘mainstream’ (i.e. presently fashionable), they are ‘main-line’ , or part of the causal-realist and agent-centered intellectual tradition that underpins the way economics is done. If so, then they already have more in common with the mainstream than is believed. Those that seek to distance themselves from this connection miss the subtle influence they can have, and only alienate many who might otherwise have wanted to engage with them.
1. I.e. the rate determined simply by consumers’ preferences for present goods over future goods. In the US, the central bank (the Federal Reserve) has the power to set interest rates below the natural interest rate, and often does.