Tag: Austrian Business Cycle Theory

Pavlov’s dogs of stimulus

In his latest column “To Spend or Not to Spend,” Anthony de Jasay discusses the current plans to borrow and spend our way out of economic recession. A central place in such policy proposals is taken by the renewed enthusiasm for Keynesian economics, a school of economic thinking that appears to have been formulated for activist politicians (which raises some interesting questions about the relationship between the popularity of economic “ideologies” and policy needs). Keynesian economics raises some serious epistemological problems and questions about the ability of  its recommended policies to produce predictable and consistent effects. As de Jasay writes:

…for all its admirable originality and inner consistency the Keynesian system has notorious faults. Perhaps the principal one is that it holds out an open invitation to lesser Keynesians to treat the economy as a complex machine made of rigid Meccano parts whose mechanical properties are fixed and known. There is the propensity to consume, the marginal efficiency of capital, liquidity preference and so forth, great impersonal data that make the whole economy move in certain ways when they move—but why do they move? It is all macro and no micro. It is too easy to forget that the data are the sums of human decisions subject to human expectations and they change as expectations change. The eminent Polish economist and statesman Leszek Balcerovicz holds that the authors of fiscal stimulus packages must be taking people for Pavlov’s dogs who react predictably to signals because they live by conditioned reflexes and not by calculating reason.

In the January 12, 2009 issue of the American Conservative, David Gordon reviews Paul Krugman’s The Return of Depression Economics and the Crisis of 2008 and wonders why price adjustments in the market should not be allowed to “solve” the recession instead of engaging in a new round of interventions that set the stage for another  bust, and so forth. But why does the economy face collapse at all? Gordon quotes from Krugman’s own work to support the Austrian Business Cycle Theory [ABCT]. Over at the Ludwig von Mises website, Juan Ramón Rallo Julián presents a case that “the current crisis fits perfectly with how Austrian economists have explained these events since the beginning of the 20th century.”


The New Deal disaster

The conventional wisdom is that Franklin Roosevelt’s New Deal got the United States out of the Great Depression. The most obvious objection to this view would be epistemological in nature. How do we know what would have happened without the New Deal? Strictly speaking, we cannot know this through empirical means. This feature of evaluating public policy presents a major problem for any kind of political consequentialism.

A related question is what constitutes a solution. How should a delayed recovery but healthier economy be compared to a faster recovery with negative consequences in the long run? It should not be assumed that the solution that produces the fastest recovery is the best solution.

On the website of the Ludwig von Mises Institute, David Gordon reviews Burton Folsom’s New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America.

Should the government create jobs because businessmen are too reluctant to invest?

Folsom ably dispatches this Keynesian canard. If businessmen were reluctant to invest, precisely the antibusiness attitude of the Roosevelt administration was in large part responsible. Roosevelt supported confiscatory rates of taxation; small wonder, then, that investors were reluctant to embark on new projects.

A similar point about regime uncertainty has been made by Robert Higgs.

But how to explain the popularity of Roosevelt?

…Folsom has a deeper explanation. Roosevelt manipulated welfare programs, especially jobs under the WPA, to gain votes…Folsom here uses to good advantage a long-forgotten book, Who Were the Eleven Million? by David Lawrence, the founder and editor of US News & World Report. Through a county-by-county analysis of the 1936 election, Lawrence showed that voting for Roosevelt varied directly with the patronage and jobs extended.

Gordon does find fault in Folsom’s book for ignoring the Austrian view of  business cycles. This is interesting because in contemporary discussions about the current financial meltdown, the majority of “pro-market” economists do not seem to find much fault with the Fed either. But one does not have to completely subscribe to the Austrian Business Cycle Theory (ABCT) to observe the highly political role the Fed currently plays in the management of the crisis. Neither does one have to be an Austrian economist to question the rationale for central banking and a fiat currency.