1) The economy is really, really complex, to the point that people who study professionally are about as good at predictions as a dartboard.
2) Therefore, monkeying with it means pulling levers on a machine you don't understand.
3) While pulling those levers (via stimulus, bailouts, etc) may or may not help, it DEFINITELY costs lots of money.
My conclusion: as much as possible, leave it alone.
Exceptions: "referee" kinds of issues - no stealing from your customers; banks can't have a bunch of CDO debts off the books, etc. Then let the market work it out.
House prices falling? Well I guess we built too many houses. Sucks for the people that are trying to sell, but it's awesome for the people trying to buy. Leave it alone and it will work itself out. Propping up the market just wastes money and delays the inevitable day of reckoning.
Actually, what you're writing about -- the very fact that the economy is so complex that nobody can fathom it -- is pretty much what one of the Austrian gods, Friedrich Hayek, wrote, and he earned a Nobel Prize (partly) for this.
Yes, it's quite impossible for any one entity to understand all that's going on: every project and its priority; every input to those projects, and how readily other inputs can be substituted (aluminum instead of steel? we could do it, but...), and so on.
The only way to work this stuff out is to let the market handle it. And this is exactly what is being done when you see prices fluctuate in response to supply and demand, etc. This allows people to indicate directly just how important each choice is to them.
Generally markets work much better when the "referee" part is a known quantity. We are currently seeing a lot of problems based on the lack of knowledge about healthcare rulings and further government intervention. It is almost like everyone is holding their breaths.
Anatomy, physiology and pharmacy are susceptible to investigation via the scientific method. The economy is not.
Tell that to Esther Duflo, the only rational economist. Unlike just about the entirety of the rest of her field, she actually conducts controlled experiments and gathers data, rather than arguing from a priori assumptions.
Really? She conducts controlled experiments on economies? Gives stimulus money to one city and simultaneously does not give money to an identical city in the same economic climate, something like that?
As Hayek noted in The Fatal Conceit, "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
If you're lucky, you find a few books over the course of your life that completely change the way you look at the world. For me, The Fatal Conceit was one of those books.
Hayek does a great job of showing how society, including its markets, evolve just like nature does. Victors impose their culture on the vanquished, but themselves aren't immune from influences of those they're occupying, etc. The product of this is something of tremendous complexity. That it works is evident, but just like a natural evolved organism (or a genetically-derived algorithm, for that matter), the way that it works is completely opaque.
Today we can't even imagine actually engineering a better human being -- or even a frog for that matter. If we're lucky we can manipulate a few very basic traits. Deeper meddling than that is pretty much assured to produce stillborn offspring.
Why, then, do we persist in the belief that we can fundamentally change the structure of how our markets work, or even completely engineer new ones from whole cloth?
The one problem with this logic is that occasionally leaving it alone, as you put it, can be more costly than taking action. Often when we see the problems that emerge when the government takes action, i.e. with bailouts, we ignore the problems that were prevented.
Agreed: TARP and the related interventions of that period were designed to prevent a cascading failure of the world's financial system, which we know is very bad: http://en.wikipedia.org/wiki/Creditanstalt.
The failure has not been prevented, it has merely been postponed to a point at which it will be vastly worse.
This is a fundamental misunderstanding of economics that politicians tend to have. You can't spend money and change history, all you can do is let the errors f the past be worked out via natural processes, like bankruptcy. If we had liquidated all those fraudulent securities we would have a stronger economy than we do by damaging the rest of the economy in order to perpetuate the fiction that those securities were not fraudulent.
The money used to support these bog use housing securities was taken out of the economy, and that act damaged it more than letting banks fail.
It, notably, also did not free up the credit markets which remain seized. In this case the market was not tricked by a political action that did not address the fundamental issues.
I think you're misapprehending my point (and I wasn't all that clear or let alone detailed).
I agree 100% that deleveraging is what's required, the liquidation of all these bad investments (and for that matter that's what the Austrians recommend).
Here I'm talking about timing and secondary effects. There's a big difference between this effectively happening all at once as banks and other institutions refuse to do business with each other due to the fear of counterparty risk vs. working through this inevitably very painful process over a period of years (traditionally I gather it tends to be about a decade, which is way too slow and painful, but better than the first option).
When you allow the first to happen a bunch of viable companies go out of business quickly because they can't do their day to day financial work. E.g. one of the FDICs actions has been to guarantee non-interest bearing business accounts so that e.g. you can be sure your payroll will happen (even if the bank collapses and a bit of a delay is incurred at worst case).
I understand your point, but I appreciate the term "misapprehending"... like your point is trying to get away!
My point, which may have gotten away as well, is that there will always be a rationalization for the claim that "if we don't act now, the whole system will seize up and it will be a catastrophe!"
I believe this is a perspective that is popular among politicians because it gives them a chance to take Bold Swift Action in the Face of Danger.
But it fails to understand what markets are. Markets, if allowed to operate, will reprice correctly, and pretty quickly, things that are mis-priced.
Thus we can have a huge change in the market price of some particular asset due to new information--- and here's the point-- but we then have a new price.
Politicians think that achieving this new price, eg, the price drop, is the calamity. But it is actually the aversion of the calamity because it brings clarity to all the players and they can start dealing with the new price.
The alternative, to "prevent the crisis" involves regulation which inherently makes prices more opaque and makes it harder for the operators to know what things are really worth.
I am not presuming perfectly efficient markets, they can over react, but it is the ability for prices to move freely based on new information that is the mechanism by which things get worked out.
Seizing control over the market inevitably does more damage, because it prevents transparency about real prices.
It also creates moral hazard because it incentivizes bad activity-- you just have to be "too big to fail" and then your actions have no consequences, or perceived consequences.
The mental image I think people have is that the economy is an engine and it can sieze up if there's not enough liduidity like oil, in it.
But that's not really right. If allowed, it will react fairly quickly and seek the least painful solution to the problem by letting actors price based on how efficiently they can solve the problem.
It is important for institutions that act poorly to fail, so that the following institutions can learn from their mistakes, or institute controls to reign in their excesses.
It is all the external solutions, like TARP and Stimulus, that are the sand in the oil, so to speak.
I've broadened my response, more to make my core point, and realize you may not be disagreeing with me.
BTW, the FDIC increases bank failures by having a government monopoly on deposit insurance. The rates are not priced actuarially and thus bad banks are not incentivized to be good banks less likely to fail. This is an example of the moral hazard. (not to mention the inherent risk of fractional reserve banking in the first place.)
I agree with the nearly all of your points including most especially the moral hazard point: the bailout of Bear Sterns appears to have encouraged complacency on the part of Lehman Brothers and holders of their debt. One of the latter, the Reserve Primary Fund (a pioneer in the field which had been boasting about the quality of the assets they held), "broke the buck" (http://en.wikipedia.org/wiki/Money_market_fund#Breaking_the_...) and as far as I can tell that started a cascading failure of the world's financial system and my approval of intervention at that point and only that point is based on this.
I agree that discovering the new price is not a calamity, my argument is narrowly limited to keeping the financial system going so that process can happen in a orderly fashion. The Great Depression in the US was immeasurably worse due to all the bank failures triggered by this sort of thing (and I've read this seems to be a mostly US phenomena due to regulations which kept banks small and limited to one state (heck, when I arrived in Massachusetts in 1979 a bank couldn't cross county lines; my bank (BayBank) had a holding company on top of their individual county banks)).
The vast, near total majority of "bailouts", like the multiple efforts to prop up residential real estate prices in the US or Cash for Clunkers (which at best moved purchases forward in time and in the latter case amply demonstrate the Broken Window thesis) are not called for.
An edge case of possibly justified intervention might be keeping GM and Chrysler alive so that the failure of the suppliers wouldn't put Ford out of business; that would be another example of a cascading failure, but a hopefully limited one and obviously spending less money by only keeping Ford's supply line intact would have been a lot better.
(And, yeah, I've grown rather fond of "misapprehension"; it's great for situations where someone has gotten part of the point but the rest is succeeding for the moment in getting away.)
Austrian economics always struck me as kind of hand wavy. I never made it more than 1/3 of the way through the Wikipedia article on it before realizing I didn't know what it was talking about.
Does Austrian economics make an testable predictions? Is it based on empirical data? Does it have models? It seems more like a statement of beliefs to me.
They make predictions, but they tend to be more qualitative and less useful for central control than Keynesian policies.
The main reason for that is Keynesian economics reduces the many sectors of our economy to a few simple aggregate quantities - e.g., rather than having demand for housing, demand for pizza, demand for computers, we simply have "aggregate demand". An uncharitable person would say that this is simply because Keynes was not very good at math.
If you simply do this calculus, we should never have a recession. Therefore, Keynesian economics assumes these curves behave in certain tricky ways - this imposes recessions and stimulus comes out as the remedy.
Austrian economics, or at least their more modern variants, does not accept the reduction of a complex economy to simple calculus. It views recessions as being caused by misallocation of resources between sectors (i.e., too much housing, too little something else) and recessions as being caused by a lag [1] in re-adjustment. Fine tuning such a complex system is tricky (not to mention many parameters are unknown), and most predictions would simply be qualitative. Such a system is also not amenable to simple calculus (you need big ODE/graph models), which makes it somewhat unpopular.
[1] An unemployed construction worker may be unwilling to accept a non-construction job or to leave his hometown. Or he may be willing to make such a move, but not know where to move to. Until his attitudes change or he becomes more knowledgeable, he remains unemployed.
Aggregate demand is a money quantity, so it is perfectly well-defined. Keynes never tries to add 1 slice of pizza to 1 computer, and in fact goes into great detail about units and definitions in book 2 ("definitions and ideas") of The General Theory. An uncharitable person would say you've probably never even read it.
I did not claim Keynes ignored units. I claimed he reduced the economy to a few aggregate quantities and claimed they are sufficient to make predictions. Statistical physics does much the same thing - they reduce a complex newtonian system of 10^23 particles to a few aggregate quantities: temperature, pressure, etc, and makes predictions based on the aggregates. Keynes tries to do the same thing, reducing a bunch of sectorial demand curves into a single aggregate demand curve.
Austrians/Chicagoans believe this reduction is unjustified.
I freely admit I've only read a small portion of General Theory, though I've read a bit more by newer Keynesians (Krugman and Thoma are two names that spring to mind).
Okay, I assumed you were talking about the 'aggregation problem' (the aggregation of unlike quantities, rather a common pitfall in economics).
If you agree that aggregate demand is a well-defined quantity, then I'm not sure what you're objecting to. You can disagree with a theory based on this curve, but the curve itself requires no justification beyond a proof that it is well-defined.
An aggregate theory of any sort has two separate pieces. The first is the definition of the aggregate. The second is a a reduction of the more complicated system to a simplified one based on the aggregate, i.e. showing that theories based on the aggregate quantity are sufficient to predict the world.
I'll make the analogy to statistical physics again. You can always define the average temperature and pressure in a vessel. One can come up with simple calculus laws, such as PV=nT and make predictions(remember high school chem?). Sometimes that's an oversimplification, since temperature and pressure vary from place to place within the vessel. Sometimes you can't even use simple gas laws and need to revert to newtonian or quantum mechanics.
The belief of Austrians (and myself) is that for the most part, the simple calculus of aggregates is an oversimplification and hides important details necessary to explain the world.
One example: you can make a two-sector model of the economy, say [housing, everything else]. In this case, demand is a vector, say [housing demand, other demand]. The demand shock is in housing, and that's where a lot of the unemployment lives (there is some unemployment in "everything else" due to knock-on effects). It's fairly clear to see that stimulus will have different effects depending on whether it is a housing stimulus or an "everything else" stimulus, and that stimulus can mostly only help with the knock-on effects.
A theory based solely on aggregate demand is completely incapable of recognizing this, since it doesn't even have the variables to describe it. The AD theory simply studies AD=housing demand + everything else demand, and tries to go from there. If, for example, housing demand = alpha x AD, and everything else demand = beta x AD, an AD-based theory would be very useful since it would just hide unnecessary complexity. If that isn't the case, then an AD-based theory hides necessary complexity and gives the wrong answers.
It's fairly clear to see that stimulus will have different effects depending on whether it is a housing stimulus or an "everything else" stimulus, and that stimulus can mostly only help with the knock-on effects.
This is exactly what is not clear. If Keynes is right, then any stimulus which boosts aggregate demand will have the same effect on unemployment, whether it acts through the housing market or by building Furbies. It is not that Keynes is unable to recognize the distinction; he positively asserts that the distinction does not matter when in a situation of deficient aggregate demand.
A lot of the unemployment is in housing and related industries (~2 million jobs lost in construction), but a lot of it is also not in housing and related industries (~8 million jobs lost total). Every industry save health and education has lost jobs since 2008. The expected effect from a large loss of jobs in one sector, absent the resulting loss in AD, would be an increase of employment in other sectors, since the employees freed from the bad sector would lower the price of labor in other sectors. This is simple supply and demand. The fact that the opposite impact is seen every single time strongly suggests that the adjustment is blocked, per Keynes theory.
That's exactly what I was saying. Keynes assumes he can reduce the world to Calc 101. Austrians/Chicagoans/etc don't.
As for why I think it's clear this reduction is not always valid, a simple hypothetical: suppose the stimulus targeted doctor-delivered medicine. There is no unemployment among doctors, so there is no pool of underutilized doctors to employ. It also takes about 8 years to train a doctor, so any effect that stimulus has on inducing construction workers (or others) to become doctors can only occur 8 years later.
Also, sticky wages don't immediately lead to the validity of AD or keynesianism. For example, suppose construction workers earned $30/hour before the bust and assume Keynesian wage stickiness. They will not take un-stimulated jobs at Walmart at $12/hour or even stimulated jobs at $24/hour and they will be unqualified for Sous Chef jobs at $30/hour or even a stimulated $35/hour. Unless there is some specific job out there that pays at least $30/hour and construction workers are qualified for it, they will simply remain unemployed. Thus, under some circumstances, Keynes own assumptions make his Calc 101 reduction invalid.
Lastly, there is no reason a housing bubble bursting would cause job losses only in construction. It would also harm realtors, mortgage brokers, bankers, etc. It would indirectly harm people who sell things to realtors, mortgage brokers and bankers. Thus, in the recalculation picture, we'd expect the biggest job losses in construction, real estate and mortgages, and correspondingly smaller job losses as you move outward through the economy from this epicenter.
they make qualitative predictions rather than the quantitative ones you need to be considered a science. Of course AE claim that economics is a deductive discipline rather than the inductive ones orthodox economists assume. I sympathize with this view because it would seem that social sciences can never really meet the prerequisites for actual empiricism (controlled variables). statistical regression often has elements of hand waving as well.
Praxeology doesn't reject models or science at all. It rejects reductionism - the claim is that you can't predict human behavior in a complex system based on observations of human behavior in simplified systems.
Praxeology simply claims that you can't predict the economy based on experiments where you stick 30 college students into some iterated prisoner's dilemma scenario.
Austrians strongly favor models, math and science. They just want robust models which are not sensitive to parameters, and econometrics of revealed preferences rather than highly controlled experiments.
I'm a big fan of Austrians (I'm a complete Hayek groupie). But I don't think this is quite correct. It seems to me that Austrians really do stay away from mathematical models, at least. But they do have very strong logical models. The praxeology you refer to is really rooted in inductive logical reasoning.
The difficulty is that these logical arguments depend on the rationality of the actors in the economy. And while Mises acknowledges that the real reasons for a person's actions may not even be known to one's self, more recent experimentation seems to show that at least in some situations, people really do not behave rationally.
Anyway, if you're concerned about a lack of mathematical rigor, but are interested in Austrian ideas, you should look at the Chicago school, with luminaries such as Milton Friedman. The Chicagoans started from Austrian roots, but if anything, their attitude toward mathematical models is the opposite of the Austrians: they virtually invented much of the mathematical techniques that are employed by modern economists.
I think we disagree only on definitions. I'm treating Chicago as a subset (the majority, from what I've seen) of Austrians, you seem to be treating them as a separate group.
I'm also not sure what you mean when you distinguish logical from mathematical models. Could you explain?
Chicago and Austrian schools are separate groups, despite both being on the side of less government intervention. They have different philosophical/methodological roots, and have different histories of their interaction with government.
I think monetary policy is the primary axis upon which these two schools are separated. Chicago is under sway Keynes when it comets minatory policy-- but note this is not the same as keynsianism which is a modern political theory that ignores the repercussions of easement that Keynes warned about.
Austrians are pretty much hard money. There are some interesting comments made by rothbards and Friedman about each other ot illustrate the split.
The schools reach similar conclusions on a number of issues, though.
You already accepted they are separate, I'm just trying to add flavor here, not win a point.
I have to wonder if you're asking too much out of macroeconomics. There's so many variables, you can't do clean let alone repeatable experiments, etc.
It does make testable predictions, but given the above one can always argue about how thus and so made the result irrelevant (either way).
Look at the current remaining faithful Keynesians, who say the only problem with the "stimulus" was that it wasn't big enough while the more honest admit it wasn't Keynesian at all to begin with.
So let me ask you this: can you or anyone else extract rigorous useful data WRT to all this from Japan's two lost decades?
"... the more honest admit it wasn't Keynesian at all to begin with."
Nice to see someone else say that for once. If one reads up on what Keynes considers "stimulus" and compare that to what our politicians have labelled "stimulus", less than 10% or so of our "stimulus" was Keynesian. There's a bit of play in that number depending on exactly how you apply definitions, but you certainly can't get it to 80% or 90%.
I am fairly Austrian and consider Keynesian economics to be interesting but misguided on some fundamental points, but in all honestly I can't consider the utter failure of this stimulus as evidence against Keynesian economics. From what I can tell, he too would have predicted this to be utter failure, so both true Keynesianism and my preferred systems predict utter failure and therefore I can't use this to distinguish the two. I am however coming to view Keynesian economics in much the same way I view Communism, as beautiful theories that can't survive contact with real humans. It's too easy for the government to squint at Keynesianism and see nothing but "Hey, spend more money and take more power!", which is not an accurate reflection of Keynesianism at all, but it's what they see. (There's a kernel of truth to that simplification, but no more; the reality of the theory is considerably more nuanced and complicated.)
Well, I quibble about the "multiplier effect" (which I admit I haven't seriously studied at all), since it's my understanding that it ignores the costs of taking out all that debt (but since I guess this happens in a period when no one wants to borrow anyway ... well, as I said, I haven't seriously studied it :-).
However the "can't survive contact with real humans" is spot on. One thing you left out as I understand it is that you're supposed to pay back the money you borrowed after the economy recovers. This of course never happens.
True, some countries do decide to seriously pay back debt, I understand Canada did a lot not too long ago, and we paid back a lot of our WWII debt, but those are not the same thing.
And countries that run their operating budgets on ever increasing debt inevitably renege on it one way or another (getting conquered was not uncommon in times past), with I suspect the recent technology based boom (say the post-WWII one) being a special case of the game being able to last a lot longer than normal. (I.e. that's our (the hackers) fault :-).
My fundamental quibble is that for the multiplier to kick in, the central spending authority must not only invest in certain things (the part our real-world stimulus failed), but it must invest successfully in projects that also bring value to society. A Keynesian stimulus isn't just paying 10 men to dig holes and 10 men to fill them in, it's paying 20 men to build an important road or something, usually infrastructure, of other importance that will bring wealth to a society. To get the multiplier you must both put money into the otherwise-jammed society and obtain something of value for the money. Skip the second part and you just lost a full 1x factor off your multiplier.
This is where I say that even Keynes could tell you this stimulus would fail. For instance, there is a local road that even as I type is being "repaired" with stimulus money. But it didn't need repair. Where a $1 of stimulus here is supposed to produce, say, $1.20 in "stimulative value", now we're only getting the $0.20 in value. That's not stimulus. That's actively worse than letting the funds sit there, actively worse than the worse case that Keynes fears; now you're destroying capital. Not only does that not help avert the worst case, you actively bring it closer! And this is the "good" part of the stimulus that is actually infrastructure, too.
Granted, not every project wastes %100 of the capital, but an analysis of the actual stimulus shows the vast bulk of it does; most of it essentially puts useless and wealth-destroying institutions on life support so they can continue destroying wealth. You don't have to guess what the resulting consequences are, you just have to look around.
As an Austrian I believe (with some reason) that a central government is not capable of deciding which projects are actually valuable, any more than a central authority can set prices of any other kind. Moreover, in a relatively efficient economy (it doesn't have to be perfectly efficient), the big infrastructure wins would already have been built, leaving only the dregs behind, things that weren't already built because the economy has decided they aren't of value.
So I think right at the heart of Keynesian economic policy is an enormous "... and magic happens here...", right where the stimulating government entity determines how to allocate the stimulation. Which, if you note, rather precisely and correct predicts how the stimulus fails in the real world, which is that it was very inefficiently applied regardless of whose standards you apply, Keynes or otherwise. A Keynesian must believe that this was a poor application of the stimulus concept, but that hypothetically a government usually gets it right, despite my inability to come up with examples of said; an Austrian like me gets to continue believing that governments are foundationally and structurally incapable of efficient allocation of resources.
That said, my family and I have used CCC infrastructure out in the west in times past. Good investment? Don't know, we were vacationing.
A relevant example this many decades in the future? I seriously doubt it, as you note in your comment on dregs. Which is I gather a lot of what happened in Japan in the last two decades: they've now got some really super-duper infrastructure all over for a steadily aging and decreasing population (peaked in 2006 and is now accelerating downwards: http://en.wikipedia.org/wiki/Demographics_of_Japan#Populatio...).
Let me put it this way. Suppose you use the methods of mathematics to determine that 7 x 8 = 56, and you decide to test this by arranging physical things in 7 rows of 8 and then counting them up. Suppose you try this, and you end up counting some other number, like 55. Why could this be? It could be that 7 x 8 is actually not 56, or it could be that your physical experiment was badly suited to test the principle (or badly executed). For example, perhaps you were putting drops of water in rows, and two of them combined into a single drop while you were putting down the rest of the drops.
There are two things to say here. First, if the materials you have are highly volatile and it is incredibly difficult to rule out "things happening that you didn't account for" as the explanation when the results of an experiment appear to disagree with your theory, then it's efforts to advance the theory by empirical investigation are likely to be doubtful and fruitless. Note that if your materials are free human beings and you're observing their responses to various stimuli, then the condition in the preceding sentence applies very thoroughly.
Second, even if [the reason the results of a physical experiment appear to disagree with the conclusions of a theory] is that the theory is incorrect, then it is always possible to confirm that the theory is incorrect by theoretical analysis. If you find that arranging physical objects in 3 rows of 4 and counting them up never yields 16, then you can verify by the methods of mathematics that 3 x 4 is not 16. And it is only once you've done this that you actually feel sure that the theory was wrong; until then, you always have the doubt that your experiment was badly designed, executed, or interpreted.
(Imagine telling mathematicians that you were going to test one of their theorems by physical experiment. Or announcing that you had disproven a theorem by physical experiment. I think you would be laughed at. At any rate, they would want you to turn your results into a mathematical argument, with no reference to your experiment.)
I believe it is with these things in mind that Mises and others say things to the effect that economic theory is not subject to empirical verification or falsification.
Austrian economics is heavily into modeling, even though they don't usually call it that. In fact, its immersion in the ontological, methodological and epistemological issues around economics (and some nearby social sciences) is in many aspects unique in comparison with the more mainstream approaches.
The thing is, most "Austrians" traditionally avoid conventional mathematical models, as well as formal notations, preferring to use plain textual reasoning. In some aspects it's good: they do not limit themselves only to what is easily rendered to math (correlations go well with maths, causal relations not so well (but perhaps manageable), formalizing teleological reasoning about human choice-making is much harder).
In other aspects, the lack of formal notations is really bad: most modern economists have mathematical, not philosophical training, and to an unaccustomed eye the Austrian texts actually do look like non-sensical hand-waving. It takes quite some studying to see the actual rigorous structure and careful choice of terms behind those walls of text -- and I won't go into why there aren't that many incentives for most people to study those kinds of books.
I actually think Austrians would gain a lot from adopting more formal notations (perhaps not of the kind adopted by mainstream nowadays). After all, Hayek himself have failed to finish his own book on the theory of capital (which is one of the distinctive concepts in the Austrian economics), because of the sheer complexity of it. Keeping rigor and precision without the formal language is really hard; and formalized representations might be better suited for independent review and verification.
However, in case of economics, the problem domain doesn't lend itself for easy formalization.
> Does Austrian economics make an testable predictions? Is it based on empirical data?
These are some hard questions about Austrians that pop up quite often. It's true that at its heart much of Austrian economics is based on deductive reasoning from a priori assumptions (the correct analogy, they say, is mathematics, not physics). Theories do not follow from the facts; instead, the observed facts are explained on the basis of the theories we find reasonable, and the best theories are those that provide the best (i.e., the simplest and the most general) explanations. This is not really a uniquely Austrian approach, but I believe it's a good way to approach their research.
However, there's not a single strong view on apriorism even within the Austrian school. Mises indeed was quite a radical a-prioist. Hayek and Menger much less so -- and that, I believe, for a good reason.
Austrians correctly predicted:
The great depression
The rise of Naziism
The decline of the soviet union, and it's fall, and why it would fall, based on economic principles about 50 years before it happened.
The appearance of the housing bubble in 2000, along with the prediction that it would burst and take down major banks.
In my lifetime, when krugman and politicians have been saying one thing, and austrians have been saying another, consistently the austrians have turned out to be right. Meanwhile the politicians in question are no longer in office, and krugman contradicts himself regularly.
Plus, if you will read some austrian writings you will find the are retry straightforward and comprehensible.
Unfortunately, on topics like this, wikipedia has a very strong left bias, so it is best to go to the source.
Start reading the daily articles at mises.org or check out Henry hazlitts book "economics one Eason" which you can get there.
Mises.org also has many major Austrian books for free download
'Peter J. Boettke, shuffling around in a maroon velour track suit or faux-leather rubber shoes he calls "dress Crocs," hardly seems like the type to lead a revolution.'
The Austrian school is not new. Why does Boettke have to be leading a 'revolution' to justify the article? It should be enough to be interesting. Or even just right.
Agree that the Austrian school is not new. The revolution is that it had been out of favor at most US academic institutions, and he's been trying to bring it back. It's a bit of a story that goes along with people beginning to question the standard story line of the great depression, bias in academia, and failures of purely quantitative approaches. Of course, the whole concept of behavioral econ is a bit of a paradigm shift as well, and the intersection of the "imperfectly rational" actor with business cycle theory is quite useful.
So, you're either Keynesian or Austrian? Doesn't that simplify a bit too much or is current economic science really that easy to put into different camps?
Other than that, debates about that issue always remind me of debates about food. Some people seem to have simple models, but can't explain a lot. Some people (Pollan et al.) say that it's too complicated anyway, so here's my personal wisdom. And while some people in white labcoats might know a bit more, people just listen to those selling the hamburgers or the organic tofu.
I find economics, more than almost any other topic of discussion amongst techies, elicits an incredibly strong Dunning-Krueger effect. Mention economics, particularly something like Austrian economics which doesn't have complex mathematical models, and all of the sudden everybody is an expert.
I don't pretend to understand the vagaries, and I tend to read Paul Krugman columns, but the vehemence in which people who are completely unqualified in the field will attack expert opinions is stunning to me.
The error is to assume that krugman is an expert and that people who disagree with him are unqualified.
This is because much of what passes for economics is rationalizations given with a political purpose, and the primary propagandist in that effort is krugman. Remember. This is the guy who advocated that we should have a housing bubble, the denied we were in one, etc.
He is, to be sincere, and embarrassment to the science of economics.... But he is the government designated esparto and so there are millions of people who believe his nonsense because they don't know better and trust the experts.
Actually, the science of economics isn't that hard, nor is it complicated enough to need ot listen to an expert. You can teach yourself. Economics in one lesson is the tittle of a book that im sure you will find enlightening.... And it was written by an expert.
This is exactly what I'm talking about. I only mentioned Krugman because he's often vilified by the same people who get wound up in economics threads.
People on the Keynes side of the equation also get wound up over mentions of Chicago School stuff.
That said, it is weird that you're saying Krugman is some sort of government designated expert when almost every column he writes is critical of the economic policies being made in Washington. He disagreed with the size of the stimulus (he wanted it to be larger), he thinks the Fed has its head in the sand, etc. . . .
And as far as Paul Krugman being an expert, I find it very strange that you would disagree with that. You might disagree with his policy positions but he is most definitely an expert in the field.
Notice I never made any judgements about policy itself. My remark was that people who are not qualified in economics dismiss people who are right out of hand: Krugman is just a good example because he really seems to rile up libertarians and Austrians.
Personally my favourite opposing viewpoints to Krugman are made by Tyler Cowan, I like to read them both. Anyway, it's not my objective to get into a policy discussion, I was interested more in the meta-observation which you so handily provided reinforcement for.
Economics, especially macroeconomics, is a little too big to say which such certainty that "... he is most definitely an expert in the field."
We're talking about the problem of recovering from a leverage based bubble, an area where Ben "Helicopter" Bernanke (Chairman of The Fed) is an expert. If you look at what Wikipedia cites for Krugman's areas of specialty, they will touch on some of the issues of this but they don't seem to be directly related: http://en.wikipedia.org/wiki/Paul_Krugman
Expert; meaning he's studied macro economics, holds a PHD, teaches at Princeton, and is widely regarded as such, I'm aware his specialty is currency crises but it's not exactly like that's the only thing he knows.
That doesn't mean he's right (any or) all the time but it does mean that his opinions, even when wrong usually have a strong basis in established research. I'm using it in the same way that I'd say Bernanke, Paulson, Tyler Cowan, Greg Mankiw, etc. . . are experts.
Again, I don't understand the hostility. I wasn't in fact trolling, I was trying to get into a discussion about why economics gets people so riled up and then you came along and reinforced the point I was making without actually adding to the discussion.
The thing is that I find myself charged up over the topic as well, which makes me wonder why exactly it's such a hotpoint issue, and why it makes people (myself included) feel like they are qualified in a field in which they are clearly not. I mean that in the sense that I (nor, likely you) have any formal economics education beyond reading columns, articles, and perhaps attending econ 101 many years ago.
Think about this- you define "qualified" as having "formal economics education" and yet you feel that you are qualified to say who is not qualified, without knowing whether they have the qualifications you just specified. You presume that I, and others, are not qualified. How would you know?
Edit to ad: This is not meant as a characterization of you, or an attack, etc. It is food for thought. You think that I was not "adding to the discussion" so, I've attempted to construct as neutral of a point as possible.
Well, are you qualified? How does your economics education differ from my guess? Was my assumption correct? Again, back to my original point, it's often people who explicitly aren't qualified who most vehemently argue the topic, particularly by dismissing out of hand various experts as stooges or imbeciles.
I think there's something about the seeming simplicity of the topic that appeals to programmers especially. We tend to be smarter than average and have mastered a field that involves a large amount of self-study. The inner narrative is then "I'm an expert" and somehow that really kicks in when we start talking about economics.
"What I'm really worried about is an endless cycle of deficits, debt, and debasement of currency," Mr. Boettke says. "What we've done is engage in a set of policies that's turned a market correction into an economy-wide crisis."
Which is what a lot of people believed made the 1930s depression Great: first Hoover (an engineer) and then FDR engaged in massive and unprecedented intervention in the economy (pre-Keynes-ian, seeing as how his major work presenting his theories on the subject was published in 1936). (Which is not to say that recovering from over-leveraging is ever easy.)
Those didn't exactly take the shape of the above (from memory, aside from FDR seizing the nation's gold at the traditional $20/oz price and the repricing it at $35/oz), but certainly we're entitled to question a "stimulus" bill that cost more than the Iraq war (http://www.americanthinker.com/2010/08/does_barely_true_mean...) that doesn't even look it will accomplish the traditional (e.g. FDR) goal of it winning elections for the party in power.
Except Hoover didn't engage in either a massive or unprecedented spending. All his public pronouncements and actions show that he was concerned with keeping the budget close to balanced over stimulus, whereas FDR was the opposite.
Total federal spending went from 3.8 to 4.3 billion under Hoover over the 4 years from 1929,1930,1931,1932. Hopped to 5.1 billion in FDR's first budget. 15% is "increased spending", 3% is really not, in the context of rolling over a large institution, it's basically holding even or cutting a little.
Far lower rate of increase under Hoover than under, say, Reagan. Hoover also lobbied for a big tax increase in 1931 to "balance the budget", and typically in economic contractions the states and municipalities cut spending, because they have to run balanced budgets by law most of the time.
Also, the recent stimulus bill was over 1/3 tax cuts -- so it's not really like like they're spending more than the Iraq war. More fun with statistics.
"Except Hoover didn't engage in either a massive or unprecedented spending"
Then I guess it's fortunate I said "massive and unprecedented intervention in the economy".
As for "tax cuts", in Washington that's scored as spending, e.g. you can't in theory cut a tax (rate, of course D.C. ignores dynamic scoring) without making up for it elsewhere. When you apply the "money is fungible" rule and you're running an annual deficit, it comes out the same, either requires the same amount of money to be borrowed to cover it.
Your last (now edited out) point is a bit off since the fight over interpretation of the Great Depression has been going on from the very beginning and looks to be without end. There was certainly a CW, after all the (political) victors write the history, but that doesn't mean it's The Truth.
I don't remember your including Reagan's budgeting in your first draft, so I'll just point out that he was fighting and winning an existential war, something that didn't burden Hoover.
Even on intervention, what'd he do, he held the federal budget pretty stable, he did the Smoot Hawley tarriffs which were large but I wouldn't call them "massive" or "unprecedented"..
What's the huge intervention? I see perhaps slightly more active than the typical President but, considering the massive and unprecedented circumstances, I don't see a whole ton of activity.
Regarding the never-ending debate on the topic of Hoover vs FDR, sure, although I'd say the victory was well-earned, and that documented statistics on government spending are a pretty solid fact.
There's lots more although many not as consequential and unprecedented (i.e. excluding Smoot-Hawley and the massive tax rate increase), as a quick read of the first link will indicate.
Fair points, I could nitpick at those too but I can see where you're coming from. I guess I just see his actions as more "reactive" rather than "intervention". If the economy's falling apart, and the government's intertwined with it, then you're going to see some increased activity from the government.. I tend to differentiate between whether the person's running around sticking their thumb in various holes in the dike (Hoover) or rebuilding the whole dike (FDR).
1) The economy is really, really complex, to the point that people who study professionally are about as good at predictions as a dartboard. 2) Therefore, monkeying with it means pulling levers on a machine you don't understand. 3) While pulling those levers (via stimulus, bailouts, etc) may or may not help, it DEFINITELY costs lots of money.
My conclusion: as much as possible, leave it alone.
Exceptions: "referee" kinds of issues - no stealing from your customers; banks can't have a bunch of CDO debts off the books, etc. Then let the market work it out.
House prices falling? Well I guess we built too many houses. Sucks for the people that are trying to sell, but it's awesome for the people trying to buy. Leave it alone and it will work itself out. Propping up the market just wastes money and delays the inevitable day of reckoning.