Austrian Economics

For those of you who have not heard of Austrian economics, I suggest that you be open to learn more. It’s a philosophy of economic thinking that has been mostly marginalized in the 20th century, and excluded from the halls of power. I don’t believe 100% everything that they say, and I have some difficulty in believing that the free market is always better than public initiatives, but it is surprising how much of what they say makes absolute sense. It’s also refreshing to hear their message, especially in a day when our political class and media is constantly cheerleading the idea that endless debt acquisition is an unmitigated good, and that the banks must be saved, because they are “too big to fail”.  In general I like the message of the Austrian economics that wealth is created by savings and production, not by debt and spending. And, that the government does a very poor job of allocating scarce resources.  They also talk about how the Fed makes things worse by artificially lowering interest rates, for political reasons, thus creating a series of bubbles, and distorting, and damaging the economy.  In addition, they describe how money printing only creates inflation, but does nothing to actually improve the economy. Another interesting point that they make is that recessions are often healthy in that they help to work off the excesses-often created by government policies-and thus allow the economy to rebalance and become competitive again.

All of these ideas are anathema among the media and our political class. But, I find them really to be quite sensible, and to be getting back to basics. There’s a constant effort with our political class now to try to cheat the system by constantly tinkering with it with government controls and spending initiatives.  These efforts almost always backfire, and make the situation worse, as we can see in the present day. Obama has no clue as to how to get the economy going, but then again he is completely dominated by Keynesian thinking. I think that if he brushed up on Austrian economics he would have a lot better tools at hand to do with the problems. What makes Austrian economics is so unpalatable to the political class is the fact that-unlike Keynesian economics which is so popular today-Austrian economics says that there is no free lunch. If we want to get the economy going again, we are going to have to pay down our debts, stop inflating the currency, stop spending so much money, allow failing businesses to go broke, and generally work hard to make our production competitive again. This is a message that the political class does not want to hear, because they are endlessly trying to pander to the infantile desires of the electorate. Much better to go with the Keynesian idea that we can get something for nothing-that there is a free lunch. If the economy is in trouble, all we have to do is lower interest rates, and take out a loan or print more money to “stimulate” the economy back into recovery. If things are bad, just go out and spend even more. This is the, no pain no pain, approach with no sacrifice involved. The Austrian school philosophy is, no pain, no gain. You can see why people, like Obama, whose modus operandi is to endlessly pander to the electorate, find this message of hard reality to be highly unappealing, and won’t touch it with a 10 foot pole.

There’s another aspect to Austrian economics which I like, and that is that it tends to get swallowed less up into the impenetrable jungle of mathematical models. The whole idea of using mathematics, which is so de rigueur among high-level economists, is that it promises to provide a clean, precise and scientific way of measuring and predicting the economy-that it can provide a scientific level of decision and certainty to a field which is normally considered to be quite messy. This idea of mathematical certitude is a seduction leading to many errors and a false sense of dominion over the field.  The reality is that economics is extraordinarily complex, involving individual and mass human psychology, chaos theory, and interrelated events happening all over the world.  There is no way to something this complex can be accurately mathematically modeled with any degree of certainty or precision. At least not with human minds. We may try to delude ourselves by believing that were smart enough that we can fully model the complexities of reality with mathematics, but the reality is that it is beyond our grasp.

Aside from the fact that trying to model everything is just too complicated, with too many intricate nonlinear variables that cannot be incorrectly weighted and correlated, there is also enormous problem of trendiness in academic theories. Academics are prone to the same forces of politics and career ambitions as everyone else, and people have a natural tendency to conform to the prevailing fashion, no matter whether it makes sense or not. Our finest universities have, again and again, stated the most nonsensical things imaginable (the human races are nothing more than a social construct) simply because agreeing with politically correct ideas is the best way that ambitious academics can advance their career. Academics are just as much sheeple as the rest of humanity.  Academics are really not much different from all those people that joined the Communist Party in the Soviet Union, so as to advance their career.

The second problem with relying too heavily on ultra-complex mathematical models to try to understand and predict economics, is that there is a basic law that the more complex something becomes, the more fragile and difficult it is to get right. So, as these mathematical models become ever more complex, difficult and dense, they also become more prone to errors. In other words the more complex it is, the harder it is to get it right and keep it right.  A further difficulty is that, as the economic models become ever more abstruse, less and less people understand them, and less and less people can correct them. Eventually, only a small group of specialized academics is able to understand what the mathematical model means. With less and less people supervising the operation, the opportunities for error, groupthink, fraud and mischief grows.   It is not a good idea to place important decisions in the hands of a small unaccountable priestly class of academic experts. The fallacy of all of this has been shown with a subprime crisis. All of the financial institutions involved in the mortgage markets, hired very well qualified, very intelligent and very well-paid Quants, who were supposed to do their mathematical magic and correctly evaluate risk. They came up with very complex and almost impossible to understand formulas, that in the end were completely wrong in terms of predicting what would happen. They said that there was no problem, and that housing prices would go up forever. This is interesting since lowly me, who does not have a degree in economics, was able to predict the coming crisis just by looking around me.   One reason that people did not question the predictions of the Quants is that hardly anyone could understand their formulas, until they realized it was too late.

So, I find the Austrian school of economics refreshing, because they tend to base their predictions and understanding more on simple reasoning, then none impenetrable mathematical models. I think these models in university economics departments have become a kind of game, or a goal unto themselves. It is something that academics can endlessly tinker with, and write reports about it, thus having their resume. I also think it often becomes a kind of game of-whoever is the smartest can come up with the most complex most abstruse model possible. This is very similar to the writings of a trendy postmodernist like Derrida, who has made a career and an art form out of producing texts that are basically incomprehensible. Because nobody can really understand them, nobody can judge them, and everyone assumes that Derrida must be so smart, that mere mortals cannot understand the complexity and depth of his thoughts. It’s all a bunch of nonsense, but it keeps academics busy going around in circles, and posturing about how unbelievably smart and intellectual they are.

Below are two videos by Mr. Wood. The first explains how Pres. Harding was a man who asked the nation for discipline, sacrifice, thrift, self-denial, and reduced government expenditure. Despite what the propaganda says, it appears that this approach of less actually enabled the US to quickly get out of its mini depression in 1920-21. Can you imagine a president today (either Democrat or Republican) seriously talking about smaller government, and shared sacrifice and denial? I think it shows how much we have fallen.

The second video (below) talks about how myths get created, and often become taken as incontrovertible fact, when in fact they are untrue.

The third video is another example of how the victors rewrite history. We are given the classic narrative that Hoover did nothing, less provoking the Great Depression, while Roosevelt came in with his big socialism, and ended the Great Depression. The reality is that the Great Depression dragged on for more than 10 years, until we entered World War II, when the whole country was so involved in the war effort, that basically there was almost no unemployment. For more than 10 years, Roosevelt’s big government efforts didn’t do anything to end the Great Depression, and I believe they simply extended it. I believe it was Roosevelt’s micromanaging the economy, and government spending, which helped keep the US in the Great Depression for more than a decade. The last video destroys the myth that Hoover was a lassie-faire is do-nothing president about the economy. In reality, he was a man who believed highly in “scientific” management of the economy; in other words the idea that the experts in government knew how to run the system better than the free market did.  In reality Hoover was really a pre-Roosevelt in his economic policy, which is a complete opposite of how he is presented in history books.

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