Thursday, June 28, 2012

Response to Dr Horwitz's thoughts

Dr Horwitz's thoughtful and generous response to my original post is useful in clarifying what a serious Austrian school economist thinks and correcting some of my misapprehensions. It seems to have been a useful exercise, to provide reactions to Austrian commentary from someone much more familiar with mainstream economics. Even better, I now have something I can point to correct what Dr Horwitz rather nicely calls "consumer Austrians".

Dr Horwitz has also provided useful links, such as Peter Lewin's Capital in Disequilibrium. Though not always useful in the sense of being persuasive. I have never been comfortable with the Austrian framing of action in terms of plans by economic agents, in part because it smacks of responding to socialist touting of plans, a sort of high modernist hangover. Reading Peter Lewin's book has crystallised the rest of my discomfort. Speaking as someone in business, the notion of a specific plan is not how one thinks of capital goods. It is about creating a capacity to produce that will (hopefully) pay its way across the flux of commercial circumstances. You do not have a definitive plan, you have an intent and associated estimations and you manage use of the capital goods as you go.

To invest in capital good(s) is to purchase capacity, capacity that typically expands production possibilities. Production possibilities that are not likely to be fully predictable, as some may only reveal themselves in use or once the capacity is there. One does not purchase a production path (except in retrospect) for that is revealed over time. The hope is that the manifested production path is not, overall, below break even for the cost of the capital good. Having a plan, in the sense of pre-specified actions, is typically a way to retard performance through failing to respond quickly and effectively to new information and possibilities.

If the above is included in what is intended to be covered by the term 'plan', then it is highly misleading terminology and should be abandoned for something clearer.

It remains of concern, the way folk who regard themselves as followers of the Austrian school are so frequently so arrogant and abusive (and, according to Dr Horwitz, often don't understand the school of analysis they are so attached to). They are so, fairly clearly, because they believe they are possessors of "self-evident" truths about matters economic which follow from the inner logic of economic life. Since it is not a matter of competing empirical claims, but of intrinsic logic which has already laid bare by the Austrian school, they are left with only malice and stupidity to explain differences of economic opinion.

This embrace of a self-righteous "self-evident" rationalism is exacerbated by the moral commitments that the Austrian school comes with. Harold Demsetz's rather grumpy response (pdf) to an attack by Walter Block on himself and Ronald Coase provides an nice example of economists discussing the positive economics and being subject to a moralising attack from an indignant Austrian.

So consumer Austrians (to use Steve Horwitz's term) act like Eric Hoffer True Believers. No evidence or argument pierces their armour of self-righteous certitude. There is an Austrian form of political correctnes--political correctness as defined by Matt Ridleyof ought implying is--whereby economic phenomena are treated as if they are the way they ought to be for Austrian analysis to be correct and for Austrian normative preferences to be optimal policy. I vividly remember listening to a young Austrian economist tell his audience that "by definition" what government did could not be investment.

There is also a recurring failure to acknowledge that von Mises and Hayek got the 1930s Depression very seriously wrong (regarding appropriate policy response), as Hayek later admitted. With the result that their would-be acolytes are getting the Great Recession wrong, for essentially the same reasons. It is extremely poor advertising for the virtues of Austrian analysis if it attracts such unfortunate outlooks and behaviour.

On the other hand, as noted above, Dr Horwitz's comments will be a useful rejoinder to such. (Who, as Dr Horwitz implies, much of my original comments were directed to.)

Of course, the "Austerians" (the Austrian supporters of austerity), as they [and other supporters of austerity]  have come to be called, are not the only ones recycling past mistakes. If one reads either version of the paper (pdf) by Barry Eichengreen and Peter Temin, The Gold standard and the Great Depression, and replaces gold standard with inflation targeting, one gets an almost perfect description of the current failures of central banks and the mentality behind such; of the current mentality of the US Federal Reserve (the Fed), the European Central Bank (ECB), the Bank of England (BoE) and the Bank of Japan (BoJ). Particularly when the Eichengreen and Temin say (p.19 of the NBER paper):
policies were perverse because they were designed to preserve the gold standard, not employment.
Replace gold standard with inflation target and that is exactly what has been happening in our own time. Indeed, it was worse than that as the Fed and the Bank of France were not even "doing" the gold standard properly (pdf). Just as the ECB and the Fed are now not even doing inflation targeting properly. In all these cases, the central banks are and were being too restrictive. They acted and are acting, in effect, like conventional monopolists; underproviding their product in order to maximise return--the return being the "sound money" reputation of the officials involved and, after disaster unfolded, in refusing to change course, seeking protection from explicit or implicit responsibility for economic disaster.

Dangerous presumptions
Which brings me to my first specific disagreement with Dr Horwitz, his claim that:

[Read the rest at Critical Thinking Applied and at Skepticlawyer.]

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