Just some of my thoughts on why I am partial to the Austrian school of economic thought when tackling and studying economic issues. It was a response to an inquiry into my views on other heterodox schools and economic perspectives.
tl;dr There isn’t enough information and knowledge to be able to control economies and alleviate market failures. Austrians know this and other schools don’t care.
I’m often labeled as a strict follower of the Austrian school of economics, and this is not incorrect. In my opinion, this school of thought is laden with insights that trump most of (if not all) the claims from other schools of economic thought. This is not to say that I only read or learn from pundits with the same bent or that I am closed minded with regards to my study of economics. In order to be proficient at the craft, I must read and learn from those of different schools of thoughts and perspectives. Humans, though, have predispositions, ideologies, and heuristics, that are quasi-consciously applied to all the knowledge they acquire. Indeed, I put on my Austrian lenses when I read and learn from experts in the field.
Technology ain’t enough
But, what is a better lens than the Austrian? Ironically, this is the school that is rooted in humility. Being humble to the limits of human capacity and knowledge. Information, like any other resource, is riddled in scarcity. Technology can make the acquisition of information a less daunting task, but it is far from perfect. Importantly, tacit knowledge—the localized knowledge that cannot be gathered, but experienced—is still far from the reach of technology’s grasp. Austrians try to remind us that using advanced technology in assisting economists to seek allocative efficiency is, for now, out of the reach of economics proper.
Economists under the “New Keynesian” umbrella set themselves apart with their model that supposedly incorporates much more of the uncertainty that is left out in previous models. In the new dynamic, stochastic general equilibrium model, the attempt is made to include exogenous policy shocks to more effectively address monetary policy by adding in the Bayesian analysis. This is a great push forward, bringing Bayes’ theorem back in style after years of it sitting in the closet. (Insert Austrian lens) However, the prior distribution, or the left-hand side of Bayes’ theorem, is laden with subjectivity, running into a knowledge problem.
It’s a guessing game that has negative effects
The New Keynesians, that flood the Federal Reserve’s workforce, are to be appreciated for their attempts to figure out how to effectively execute monetary policy, but their attempts are all still guessing games. The fact that they are so hesitant in moving the fed funds rate, by only 25 basis points in either direction, at the voted-on time of execution, shows that they have little idea on what they are actually doing. It is all a guessing game. Those at the top, striving to make a name for themselves by keeping “the economy” from collapsing, are indeed extremely smart, well-read, and experienced, but still fall short in the role of economic god, because of their lack of omniscience. Not only are these economists attempting to influence the movement of capital, but also the movement of labor with the full employment mandate. How is this even possible?
Capital is an intricate, delicate, interweaving, structure of capital goods. All the delicate strands of this structure have to fit and fit precisely, which is not the job of an economist. This is the job of the market on its own. In fact, when these delicate strands do not come together and fit precisely, it is often the result of distorted prices induced by monetary and fiscal policy intervention. On the other hand, seeking to achieve “full employment” is also not the task of the economist. With the Federal Reserve doing its part to increase employment and government agencies seeking their own ends to “protect workers” they end up working against each other.
Ah, the knowledge problem again
But if we are going to have monetary policy, I am partial to a rules-based approach that systematically, and unwaveringly, executes open market operations, something like a more rigid Taylor rule. The market monetarists are sympathetic to this as well. But, again, striving for a particular national growth rate of production, or NGDP targeting, assumes that this is a necessary virtue. The Soviet Union had rapid growth throughout the first half of the 20th century; even defied the downturn of the 1930s. China has experienced close to double-digit growth rates in the last couple decades as well. Yet, standards of living were still extremely low for the Soviets and the Chinese have developed towns with no one residing in them. Additionally, GDP is a fundamentally flawed statistic. Not only is it difficult to make the calculations but GDP is used extensively, furthering its detrimental flaws across all aspects of trade, production, and other economic transactions. Just by scratching the surface, we see Hayek’s knowledge problem emerge.
Modern monetary theorists, or MMT, sound convincing as they come to terms with the monopoly of money given to the central bank. These economists believe that markets fail and government can fill the gaps. They have some good ideas on helping unemployed or displaced workers transition into new occupations and jobs. Alleviating frictional unemployment by providing training and infrastructure jobs sounds like a decent idea. But, many of their ideas gives way too much leverage to the government and central bank, like dangerous amounts of leverage. Sadly, much of what they propose is similar to the structure the United States currently has in place. Having no consideration to deficit spending and debt is a short run perspective and passes on the unintended consequences to the succeeding generations. These folks also run into the knowledge problem right from the start as they see themselves high and mighty enough to know how to “fill the gaps” of market failures.
Calculating market equilibriums is a helpful exercise in showing tendencies and market patterns. But, to use them any further as recommendations for allocative efficiency should not be the role of the economist, as it is impossible to calculate without more than a dash of luck. Markets fail. This is a fact. However, from the Austrian perspective, this is the root of progress. Because markets fail, entrepreneurial opportunities exist. Disequilibrium is necessary for entrepreneurial discovery. Prices are marvelous, but they are also not perfect. Yet, they convey enough information to incentivize entrepreneurs to make the decisions that lead to wealth and value creation. Profits and loss coordinate people in conjunction with market prices and provide the natural feedback to the economic actors. The market process is a systematic process in which economic actors discover new and more accurate mutual knowledge to coordinate their actions. It’s a beautiful thing.
Skeptical of government
When economists use their models to address the “market failure” and to think that by applying the models through government or other centralized entity of an economy, seems to be a rather absurd practice. The economy is not orderly like a house or a room is orderly. It is subject to continuous fluctuations, making it hard to predict its directions. This is not a negative aspect of the market economy, but the beauty of it. Our sheer ignorance of what the market economy produces should be embraced not reviled. The government, that is not subject to profit and loss as market participants are, does not have the feedback loops to show that they are indeed resolving the market failure. Government intervention should be viewed with ultimate skepticism as they have not only a monopoly on currency but a monopoly on force. History tells us that with a monopoly on these two can prove to have extremely grave repercussions.
Much of Austrian economics is built on the foundations of the other schools. If it wasn’t for the Keynesians’ demand side approach, there would be less relevance to the Austrian school of thought. If it wasn’t for the classical economists, the Austrian school would have no pillars to hold it up. Many other schools appreciate the Austrian school as well, but they apply their ambitious undertakings to policy which can do more harm than good. Interestingly enough, behavioral economists do not depart too much from the Austrian school, but it is when they apply their findings to policy that it becomes dangerous. They are doing a great job in bringing to light many different heuristics and biases that are at play with decision making. This is very Austrian at its root, but it is still not the end all be all. Much is left out of these controlled experiments. Institutions, circumstances, and preferences (stated or revealed) are dynamic and changing.
Now I can go on and on about the other schools of thought, but, for now, I’ll leave plenty of room for conversation. This short rambled essay leaves out the importance of being interdisciplinary with our field, bringing in politics, philosophy, and institutional economics to the arena. That being said, I am in constant awe with the work of all the schools of thought as I embark on the adventure of applying and communicating economics for the rest of my life.