I will start this essay off with a disclaimer: I am not an economist. I’ve studied economics on a basic collegiate level, and as such my economic views are not of any one school or movement.
When I first joined the political blogosphere, I found the term “Austrian Economics” thrown around a lot by libertarians. The support for this school was and is common among libertarians, and when I first noticed this I was offput. It seemed to me that the Austrian school was nothing more than an excuse by which laissez-faire could be defended. This essay is an answer to my concern. I believe that believers in the Austrian School need to recognize their ideological bias, and that the Austrian school must be made into a normative, empirical movement which reflects the methodology of F.A. Hayek, Karl Menger, Eugene Bohm-Von Bawerk, Russel Roberts, George Mason, and Arnold Kling. At the same time, I think Keynesians and Synthesis economics need to give the Austrian school a fairer look.
Part I: Making Austrian Economics Academic.
Many of the issues I have with the Austrian School come from the fact that many bloggers and pundits who subscribe to it tend to do so as virtue signaling for their political ideology. There is very little real difference between Austrian capitalism and Keynesian capitalism; both can be completely integrated into libertarian constitutionalism, and both legitimately protect rights to life, liberty, and property in the Western conception. The moment that Austrians recognize that the center-right is a better friend than foe, the School will likely find itself in a better position to conduct research and develop theory that supports its views. Russ Roberts is a fantastic example of an Austrian Economist who can and does converse with Keynesians in an honest, academic, and open-minded way. He recognizes that Keynesianism dominates modern economics, and with humility disagrees with the mainstream.
Further, I think that the Misesian branch of Austrian economics should be philosophically examined, but academically abandoned. Praxeology, as a science, is difficult to understand given modern conceptions of scientific method (as it is essentially non-falsifiable). Further, Mises’ work is better expressed through new research into the Austrian ideas that were refined by Hayek. It is very much the case that Mises was more important in the socialist calculation debate than in the development of a distinct opposition to Keynesian economics. The empirical pursuit of economics is both practically and academically necessary, and it gives much leeway to dangerous leftists to abandon empiricism. After all, a Marxist would like nothing more than to say “that doesn’t matter” in response to the argument that capitalism works.
Part II: Why the Austrian Perspective should be explored by Keynesian and mainstream economics.
I was one of the first of this political community to jettison commitment to Austrian Economics in the original “Centre-Right” movement. To this day, I’m relatively fluent in Keynesian ideas, and I understand how and why it is popular. However, I think that Keynesians can learn certain things from Austrians, especially in terms of economic philosophy, political economy, the business cycle, knowledge problems, and individual well-being (especially in the face of great technological shifts).
Beginning with Economic Philosophy, I think Keynesians have neglected the question of methodology and the way in which modeling is done. I think that methodological individualism is, perhaps, a bit extreme: groups can (and do) make decisions in the short run. However, Keynesian economists often speak of an economy far too abstracted from reality. In 2008, we saw a variety of negative events occur in sectors outside of housing, alongside a huge technological advancement: the smartphone. At the same time, we saw a weak recovery despite expansionary fiscal policy, and a risky anti-monetarist action by the Fed to increase the excess reserves of banks while simultaneously slowing inflation through interest-on-reserve policy. Both of these events are championed by Keynesians as a major victory akin to the Great Depression; but, in much the same way as the Depression, it is intellectually dishonest to neglect the paradoxes of the former and the uncertain long-run effects of the latter. John Taylor, though not an Austrian, makes a great point in noting the low fiscal multipliers of almost every federal expansionary tool (often below 1, implying waste of money). If Keynesians truly advocated for the empirical, scientific pursuit of economics, then they might have greater caution about advocating for many of the policies they deem necessary in a recession.
Further, I think there is something truly problematic about the ad-hoc blend of Economic theory and research that exists in academic economics. It is my opinion that the separation of science and engineering might do well if emulated in economics: divide the subject into a research-based, statistical task concerning public policy and private action (economic “engineering”), and a historically-minded, theoretical analysis utilizing more formal logic, philosophical concerns, and case studies (economic “science”). In general, this would separate things like Animal spirits, the Invisible Hand, the Homo Economicus, Rational Expectations, Optimizing consumers, Extended order, and the Iron Law of Oligopolies from things like Recession policy, Fed action, the Laffer Curve, Banking, Finance, Microeconomics, and International Economics. I tend to think that calling Economics a “science” is an insult to true science; its roots are fundamentally human, and it is much closer to History (a discipline that analyzes the empirical facts of humanity and creates judgements based upon correlation and suspected causation) than Physics. Even a move toward looking like Psychology would be preferable (as Psychology contains several respected and equal schools of thought rather than one mainstream one, including Freudians, Behaviorists, Humanists, Trait Theorists, Neuroscientists, Social Psychologists, and Evolutionary Psychologists).
In terms of political economy, I think Keynesians should better recognize the empirical arguments made by Austrians concerning government. Economics in general has a tendency to view the government as an institution not bound by constraints or non-utilitarian incentives. The fact of the matter is that economics cannot remain in the short-run, and that short-run utility can very well create long-run maleffects: one must only look at basic Pigouvian arguments to understand this. It may very well be that the marginal political benefit of Keynesian action (or any other public policy) could be to the right of the marginal public benefit; given the fact that recessions essentially allow for a near-vertical supply of public policy, we must be cautious of the institutional constraints in which we work. Finally, I think that Keynesians too often ignore how little their policies are followed. They take victories to be absolute, and in a progressive-era fashion, tend to view the state as able to enact their vision. I cannot tell you the last time a president actually engaged in true contractionary fiscal policy; the Fed, even, has been bad at this (though better, the Greenspan years are debatable, and Bernake’s strategy seems to give a perplexing amount of long-run risk-leveraging to the very institutions that misused their leverage).
This leads directly into my observation that Keynesians do not consider Austrian institutional alternatives to the KBCT. While I am not a believer in the ABCT, I think that Austrian concerns with the KBCT are legitimate and testable. Look, it is all too true that Keynesian economics and monetarism could cause things akin to malinvestment, and I think that observations of softer, infrequent recessions are not scientifically valid. Yes, the Panic of 1873 was worse than the S&L Crisis under Bush 41. However, life expectancy was 20% lower in 1873 than in the 90s, and there wasn’t half the technology–both in terms of economically useful and personally useful technology–that existed then. A recession will always be solved sooner when one can end their unemployment by telephone, and with the internet, the resources with which the workforce can return to work are more than ever before. Education has increased, making decisions more rational and economically sound; the Crash of ’29 was not due to some abstract “market failure” so much as it was due to the stupidity of virgin investors given new, too-powerful tools with which they could invest their money.
Further, there is no structure by which economic experiments can be verified; an economy might bounce back after federal expansionary policy. But do we have actual ways to prove that a placebo would not have been more effective? Let’s say Obama says he is going to spend money, create public works jobs, increase unemployment payments within a year, and GDP figures are put out showing things were on track to improve. To what extent does it matter, economically, if he actually does those things? Does Keynesian Economics pass a placebo test? I think Keynes himself might be a little intrigued by this, given his dependence on irrational “animal spirits” in proving his theory. Recognizing my own bias, I’ll even argue that perhaps Adam Smith’s “invisible hand” could just as easily have been due to the wild explosion in research and education experienced during his time. Further, if we assume that both the theories of Animal Spirits and the Invisible Hand are true, why not pursue a supply-side approach to Keynesian expansion so as to complement the action of the Invisible Hand? (Note: I am not referring to the 1980s school of the same name). Having wage-supplements and incentives to lower wages and/or hire workers would not only be economically viable (pushing the AS Curve rightward), but politically feasible. It is my opinion that these policies would be explored with greater interest if the KBCT were not regarded as so scientifically absolute.
Penultimately, I would like to touch upon the fact that Keynesian economics tends to equate aggregate economic well-being with individual well-being. This assumption works in the short run, but it neglects its own long- and mid-run effects. Looking toward the future, I am increasingly cautious of the belief that aggregates can represent individual preferences. Let us take the example of a massive bout of techno-unemployment in a certain sector. If a recession occurs, one might expect government policy to assuage an excess in supply. However, consider the fact that propping up the market might prevent the return of human workers to said sectors. I say this not as a protectionist, but as a person who believes that technology and humanity must unite in order to continue the extension of man’s person onto the physical world. The creative solution to such a recession—say, the implantation of robotic devices into workers as marketable employees—might be prevented by a government-led protection of the market from recession. We may very well be led on a road to serfdom through corporatist autonomous oligopolies supported by government’s welfare for consumers. The distortional effects possible are tremendous, and the modern cell service model is a smaller example of such distortion. In the late 1990s, Motorola launched 23 geosynchronous satellites into space to create a satellite phone network: a Motorola satellite cell phone could have service anywhere on the planet. However, because of regulations against greater private spaceflight and subsidies to traditional tower-network models, we have been left with a cell phone infrastructure that may or may not be very efficient in comparison to the satellite phone improvements that could have occurred.
Finally, I think the one major aspect of Austrian Economics that must be considered by Keynesians is that of the Hayekian knowledge problem. There are empirical, psychological, and philosophically liberal reasons to support the notion that individuals are unique, and that the networks created by them are likely to be efficient. Especially given the rise of the internet, we should be wary to assume that technology will result in a hive mind of an aggregate individual momentum. The internet is a medium by which individuals can express views of what is to be done through their own subjective interpretation of objective reality, and the networks that individuals create are now existent within a virtually unlimited supply of individuals and knowledges. We must be wary, as scholars of economics, of tampering with the networks of individuals and the economic phenomena they might create given certain conditions. It is impossible for an economist to know if a persona seem online is genuine; however, the individual online is presented with a virtually unlimited supply of assumed-to-be-genuine persons, and chooses to interact with those they find and those they need. This seeming paradox is resolved by the fact that the very observation of human action does not take into account the internal reasoning behind said actions, and therefore it is very much impossible to plan such interactions, much less an economy. In short, if the Austrian School shows us anything, it is that humility should be the foundational pillar of economics.