Krlatham’s piece on this Slate article is excellent, and exposes most of the strawmen and mischaracterizations in Yglesias’ article. However, the article was so badly misinformed it deserves a few follow-up comments.
“He was referring to so-called “Austrian economics,” an idiosyncratic passion of his and a set of beliefs that put him at odds with the vast majority of well-known economists of all ideological inclinations.”
i.) This is the academic equivalent of “might makes right.” Shouldn’t we be more concerned about truth-claims themselves instead of their respective number of adherents?
ii.) We shouldn’t find it suspicious that most economists either 1. work for the Fed itself or 2. teach in a heavily subsidized university? To the contrary, these seem like pretty good reasons why most economists might have incentive to preach centrally-planned macroeconomics.
iii.) “The vast majority of well-known economists” happen to be odds with historically orthodox economics, pre-Keynesian Revolution. By ignoring the importance of prices, by and large, Keynesians severed any connection they might have to orthodox (price-based) economics.
“Many of these thinkers are obscure today…”
i.) Yglesias may consider Austrian thinkers obscure, but their contributions certainly are not. I list a few of the more important ones.
ii.) Menger contributed to the Marginalist Revolution, essentially allowing for an accurate understanding of value and utility. In so doing, the Diamond-Water Paradox was solved, something that had frustrated economists for about a century. This new subjectivist understanding of value destroyed the labor theory, and paved the way for economics to move forward.
iii.) Mises correctly showed the impossibility of socialism in 1922 by showing us the inability for a socialist economy to calculate rationally without prices.
iv.) Interestingly, Yglesias mentions Hayek’s Nobel Prize, but neglects to mention that this prize was in part for the very theory that Yglesias criticizes—Austrian Business Cycle Theory.
“Most notably, it seeks to build a strong ethical case for strict libertarianism without admitting that this would lead to any practical problems whatsoever.”
i.) It’s not as if Austrian thinkers haven’t addressed the potential objections to free-market economics.
ii.) Perhaps Yglesias should familiarize himself with these.
“Therefore, along with rejecting the legitimacy of any intervention to protect the poor…”
i.) It depends on what he means by “protect the poor.” Austrian economists believe that everyone’s private property should be protected regardless of his or her wealth.
ii.) In fact, the very boom-bust cycle that Austrians talk about is particularly devastating to the poor. Economic fluctuations hit the poor harder because they have less savings. Additionally, they are often on fixed-incomes which exacerbates the pain of inflation. Finally, they are often the last to receive new money created by the Federal Reserve—in other words, their wages often lag behind price increases.
iii.) Consequently, one of the best ways to help the poor would be to implement the very policies that Yglesias is ridiculing.
“Spending patterns shift all the time without sparking a recession. People stop buying BlackBerrys and they buy iPhones instead. Or people stop buying boot-cut jeans and buy skinny jeans instead.”
i.) It is correct that spending shifts between different consumer goods. This isn’t the problem. Austrian Business Cycle Theory claims that the problem occurs when spending is pulled in two different directions: spending on consumption goods like BlackBerrys/iPhones AND investment goods like backhoes.
ii.) Why should we expect an enormous cluster of errors by many entrepreneurs at the same instant? *This* is precisely what Austrian theory explains.
“…discredited by the Great Depression, in which the bust was clearly not self-correcting and country after country stimulated real output by abandoning the gold standard and engaging in deficit spending.”
i.) Which is precisely why the Great Depression lasted for around 15 years.
ii.) Meanwhile, the depression of 1920-1921 was sparked by a downturn more severe than the Great Depression. No fiscal or monetary policy was employed, and recovery ensued within 6 months.
“Unfortunately, however, it’s the Austrian school, which preaches despair and demands no action at all, that has the most effective political champion and the most dedicated followers.”
i.) The Austrian school preaches no action? To the contrary, it preaches the abolition of a centrally-controlled money supply and a return to a legal system which requires the reserve requirement to be 100%.
ii.) If there was a central entity that controlled the number of shoes in the economy, Austrians would advocate for abolishing that institution as well.
“…while the European Central Bank’s insistence on pursuing a somewhat Austrian-style course in Spain and Italy is creating a deepening crisis.”
i.) How can the central bank pursue a course that requires the abolition of the central bank?