Austrian Economics is No Longer the Unheard Music
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Readers of a certain generation will remember the seminal 1980s rock band X, featured in Penelope Spheeris's great documentary The Decline of Western Civilization.
Punk and alternative bands in the Tipper Gore era struggled to get record deals, radio airplay, or even hire venues for gigs at their own expense. "The Unheard Music," a song from X's 1980 album Los Angeles, captures this struggle with the lyrics "We're locked out/of the public eye/no hard chords/on the car radio."
So a DIY ("do it yourself") ethic emerged among bands like X and Black Flag. They bought dilapidated old vans and booked their own tours on the fly, using word of mouth and sleeping where they could. They bypassed radio station executives and snuck their cassette demos into late night rotation through sympathetic disc jockeys like Rodney on the ROQ. They built their own PA boxes and printed their own T shirts. They even created record labels like Dischord, SST, and Alternative Tentacles which would go on challenge the major studios.
Ultimately, over time, they earned grudging respect from the music industry. They paved the way for countless local garage bands and aspiring YouTube musicians to work outside of traditional institutions and channels.
There is a tortured analogy here. Austrian school economists in the US once faced similar obstacles, and similarly persevered to make their mark on a sclerotic profession badly in need of a shakeup.
Largely shut out of university economics departments after the Keynesian revolution of the 30s and 40s, brilliant Austrians like Mises and Hayek had to find audiences and funding where they could. Organizations like the Volker Fund and businessmen like Leonard Read made it possible for Mises and Rothbard to survive financially while producing books we cannot imagine not having today. Benefactors like Henry Hazlitt brought Austrian ideas to the public in the pages of The New York Times and Newsweek. Popular authors like Ayn Rand provided an intellectual defense of capitalism and publicly praised Mises's Human Action.
DIY Austrians worked their way into the edges of academia, started and published their own journals, and did end runs around the gatekeepers to reach wider audiences. And slowly, over time, they succeeded.
In the mid-twentieth century, the Austrian school reasserted itself in its new American home and planted a flag. Mises became a US citizen. Rothbard published Man, Economy, and State in 1962, the first wholesale Austrian treatise in decades. The South Royalton conference in 1974 created a coalescence of scholars who were prepared to think of themselves as a resurgent Austrian school, including Hayek, Rothbard, Israel Kirzner, Ludwig Lachmann, and Hazlitt. The Thatcher and Reagan years brought about the rhetoric, though not the reality, of market liberalism.
Progress since then, particularly in publishing and academic employment for Austrians, has been steady. But the digital age accelerated everything, making the great Austrian books and articles available free to anyone around the world with an internet connection. Austrians today have insitutional and financial support. And Austrian PhDs work in academia, business, banking, finance, and investment houses in numbers unthinkable just a few decades ago.
Of course the Paul Krugmans and Noah Smiths and Gregory Mankiws still dominate the profession. Bad ideas still dominate university economics departments. But signs of the end of that dominance are everywhere, even if those signs manifest in illiberal populist ways economists don't much like.
Austrians today are right to ask: is supposedly mainstream economics doing any good? Does it benefit society, beyond providing sinecures for academics? Does it accurately predict anything? Does it help us discover truth, or become more prosperous?
Mainstream economists remain mired in mathematics and statistics, yet unlike mathematicians they fail to tell us much about the world. They view human action only in aggregates. They attempt to express economics in mathematical equations. They criticize Mises as a "literary economist." They force backward-looking data into forward-looking models. Yet perversely all of this data and empirical testing never seem to explain the booms or time the busts.
The dismal science is in trouble, and it deserves to be in trouble. Economic axioms cannot be flouted without consequences—which means the central insights of the Austrian school will prove correct over the coming decades.
- Political money will unravel; commodity money will reassert itself. Central bankers will force depositors into the bizarro-world of negative interest rates, destroying capital and dramatically hurting savers. Central bankers similarly will do everything they can to avoid a stock market crash. They will once again buy assets and prop up equities, while telling us their fiat currencies are healthy—even as they quietly buy more gold than they have in decades.
- Governments, businesses, investors, and individuals will respond to loose monetary policy rationally, by borrowing and spending instead of saving and investing. M&A, stock buybacks, and other forms of financial engineering will attempt to extract tiny amounts of value from moribund companies and industries.
- Federal Reserve officials will disavow outright monetization of government spending (i.e. Modern Monetary Theory), even as they partially practice it with an increasingly debt-financed federal budget. All of this new money and credit will not be neutral, but will primarily benefit political and economic elites.
- This monetary alchemy (h/t Nomi Prins) will not work. Consumption will not magically substitute for production. Demand-side stimulus, whether fiscal or monetary, will produce only ersatz and short-lived economic growth. Underlying incentives will continue to matter.
- Political movements in the US toward greater degrees of socialism and bigger entitlements (e.g. single payer government health care) will encourage the gross misallocation of resources, just as Austrians warn.
- Bureaucrats, far more powerful than presidents or Congress, will steer the economy based on political expediency and without regard to market signals.
- "Capitalism" will be blamed for any economic crises, whether in jobs, housing, energy, stocks, or consumer prices.
- Positivist economists will explain everything after the fact, with no acknowledgement of their own complicity and lack of foresight.
Nobody wants, or hopes for, a severe economic contraction. Nobody wants to see people suffer from bad political and economic policies. But debt and entitlements are unsustainable. The Fed's swollen balance sheet in unsustainable. Moving toward socialism is unsustainable. Austrians will be vindicated, but will they be heard?