Austrians ascendant?

Many see the Austrian school of economics as a fringe perspective. George Selgin links to an intriguing counterpoint to that idea. The outgoing President of the Kansas City Federal Reserve Bank has given an interview to the New York Times, which Selgin says is in close concordance with Hayek's own thinking about money and the economy:

“The central bank has to be, in a way, a neutral player, and yet we find ourselves trying to stimulate, and the effect is further leveraging,” he said. “If I thought zero rates would bring jobs, I’d want it forever. But it distorts the economy.”

He continued, “In 2003, when we lowered rates and kept them there because unemployment was 6.5 percent — look at the consequences.” Those consequences included the nation’s mortgage feast, followed by its current economic famine.

Selgin comments:

...I can't help feeling that Hayek deserves a lot more credit than he's getting for having put forward a theory which, whatever its general merits may be, seems to fit the recent boom-bust experience so well. So far as I'm aware, Mr. Hoenig never mentions Hayek, and may not even be aware of the overlap between his own thinking and Hayek's theory. Bill Woolsey, on the other hand, knows about the ABCT, sees the fit to recent experience, but remains a "skeptic." I wonder whether he is merely indicating his disagreement with those more fervent proponents of the theory who seem to insist that it is the only valid theory of cycles.

In any event it seems to me that anyone who believes that the recent bust is to some important extent a consequence of past malinvestment that was sponsored by easy monetary policy ought to acknowledge the fact that F.A. Hayek spent much of his early career warning against this very possibility, and later won a Nobel prize for the work in question. That something akin to his theory, if not the very thing itself, is now subscribed to by many non-Austrians, either with no mention of Hayek's contribution or with somewhat grudging acknowledgment of it only, seems to me both strange and unfair.

Unfair, yes, but also one of the great strengths of the Austrian perspective. The Austrian theory of the business cycle, it seems to me, offers the most intuititvely satisfying explanations of the last decade. Many professional economists disregard Austrian views in favour of economic aggregations and statistical models that feel scientific, even though they are not. But the Austrian perspective is making remarkable headway in a very short space of time.

Witness last month's Hayek-Keynes debate, which needed two overflow halls to cope with excess audience. It has been repeated twice on Radio 4. How many people will have been exposed to Hayekian ideas for the first time thanks to that? Would something like that even be imaginable a few years ago? Online resources like the Ludwig von Mises Institute's breathtaking digital library – all available for free, of course – allow anybody with an internet connection and a sharp mind to pick up some Mises in less than a minute. And the awfulness of the last few years has made many people think twice about state-controlled central banking. In Ireland, for instance, many people attribute the growth of the property bubble during the Celtic Tiger years to the easy money that was available at the time.

Somebody else (I cannot remember who) said recently that the big new development is that everybody now has to have an opinion about Hayek. A slight overstatement, but it's true that Hayekianism is now more debated than in any other time in recent decades. Hayek isn't all of the Austrian school by a long-shot, but he may be the thin end of the wedge.

Marxism died as a creed in the West once ordinary people saw the atrocious real-world consequences of the idea. Keynesian ideas are less brutal in practice, and less obviously destructive. But, someday, people might look back at this time in history and ask the same things that people today ask about the Soviet era: Who were these people who thought they could plan the economy from the top down? Who could think that breaking windows or being invaded by aliens would be good for the economy?

We have a long way to go, but we may just be getting there.

Source: http://feedproxy.google.com/~r/TheAdamSmithInstituteBlog/~3/8kOkMjnM5Wk/

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