Thomas Mayer: “I am an Austrian in Economics”

September 16, 2011

by Andreas Hoffmann

In today’s publication Thomas Mayer writes that he is “an Austrian in economics.” Mayer is the chief economist of Deutsche Bank Group and head of Deutsche Bank Research. Mayer argues that Austrian theory fits recent events well.  He suggests that

“Failure of the liquidationists to overcome the Great Depression of the early 1930s prepared the ground for an era of interventionist economic policies. Modern macroeconomics and finance nourished the belief that we can successfully plan for the future. But the present crisis teaches us that we live in a world of Knightian uncertainty, where the ―unknown unknowns dominate and our plans for the future are regularly thwarted by unforeseen and unforeseeable events.

— In a world of Knightian uncertainty, financial firms and investors need larger buffers to cope with the unforeseen, i.e. more equity and less leverage.

— In a world, where markets are not always liquid but can seize up in a collective fit of panic, financial firms and investors also need a greater reserve of liquidity.

— Regulation can help to achieve both objectives, but it needs to realize its limits. First and foremost, firms should have the incentives to follow sound business practices. The best incentive is to make failure possible. Hence, we need resolution regimes for financial firms.

— In a world where people have imperfect foresight and do not always behave rationally, and markets are not always efficient, we need to accept that economic policy cannot fine-tune the cycle.

— For us economists, the lesson from recent events should be to rely less on the development of theories by ―deduction (like in natural sciences) and to apply more ―induction (like in social and historical sciences). Failure to study history makes us repeat the mistakes of the past.”

While not all of the above statements really fit the general Austrian view – some seem quite Schumpeterian, though (emphasis on history) -, he basically says that much of macroeconomics has to be rebuilt to be useful in the real world. This comes from one of the most influential economists in the private sector.

He further writes about the ABCT: 

“The historical review of the Great Depression leaves us with a disturbing conclusion: The Austrian credit cycle theory seems to have a better fit to events than Keynes’ theory of the liquidity trap and power of fiscal policy.”

Therefore, he concludes:

A revival of Austrian economics could be a good start for such a research programme.

and addressing the crisis he concludes:

“Unfortunately, however, the battle cry of the public and politicians is for more regulation: regulate banks, regulate markets, regulate financial products! But those who push for blanket regulation suffer from the same control-illusion that got us into this crisis.”

He is right!

5 Responses to “Thomas Mayer: “I am an Austrian in Economics””

  1. Jose Abad Says:

    Extraordinary piece. However, as Andreas suggests, the importance of the article relies on who its author is rather than on its content.

    Essentially, Mayer is saying: “Hey, guys, your (mainstream) work is useless for us, practitioners; further, given the impact it’s had on the institutional design of economic policy -monetary policy in particular- your theories happen to be harmful as well”.

    The days of neoclassical economics are over, clients (not competitors) said.


  2. I agree with José

    It does not matter whether he represents a purely Austrian position here. There are obviously views that are quite at odds with AE.

    But he acknowledges that the core ABCT is useful to explain certain patterns and real world phenomena.

    Maybe he also likes some other theories such as that of Minsky and Schumpeter.

    It is encouraging that important figures in the private sector find research based on Austrian ideas useful.

    Or as José said, the clients find use in the product.

  3. Ekkehard Says:

    Knightian Uncertainty is the magic word to me in this piece. Frank Knight is Buchanan’s doctoral father, if I am right.
    His recent contributions on Old Chicago are worthwhile to discuss, too, in this respect. He comes to a very similar conclusion as outlined in the Mayer paper.
    I do not know if Buchanan’s recent papers are published, yet. Does anybody know more?

  4. Mario Rizzo Says:

    Just to set the record straight this is *not* the Thomas Mayer who is emeritus professor at UC Davis.


  5. A big “Jawohl”! Von Mises himself created the construct of an evenly rotating economy. In Against the Gods Peter L. Bernstein granted the origin of modern capitalism (versus mere merchantry) to Pascal and Fermat who created the mathematics of risk calculation. That placed entrepreneurship in the zone of the uncalculable uncertainty. Who wants a lightbulb? Who wants a computer? Who wants a cure for cnacer? Who wants new sweatshirts that look faded? Who wants a single-engine business jet … no way to predict it…


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