A triple whammy for Austrian economics

by Sandy Ikeda

An article appeared in the Arts section of last Thursday’s New York Times called, “Ivory tower unswayed by crashing economy.” I found three things in particular that were dismaying about it.

The reporter argues that academic economists have been slow to change their minds about the virtues of the free market, in spite of recent events, when she says,

Free market theory, mathematical models and hostility to government regulation still reign in most economics departments at colleges and universities around the country.

So, first, is the common bromide that the free market is primarily responsible for the economic mess we’re in. But what I find almost as disturbing is the way she tacitly equates free-market economics (leave aside for a moment the appropriateness of the term) with mathematical economics and in particular neoclassical mathematical economics.  This is something I’ve encountered a lot lately.

Finally, because free-market equals neoclassical mathematical economics, the only alternatives she mentions in the article are naturally those that are anti-market.

There are a handful of departments that have welcomed alternative theorists, like the University of Massachusetts, Amherst; the University of Massachusetts, Boston; the University of Utah; and the University of Missouri, Kansas City (where the Heterodox Economics Newsletter is published).

Economists during an economic crisis are like weathermen during a hurricane. And like many of my colleagues reading this, I’ve been doing more speaking before public audiences in the past six months.  I’ve found, however, that there’s much hostility out there not only to the idea of free markets but to economists in general, and even much skepticism about whether economics is a science.

Fighting the public conflation of Austrian economics with the mainstream whenever the opportunity arises is one thing Austrians can do to help turn the intellectual battle around.  This is an instance in which methological issues need to take center stage.

20 thoughts on “A triple whammy for Austrian economics

  1. The title of the NYTimes article was maddening. Now is the time for simple truths. The Bush years were not pro-market. Big Business is not pro-market. Bush implemented a fascist economic model. The Bailout and the Stimulus are hair of the dog.

  2. As long as Austrians ignore the existence of market failure, they will not be taken seriously.

  3. Does anyone else find it funny how they’re so quick to blame free markets for the current crisis, and so quick to give Bill Clinton all of the credit for the boom of the 1990’s? They’ll also ignore examples of extreme market success like China and India. Yeah, if free anything is the problem, then I’m proud to be part of the problem.

  4. The example of China suggests that a mixed strategy is better for development than is a more market-oriented, “Washington Consensus” approach. I don’t know enough about India to comment on that example, though.

  5. China of the nineteen-eighties, an era of deregulation and entrepreneurship, suggests that a free market approach is preferable.

    Even though China recorded impressive growth in the nineties (an era of state led growth), the income of regular chinese did not grow as fast as in the eighties and several poverty measures like adult illiteracy deteriorated.

  6. This would look different in logs, of course, but it’s difficult to argue that growth in the 1980s was greater than growth in the 1990s:

    Literacy in China in 2007/2008 was around 90%, so literacy couldn’t have fallen much since 1990.

    The poverty rate in China fell almost as fast in the 1990s as in the 1980s.

    Sala-i-Martin presents evidence that although inequality has increased, the entire distribution of income moved to the right between 1980 and 1990, and moved to the right again between 1990 and 2000.

    Finally, the examples of the Asian and Celtic Tigers, particularly when compared with Argentina and Mexico, are further evidence that the mixed strategy is the way to go.

  7. Regardless of confusions and omissions here and there, I think that the difficult truth is that, although there are “Austrian” economists, maybe even specific “Austrian theories” there is no “Austrian Economics”, not anymore at least.

  8. If there’s a group that better appreciates the potential failures of market economics than the Austrians (because knowledge is dispersed over time and space, and is constantly being recreated), I’d like to see it. What makes the Austrian approach better is their willingness to acknowledge that despite the fragmentary knowledge of relevant market knowledge, the market is still far superior to the arrogance of planners.

  9. An even better approach would be to revise one’s theories when they are contradicted by the evidence.

  10. Eric, if you think that our government favors a free-market approach, you simply aren’t paying attention. And you are resorting to post-hoc-ergo-proper reasoning. Who is to say that a free-market China wouldn’t have been more prosperous? You won’t, but without presenting any facts, you’re resorting to faith-based economics.

  11. Eric, click on my name for a link to a page that explains the reality of “market failure”. If you’re willing to say “market failure” without saying “government failure” on the odd-numbered days, then you aren’t saying anything related to economics.

  12. Thanks, Russell. I’ve got a decent understanding of economics. I would probably agree with you about the crony capitalism of the U.S. government, if that’s what you’re implying about the “free market approach” of the U.S. government.

    I agree with your point about the counter-factual China, of course, but one could apply that to any historical argument.

    I don’t know if I’ve presented facts, but I’ve presented some suggestive historical evidence. I’ve presented the Asian Tigers, China, and Ireland on the one hand, and Mexico and Argentina on the other.

    Your link didn’t work for me, unfortunately. So I can’t address that particular point.

    Markets fail. Information is imperfect. Externalities exist. Public goods exist. Government can address these problems and increase efficiency. Sometimes government goes too far, but sometimes it does not go far enough.

  13. My point was more that China and India exploded with growth once they embraced free market principles. Hong Kong (which China regained in the 90’s) is still they’re largest cash crop, and that is a region that the Chinese government largely won’t touch in many ways (except taxation of course). They’re not going to strangle the goose that lays the golden egg.

    Besides, I don’t think you’ll find any purely free market in the world today. The question of mixed systems is more of what is the root cause of the growth, not is the market mixed or purely free.

  14. Oh and Eric, I could agree with you to a point, except I don’t see where government has increased efficiency. Also, of course markets fail, but government systems fail too, the difference is that the market is then forced to correct itself whereas the government often continues to subsidise a failing system.

  15. Bitter Marketeer makes me think of a question… Does China count Hong Kong in it’s economic statistics?

  16. No, Hong Kong is not counted in China’s economic statistics (it’s officially considered a separate economy, but not a separate state). Hong Kong residents also do not pay taxes to the central government (only local Hong Kong taxes, that are among the lowest in the world: no sales tax, and a maximum marginal income tax of about 15%). The same is true of the neighboring “economy” of Macau, where the government relies almost exclusively on gambling taxes.

    Remember that the degree to which a country conforms to free-market ideals is not only a function of taxes and government spending – it also reflects other factors such as labor regulations, land-use regulations, barriers to trade etc. According to mose free-market indices, Hong Kong is the freest economy in the world; the United State and Canada are now (after Bush) equally free (or unfree); and the People’s Republic is still way behind.

  17. “As long as Austrians ignore the existence of market failure, they will not be taken seriously.”

    But, Erik, Austrians don’t ignore the existence of market failure.

  18. Re: Eric’s points.

    “Markets fail. Information is imperfect. Externalities exist. Public goods exist. Government can address these problems and increase efficiency.”

    These remarks encapsulate most of what’s wrong with mainstream economic thinking (and most of the rest of it).
    Why is economics the only science (assuming it is) to define any deviation in practice from theoretical perfection, as a failure mode? Not simply a case of sub-optimality, or less-than-100%-efficiency, but outright failure.
    Do engineers refer to the c. 25% efficiency of the internal combustion engine as ‘combustion failure’, or ‘Carnot Cycle Failure’. Or even to its emissions as ‘waste failure’. No! These are simply regarded as inevitable inefficiencies, owing to the relevant laws of physics and chemistry, but ones which the engineers do their best to limit.
    Only economics refers to non-perfection as ‘failure’. Why is this? It is, i’d suggest, a case of ivory-tower thinking gone mad due to a lack of worldly constraints – like that which markets impose on private businesses.

    “Externalities exist.” Wrong. What exists under Capitalism is private ownership of the means of production and exchange. What exists in countries like the U.S. is a mixture of private ownership, public ownership and the ‘commons’ – with it’s inevitable tragedies. The tragedy of the commons is simply the tragedy of collective ownership. ‘Externalities’ should really be referred to as ‘Internalities’.
    Eric, you have made your criticism of free markets by overlooking the not too subtle distinction between private and collective ownership. All of the so called market failure claims regarding so called externalities make this elementary mistake.

    So Eric, when you say “Markets fail. Information is imperfect.”, do you mean that markets fail because information is imperfect, and if so, compared to what? An omniscient dictator?
    On the contrary, i would say that it is precisely because the world, the economic actors and the information they are acting on is/are imperfect and necessarily so, that we need free markets. That is, institutions of exchange and contract that allow free people to deal with the inherent uncertainty of the world and the economic environment, by adapting, planning and innovating appropriately.

    Your implicit definition of governments as “that which removes or makes imperfection go away” has an undercurrent of totalitarianism about it, as does the thinking of the externalities-public goods-market failure-social welfare-government will make it better mentality of most economists. Witness Paul Samuelson and his repeated talking up of the prospects of the Soviet Union (in ‘Economics’) until 1989.

    The concept of ‘the market’ ultimately refers, at a less abstract level, to the voluntary exchange decisions of (mostly) private individuals. It is people that make and participate in markets. Thus the concept of ‘market failure’, can be rephrased as ‘people failure’. Again, this demonstrates the anti-individualist, pro-state bias of its proponents.

    You say ‘Public goods exist’. I say; political services exist – namely defense, policing, law courts and democracy. These ‘services’ predate or at least coincide with the rise of the market economy, so the ‘public goods’ notion that these political services are introduced as a result of market failure is simply blatantly a-historical. The purpose of this tactic, as i believe it is, is to conflate these necessary political institutions with whatever non-rival, non-excludable goods are deemed by the proponent of public goods to be necessary. He can see no difference between the army and a lighthouse. This amounts to an ‘imperialist’ crowding out of Homo Politicus by Homo Economicus, but one that is completely contradicted by history. That is, state political services came first, the rise of Capitalism second. Furthermore, lighthouses, post offices, roads and educational centers can all be well provided by the market (I.e. the people). There is no ‘market failure’ here. There is instead ‘economist failure’ – a failure to read and/or understand history.

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