by Jerry O’Driscoll
“Economics is not the science that gives accurate near-term forecasts of inflation and output growth. There is no such science.”
What economist said that? Is it the pronouncement of an Austrian, or some other heterodox critic?
Before answering, I want to make a point. In the aftermath of the crisis, economists have been realigning and reassessing their positions. Perhaps the most shocking example (at least to some) is Richard Posner’s breaking with his Chicago colleagues and discovering the brilliance of Keynes and the virtues of regulation (at least in principle).
I have observed a coalescing of views on the Crash of 2008 among Austrians and monetarists. In large part that has occurred because what unites the schools is more than what divides them when it comes to the cause of economic fluctuations. In a 2008 Wall Street Journal interview with Brian Carney, Anna Schwartz reviewed the historical record on asset bubbles or booms. The precise details differ across each boom-and-bust cycle, but in each case “the basic propagator was too-easy monetary policy and too-low interest rates.”
The classic divide in business cycle theory has between real and monetary explanations of cycles. For some years, real explanations have been in vogue. Real business cycle theory is the most notable example. The Bernanke view that a global savings glut caused one-percent interest rates is an example of a real theory. Central bankers are institutionally inclined to non-monetary explanations because they absolve them of responsibility.
At minimum, Austrians and monetarists agree that major economic fluctuations are caused by monetary shocks. The current crisis has caused both groups to push back against trendy real theories of economic fluctuations.
Oh, yes, who said that?
Allan Meltzer in his paper for the 2009 Cato monetary conference: “Learning about Policy from Federal Reserve History.”