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!