Why Austrian economists don’t work as policy advisers
IN (1955) edition of his best-selling economy textPaul Samuelson stated that economists have finally determined how the economy works. As he put it:
In recent years, 90 percent of American economists have ceased to be “Keynesian economists” or “anti-Keynesian economists.” Instead, they worked on a synthesis of everything of value in old economic theory and in modern theories of income determination. The result can be called a neoclassical synthesis, and is broadly accepted by all but about 5 percent of far-left and right-wing writers.
With the proper strengthening of monetary and fiscal policies, our mixed-enterprise system can avoid boom and bust excesses and look forward to healthy sustained growth. Once this fundamental understanding is understood, the paradoxes that robbed the old classical principles about small-scale “microeconomics” of much of their relevance and validity now lose their edge. … Perhaps for the first time an economist rightly says that the wide gap between microeconomics and macroeconomics is closed.
The period 1955-1972 can be called the “we know everything” period in macroeconomics. There was one authoritative model, all-seeing and explaining everything. By turning the right fiscal controls and pulling the right monetary levers, the planner priests could fine-tune the previously unpredictable world economy.
But the models were, at best, hindsight approximations, rapidly becoming outdated by attempts to use measured relationships for political intervention. For example, an attempt to use the Phillips curve compromise between unemployment and inflation. ultimately led to higher unemployment and inflation because the market is about people, not billiard balls.. While the government generally cannot improve the situation, aggressive government intervention can certainly make it worse.
This is the essence of the Austrian economy’s response to the idea of fixed models based on equilibrium. The problem from the Austrian point of view is that politically perceived the need for a model that represents the total economy and takes into account the effects of policy interventions is enormous. The Austrians believe that the very idea of synthesizing a “macro model” is inconsistent. First, the level of aggregation required to define variables—GDP, employment, price levels—eliminates any identifiable vectors of cause and effect, because production, capital, and jobs are not homogeneous things. In particular, the problem is the aggregation of “fixed capital”.
Suppose I have taken a thorough inventory of the “equipment” of the hospital. In my ledger, I can state that the hospital has 31,718 “pieces of equipment”; It’s enough? As I discussed in my own account of the experience of supervising highly specialized, capital-intensive medical operations, to have “equipment” is not enough. this is the capital compound, organized in a certain way at a certain point in time, extending into an indefinite future, which makes capital valuable or worthless. To say that a bedpan, a heart monitor, and a set of surgical instruments are the “three pieces of equipment” is to write nonsense and pretend you know something.
But even if the aggregates make sense, the empirical relationships between these variables are never “equilibrium.” Causal relationships are not even stable at any level, but change, like in a kaleidoscope, in complex ways. A snapshot of data or a monthly aggregation of data for a model record is already hopelessly out of date by the time it is used to analyze a simulated “shock” because kaleidotic changes in relational economics are, by definition, unpredictable. This general problem of the social sciencesbut even the problem short-term parameter stability is acute in macromodels.
Why is the Austrian point of view so little heeded, and in fact almost ignored in the halls of power? Brian Kaplan argued that insisting on an essential difference The Austrian approach was counterproductive, and I think he makes some reasonable remarks in this regard. But I think there is a simpler explanation based on the needs of political discourse. The difficulty faced by Austrian criticism lies in the oft-quoted demand that a model is needed to defeat a model.
This view was hardly limited to the Keynesians; Here are two pro-market neoclassical economists who share the same view:
The answer is that need theory to beat theory; if there is a theory that is correct 51% of the time, it should be used until a better one comes along. (Theories that are only correct 50% of the time may be less economical than flipping a coin.) George Stigler, 1987; added accent.
I play by this rule need a model to beat a model. — Thomas Sargent, 2011; added accent.
To say that the economy is a competition between models is no longer the case. The Austrian critique of central planning is based on the claim that government officials, even if guided by the best goals and objectives, cannot obtain accurate and timely local information. It’s an empirical claim about the world in the sense that it makes the (in principle falsifiable) claim that it’s impossible – not difficult, impossible – “calculate” the cost of resources and products needed to “start” the economy.
To planners, this seems like a rejection of models because our measurements are “not good enough, more“. In fact, this was exactly the answer of Oskar Lange, who famously went so far as to congratulate (sarcastically) Ludwig von Mises’ contribution to the illumination of the problem of computation:
Socialists certainly have every reason to be grateful to Professor Mises, the great Devil’s Advocate their reasons. For it was his powerful challenge that made socialists recognize the importance of an adequate system of economic accounting for managing the allocation of resources in a socialist economy. Moreover, it was thanks to the challenge of Professor Mises that many socialists became aware of the very existence of such a problem. And although Professor Mises was not the first to raise it, and although not all socialists were as completely ignorant of this problem as is often believedHowever, it is true that, especially on the European continent (outside of Italy), the credit for having forced the socialists to approach this problem systematically belongs entirely to Professor Mises. The statue of Professor Mises should take pride of place in the great hall of the Ministry of Socialization or the Central Planning Council of a socialist state. — Lange, 1936.
Obviously, the planners think that the problem of calculation can be solved by the trial and error method called for by market proponents. Traders in a particular market—say, tin—buy and sell to make up the difference in price, and the “price” then reflects the opportunity cost of the resource at that moment, without anyone fully understanding the sources or use of that tin. As Hayek pointed out in 1945, it is very important that no one needs to know why the price is at the same level; all you need to know is the value of the price at the moment in order to be able to decide whether to buy, hold or sell the tin..
The central planners seem to be thinking along the same lines, but the analogy is misleading. Instead of using trial and error on a single market, planners want to replace centralized trial and error on thousands of parameters at once. There is a huge difference between feeling the price and guessing the “price level” in the aggregate.
Unfortunately, we are left with two sharply contradictory imperatives, both of which are in fact true.
- First, attempts to use observed statistical “ratios” measured on aggregate data in the past are at best unrelated, and at worst, actively harm the ability to manage aggregate economic activity, employment, inflation, or whatever else we care about.
- Secondly, the recommendation to do anything, and the statement that “we have a plan” will always be a competitive advantage in politics and elections; the claim that we know nothing and that state intervention could do more harm than good is simply not a valid political recommendation.
After all, some policy recommendations are better than others, and the political imperatives to “do something” are simply irresistible. To the extent that the Austrian prospect sits on the bench, refusing to play, the field is occupied by teams of economists who only make matters worse. Because bad models put forward with the smooth confidence and authority of many dogmatic but peer-reviewed journal articles are far worse than no model at all.
However, this involves protecting the economy, which we often forget about. Most economists, if you have a sober conversation with them in private, it is easy to recognize that models are at best temporary approximations, and can be misleading. But anyone who wants to work for the government or seek advice from important officials must pretend to believe that the models are exceptionally informative and, in particular, that their personal favorite models are the best. In short, the problem is not so much with us. reliance on the economy like our support for politics. Politics insists that we must pretend to believe in the fiction of central market control as an effective policy.