A year ago, you could have put everything I know about Austrian economics into a mosquito and still have room for a Republican's heart. But some theory on the net didn't pass the smell test, so I did a bit of research. And I was amazed. It was like finding out George W. Bush was a Yale graduate. Eli, Eli Yikes.
Imagine arguing with someone who says history doesn't matter because things change all the time. And that measurements don't matter because context is never dependable. And that numbers don't matter because they miss more basic truth. Now imagine the person you are talking with is not only NOT President Bush, but is actually a self-described economist. An economist who hates economic data, history, measurement, and numbers. Now go even farther. Imagine that the economist dismisses the concepts of supply and demand lines as not worth considering. You know what you have? No, NOT a former half -term governor.
What you end up with is a follower of Austrian economics. I'm not making this up. They were a major intellectual force a hundred years ago. This was a group best explored for their entertainment value.
Okay, I exaggerate. The Three Stooges would be better entertainment.
Austrian economists rejected what they termed continuity. This is what they called the predictive value of economic experience. The future usually resembles the past in very useful ways. Water boils at a specific temperature while at sea level. Tomatoes seldom grow on banana trees. Most study of the real world looks at what actually happens, speculates on why the world acts as it does, then makes predictions based on that speculation, then looks again to see if the real world acts as predicted. Austrian economists rejected all that. The world is chaos, unrelated to the past. Hey, LIVE with it.
They rejected measurements. They called the notion that measurements have any usefulness in economics "Differentiability." They held it in scorn.
Remember Adam Smith's invisible hand, the intersecting lines of Supply and Demand? They called those lines Income and Substitution and they regarded them as fictional. Useless to even think about. "Income" one would say to another at the annual Austrian convention. "Substitution," would be the reply. Then both would dissolve into hysterical laughter. "Cardinality" was simply an obstacle to deeper insight. That's what they called numbers: Cardinality. They were somewhat prudish in their own way, disapproving of cardinal knowledge. Ha ha ha. Okay, let's move on.
They published papers that were pretty much entirely theoretical. No numbers, measurements, or history. Their work was based on what they thought of as pure logic. They simply projected the way the world ought to be. If Stephen Colbert had a television program a hundred years ago (he didn't, actually) he might have referred to their ideas as truthiness. It was subjective, because any attempt of real-world objectivity was proclaimed to be an impossibility.
They eventually faded from sight never to be seen again. Boy, was THAT a relief. Did I say never? To the mirth of economists who deal with ... you know ... economics, the movement was lifted from obscurity by the nascent Tea Party movement. How surprising that this group would embrace a no-evidence, whatever-you-feel-must-be-true school of thought. Okay, so maybe I'm just a little sarcastic on that.
In fact, the modern version of Austrianism has evolved into a sort of Beckian incarnation.. That may be why Glenn Beck is a chief sponsor of the resurgence. Today's neo-Austrians sort of make up facts as they go along. Our friend T. Paine of Saving Common Sense inadvertently provided an apt illustration in a comment he contributed here yesterday. He links to Thomas E. Woods, Jr. of the Ludwig von Mises Institute. von Mises was what you might call an iconoclast. He fought for the gold standard, was a Ron Paul fan before Ron Paul was born, and eventually came to a blind adherence to what he called Methodological Individualism. Methodological individualism was a philosophical approach to economics that rejected such mundane concepts as statistical analysis. Among the honors Thomas E. Woods, Jr. lists on his website are appearances on economic panels like the G. Gordon Liddy Show and the Dennis Miller Show. He is known as an advocate of Nullification, remembered for it's most notable spokesman John C. Calhoun, back during slavery. Ah, those were the days, Mr. Woods.
Anyway, Woods from the House of von points to a severe recession that started just before Warren Harding took office as President. Harding, says Woods, put in tough reductions in spending and things got better right away. Pretty much the opposite of what those of us among the unenlightened think should have happened. Now let's be up front about this. The recession of 1920 and 1921 really did happen, and it really did stop, and President Harding really was in office when it stopped. Wanna know the rest?
Recessions can start for a number of reasons. Sometimes monetary policy shrinks money supply and we all run like rabbits to our holes, making things worse. Usually, interest rates are low and demand is way less than supply. So money is hard to get and nobody is buying anything. Workers lose their jobs and things get worse. They can really get bad. In the 1930s people sold apples on street corners to survive.
In 1920, the recession was a little unusual. Interest rates were low. Money was easy to get. Supply and demand met about the same spot, but the volume of buying and selling went down. Oh come on. Ask me why!!
Well, folks were scared. The new federal reserve board made ordinary people really nervous, especially when the new Fed started shrinking money supply. It was not a smart tactic. But it wasn't that radical a move. Shouldn't have caused that much effect. But the country had just come off the gold standard and conservatives were yelling LOUD that ruin was about to engulf everyone. William Jennings Bryan had made his famous Cross of Gold speech (Oh man, what a speech!) a quarter century before. Everyone knew he was a dangerous radical, and yet he only wanted to go to from a gold standard to gold and silver. Jumping off gold completely? Oh my. So everyone thought everyone else might get scared, which really scared everyone. Best to get scared ahead of the crowd. So people stopped buying OR selling. Lots of money was around, but it wasn't being spent and lots of goods were around but they weren't being offered for sale.
Like most purely emotional jags, it didn't last. Things picked up quickly. In fact, the 1920 recession was, as it was then called, a panic. Like crazy rumors causing a run on toilet paper. A year later it was gone like a fart in the wind.
I don't mind pointing out that the Fed did loosen money quite a bit in 1921, thus helping, in a Keynesian way, to promote a recovery. No claims. Just sayin'. And the part about new Harding spending cuts providing a working solution? Au contraire, Pierre. Harding mostly just held onto tight policies already put into place by Woodrow Wilson. A person of less pristine honesty than myself might blame those Wilsonian spending cuts for the 1920 recession, but that would be so beneath me. Plus I wouldn't get away with it.
Double plus the main economic expert who does support T. Paine is kind of scary. Enjoy:
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