The best opportunity for the rehabilitation of Austrian economics

In a recent email, Sean Corrigan highlighted the following excerpt from Ludwig M. Lachmann‘s essay Austrian Economics in the Age of the Neo-Ricardian Counterrevolution. It was written in 1976.

The best opportunity for the rehabilitation of Austrian economics today is, I regret to say, to be sought in the permanent inflation the Western world has suffered since the Second World War. This is certainly not the fault of Austrian economists; there has been no lack of warnings from their side.

We live in a world in which prices can only rise and never fall, because the public has come to believe that a widespread fall of money wage rates in the face of a falling demand for goods and services would be intolerable. A world, however, in which all relative price adjustments have to be made against a background of continuously rising money prices and wages is one in which money is no longer a store of value: it can only depreciate, never appreciate. The process of inflation must accelerate once everybody understands what is happening.

Faced with this situation neoclassical economists, on the whole, have (predictably?) behaved badly. Some have distinguished between cost-push and demand-pull inflations as though we were dealing with a succession of historical processes of inflation and not one indivisible process. Some would have us believe that there is a choice between a little more unemployment and a little more inflation. The facts of the inflation now accelerating all over the Western world speak for themselves, though the econometricians may not understand the language. A mind for which the economic world is a complex system of given variables seems quite unable to grasp a kaleidic world. The facts of a world of accelerating inflation elude it.

Some neoclassical economists have shown themselves to be rather uninhibited inflationists. According to Kenneth J. Arrow:

The rates of inflation with which we have had to contend impose no insuperable problem or even major difficulty to the operation of the economic system, nothing comparable to the major depressions of the past. Individuals will learn and have learned to deal with inflation making their plans to take expected inflation into account. The economic system and the government will create and are creating methods of mitigating the effects . . . . Some analysts feel that inflation will inevitably accelerate, but others will note that in the past peacetime inflation has tapered off.

Second, we may have some reasonable hope that economic research and experimentation in policymaking, between them, will evolve more sophisticated means of managing the overall economy.[9]

Solow expressed an even more striking view:

In a monetary economy, it is natural to amend the definition of a steady state to require a constant rate of inflation; since everything else is growing exponentially, the price level ought to be no exception. [10]

Neo-Ricardians have been far more cautious about inflation. Hayek and Joan Robinson not merely agreed on the substance of the matter but actually, though no doubt unwittingly, used the same metaphor:

An inflationary economy is in the situation of a man holding a tiger by the tail.[11]

Faced with this terrible but challenging situation Austrian economists today have a triple duty. They must tell the public that:

1. The real cause of the accelerating inflation lies in a change in the social climate that, engineered by the left intelligentsia, took place about a half-century ago and resulted in a taboo on downward adjustments of money wage rates.

2. A market economy requires a money that can serve as a store of value, a money in terms of which prices are as likely to fall as they may be to rise. (An absolutely stable price level is impossible.) No such money exists today.

3. None of the nostrums peddled by economists in many countries today involving price and wage controls will work, and they may well paralyze the market process.

[9] Kenneth J. Arrow, “Capitalism, for Better or Worse,” in Capitalism: the Moving Target, ed. Leonard Silk (New York: Quadrangle, 1974), pp. 105–113.

[10] Robert M. Solow, Growth Theory: An Exposition (Oxford: Oxford University Press, 1970), p. 66.

[11] Joan Robinson, Economic Heresies (London: Macmillan & Co., 1971), p. 95; Friedrich A. Hayek, A Tiger by the Tail, ed. Sudha R. Shenoy, Institute of Economic Affairs, Hobart Paper 4 (London, 1972), p. 112.

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7 replies on “The best opportunity for the rehabilitation of Austrian economics”
  1. says: Paul Marks

    Economic collapse is comming (it will start this year – and next year will be worse).

    The Austrian School can explain it – the “mainstream” establishment can not.

  2. says: Mr Ed

    The current strategy is like flying a short-range aircraft over a vast ocean, relying on in-flight refuelling at regular intervals to keep it in the air. But sooner or later the tankers will turn back to base, the refuelling probe might break, or the engine oil will be consumed, and the aircraft will have to conform to the laws of physics when the pressure of the air underneath it does not match or exceed the force of gravity, and the far side of the ocean will be unattainable. What is the goal of the inflation, if not to benefit some in the short-term?

    Any sensible pilot would have turned round for base, trading height for speed and hoping for a soft landing.

    Money is not a store of value, prices are expressed in money, but value is what we attribute to a particular item when buying or selling. A gold coin at the bottom of a disused mineshaft has no ‘value’ if no one knows it is there, but if found, it can be part of the economy and be valued.

  3. says: John Phillips

    Its amazing that was written in 1976.

    A “mainstream” economist, Matt Yglesais wrote an article trashing Austrian school economics in January 2012. Toward the end of the article, he writes “If I’m wrong, and the economy doesn’t recover in 2012, then these faddish views may gain more steam and perhaps we really all will be Austrians someday soon.”

    Here is the link to his article.

    Well, for some reason, even though the economy did not recover in 2012, he’s still not an Austrian. He’s still preaching stimulus and deficit spending to keep prices up and force inflation. Its just they didn’t do enough.

    So surprising right? <—– Sarcasm.

    Point is, it may take something worse than permanent inflation to bring Austrians into the mainstream. It may take a total meltdown of the current system before there will be any real change. Mainstream economists are entrenched in their "beliefs". They will never change so they can only be replaced. But because the Keynesians are a perfect fit for big government, they will have to be completely discredited before they are replaced as advisers to governments.

    1. says: Captain Skin

      But normal people are not economists.

      I’ve done it myself. Try explaining Austrian economics to the lay man, and after a while they start to get it. It isn’t rocket science, it’s common sense!

      Try explaining Keynesian neoclassical economics, and they’ll look back at you, confused, saying it doesn’t make sense.

      IMO it is much easier to educate the layman, than to try to reason with brainwashed neoclassical economists.

      Economics put simply, is the study of how the world works. There is no magic to it, it’s common sense. The Austrian school explains how the world works, and that’s why it’s so accessible to the lay man.

      This is how Austrian economics will become the mainstream, and Keynes and his ilk will be banished to the obscurity they deserve…

      1. says: Captain Skin

        An example of what I just talked about is the Keynes V Hayek rap video on Youtube. It has over 4 million views! That’s how you get through to the mainstream, and get them questioning and thinking about the current view of economics…

      2. says: Steven Farrall

        Au contraire, Mon Capitaine, Austrianism is simple to explain to the proles, and once they get it they get very angry indeed. Mind you my business is explaining money stuff to clients, and that helps.

  4. says: Craig Howard

    even though the economy did not recover in 2012, he’s still not an Austrian

    That’s because, as a “mainstream” economist, he can see recovery where there is none. Any sliver of good-sounding news — perhaps a drop in first-time unemployment claims as compared to last week — is enough to count as recovery when you’re busy defending a lifetime’s learning, um education.

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