Sunday, July 22, 2007

The Austrian School and credit bubbles

Why do I give the Austrian school some credence when it comes to credit bubbles, and not to their claims about the nature of economics? Because it is rarely an all-or-nothing affair, when it comes to evaluating the truth or falsity of a claims put forth by a school or system--truth can be mixed with error.

If the Austrian school is speaking in a descriptive mode, telling us the causes of inflation and the effect of currency and credit manipulation by a "central" agency, one can evaluate its explanation against the explanations offered by other economic schools. (Though one must be careful, as even this form of explanation, whether it is historical narrative, when applied to understanding events in the past like the Great Depression, or as an idealized "law" falls short of the necessity strictly required by a true science.) I have not read other schools on monetary economics, but Ron Paul is a follower of the Austrian school and makes much use of it in his discussion of the Federal Reserve and its policies.

However, as far as I can tell, much of the problem with the positions of the Austrian school arises when it is speaking in a normative mode, making claims about what ought to be done, or the relation of economics with respect to ethics and politics. One cannot sever economic behavior from the natural law if the goods attained by economic actions are subordinate to the ultimate end of human life. Nor can it be argued that the ultimate end of a political community is merely the production of wealth, or that idealized laws that supposedly represent human behavior should therefore be elevated to the status of norms. Models of practical rationality are only good in so far as they admit of the full range of human freedom, which is rooted in the conception of the good, however erroneous it may be in certain people. When those models become reductionistic in order to simplify the explanation being given and to give them the semblance of necessity needed for them to appear "scientific," some form of determinism is inevitable.

If the Austrian school is wrong with respect to its first principles in the practical realm, then its conclusions [concrete recommendations] cannot but be flawed.

While Lew has no problems publishing the political tracts of Paul Craig Roberts, as far as I can tell, it will not reprint what he says about the economy, and for a good reason. The sort of "protectionism" that Mr. Roberts endorses is opposed by the Austrian school. It is not clear to me how well-grounded the protectionism of Messrs. Roberts, Buchanan, or Dobbs might be. Let me instead refer to the protectionism advocated by Wendell Berry, in The Idea of a Local Economy, which is a normative claim rooted in a conception of what the good life should be like for a community and is virtually identical with Aristotelian-Thomistic politics on this point:

SO FAR AS I CAN SEE, the idea of a local economy rests upon only two principles: neighborhood and subsistence. In a viable neighborhood, neighbors ask themselves what they can do or provide for one another, and they find answers that they and their place can afford. This, and nothing else, is the practice of neighborhood. This practice must be, in part, charitable, but it must also be economic, and the economic part must be equitable; there is a significant charity in just prices.

Of course, everything needed locally cannot be produced locally. But a viable neighborhood is a community; and a viable community is made up of neighbors who cherish and protect what they have in common. This is the principle of subsistence. A viable community, like a viable farm, protects its own production capacities. It does not import products that it can produce for itself. And it does not export local products until local needs have been met. The economic products of a viable community are understood either as belonging to the community's subsistence or as surplus, and only the surplus is considered to be marketable abroad. A community, if it is to be viable, cannot think of producing solely for export, and it cannot permit importers to use cheaper labor and goods from other places to destroy the local capacity to produce goods that are needed locally. In charity, moreover, it must refuse to import goods that are produced at the cost of human or ecological degradation elsewhere. This principle applies not just to localities, but to regions and nations as well.

The principles of neighborhood and subsistence will be disparaged by the globalists as "protectionism" - and that is exactly what it is. It is a protectionism that is just and sound, because it protects local producers and is the best assurance of adequate supplies to local consumers. And the idea that local needs should be met first and only surpluses exported does not imply any prejudice against charity toward people in other places or trade with them. The principle of neighborhood at home always implies the principle of charity abroad. And the principle of subsistence is in fact the best guarantee of giveable or marketable surpluses. This kind of protection is not "isolationism."
Legislators are not concerned merely with bringing about a state of affairs that is "best for the consumer" (i.e. an abudance of goods at the cheapest prices possible)--they must consider what is best for the producers who are also members of that community, and for the community as a whole. Life is not just about consumption, and both production and consumption are ordered towards higher things.

Credit Bubbles - A Daily Reckoning Whitepaper Report
'Austrian School' of Economics Makes a Comeback - Seeking Alpha

The housing bubble created by a credit bubble and poor banking standards

What is Austrian Economics
Economics Blog : Amid Financial Excess, a Revival of Austrian ...
Mises Economics Blog: on Price Controls and the ...
Mises Economics Blog: The Economist: Austrian school provides the ...
PIMCO Bonds - Global Central Bank Focus- July 2006 "A Kind Word ...
The Mess That Greenspan Made: Austrian economics in the WSJ The Austrian School and the “Austrian” School
Austrian School: History
Austrian Economics, by Deborah L. Walker: The Concise Encyclopedia ...
1 AUSTRIAN SCHOOL OF ECONOMICS What is it about the Austrian (pdf)
Austrian Authors: The Online Library of Liberty
The Austrian Economics Study Guide
The Austrian School of Economics (ppt)
The Austrian School of Economics (ppt)
The Austrian School of Economics (pdf)
Austrian Economics
Austrian School - Wikipedia
New Perspectives on Political Economy The Austrian School in the
Austrian School: Introduction
The Economists.
EconLog, Austrian Economists and the mainstream, Arnold Kling ...

Mises Economics Blog: More on "Austrian School Flunks"

It's The Bubbles, Stupid
American Chronicle: Is the U.S. in a bubble now?
Inflation, global monetary tightening
Global Liquidity Crisis when the Credit Boom comes to an End ...

On the Fed:
Board of Governors of the Federal Reserve System
Federal Reserve Education Home
The Federal Reserve Monopoly Over Money by Ron Paul
Abolish the Federal Reserve
Weazl's Revenge: Ron Paul devastating the Fed

Monetary Economics:
Money - Wikipedia, the free encyclopedia
Monetarism - Wikipedia, the free encyclopedia
Monetary Economics
ERN Monetary Economics
American Monetary Institute
The Monetary Economics of Thurston Howell III - Mises Institute
Money and the Individual by Murray N. Rothbard
Moss, The Economics of Ludwig von Mises, The Monetary Economics of ...
Austrian school arguments on the free market origin of money ...
Austrian economics for central bankers

Journal of Monetary Economics - Elsevier

MIT Economics: Macroeconomics and Monetary Econommics

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